Quanta Services Inc (PWR) 2016 Q4 法說會逐字稿

Greetings and welcome to the Quanta Services conference call to review fourth-quarter and full-year 2016 results.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host Kip Rupp, Vice President, Investor Relations. Please go ahead.

Great. Thank you, Operator. Welcome, everyone, to the Quanta Services conference call to review fourth-quarter and full-year 2016 results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to be notified when Quanta publishes news releases and other information, please sign up for email alerts by going to the investors and media section of www.Quantaservices.com or download the Quanta services Investor Relations app. We encourage investors and others interested in our Company to also follow Quanta on the social media channels listed on our website.

Please note that in today's call, we will present certain non-GAAP financial measures. In the investors and media section of our website, we will -- have posted reconciliations of the differences between these measures and their most directly comparable GAAP financial measures. Please remember that information reported on this call speaks only as of today, February 21, 2017, and therefore you are advised that any time-sensitive information may no longer be accurate as of any replay of this call.

This call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all statements reflecting Quanta's expectations, intentions, assumptions, or beliefs about future events or performance or that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or that are beyond Quanta's control, and actual results may differ materially from those expressed or implied.

For additional information concerning some of these risks, uncertainties, and assumptions, please refer to the Company's 2015 annual report on Form 10-K and its other documents filed with the Securities and Exchange Commission which are available on Quanta's or the SEC's website. Management cautions that you should not place undue reliance on these forward-looking statements, and Quanta does not undertake any obligation to update any forward-looking statements and disclaims any written or oral statements made by any third party regarding the subject matter of this call.

Finally, Quanta Services is hosting an Investor Day on April 4 at our training facility in La Grange, Texas with other activities taking place in Austin, Texas. This event is for institutional investors and sell-side analysts only. If you would like to attend the event, please contact me for additional information. We will webcast that event live, and we will have an audio replay available both from the investors and media section of our website.

With that, I would like to now turn the call over to Mr. Duke Austin, Quanta's President and CEO. Duke?

Thanks, Kip. Good morning, everyone. Welcome to the Quanta Services fourth-quarter and year-end 2016 earnings conference call. On the call, I will provide operational and strategic commentary before turning it over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a detailed review of our fourth-quarter results. Following Derrick's comments, we welcome your questions.

We finished 2016 on solid footing with significant revenue and profitability momentum in the second half of the year. While I'm pleased with the substantial improvement, we are not satisfied and remain committed to returning our operating margins to historical levels. Our third-quarter and fourth-quarter results demonstrate progress towards that goal, and our commitment to realizing the long-term earnings potential of the Company.

We ended the quarter with record 12-month backlog. I would note that our backlog does not yet include various projects we have been awarded that have ongoing permitting requirements which have an aggregate contract value well in excess of $1 billion. We are confident that these projects will move forward and expect to include them in backlog when we have better visibility into final contract terms and probable construction starts.

The American election and the potential positive impact the new administration's policies could have on our business has created a lot of press and speculation. We are hopeful that the regulatory reform will progress and onerous permitting and approval processes will ease. It is important to note, however, that our end markets and related project opportunities do not rely on government funding to move forward, and any additional government infrastructure support is incremental to our positive, multi-year outlook. We remain committed to providing dynamic, [self-performed] infrastructure solutions to improve America's infrastructure.

Electric power segment revenues for the quarter were comparable to the fourth quarter of 2015. However, operating income and margins for the segment showed solid improvement. We continue to have a positive, long-term outlook for our electric power segment and believe we are entering an upward, multi-year cycle.

The end market drivers we have spoken about for some time continue to spur demand for our electric power infrastructure services. These drivers, including the need to maintain and replace aging infrastructure, generation mix shifting to more renewables in natural gas, and regulation aimed at improving the reliability of the grid, are what we believe will continue to provide opportunities to grow our base business.

Based exclusively on these projects, we are working on and have in backlog, our larger transmission project revenues should increase in 2017 as compared to 2016. Additionally, we believe larger transmission project awards will likely increase over the next 18 months, and should this occur, could provide improved visibility for the next several years. I believe we are uniquely well-positioned to provide solutions for these potential projects, some of which are the size and scope the industry has rarely experienced.

The macro environment in Canada has been challenging for the past couple of years for both our electric power and oil and gas operations. However, we are seeing signs of recovery that could have a positive effect going forward such as the Alberta Utilities Commission approval of the Fort McMurray West 500 kilovolt transmission project in Canada which we expect to start full-scale construction in the second half of this year.

We have adjusted the cost structure of our Canadian operations as we move through these challenges and will continue to do so as necessary. We are positioned to increase profitability, compete on our track record for safely executing projects on time and on budget, and we will remain disciplined on pricing and project risk.

It is important to note that we do not operate our business to just accept only what the market brings us. We continually strive to innovate our solution offering and remain well ahead of the industry trends. Our success in doing so over the years has played a critical role in establishing the leadership position we have today.

I believe our scope and scale and competitive distinction in the markets puts us in a position to provide solutions that our end markets did not have in the past. We value the collaborative relationships we have with our customers, and we will continue to partner with them as they execute their capital deployment plans.

Turning to our oil and gas segment. Revenues were strong, and operating income and margins increased substantially in the fourth quarter versus the same quarter as last year. Though we experienced some project timing issues on larger pipe projects during 2016, the year largely played out as we anticipated with the second half of the year being meaningfully stronger than the first, driven by a significant increase in larger pipeline project activity.

We have been in active discussions and negotiations on a number of large pipeline projects that, depending on construction start timing, could give us incremental growth for the second half of 2017. While we expect to generate more larger pipeline project revenue in 2017 then in 2016, we believe 2018 could be even better and that the next several years could be a very good larger pipeline markets.

The vast majority of pipeline opportunities we see are driven by the need to move natural gas from the Marcellus and Utica Shale regions to various demand centers. However, we believe out-year larger pipeline projects opportunities could include larger oil and natural gas pipeline projects in Canada. These projects would provide desperately needed takeaway capacity for resources to access various markets in North America and meet the need for natural gas to fuel LNG export projects on the West Coast of Canada.

Additionally, development of liquid-rich, natural gas formations in the Montney and Duvernay shells is beginning to increase demand for midstream infrastructure that could provide opportunity for us later this year. If production volumes increase over time, larger pipelines would also be needed to reach various end markets. Quanta's pipeline operating units are some of the most established and respected companies in the industry and are well positioned to capitalize on these opportunities as market activities increase.

In addition to larger pipe projects, we see opportunity for our base business to continue to grow over the coming years. Our base business includes supporting midstream infrastructure, downstream support services, natural gas distribution, pipeline integrity, pipeline logistics management, horizontal directional drilling, and engineering.

Like our electric operations, larger projects compliment our base business in this segment, and we continue to develop unique infrastructure solutions for our customers. For example, we recently completed the REX zone 3 capacity enhancement project for the Rockies Express Pipeline, LLC, where we provided turnkey engineering, procurement, and construction services for the installation of three new compressor stations and the upgrade of two existing compressor stations. This project is an example of our base-business services providing a solution that led to a larger project.

And, finally, on our first-quarter earnings call last year, we announced that following the expiration of our telecom non-compete arrangement in December, 2016, we intended to resume broad activity in the US telecom infrastructure services market. We have done that.

A strength of Quanta is our ability to be opportunistic, and one of our strategic initiatives for the long-term growth is to find adjacent markets and new market opportunities. Over the past several years, we have [been] performing limited telecom and telecom-related infrastructure services in the US consistent with the terms of our non-compete arrangement.

At the same time, we have been growing our telecom infrastructure service operations in Canada by leveraging our electric power resources, reputation, and relationships. We have also successfully Greenfielded and grown our telecom infrastructure services operation in various Latin American markets.

It is a natural progression of these efforts and our success to expand our telecom infrastructure services operations in the US market which we believe offers significant long-term growth opportunities. In light of a trial scheduled this week and the litigation around our non-compete, we will not be, as we had previously expected, in a position to talk more fully about our US telecom expansion strategy on this call. Once the litigation has concluded, I will comment further about our US telecom expansion strategy.

That said, I would note that we do not believe there is any merit to the plaintiffs' claims. In the pending litigation regarding the non-compete, the plaintiff has informed the court that it does not intend to seek any lost profit damages as a result of Quanta's activities. On December 3, 2016, the non-compete expired, and Quanta is currently not subject to any restrictions on providing telecom infrastructure services in the US.

In summary, overall, we had solid operating performance in the fourth quarter, and believe the momentum we experienced in the second half of 2016 should continue into 2017. Our guidance announced this morning reflects growth expectations for both the electric power and oil and gas segments over the next 12 months.

As we typically do at the beginning of the year, we have taken a prudent approach to the revenue and margin range expectations in our guidance to reflect what we believe are possible outcomes based on the risk inherent in our business. As the year progresses and we gain better visibility in our performance, project timing, and industry dynamics, we will adjust our guidance and commentary if needed. That said, we remain committed to and are strategically positioning Quanta to profitably grow over the longer term.

I hope my comments this morning have confirmed that we continue to have a positive multi-year view of end markets we serve. We believe we are entering a renewed multi-year upcycle for our electric power and oil and gas operations and are confident that we are well positioned to provide unique solutions to our customers.

Our qualitative outlook for our business is largely shaped by our collaborative relationships with our customers which give us valuable insight into their multi-year infrastructure capital programs. We are focused on operating the business for the longer term and continuing distinguish ourselves through safe execution and best-in-class field leadership.

We will pursue opportunities to enhance Quanta's core business and leadership position in the industry and provide innovative solutions to our customers. We believe Quanta's unique operating model and entrepreneurial mindset will continue to provide us the foundation to generate long-term value for all our stakeholders.

We faced some challenges this year, and our employees performed well in a tough environment. As we close out 2016 with this call, I want to recognize their efforts and thank them for their commitment to supporting Quanta's unwavering dedication to health, safety, the environment, and quality. We ended the year with more than 28,000 employees who I believe are the very best in the industry. They are the key to our past and future success.

With that, I will now turn the call over to Derrick Jensen, our CFO, for his review of our fourth-quarter results. Derrick?

Thanks, Duke. Good morning, everyone. Today, we announced revenues of $2.1 billion for the fourth quarter of 2016, reflecting a 10.7% increase from the fourth quarter of 2015. Net income from continuing operations attributable to common stock was $88.5 million, or $0.57 per diluted share compared to a net loss from continuing operations attributable to common stock of $2.6 million, or a loss of $0.02 per diluted share in the fourth quarter of 2015.

Impacting the quarter and reflected as adjustments in Quanta's adjusted diluted earnings per share calculation were tax benefits of $20.5 million, or $0.13 per diluted share, associated with the release of tax contingencies as a result of the expiration of various federal and state tax statute of limitations periods.

These benefits were partially offset by approximately $8 million, or $0.05 per diluted share, of asset impairment charges primarily due to a pending disposition of certain international renewable energy services operations in our electric power segment. This compares to a $6.6 million property and equipment impairment charge reflected in last year's fourth-quarter results.

After last year's charge and through 2016, we evaluated various avenues for profitability improvement but determined near the end of 2016 that the disposal of these operations best fit our ongoing strategy. We would expect no further losses associated with these assets.

Adjusted diluted earnings per share from continuing operations attributable to common stock, a non-GAAP measure, was $0.56 for the fourth quarter of 2016 compared to $0.30 for the fourth quarter of 2015. Also negatively affecting the fourth quarter of 2016 were litigation costs incurred of approximately $6 million, or $0.02 per diluted share, resulting from Quanta's defense of allegations that it violated the non-compete agreement entered into in connection with the disposition of certain telecommunication construction operations in December of 2012. The trial schedule for this matter was aggressive, and the significant amount of discovery was compressed into the latter half of the fourth quarter.

The increase in consolidated revenues for the fourth quarter of 2016 as compared to the fourth quarter of 2015 was primarily associated with an increase in the size and number of larger oil and gas pipeline projects that moved into full construction in the latter half of 2016. Also contributing to these increases was a favorable impact of approximately $25 million in revenues generated by acquired companies, primarily in our electric power infrastructure services segment.

Our consolidated gross margin was 14.6% in the fourth quarter of 2016 as compared to 11.7% in the fourth quarter of 2015. This increase was driven by substantially improved margins in both segments which I'll discuss later in my prepared remarks.

Selling, general, and administrative expenses were $173.9 million in the fourth quarter of 2016, or 8.3% of revenues, reflecting an increase of $22.1 million as compared to the fourth quarter of 2015. This increase was primarily due to a $8.3 million in higher incentive compensation costs associated with levels of profitability.

We accrue incentive compensation proportionate to the levels of income for the year. Therefore, the accrual in the fourth quarter of 2016 was much higher based on the higher operating income and the proportion 2016 operating income represented by the quarter. Other increases include the previously mentioned higher legal costs, higher salaries and benefits from increased personnel and annual compensation increases, as well as incremental general and administrative costs associated with acquired companies.

To further discuss our segment results, electric power revenues were comparable quarter over quarter with approximately $15 million in incremental revenues from acquired companies and slight increases in emergency restoration service revenues, offset by less power plant revenues due to the completion of the Alaskan power plant earlier this year as well as the timing of electric transmission projects.

Operating margins in the electric power segment increased to 8.9% in the fourth quarter of 2016 as compared to 6.8% in the fourth quarter of 2015. Operating margins were impacted by 45 basis points in 4Q 2016 and 201 basis points in 4Q 2015 by items described in the notes to our segment results as presented in today's earnings release. Aside from these items, operating margin improvement reflects better utilization of certain large transmission resources and improved performance on ongoing projects.

As of December 31, 2016, 12-month backlog for the electric power segment was comparable while total backlog for the segment increased 2.1% both as compared to September 30, 2016. As compared to the fourth quarter of last year, total backlog for this segment increased 5.5%.

Oil and gas segment revenues increased 35.1% quarter over quarter to $821 million in 4Q 2016. This increase was primarily due to the number and size of projects that moved into full construction in the latter half of 2016 and approximately $10 million in incremental revenues from acquired companies. The increase in revenues from larger projects also drove the substantial operating margin increased to 8.1% in 4Q 2016 from 3.9% in 4Q 2015.

12-month backlog for the oil and gas infrastructure services segment increased by 3.4% when compared to September 30, 2016, and by 30.7% compared to December 31, 2015. Total backlog for the segment as of year-end is $3.1 billion. As Duke commented in his prepared remarks, we have been in active discussions on a number of pipeline projects which gives us confidence that backlog in this segment will remain strong.

Corporate and non-allocated costs decreased $47 million in the fourth quarter of 2016 as compared to last year, primarily as a result of a $51.9 million charge recorded in 4Q 2015 associated with the goodwill and intangible asset impairments discussed in today's release.

We closed the year with significant cash flows from operating activities from continuing operations for the fourth quarter of 2016 of approximately $184.2 million leading to net repayments of $124.6 million under our credit facility. The fourth-quarter operating cash flow contributed to $381.2 million in total cash flows from operating activities of continuing operations for the year.

Net capital expenditures of approximately $190.6 million for the year resulted in approximately $191 million of year-to-date free cash flow. This compares to free cash flow of approximately $434.4 million for the year ended December 31, 2015.

The decrease in cash flows from operating activities from continuing operations in 2016 was primarily due to additional working capital requirements associated with the increase in the size of oil and gas infrastructure projects that moved into full construction in the latter part of 2016 and the impact of the invoicing challenges and billing delays on an electric transmission project in remote regions of northeastern Canada which we have discussed in previous calls.

The overall AR and unbilled position for this project remains at levels comparable to the third quarter of 2016, in part due to the recognition of some change orders and to a lesser extent, claims associated with customer scope changes and access and delay items. However, we are working very collaboratively with the customer which has led to significant improvement in invoice processing. In addition, the stronger fourth quarter 2016 cash flows benefited from improved cash collections on this project with continued favorable progress thus far post-year-end.

Despite the larger balance this year, DSOs were 74 days at December 31, 2016 compared to 79 days at September 30, 2016 and 75 days at December 31, 2015. At December 31, 2016, we had approximately $112.2 million in cash. Also, we had about $305.6 million in letters of credit and bank guarantees outstanding to secure our casualty insurance program and other contractual commitments, and we had $351.3 million of borrowings outstanding under our credit facility, leaving us with approximately $1.27 billion of liquidity as of December 31, 2016.

Turning to our guidance for 2017. For the full-year 2017, we expect consolidated revenues to range between $7.9 billion and $8.5 billion. This range contemplates electric power segment revenues increasing between 5% and 10% from 2016 level, driven in part by the recent approval of the Fort McMurray West transmission project. Oil and gas segment revenues are expected to range from revenues remaining comparable to 2016 to growth of around 10%.

As discussed on last quarter's earnings call, current 12-month backlog for the segment has 2017 construction activity weighted towards the first half of the year. The low end of revenue guidance for the segment therefore requires no additional larger pipeline awards. However, active discussions with customers lead us to believe that additional awards are available which could provide second-half construction opportunity.

As it relates to seasonality, for consolidated revenues due to the timing of larger pipeline projects, we could see substantial quarter-over-quarter variances in 2017. We believe there will be quarter-over-quarter consolidated revenue growth through the third quarter of 2017 with revenue growth in the first quarter likely exceeding 20%.

I would generally assume revenues will increase through the year from the first quarter into the second and into the third although we anticipate less of a seasonal effect. As we forecast today, we would say that even at the high end of our forecasted revenue guidance, we believe there is likely a meaningful decline in consolidated revenues for the fourth quarter of 2017 as compared to the fourth quarter of 2016.

We currently estimate operating margins for the electric power segment will be in the low to mid-9% range, and the oil and gas segment operating margins are forecasted to be between 5% and 6%. We anticipate seasonal effects will continue to impact our margins with the first-quarter operating margins for both segments expected to be lower, and margins rising through the third quarter. Both segments will likely see operating margin compression in the fourth quarter, or perhaps more so in the oil and gas segment, due to the potential meaningful revenue decline.

We estimate interest expense will be approximately $10 million for 2017 and are currently projecting our GAAP tax rate for 2017 to be between 35% and 36.5%. Contributing to the lower projected tax rate for 2017 is a higher mix of international earnings which are generally taxed at lower tax rates.

In addition, a change in GAAP accounting will now require companies to record all tax effects related to stock-based compensation at settlement through income tax expense rather than through equity. It is anticipated that we will experience increased period-to-period volatility of income tax expense as the calculation is based on the stock price as of the date of vesting which is difficult to estimate. We expect this GAAP accounting change will impact Quanta's first-quarter results more significantly than subsequent quarters and could reduce the first-quarter tax rate to as low as 32.5% to 33%.

We are forecasting minority interest for the year to be between $1.5 million and $2 million. Our annual 2017 guidance also reflects the current foreign exchange rate environment. Fluctuations of foreign exchange rates could make comparisons to prior periods difficult and could cause actual financial results to differ from guidance.

For purposes of calculating diluted earnings per share for the year ended December 31, 2017, we are assuming around 156 million weighted average shares outstanding. We currently anticipate GAAP diluted earnings per share from continuing operations for the year to be between $1.52 and $1.77. And, anticipate non-GAAP adjusted diluted earnings per share from continuing operations to be between $1.80 and $2.05.

Our forecasted non-GAAP measures are estimated on a basis similar to the calculations of historical adjusted diluted earnings per share from continuing operations presented in our release. CapEx for all of 2017 should be approximately $210 million to $225 million. This compares to CapEx for all of 2016 of $212.6 million.

Reflecting on 2016, we ended the year with record fourth-quarter revenues, record annual oil and gas segment revenues, and record 12-month backlog. We experienced solid improvement in our electric power segment operating margins, and as expected, realized significant second-half improvement in our oil and gas segment operating margins.

We finalized repurchases of stock under our accelerated stock repurchase program in April of 2016, successfully acquiring 35.1 million shares for $750 million at an average price of $21.36. This concluded our two-year buyback effort totaling 71.7 million shares for $1.7 billion at an average price of $23.72. Despite this significant deployment of capital, we ended the year with a conservative leverage profile, and we believe that we are operationally and financially well positioned for continued profitable growth in 2017 and beyond.

We are committed to our strong balance sheet and financial flexibility which positions the Company for continued internal growth and the ability to execute on strategic initiatives. We will continue to focus on the strong cash flow of our base business and on mitigating the more pronounced fluctuations in cash flow associated with the working capital requirements of larger projects.

Overall, our capital priorities remain the same with a focus on ensuring adequate resources for working capital, capital expenditures, and organic growth with an opportunistic approach towards acquisitions and other strategic investments. This concludes our formal presentation and we will now open the line for Q&A. Operator?

(Operator Instructions)

Tahira Afzal, KeyBanc.

Thanks. Good morning and congrats on a great quarter.

Thank you.

First question is, Duke, these pipeline projects that could backfill second half potentially? I guess they're pretty fast burned so as we look at the timeline by which it's too late for them to contribute, I assume we are safe as long as you book them by maybe June, July?

Yes, Tahira, the market is robust right now with some of the other projects -- larger projects going into construction. We are certainly optimistic that some of -- the most of the projects on the back half will have the ability to fill it. A little bit worried with Canada, just the overall economy there, so we will be cautious on how we guided the back half with the Canadian market as it is. But, we are optimistic that we can fill the back half here with large pipe for the second half of 2017.

Got it, Duke. And, second question is in regards to the transmission side, you mentioned something pretty interesting which is you've seen projects that are of a size you haven't seen before the US? Is this partly because they're now different in terms of how they are being structured? As in, they are more merchant? Or, is there something more sizable shaping up outside of that?

Really, Tahira, I think the industry is trying to move renewables across multi-states, multi-jurisdiction so you're seeing a lot of larger longer projects from a DC voltage, even an AC voltage. So, you're starting to see us move across state lines -- ISOs, independent operators. So, as you start to see that, the projects get bigger, larger. Some of them are long in nature from a standpoint of the beginning to the end so you hear a lot about them and nothing happens for a long time. So, permitting, siding -- all those things take a very -- it's a long cycle on those larger projects. So, you hear a lot. We see a lot of them out there. We are around the edges. We're optimistic that a few of them will go over the next three to five years here.

Got it. Thanks very much. I'll hop back in the queue.

Thank you.

Andy Wittmann, Robert W. Baird.

Great. On the $1 billion of awards that you mentioned in the prepared remarks that were won in the quarter. I was hoping you could give a little context. It sounds like those are pipeline-driven? But, could you talk about the split between electric and pipeline? And, the visibility at which -- or the steps that need to happen for those to actually get permitted, and therefore, wind up in your backlog?

I think the projects on the $1 billion -- or $1 billion-plus is primarily pipeline. We will talk about them as we get a firm contract, a start date. I think the ability for us to understand the scope and the commitments that we have with our customers and be able to explain that in a firm nature in a firm contract will -- as they go into backlog, we will make sure we communicate to the Street. But, we are confident these will go into construction.

Okay. Maybe just as a follow-up on the pipeline side, as mentioned -- the out-year opportunity for Canadian-driven pipelines. And, clearly, there's been the transmountain -- Kinder Morgan's transmountain pipe is getting some traction. Keystone is potentially back on the table, and Bridge is thinking about upgrading their Alberta clipper line into the US. Duke, from talking to the customers that you can talk to and looking at the market out there, how many or all of these do you believe can go? Or, is that too much maybe off-take from Western Canada? I'd love to get your thoughts on the economics of those as well as the timing which you might see some of those first ones start moving into backlog and then maybe into construction.

I'm not privy to, obviously, what the shippers are saying, but I would say that, in general, if you are moving heavy oil out of Canada you want optionality. I think as long as they are able to move to different geographic areas, you'll start to see pipe move. You're railing most of it now so anywhere you have a rail line it makes a lot of sense to have a piece of pipe. So, that alone will create markets on both coastlines there in Canada. As we start to look to the lower 48 with some of the larger pipe here, same dynamics. Shippers want optionality, and our clients are in a robust environment to build pipe. We see it in Canada and the lower 48. We are in great positions on both sides of the border there. We are optimistic. We like the markets the next three to five years. It's robust in my mind from a bidding cycle. Everything we can say about it -- it's basically permitting delays and things of that nature that concern us.

Thank you.

Jamie Cook, Credit Suisse.

Good morning and nice quarter. My first question relates -- just given the backlog that you have and your confidence that you can fill -- backfill the back half of the year within oil and gas. Why are we still only targeting a 5% to 6% operating margin for the year? Just given the visibility have, and the prospects that you have in place? My second question, just with regards to the Canadian outlook. Obviously, Fort McMurray, that's -- the approval is a good sign. But, can you just help us with what your assumptions are for the Canadian market in 2017? And then, how would you characterize the potential for upside? If you could frame that for us. Thank you.

Thank you, Jamie. From the standpoint of filling the backside in our margin capability there, I think utilization is a big part of that. As we fill it, we're optimistic that our margins will improve. We need to fill the pipe. We need to see it. We need to see it go. We will be conservative until we do. Big pipe is fast -- book and burns fast. So, we will be cautious on how we guide to that. And then, as we fill it, we will talk to you about it in the next quarter or the next quarter. Whenever we fill it, if we fill it. Again, we are optimistic. The end markets are there. And, I think, from my standpoint, we will improve -- our guidance will improve as we move forward through the year.

On the [Wolf-Mac] project in Canada, I think we would say in general that does strengthen our guidance. But, from that standpoint, I'm worried about the overall economic position in Canada. And, just in general, the pressing of the business as far as going down on our margins and what Canada can do to the overall business. So, we are cautious on the Canadian markets.

Jamie, I have one bit of color as well is that it's a segment mix and seasonality. At this stage in the game, we have a fair amount of that pipeline work. The majority of the pipeline work we have in backlog today loaded to the front half the year. And, to that end, the seasonality of the rest of the business has a tendency to put pressure on margins. As we get to the latter part of the year to the extent that we see those awards, that is where you probably would see the ability to see some of that expansion. But, right now, we think it's prudent to guide to the margin range of that 5% to 6% until we see how those other mainline-type of opportunities are playing and offset the seasonality.

Okay, thanks. I'll get back in queue.

Noelle Dilts, Stifel.

Thanks, everyone. Good morning. I wanted to expand on that margin expectation conversation. So, looking at your margin targets for 2017, both ranges are below the 10% to 12% targeted range you've been talking about for electric and well below the 9% to 12% range, I think, you've been looking at in oil and gas. Can you give us some thoughts on, are those ranges still targets over the long term? Or, has something fundamentally changed in both of those segments that's shifting your thinking. For example, in electric, how is this shift toward EPC driving your thinking around margin? Thanks.

Yes, I think we would say that our goals and targets for both segments are still to be at or near the double-digit range. The biggest thing driving electric power is the headwinds relative to the Canadian market. If you were to look a 2016 and remove the effects of the power plant in Canada, the rest of the electric operations are operating solidly in the double-digit range. The headwinds right now are still the softness in the Canadian market. The larger transmission opportunities that we see here coming into 2017 in Canada, obviously, give us some potential for the upside. With the remaining portion of the business, you're still dealing with some degree of headwinds, and we try to factor that into the overall range -- to factor in a degree of prudency to the overall execution. But, again, it's pretty important, I think, to recognize that the rest of the business is operating strongly in the double-digit range.

For the oil and gas segment, it's the complement and the mix of work. We've talked extensively over the last few years about how the degree of mainline opportunities and how they flow into the year will heavily influence our ability to be at a stronger margin profile. Our original commentary over the years has also -- before we ran into some of the headwinds associated with the broader energy market. As oil prices declined, the remaining portion of our business is still yet functioning in an oppressed oil price environment to an extent, and that is putting pressure on some of the other areas of our business. Working against some of the complements or upside potential we see on the mainline side. So, as the mainline gets a complement of work that happens to be more spread through the given year rather than just being front-end or back-end loaded, as well as the mix of work and energy dynamic changing, we still believe that we can see upward momentum to those margins in the long term.

Okay, and then, a second question. Could you update us and give us some thoughts on what your equipment spread utilization was in oil and gas infrastructure in the fourth quarter? And then, as you move into 2017? And, also, how are you thinking about the legal expenses moving into next year as well? Thanks.

Yes, the spread capacity, Noelle -- we are not at capacity on either side so the way those spreads come on and off projects it is very difficult to give you numbers. But, in either case, we were not at capacity and certainly have room in the first quarter here and onward to book work. As far as -- .

It's legal costs. As it relates to how [it goes in] 2017, I wouldn't anticipate right now anything truly abnormal. This was more from the fourth quarter accelerated timing. But, as we go into 2017, we haven't factored into any substantial uptick or downtick in that regard.

Okay. Thanks, appreciate it.

Yes.

Matt Duncan, Stephens.

Good morning.

Good morning

I want to dig a little more on this oil and gas margin thing. I think we are all struggling with the Delta between first half and back half of the year. It sounds like if we are talking 5% to 6% for year, the back half has probably got to be in the 3% to 4% range. Is that in the ballpark of what you are thinking? 7%, 8% first half and maybe 3% to 5% back half. Is that the way you're assuming in the guide?

I would say that as we stand here today with the potential for the fourth quarter to have a lack of an uncommitted filling as an example. The fourth quarter is probably where you'd see the biggest portion of the pressure from the margins. So, I don't know if I necessarily see it relative to the entire back half the year, but the third quarter has a tendency for us to have the highest overall margin profile because of the good seasonality. But, yes, there could be specific softness in the fourth quarter if we are not able to fill it with other larger diameter work

And then, Derrick, what are you assuming in terms of the rest of the oil and gas business outside of large pipe? Because I would think that you would start to see that recovering as rig count has gone up here. And then, last thing for me. Just on FERC, with the lack of a quorum right now. Is there anything in your backlog that needs a FERC order to move forward? Or, how do you think that may impact you?

On the first part, for the margins and the remaining portion of work, we haven't factored in any sizable uptick in our margins there despite what we are seeing. Potential on the rig count-type dynamic, I think in our mind, it's a bit too soon to have an expectation of 2017 immediate benefit, but we do look at that as potential for a positive upside.

Matt, also in general, on the pipe margins and the seasonality. There's normal seasonality in the business, and so I think as you see us fill up work and execute, the margin has the potential to move upward. We will be cautious about how we guide again. As far as FERC, our forecast -- we don't need any large pipe to meet the midpoint of the range so we are confident in our year-end guidance on the gas side.

Thank you. Alan Fleming, CitiBank.

Good morning. Derrick or Duke, can you talk about how much impact storm work, or the storm that you talked about last quarter, had on your 4Q results. I think last quarter you said you expected storm work to be higher, but it might come at the expense of other electric transmission work. Maybe it seems like it was a little more modest than you had thought. Maybe you can comment on that? And, comment on if there were any delays that you saw in your oil and gas revenue this because of that storm that impacted -- that had been in 3Q.

Yes, storm came in at around $35 million for the quarter. Maybe just slightly above what we had otherwise forecasted in our original thoughts for the year. But, from a margin perspective, there wasn't any substantial difference. Realistically, if you recall in our previous commentary, we had said that the number of customers that we were working for were customers that we dealt with on a regular basis. And, from a strategic perspective, you don't see maybe quite as much upside from a margin perspective. So, very much in line with our original expectations. Overall, for the quarter itself, just having some degree of seasonality which we had already factored in and expected to somewhat offset that margin expansion. T

he second part of your question was the timing. We did come in at the lower end of our overall revenue guidance, and most of that came out of the oil and gas segment. There was a degree of some level of push of that revenue from 2016 into 2017. Some of which would have been attributable to some of the heavier rainfall.

On the oil and gas side -- excuse me, on the oil and gas side, it did impact some of those spreads, and we were delayed some time there. So, you had some revenue impact there. In the southeast where the storm hit, we have a large concentration of day-to-day, MSA-type work, and that work was delayed along with it. So, there's some offset in the storm.

Okay, that's helpful. And then, shifting to electric power. If I look at your electric power backlog on a 12-month basis, it has been relatively flattish for the last year. It seems like your base business there of the small to midsize work has been growing at a pretty healthy clip. So, maybe you can comment on what you are expecting in that base business in 2017? And, if you combine that with some of the growth or the visibility that you seem like you have on the larger project side, what is your confidence that 12-month backlog here in electric power can grow in 2017?

We see our customers expanding their capital budgets in multi-year fashion next three to five years. You start to see visibility in those capital programs. So, as that happens, we will continue to grow that base business. The recurring revenue-type MSA work will continue to grow with our customers' capital budgets. As far as the larger projects, as we see Canada -- as we see Wolf-Mac go in. Some other larger projects that are out there. Certainly, the opportunity to win and execute on those, I do think the electric segment is in a multi-year cycle, an upward cycle, and we're optimistic in the environment that we are in.

Thank you.

Chad Dillard, Deutsche Bank.

Good morning.

Good morning.

Just help me think through the moving pieces on the transmission margin guidance side. If I back out those one-time items you're talking about in 2016, when you're effectively guiding margins to be flat to down despite having more and large-scale transmission work. I know that you mentioned that there were some issues with Canada. But, I'm trying to understand, it's getting worse? Or, are there issues with pricing? Or, is utilization coming down? Just trying to understand what the difference is between 2016 versus 2017 that's not leading you to raise margins?

Yes. No, there's nothing that's unique or specific. I think what we've done is we've not factored in a marked improvement in the Canadian environment. We know -- as we've talked through 2016 we saw a degree of stabilization, but I think it's too soon in the year to factor in some sort of distinctive improvement in the non-larger transmission side of the equation. We do have those larger projects that are coming in. Specifically, Fort McMurray. But, that's going to be backend loaded into the year, and so the first half of the year I think you still see with seasonality the aspect of being able to have some degree of margin pressure in the broader Canadian side of the equation. But, we think we've got the ability to go through and potentially see some degree of upside to the extent that you'd be looking at, but I think it's just too soon in the year to factor that in.

Okay. And then, just secondly, over to the oil and gas side of the business. Could you just speak a little bit more about what your expectations are for growth in the base business? Either gathering or your pipeline distribution work? And then, also, with your full-year earnings guidance, is that including the contribution from telecom expansion to the US? And, if so, how much? If you could speak about that.

Yes, the base business on the gas side continues to improve. The LDC market, local distribution market with the [FEMSA] rules and rules that are in place to repair infrastructure, we're in a good environment to continue to see CapEx in those markets. I think we will continue to expand, albeit off a smaller base, but that will continue to grow.

As far as telecom, we have our Latin America and Canadian construction going. We are -- they are good markets. We have about $150 million to $200 million in our forecast that -- with those along with the lower 48 here getting started.

Great, thank you.

Adam Thalhimer, Thompson Davis.

Good morning.

Good morning

You talked about a little bit of a hole in Q4 2017 in terms of the large pipe projects. Does that situation get better as you move into 2018, and ACP gets started?

We will be cautious about how we talk about large pipe. The book environment and the amount of regulatory process that's involved in those projects -- they're distinct. And, we need to make sure that we have them, we are moving, and we are mobilize before we communicate on them. I do like the end markets in 2018. It's a in robust market. I do think we will fill up early and be able to talk more about that. If we get some ease on regulation through FERC through the administration, we will continue to talk to the Street about as we get more positive and move into construction. Those things slip three months -- it is just a big impact to us, and we will be cautious about how we talk to you.

Okay, and then, I think somebody else asked it. But, I just wanted to ask again on the impact of oil prices and the rig counts being up. In any of your businesses, are you seeing an impact from that?

I think the midstream business -- it is a good business. We need to take away that capacity to go to the end markets. As you start to see larger pipe get built, you will see the midstream pick up, and the rig counts -- obviously, there's take away. We are starting to see more rigs so you will start to see all those things happen. We're optimistic on that as well.

Thank you.

Stefan Neely, Avondale Partners.

Good morning. Thanks for taking my questions.

Good morning

Real quick, I wanted to follow up again on the margins for electric in the back half of the year. Can you help me a little bit. Think through the impact of the ramp-up of the Fort Mac job, does that impact your outlook? Or, are you mostly expecting any improvement in margins to be offset by headwinds in the market in general?

As I said in my prepared comments, we can see the margins rising into the third quarter. Part of that will be a contribution of the work associated with Fort McMurray, but at the same time I think it's just broader to the seasonality of our business. I think I'd still factor in a degree of decline potentially in fourth quarter. Again, just driven largely by seasonality. One individual project is not going to offset the broader overall segment seasonality is what I'd expect at this stage.

Okay, thanks. And, for my follow-up, I was curious if you have any update on any cost recoveries from the Alaska power plant job that you finished up last year?

We are continuing to work on those items. We had not anticipated those items to be soft in the latter part of 2016. We've not factored in any recovery of that into 2017. The work is ongoing. We are in the process of quantifying and having those discussions with the customer, but as of today, we are not in a position to quantify.

Okay, perfect. Thanks a lot.

Alex Rygiel, FBR.

Thank you. Good morning.

Hey, good morning.

Duke, you had mentioned that you have resumed operations in telecom. I understand you don't want to talk about strategy, but can you update us on what activities you've resumed?

Yes, we never got out of the telecom business to be clear. We were always in the telecom business. We had certain things under the non-compete we could not do, and basically the primary drivers where we were the telecom contractor or general contractor in the lower 48, we have the ability to do that today. So, as we move forward, you will see us in that market on the general side of this and not just the electric make-ready work. So, we're optimistic. The market is good. It's a robust market. We built our Canadian operations and our Latin American operations so we will participate both in North America as well as Latin America. We like the markets -- we've stated all along, and I'll talk more about strategy as we move forward. I'll leave it at that.

And, as it relates to the international Latin America and Canada, can you give us a little bit more color on wireless versus wire line, and how that business has been growing over the last two years?

Yes, it's both. In Latin America, I would say 70% wire line, 30% wireless. Canada is primarily wire line, and the business has been growing double digits-plus year-over-year.

Excellent. Thank you.

Steven Fisher, UBS.

Thanks. Good morning. Just to clarify, to what extent does filling Q4 rely on Canadian projects, specifically in oil and gas? Sorry if I missed that earlier in the call.

Yes, I think, in general, it does rely on some Canadian work to fill the back half. But, again, I think that the markets are there. The lower 48 could fill as well and bring the back half up. So, the opportunity on both sides of the border are there in the back half.

Okay, thanks. And then, can you just frame the potential oil and gas backlog or revenue opportunity if you are fully utilizing all your large [aminer] spreads and maxed out on your regional gathering business? I'm just trying to think about whether you could add $2 billion to this business and get it to be on par from a revenue basis with the electric business. Or, is there just capacity constraint to prevent that from reaching that kind of scale?

We are building our base business nicely. The opportunities are there. You get people constrained at some point and so you have to be careful about where you're at in the world geographically. Mountainous terrain, the qualified personnel that we have in the field, and we will be cautious about how we move forward in those markets due to the constraints on some of the people in the field. We train people every day. We are hiring every day. So, as we get people trained, we will put them to market and how fast we can do that will dictate how our revenues go in the future.

Okay, thanks.

I'll turn the floor back to management at this time for closing remarks.

Yes, I'd like to thank you for participating in the fourth-quarter 2016 conference call. We appreciate your questions and ongoing interesting in Quanta Services. Thank you. This concludes our call.

Thank you. You may now disconnect your lines at this time, and thank you for your participation.