Quanta Services Inc (PWR) — Q1 2019 Earnings Call Transcript

Great, thank you and welcome everyone to the Quanta Services First Quarter 2019 Earnings Conference Call. This morning we issued a press release announcing our first quarter results, which can be found in the Investors and Media section of our website at quantaservices.com along with a summary of our 2019 outlook and commentary that we will discuss this morning. Please remember that information reported on this call speaks only as of today, May 2nd, 2019 and therefore you are advised that any time sensitive information may no longer be accurate as of any replay of this call. This call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance or that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or beyond Quanta's control and actual results may differ materially from those expressed or implied. For additional information concerning some of these risks, uncertainties and assumptions, please refer to the cautionary language included in today's press release along with the company's 2018 Annual Report on Form 10-K and its other documents filed with the Securities and Exchange Commission which are available on Quanta's or the SEC's website. You should not place undue reliance on forward-looking statements and Quanta does not undertake any obligation to update such statements and disclaims any written or oral statements made by any third-party regarding the subject matter of this call. Please also note that we will present certain historical and forecasted non-GAAP financial measures in today's call, including adjusted diluted EPS, backlog, EBITDA and free cash flow. Reconciliations of these measures to their most directly comparable GAAP financial measures are included in our earnings release. Lastly, if you would like to be notified when Quanta publishes news releases and other information, please sign up for email alerts through the Investors and Media section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website. With that, I would like to now turn the call over to Mr. Duke Austin, Quanta's President and CEO. Duke?

Thanks, Kip. Good morning everyone and welcome to the Quanta Services First Quarter 2019 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 first quarter results. Following Derrick's comments, we welcome your questions. This morning we reported record first quarter results, with revenues of $2.8 billion and GAAP and adjusted diluted earnings per share of $0.82 and $0.96 respectively. Backlog at the end of the quarter was a record $12.6 billion, which we believe supports our expectations for this year and bodes well for opportunities for multi-year growth. It is worth highlighting that backlog continues to grow without meaningful large project awards and is primarily the result of incremental growth of programmatic spending with existing and new customers. As a result of our solid first quarter results, increased visibility for our Electric Power Services and confidence in our ability to safely execute, we are increasing our full-year financial expectations for 2019. We are pleased with the growth of our utility-focused operations and continue to enhance the stability of our business portfolio. We also continue to evaluate opportunities to strategically expand our geographic presence and diversify our service lines. These strategies are designed to mitigate many aspects of risks in our business, including customer, project, permitting, geographic, execution, weather and other risks. We believe Quanta's diversity, scope and scale and capabilities are unique in our space and set us apart both competitively and in investments. Quanta is a construction led specialty infrastructure solutions provider, whose portfolio of companies, services and geographic diversity position us to profitably grow through various cycles over time. Our electric power operations reflect broad based business strength in the quarter, with increased demand for our services in the western region of the United States due to ongoing grid modernization and accelerated fire hardening programs. Over the past several years devastating wildfires in California and the hurricanes hitting the Gulf and the East Coast have caused significant damage to property and life. These events have spurred our customers, state lawmakers and regulators to enhance the resiliency of the electric grid. Storm hardening initiatives are ongoing and we have talked about them for some time. However, we believe the system hardening initiatives for improved resiliency against wildfires are in their very early stages. Multi-year utility CapEx budgets in California and other regions in the Western United States exceed $40 billion in the aggregate, with a significant portion allocated to grid modernization and fire hardening. These initiatives are necessary for resilient modern grid that benefits the economy and the rate payer and provide meaningful near and longer term opportunities for Quanta. Also during the first quarter, we and our partner ATCO completed and energized the Fort McMurray West 500-kV Transmission Project three months ahead of schedule, on budget and with an impeccable safety record. The total project value of over CAD 1.6 billion, this was the largest project ever completed by Quanta and included engineering, procurement and construction services for the 508-km transmission line project. The project was financed through the largest public-private partnership bond in Canadian history, was the longest 500-kV AC transmission line built in Canada's history and was ranked among the top 40 infrastructure projects in Canada in 2018. Our success in this project would not have been possible without the dedication, hard work and safe world-class execution by our partners and employees. This project is an example of how Quanta's partners and collaborates with our customers to develop successful solutions, but this is only one example of many ongoing collaborative initiatives between Quanta and our customers that will continue to provide world-class execution on infrastructure projects. Additionally, the election in Albert last month brings a political change in the province that is considered favorable to the energy and business communities. While we are optimistic that this change will bring greater business confidence and positive policies that could encourage infrastructure development in Alberta and other parts of Canada, we are taking a prudent approach to our expectations regarding how this change could impact timing for several larger electric transmission and pipeline project opportunities. Our communications operations have also started the year well. Revenues grew significantly over the same quarter last year. We were incrementally profitable for the quarter and believe we are on track to generate approximately $500 million in revenue with mid-single digit operating income margins this year. We also continue to believe we can achieve $1 billion in annual revenue with 10% operating income margins in the medium term as service providers continue to push fiber closer to the customer. Fiber backhaul densification continues, additional fiber is deployed for 5G wireless and broadband network expansion initiatives in rural markets continue. Further, as 5G networks expand outside urban areas, we believe carriers will increasingly seek to utilize electric utilities distribution systems for small cell locations, which should provide additional opportunities for Quanta. Turning to our pipeline and industrial segment. Industrial Services performed well in the quarter and are on track for another record year in 2019. Our utility-based gas distribution and integrity operations are expanding, and demand for those services grew as utility customers execute our multi-decade system modernization and safety initiatives. The opportunity for business work in this segment to continue to grow over the coming years, which include supporting mainline and midstream infrastructure, downstream industrial services, natural gas distribution, pipeline integrity, MSAs, pipeline logistics management, horizontal directional drilling, drill services and engineering. Our pipeline construction operations also executed well during the quarter and we continue to actively pursue a meaningful number of large pipeline projects throughout North America. As natural gas main lines from the Marcellus and Utica shales are placed into service to provide market access, we believe natural gas production will grow and our midstream operations in the Appalachian region will experience increased activity. Additionally, we were actively building midstream infrastructure in the Bakken, DJ and Permian basins. We are also seeing multiple pipeline opportunities driven by LNG and petroleum export development in the United States and Canada and are well positioned to benefit from these growing markets. Other increasing oil and natural gas production in West Texas is outstripping available mainline capacity and there are a number of pipeline projects in various stages of permitting and development to move oil and gas from West Texas to market. We have strong midstream in mainline pipeline capabilities in Texas and other regions of North America and are actively pursuing opportunities that could result in project awards as we progress through the year. Demand for our services is high and industry resources are increasingly strained as a result of the historic levels of customers' capital and operating investments. We expect to self-perform approximately 85% of our revenues this year, which allows us to provide cost certainty to our customers, control quality and mitigate execution risk. The solutions we provide are specialized and we have the largest skilled workforce in the industry, which continues to grow as we meet the growing needs of our customers' multi-year capital spending plans. For many years Quanta has made strategic investments in safety, training and recruiting to become increasingly self-reliant and to ensure we have the qualified workforce necessary to meet the needs of our customers and grow our business. Our ongoing investment in training through Quanta's world-class training facility, Northwest Lineman College, our partnership and affiliations with educational and trade groups and our other regional activity all demonstrate our commitment to developing qualified labor to meet the longer-term needs of our customers and safety of our employees, what sets us apart in the marketplace. In summary, our record first quarter results reflect a solid start to the year, due to these results increased visibility for our electric power services and confidence in our ability to safely execute, we have increased our full year financial expectations. Quanta is performing well operationally and we continue to execute well against our strategic plan. Our end markets visibility are strengthening and we continue to believe we're in a multi-year upcycle with the opportunity for continued record backlog and results in 2019. We expect our base business to continue to grow and account for approximately 90% of our revenues in 2019. We continue to see more than $3 billion of larger electric transmission project opportunities and more than $3 billion of larger pipeline project opportunities that could be awarded over the coming quarters. There are also opportunities for new multi-year alliance programs over the near, medium term and we expect robust growth from our communications infrastructure services operations with improved profitability. We are focused on operating the business for the long term and expect to continue to distinguish ourselves through safe execution and best-in-class leadership. We will pursue opportunities to enhance Quanta's base business and leadership position in the industry and provide innovative solutions to our customers. I believe Quanta's diversity, unique operating model and entrepreneurial mindset form the foundation that will allow us to continue to generate long term value for all our stakeholders. With that I will now turn the call over to Derrick Jensen, our CFO for his review of our first quarter results. Derrick?

Thanks, Duke, and good morning everyone. Today we announced record first quarter revenues of $2.8 billion, a 16% increase over the first quarter of 2018. For the first quarter of 2019, net income attributable to common stock was $120.5 million or $0.82 per diluted share. Adjusted diluted earnings per share, a non-GAAP measure was $0.96, included in GAAP and adjusted diluted earnings per share for the first quarter of 2019 is the recognition of $60.3 million or $0.30 per diluted share, attributable to previously deferred earnings related to the Fort McMurray West electric transmission project. Excluding this benefit, GAAP diluted earnings per share increased by $0.28 or 117%. Adjusted diluted earnings per share increased by $0.27 or 69% compared to the first quarter of 2018. Discussing our segment results, our electric power revenues increased to 6% when compared to the first quarter of 2018 to $1.66 billion and represents record first quarter revenues for the segment. This increase reflects continued momentum in our base business due to robust transmission, distribution and communication spending by our customers. The strength of the base business in the first quarter of 2019 offset approximately $106 million in reduced revenues from larger projects, as well as lower levels of emergency restoration services compared with the first quarter of 2018. As Duke mentioned, in the first quarter of 2019, the Fort McMurray project was energized. However, the project had substantially reduced activities compared to the first quarter of 2018. In addition, while emergency restoration services decreased relative to the first quarter of 2018, we still exceeded our expectations, generating approximately $58 million of revenues during the quarter. Operating margin in the electric power segment was 9.7% in the first quarter of 2019, as compared to 9% in the first quarter of 2018. Excluding our communications operations, which are included within the electric power segment, electric power margins were approximately 10%. Higher margins were attributable to solid execution across the segment aided by elevated levels of spending on continuing fire hardening programs on the West Coast, which helped to offset normal seasonal effects within the segment. Communications infrastructure services operations continued to deliver both revenue growth and margin improvement led by performance in our US operations. Margins for these operations approach mid-single digits improved for the fourth consecutive quarter and we expect continued incremental margin improvement during 2019. Our ongoing larger communications project in Latin America has continued to run into delays due to severe weather permitting and land acquisition. We had been working collaboratively with our customer and until recently had been receiving ongoing extensions as these items were outside of our control. We had reached certain milestones and despite our efforts, the customer was unwilling to accept delivery of the completed portions and delayed payment. Subsequent to the quarter however, the customer position towards contract cancellation and the presentation of demand payment models. We believe that our likely next step is arbitration and that we have substantive positions to obtain equitable resolution. Our pipeline and industrial segment revenues increased 34.6% when compared to the first quarter of 2018 to $1.14 billion. This increase is attributable to both increased revenues from larger projects as 2018 larger project timing was weighted towards the second half of the year as well as increased base business activities as our gas distribution, small transmission and industrial services all experienced growth when compared to the first quarter of 2018. Operating margin for the pipeline and industrial segment increased to 3.6% in Q1'19 from 1.2% in Q1'18. This was primarily due to the increased contribution of revenues from larger projects, which typically provide an opportunity for higher margin coupled with improved execution from our operations in weather-sensitive regions, which were negatively impacted in the first quarter of 2018. Partially offsetting this performance was approximately $8 million of increased estimated cost and reserves for potential liquidated damages relating to a processing facility project that was approximately 95% complete as of March 31. Corporate and non-allocated costs increased $7.1 million in the first quarter of 2019, as compared to the first quarter of 2018, primarily due to increased intangible amortization expense and increased compensation expense to support business growth. Overall, these segment results combined to deliver record first quarter adjusted EBITDA, a non-GAAP measure of $202 million, an increase of $45 million or 29% when compared to the first quarter of 2018. For the first quarter of 2019, we had negative free cash flow of $141 million, cash flow used by operating activities was $83 million and net capital expenditures were $58 million. Increased working capital requirements to support fire hardening programs contributed to the negative cash flow from operating activities. Also, as we discussed on last quarter's call, PG&E filed for bankruptcy protection during the first quarter. In conjunction with the bankruptcy filing, payment of all pre-petition receivables was stayed as bankruptcy proceedings progressed. Our pre-petition receivables totaled approximately $157 million and remained outstanding as of March 31, 2019. In April, the bankruptcy court approved the assumption of two contracts by PG&E, which will result in the payment of approximately $116 million of the pre-petition receivables in the near term. We believe this development and the speed at which significant portions of pre-petition receivables were resolved underscores the collaborative nature of our customer relationships and the value that our customers place on our abilities to strategically support them. Additionally, DSO for the quarter was 88 days, an increase of 11 days when compared to 77 days for the same period in 2018. Although it impacted to some extent by billing process changes for a few customers, the elevated DSO level is predominantly attributable to the payment schedule for the Fort McMurray project, including the reclassification of significant retainers balances from long-term to current receivables during this quarter. During the first quarter 2019, we repurchased 376,000 shares of outstanding common stock in the open market for $12 million. After these repurchases, we had approximately $287 million of availability remaining on our $500 million stock repurchase authorization. Additionally, during the first quarter of 2019, we announced our second quarterly cash dividend of $0.04 per share, totaling $5.9 million. At March 31, 2019, we had $891 million in total liquidity, which results in a debt-to-EBITDA ratio as calculated under our senior secured credit agreement of approximately 1.75 times. As of March 31, 2019, our aggregate total remaining performance obligations were estimated to be approximately $4.7 billion, approximately 70% of which is expected to be recognized in the next 12 months. Our aggregate total backlog as of March 31, 2019 was $12.6 billion, an increase of 8% over the first quarter of 2018 and 2.2% over year-end. 12-month backlog was $6.9 billion in line with the first quarter of 2018 and December 31. The growth in total backlog reflects the continued strength of our end markets, our ability to capitalize on opportunities and specifically the longer-term demand for our base business activities. Turning to guidance. Due to our solid first quarter performance, continued strength in our base business and improved visibility into the remainder of the year, we are increasing our consolidated revenue range to be between $11.2 billion and $11.6 billion with $300 million of that increase attributable to the electric segment. Our full year margin expectations for both the electric power and pipeline and industrial segments are unchanged from our initial guidance and continue to reflect confidence in our ability to execute across our end markets. Of note, with regard to seasonality within the electric power segment, due in part to the acceleration of Fort McMurray project revenues into the first quarter and other project timing shifts, we expect second quarter electric segment margins to likely be the lowest margin quarter for the year. With the expected increase in revenues, we are increasing our full-year earnings per share expectations to range between $2.86 and $3.32 and our adjusted earnings per share expectations to range between $3.40 and $3.86. We've also increased our expectations for adjusted EBITDA to range between $905 million and just over $1 billion. From a cash flow perspective, we continue to forecast free cash flow between $300 million and $500 million. However, due to the timing of certain cash receipts during the first quarter, coupled with our increased full year revenue expectations, we are increasing our forecasted interest expense to range between $47 million and $49 million. Similar to prior years, additional working capital required to support incremental awards or revenue growth in excess of our current forecast could put pressure on our expectations for free cash flow and interest expense. As a reminder, we've posted our guidance summary on the Investors & Media section of our website, which presents our current full year expectations in greater detail. We believe our first quarter performance and increased annual guidance continue to reflect the strength of our end markets and particularly the momentum in our base business, which currently represents approximately 90% of our 2019 revenue expectation. We remain operationally and financially well-positioned to capitalize on larger project opportunities and are confident in our ability to execute on our strategic initiatives. This concludes our formal presentation and we will now open the line for Q&A.

Thank you. Great quarter, everyone. My first question is about the pipeline space, particularly in oil and gas, which had a strong quarter in terms of margins. I would like to know how the pipeline integrity business is performing. I understand you've been focusing on the margins there as well, and are we seeing the improvements you expected?

Thanks, Tahira. When we look at the pipeline segment, our LDC business, the utility side of it's doing very well. We came through the quarter quite nicely, we said we would focus on the earnings, the margins there and we have, and I believe you're starting to see some of that show up in the quarter. We look at our industrial segment. It's certainly performing well, we said it was at record levels and we think that would stay that way throughout 2019. So that's done very well. Our big pipe, we're seeing activity there, we have not started yet really in the season. So that'll be in the latter half of the year. When we look at Canada, we are seeing some comeback of our midstream business in Canada as well as in the Bakken and Texas. So overall, the things that we're working on are starting to come together. We're starting to see some margin pull through in the segment and especially on the underlying business with the integrity and our utility side of that business. So we're pretty proud of what we're able to accomplish.

Okay, great. And the second question is on the transmission side, Duke, you talked about the $3 billion, but do you know when we tally our prospects out there now and to your point, we've seen some other ones in Canada has finally come back on the map. Could that end up being a conservative estimate for you? Just based on what we're seeing and based on the last cycle, we saw right back in 2013. Everything kind of piles up together. Is there a bias for that $3 billion to be revised up going forward?

I believe that when we discuss our large projects, we tend to be cautious, and the figures we are aiming for are significantly higher. It’s important to note that there is still that $3 billion available from both segments of the business, and we have many substantial projects with that figure varying. However, if you examine our pipeline, it is considerably larger than those amounts.

Thanks, Duke, and congrats to your team.

Thanks and congratulations on a good quarter. Just given that we're in such a tight labor market and I know that Quanta has taken a lot of actions to try and ensure that you have a strong supply of labor. Can you comment on just generally from a high level, if you do think that there the labor is getting tight in any of your markets? And if basically your position as an employer of choice is beginning to become more valuable?

Thank you, Noelle. When we consider Quanta as a whole, our focus remains on specialized skilled labor and our performance capabilities. A tight labor market is advantageous for us, and we've made a significant investment of $100 million in labor training and upskilling. The initiatives we've undertaken in the past are beginning to yield positive results. Moving forward, labor will be crucial for our growth and our ability to serve our clients effectively in core utility services. We will continue to prioritize our efforts in labor recruitment and ensure that we train workers early, getting them into the field to enhance productivity. This focus on labor is essential for our business's future.

Okay, thanks. And second, there's just been a little bit of discussion at FERC that came up a few months ago talking about kind of rates of return allowed on transmission and distribution lines. Any kind of high level thoughts on how that will shake out and if there'll be any impact on the industry?

We're observing various developments in different states, including some new legislation in Texas regarding the first right of refusal for incumbents on any FERC line. I believe we will see stable returns that won't deviate significantly, and those interested in investing in U.S. infrastructure in the near future will find that FERC is supportive of building lines. With a strong leadership in place at FERC, I expect the agency to facilitate infrastructure development for an extended period.

Great. Perfect, thank you very much.

Good morning, guys, nice quarter.

Thank you.

Duke, you talked about fire or storm hardening and grid modernization in the past, but it seems like the focus in the US and the grid has continued to ramp up. But it looks like you grew very strong double digits in the quarter in your base business. So can you give us more color to how long the higher level of spend could last? Do you see those build-out in the US as a multi-year build-out and your visibility into double-digit base growth now at least to the end of this year?

We have focused on expanding our core business, which constitutes about 90% of the company. Looking at the utility segment, we expect this part to grow steadily in the mid-single digits, which we believe is sustainable. The initiatives you see, such as storm hardening and grid modernization, are genuine and necessary. A modern grid is essential, especially with advancements in automation and self-driving technology requiring a reliable and sustainable grid. Numerous reports support this perspective, and we anticipate continued growth in our business within the TND sector.

That's helpful. If I look at the total backlog and pipeline for industrial infrastructure, it did increase in the quarter even though you mentioned there weren't any significant projects booked. Is this related to the improvement in pipeline integrity midstream? Are you seeing acceleration within these segments of the oil and gas business?

Yes. We didn't have a significant project during the quarter. However, we are beginning to see larger programs and alliances in Industrial Services contribute to our backlog. These larger, multi-year programs are being incorporated into our backlog now, although we don’t announce these projects at any specific time, but they are substantial in nature.

Thanks guys.

Thank you.

Hi, good morning. This is actually Kevin on for Jamie. Just a question on the free cash flow. Understanding the outstanding receivables from PG&E. I guess you have a sense of sort of the cadence of free cash flow for the rest of the year? And then, sort of related to that, are you still expecting broadly up to 50% conversion of adjusted EBITDA, because at the midpoint of your guidance, it looks like you need about $600 million of free cash flow in the remaining 9 months to achieve that. Thanks.

Yeah. We still expect our free cash flow to still be in that kind of the $300 million to $500 million range. From a cadence perspective, similar to our previous commentary, we think it'll be largely back-end loaded. The seasonality, the year will still probably put a degree of pressure into the second and third quarter with a drift in the fourth. The largest portion of it by far will come in the fourth quarter, not uncommon though and it is relates to timing from a PG&E perspective, I would tell you that we have some visibility to be able to see some of that coming in kind of in the near term, potentially, a large portion here by the end of the second quarter. But there are some administrative things that we need to deal with as far as on our side and there is going through the administrative processes of getting those things through the system. So I think that in the second and third quarter type dynamic is when you see some of that recovery.

Thanks, that's helpful. And then you mentioned in the release an acquisition during the quarter, I was just wondering how significant that was, and which segment and then in general, there is the M&A pipeline, how is that looking and I don't know if you have any updated thoughts on capital allocation in general. Thanks.

Yes. The acquisition was the specialized aviation company that allows us to some critical path we have on transmission and distribution that was necessary for us, so that was a smaller acquisition that was meant to support our ongoing operations in North America. And as far as M&A again we're opportunistic out there, there's a good pipeline of great businesses that are more, there's nothing eminent or large in nature from our standpoint, but certainly the markets there and we've always been a company that's acquired, we have a strategy we'll stick to it.

Relative to size, it was a little less than about $50 million run rate revenues.

As for cash allocation, we will continue on the same approach we have used in the past. This means we will consider acquisitions, stock buybacks, and dividends. We will evaluate all of these options to ensure we are enhancing shareholder value.

Thanks guys.

Good morning, everyone. Great quarter. Duke, how did Stronghold perform in Q1, and what’s the outlook for 2019?

I mean, I think we've talked about the record of our Industrial Services business and we won't get into specifics on Stronghold. But in general that segment, industrial segment that's underneath and they're performing really well, better than our expectations. So we're really proud of that, we're really proud of kind of adding that service line to the pipeline and industrial segment. So from our standpoint, we see them having a record year this year and next year was just as good.

Good. And then I know Atlantic Coast is not in guidance. But do you expect what's the latest thoughts on the potential first sum activity this year?

We have very little expectation for Atlantic Coast this year. I think if you go back to what Dominion, Duke and others are saying it's a 2020, 2021 type build and we'll stick to their schedules.

Thanks, good morning and thank you for taking my questions.

Thanks Alex.

A couple of quick questions here, you mentioned something about a Latin American telecom project, can you go back through that and how big was that and is there anything that needs to come out of backlog or has that already happened?

No. The Latin America issue it was a P3 type project in Peru. And so we're well along in the project. We're just, it's been delayed for various reasons and country was necessary to kind of move this thing along as to go to some sort of arbitration at some point here. So we're working through that with the client and I think we'll get it resolved and move forward. We have a very small piece left to finish out the project.

Yes, it's only about $30 million expectation for 2019. So it's relatively small.

And then you also mentioned an $8 million charge in the industrial business of some sort, what was that again?

That was, previously, we had talked about the processing facility and some liquidated damages that was the same processing facility. We had some delays as far as getting it complete and primarily most of that is around that delay and liquidated damages on that project. Very helpful. And then any other sort of macro views on the world of telecom? It seems like a number of telecom customers might have kind of pulled back CapEx in the first quarter here. Is that more of a technology shift or timing shift in your mind, or is that a longer-term change in their views on how to spend CapEx? Yes, Alex, when we examine the situation, it seems essential for the fiber development. We're beginning to notice how some of the advancements in 5G technology are influencing that direction. As 5G technology progresses, we expect to see some shifts in fiber investment, but overall, it's crucial for them to have a robust infrastructure, whether it involves data centers or other aspects. We expect to see significantly high capital expenditures for the foreseeable future, and while the timing of these moves may fluctuate, we're confident in our clients and our perspective. We're monitoring the situation closely. I wouldn't say we've observed any significant fundamental changes; however, when 5G extends beyond densely populated areas into communities and suburbs, the process might take longer due to reliance on the electrical distribution system. I anticipate that navigating permitting will be more complex than in previous endeavors, posing a challenge for carriers as they collaborate with utilities in the electric distribution segment.

Thank you. Nice quarter.

Thanks, Alex.

Hi, great. I guess my questions are probably going to be for Derrick. And I guess, I wanted to just talk about two other chunks of DSO and/or working capital cash flows. Specifically I think Derrick, you mentioned that the retainage on Fort Mac could move places on the balance sheet, presumably that means the cash is coming in soon. I was wondering the size of that and what other contingencies need to be released or boxes need to be checked to be able to get the Fort Mac cash fully in the door.

Yes, it's a reasonably sizable balance. I mean it's upwards to $90 million. It's moved from non-current to current, there isn't that much necessarily related to from a timing perspective as a hold up, it's just more kind of as you reached effective amortization this quarter, we've got to go through the final process of administrative by getting those mixed balances. I would tell you that we expect all of those remaining balances to be received tiered during 2019, probably in the second and third, maybe early part of fourth quarter timeframe.

Helpful. And then I think you said that the PG&E receivable, the total size was 157 you're collecting a good chunk of that, but there's still going to be $41 million that you did not comment on, what's the process for that and how should we think about that as it relates to your cash flows, balance sheet and potentially income statement as that plays out?

Sure. Previously, we had indicated that we expected those balances to extend beyond 2019. As it stands today, we still believe that will be the case for the remaining balance without a contract assumption. In fact, we have classified that balance as non-current, which aligns with the normal administrative process we are undergoing. We are collaborating with the customer and the courts to facilitate the collection. There has been no change in our position, and we still anticipate full collection at this stage; we will simply be managing the timing while working with the related parties.

That's helpful. My final question is regarding your guidance. I would like a different perspective on it. I understand that the first quarter exceeded expectations, and that you brought some electric revenue into Q1 due to strong performance. Also, with the acquisitions in mind, Derrick, how has the overall guidance increase affected the rest of the year? Or is it primarily that you performed better in the first quarter, and what does that mean for the year-over-year change in guidance?

Yes, I mean, relative to our own side of the equation and kind of looking it up from our modeling. I mean we did add a nice first quarter, but we have upped from a revenue perspective on both pipeline and electric power, a larger portion of electric power. So that is representing strengths to through the year. We see a higher degree of potential contribution coming still yet in the third and fourth quarter due to the expanding base business, as well as some of the storm hardening work that Duke has made reference to. So from our standpoint, we see as much of the upside happening in the latter portions of the year against our own expectations versus just the contribution of the first quarter.

Super. Thank you very much.

Thank you for taking my questions. I have a quick inquiry regarding the outlook for electric margins. They were quite strong in Q1, nearing the high end of the range. I understand that communications will slightly dilute those margins as we progress through the year. Could you provide some insight on the trajectory within the communications business and how it may develop by the year's end?

I mean, when you look at the communications business, I think it continues to strengthen, quarter-over-quarter and when you get into the fourth quarter, you may have some seasonality, but whoever is working, I think in general, will be fine there. So we continue to strengthen and we'll be prudent about how we got it. But we still believe that business is capable of margins at parity to what our electric segment is doing there in the segment. So we feel like it will strengthen throughout the year in the US especially.

Alright, great. And then just shifting of the pipelines, you noted the Bakken and DJ as other basins within the US and in Western Canada as well. So just wanted to try and get some color on how active is the bidding in those regions and what kind of, I guess, how much of the pipeline portfolio do you think work in those regions and other non-Permian regions can account for moving forward?

I mean, anytime you have takeaway capacity, and you have drilling activity, you'll start to see the midstream comeback, as you'll see in the Appalachian once we get some big takeaway pipe build-out of the Appalachian, you'll start to see our midstream business come back underneath. So that's what's you're seeing in Canada and Western Canada is also in the Bakken and DJ is you're seeing drilling activity and underlying that you're seeing the midstream business start to come back and we have a nice midstream business there in Canada that comes down into the Bakken region. So the activity there is robust. We like that business underneath the big pipe and it's pretty repetitive in nature. So we're working pretty hard at those regions and shales.

Alright, great, thanks a lot guys.

Thank you.

Thank you and congrats on the great quarter guys.

Thank you.

I guess first of all on the pipeline side, Duke, I think you mentioned it briefly in response to Noelle earlier, but we've seen a couple of these Senate Bills in Texas pop up regarding kind of eminent domain reforms and just wondering if you have any more thoughts on where they have legs? I mean, particularly given that's in a state that's historically been I think relatively favorable from a permitting standpoint in the past?

Yeah, I think Texas is fine and we will continue to see a lot of infrastructure build here in the state. I don't think from a legislation standpoint will see any change material that's an energy state if people want to build infrastructure if necessary to move it down to LNG exports out of the Gulf Coast here. So we continue to see that build happening. I don't think anything from a regulatory standpoint, Texas for sure will cause out to have any impact. I would say that the federal administration did make some executive orders that are intended to help us and help the permitting process and give certainty to part process. So with that, I do think federally, you'll start to see some at least some certainty and what it takes to build pipe and once you get it through FERC it will be somewhat full but not to say you won't get sued and such, but I do believe that you will prevail if you get it through FERC. And so we like all the decisions and some of the executive orders that had happened in the quarter. And we do think in the future it will certainly help infrastructure and infrastructure builds in order to move gas and liquids down to the coast or whatever it may be.

I appreciate that. That's helpful. Getting back to the communication side, could you share what the current mix looks like in that business? It seems like you are developing capabilities in both wireline and wireless. Where do you see that mix now, and what are your expectations for the next one to two years?

When we examine our current activities in the communications sector, we are primarily building backhaul fiber or fiber rings. We are engaging in some 5G projects as well, but our significant wireless business growth is tied to the electric distribution side. This requires specialists to work with the primary voltages in the distribution system, and the involvement of utility companies in fiber 5G could greatly benefit Quanta. I believe we will truly see progress in 2020 to 2021 and beyond. We're methodically addressing our initiatives, have managed permitting challenges, and I'm pleased with our current position and pace. Our business is becoming more profitable each quarter as we scale from these locations and our opportunities keep expanding.

Appreciate it. Thank you.

I'd like to thank the men and women in the field for the safe performance in the quarter. They did exceptionally well. So we want to thank them, and thank you all for participating in our first quarter conference call. We appreciate your questions and your ongoing interest in Quanta. Thank you, this concludes the call.