Quanta Services Inc (PWR) — Q2 2017 Earnings Call Transcript

Greetings and welcome to Quanta Services Inc Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kip Rupp, Vice President of Investor Relations. Please go ahead, sir. Great, thank you, and welcome everyone to the Quanta Services conference call to review second quarter 2017 results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to be notified when Quanta publishes news releases and other information, please sign up for e-mail alerts by going to the Investors & Media section of quantaservices.com. We encourage investors and others interested in our company to also follow Quanta on social media channels listed on our website. Please note that in today's call, we will present certain non-GAAP financial measures. In the Investors & Media section of our website, we have posted reconciliations of the differences between these measures and their most directly comparable GAAP financial measures. Please remember that information reported on this call speaks only as of today, August 3, 2017, and therefore you're advised that any time sensitive information may no longer be accurate as of any replay of this call. This call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance or that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or that are beyond Quanta's control and actual results may differ materially from those expressed or implied. For additional information concerning some of these risks, uncertainties and assumptions, please refer to the company's 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. Management cautions that you should not place undue reliance on these forward-looking statements and Quanta does not undertake any obligation to update any forward-looking statements and disclaims any written or oral statements made by any third party regarding the subject matter of this call. With that, I would now like to turn the call over to Mr. Duke Austin, Quanta's President and CEO.

Thanks, Kip. Good morning everyone and welcome to the Quanta Services second quarter 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 second quarter results. Following Derrick's comments, we welcome your questions. We remain on track to achieve our full year guidance and multiyear outlook. We continue to execute on our core business and strategic initiatives and continue to believe that our end markets are strengthening. As a result, we believe 2018 and 2019 are firming up to be solid years for both our electric power and oil and gas segments and that Quanta is in a renewed multiyear up-cycle. While the timing of when project contracts are signed and reflected in our backlog can be challenging to predict, we have good visibility into the overall CAPEX and OPEX spends of our end markets and remain in active discussions with our customers for billions of dollars of work. I will note that the timing for larger projects is currently more difficult to predict due to the lack of commissioner quorum at FERC. Despite these challenges, we believe it is not a matter of if larger projects move forward, but when. We continue to believe end market drivers remain firmly in place and that we have the opportunity to achieve record backlog levels over the next few quarters. Turning to the electric power segment, we are generally pleased with our performance during the quarter as mentioned earlier. We continue to invest in the workforce for our electric distribution business, which created short-term margin pressure in the second quarter, but it is necessary to support future growth. Nevertheless, we are on track to achieving our margin expectations for this year and continue to believe we have the opportunity to improve operating margins to double-digits as these investments pay off and our Canadian operations strengthen with the start of field construction of the Fort McMurray West Transmission Project. Our customers are actively executing on existing capital programs. Small and medium transmission projects as well as distribution work remain active, and we continue to have discussions with customers about the solutions we can deploy for new large multiyear capital programs. These programs include both larger and smaller electric power infrastructure projects that are designed to upgrade and modernize the grid. On prior calls, we have talked about and anticipated an increase in larger transmission project awards. Earlier this week, we announced that Quanta was selected by American Electric Power, or AEP, to provide EPC solutions for the Wind Catcher Generation Tie Line Project. The anticipated contract value for this project makes it the largest award in Quanta's history. The Wind Catcher Tie Line consists of approximately 350 miles of a single circuit 765 kilovolt power line and two new EPC substations in Oklahoma. We will provide turnkey EPC services for the entire project. Once completed, the line will deliver energy from the Wind Catcher wind farm in Western Oklahoma to customers in Arkansas, Louisiana, Oklahoma, and Texas. We are providing early phase project services to AEP. And subject to AEP obtaining regulatory approvals, we expect construction to begin in the later part of 2018 with the completion expected in late 2020. We have yet to determine whether the project will be included in the third quarter 2017 backlog. Quanta has built more high-voltage electric transmission infrastructure in North America than any other specialty contractor. With industry-leading experience constructing 765 kilovolt lines, Quanta brings significant scope, scale and financial resources, as well as a track record of safely executing large complex projects. We are also able to provide cost certainty to these projects like the Wind Catcher Tie Line, all of which, we believe, are competitive advantages. We have agreements for and continue to discuss additional large transmission project opportunities with numerous utilities and merchant transmission companies in North America. Several of these projects are making progress through the permitting and regulatory approval process, with announcements possible in the medium-term. Further, our ongoing investment in training through Quanta's world-class training facility, college and trade affiliations, and other regional activities, and our commitment to meeting the long-term needs of our customers sets us apart in the marketplace and will continue to pay dividends. We have added to that effort by helping form a non-profit line school. Although in the early stages, we believe this school will help to develop quality line workers to supplement our growing resource needs. Our oil and gas segment had a good second quarter as we executed well on several mainline projects and other work, which resulted in solid operating income margins. Further, backlog held up well in the second quarter, especially considering segment revenues increased strongly over the same quarter last year. As a reminder, oil and gas segment backlog can vary due to its faster book and burn nature and the timing of larger pipeline project awards. In July, Quanta was awarded two spreads of the Canadian section of Enbridge's Line 3 Replacement Project. Quanta's scope of the work includes the construction and installation of approximately 168 miles of new 36 inch diameter crude oil mainline pipe, which will begin in Hardisty, Alberta and continue into the province of Saskatchewan, Canada. Construction is expected to begin this month and is anticipated to continue through 2019. This project supports our prior commentary regarding improved expectations to booked pipeline work for the second half of this year. As I commented earlier, FERC currently lacks a commissioner quorum, which is required to provide final approval for major projects, including pipelines. Due to this uncertainty, customers have been reluctant to sign project contracts. A recent article estimated that there is $50 billion of energy projects that are held up and waiting for FERC approval. The Trump administration has nominated candidates to fill all currently vacant FERC commissioner seats and we believe a quorum will be achieved over the coming months as commissioners proceed through the confirmation process. The majority of the pipeline projects waiting for FERC approval are planned to begin construction in 2018. Quanta remains in late-stage discussions and negotiations on multiple larger pipeline projects, and we continue to believe that 2018 and 2019 will be active years. We believe a number of them will be awarded pending their receipt of FERC approval or perhaps earlier and should break ground over the next 24 months. A couple of weeks ago, we announced the acquisition of Stronghold, a leading specialized services company that provides high pressure and critical path solutions to the downstream and midstream energy markets. Stronghold is a strategic acquisition that will allow us to capture a greater portion of the industry operating and capital spends. With positive industry dynamics, visible cross-selling opportunities, and Quanta's support, we believe there is a multiyear opportunity for Stronghold's operations to achieve double-digit growth. Stronghold's recurring revenues, accretive operating income margin profile, and strong free cash flow generation align well with our strategic imperatives for long-term profitable growth. Since announcing the acquisition, a number of Stronghold's customers have responded very favorably and we have received inquiries from several customers that would like to learn more about the comprehensive solutions a combined Quanta and Stronghold can provide them. The growth of our communications infrastructure services operations continues and our outlook remains positive. Our U.S. market expansion efforts are going well and continue to be very well-received by current and potential customers and we are actively pursuing opportunities with various U.S. telecom and cable MSOs. During the second quarter, we booked approximately $150 million of new project awards in North America, the majority of which were in the United States. We are in discussions with providers across North America and in certain countries in Latin America for projects worth several hundred million dollars in total, which, if we are successful in signing, would be performed over the next few years. Additionally, during the second quarter, we completed the strategic acquisition of an established communications contractor that serves the Southeast and other regions of the United States with strong customer relationships. Now as a part of Quanta, we are growing the business and have strong support from its key customers. We remain focused on organically growing our communications services offerings. However, we will evaluate select acquisitions that bring strategic value to Quanta and allow us to provide differentiated solutions that can accelerate our expansion efforts. In summary, we remain on track to achieve our full year outlook, continue to have a positive multiyear view of the end markets we serve, and believe we are entering a renewed multiyear up-cycle for electric power, oil and gas, and communications infrastructure services operations. We are confident that Quanta is well positioned to provide unique solutions to our customers and capitalize on favorable end market trends. Our small and medium-sized base business work continues to grow nicely and we are seeing larger electric transmission and pipeline projects move forward as evidenced by the Wind Catcher Tie Line and Line 3 Replacement Program projects. We are making progress with our U.S. communication services expansion efforts and see meaningful growth opportunities for our operations in North America and Latin America. We are focused on operating a business for the long term and continue to distinguish ourselves through safe execution and best-in-class field leadership. We will pursue opportunities to enhance Quanta's core businesses 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 stakeholders. With that, I will now turn the call over to Derrick Jensen, our CFO, for his review of our second quarter results.

Thanks, Duke, and good morning everyone. Today, we announced record second quarter revenues of $2.2 billion. Net income attributable to common stock was $63.8 million or $0.41 per diluted share compared to net income attributable to common stock of $16.6 million or $0.11 per diluted share in the second quarter of 2016. Adjusted diluted earnings per share, a non-GAAP measure, was $0.50 for the second quarter of 2017 compared to $0.18 for the second quarter of 2016. Consolidated revenues increased almost 23% when compared to the second quarter of last year. This overall increase was primarily associated with increased capital spending by our oil and gas pipeline customers on larger pipeline transmission projects and increased capital spending by our electric customers on multiple types of services and project sizes. Our consolidated gross margin was 13.7% as compared to 11.2% in the second quarter of 2016. This increase was driven by improved margins in both segments, which I'll discuss later in my prepared remarks. Selling, general, and administrative expenses were $185.9 million in the second quarter of 2017 or 8.4% of revenues as compared to $156.6 million or 8.7% of revenues in last year's second quarter. The increase in SG&A was primarily due to higher compensation costs largely associated with higher incentive compensation based on current levels of profitability, as well as annual compensation increases and increased personnel to support business growth. Also contributing to the increase was $5.1 million in incremental G&A expenses associated with acquired businesses, which included a $3.8 million increase in acquisition and integration costs. We also made a $2.4 million charitable contribution during the quarter. This contribution was an initial grant to help form a non-profit line school and to fund its operations for the remainder of 2017. We anticipate making future annual contributions starting in 2018, which with the school now established, we would expect to include in our future annual guidance. To further discuss our segment results, electric power revenues increased 12.2% to $1.3 billion when compared to last year's second quarter. This increase was primarily due to higher customer spending in both our recurring type revenues of distribution and smaller electric transmission projects as well as a higher contribution associated with larger electric transmission projects as more of these larger projects were in construction during the second quarter of this year. In addition, we had approximately $15 million in revenues from acquired businesses and $8.1 million in additional emergency restoration services revenues. These increases were partially offset by a decrease in power plant-related revenues due primarily to a lower volume of renewable power plant projects and the completion of a power plant project in Alaska during 2016. Operating margin in the electric power segment increased to 8.7% in the second quarter of 2017 as compared to 6.6% in last year's second quarter. This increase largely resulted from $30.5 million of project losses related to a power plant project in Alaska that were recognized in the second quarter of 2016, which negatively impacted margins in last year's quarter by approximately 260 basis points. Partially offsetting this increase in the quarter were slightly lower margins associated with our distribution services as we ramp on certain training and development costs for upcoming work, as well as variations in segment margins due to typical seasonality and the timing of project start dates and completions. As of June 30, 2017, 12 month backlog for the electric power segment was $3.6 billion, which is an increase of 1.6% when compared to March 31, 2017, while total backlog remained relatively constant despite record second quarter revenues for the segment. As compared to the second quarter of 2016, total backlog for the segment increased 6.5%. Oil and gas segment revenues increased 42% quarter-over-quarter to $899.6 million in 2Q 2017. This increase was primarily due to increased capital spending by our customers on larger pipeline transmission projects. The increase in revenues from larger pipeline projects also drove the operating margin to 7.5% in 2Q 2017 from 1.9% in 2Q 2016 as these larger projects typically have a higher margin profile due to the associated risks. Additionally, the overall higher revenues in the segment allow for better coverage of fixed and overhead costs. As of June 30, 2017, 12 month backlog for the oil and gas segment was $1.7 billion and total backlog for the segment was $2.4 billion, both representing slight decreases compared to March 31, 2017 and year-end 2016. These decreases are primarily due to burn of larger pipeline projects that moved into full construction. Our second quarter backlog does not reflect the July award of Line 3 and as Duke commented in his prepared remarks, we have been in active discussions on a number of pipeline projects, which gives us confidence in future backlog materializing. Corporate and non-allocated costs increased $18.6 million in the second quarter 2017 as compared to 2Q 2016 due to $12 million of higher compensation costs, largely associated with higher incentive and non-cash stock compensation expense based on current levels of profitability, $3.8 million in higher acquisition and integration costs, and the $2.4 million charitable contribution to the non-profit line school. For the second quarter of 2017, cash flows provided by operating activities of continuing operations were approximately $8.7 million and net capital expenditures were approximately $54.5 million, resulting in $45.8 million of negative free cash flow. This compares to free cash flow of $12.1 million for the second quarter of 2016. Free cash flow for the second quarter of 2017 was negatively impacted by increased working capital requirements related to the increase in number and size of oil and gas infrastructure projects and to a lesser extent, electric power infrastructure projects, partially offset by more favorable operating results. Regarding the two electric transmission projects in remote regions of Northeastern Canada where we have had previous billing delays, as anticipated, we reached a resolution on all of the outstanding issues. The amended contract eliminates the previous scheduling and billing issues and establishes new processes, which eliminated the access and delayed items mentioned in previous earnings calls. After reaching this agreement, our net receivable position decreased as of June 30, 2017 and we have received additional payment subsequent to the quarter-end of $79.5 million. Total cash received from this customer during the second quarter of 2017 and through the end of July was approximately $277 million and the project is scheduled to be completed by year-end with no further receivable or billing issues anticipated. DSOs increased to 80 days at June 30, 2017 compared to 74 days at December 31, 2016 and 74 days at the end of last year's second quarter. This increase was primarily due to more favorable billing terms for certain projects ongoing in 2016 as compared to projects ongoing in 2017. At June 30, 2017, we had $99.6 million in cash. We had $324.7 million in letters of credit and bank guarantees outstanding and we had $480.7 million of borrowings outstanding under our credit facility, leaving us with $1.1 billion in total liquidity as of June 30, 2017. Subsequent to the quarter, we closed the Stronghold acquisition and increased borrowings on our credit facility by an additional $360 million related to the cash consideration for the acquisition. Considering our expected performance for the rest of the year and our typically stronger back half of the year free cash flow, we believe we will see our end of year leverage profile within our preferred 1 to 1.5 times EBITDA range. We believe this leverage profile allows us to continue to be opportunistic with deployment of future capital. In May of this year, we announced that our Board of Directors had approved a $300 million stock repurchase program. The authorization covers a three-year period and we anticipate utilizing the repurchase program opportunistically as well as to potentially offset dilution from stock issued to fund acquisitions or under our equity compensation programs. To-date, we have made no repurchases under this authorization. Turning to guidance, we are increasing our full year 2017 revenue expectation to range between $8.65 billion and $9.05 billion. Our range of guidance contemplates the potential for project delays and cancellations. Fourth quarter revenues are still expected to decline compared to the third quarter of 2017. Based on our full year revenue expectation, we expect double-digit growth percentages in electric power in 2017 over 2016 and including results of Stronghold, we expect oil and gas revenue to increase around 20% to 30% over 2016. We continue to see operating margins for electric power in the 9% to 9.5% range for 2017 and oil and gas segment operating margins, in part reflecting the margin accretion from Stronghold, to now be between 5.5% and 6% for 2017. Due in part to the increased borrowings for Stronghold, we anticipate interest expense for the year to be approximately $17 million to $18 million. Also, the Fort McMurray West Transmission Project began construction in the third quarter. As such, we can now more accurately anticipate the construction offset associated with our investment in the project, which will be recorded as other expense below operating income. Our forecast for the year for other expense is now approximately $7 million to $9 million. Non-controlling interest deductions have also increased slightly and should be between $1.5 million and $2.5 million for the year. We anticipate GAAP diluted earnings per share for the year to be between $1.57 and $1.75 and anticipate non-GAAP adjusted diluted earnings per share to be between $1.92 and $2.10. Included in our outlook is the expectation that for the remainder of 2017, the acquisition of Stronghold is expected to generate approximately $240 million to $260 million of revenues and approximately $6 million to $7.5 million of net income attributable to common stock. The acquisition is expected to be accretive to Quanta's GAAP diluted earnings per share attributable to common stock by $0.02 to $0.03 and non-GAAP adjusted diluted earnings per share attributable to common stock by $0.06 to $0.07 for the remainder of the year. Our forecasted non-GAAP measures are estimated on a basis similar to the calculations of historical adjusted diluted earnings per share represented or presented in our release. Our full-year 2017 guidance reflects foreign exchange rates comparable to the first six months of 2017. Although Canadian and Australian rates have strengthened against the U.S. dollar a bit in the last few weeks, we have not considered this increase in our updated annual guidance. Fluctuations of foreign exchange rates could make comparisons to prior periods difficult and could cause actual financial results to differ from guidance. Shortly after this conference call, we will post a summary of our guidance expectations in the Investors & Media section of our website. We are committed to maintaining our strong balance sheet and financial flexibility, which positions the company for continued growth and the ability to execute on strategic initiatives. Overall, our capital priorities remain the same with a focus on ensuring adequate resources for working capital, capital expenditures, and organic growth. We continue to see acquisitions as a fundamental component of our strategy and with the formation of First Infrastructure Capital earlier this year, we also see continued if not incremental opportunities for investments supporting our customers and the development of incremental backlog for Quanta. While our stock repurchase authorization offers us the additional option to return to stockholders, we will continue to take an opportunistic approach among all components of our capital allocation. This concludes our formal presentation. And we will now open the line for Q&A.

Hey, good morning guys. So, first question I've got, Duke, you talked about this a little bit in your prepared comments. It's regarding the lack of a quorum at FERC. And it sounds like you still feel pretty confident about the outlook for 2018 and 2019, pretty much on par with your comments from the analyst meeting back in early April. At what point would the lack of a quorum at FERC become a problem potentially, for revenues and profits in 2018? When do you think you need to see that by, for everything to stay on track timing-wise into 2018?

Yes, that's a good question. From our perspective, based on what we're hearing from customers and looking at the schedules, we believe there will be a quorum. Recently, some matters moved through committee, which is a positive sign. We're not able to predict when this will occur, as things change frequently in D.C. However, our customers are optimistic, and so are we. The timing depends on the regulations, the specific area, and how much those regulations are relaxed. We're hearing positive news about some easing of regulations related to clearing, which could facilitate construction, possibly later this year. As it stands now, we are hopeful that the quorum will be established and that we will receive approvals for some of these larger projects.

Okay. For the second question regarding Stronghold, shortly after you announced that deal, another public industrial services company revealed a challenging second quarter. Can you provide some reassurance about how your business has performed better than other industrial services companies? What factors contribute to its resilience and growth potential? Additionally, could you elaborate on the cross-selling opportunities and the associated revenue potential in those markets?

Yes. Generally, our industrial service business has been established for a long time, and we have performed well in the high-voltage sector. We are familiar with the market and stayed informed about announcements from others in the industry when we made this acquisition. We recognize the importance of our services in any turnaround situation and in optimizing cost structures. If a faster turnaround is needed, our capabilities on both the catalyst and high-voltage sides are crucial. These aspects, along with our ancillary services, play a significant role. The company we acquired has a proven track record of over five years, consistent double-digit growth, and an industry-leading margin profile. We are confident in our guidance and the acquisition. We feel as positive today as we did at the time of purchase, and we believe the company integrates well into our operations. Our management team has performed excellently, and we are very pleased with the fit. Additionally, we have started cross-selling and engaging in meaningful discussions with clients about how our combined offerings can create unique solutions for turnaround projects.

Hi guys and congrats on a decent quarter. I guess, first question. If you look at your comments in the past, Duke, about record backlog this year, would those still hold if you don't book Wind Catcher in the third quarter or did that project just come out of the blue in terms of timing of booking?

My comments were pre-Wind Catcher. And I also want to reiterate on the quarter, I think we had an exceptional quarter. We're right on track. We think that, from what we see, the markets and also our guidance is intact and we're affirming as well as increasing as far as I'm concerned.

Got it, and I agree based on what I saw today. And, I guess, the second question, Duke, we track these transmission projects pretty closely. It seemed like this one popped out, at least for us, out of nowhere a week before you announced it. Have you seen some of the regulated utilities that have been a little more slow in terms of announcing larger projects come back on the map?

Yes, Tahira I think you know we've been consistent in talking about our base business, which is particularly about 85% of what we do on any given day is our base business. The larger projects are a small piece, 15% of the business. So we're around the edges on them all. We talk to our customers all the time. We're involved in many, many projects, some as big as Wind Catcher, some not. But in general, we understand the markets. We understand the end markets and then we're able to get in front of that and provide solutions. We've said all along, we need to be solution-based. We need to be able to program manage. We got out in front of some engineering capabilities, and it's consistent with what we've said for the previous years and where we're going with the company as far as the solution base. And our relationships with the clients and our execution capabilities are exceptional. Our guys in the field are just exceptional.

Hi, good morning. A nice quarter and bookings. I guess two questions; one, Duke, longer-term or Derrick, you guys put out at your analyst meeting your medium-term targets of the $10 billion in revenues. With the Wind Catcher project in Line 3, just sort of how you're thinking about the timeline associated with the $10 billion, does that get pulled forward to some degree maybe to three years versus five years and confidence that margins will come through, given some of these bookings? And then, I guess, just the second question, I was pleasantly surprised by the bookings on the communications side. So can you just talk about the momentum you're seeing there and whether there is any upside to the implied revenue guide for communications in 2017? Thanks.

Yes, Jamie. Generally speaking, we believe we are likely to exceed the $200 million mark in the communications sector, as we currently assess our position. We take pride in our achievements thus far, which have largely stemmed from organic growth. Therefore, we are satisfied with our current standing in communications. I'll provide some comments and then hand it over to Derrick regarding our earlier statements. When we discussed reaching the $10 billion target, we mentioned that it is within our sight although we did not specify a timeline. We maintain that it is attainable, and we wouldn’t assert this if we didn’t believe it. Now, I'll pass it to Derrick for the numbers.

Yes. Well, I mean, inherently, I mean, our original discussion of that was excluding acquisitions. And so the Stronghold acquisition alone gives us a $500 million uptick to that number. And so based upon the guidance that you're seeing here for 2017, which is only inclusive of a partial year of Stronghold, I think that you would say although we're not in the spot of giving that multiyear guidance yet, that you would see a number in a much more sooner time frame.

And sorry, just the one thing you didn't answer, and Derrick, and I'll give this question to you because we've been going back and forth on this for a couple of years. Given the bookings that we're seeing, can we get confidence that, at least by 2018 we're back in our targeted range for electric transmission and, to some degree, oil and gas?

Yes, I believe that if you examine our annual guidance of 9% to 9.5% for electric power, achieving this target will require a stronger performance in the latter half of the year. This enhanced performance should reflect near or at double-digit margins. Over the past few years, including 2017, I've noted that electric power, excluding Canada, has been operating within the double-digit margin range. Currently, for 2017 as well as the second quarter, we have been close to or at double-digit margins, not considering Canada. The challenges faced in Canada have created some pressure. However, as we look forward to the second half of the year, improvements associated with larger transmission projects in Canada should help enhance our margin profile. Therefore, we remain optimistic about sustaining those double-digit margins in electric power.

Good morning, everyone. It was great to see the success with the Enbridge Line 3 project in Canada. It looks like you secured approximately 25% of that Canadian mileage. Regarding that project, there are two spreads set to start this year and six more planned to kick off in 2018. My question is whether there's any further opportunity related to those six spreads, and how you are approaching the U.S. segment? Additionally, any insights you could provide on both the portion you've secured and the potential opportunities would be appreciated.

Thank you, Noelle. Generally, we are collaborating with Enbridge on the remainder of the project. We have submitted bids for some parts in Canada, and another portion will be bid later. They are excellent clients, and our collaboration spans both Canada and the Lower 48. While I prefer not to provide specific details on individual projects for competitive reasons, overall, they are a valuable client, and we are eager to continue working with them on this aspect of the project.

Okay, great. And then, can you just give us a little bit more color on the telecom acquisition, sort of what this brings to you from a strategic standpoint, maybe key customer relationships that maybe come in with this, how you think it could grow? And then, are you looking to do additional kind of smaller bolt-on telecom deals?

Yes. Noelle, it was a small acquisition. And it brought, actually, no backlog to us in the Southeast, but great client relationships and such. So we're able to leverage their client relationships across a broad spectrum and add our solution capabilities and some of the people that we had already. And we pulled them out of Canada and such and then really boosted our telecom operations and get a kickstart in the Southeast. If we're able to do that in multiple areas, we'd do it, but it was a very small acquisition. I do not think we have a kind of a program as such as far as an acquisition profile in any way, shape or form going forward. We said we'd organically grow and I think that’s the intent, but we're not going to pass up good opportunities.

Hi guys, good morning. Duke or Derrick, you averaged around 6% oil and gas margins through the first half of the year versus closer to 1.5% in the first half of 2016 and then last year you did 5%. So we know you want to keep expectations manageable for particularly the fourth quarter and you did raise the bottom end of the guidance there to 5.5% to 6%. But given the confidence that you have in bookings and Line 3 coming in, I mean, is maybe the low end, at least the low end looking a little conservative now?

No. Our main concern is the timing of the projects themselves. When considering projects in oil and gas, the timing can shift between the third quarter and fourth quarter, depending on weather conditions and whether we can accelerate work due to winter weather. We're being cautious about that. Additionally, we do anticipate a notable downturn between the third and fourth quarters because of the timing of our larger transmission projects. While we had strong margins in this segment during the second quarter, we expect some margin pressure in the fourth quarter due to our caution regarding how the winter will affect our operations.

Yes, a little commentary as well. When you compare it to 4Q of 2016, we are on multiple large spreads in the South and so that's not in our backlog as we see it today. So that's part of our comparable issue as well.

Okay, that's helpful. But maybe you can talk a little more about how you're thinking about cash flow in the second half of the year, DSOs around 80 days this quarter. I mean, what's your confidence in being able to get those down in the back half and do you think a little bit more focus on working capital can help even as some of these larger projects start to ramp like Fort McMurray and Line 3?

Yes, I mean, I think that, in my prepared remarks, I commented that we're typically in the back half of the year, we're a stronger free cash flow company and I think that will be very much the case here still for 2017. At this stage, I would tell you that I expect free cash flow to be stronger than it was last year. Previously, we had been forecasting that the Canadian work would have some delays in that, but obviously we have reached a substantial improvement of that here in the second quarter. That's going to contribute to the third and fourth quarter free cash flow. I feel pretty comfortable that we'll have a pretty strong end of the year in that regard.

Hi, good morning. So you mentioned that there is an investment in the distribution that caused margin pressure in the transmission during 2Q. Can you just talk a little bit more about this, could you quantify how much pressure there was? And is it only a 2Q event or do you expect that pressure to continue over the next couple of months? And then also, just moving over to oil and gas, were there any closeouts for that segment in 2Q, if not, were there any baked in, in the second half of this year?

Yes, I will address the electric side. In general, during this quarter, we added around 500 employees and a total of 1,500 for the year without considering acquisitions. This expansion, particularly in the distribution business, has led to some inefficiencies. We encountered unique challenges in our baseload work and as we ramp up our telecom business. These factors contributed to some variability in this segment. However, I think this is not indicative of future performance. When assessing the business over time and providing guidance, our utilization rates will improve, eliminating these issues. This was a unique quarter where we experienced some pressure, but it was minimal. As Derrick mentioned, we still saw double-digit growth in the Lower 48, but we felt it was important to acknowledge this situation.

In relation to gas, we implemented two contingencies in several of our larger diameter projects. We incorporate contingencies into these projects to address the associated risks. However, as we reached the second quarter, we effectively managed those contingencies, leading to improved margins as some of those projects approached completion.

That's helpful. And then, just moving over to Canada, can you just talk a little bit about the bidding environment on the transmission side? How's that changed in the last three to four months and whether you're seeing any recovery or have conditions softened in that market?

In Canada, particularly in the larger transmission sector, we continue to identify opportunities. We have been careful in how we approach our bids. Currently, we are commencing work at West Fort McMurray and are satisfied with our positioning there. We plan to maintain our discipline in that region, being aware of our costs and current status. We anticipate the market will improve, particularly with significant projects like non-core Nalcor and West Fort McMurray starting up. After completing Nalcor, we are optimistic about seeing market growth due to these projects, as well as a rebound in our core business in both Eastern and Western Canada. However, the overall economy is currently subdued because of the energy markets. We are also exploring opportunities in the gas pipeline sector. Our strict approach to large projects and accurate pricing at this scale is noteworthy; we don't have any projects facing significant issues, which reflects positively on our execution and bidding practices moving forward.

Hi, good morning guys, this is Cleve on for Steve. Duke, just jumping back to the conversation about the FERC, once a quorum is established, how quickly do you think pipeline projects could actually move forward? I mean, are they pretty much staged and ready to go or are there additional citing and state regulatory requirements that need to be finalized?

I mean, I think, in general, the process within FERC has moved forward. The work underneath is ongoing, right of ways and things like that are getting bought, easements, all the necessary things within the state levels are getting done. We're optimistic on the ones that we're looking at or working or collaborating with our customers that we're moving forward. And as we stated before 2018 and 2019 we believe will be a robust environment. And so when we see that, again, it's mainly just waiting on the FERC quorum and final approvals, in my mind, to see us into 2018 and 2019.

I have a question regarding the EPC power projects. When you book that work, how does Quanta's risk profile change? Is there more or less fixed price risk associated with this type of work, or is it mainly an opportunity to expand into different project areas?

We have been performing EPC work for 50 years, mainly in the transmission sector, specifically substations. We are very familiar with EPC and its risk profile. I have confidence in our internal capabilities to execute that work with more efficient construction practices. While we did encounter issues with a power plant project, that was a unique case that we are currently not engaged in. Nevertheless, we have a solid understanding of the risk profile from that experience. Overall, our backlog and our ability to execute EPC projects, whether on the electric or gas side, reflects our expertise. We are enthusiastic about the opportunities ahead.

Thank you and nice quarter. Duke, can you talk a little bit about the mix shift in your electrical business, particularly as it relates to increasing level of EPC work and how we should think about its effect on margin over the next two years?

Yes, Alex. We have considered that. Generally, we believe we can maintain our historical margins with the current mix of EPC. If that changes, we will inform you, but based on what we see today, we feel very confident. I will let Derrick elaborate further, but I am satisfied with our current position. We believe we can achieve historical margins. We're not there yet, but we anticipate getting there, even with EPC, and I'll let Derrick provide additional comments.

Yes. The only thing being is, is that if materials is a larger component of the overall contract, in some circumstances, you see pressure on margins. But to Duke's point, to the extent that we have contracts where material component is larger and diluting the margins, it will be our intention to somehow kind of bifurcate. So people are able to see what's happening from the construction side versus the material side, but we'll have to just address that as the level of mix of those contracts come forward.

And I believe your revenue contribution from Canadian operations last year was around 20% of total company revenue. How should we think about that number changing over the next couple of years? And what kind of implications are there towards that change?

That's probably right. It's in that 20% range. On a go-forward basis, we'll have to look at how, as an example, Stronghold and the like comes in. I think for right now though, between the markets that we see in the opportunity, whether it be in oil and gas or electric power, I think still holding something in that 15% to 20% range for now is likely a good number. We see double-digit type growth opportunities in the Canadian market as much as we do in electric power. So right now, I think I'd say you probably anticipate some sort of similar percentage.

Thank you. My first question is about the pipeline aspect of the business. You typically have a good understanding of the urgency with which your customers want to move forward on projects once the awards are given. Could you provide an estimate of the amount of work that is currently pending at the FERC? I would like to know how quickly you can proceed once they make their ruling.

Yes, and I think we have consistently commented on this that we believe we'll be booked in 2018 and 2019 in the Lower 48. We stand by those comments.

But can you give a dollar amount to it, I guess, is my question.

I just did. We're going to stand by our books. We believe we have a robust environment. It's difficult for us to comment on what that is going to look like. And certainly, in 2018 to 2019, we're not going to give multiyear kind of quantification on it other than to say it's a robust environment and our spreads, we believe, will be booked in 2018 and 2019.

Thank you, good morning. Regarding communications, with the new projects you have taken on and are considering moving forward, do you think there’s a possibility that this could positively impact the electrical segment margins as it develops?

Yes, as we start to see utilizations and project mix improve with larger projects and significant transmissions returning, we believe we can effectively navigate through the associated risks and margins. This should increase our margins, although our base load work is also impacting that, and while it’s not mandatory, it should still contribute to margin enhancement. Yes, I think, from our perspective, the current labor environment, along with the availability of qualified supervision, is favorable. In the past, we acknowledged that we had an excess of supervision in some areas due to anticipating these conditions. Presently, we are well-positioned in terms of labor and our operational programs. We have experienced some costs but proactively managed them by staying ahead of our projects. We maintain open communication with our customers, allowing us to plan collaboratively. This collaboration enables us to engage in projects like Wind Catcher, along with numerous others, primarily from clients who have been with us for over 50 years. We believe we are in a good position moving forward, and we remain optimistic about the market.

Hi guys, just a couple of quick follow-ups. So first, given what we're hearing from some of your peers about weather impacts in the quarter, I was curious if; one, weather was meaningfully detrimental at all in the quarter and also if you had any meaningful storm work? And then second, I was wondering if you could give us just an update of what your mainline spread utilization was in the quarter?

Yes, Noelle. Generally, from a weather perspective, we did consider weather patterns in our work, and there were certainly wet conditions in the Northeast, if I recall correctly. We analyzed the weather patterns with our historical data and were able to manage through any weather-related challenges. I'll have Derrick provide insights on the storm.

Yes. I mean, we had kind of a typical quarter. We had about $25 million to $30 million worth of storm work this quarter.

If you analyze the business in terms of mainline and base work, approximately 75% to 80% of gas pipeline work is base load, not mainline.

Okay, thanks a lot.

Thank you for joining our quarterly conference call. I also want to express my gratitude to the over 32,000 employees in the field for their safe execution throughout the quarter. We appreciate your support and interest in Quanta Services. This concludes our call.