Quanta Services Inc (PWR) 2017 Q4 法說會逐字稿

Greetings, and welcome to Quanta Services Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is my pleasure to turn the conference over to your host, Mr. Kip Rupp. Thank you. You may begin.

Thank you, and welcome, everyone, to the Quanta Services fourth quarter earnings conference call. This morning, we issued a press release announcing our fourth quarter and full year 2017 results, which can be found in the Investors and Media section of our website at quantaservices.com.

Additionally, we have posted a summary of our 2018 outlook and commentary we will discuss this morning in the Investors and Media section of our website. Please remember the information reported on this call speaks only as of today, February 22, 2018, 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 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 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 cautionary language included in our press release issued today, along with the company's 2016 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.

You should not place undue reliance on forward-looking statements and Quanta does not undertake any obligation to update such statements and disclaims any written or oral statements made by any third party regarding the subject matter of this call.

Please also note that we will present certain non-GAAP financial measures in today's call and have posted a reconciliation of these measures to their most directly comparable GAAP financial measures in the Investors and Media section of our website.

Lastly, if you would like to be notified when Quanta publishes news releases and other information, please sign up for e-mail alerts through the Investors and Media section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on 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, and welcome to the Quanta Services Fourth Quarter and Year End 2017 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.

2017 was a strong year for Quanta, and we are pleased with our strategic position in the marketplace and believe the operational and strategic investments we made last year will continue to separate Quanta in the utility, energy and communications infrastructure industries. We accomplished many of our goals in 2017, including increasing revenue more than 23% and growing adjusted earnings per share by approximately 30%. We ended the year with record backlog in excess of $11 billion, which does not include several larger projects we previously announced last year and after the end of the fourth quarter. We continue to lead the industry in safety, which we believe starts with training. In the fourth quarter, we completed our first internally developed electric power line worker pre-apprentice program class, and we recently acquired Northwest Lineman College, which I will talk about in more detail shortly.

In response to several major hurricanes in 2017, we deployed thousands of line workers across 6 states and multiple islands in the Caribbean to support and assist multiple customers' power restoration efforts. And during all of 2017, we responded to natural disasters in another 33 states and Canada. We also established Quanta Cares, which raised more than $1.4 million through donations from employees, friends and suppliers and company matching to assist Quanta employees that were impacted by disasters.

We focus on positioning our base business for long-term profitable growth, as evidenced by double-digit growth in MSA revenues in 2017 over 2016, which was accomplished through new agreements, increased MSA share as well as service line expansions with many existing customers. We signed an EPC contract for the largest electric transmission project in our company's history, which further demonstrated our ability to provide differentiated solutions to our customers. Excluding this project, we estimate that our EPC backlog at the end of 2017 increased more than 25% over year-end 2016 backlog.

Quanta established a market-leading presence in the downstream industrial services space through the acquisition of Stronghold, which we believe provides multiple platforms for future growth, including critical path industrial services and storage tank construction and maintenance.

We successfully launched our communications infrastructure services in the United States. This has been very well received by customers and resulted in booking approximately $400 million of backlog with 8 customers in the U.S. in 2017. We on-boarded hundreds of employees and performed engineering and construction services on projects in 13 states.

We established First Infrastructure Capital and secured up to $1 billion of available capital to invest in infrastructure projects. Additionally, we began construction on 2 large EPC projects in which Quanta has minority investments, including the Fort McMurray West high-voltage transmission project in Alberta.

Also, Quanta executed on several strategic industry-leading training and recruiting initiatives that we believe will ensure we have access to craft skilled labor needed for future growth and to differentiate us in the marketplace.

These are just some of the accomplishments in 2017, and while we are proud of these achievements, there is room for improvement. We continue to believe there's opportunity to create significant stockholder value as we execute on our strategic initiatives, which includes returning our operating margin to historical levels.

We continue to believe we're in a prolific environment across our end markets in the U.S. and that we are in the early stages of a multiyear growth cycle. Both our Electric Power and Oil and Gas Infrastructure Services segments grew revenues by double digits in 2017 over 2016, and we expect continued growth in 2018.

While larger projects capture the headlines and generate excitement, it is the smaller projects, maintenance and everyday work that is driving much of our growth. We estimate this type of work grew 20% and accounted for more than 75% of our revenues in 2017.

Looking forward, we expect this activity to remain strong. Each of our addressable markets are large, accounting for several hundred billion dollars in aggregate annual spend. We believe each of our end markets could grow CapEx and OpEx spending at a mid-single-digit compound annual growth rate over the medium term, with opportunity for double-digit growth in some periods.

For example, our top 10 electrical customers in 2017 are estimated to grow their transmission and distribution CapEx greater than 10% in the aggregate over the next 2 years. A majority of the annual end market spend drives the everyday work we perform and provides meaningful growth opportunity for Quanta.

Quanta has been growing, expanding and investing in craft skilled labor for 2 decades, and with 33,000 employees at year-end, has the largest, and we think, the best workforce in our industry. We are leveraging our craft skilled labor and construction expertise with advanced solution offerings and expanding into market adjacencies that allow us to capture more of our end markets' annual spend.

For example, in 2017, we organically grew our gas distribution headcount by approximately 10% and extended our gas distribution operations in 2 states to give us a presence in a total of 25 states. These organic expansion efforts have created short-term margin pressure, but we are confident that the margin should improve as productivity increases and these operations scale. We will continue to focus on and invest in growing this recurring work across our service lines, which should provide a solid and more consistent business underpinning for the long term, complemented by larger projects.

It is important to note that we do not operate our business to just accept what the market brings us. We continually strive to innovate our solution offering and remain well ahead of industry trends. Our success in doing so over the years has played a critical role in establishing the leadership position we have today. We believe our scope, scale, safety record and balance sheet gives us a competitive advantage in the market and allows us 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'll continue to partner with them as they execute their capital deployment plans. We also see an increase in larger projects for electric transmission and mainline pipeline over the next few years.

For example, with respect to larger electric transmission projects in 2017 and early 2018, we signed contracts for AEP's Wind Catcher Generation Tie Line, which has a contract value in excess of $1 billion, but is not yet reflected in backlog; the Ontario East-West Tie Line Project in Canada for NextBridge; and as disclosed in our earnings release this morning, in January, we signed a contract to provide comprehensive construction services for a large transmission project in South Florida.

For larger mainline pipeline projects in 2017 and early 2018, we signed a contract for 2 spreads of Enbridge's Line 3 Replacement Project in Canada; added the estimated value of our work on the Atlantic Coast Pipeline project to our backlog; signed contracts for other large pipeline projects that we are not able to disclose due to confidentiality agreements with our customers; and earlier this month, we announced that Quanta secured 3 spreads of large-diameter pipeline work in West Virginia for 2 mainline pipeline projects, with an aggregate estimated contract value in excess of $550 million.

The quality of our people and our strategic focus on safety, training and being the preferred employer in our industry, coupled with our self-perform model, has earned us a reputation for safely executing projects on time and on budget. Our construction execution has allowed us to provide cost certainty to our customers and offer a self-perform EPC solution across many of our end markets and geographies that we believe is unmatched.

As a result of the historic levels of capital and operating investments, demand for skilled labor is high and industry resources are increasingly strained. The solutions we provide are specialized. And even though we have the largest skilled workforce in the industry and the ability to expand, meeting the growing needs of our customers is challenging. For many years, Quanta has made strategic investments in safety, training and recruiting to become increasingly self-reliant and to ensure we have a qualified workforce needed to grow our business and meet the needs of our customers. Our ongoing investment in training through Quanta's world-class training facility, our partnership and affiliations with educational and trade groups and our other regional activities all demonstrate our commitment to meeting the long-term needs of our customers and sets us apart in the marketplace.

To that end, this morning, we announced the acquisition of Northwest Lineman College, or NLC, which is a strategic and transformative addition to Quanta's ability to attract and train qualified craft skilled labor. NLC is an accredited college and we believe is the premier educational and training institution for pre-apprentice and apprentice line workers in the country. NLC is the largest educational and training organization that provides training across the full lifespan of a line worker's career. Their education and training expertise is scalable, and should allow us to expand their operations across geographies, industries and service lines. For example, we are developing new curriculum for the natural gas distribution and communication industries, which we believe will benefit Quanta, our industry and our customers.

Our people in the field are what makes Quanta unique. The addition of NLC, which we believe is the best education and training facility in the world, to our already industry-leading craft skilled workforce is a powerful differentiator. We believe NLC has the ability to transform Quanta's workforce and the industries we serve. We are proud to start 2018 off with this acquisition. We are pleased with what we accomplished in 2017 but are focused on further improvement. We continue to believe that end-market drivers are firmly in place and that we have the opportunity to achieve levels of record backlog this year.

We expect MSAs, smaller projects and other types of work that we consider recurring in nature to continue to grow. We also see continued opportunity for the award of larger high-voltage electric transmission projects and multiyear alliance programs over the near and medium term. We believe the larger-diameter pipeline project market is robust with a multiyear cycle ahead of us, and expect our communications infrastructure services operations to grow. As a result, our guidance announced this morning reflects revenue growth and improved profitability expectations for both the electric power and oil and gas segments in 2018 and solid EPS growth. Of note, it is the first time that the midpoint of our guidance equates to $10 billion of revenues, and our adjusted earnings per share guidance range has exceeded $2, even excluding the beneficial effect of tax reform.

As we typically do at the beginning of the year, we have taken a prudent approach to the revenue and margin ranges in our guidance to reflect what we believe are possible outcomes based on the risks inherent with our business. Some of these risks are more pronounced earlier in the year due to unpredictable weather, the timing of project starts and general customer budget releases, all of which can affect our financial results. In addition, we are in the earlier stages of ramping construction on certain larger projects. Most notably, almost all of the increased mainline pipeline activity is not expected to begin until the second and third quarter of this year.

As the year progresses and we gain better visibility into our performance, project timing and industry dynamics, we typically adjust our guidance as needed. To the extent adjustments are warranted, ideally, they are upward due do prudently setting expectations at the outset.

We are focused on operating the business for the long term, and we'll continue to distinguish ourselves through safe execution and best-in-class skilled 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 is the foundation that will allow us to continue to generate long-term value for our stakeholders.

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, and good morning, everyone. Today, we announced record fourth quarter revenues of $2.48 billion, a 17.9% increase over the fourth quarter 2016. Net income from continuing operations attributable to common stock was $113.6 million or $0.72 per diluted share compared to net income from continuing operations attributable to common stock of $88.5 million or $0.57 per diluted share in the fourth quarter of 2016.

Adjusted diluted earnings per share attributable to common stock, a non-GAAP measure, was $0.45 for the fourth quarter of 2017 compared to $0.56 for the fourth quarter of 2016.

Consolidated 12-month backlog at December 31, 2017, is approximately $6.4 billion and total backlog is $11.2 billion, both of which are at record levels.

Certain items impacted the fourth quarter 2017 and were reflected as adjustments in our adjusted diluted earnings per share calculation. Favorably impacting the fourth quarter 2017 was a net tax benefit of $70.1 million or $0.44 per diluted share associated with the enactment of the Tax Cuts & Jobs Act on December 22, 2017.

The tax reform benefit includes $85.3 million associated with the remeasurement of U.S. deferred tax assets and liabilities based on the lower U.S. federal corporate tax rate of 21%. The remeasurement benefit was partially offset by an estimated $15.2 million transition tax on undistributed earnings and profits of certain foreign subsidiaries. Additionally, a net tax benefit of $18.2 million or $0.11 per diluted share was generated as a result of various Quanta-led entity restructuring and recapitalization efforts that culminated in the fourth quarter. This tax benefit offsets the negative cash impact of the transition tax on undistributed foreign earnings.

The favorable tax impact for the fourth quarter of 2017 was partially offset by the negative impact of goodwill and intangible asset impairments of $58.1 million, $36.6 million net of tax or $0.23 per diluted share, which were primarily associated with 2 reporting units within our Oil and Gas Infrastructure Services segment. The aggregate revenues of these reporting units represent approximately 1% of our consolidated revenues, so their operations are not material to our consolidated results or expectations.

To further discuss our segment results, electric power revenues increased 22.8% when compared to the fourth quarter of 2016 to $1.57 billion. This increase was primarily due to higher customer spending associated with electric transmission projects, and to a lesser extent, $16.9 million in additional emergency restoration services revenues.

Operating margin in the electric power segment increased to 9.9% in the fourth quarter of 2017 as compared to 8.9% in the fourth quarter of 2016. This increase was primarily due to higher segment revenues, including a higher proportion of larger electric transmission project revenues as well as favorable execution across our broader work.

I also want to mention that the necessary investments we are making to scale and support the growth of our communications infrastructure services operations included within this segment continue to have a slight negative effect on electric power segment margins. Without the dilution associated with these target efforts, the electric power segment operating margins would have exceeded double digits for the quarter. We believe the communication operations are at a positive tipping point and expect improved profitability in 2018. As of December 31, 2017, 12-month backlog for the electric power segment was $4 billion, which is incrementally stronger from the third quarter and was an increase of 20% when compared to December 31, 2016.

Total backlog for the segment was $7.4 billion, which was also incrementally stronger and an increase of 11% when compared to 4Q '16. These increases continue to reflect the end market drivers and opportunities that Duke referenced in his comments.

Oil and gas segment revenues increased 10.1% quarter-over-quarter to $903.8 million in 4Q '17. This increase was primarily due to incremental revenues from the acquisition of Stronghold, partially offset by a decrease in revenues on larger pipeline transmission projects due to the timing of these projects. During 4Q '16, we had several larger pipeline transmission projects in full construction, whereas in 4Q '17, most larger pipeline transmission projects were nearing completion, with others scheduled to begin in 2018.

Operating margin decreased to 2.1% in 4Q '17 from 8.1% in 4Q '16. This decrease was due to the significantly lower contribution of larger pipeline transmission revenues; lower margins on certain distribution work as crews continue to ramp on newer work; impacts from the temporary suspension or deferral of projects as a result of Hurricane Harvey, largely associated with the operations of Stronghold; as well as some degree of seasonality and project performance.

As of December 31, 2017, 12-month backlog for the oil and gas segment was $2.4 billion, which was an increase of 5.7% when compared to September 30, 2017, and was at comparable levels to last year-end's 12-month backlog. Total backlog for the segment was $3.8 billion, which was a decrease of 2.2% when compared to September 30, 2017, but represents a 23% increase from the end of last year.

Corporate and non-allocated costs increased $59.1 million in the fourth quarter of 2017 as compared to 4Q '16, primarily due to the previously mentioned goodwill impairment charges. For the fourth quarter 2017, cash flows provided by operating activities were $198 million. The fourth quarter operating cash flows contributed to $372 million in total cash flows from operating activities for the year.

Net capital expenditures of approximately $221 million for the year resulted in approximately $151 million of full year free cash flow. This compares to free cash flow of approximately $200 million for the year ended 2016. The year-over-year decrease in cash flows from operating activities from continuing operations was largely due to incremental payments of $25 million in the fourth quarter 2017 related to the settlement of a multiemployer pension plan withdrawal liability, which originated in 2011.

DSOs were 76 days at year-end 2017, down from 79 days as of the third quarter, which positively contributed to the fourth quarter 2017 cash flows. DSOs are up slightly when compared to 74 days at year-end 2016. This increase also somewhat negatively impacted annual cash flows when compared to last year, and is due to timing of billing terms across various projects. The $128 million of free cash flow in the fourth quarter of 2017 allowed us to repay $88 million under our credit facility and repurchase of 1.4 million shares of our common stock for approximately $50 million.

At December 31, 2017, we had $138 million in cash. We had $413 million of letters of credit and bank guarantees outstanding, and we had $668 million of borrowings outstanding under our credit facility, leaving us with $867 million in total liquidity as of December 31, 2017.

Turning to our guidance. For the full year 2018, consolidated revenues are expected to range between $9.75 billion and $10.25 billion. Our range of revenue guidance contemplates electric power segment revenues of $5.8 billion to $6 billion. These levels are driven by our expectation for continued momentum in our electric power and communications operations, and represent growth over 2017.

Of note, 2017 included record emergency restoration revenues of $265 million as compared to our expectation of approximately $100 million of emergency restoration revenues in 2018. In addition, our electric power expectations do not include construction revenues associated with the previously announced Wind Catcher and Northern Pass transmission projects, both of which are subject to regulatory approval and would represent additional upside to our 2018 results. As it relates to seasonality, we expect revenues in the first quarter of the year to be the lowest, ramping in the second and third quarters, and then reducing in the fourth quarter.

Quarter-over-quarter growth could be between 10% and 20% for the first and second quarters, with quarter-over-quarter growth rates moderating through the third and fourth quarter. We expect the high end of our revenue range to offer opportunity, principally during the latter part of the year, potentially resulting in greater revenue growth in the third and fourth quarters relative to 2017.

We see 2018 operating margins for the electric power segment increasing compared to 2017 and to be between 9.25% and 9.8%. We expect the seasonal effect on margins will be comparable to 2017, with first quarter operating margins of approximately 8% growing to exceed 10% in the third and fourth quarters.

Although the high end of our full year electric power operating margin expectations contemplate double-digit margins, our communications operations continue to ramp, slightly diluting margins in the segment. However, we believe communications operating income margins could reach upper single digits by the end of the year.

The high end of our revenue range contemplates oil and gas revenues growing at roughly 10% relative to 2017. The year-over-year growth in oil and gas revenues is partially attributable to a full year contribution from Stronghold, which we continue to expect will contribute between $575 million and $600 million in segment revenues.

As to seasonality, for the oil and gas segment, due to the timing of projects, the first quarter may have revenues as low as $700 million, which would pressure margins in a similar manner as the fourth quarter of 2017, potentially yielding margins in the 1% to 2% range. However, revenues and margins are expected to ramp into the second and third quarters, with third quarter revenues increasing as much as 25% as compared to the third quarter of 2017. Similar to electric power, revenues and margins are expected to decline into the fourth quarter. Overall, oil and gas segment operating margins are expected to improve over 2017 and be between 5.7% and 6.7%. We anticipate interest expense for the year to be approximately $23 million for 2018. Two areas that have significant variability in the 2018 financial models within the investment community are other income and expense and income taxes.

In prior earnings calls in other venues last year, you may recall our commentary that the other expense line item would increase in 2017 and increase further in 2018, partly due to the ramp-up in construction activity on projects in which we have investments. Recall that our investments require us to defer a portion of the construction activity.

Currently, our forecast for 2018 for other expense is approximately $20 million to $30 million, a portion which relates to these deferrals. We are currently projecting our effective tax rate for 2018 to be approximately 29% for the year, with the first quarter rate being as low as 26% due to the tax effects of stock-based compensation, a majority of which impacts the first quarter. We anticipate our noncontrolling interest deductions should be between $2 million to $3 million for the year. For purposes of calculated diluted and adjusted diluted earnings per share for the year ended 2018, we are assuming around 159.3 million weighted shares outstanding.

We anticipate GAAP diluted earnings per share attributable to common stock for the year to be between $1.95 and $2.35 and anticipate non-GAAP adjusted diluted earnings per share to be between $2.40 to $2.80. Our forecasted non-GAAP measures are estimated on the basis similar to the calculations of historical adjusted diluted earnings per share presented in our release.

We closed 2 transactions during the first quarter of 2018. The results of these transactions are included in our guidance. However, there are acquisition and integration costs associated with these transactions, approximately $6.1 million of which will impact the first quarter GAAP diluted earnings per share expectations.

Our full year 2018 guidance reflects foreign exchange rates comparable to 2017. Fluctuations in foreign exchange rates could make comparisons to prior periods difficult and could cause actual financial results to differ from guidance.

Reflecting on 2017, we ended the year with record fourth quarter revenues, record annual revenues and record revenues for each segment. We generated record emergency restoration service revenues of $265 million. We supported this growth in demand on working capital by extending the maturity of our credit facility during the year while deploying $361 million for acquisitions and $50 million for share repurchases and supporting various of our project investments.

We ended the year achieving a debt-to-EBITDA ratio of approximately 1.3, which we believe is prudent in order to support the working capital demands of our growing business while allowing us to continue to pursue opportunistic deployments of capital to acquisitions, investments and share repurchases.

We have record 12-month and total backlog, and we believe that we are operationally and financially well positioned for continued profitable growth in 2018 and beyond.

This concludes our formal presentation, and we'll now open the line for Q&A. Operator?

(Operator Instructions) Our first question is from Tahira Afzal with KeyBanc.

Duke, your namesake utility came out with a pretty solid budget the other day. They're upping distribution spending by 40% year-on-year. And if you look at the 3-year plan, transmission is going up. Seems like you've got a project in the Southeast. Can you shed some light? That's an area we haven't seen much about from storm restoration sort of resilience work in the past. Is there anything new going on there that's bringing that area to life on some of the electric T&D work?

Yes, Tahira, again, I think we talk a lot about the CapEx and OpEx budgets of our utility customers, which we think is really what drives the very basis of the electric power and gas segment, for that matter. When we talk about the 75% of our base business, that's what we're talking about. We hear a lot about communication customer growth, their budgets and things of that nature about the growth, but that's -- the same thing on the power side is going on. We're not hearing a lot about it. Duke was the one of them that came out and talked about what's going on from a CapEx and OpEx standpoint. So yes, we support all those customers. And it's growing quite nicely underneath, and it's underpinning what you're seeing. And while we're so bullish about the macro demand of the electric power and gas markets, we continue to talk about it over and over and over again about the growth. And so that's what you're seeing in the electric power business, and it's going to sustain for the medium term as far as we see it.

Got it, Duke. And the second question is about the training school. Last year, in your Analyst Day, you talked a lot about training, and it's been something that's showing up more in your commentary. With the acquisition of the school, is it going to help you remain competitive on the pricing side? Is it going to give you more leeway regionally? Would love to get an idea of strategically how this helps you even maintain your market share or gain market share.

Yes. I think it's unique. We bought an accredited college, I wouldn't call it a school. So when you think about it, it's something that adds to what we already have, which is world-class skilled labor. And what we think is the very core of who we are is putting that world-class skilled labor out and having cost certainty, and then adding the advanced solutions around that craft skilled labor. What Northwest Lineman does for us is it takes the academia piece of that and it puts it into all of our training across all of Quanta as well as what we're doing for the industry when we recruit, when we train new apprentices. It just allows us to expedite what we're trying to accomplish with boots-on-the-ground labor in the field, and it makes us look -- feel different and also helps the industry and our clients because they have the same issues we have. For 15 years or so, North America has not trained craft skilled labor. It's almost been a dirty word. We've got in front of that about 5 years ago with the Lazy Q facility. This academia piece, which I believe is world class, the best training guys in the country and our business, and we'll take that and ramp it into gas, telecom and whatever other verticals that we come up with to put it into craft-skilled labor. It will enhance who we are. It will enhance how quickly we can deploy resources in the field and grow organically. So we're very proud of the acquisition. It's certainly a solution-based acquisition that's going to help Quanta and the industry.

Our next question is from Noelle Dilts with Stifel.

So just starting off, it sounds like the large-diameter pipeline market is, overall, picking up and accelerating. I understand you're really focused on emphasizing small to medium market as well, and that picking up. So can you just give us some thoughts on, now that, overall, the pipeline market, both small and medium and large seems to be picking up, how just the competitive environment is looking, what you're seeing in terms of pricing and terms on some of these contracts? And then can you also give us an update on the Canadian market and how you're thinking about the outlook there as it relates to activity?

Yes, Noelle. The large-diameter pipeline market we talked about being at capacity in 2018 and we still think that's the case as far as North America goes. As far as pricing and such, I mean, most of these projects are long-term projects. We've negotiated many of them years ago with the weight escalation and things like that work. So we're happy with the contracts that we have. We continue to see a robust market there out past 2018, continue to see RFPs, RFQs. It's all over the place as far as negotiations, alliances and the way the contracts are looking. Obviously, we price the risk. We talk about the markets with our clients, but continue to support their CapEx bids on large pipe. The LNG markets are exporting as well. So that looks good for us. As far as Canada goes, I think you need export there on the LNG on coast lines with gas or oil. If that does not happen, you're going to see the export market in the U.S. get more robust. And so you'll see more pipes to support LNG in the States. So one or the other is going to happen. We are seeing a pick up on the small-diameter pipe in the markets in Canada, which is good, and so we're optimistic on that.

Great. That's helpful. And then just shifting over to T&D, the South Florida project that you announced. Can you clarify if that's an independent project or if it's related to some of the rebuild work following the hurricane? And then if you could talk about that longer-term opportunity that you're seeing in South Florida and even Puerto Rico around rebuild work?

Yes. I mean, Florida, and our customers in Florida, there's a tremendous amount of grid modernization going on down there, and they did a real nice job with the hurricane. We picked it up quite nicely in Florida. So the job itself was not -- it was an independent job. When we announce, it's typically over $100 million. So that's typically when we announce a job. That job was independent of that just to show the breadth of -- there is some large projects out there that kind of -- that don't make the headlines every day that we are picking up. But in general, I would say the Florida market and what's going on there is robust. As far as Puerto Rico, there's a lot of rebuild going on down there. We've looked at it multiple times. I would just say that, for us, it was extremely important to support our ongoing customer base, and it was necessary for us to do that. We were constrained with people already, so -- and then trying to ramp for 2018. We chose to stay and support our customers here in the States at this point. We'll continue to look at opportunities in Puerto Rico.

Our next question is from Matt Duncan with Stephens.

So Duke, the first question I've got -- and look, I appreciate that you guys have to be conservative around the timing of pipeline projects. But when I break down what's going on in your oil and gas segment, it makes the guide look really conservative, right? Stronghold, if I remember correctly, was supposed to do less than $200 million in 2017. We're now talking closer to $600 million in 2018. So that's $400 million of growth. That's more than 10% right there, and you're talking about the large-diameter pipeline spreads being, it sounds like, more utilized this year than last. So was it really just as simple as until some of the large-diameter work starts, you're going to assume less-than-perfect timing on those start dates? Is that really what we should be thinking about with relation to where the guidance is?

Yes, Matt. I think if you look at what we guided, and you think about the $550 million to $600 million we talked about in Stronghold, we're on track there. We have not backed off that. When we look at our guidance, we are prudent about how we look at the large-diameter pipe and how it's in the outer -- we have not started. We have not -- we've mobilized maybe on a few, but we have not started construction on any of our large-diameter pipeline as we sit here today. So when we look at that and we take an approach to the quarter or to the year, we're going to have to take a prudent approach to gas and we always have, and we will continue to do that. And we'll update you as we move all along, as we move along on the projects. I do think we can execute through that, through some contingencies there. I think there's some upside there on the outer quarters. But as far as it sits today, I think we put a prudent guidance, which also includes EPS growth or at least growth in the segment. Now I'm now going to let Derrick talk a little bit about that growth.

Yes. I mean, to Duke's point, I mean, to the extent we see the higher revenue base overall and then expanding margin opportunity to our guidance, you can -- I mean, it's [fairly] substantial, a bit of change from our operating income contribution. To the point on the revenue side, we're always going to take into consideration the risk of cancellations or delays within that segment. That's a pretty big component that we always look to be prudent about in the guidance. And from the standpoint as we move forward, we see the ability to expand on both bases of business and continue to have some level of awards. But the -- that's where the biggest risk of cancellation and delay that can happen.

Okay, that helps. I appreciate it, guys. And then sticking with that business for my second question, sort of longer term, can you talk just a little bit about what the market outlook is there? I know there's always a little bit of consternation in the investment community, people concerned about when the peak is for pipeline activity. You guys obviously are just the largest pipeline contractor in both the U.S. and Canada. I would think you have a pretty unique perspective on the visibility that you have to projects beyond what we all can see. So as you sit here today, how long do you think you can continue to grow that segment? What is just the intermediate-term market outlook there?

Yes. I mean, for us, I think when you look at it, it's broken up into 2 or 3 pieces. So if you look at the industrial business and what we did there, it's more of what we call our base business, our core business that's repetitive in nature. We talked about the growth there. We think we can grow that high single, double digits. It's got a longer-term outlook to it. We also have our distribution business that's along that same thing there. We're working on getting scale out of offices this year and things of that nature in that distribution business to increase our margin profile. So you'll see us take some breath and make sure that we grow our margins in that period -- in that piece of business. We also have a midstream business that's underneath that, typically, when after you build large-diameter pipe, it goes back and then you get a lot of takeaway, storage, things of that nature in the midstream piece, which we have a really nice business there that continues. And on the larger-diameter pipe, Canada has been down a bit. They've got to get policy there that will allow to get capacity takeaway. So that has pulled back some. But when you look at it and look at the projects that are out there, I mean, you still have the Keystones of the world. You still have a lot of LNG takeaway that we're hearing now, export capabilities on oil in the U.S. We talked about that in the past, where if you saw some LNG exports start, you would see more gas needed as far as transportation. Those are large-diameter pipes. So I think the market, the way I see it today, has elongated a bit. So that's a good thing in the large-diameter pipe. And we're building our nice base business underneath that, which when we look at the interest rates and what's going on in the replacement and things of that nature, our utility customers have got -- already put in place bonds and things of that nature to support their CapEx on the distribution side, cast iron, steel replacement, all the things that are going on. It's just a matter of us manning and getting scale out of these offices, which will create incremental margin underneath. And we won't be so reliant on this large-diameter pipe as we move out past 2020 and beyond because that's the market that's cyclical, and we talked about the lumpiness of it and then us trying to stabilize that.

Our next question is from Jamie Cook with Crédit Suisse.

I have a couple of follow-up questions. One, in terms of just following up on Matt's question on the oil and gas business. I mean, if you back out Stronghold, you're essentially assuming your organic business is flat. So is there something specific to Quanta in terms of capacity concerns, in terms of projects that we're more worried about, certain projects are getting canceled or not going forward? I just want to make sure there's nothing specific to Quanta or something that's in your backlog. My second question is what is the expected EPS contribution from Stronghold in 2018 relative to '17? And then last, can you just talk about, understanding the electric power margins are being hurt somewhat by investment in communications, can you talk about how long that's a headwind? Or what's the revenue base we need to see for the communications business to get more to the double-digit range that you target longer term?

The gas side, I would say, in general, when we look at our gas business and the guidance that we provided, one, Stronghold, we said $550 million to $600 million, high-single digits. We stand by that as far as margin contribution, the EPS contribution. When we look at the rest of the business, and what we talked about was the prudent approach to guidance, there's nothing in the backlog that would say -- that alarms us as far as getting started or when it starts. We've taken a prudent approach to it just to make sure that we get started. I mean, I think it's important for us, as we start the year on these large-diameter projects and the risks associated with them, that we take that approach to guidance, and we did. And in the underlying business, it's growing really well. We are taking some breath in the distribution business to make sure we can get some scale out of the current offices that we have. I thought that was important. If you look at where we're at from a margin profile, I think we're picking up the whole margin in the segment. So that being said, we are moving the margin up in the segment. And as far as telecom on the electric power, it is dragging some, I think, by -- when we go out in the third and fourth quarter. We're engineering, we're getting into construction. I think we have $400 million of backlog in North America right now. There's no stop in people wanting us to put facilities in the ground and in the air. So that being said, we are concentrated on making sure we have the right labor force and the execution strategy to move that forward as we sit today. And I think as we look into the midpoint of the year, you'll start to see that be at least at parity with our current electric margins on the outer third and fourth quarter.

And then, just sorry, the Stronghold contribution, I think before you were targeting -- I think in '17, it was supposed to lose $0.05 and then swing to a positive $0.10 contribution in '18. Is that still what we're expecting?

Yes. I said $550 million to $600 million in revenue...

I'm talking about EPS though, EPS contribution.

Yes, I'll let Derrick...

Yes, Jamie, that's fair from an EPS perspective. It's just we look at it basically swinging back to about $0.10 that we talked about previously. Our overall guidance expectations for Stronghold for revenue and margins are consistent with what we said in our original acquisition call.

Our next question is from Alan Fleming with Citi.

Duke, we've heard a lot about the tightness on the gas side and demand outstripping available capacity. Does that tightness allow you or give you more control in terms of how you ramp up these large projects as you get into the second half of the year? And would you say visibility today is better than where you've started out the last couple of years?

Yes. On the large-diameter side, I mean, as far as us seeing the work, we can see it, the starts and stops. And when they start is something that's out of our control. So anything that we can control, we certainly can put it on a piece of paper and execute it. Most of the work's in what I would consider risky terrain and parts of that area that we're very, very familiar with. We understand that area. We bid it appropriately to make sure that we've covered our risk off in those areas. So I think we've done a nice job of putting together a book of work that we're happy about going into 2018. And for us, it's just about getting started on it, executing through some of the contingency, and then getting back to you on it, but we're really proud of what we got. I mean, our companies that are under that are 100 years old and built most of the large-diameter pipe or a lot of the large-diameter pipe in North America, so we understand it very, very well.

Okay. That's helpful. And I think previously, you had talked about expecting some of the industrial-related work that you lost out on when the hurricanes hit in the second half of '17 potentially coming back this year. Have you started to see that happen? And do you think there's any pent-up demand there on the industrial side on the Gulf Coast that can start to shake loose here in the early part of '18?

Yes, that's a new acquisition for us. And I think as we look at it, we're really happy with what -- the acquisition and what we're seeing there. I'm cautious about how to talk about this year. But I think, in general, we're seeing more demand. Whether it's Harvey related or not, I can't be sure. But I think we're seeing more demand in the services that we offer in the industrial space, and we're really happy with what we see.

Our next question is from Chad Dillard with Deutsche Bank.

Duke, could you walk through some of the moving pieces behind your oil and gas outlook? Just trying to think through how the LDC business contributes as well as on the midstream side. And just a question on Stronghold as well. I know that there's some cost absorption issues that were impacting performance in 3Q and 4Q of last year. Just trying to get a sense for whether we're fully beyond that, or will there be some absorption issues that play through until 1Q?

I think, in general, we've talked a little bit about it. As far as the industrial, we stand behind the guidance we gave there. We've taken a prudent approach to our large-diameter pipe. Our takeaway capacity that's there as far as what's out there, they continue to build that. It's Texas, the Permian Basin, continues to be prolific. So I mean, we see a really nice market there. I think when we talk about it, it's the distribution business that we're seeing that we invested in last year. We're able to now take that and get scale out of those offices and we'll start executing. When you look at year-over-year, you have some -- you had Sabal Trail going in the first half last year. We don't have it going right now, so we're just -- we're starting with no large-diameter pipe in the first quarter for that matter, a little bit in Canada, so there is some difference in the way the years fall out, so it's more second quarter and beyond, driven on large-diameter pipe and we take that approach in guidance. Canada is still, I would say, out of all of it, is still the unknown as it sits today. The large-diameter pipe that -- you have Line 3 up there that's under RFQ now. Some of the other larger projects are still in RFQ stages. So that's probably, I would say, if we had a visibility issue, it would be Canada and large-diameter pipe. But we're real happy with where we're at, and we think we really have a good market in 2018.

That's helpful. I mean, switching over to large transmission, can you speak to your expectations on utilization? I was trying to think through just the number of projects that you have. You have Fort McMurray already in construction, the East-West Tie Line, recent win with the large Florida project and potential Wind Catcher. Well, I'm just trying to think through over the next maybe 1 to 2 years, I mean, how should we think about the collective, I guess, utilization or productivity peak for these projects and when will that hit?

Yes. I think if you just -- if you look at it and you see the CapEx and the OpEx, and we're on 2 large projects. It'd be 3 with the Florida project there. We're able to put up $5.9 billion or so, $6 billion or so of electric power revenue without -- with those large projects. That will continue to grow. We continue to see the CapEx, OpEx budgets of these customers be prolific, and I can't stress it enough about the business that it's what's driving the business. We're talking about Wind Catcher and Northern Pass and all those kind of things every day. None of that is in our outlook, none of that is in our backlog, none of that is what we're considering what's driving this business today. It's really the enhancement of us providing solutions to our customers so they can be successful in their capital deployments and OpEx deployments. And that's what's driving the electric power business on a daily basis, which what's driving Quanta for the most part on that 60%, 65% of our business.

Our next question is from Adam Thalhimer with Thompson, Davis.

I wanted to start with telecom. Can you just talk about the trends you're seeing in the U.S.? And then also, what are your thoughts on continued U.S. telecom backlog growth in '18?

Yes. The telecom business is robust. We talk about it daily with our larger customers there, us being back in the business. It's certainly something that's -- it's getting a lot of our attention here. We're able to talk to a variety of customers about their builds. It's a really good market. What we're in now, I mean, we're engineering a lot of projects. We're starting to put boots on the ground and delivering at this point. So it's something that I think is going to continue. You see the markets in 5G, 4Gs in places still. Our Latin America market and Canada market is good. So we're excited about the business, so we continue to put people in the air and on the ground. So to us, it's just now it's about execution. I think we can continue to build backlog. We've talked about $1 billion, and I stand behind it. We're still headed that direction.

Great. And then just a clarification on these other expenses. When do those projects end that are generating the other expenses?

Yes. I mean, I have to tell you that you should expect to some extent that we would see that probably over the mid- to long-term portion of our visibility because we continue to believe that we'll go through and make investments in other projects as we move forward. The projects that are sitting here today that are influencing that number, those go into an '18 and '19 time frame. But I would continue to expect that '19, '20 and beyond, that you'd see some sort of level of that other expense or deferral as we continue to pursue other types of investments.

Our next question is from Alex Rygiel with FBR and Company.

Two quick questions. First, in the gas distribution business, congratulations on picking up some more share there. Could you help us to kind of frame the size of that either as a percentage of total oil and gas segment or sort of the annual revenue run rate that gas distribution is on right now? Maybe talk a little bit about the growth rate in that business in 2018 versus '17? And then from a more macro standpoint, talk about the margin profile of that business, and how it's changed over the last couple of years and where it could get to.

Yes. So thanks, Alex, for the question. I think the gas distribution business, it's basically -- underneath, it's really the steel replacement, the cast iron replacement, all the things that are going on from an integrity standpoint in distribution systems. You have low interest, low fuel costs, so that regulators are really putting money into replacing the systems. And it's broad-based. It's U.S.-based. It's all over. So that being said, labor constraints and things like that, us building it organic -- growing it organically and building these offices has put pressure on the margin profile of the segment. So it's difficult because there's some large steel, low-pressure steel that goes along with some of that replacement. So it really looks and feels like a midstream job in many ways, other than being in the city. So you do cross a little bit, so we can move crews back and forth on some of those cast iron and steel replacement jobs. It's a nice market. It's a 20-year, 30-year build. We've seen people pull back from saying 50 to 60, and now they want to do it in 30 years. So we're starting to see that. I think our acquisition of Northwest Lineman will allow us to train those -- our folks in the field faster, and we can put more crews together and grow that business. But if you look at the growth of the business, I think we can grow it in the high, high to mid-single digits year-over-year. And I'll let Derrick talk about how it complements the whole segment.

Yes. The distribution on its own, this probably runs in the 20% to 25% of the overall segment. It's a component of what we consider to be base business for that, which is, on average, is still running about 75% of everything. But that component alone probably runs in the 20% range.

That's very helpful. And then on NLC, is this just a cost center? And if so, what's the annual drag that we should think about, if we should even think about it that way?

No, I don't look at it like that. I think it can -- it is a cost center to some extent, but it also earns revenue as well. It's a nice business. It offsets some of our training costs as well. When we look at it, we look at it as a solution really to our customers' labor solution, and to ourselves, and it allows us to train and facilitate our training and get people deployed faster. And also, when they hit the ground, people today, kids today, we need to put them out there smarter, and so they're able to be smarter when they hit the ground. And I think the pre-apprentice piece of this, and it allows us to really complement our already trade associations and things that we're doing today and work in a collaborative effort with our client and our trade associations to deploy more people and grow organically faster and more economical. So it's difficult to say what that is synergistically. But as itself, I mean, if you just look at the margins on what they do on any given day, their margins are comparable to our electric segment.

Our next question is from Bill Newby with D.A. Davidson.

I just had a couple of follow-ups on the telecom. Duke, you kind of mentioned that $1 billion revenue target kind of longer term. I think, originally, you had said that's kind of a medium-term target. Is that -- I mean, can you give us any more color there on how quickly you guys think you can get to $1 billion? Is that a '19 event? Or are we still too soon to tell?

Yes, I think '19 is a stretch. I would say it's more longer than shorter. But where I think you'll incrementally see us -- it's a matter of how much labor can we deploy in the field and how well can we execute on these larger projects. And so for us, I mean, the macro market's certainly there for us to do that in any given area. If we look at our international markets, and also what's going on in the Lower 48, we can certainly get there. If we chose to do some regional acquisitions or things of that nature, we can expedite that. We're talking about doing that organically as it sits. So I think, in general, it just depends on how we look at it on a go-forward basis. But the market's there. I don't want to press it. We want to make sure we can execute, so we'll take a prudent approach to how fast we get there.

Okay. I appreciate that. And then I guess, on the margin side, it's good to hear that those margins on that business should be on par with electric by the end of this year, it sounds like. Is there more upside there as you continue to ramp it? I mean, could those margins be accretive to electric power segment by the time you get to $1 billion in revenue?

Yes. I mean, I think you see our pure-play competition. I think when you see that, there's no reason why, with our boots-on-the-ground capabilities and what we're able to accomplish, we couldn't have comparable margins or should. It's my expectations that we would have comparable margins to what you see out of those guys. We are growing this business organically. And so when you're growing anything organically, it costs money to grow. And I think it gets unnoticed, the amount of resources, both on the distribution side of the business, on the gas side, the electric side and the organic growth that it takes to put people in the air and train them. It costs money, and it drags a little bit. But for the longer term, if we look at the company 5, 10 years and the ability for us to continue to grow our EBITDA and margins, that's there. We continue to do that, and we'll continue to do it for the foreseeable future.

Our next question is from Steven Fisher with UBS.

I wondered if you could talk about how revenue recognition changes are affecting your financials and the guidance for 2018.

Yes. Actually, we have anticipated fairly little impact. I think that we're looking at something in kind of a low single, maybe kind of double-digit cumulative effect that we may be booking here in the first quarter. But broadly, I think you'll see absolute kind of negligible impact to our overall revenue recognition.

Okay. And then just a further clarification on the large-diameter pipe guidance assumptions, I know you're trying to be prudent, but maybe you can kind of tell us how much you have included in your guidance that's not actually permitted at this point, and if you could kind of quantify for us how much large-diameter pipeline work you did in 2017 versus what your base case is for 2018.

Yes, I mean, I can tell you, and I'll let Derrick talk to the comment on the end. But as far us mobilizing and things, it's not a permit issue. More so, it's just making sure that we do mobilize and nothing else comes up on those larger projects. We feel confident that they'll all go. We're not concerned at this point with that, and so we've taken that into account in the guidance. We don't have a bunch of cancellations or anything like that. You could see some slippage quarter-over-quarter or things of that nature. We're still looking at work and booking work on a daily basis. I mean, we're booking work in the quarter. We'll continue to book work. So that being said, it's still a robust market as we sit today. And I'll let Derrick comment on the amount in the segment.

Yes. In 2017, I think the big thing to remember is the first portion of the year had a substantial amount of winter work, which is not necessarily normal for us. So '17 had a larger portion of mainline contribution [likely] overall. As an example, when you come into '18, you're not seeing very much of that, and it's what's bringing the overall revenue base down. I would say that in '17, we did north of $1.5 billion. And this year, right now, we still see the opportunity, but we're probably a little less than that as we stand here today.

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back to management for closing comments.

Yes, I'd like to thank everyone for participating in the call, and thank you for your support in 2017, and more importantly, our people in the field for doing what they do every day. We thank you, and thanks for participating in this call.

This concludes today's conference call. You may disconnect your lines at this time, and we thank you for your participation.