Quanta Services Inc (PWR) — Q3 2017 Earnings Call Transcript

Thank you, and welcome, everyone, to the Quanta Services conference call to review our third quarter 2017 results. Before we begin our discussion, 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 through the Investors & Media section of quantaservices.com. We encourage investors and others interested in our company to also follow Quanta on the social media channels listed on our website. Please note that in today's call, we will present certain non-GAAP financial measures. In the Investors & 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, November 2, 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 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 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. Duke?

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services Third 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 third quarter results. Following Derrick's comments, we welcome your questions. Quanta continues to make incremental progress on enhancing certain margin profiles while strategically investing in our recurring revenue base business. We continue to believe there's opportunity to create significant shareholder value as we execute on our strategic initiatives. We achieved record quarterly revenues and solid adjusted diluted earnings per share growth as compared to the third quarter of last year. More importantly, we're confident that Quanta is well positioned for continued growth in revenues and earnings. I am pleased to report that we ended the quarter with a record backlog of $10.5 billion. I would note that our backlog does not yet include a couple of larger projects we have previously announced, primarily due to the ongoing permitting and regulatory approval processes. We're confident that these projects will move forward and expect to include them in backlog when we have better visibility into mobilization. We continue to believe end market drivers are firmly in place and that we have the opportunity to achieve new levels of record backlog. During the third quarter, three hurricanes devastated parts of Texas, the Gulf Coast, Florida, Puerto Rico, and the Caribbean, causing significant damage to the electric power grid and other infrastructure. Quanta deployed significant resources during the quarter to many of these areas to assist our customers with power restoration. As a result, emergency restoration services revenues were approximately $130 million, nearly a record, driven primarily by Hurricanes Harvey and Irma, and to a lesser extent, Hurricane Maria. In addition, we continue to evaluate ways Quanta can supplement and support power grid restoration efforts in Puerto Rico. Preplanning with our customers in the days before these hurricanes made landfall allowed us to position the majority of our resources in or near impacted areas well in advance of the storms, enabling us to begin restoring power as soon as it was safe to work. Our employees had no serious safety incidents despite working more than 1 million man-hours in extremely challenging environments. We want to congratulate our crews for their commitment to safety and thank them for their dedication to restoring power to those affected by these catastrophic storms. Additionally, we believe the significant investments the utility industry has made in hardening electric systems facilitated the power recovery faster than we have seen in the past. In our view, these proof points support the value of system hardening and modernization initiatives, which further supports our growth expectations for the electric power segment. The high level of emergency restoration revenues during the quarter was largely offset by the negative effects the events had on our ongoing operations in the impacted areas. The historic flooding caused by Hurricane Harvey significantly impacted our industrial services operations and adversely affected our day-to-day electric power work along the Gulf Coast for several weeks. We have a large number of employees located throughout the Gulf Coast, some of whom experienced significant property damage from hurricanes. Further, many of our employees were away from their families during and after hurricanes, restoring power to others. In response to the hurricanes, we created the Quanta Cares employee relief fund. Contributions from Quanta, employees, vendors, and other partners raised nearly $1.3 million, much of which is being distributed to over 200 employees who are recovering from damage caused by the hurricanes. Additionally, after the storms, hundreds of our employees were active in their communities, helping neighbors and other Quanta employees. We say that Quanta is a family, and the way our employees help others in need exemplifies the Quanta culture. Turning to the electric power segment. We are generally pleased with our performance during the quarter. As just discussed, strong emergency restoration activities were partially offset by work disruptions caused by the hurricanes during the quarter. Additionally, the profitability of our Canadian operations improved in the third quarter as compared to the same quarter last year. We have completed construction activities on the Labrador Island Link transmission project and are successfully transitioning resources to ramping up activity in the Fort McMurray West transmission project, which began construction in the third quarter. As we increase activity levels on the project, we expect further improvement in the profitability of our Canadian operations. 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 those projects are making progress through the permitting and regulatory approval process with announcements possible in the medium term. Our customers are actively executing on existing capital programs; small and medium transmission projects as well as distribution work remains active, and we continue to expand and formalize with customers these solutions we can deploy for new large multi-year capital programs. These programs include both larger and smaller electric power infrastructure projects that are designed to upgrade and modernize the grid. We believe there are opportunities for new alliance agreements, with Quanta playing an important role in supporting our customers' multi-year capital programs. Our communications infrastructure services operation, which is part of the electric power segment, are gaining momentum. Our U.S. market expansion efforts are going well. We continue to be very well received by our current and potential customers. We remain focused on organically growing these operations. However, we will evaluate select acquisitions that bring strategic value to Quanta, allow us to provide differentiated solutions, and accelerate our U.S. expansion efforts. Subsequent to the end of the third quarter, we have secured more than $200 million of new project awards in North America, the majority of which were in the United States. Quanta's scope of work on these projects includes fiber-to-the-home deployments, fiber backhaul, and long-haul fiber installations, and we expect to perform this work over the next few years. Our oil and gas segment generated record revenue during the third quarter despite negative impacts from Hurricanes Harvey and Irma. These events significantly impacted our industrial services operations due to the work disruptions, deferrals, and project cancellations. We expect the impact of these storms to negatively influence the industrial services portion of our oil and gas segment for the balance of this year. While it's still early, our mid- and longer-term expectations for these operations are still very much intact, with the potential for incremental work in 2018 due to work deferrals caused by hurricanes this year. During the third quarter, FERC regained a commissioner quorum, which has significantly improved our regulatory visibility and project construction timing for the pipeline industry. As a result, FERC has begun to clear the large backlog of major pipeline and other infrastructure projects awaiting final approvals. Several major pipeline projects have since been approved by FERC, including the Atlantic Coast Pipeline project, a portion of which was previously awarded to us but was not reflected in our backlog, partially due to the uncertainty about the timing of FERC approval. The Atlantic Coast Pipeline is a proposed 600-mile natural gas pipeline planned to run from Harrison County, West Virginia, to Robeson County, North Carolina. We expect the majority of work will be performed in 2018 and 2019. Our portion of this project is now included in the backlog, with a contract value in excess of $0.5 billion. Based on these developments at FERC, conversations with customers regarding a number of larger pipeline projects are accelerating, and the timing of contract signing is gaining greater near-term visibility. As a result, we continue to believe that demand for large diameter pipeline spread resources can reach full capacity over the next couple of years. As we have discussed for some time, our end markets are experiencing historic levels of capital and operating investments, which we believe will continue for the foreseeable future. As a result, demand for skilled labor is high and industry resources are increasingly strained. For many years, Quanta has been making strategic investments in safety, training, and recruiting to become increasingly self-reliant to ensure that Quanta is a preferred employer in our industry and has the qualified workforce we need to grow our business. Our ongoing investments in training through Quanta's world-class training facility, college and trade affiliations, assistance with the formation of a nonprofit line school, 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. In summary, we delivered a solid operating performance in the third quarter despite facing severe weather events that affected our operations. While we now expect 2017 earnings to be down slightly from our previous expectations, this is entirely due to the floods and effects of the hurricanes during the third quarter and the carryover into the fourth quarter. As I hope you have heard in my remarks, our end markets are strong. Visibility is improving, and we continue to believe we are in the earlier stages of our renewed multi-year upcycle with continued opportunity for record backlog. While we will provide our formal commentary on 2018 expectations on the fourth quarter earnings call next February, I am confident there's an opportunity for Quanta to grow its top and bottom lines in 2018. We expect our base business to continue to grow. We see continued opportunity for the award of larger, high-voltage electric transmission projects in multi-year alliance programs over the near and medium term. We believe the larger diameter pipeline market is robust with a multi-year cycle ahead of us and expect our communications infrastructure services operations to grow. Our qualitative outlook for our business is largely shaped by our collaborative relationships with our customers, which gives us valuable insight into their multi-year infrastructure capital programs. 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 field leadership. We will pursue opportunities to enhance Quanta's core business and leadership position in the industry and provide innovative solutions to our customers. We believe Quanta's unique operating model and entrepreneurial mindset is the foundation that will allow us to continue to generate long-term value for all of our stakeholders. With that, I will now turn the call over to Derrick Jensen, our CFO, for his review of the third quarter results. Derrick?

Thanks, Duke, and good morning, everyone. Today we announced record third quarter revenues of $2.61 billion. Net income from continuing operations attributable to common stock was $89.3 million or $0.56 per diluted share compared to net income from continuing operations attributable to common stock of $73.1 million or $0.47 per diluted share in the third quarter of 2016. Adjusted diluted earnings per share from continuing operations attributable to common stock, a non-GAAP measure, was a record $0.63 for the third quarter of 2017 compared to $0.55 for the third quarter of 2016. Favorably impacting the quarter was a $5.5 million or a $0.03 per diluted share tax benefit from a decrease in reserves for uncertain tax positions resulting from the expiration of certain statute of limitation periods. Consolidated revenues increased $567.1 million or 27.8% when compared to the third quarter of last year. This overall increase was primarily due to increased customer capital spending associated with electric and various gas transmission projects, $100.1 million of incremental emergency restoration services revenues, and $85 million of revenues from acquisitions, most of which related to the acquisition of Stronghold. The most substantial financial items of the quarter resulted from the impacts of the various hurricanes. We executed on approximately $130 million of emergency restoration service revenues, an amount comparable to our highest levels ever performed in the quarter. Although this work often offers higher gross margin opportunity, large adverse weather events can come with offsets. This quarter, the negative aspects of the storms offset much of the positive contributions. First, within our electric power operations, the negative impact of Hurricane Harvey caused various work shutdowns, delays, and inefficiencies, as well as an increase in employee support costs. Further, as Duke commented in his prepared remarks, Harvey specifically impacted our oil and gas industrial services operations in the Gulf Coast region. Our annual guidance provided in our second quarter 2017 earnings call included post-acquisition expectations for Stronghold to be approximately $240 million to $260 million of revenues. Although we do not intend to continue to provide quarterly commentary on specific acquisitions, due to the significant storm impacts on our operations, our post-acquisition revenue expectations are now $170 million to $190 million for Stronghold. In addition, the acquisition was previously expected to be accretive to Quanta's 2017 annual non-GAAP adjusted diluted earnings per share attributable to common stock by $0.06 to $0.07. We now anticipate the impacts of the disruptions attributable to the hurricanes will cause the transaction to be dilutive to our annual adjusted diluted earnings per share estimates by around $0.05. Ultimately, these negative effects largely muted the overall positive contribution of emergency restoration service work to the quarter and the year. Returning to our consolidated results. Our consolidated gross margin was 13.4% as compared to 14.8% in the third quarter of 2016. This decrease was driven by factors, which I'll discuss later in my remarks, related to segment results. Selling, general, and administrative expenses were $201.2 million in the third quarter of 2017 or 7.7% of revenues as compared to $164.3 million or 8% of revenues in last year's third quarter. The increase in SG&A was partially due to $16.9 million in incremental general and administrative costs associated with acquired businesses, which included a $3.3 million increase in acquisition and integration costs. Much of the remaining increase was 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. To further discuss our segment results. Electric power revenues increased 23.1% when compared to last year's third quarter to $1.5 billion. This increase was primarily due to higher customer spending associated with electric transmission projects and $101.1 million in additional emergency restoration services revenues. Operating margin in the electric power segment increased to 10% in the third quarter of 2017 as compared to 9.7% in last year's third quarter. This increase was partially due to the increase in revenues described above, including the incremental emergency restoration services revenues, which typically yield higher margins, partially offset by the delays and other effects I discussed previously. In addition, we had an electric transmission project in the Lower 48 that underperformed against our expectations and experienced increased costs associated with road access, subcontractor, and labor productivity issues, which resulted in a $9.4 million loss during the third quarter of 2017. The project was approximately 80% complete as of September 30, 2017, and should be near completion by year-end. Lastly, the necessary investments we are making to scale and support the growth of our communication services operation included within this segment continue to have a slight negative effect on electric segment margins. However, we believe these operations are at the positive tipping point and expect improved profitability in 2018. As of September 30, 2017, the 12-month backlog for the electric power segment was a record $3.9 billion, which was an increase of 7.6% when compared to June 30, 2017, while total backlog for the segment was $6.6 billion, which is fairly consistent with levels at June of this year and in the third quarter of 2016. Oil and gas segment revenues increased 34.7% quarter-over-quarter to $1.1 billion in 3Q '17. This increase is primarily due to continued gas transmission pipeline demand with quarter-over-quarter revenue increases, driven largely from smaller projects, offset slightly by lower contributions from larger projects due to the timing of awards. In addition, incremental revenues from acquisitions contributed approximately $80 million in the quarter. Operating margin decreased to 5.3% in 3Q '17 from 8% in 3Q '16. In addition to the storm impacts discussed earlier, margins were impacted by the overall decrease in revenues from larger pipeline projects, which typically offer higher-margin opportunities. Also, adverse weather conditions on certain Canadian gas transmission projects created delays and other production issues resulting in higher-than-expected costs. These projects were substantially complete as of September 30, 2017, and change orders related to certain of these impacts are being pursued but have not yet been recorded. As of September 30, 2017, the 12-month backlog for the oil and gas segment was $2.3 billion and total backlog for the segment was $3.9 billion, both of which represent significant increases when compared to June 30, 2017. As discussed in today's earnings release, we have now included the Atlantic Coast Pipeline project in backlog largely as a result of the FERC approval of the project as well as better visibility to the scope of work we will be performing. In addition, the incremental backlog associated with the acquisition of Stronghold contributed roughly $300 million of 12-month backlog and $700 million to total backlog. A large portion of their work is associated with evergreen MSA arrangements, and our backlog includes estimates based on 12-month run rates for this type of maintenance work. Consolidated 12-month backlog at September 30, 2017, is approximately $6.2 billion, which, after excluding the backlog acquired during the quarter, still remains at a record level, which is a great start towards achieving Duke's earlier in the year comments about opportunity for new record overall backlog. Also, with his earlier discussion, we continue to see the opportunity for additional awards in both segments. Corporate and non-allocated costs increased $13.6 million in the third quarter of 2017 as compared to 3Q '16 due to $9.6 million of higher compensation costs, due largely to the factors impacting consolidated SG&A as well as $3.3 million in higher acquisition and integration costs. For the third quarter of 2017, cash flows provided by operating activities of continuing operations were approximately $173.7 million and net capital expenditures were approximately $58.9 million, resulting in $114.8 million of free cash flow. This compares to negative free cash flow of $97.6 million for the third quarter of 2016. Free cash flow for the third quarter of last year was negatively impacted by higher working capital requirements related to the number and size of oil and gas infrastructure projects that moved into full construction that quarter. However, for the third quarter of 2017, we had a smaller number of these projects and most were winding down, reducing the cash flow demand. The third quarter of 2017 was negatively impacted by high unbilled balances associated with the storm work late in the quarter as much of the work had not been billed by quarter-end. DSOs were 79 days at September 30, 2017, compared to 74 days at December 31, 2016, and 79 days at the end of last year's third quarter. This increase from year-end was primarily due to more favorable billing terms for certain projects ongoing at the end of the year as compared to the projects ongoing in 2017. At September 30, 2017, we had $91.5 million in cash. We had $392.8 million in letters of credit and bank guarantees outstanding, and we had $757.5 million of borrowings outstanding under our credit facility, leaving us with $751.2 million in total liquidity as of September 30, 2017. During the quarter of 2017, we closed the Stronghold acquisition and increased borrowings on our credit facility to fund the $347.5 million of net cash used for the acquisition. As expected, the third quarter had stronger free cash flow than the previous six months of the year. And although it is difficult for us to forecast overall free cash flow, we continue to expect the fourth quarter will be our strongest free cash flow quarter of the year. FX is now expected to run between $240 million and $250 million for the year, which is up slightly from our previous annual guidance due to opportunistic realignment of certain equipment from rented or leased to owned assets. Turning to our guidance. Our full-year 2017 consolidated revenue is expected to range between $9.25 billion and $9.35 billion. Our range of revenue guidance contemplates electric power revenues with year-over-year growth approaching 15% and oil and gas revenues potentially exceeding 35% growth year-over-year. We see operating margins for the electric power segment at around 10% for the fourth quarter, resulting in annual margins still in the 9% to 9.5% range for 2017. In addition, we see fourth quarter operating margins for the oil and gas segment to now be around 2%, resulting in annual operating margins slightly below 5% for 2017, both lower in large part as a result of the margin declines from the previously discussed storm impacts. We anticipate interest expense for the year to be approximately $18 million to $19 million. Our forecast for the year for other expense is now approximately $7 million to $8 million, which includes other expense related to the deferral of a portion of the construction profit on the Fort McMurray West transmission project. Non-controlling interest deductions should be between $1.5 million to $2.5 million for the year. We anticipate GAAP diluted earnings per share from continuing operations attributable to common stock for the year to be between $1.58 and $1.68 and anticipate non-GAAP adjusted diluted earnings per share to be between $1.90 and $2. Our forecasted non-GAAP measures are estimated on a basis similar to the calculations of historical adjusted diluted earnings per share presented in our release. Our full year 2017 guidance reflects foreign exchange rates comparable to the first nine months of 2017. Fluctuations in 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'll post a summary of our guidance expectations in the Investors & Media section of our website. We do believe our net results for the quarter weathered the storms and reflected the diversity of our operations. In addition, we believe our expected results for the year continue to reflect our opportunities for growth and our commitment to maintaining our strong balance sheet and financial flexibility. We continue our bottoms-up assessment of our 2018 opportunities and feel we are well positioned financially for continued growth and the ability to execute on strategic initiatives. This concludes our formal presentation, and we'll now open the line for Q&A.

Duke, so industrial services looks like, you mentioned, it's going to cost you about $0.12 swing this year in the second half of the year because of the hurricanes. You mentioned that some of the business may come back in 2018. So, can you talk about the confidence that, that business does come back, that it's not just lost revenues in the hurricane in the second half of the year? Then can you talk about overall emergency restoration work? Does it start to sort of significantly outweigh the hurricane issues that you've had, especially with upcoming projects? How much longevity is there for hurricane restoration work this cycle?

Yes. First, let me take the industrial question and talk a little bit about that. I think what you had this year, you had a flood along with some wind events. So, Harvey, you had wind events in the Corpus area, Gulf Coast, and then you also had big floods in Houston all along the refineries. So, our industrial business, when we look at it, we had a pretty nice fall turnaround season ahead of us. We were preparing for that. And we had a flood event. And so, we can't control the weather. It happened and it affected not only the third quarter. It will affect the fourth quarter in that business and the guidance we have given. So that being said, I think some of that differs into 2018. We stand behind our guidance that we've given in 2018. We think the company is in great shape. We couldn't be prouder of it, of the management team and what we're doing there and the strategy we have behind it long term, and that includes 2018. So, I think some of that can get deferred. It's too early to say, but we're having great conversations with our customers and our customer base on the industrial segment. In the restoration business, focusing on the electric segment, we reported $130 million for the quarter, which accounts for less than 5% to 10% of our business during that time. While this is a small percentage, we are achieving notable outcomes. Our primary goal is to assist our customers in restoring power and ensuring safety. I am very proud of our team's performance and the company’s efforts in what was a world-class restoration operation. Looking ahead to the fourth quarter, there is ongoing activity with our customers related to cleanup and repairs from the storm, addressing any issues that were not up to standards previously. We are committed to resolving these matters as we progress through the fourth quarter. Currently, we are prioritizing support for our U.S.-based customers, while also assessing opportunities in other regions, including the islands, on a daily basis.

And Duke, just as a follow-up, obviously, a fair amount of noise in your oil and gas margin in 3Q given the storm issues and the weather impacts in Canada. How do we think about the underlying margin in that business and the potential for it to get back closer to your long-term range of 9% to 12% in '18, especially as I would imagine utilization is going to be pretty good by the time it gets better next year? So how do we think about that?

Yes. When we examine our oil and gas segment, the core business is strong with our distribution and industrial operations. I believe we are well-positioned for growth in this area. Additionally, our project-based business is progressing. The work we have in Canada is being approached with caution. We have significantly expanded our base business organically, and I expect to see increased scale as we move into 2018. I am pleased with our current status and acknowledge the margins. We are monitoring them and are not satisfied with their current levels. We are working towards next year's guidance to return to what we previously considered normal. I anticipate that as we enter the project-based business in 2018, especially on the pipeline side, the outlook for future years looks promising.

Starting with the oil and gas sector, I have a multi-part question. First, you mentioned seeing several project opportunities in the market. Can you let us know if most of those projects are still gas-related and provide some insight into their regional origins? Additionally, we are monitoring numerous projects, many of which are in the Permian. Historically, Quanta has been seen as primarily operating in Union areas, but I understand you have expanded your non-Union capabilities. Can you discuss your competitiveness on these projects in traditionally non-Union regions?

Thank you, Noelle. Regarding the large project, we are currently in active discussions with customers on several initiatives and have added one to our backlog. I expect we will be fully engaged in North America, particularly in the Lower 48, looking ahead to 2018 and 2019. There are no concerns in this regard; the environment is strong, and it looks promising. You are aware of the larger projects, and we are involved with all of them. We are in discussions with customers on how Quanta can effectively move forward and provide them with the necessary support and solutions for these larger builds. In terms of the Permian, we have made investments and are capable of operating in that setting. As we transition into 2019 and complete work from 2018, we are involved in those projects as well. We are also noticing improvements in the midstream business, especially as gas transportation to Mexico increases. This sector is improving in both Canada and the Lower 48. Overall, things are progressing positively on the midstream side, our Canadian midstream operations, and in our large diameter pipe projects. We are optimistic about how 2018 is developing.

Great. Shifting over to transmission, when you look at the commentary from peers and equipment suppliers in this space, there's a consistent message about strength in the small to medium market, which you discussed today. However, there are also some significant opportunities on the horizon. Are you considering those opportunities? I know you have Wind Catcher, but do you think it will contribute in the second half of 2018, or are you looking at them as more likely opportunities for 2019 at this point?

Yes, I believe we will see good growth in our electric business in 2018. As previously mentioned, about 85% of our business is in that core electric sector, and it may even be slightly higher now. We're experiencing a positive trend due to various capital projects and programs with our customers. While we are considering some larger projects, we do not expect them to materialize in 2018. Although it is encouraging to explore these opportunities, we are not factoring them into our current guidance.

So, I guess I was very curious to see this hybrid wind-solar-battery power plant announcement that you made. I know maybe starting off on the renewable side, I would love to get an idea of the opportunities that you see there, what business in terms of size. And then on the telecom side, obviously, some good bookings coming through. Are the bookings you're seeing a little faster than you thought, or are they tracking as you thought?

Good question, Tahira. Regarding the battery project in Australia, we often receive inquiries about our activities there and our growth potential in service lines. Initially, Australia was focused solely on gas, but we've since expanded to include electric services and renewable capabilities from the Lower 48. This project involved a combination of battery, wind, and solar initiatives, allowing us to create something distinctive in Australia on an EPC basis. We're proud of our progress and the management team in that region, which demonstrates the range of services we have in our regional offices. On the telecom side, I want to note that we are currently six months behind our anticipated timeline, as we've mentioned before. However, we're experiencing strong bookings and have begun executing engineering work. I believe we're approaching a turning point where we will see steady improvement in this segment quarter over quarter. We did face some delays in Latin America on certain projects, but those are now resolving, and everything is coming together nicely. I am optimistic about our growth next year as we continue to build our backlog. Our customers have expressed strong support for us, and we have a deep understanding of the business. This is an organic growth story, and while organic growth may initially impact our earnings, it is the right long-term strategy for Quanta and represents the best use of our capital. Hence, we are focusing on growing organically in these service lines, including our gas sector, and I'm very satisfied with our current position, even if we are six months behind.

And just as a follow-up, first of all, congratulations on Labrador Island. Obviously, I got to see firsthand what a complex project it is, so congrats over there. I did notice that you talked about some projects but the execution wasn't that good. Would you say that the nuances you saw there are within the normal range? Or was anything structural we should be focusing on?

No, I believe that Derrick's comments regarding the project in the Midwest mainly focused on access and our ability to reach the right-of-way. It wasn't really about the execution of the work itself. As we evaluate these projects, it has become increasingly challenging to gain access. We began this process two years ago, and our perspective has evolved since then. We've learned valuable lessons about access, which has made us more knowledgeable moving forward. Typically, we don't face such issues in our electric segment, as we prioritize execution. However, we felt it was important to highlight this in the quarter to demonstrate the strength of our underlying business in other areas. This was a unique situation, and I don't foresee similar problems in that segment of the business. We are very proud of our team at Labrador Island. That was a demanding, remote project, and I believe that no one else in the world could have completed it under budget and on time. We take great pride in that accomplishment.

Duke, could you provide insight into your long-term goals regarding the $10 billion revenue target and how you define the medium term in relation to your recent bookings? Is that more aligned with a three-year or five-year outlook? Additionally, do you feel more confident about your top line or margins? My second question is a follow-up regarding the electric power project, which incurred a $9.4 million loss and is 80% complete. How much revenue is still expected from this project, as I'm trying to assess its impact on margins? Also, can you quantify the effect of weather-related delays on your oil and gas margins? Even when adjusting for Stronghold, your margins seemed a bit weak in that segment, especially during the hurricane.

Yes, thanks, Jamie. A few questions there. So, the 10 billion top line, if we add Stronghold and what we said on the Stronghold acquisition, it was about a 570 million to 600 million type run rate on a go-forward basis. Given what we've done this year, I think our 10 billion number is reachable in the short term. Much shorter rather than longer. I would say that's somewhere between two and three years to achieve. I think that's a fair comment. So, we see the same thing you see and we like the macro markets and we like what we're doing as far as executing within the business segments. I think in general, we're working on our gas margins. And so that's something we understand and we know where we're at there and we continue to work on it. As far as the margins go in the gas side, I'll let Derrick take that question. The 9.4 million on the electric side, we're substantially complete with the issues that we were having on the below grade. We're into the kind of the wire, the clip and the stuff that does not cause issues there. We're working with the customer on some changes. So, I think in general, there's no real issues on a go-forward basis on the job. We're 80-plus percent complete, probably $15 million left, or something like that. I'm not worried about that one. Not worried about that one. And as far as the qualitative comments on the weather on our gas segment, I think you're right. We were a little light in places. Some of the spring break up in Canada was pulling down some of those margins in our Canadian operations. And we were also starting other operations in Canada on the midstream side, which I like long term. So, it was a drag there in the quarter. And I'll let Derrick comment on some of the other things you asked.

Yes. I think Duke basically handled it. I mean, from a revenue perspective, the idea being is obviously we have this year, there's quite a bit of storm work in it, probably $100 million more than normal. But it doesn't have the full annual effect of Stronghold in it. So, when you think about the midpoint of our guidance and you factor both of those equations into it, you see a number next year that when you take into consideration our opportunities for double-digit growth that we have spoken about, we can see how modeling can get you into a number that's up there. We have yet to put out exactly how we're going to do it from a bottoms-up perspective, but we can understand how the scenarios and the modeling can start to look closer to the $10 billion number that you're talking about. And then Duke has already covered it earlier in the comments ultimately about oil and gas. The largest contributor we regularly discuss is the aspect of large diameter pipe. We have a significant number of large diameter pipe opportunities for 2018, much of which is already in our backlog. If we execute on this, both in terms of contingency and asset utilization, these factors have historically indicated the greatest potential for margin improvement. While it’s too early to specify our margin range, we expect it to surpass 2017 levels.

And one more thing, Jamie, I think we discussed the gas margins in general and whether we're aiming to grow the top or bottom line. We're always focused on improving the bottom line margins in that business. We've invested significantly in that core part of the business, so it's not solely reliant on projects. This year in particular, we've nearly doubled our employee count in our core business and also increased our investment in our industrial segment on the gas side. This is expected to yield benefits next year and in the years to come. When project opportunities are sparse, we still have a solid core business. This has affected our margins this year, but I don't anticipate that being the case next year as we progress. We should see more stable margins, and we'll also be adding some projects. I'm optimistic about how the business is positioned for the multi-year market ahead.

So, first thing I want to talk about, and look, I get that you're not to the point where you're ready to give 2018 guidance yet and Jamie was just kind of hitting on this, just sort of the timeframe around the $10 billion in revenue. But if we look at the comments you're making about each segment individually and the growth potential that you're seeing into next year, it seems like maybe you could achieve that revenue number as early as next year. So, I just want to make sure we're not misunderstanding the way you're framing up the opportunity for both segments. Is it fair to say you can grow both at least mid-single digits or better in the next year?

I think it's a fair comment. So, we see the same thing you see and we like the macro markets and we like what we're doing as far as executing within the business segments. I think in general, we're working on our gas margins. And so that's something we understand and we know where we're at there and we continue to work on it. As far as on the pipeline side, if you could comment just based on what you're seeing from a market perspective and sort of translate that to your business. How many large diameter spreads do you think you could have working next year versus this year? And then on Stronghold, you gave us an updated view on what it's going to do this year. Is that lower view all due to the storms? Would you have been able to hit the numbers that you laid out when you bought it if not for the hurricane impacts so that, that business is still kind of on track for what you laid out for us for next year? Yes. We maintain regular communication with our customers, and overall, we're pleased with our position in Stronghold. We believe we are on the right path, aside from the effects of the storms. It’s difficult to determine exactly what we could have achieved without the hurricane, which is not something we can control. We examined the situation and anticipate a strong market moving forward, standing by our guidance for 2018 and beyond. We are confident in that business. Regarding our capacity, the market conditions support our ability to operate at full capacity in the Lower 48. We will not take unnecessary risks, but we could potentially operate 8 to 10 spreads in North America next year, while proceeding with caution.

I would have been in the fourth quarter. Can you hear me?

You broke up. Can you repeat, please?

Sure. Could you let us know what the oil and gas margin would have been in the fourth quarter without considering the storm impact? Would it have been in the 5% to 6% range? Additionally, can you discuss the timing and mix of larger versus smaller pipelines and how that will affect the oil and gas margins in the upcoming quarters?

Excluding the storm impact, our current estimate is that it would be around 100 to 130 basis points higher. Compared to our initial projections, it would have been greater without the burden of Stronghold. Currently, we can expect at least 100 basis points increase. Regarding how the quarters will unfold, it's still too early to provide a definitive answer. We will continue using our typical bottoms-up approach. The outcomes for December and January are crucial in assessing how we anticipate the quarters of 2018 will progress. As of now, I believe the seasonal trends will remain consistent: lower in the first quarter, rising in the second, peaking in the third, and declining in the fourth. I do not expect anything significantly different from that, but I need more clarity on the first quarter before providing specific insights.

Qualitatively, some of the work is in the mountains. So, when you look at that in the big pipe piece of it, we got to be careful about how we look at that and when we get spreads kind of at capacity. So, we'll be smart about that. And I would say, Derrick is right. There will be some seasonality in that business. But if you look at what's happening in Canada, some of our midstream business, our Canadian midstream business is starting to come back and some things that can impact the first quarter in a positive way as well. So, it's hard to say. Like Derrick said, we needed to do a bottoms-up approach and come back and give you some seasonality. But as far as the overall year and what it's shaping up, we like it.

So, Derrick, in your prepared remarks, you mentioned some absorption of communications costs. Can you provide a quantification of that? Additionally, how much communications work is currently in backlog? How should we view margins concerning both the transmission side and coverage, and could you discuss how you anticipate this work increasing as we progress through 2018?

Yes, for the quarter, communications, I would say that roughly it's probably 20 basis points dilutive to the electric power group overall right now. The project work is profitable, but it's just an aspect of how the ramp-up of the strategic side of the equation is putting pressure on it. But the project work itself is profitable. Communications backlog, when you consider Latin America, Canada, and I would throw in there the post September 30 type of awards, I mean, that number is going to be in excess of $600 million. I mean, it's a growing number for certain. And as we go forward, I think Duke has commented about that he sees additional opportunities for awards comparable to what you've seen both in the second quarter and the third quarter as we move forward. About $200 million of storm work has been completed so far. We currently expect the fourth quarter to contribute around $25 million, which would bring the total for the year to approximately $225 million. Some of the work anticipated in the fourth quarter will not be classified as storm work. A significant portion of the additional work mentioned by Duke will be traditional maintenance rather than storm-related. Therefore, we are likely to finish the year with about $225 million. Overall, the project is an EPC project, which is lump-sum and entails the conventional risks typically associated with this type of work, with nothing particularly unique or unusual.

I'm not too worried about the large material component. There is no output risk or anything like that, and I'm not particularly concerned about that project.

I guess I wanted to ask on Puerto Rico. And as you have been looking at this, what do you need to see out of that type of work to get you comfortable with going in there? Is it advanced payments? Is it credit worthiness of the customer? Maybe you can just talk about some of the factors that you need to see line up for you guys to have a role there.

Yes, we are recognized for our hands-on construction approach. We currently have 5,000 personnel deployed in the U.S., and our operations are progressing well. We are focused on events that prioritize human safety, and we are open to providing assistance. To engage in such efforts, we need clear direction from the organization that will lead it. We are in touch with both utility providers and government officials regarding this. However, we must prioritize our existing customers who have high demands to complete their capital budgets. Presently, we are managing a significant storm in the Northeast and supporting our traditional customers affected by it. We must carefully consider our resources and support for other locations. We are continuously discussing how to assist both the islands and Puerto Rico. Regarding the recent media coverage and comments about contracts in that region, we were not involved.

Okay, great. And then just a cleanup question here. At the outset of the call, you guys mentioned there's a couple of large projects that you've won and talked about publicly that are not in the backlog. One of them is Wind Catcher. I was wondering if you can remind us what the other ones are.

The other one is Northern Pass, and we're around the edges on many more. So various stages of that.

I wanted to ask first on Stronghold. Do you have any feel for the spring turnaround season yet and how that business might bounce back in Q1 of next year?

Yes, I think from our standpoint, we see a robust turnaround season in the spring. We're talking to our clients and we stand behind our guidance there, the 570 million to 600 million next year. We're in constant discussions in the things that we do on the industrial side. We're happy, happy with the business, happy with where we're going in 2018. Constant communications over there, and I'm pleased with what's going on. It's all storm-related here. And some of that deferred, some of that just kind of pushed into next year or the years beyond. But I think from our standpoint, we see opportunity into 2018 on top of what we've already said.

Okay. And then the oil and gas backlog, you're already at a record. You referenced continued growth. I'm just curious if you can give us any kind of a sense for what do you think the peak potential backlog is for that segment based on your capacity?

Yes. I mean, as far as backlog peak, I'm not certain. EPC, we can do a lot of things over there that allow us to build backlog relatively quickly. We're also building our base business, and it's just difficult to tell you how long the backlog goes out beyond 12 months versus the 12-month backlog, but it's a robust market on the large diameter side as well as on the other underlying businesses. We've invested a bunch in that. We're really focusing on bringing up our margin profiles and executing on the work that's ahead of us in the next 12 months and beyond.

Duke, based off your experience in the past with some of these events like we've seen this quarter, as customers in the South sort of digest everything that happened and kind of calibrate where they need to spend money in the next 12 months, is that something that can impact bid schedules on these larger transmission programs? Maybe there's an emphasis on other areas of the asset base. Or does it actually kind of create more urgency to move these jobs forward?

In general, the advancements in hardening and modernization of the grid were clearly demonstrated during the recent event. This suggests that regulators are willing to invest in their systems for the benefit of the public. Our customers have taken initiative in this area, and it proved to be beneficial during the storm. I anticipate continued investment in the modernization of the grid along the Eastern seaboard and into California. Consequently, I expect to see more long-term investments in the grid beyond what we have already observed. Regarding our ongoing projects, we will keep moving forward with our capital budgets as planned, without any reduction at this time.

Okay, great. And then just on the mechanics of some of this work that Stronghold was supposed to do but clearly impacted. Is that work that's still in backlog and can come out and you have to potentially re-bid next year, how does that fit into the backlog today?

Yes. In general, some of it is in backlog, and we are having extensive discussions with customers regarding timing. Much of it relates to timelines for next year, and some of it is simply being pushed further out. There are opportunities that arise daily; for every one that goes away, three more emerge. From our customer base, we see the potential to meet or exceed our previously stated guidance.

Yes, I'd like to thank you all for participating in our Third Quarter 2017 Conference Call. We appreciate your questions and ongoing interest in Quanta and go Astros. Thanks again, guys.