Quanta Services Inc (PWR) — Q3 2016 Earnings Call Transcript

Great. Thank you, and welcome to the Quanta Services conference call to review third quarter 2016 results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to have Quanta news releases and other information emailed to you when they occur, please sign up for email information alerts by going to the Investors and Media section of the Quanta Services website. You can also access Quanta's latest earnings release and other investor materials such as press releases, SEC filings, presentations, videos, audio cast conference calls, and stock price information with the Quanta Services Investor Relations App, which is available for iPhone, iPad and Android mobile devices for free at Apple's App Store and at Google Play. Additionally, investors and others should note that while we announce material financial information and make other public disclosures of information regarding Quanta through SEC filings, press releases and public conference calls, we may also utilize social media to communicate this information. It is possible that the information we post on social media could be deemed material. Accordingly, we encourage investors, the media and others interested in our company to follow Quanta and review the information we post on the social media channels listed on our website in the Investors and Media section. A replay of today's call will be available on Quanta's 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 have posted the most directly comparable GAAP financial measures and a reconciliation of the differences between these non-GAAP financial measures and the corresponding GAAP financial measures. Please remember that information reported on this call speaks only as of today, November 3, 2016. And therefore, you are advised that any time sensitive information may no longer be accurate as of the time of any replay of this call. This conference 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 are beyond Quanta's control, and actual results may differ materially from those expressed or implied by any forward-looking statements. For additional information concerning some of the risks, uncertainties and assumptions that could affect Quanta's forward-looking statements, please refer to the company's Annual Report on Form 10-K for the year ended December 31, 2015, and its other documents filed with the Securities and Exchange Commission. Management cautions that you should not place undue reliance on Quanta's forward-looking statements, and Quanta does not undertake and disclaims any obligation to update or revise any forward-looking statements based on new information, future events or otherwise, and disclaims any written or oral statements made by any third-party regarding the subject matter of this call. With that, I would now like to 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 third quarter 2016 earnings conference call. On the call, I will provide an operational and strategic overview before turning it over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a detailed review of our third quarter results. Following Derrick's comments, we welcome your questions. We are pleased with the solid third quarter results we reported this morning. Compared to the third quarter of last year, revenues increased approximately 5%, operating income in our end margins improved significantly, and diluted earnings per share from continuing operations doubled. We are committed to returning our operating margins to historical levels, and our third quarter results demonstrate progress towards that goal and the earnings potential of the company. We ended the quarter with a record 12-month backlog. I would note that our backlog does not yet include a couple of large projects we have announced, primarily due to their ongoing permitting process. We are confident that these projects will move forward and will be included in the backlog when we get better visibility into mobilization. Electric Power segment revenues grew approximately 3% during the quarter as compared to the same quarter last year. In addition, excluding a relatively small loss recognized on the Alaska power plant project in the quarter, our Electric Power segment operating income margins rose 10%. These results were driven by sound execution of our base Electric Power business. Of note, we had a nominal contribution from the startup of two larger electric transmission projects we discussed previously on our second quarter earnings call. Regarding the Alaska power plant project, in early October we met the contractual performance guarantees required under the contract and have moved into the final punch list completion phase, which is on schedule with the previous expectations. We continue to build our base transmission and distribution business while actively pursuing large multiyear transmission project opportunities. Based on the projects we are executing on and have in backlog, we believe large transmission project revenues should increase in 2017 as compared to 2016. These projects complement our day-to-day base business operations. In addition, we are in various stages of discussion and negotiations with customers on other large transmission projects that could be awarded over the coming quarters. But we remain cautious on the timing due to permitting uncertainty. The micro environment in Canada remains challenging for our Electric Power operations, but we are seeing signs of recovery that could have a positive effect going forward. We have been taking steps over the past several quarters to adjust the cost structure of these operations. We are pleased with the progress and believe we are well positioned to increase profitability as the markets recover. We compete on a track record for safely executing projects on time and on budget, and we will remain disciplined on pricing and project work risk. We are okay with not winning them all. We continue to have a positive long-term outlook for the Electric Power segment, the end market drivers underpinning the demand for our Electric Power infrastructure services are firmly in place, and we believe will remain so for years to come. We expect our base Electric Power business to continue to grow over time with larger high voltage electric transmission projects creating opportunities for incremental growth but with some cyclicality. And finally, in October, Hurricane Matthew hit the southeast coast of the United States, knocking out power to more than 4 million people along its path and significantly damaging property and infrastructure. Quanta deployed more than 1,700 power workers to assist utilities in restoring power to customers impacted by the hurricane. Quanta and the rest of the industry were able to quickly restore power, which reflects the benefits of system partnering initiatives that utilities invested in over the past several years. We believe this demonstrated system partnering benefits will continue to drive infrastructure replacement for years to come. Our employees safely responded to help others in need and, in many cases, put themselves in harm's way to do so. We have the best craftsmen in the world, and they performed at the highest level during this event. Turning to our oil and gas segment, revenues increased more than 8% versus the same quarter last year and increased more than 29% sequentially. Of note, sequential operating margins increased considerably in the third quarter primarily due to a significant increase in large pipeline project activity. We expect an improved performance for this segment as we move through 2016, with the second half of the year being meaningfully stronger than the first, driven by a significant increase in large pipeline contributions. On our second quarter earnings conference call, we discussed two large natural gas pipeline projects that were awaiting final permitting before the customer gives us notice to proceed with instructions. We began construction on the larger of the two projects, a large natural gas pipeline project in the Southeast United States, in mid-September and expect to complete construction in the first half of 2017. We have also begun initial construction activities on the second project but now expect the majority of the pipeline construction activities to begin early next year rather than this year. We are currently in construction on ten large diameter pipeline phases across North America and Australia. The vast majority of our current and future pipeline projects we see are designed to move natural gas from the Marcellus and Utica shale regions to various demand centers. While a number of others are intended to support coal-to-gas generation switching efforts, increased local gas distribution demand, and further out the movement of natural gas to the coastlines for LNG export. For example, in September, Dominion announced that the Atlantic Coast Pipeline LLC signed a contract with Spring Rig Constructors LLC to build a proposed 600-mile natural gas Atlantic Coast pipeline. Spring Rig Constructors is a joint venture of leading pipeline construction companies, including Price Gregory International, a Quanta Services Company. Pending approval by FERC, the Atlantic Coast Pipeline would run from Harris County, West Virginia, to Robeson County, North Carolina. Construction is scheduled to begin in late 2017, and completion is expected in the second half of 2019. This is a significant project for Quanta, and we are pleased to be a part of the joint venture. Because the project is in the permitting and approval process, it is not yet reflected in our backlog. In addition, we are experiencing increased levels of discussions with various customers about large pipeline projects in Canada. While some projects are encountering permitting and environmental delays, others have received the required government approvals and are progressing forward. Despite a difficult regulatory environment, we continue to foresee an active pipeline market for the next several years. Similar to our Electric Power segment, we have built and are strengthening the best business in our oil and gas segment, which consists of services such as natural gas distribution, pipeline integrity, pipeline logistic management, horizontal directional drilling, and engineering. We are positive on the long-term demand drivers for our natural gas distribution and pipeline integrity services; increasing natural gas demand and new pipeline safety regulations should continue to drive multiyear opportunities in the natural gas distribution market as pipeline integrity programs continue to accelerate. We have been investing in this business and expanding our operations organically into new markets. We ended the quarter with nearly 28,200 employees, which is a record, and I expect our headcount will continue to increase over the coming quarters. Attracting, training, and retaining the workforce we need to safely grow and expand our company and support our customers over the longer term is critical. The development of our world-class training facility in LaGrange, Texas, and our training programs at that facility are the cornerstone of these efforts. There is nothing like it in the industry, and we believe the facility and our training programs give us a competitive advantage. In addition, we have established a business relationship and are developing a workforce development program with Sam Houston State University that provides students with industry-leading curriculum, built experience, and internships for engineering, construction, and project management. We believe this relationship and program is an important step to ensuring we have access to high-quality, well-trained individuals who will become the future of Quanta. In supporting this initiative, Quanta has committed to an endowment of $3 million, 2.3 million of which was contributed in the third quarter. In summary, we delivered solid operating performance in the third quarter and expect the second half of the year to be significantly better than the first, driven by continued execution in our base business and larger Electric and pipeline transmission projects that are ramping into construction. While we are now expecting 2016 results to be in the lower end of our prior guidance, this is primarily due to delayed project starts, which should benefit us in 2017. We continue to have a positive multiyear view on the end markets we serve, and we believe we remain well-positioned to provide unique solutions to our customers. We will provide our formal commentary and 2017 expectations on the fourth quarter earnings call next February; our qualitative outlook for our business is largely shaped by collaborative relationships with our customers, which give us valuable insight into the multiyear infrastructure capital programs. We see increasing activity and opportunity for the award of large high-voltage electric transmission projects over the near and medium term and believe the large pipeline projects market remains robust with a multiyear cycle ahead of us. As I hope you have taken away from our comments this morning, we are confident that we will finish the year strong, and we are optimistic about the potential we see for 2017 and beyond. We are focused on operating the business for the long term, and we will continue to distinguish ourselves through safe execution and best-in-class 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. With that, I’ll now turn the call over to Derrick Jensen, our CFO, for his review of our third quarter results.

Thanks, Duke, and good morning everyone. Today we announced revenues of $2.04 billion for the third quarter of 2016 compared to $1.94 billion in the prior year third quarter. Net income from continuing operations attributable to common stock was $73.1 million, or $0.47 per diluted share. These results compared to net income from continuing operations attributable to common stock of $43.2 million or $0.23 per diluted share in the third quarter of 2015. Adjusted diluted earnings per share from continuing operations as presented in today's press release was $0.55 for the third quarter of 2016, as compared to $0.30 for the third quarter of 2015. We did have a few items impacting our results for the quarter. First, as Duke mentioned, we made the $2.3 million contribution to an endowment with Sam Houston State University. Also, we have a slight true-up for costs associated with the power plant project in Alaska that impacted the Electric Power segment by around $3 million. Lastly, our tax rate is quite a bit higher, partially due to a lower proportion of income before taxes from international jurisdictions which are generally taxed at lower statutory rates, largely driven by delays in our Latin American concession work pushing more of the low-tax income into 2017. Also, as part of filing our 2015 Federal tax return, we had changes in estimate related to amounts qualifying for the domestic manufacturing tax deduction. These items added up to approximately $0.05 to $0.06 for the quarter. Turning to our broader results, the increase in consolidated revenues in the third quarter of 2016, as compared to the same quarter of last year, was primarily associated with an increase in the number and size of the oil and gas projects that moved into full construction during 3Q '16, as well as increased customer spending for gas distribution services. Also contributing to these increases was a favorable impact of approximately $30 million in revenues from acquired companies primarily in our electric power and infrastructure services segment. Our consolidated gross margin was 14.8% in the third quarter of 2016 as compared to 12.1% in the third quarter of 2015. This increase is primarily associated with improved margins in our electric power segment, which I will discuss later in my prepared remarks. Selling, general and administrative expenses were $164.3 million in the third quarter of 2016, reflecting an increase of $18.6 million as compared to the third quarter of 2015. This increase was a result of $11.2 million in higher compensation expenses largely due to greater incentive compensation costs compared to the prior quarter. We accrue incentive compensation proportionate to the levels of income for the year. Therefore, the third quarter of 2016 has a much higher level of accrual based on the higher operating income as well as the proportionate income the quarter represents for 2016. In addition, we have $3.1 million in higher costs associated with ongoing technology and business development initiatives. The $2.3 million contribution to the endowment and $1 million in incremental G&A costs associated with acquired companies net of reduced acquisition costs. Selling, general and administrative expenses as a percentage of revenues were 8% in the third quarter of 2016 as compared to 7.5% in the third quarter of 2015. We further discuss our segment results. Electric power revenues were $1.22 billion, reflecting an increase of $39.3 million when compared to last year's third quarter or approximately 3.3%. This increase was primarily due to approximately $25 million in revenues from acquired companies. Operating margin in the electric power segment increased to 9.7% in the third quarter of 2016 as compared to 6.5% in last year's third quarter. Our margins for the quarter took a slight hit from the power plant, but otherwise reflected solid productivity across most of our electric operations. Last year's third quarter was impacted by significant delays in larger transmission projects, which at the time led to an increasingly competitive smaller transmission market because of excess transmission construction resources in the industry. We were also impacted during that timeframe as we transitioned resources from larger projects to smaller projects. Although we continued to bear the cost of certain underutilized large transmission resources and pressure from a more competitive environment for transmission projects, specifically in some regions of Canada, we have adjusted certain of our costs for the anticipated market environment and are better managing transitions between our smaller transmission projects. On the Alaska power plant project, we are continuing the documentation process and related activities to support our claims and recovery efforts to recoup from various parties a portion of the losses previously recognized on the project. While we do not know how successful these efforts will be or the timing of any recovery, we have not recognized any loss recovery on the project to date or forecasted any current recovery. We do not expect further updates on this project or potential recoveries unless matters change materially. As of September 30, 2016, 12-month and total backlog for the Electric Power segment increased 2.8% and 2.7%, respectively, when compared to June 30, 2016, due to new contract awards partially offset by normal contract burn. Oil and gas segment revenues increased quarter-over-quarter by $63.5 million, or 8.4%, to $819.8 million in the third quarter of '16. This increase is primarily from an increase in the number and size of projects that moved into full construction in 3Q '16, as well as increased customer spending for distribution services. Also contributing to the increase was approximately $5 million of revenues from acquired companies. Operating income for the oil and gas segment as the percentage of revenues increased to 8% in 3Q '16 from 7.8% in 3Q '15 and increased significantly from 1.9% in the second quarter of 2016 due to higher revenues associated with large diameter pipeline projects that typically carry higher margins. Twelve months backlog for the oil and gas segment decreased by $35.3 million, or 1.4%, and total backlog decreased $85.2 million, or 2.5%, when compared to June 30, 2016. These decreases were due to the timing of awards as well as expected contract burn during the quarter, partially offset by the positive impact of scope increases to various contracts. Corporate and non-allocated costs were comparable quarter-over-quarter. For the third quarter of 2016, operating cash flow from continuing operations used approximately $69.3 million and net capital expenditures were $29 million, resulting in $98.4 million of negative free cash flow as compared to free cash of $69.4 million for the third quarter of 2015. Free cash flow for the third quarter of 2016 was negatively impacted by the increased working capital requirement associated with the significant increase in the number and size of oil and gas infrastructure projects that moved into full construction in 3Q '16. In addition, last quarter I mentioned some unbilled production that was moving slower than expected due to the approval process with a customer that resulted in our current working capital balance being a bit higher. Although previous discussions with the customer’s senior management have proven promising on the amount of billing and collections we would achieve this quarter, the approval process has remained demanding and, in our opinion, at times beyond reason. Progress on the project overall has created a level of adjustments to the contract value largely associated with unit adders as defined in the contract, which have also contributed to a higher unbilled balance. We have added personnel demands to meet meticulous requirements that had been presented, and subsequent to the quarter have continued to receive positive comments from the customer for resolution. However, during the third quarter, these payment delays negatively affected our free cash flow. As of September, the accounts receivable and unbilled balances with these customers represented 11 days of our overall DSO position of 79 days, which compares to DSO of 85 days at September 30 last year. DSOs are otherwise lower compared to last September due to more favorable upfront billing positions on other contracts. Cash flows from operations for the nine months ended September 30, 2016 provided approximately $196.9 million, and net capital expenditures were $127.3 million, resulting in approximately $69.6 million of year-to-date free cash flow. At quarter end, we had $117.4 million in cash. At the end of the quarter, we also had $313.3 million in letters of credit and bank guarantees outstanding, and we had $479.7 million of borrowings outstanding under our credit facility, leaving us with approximately $1.13 billion in total liquidity as of September 30, 2016. Turning to guidance, for the year ending 2016, we expect consolidated revenues to range between $7.65 billion and $7.75 billion. We have lowered our revenue expectations due to delays on several projects which have shifted the revenue from 2016 to early 2017, primarily due to permitting delays as well as some delays due to the rainfall associated with Hurricane Matthew. The slight reduction in revenue expectations has a corresponding impact on our earnings projection for the year, and after considering the items I previously mentioned that impacted the third quarter, we now anticipate GAAP diluted earnings per share from continuing operations for the year to be between $1.17 and $1.22. We also anticipate non-GAAP adjusted diluted earnings per share from continuing operations to be between $1.51 and $1.56. Despite some of the project timing impacts, we continue to believe the fourth quarter will be our highest revenue quarter of the year at or near record levels for the company. Our current expectations are for electric power revenues to be comparable to last year's fourth quarter, with consolidated revenue growth quarter-over-quarter being driven by the oil and gas segment. Although we expect to perform higher levels of storm work in the fourth quarter of 2016, we still expect margins for the electric power segment to be in the low 8% range for the year. A significant number of the crews deployed to emergency restoration services associated with Hurricane Matthew left existing customer work. Therefore, the net increase will be tempered. It is too soon to qualify the net effect of storm work as of today. Also, normal seasonality is expected to negatively impact fourth quarter margins for the segment. Margin in the oil and gas segment are expected to be near 5.5% for the year. The storm work benefiting the electric power segment in October had a negative impact on the oil and gas segment, delaying start times on certain projects by a couple of weeks, which contributed to our overall lower revenue expectation. Our margin expectations are still intact for these individual projects, but the lower contributions to the quarter will somewhat offset the overall contribution of storm work to the consolidated quarter. We estimate that interest expense will approach $15 million for 2016, and are currently projecting our GAAP tax rate for the year to be around 41.5%. Also, our annual 2016 guidance reflects the current foreign exchange rate environment; fluctuations of foreign exchange rates could make comparison to prior periods difficult and cause actual financial results to differ from guidance. For the purposes of cash related diluted earnings per share for the year ending 2016, we are assuming 157.3 million weighted average shares outstanding. CapEx for all of 2016 should be approximately $205 million to $215 million, and this compares to CapEx for all of 2015 of $210 million. We are committed to maintaining 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 concentrate 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 the 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.

First of all, nice quarter, happy to see the margins, particularly in the oil and gas segment. I did want to delve in a little deeper there. Would you consider the ramp particularly on large projects, some of which started late in the quarter, can you maybe help us out with how those could trend over the next couple of quarters, assuming normal execution and also taking into account maybe the seasonality particularly with Canada?

Yes Dan, in general, as we move into the fourth quarter, we have taken seasonality into consideration with those projects. They are large, and the risk profiles are different. So I think we’ve given prudent guidance as we move forward into the fourth quarter. I’ll let Derrick kind of talk through it.

Yes, I agree with everything that Duke said. As it relates to rolling past the fourth quarter Dan, it's too soon for us to really think about how seasonality plays in '17. Some of these revenues pushing out of the fourth quarter definitely contributed to the first half of '17, which in many ways could appear as though it bodes well for a quarter-over-quarter comparison in that regard. But I don’t know that we have yet made a determination how we think the back half of the year will play out for '17 otherwise to be able to comment.

Got you. The second thing I want to ask also on the oil and gas segment is, we’re starting to hear some more positive trends, particularly as it relates to drilling activity and certain activities in certain areas. Are you seeing any uplift in terms of the smaller work and gathering work which I know has been under a lot of pressure for much of this year?

Dan, I think the micro environment on the gas side underpinning the demand of the need for large pipe as you take away from the shale regions in the Marcellus and Utica, the need for mid-stream will come back and you'll see some smaller pipe. They are all moving different products as well across and into the Gulf Coast. So yes, I think it's coming back some. It's not prolific by any means, but the large pipe should overcome any kind of shortfall as you would see in that area and the outlook is good. We continue to bid a lot of work and see a lot of work in those areas, so we're optimistic.

Got it. Thanks for the color guys. Appreciate it.

I wanted to start on the transmission side of the business. Going back to last quarter I know there were few that stripped out some of the charges and looked at the U.S. market you're margins were quite good. Looks like continued progress there this quarter. So could you speak to the trends you're seeing from a profitability standpoint in the U.S. and Canada? And how you see that translating through 2017?

The transmission business looks good; there have been other larger projects or it's the timing. So we’re always concerned with the timing on the larger projects of our larger transmission business on really both sides of the business. But, the electric side, we did start some projects. We are on three big projects now. So we are moving forward on some bigger ones. But the underpinnings underlying the base business as we’ll continue to talk about are good. There is demand there, we continue to grow that business. We're excited about it, as we stated our headcounts higher; we’ll continue to invest in our workforce. So we like what we see in the capital spend of our customers; we’re talking to them daily. Therefore, we are able to understand where they're going, and you could look at what they say on their earnings calls, and we believe the capital expenditures will increase over the next few years, especially that we can see. So the underlying business will continue to grow, with some of the larger projects coming on top of that. Canada is a little bit different; it's more dependent on your energy and where oil pricing is. So it's really difficult for us to pin that down on where there larger projects are going. We have continued to get our cost structure in line with what the market is. We do have some nice projects in backlog that we believe will move forward in '17. So we're in pretty good shape for the foreseeable future in Canada.

In the third quarter, excluding the power plant, we are achieving nearly double-digit margins in the electric power segment. We've highlighted our ability to return to this level, which is partly due to our cost control initiatives in Canada and strong margins in the U.S. Currently, the U.S. market for 2016 is executing at a double-digit margin level. We are facing some pressure this year from MLP and also from challenges in the Canadian market, where our cost control efforts have mainly been focused. Looking ahead to 2017, we see opportunities with some larger projects, and we believe that combining our cost control initiatives with these projects will help improve Canadian margins, reducing the dilution caused by current conditions in Canada. However, the U.S. market remains strong, and we are committed to improving Canadian margins for better overall performance.

Thanks, it was very helpful. So my second question is just a kind of broader question on the pipeline base. I think for anyone following the industry, we continue to see headwinds about projects just getting pushed, basically nine months from '17 into '18 or '18 into '19. My question for you is, have any of these delays changed how you are thinking about '17? Or is it sort of par for the course and maybe we’re just looking at a more extended cycle?

Yes, we have discussed the broader and longer trends compared to any peaks, and that perspective remains unchanged. We monitor these larger projects and adjust our guidance to provide accurate timelines for when we expect them to commence. While some delays are unpredictable and arise unexpectedly, we generally have a good handle on when these projects are likely to start. Although we cannot provide guidance based on a short three-month timeframe, we can share qualitative insights. There is a consistent demand for large diameter pipe, and we will account for permitting delays and seasonality in any guidance we offer. Overall, the outlook for large diameter pipe in the upcoming years appears positive for us.

Okay. Thank you.

I have a couple of questions, Derrick. How much did Canada impact earnings this year? Also, regarding the deferred oil and gas project that’s being pushed to 2017, can you provide some specifics on that? My main question is for Derrick or Duke, whoever is available to answer. I know you’re not ready to give specific margin guidance for 2017, but are there any headwinds we should be aware of that could negatively affect margins next year? I’m thinking about how we’ve lost Alaska, Canada should be less of an issue now, and you've restructured. I’m just trying to understand why margins shouldn't be significantly higher in 2017 compared to 2016. Considering the endowment and your investments in technology, it seems like many of the challenges from 2016 are gone, which would suggest a much higher EPS for 2017.

Jamie, on the first part of diluted Canada, I don’t know that I could comment on exactly what the operating income type levels of Canada are, but I can tell you that overall Canada for at least electric power, you're talking about is low single-digit margins in comparison. The international revenues right now run about 15% of our consolidated revenues. That includes some Latin American and some Australian work, but from Canada that gives you the state running in that 10% to 15% range. So you can kind of do some backwards math looking at the relative dilution. Oil and gas pushed to '17 quantifications, I would tell you that the largest portion of our revenue adjustment for the year is associated with those individual oil and gas projects. And then for margin guidance for '17, I can color first and just simply say that I think your assessment is not unfair, mainly you've been if we just look at the elimination of MLP year-over-year. We don’t know that we're going to see any sizable moves from a cost structure perspective, from a G&A perspective. So the rest is going to come down largely due to execution in the timing of the project, but I'll let Duke comment more on that.

Jamie, everything Derrick said is accurate. We see favorable markets in 2017. It really comes down to execution, and I am confident we can execute well. I have a positive outlook on the market and our direction. The company is well-positioned, and we excel in linear construction. I am confident in both the company and the markets in 2017. The only concern I have is the Canadian economy and oil prices there, as well as permitting issues. We will keep an eye on those factors as we progress, but that's mainly for large projects. Our core business continues to prosper, and I expect that to continue in 2017.

Okay, thanks and we'll get back to you.

Duke, if you look at your 12-month backlog, it's showing sort of a 5% type of increase. But if you look at the new work you could potentially book, does that seem to imply that directionally your revenue growth could be 5% plus, even in the high single-digits potentially?

I don’t want to specify the exact percentage. What I can confirm is that our core business is expanding in both segments. The uncertainty around declaring growth arises from the initiation of larger projects. We are indeed building our backlog and continue to do so. It’s the timing of these larger projects being added to the backlog that complicates the situation, so we will remain cautious in our approach.

Got it, okay, I get that. And Duke, as really a follow-up to that, when we look at some of these pipeline projects and how they're playing out or sizing up, it does seem that your normal seasonality will be somewhat different as we go into 2017. So with civil trade or the unmentionable project really trickling into the first half, would you say that the first half is comparatively going to be strong as we see it right now?

Yes. It should. There is no reason why the first half won't be stronger than the first half of this year based on the work we have ongoing. The concern is the second half and what that looks like. So we'll be trying to provide better guidance there in February on that.

Thanks very much Derrick.

It’s Alan Fleming on for Andy this morning. Duke, can you provide an update on pricing in your major businesses? Have you seen any lessening in price competition within electric transmission as some of the large project activity has started to rebound here? Has there been any change in behavior from customers on the main line pipe side as capacity seems like it's gotten a little bit tighter here, especially in the second half of the year?

Regarding the first part of your question, we maintain a disciplined approach to how we operate. Our customers continue to fit the same profile, and we assess risk accordingly. Our risk profile remains unchanged. As our activity increases, our utilization rates improve, which positively impacts our margins. We are seeing better utilization from larger projects, as some individuals who were previously inactive are now engaged in these larger initiatives, and we aim to be more efficient in smaller projects. This is why you are beginning to notice improvements in our margins, alongside the growth of our base business. This will also contribute to greater utilization. In Canada, we have adjusted our operations to better align with our margin goals, while there are certain projects that are beyond our pricing discipline, allowing others to take those opportunities. We will continue to uphold our disciplined approach to our work.

Okay. And to follow up on Canada, I think in your prepared remarks you said you are starting to see some signs of a recovery. Can you give us a little more color on what you are seeing that gives you a little bit more optimism there?

I think our backlog, we have a large project in our backlog as everyone is aware of, and that will go into construction as we stand today in 2017. So it allows us to be better utilized there and gives us some flexibility on what we do in Canada. I would say the overall market is contingent on oil pricing in many ways. So as oil fluctuates, so does Canada. So we watch that as we move forward and we’ll continue to adjust with the markets that we see.

One of the primary aspects I currently lack is guidance on cash flow due to various timing factors. In the fourth quarter, despite improved collections on historical unbilled balances, I expect to maintain a level of production on that project, likely resulting in flat performance this quarter compared to year-end. Therefore, I anticipate that my ending debt balance for the year will be quite similar to my current debt balance, with some of that potentially shifting into the early part of next year.

Okay. Thank you guys, good luck.

In transmission, given that you are entering the plus 10% margin territory, and you are in the early stages of ramping up large transmission. I'm just trying to think through the upside scenario for margins over the next year or so. I look back to the 2012 timeframe and I see about 12% margins. How much of an analog with that timeframe to where we are now? And has anything in your business or end-market changed which would either limit you to around 12% or allow you to surpass that previous peak?

Yes, the market will be in the 10% to 12% range when conditions are favorable. As mentioned before, this is a double-digit range. We are taking incremental steps, and this will progress gradually as we advance into next year. We are currently experiencing some successes in winning bids and facing challenges as well. Therefore, it’s difficult to predict exactly where the margins will end up. We will continue our efforts to return to our historical range.

Relative to 2012. One other thing to point out is that you may recall that was our largest storm work year really in Quanta’s history and we did over $250 million worth of storm work. So that very much contributed to the margins being over 12%. At the same time, in that timeframe, we were working on a significant number of larger projects. Though we do have the opportunity to have larger projects contributing as we go forward, I don’t think we are seeing it at the level of that, so there are a couple of dynamics that kept us very much on the upper side of that range. As we look forward, we'd probably say that would be a little aggressive to think that it would be that high in the near term.

That's helpful. And pivoting over to the pipeline side, can you speak to what you are seeing on distribution? What are your customers telling you about planning for 2017, and then how should we think about that?

The distribution business is a good business. It's a steady business; we see the replacement with FENSA and some of the regulation that you see. It's a long-term replacement program across the country, it’s broad-based. I think you'll continue to see that over the next 10 years to 15 years and you'll continue to see us grow in that business.

Great. Thank you very much.

I wanted to ask on the pipeline segment, and try to get some context around the opportunities that are out there by asking you if you can give us a sense of the dollar amount of projects that you believe you've won but have been unable to announce. These projects that are held up by permitting or other factors, and what the duration of those, can you best estimate the duration of time that's going to take to get those released?

Yes, I think from our standpoint, the larger projects, there is a numerous amount there. It's about which ones go, and they give any sort of guidance on that. It's very difficult. What I would say is we can see out fairly long here in the macro piece of it is that the underpinning demand is there from a power side. So it's a robust environment and bidding environment. It’s the timing, the permitting, and things like that. That's not our expertise, and we can't give guidance on that. What we can say is we do see the company in a good position to win work and execute work in the next few years.

Could you share your insights on whether you've noticed an increase in mainline projects over the past 18 months, or are you looking at the same types of work that have been considered for many years? Additionally, have the recent declines in oil prices influenced the volume of new opportunities coming your way?

If you look at the pipeline business, it's much cheaper to move product through pipe than it is rail. If you look at what was railed in the past, it becomes uneconomical. So you are starting to see more people put pipelines on the drawing board for where rail lines may have been in the past. So I think the overall dynamics of the large pipeline and moving product is there. It continues to be a robust bidding environment and a multiyear bidding environment. So we are having contacts with our customers negotiating, looking at where we’re with them, and we like the environment.

First question I've got is back on the oil and gas segment for a little bit. Trying to think through the project timing as we look out into next year, certainly not looking for guidance for the year, but really more the flow of what you see in backlog. So you've had some stuff that's pushed into the first half. Sounds like you are going to have a pretty good first half. Atlantic Coast isn't supposed to start until later in the year, so it sounds like there's the potential for a little bit of an abnormal flow to the year with an air pocket in the third quarter, which would normally be the high-water mark for the year. Should we be thinking that's the flow of the year unless you pick up a project in between Sabal Trail and other big stuff you're working on and when Atlantic Coast goes?

Yes, we are considering a variety of projects, including Atlantic Coast. Our internal timing differs somewhat. In terms of the second half, we have not initiated it yet, so we'll need until February to clarify when we provide guidance, and it's too early to predict what the third quarter will look like. I understand your perspective on this matter. We will aim to be transparent with our guidance in February, but it is premature to share specifics at this moment.

Yes, that helps. Then I want to come back to thinking about margins. So you've laid out targets of 10% to 11% for electrical and 9% to 12% for oil and gas. Electrical, you're now hitting the low end of that with Canada as a drag. And Fort Mac West is going to start up presumably relatively early next year. Is there any reason, going back to what Jamie was asking earlier, is there any reason why you can't get into the 10% to 11% range in electrical next year? And then with oil and gas, the large diameter stuff is the best margin work that you do. I understand that there's probably drags from really low profit levels on more of the gathering work you're doing. But, Derrick, if you can help us think through the moving pieces of all these segments, and especially in electrical, I'm having a hard time understanding how you don't get into the 10% to 11% range.

As it pertains to this quarter, we experienced margins in the 10% range, which is typically our highest margin quarter due to seasonality. When modeling for the fourth quarter, it's likely that margins in the electric power segment will drop below 10% because of seasonal effects. This seasonality is expected to impact the quarters of 2017. In recent years, the seasonal dynamics were less pronounced due to contributions from Canada, but currently, we are seeing reduced contributions from Canada in both volume and margin performance. While it’s premature to provide specific guidance, these factors are crucial to consider. Our ability to maintain double-digit margins in every quarter of 2017 is likely to be challenged by these seasonal impacts. For oil and gas, the timing of individual project starts and completions in each quarter plays a significant role. In our second quarter commentary regarding the fourth quarter, we noted potential for margin increases, but as of now, we are not seeing that due to project delays pushing out of the fourth quarter. Each project significantly affects the workload mix for the quarter and the year, impacting our margin levels, particularly for oil and gas which we hope can remain in double digits. Additionally, fluctuations in projects related to large-diameter pipe work could enhance our margins at certain times, but as noted by Duke, it’s uncertain how the latter part of the year will evolve, making it tough to gauge our ability to achieve double-digit margins at present.

I want to come back to what Derrick said on the gas side; the mix of work matters a lot. As our base work, the distribution and all the underlying businesses within that, the seasonality does matter there. So you should be cognizant of that when you're looking at guidance.

Yes, very helpful guys. Thank you.

Just a couple of things. First of all, in terms of the Atlantic Coast Pipeline, getting an award before projects have permits seems somewhat unusual to what we've seen in the past. Is that something that we are going to see over the next couple of years, as people try to lock up capacity in this market? And have you got other projects out there where you're signed up, but just can't announce yet?

Yes John, I mean I think in general you could see that happen quite often, and it has happened quite often and does happen quite often. So the FERC permit is one piece of it. Traditionally the gas permit has been a process with FERC that’s been fairly easy. It is not today, so we’ll look at how we put things in backlog and talk about it to the investment community. Yes, we are looking at large projects on a broad spectrum both in Canada, Australia, and in the U.S. and always have on the front end of these projects. The environment is as good as I’ve said; the underpinning demand is there; there is a need for natural gas, all across the lower 48, Canada just from the power plant side so the coal to gas switching happens you start to see the LDC use more natural gas. We are bullish on the pipe business for the foreseeable future here.

Duke, can you comment on how a change in leadership in D.C. could affect the pace of permitting? If so, is that a catalyst in 2017 or later?

Yes Alex, I don’t want to say it can’t get any worse, because it always probably could. So what I would say is that the environment is pretty tough today. The industry has always figured out a way to adapt on any kind of administration. So as the administrations go and come, it does change. It could be better, it could be worse. But the underpinning demand, the need for natural gas, the need for the infrastructure is great, and I think under either administration you’re going to see infrastructure get built.

Could you spend a minute talking a little bit more about Australia? Is that a marketplace you are emphasizing more? Is it a marketplace that has a good margin profile at this time? Or are you de-emphasizing that?

No, we like Australia. We view it as a long-term growth opportunity for Quanta, and we plan to expand our presence there. We made a small acquisition during the quarter to enhance our platform. While there are some challenges, our operations are performing well, and we believe we will grow in this market. We have previously stated that if our operating profit does not reach $1 billion or $100 million, we will consider exiting that area. Overall, we are very optimistic about Australia; we view it favorably.

Thank you very much.

I would like to thank you all for participating in the third quarter 2016 conference call. We appreciate your questions and your ongoing interest in Quanta Services. Thank you. This concludes our call.