Quanta Services Inc (PWR) — Q2 2022 Earnings Call Transcript

Thank you, and welcome, everyone, to the Quanta Services Second Quarter 2022 Earnings Conference Call. This morning, we issued a press release announcing our second quarter 2022 results which can be found in the Investor Relations section of our website at quantaservices.com, along with a summary of our 2022 outlook and commentary that we will discuss this morning. Additionally, we will use a slide presentation this morning to accompany our prepared remarks, which is viewable through the call's webcast and is also available on the Investor Relations section of the Quanta Services website. Please remember that information reported on this call speaks only as of today, August 4, 2022. 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 include all statements reflecting Quanta's expectations, intentions, assumptions, or beliefs about future events or performance 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 and the presentation. Along with the company's periodic reports and 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 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. If you would like to be notified when Quanta publishes news releases and other information, please sign up for e-mail alerts through the Investor Relations 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. And lastly, one administrative note regarding today's call. Quanta's Chief Financial Officer, Jayshree Desai, is recovering well from a planned but slightly accelerated medical procedure last week and will not be participating in today's conference call. Derrick Jensen, Quanta's Executive Vice President of Business Operations and former CFO, will review and comment on the company's second quarter financial performance and full year guidance here instead. 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 Second Quarter 2022 Earnings Conference Call. On the call today, I will provide operational and strategic commentary, and we'll then turn it over to Derrick Jensen, who, as Kip said, is making a current call appearance, filling in for Jayshree today. He will provide a review of our second quarter results and full year 2022 financial expectations. Following Derrick's comments, we welcome your questions. Our second quarter results continue our solid start to the year, with record quarterly revenues exceeding $4 billion for the first time in our history, as well as record quarterly adjusted EBITDA and adjusted earnings per share. We also believe momentum is building for continued profitable growth next year, and we continue to see opportunities for multiyear expansion across our service lines, driven by our collaborative solutions-based approach. The growth of programmatic spending with existing and new customers and favorable megatrends. We are negotiating several large master service agreement, or MSA renewals with utilities. As significant levels of limited notices to proceed for projects across our segments, and we are actively pursuing numerous larger transmission projects. As a result, we believe there is opportunity to achieve record backlog levels again in the coming quarters. Our Electric Power Infrastructure Solutions segment performed well overall during the quarter, despite some supply chain challenges causing delays and resource utilization and efficiencies. The impact on our business has been relatively limited, and these challenges are not causing meaningful delays in our overall utility capital spending. We also believe these are shorter-term conditions that have resulted in mostly short-term delays in the timing of certain electric transmission work. We continue to collaborate and partner with our customers to manage through these dynamics and work on potential mitigation solutions, which we believe will further enhance our relationships going forward. Demand for our services continues to be driven by broad-based business strength from utility grid modernization and system hardening initiatives as well as our reputation for solid and safe execution. Additionally, our communications operations continue to execute well from both a revenue and margin perspective and remain on track for improved performance this year. Overall, our electric power outlook remains strong, driven primarily by increasing service line opportunities and market share gains on our base business. Incrementally, we continue to actively pursue large utility programs that are designed to modernize the grid, support growing electric vehicle penetration and on other new technology adoption, and harden systems to be more resilient to wildfire and severe weather events. To that end, in our earnings release this morning, we highlighted an MSA we secured in July to provide turnkey engineering construction and program management solutions in support of the deployment of a national electric vehicle direct current, fast charging network. This program brings together one of the largest auto manufacturers, North America's largest operator of travel centers and the nation's largest public fast charging network for electric vehicles. These companies are collaborating on a fast-charging network that is expected to include as many as 2,000 DC charging stalls at hundreds of travel locations across the United States. We expect to begin engineering work on this program this year, with construction expected to begin in 2023. This is just one example of several large electric vehicle charging deployment programs that we have been pursuing. Additionally, we believe the need to modernize and enhance the power grid to enable higher levels of load growth and continuous power demand caused by growing electric vehicle penetration will create significant opportunity for Quanta. Renewable developers and utilities are leading the effort to reduce carbon emissions, many with significant carbon reduction commitments through aggressive efforts to expand our renewable generation portfolios. Achieving their goals will also require substantial incremental investment in transmission and substation infrastructure to interconnect new renewable generation facilities to the power grid and to ensure grid reliability due to the significant increase of intermittent power added to the system. Over the near and longer term, we believe substantial load growth, favorable public policy, and overall positive sentiment supporting a greener environment will continue to drive North America's power generation mix, increasingly towards renewables. Our Renewable Energy Infrastructure Solutions segment performed well during the quarter and successfully managed through general supply chain challenges and solar project disruptions caused by the Department of Commerce's investigation into solar panel manufacturers in several Southeast Asian countries, the impact of which has since been mitigated through an executive order by President Biden. While the first six months of 2022 presented challenges to the renewable industry, we are on track and expect to build momentum through the rest of this year. Interestingly, due to the initial solar industry uncertainty and project delays caused by the Department of Commerce investigation, a number of renewable developers and utilities have shifted projects in their wind portfolios to be built over the next several years. We believe this incremental wind activity could create a stacking effect in future years on top of existing industry expectations for accelerated solar and battery storage project investment. To that end, we are actively collaborating with existing and potential renewable generation customers on their multiyear programs with some discussions in planning extending out to 2026. Additionally, we are pursuing several large, high-voltage electric transmission projects designed to support renewable generation and overall system reliability. These projects have made meaningful progress with permitting and approvals. We are the leading high-voltage electric transmission infrastructure solutions provider in North America and believe we are well-positioned to be selected for these projects. As we have commented previously about both proposed and enacted federal infrastructure legislation, our positive month-to-year outlook is not dependent on them. However, we view the current climate-related components of the proposed inflation reduction act as incremental positives for the renewable industry. We believe the passage of these provisions could accelerate renewable generation and related infrastructure investment over the coming years and provide Quanta with greater visibility into future opportunities for growth. We are particularly pleased with the performance of our underground utility and Infrastructure Solutions segment in the second quarter. Our industrial services operations continue to execute very well and experienced strong demand as capital spending resumes and pent-up activity from two years of deferred maintenance in this part. We also continue to experience solid demand for our gas utility and pipeline integrity operations, which are executing well and driven by regulated spending to modernize systems, reduce methane emissions, ensure environmental compliance, and improve safety and reliability. Looking to the coming years, we also continue to see emerging opportunities for Quanta's underground utility and infrastructure solutions operations to play an evolving and increasing role with customers as they move forward with strategies to reduce their carbon footprint and diversify their operations and assets towards greener business opportunities. Quanta is successfully executing on our strategic initiatives to drive operational excellence, total cost solutions for our clients, profitable growth for the company, and value for our stakeholders. Our strategic initiatives are designed to uniquely position us not only to capitalize on the megatrends of our end markets, but also to enhance our customer relationships and market positioning. As a result, we are able to collaborate with our clients to execute their capital deployment plans, even during challenging conditions like the ones we face today with supply chain inflation, COVID-19, regulatory and economic uncertainties. These dynamics are not easy to navigate, but we expect to continue to successfully manage through them. We believe we have taken a prudent approach to our guidance for the remainder of the year to incorporate these factors. It is during these times that Quanta demonstrates its resilience which we believe shows the strength of our operations portfolio and platform of solutions. As I hope you gather from my remarks this morning, demand for our services is robust across our portfolio and driven by long-term visible and resilient megatrends. As a result of our solid first half financial results, greater visibility, and continued overall favorable end-market drivers, we remain confident in our 2022 consolidated financial expectations. More importantly, as we look to the medium and long term, we are incrementally more positive as energy transition and carbon reduction initiatives accelerate. We believe the infrastructure investment and renewable generation necessary to support these initiatives are still in the early stages of deployment. We have profitably grown the company and executed well in the past and expect to continue to do so. 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 build leadership. We will pursue opportunities to enhance Quanta's base business and leadership position in the industry and provide innovative solutions to our customers. We 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 our stakeholders. I will now turn the call over to Derrick Jensen for his review of our second quarter results and 2022 expectations. Derrick?

Thanks, Duke, and good morning, everyone. I want to start by acknowledging the numerous requests we've received for another call, and while I'm here for one more quarter call, this will be my last. As Kip mentioned, she is doing well and may not be on the call today, but she's been managing the quarter and will sign the certification for our filing. She will also provide the next quarter’s call notes while I am away. Now, let's discuss our earnings release, where we announced record second quarter revenues of $4.2 billion. Net income attributable to common stock was $88 million or $0.59 per diluted share, and adjusted diluted earnings per share, a non-GAAP measure, reached a record $1.54 for the second quarter. Our electric power revenues were $2.2 billion, marking a quarterly record and a 21% increase compared to the second quarter of 2021. This growth primarily stems from increased spending by our utility customers on grid modernization and hardening, which boosted demand for our electric power services, along with approximately $80 million in revenues from acquired businesses. Electric segment operating income margins in Q2 '22 were 10.6%, down from 11.4% in Q2 '21, primarily due to normal project variability. Some margin pressure was also caused by inefficiencies from supply chain disruptions affecting certain operations and increased costs of consumables. Despite these challenges, we managed to achieve double-digit margins, aligning with our expectations for the quarter. Our communications operations within the Electric segment also showed improved margins, positioning us for upper single-digit to double-digit margins for the year. The Renewable Energy Infrastructure segment reported revenues of $924 million for Q2 '22, a significant rise from Q2 '21, mainly due to $490 million in revenues from acquired businesses. Operating income margins in Q2 '22 were 8.8%, similar to the 9% seen in Q2 '21. The Underground Utility & Infrastructure segment achieved record revenues of $1.1 billion for the quarter, surpassing Q2 '21, driven by increased demand from gas utility and industrial clients and a higher contribution from larger pipeline projects. This segment's operating income margins were 8.1%, up 530 basis points from Q2 '21, reflecting strong performance, especially from our industrial operations, which had record quarterly revenues. I want to highlight our other income and expense. As I mentioned last quarter, we have a common equity interest in Star Group Holdings, Inc., a fixed wireless broadband technology provider. As required, we updated the fair value of this investment based on the market price of the publicly traded stock as of June 30, 2022, which resulted in recognizing an unrealized loss of $41.7 million during the quarter. While this loss is significant, we remain optimistic about Star's business and our scalable wireless platform. The analyst community also supports this view, with an average price target above $9 per share. Our total backlog now stands at $19.9 billion, a decline of $0.6 billion from last quarter, primarily due to our multiyear MSAs, where a quarter's worth of backlog converted to recognized revenues in Q2. Our 12-month backlog is a record $11.6 billion, slightly up from the previous quarter, suggesting stable levels of committed work in the short term. Given the ongoing demand for our services and robust activity across all segments, we anticipate strong backlog retention and expect to report new record backlog levels in future quarters. In the second quarter of 2022, our free cash flow, a non-GAAP measure, was $14 million, down from $126 million in Q2 '21. The shortfall in free cash flow stemmed mainly from the timing of certain renewable contract awards with favorable cash terms and ongoing elevated working capital requirements tied to a large Canadian renewable transmission project that has driven an increase in contract assets. We're actively working with the customer to manage the growing contract asset balance. Delays caused by COVID restrictions have extended production schedules through another build season, impacting our ability to meet billing milestones and increasing costs directly. We're in discussions with the customer regarding the revised build schedule, and we're confident about our cost position; however, the resolution of certain amounts may extend beyond this year, affecting free cash flow and increasing days sales outstanding (DSO) in the near term. We estimate that these issues could increase DSOs by 5 to 6 days. On a positive note, another large Canadian electric transmission project that faced similar challenges received customer approval for a significant portion of contract assets related to change orders this quarter. The approved amounts were billed during the quarter, and we expect flexibility in Q3 '22, with the smaller remaining balance expected to be resolved by year-end. DSO for Q2 2022 was 81 days, a decrease of 2 days from Q2 2021 but an increase of 1 day from year-end. The decrease compared to Q2 2021 was mainly the result of the acquisition of Latina, which typically operates with a lower DSO than some of our larger operating companies. However, this positive effect was partially offset by the previously mentioned working capital dynamics from the two large Canadian transmission projects. As of June 30, 2022, we had total liquidity of approximately $1.8 billion, with a debt-to-EBITDA ratio of 2.4x as per our credit agreement. We expect continued earnings growth and cash generation to support our ability to efficiently reduce leverage over the coming quarters while also delivering stockholder value through dividends, stock repurchases, and strategic acquisitions. As of July 31, 2022, we have repurchased approximately $104 million of stock this year as part of our repurchase program. In July, we also acquired a utility contract in the West focused on underground construction. Looking at our guidance, we've had a solid first half of the year and are confident in our ability to meet the guidance shared during our last call. However, the earnings composition across our segments has shifted slightly from our initial expectations, reflecting the strength and benefits of our diverse portfolio. We continue to experience strong demand for services within our electric segment, now expecting revenues between $8.5 billion and $8.6 billion, marking a $200 million increase from our prior range. However, portions of our transmission operations have been negatively affected by customer-related material delays. Consequently, we're reallocating labor and equipment to accommodate our customers' increasing distribution needs, which is causing some inefficiencies as we also grow headcount. As a result, we now expect margins for this segment to be between 10.6% and 10.8%, still a double-digit profile but lower than our previous expectations. The Renewables segment faced challenges due to project timing uncertainty linked to potential supply chain issues, although we've seen improvement in this area recently. We anticipate that the second half of the year will be stronger, raising our full-year revenue expectations for this segment to between $4 billion and $4.2 billion, an increase of $200 million, with operating margins expected to remain between 8.5% and 9%. Our Underground segment has had an excellent year so far, and given our strong performance and improved visibility for the remainder of the year, we are tightening our full-year revenue expectations for this segment to between $4.1 billion and $4.2 billion, with margins anticipated to range from 7% to 7.5%, adjusting our previous midpoint expectation to the new low end of the margin range. Regarding free cash flow, we are reducing our full-year expectations mainly due to the dynamics surrounding the Canadian transmission project and an increase in working capital needs for incremental revenue growth. We now expect free cash flow for the year to be between $550 million and $750 million. Due to the lower free cash flow and rising interest rates on our variable rate debt, we now estimate full-year interest expenses to fall between $120 million and $123 million. Overall, our consolidated outlook for full-year diluted earnings per share attributable to common stock is now expected to be between $3.32 and $3.65. We also expect full-year adjusted diluted earnings per share, a non-GAAP measure, to range from $6.10 to $6.44, and adjusted EBITDA, another non-GAAP measure, to range from $1.64 billion to $1.71 billion for the year. For more quarterly commentary and details regarding our financial outlook, please refer to our outlook summary available in the Financial Info section of our Investor Relations website at quantaservices.com. From a long-term perspective, we see robust tailwinds in our end markets. We believe our industry-leading solutions set us apart from competitors and provide management the chance to generate significant stockholder value through organic growth and strategic capital deployments leading into 2026 and beyond. I will now turn it back to our operator for Q&A.

Congrats on a nice quarter. My first question is about the supply chain labor inflationary pressures that have been discussed in the market. Can you elaborate on where these pressures are most evident and how you're managing them? To what extent do you see this as a potential risk for project delays or your guidance? My second question is for Derrick, since this is my last opportunity to ask you a question on a public call. I was pleasantly surprised by the underground margins this quarter. Could you explain how much of that was due to the industrial business picking up, or if there are any structural factors at play that give you more confidence in getting your margins closer to the targeted range?

Yes. Thank you, Jamie. I think when we look at supply chain, as we're building crew counts and things of that nature, there is some small impacts on mono material throughout the utility system. And it does create some inefficiencies with our crews, especially when we're building. So those impacts, coupled with some inflationary pressures on consumables, do pressure a bit. I do not think that's something that, given the guidance, we took all that into account if it does level off or if it does get better throughout the quarter by the end of the year, certainly, it will move upwards. It's utilization and the buildup for future years and working with the client in a collaborative manner, which is what the company has done in the past and we'll continue to do on a go-forward basis, all for really the outer years. And I think it's really important for us to make sure that we're building these crews while working with the client on these modern material issues throughout the system. So we don't really see the impact. It's not the solar we talked extensively about that last quarter, and worked through that, and like I probably would, so really nothing there to speak of. So all in all, really good from our standpoint, macro markets are strong, not seeing large supply chain issues. The ones that we are, I think it's opportunities for us to work with the client. And I'll just say a little bit on the margin, and I'll give it to Derrick. We've said all along that we view the company as a portfolio and that we get to double-digit adjusted EBITDA margins, and through the portfolio. And I think it's prevalent. It resonates. We continue to see the portfolio rise throughout. And it's really whether it's industrial, Canada or whatever, the whole portfolio continues to move forward and upward. But I'll let Derrick comment.

I would say that during this quarter, there wasn't anything specific to highlight; it was generally good performance across the segment. The industrial sector was a standout, achieving record revenues and solid margins. They are aiming to reach pre-COVID performance levels for the remainder of the year. Overall, the entire segment is experiencing improvements, with better utilization and effective execution, which includes leveraging resources in the electric power sector. This progress aligns with our goal of achieving upper single-digit growth, and we anticipate this trend will continue as we move forward.

In looking at the decline in the backlog, particularly in renewables, to what extent was this decline influenced by the tariff dynamics in the quarter and the resulting uncertainties? If that is indeed the case, it makes sense. What is your expectation for the backlog in renewables? Do you anticipate it will start growing again as early as the third quarter? I know there are some limited notices to proceed, but should we expect to see that backlog increase in the near term?

Thank you, Steve. When we examine the renewable backlog and the volume of incoming inquiries, it's likely one of the strongest periods we've experienced in the company. I anticipate that the backlog in the renewable segment will expand significantly throughout the year. Regarding limited notices to proceed, we haven't included those in the backlog yet, but once they become contracts, we will. The time it takes to convert LNTPs to contracts has stretched a little during this cycle, mainly due to the solar impact and some shifts in our land portfolio. We foresee growth in this area throughout the year, potentially in the fourth quarter, the third quarter, or possibly early next year. Moreover, we remain confident about the direction of the renewable segment, more so than ever before.

I'll add to everything Duke said; I'll add that we've always talked about how backlog can be lumpy for Quanta as a whole. I'll emphasize that in previous calls, we've commented that it could be more so in this renewable segment, right? It is an aggregate of project type dynamics that manage a little bit less base business component to it. So you might see a little bit more ups and downs at any given point in time, and that doesn't necessarily indicate the trend. We continue to feel quite confident in the multiyear market.

Could you provide some insights into the size of the EV charging MSA? Additionally, I believe you mentioned several other MSAs that are in development. How many of these arrangements are entirely new compared to those that are renewals of existing contracts?

Yes, Steve, it's meaningful. I would say it's more about, for us, when it's going to get started, how it's looking on a go-forward basis. We're having the same discussions with multiple clients, multiple programs. But it's also the ancillary effect on the utility system, and I'll continue to say that is more important of what happens to the system. And really utility spend against EV charging and what's necessary to make that work on a consistent basis day to day, it's substantial and substantially more than the EV charging network itself. But we are seeing those projects come to fruition here.

So I want to go back to your comment about electric power margins and bringing it down this quarter. So can you just break out the impact from headcount, the customer-driven material delays and I think you mentioned consumables? And then just like is there any opportunity to recover this? And just like how broad-based are these issues in your portfolio?

I don't believe the issue is widespread or prolonged. We're in the process of building teams. Typically, the company navigates through these challenges effectively. We did increase our workforce by about 1,000 in this quarter. This does create some pressure due to material delays and inflationary costs for consumables. While it has some impact, I don’t think it’s insurmountable. We are committed to collaborating with our clients for the long term. I don’t anticipate any immediate recovery but we will manage through it. It's a long-term issue that we will address over the next decade. The efforts we’re making now are investments in the future. So, in my perspective, we’re facing some margin pressure, but it’s manageable. When we compare to past experiences, considering storms, our guidance suggests around $100 million, whereas last year we achieved $400 million in the last two quarters. We're not factoring that into our current expectations. Future performance will depend on utilization, and I believe there is potential for positive outcomes if the supply chain stabilizes or if we encounter significant storm events.

I think the business itself, we continue to be pleased with what we said. We're making good progress on synergies. We constantly are in contact with our clients about both in solar, not only on utilities or developers, but also our UI segment. All of our customers are really looking towards the carbon-free footprint. And when we think through it, we thought that we could sit at the tip of the sphere on energy transition, we think we're at the tip of the sphere on energy transition with Blattner and certainly believe that every bit today as we did before, and we're proving it out every day.

Derrick, I guess last time we'll talk this way on these calls. But I guess I had a question on the guidance with the upside from the JV contribution from LUMA, I guess it implies the base segment margins are a little bit lower, but I was more interested in kind of where the upside is coming from that. I know there was opportunity for earnouts and some additional project pickup. So I guess I'm wondering if it's from that or is this the base contract expanded and there still is more opportunity from those other items?

Yes, it's really the latter. A lot of it was associated with us basically some carets cost management side of the equation on activities that we're doing. As of yet, we haven't started anything for the new project type dynamics, which would be incremental to the base project. Those things are still yet to come. They're imminent. But right now, the differential this quarter is basically kind of cumulative cost management type dynamics. And looking forward, you can see that we're still forecasting the contribution to be comparable to our previous forecast levels for the third and fourth quarter.

I do think we're seeing some fame funding coming through now on the island. And I do think there'll be opportunities for us in 2023 to actually perform some construction that's outside the contract.

Another point there is that, that line item has multiple joint ventures, not just another joint venture. So we had a few joint ventures that actually executed quite well during the quarter. So not all of that variance is unique to LUMA.

I wanted to explore the cost side a bit further since it has been challenging from a cost perspective across the industry. You have mentioned that fuel makes up a relatively small percentage of your total costs, around 2%. Can you talk about how you have managed fuel cost increases this quarter and whether you've been able to pass those costs on to customers? Additionally, regarding labor, equipment, and components, have you managed to pass those costs through effectively, or have you encountered situations where you needed to reach out to customers for some relief? I'm interested in understanding how you've handled these challenges during the quarter.

Thank you, Noelle. While costs have certainly risen, we generally manage to navigate these increases through client collaboration and scaling our operations. We are expanding our teams, and I believe that the current challenges we face mostly stem from the building process and supply chain inefficiencies, rather than fuel costs or inflation. We can usually handle such pressures and maintain a cooperative relationship with our clients. It’s important to note that in this quarter, we are experiencing a bit of pressure from the combination of all three factors. However, internally, we are aligned with our margin expectations. As we look ahead, we're being cautious with our guidance, especially since the overall segment margin is not where we had anticipated during the first half of the year. It’s uncertain whether we will manage to improve in the second half, but we are approaching guidance prudently. While we recognize there is some pressure, it hasn't reached a level that requires us to focus on fuel costs, crew counts, or similar issues on a daily basis. We can address these challenges through effective cost recovery strategies and enhancing our operational efficiency as a company.

Okay. And then in the past, we've talked about how to think about labor costs given that you're union and you typically have some visibility as it relates to the electric workforce. Any updated thoughts on how we should think about coming labor cost increases and what the conversations with the unions are like and generally, how to think about overall, what that looks like as we're kind of ending this year and heading into '23?

No, I think when you look at the company, that's our core, is across scale labor and our ability to work with unions as well as all of our trade associations, I think, are really important. And the way that we set our apology is the way that we've done our training for the last 6, 7 years, the amount that we put into this in my mind, we're really helping and collaborating with the client and talking through any kind of escalations in the future. We've worked really nicely to collaborate on these things, even the inflationary bill that has some of the language in it. We've worked through all that. So we sit in a really good position there and all, and I think we've got those covered going forward.

Duke, can you share your thoughts on the opportunities you're observing, especially regarding the larger high-voltage transmission projects? Considering your base businesses, how selective do you intend to be? What room do you believe you have on the engineering and procurement side for these types of projects? Additionally, there has been significant news from Washington regarding certain pipelines and related opportunities, along with changes in regulatory aspects. Has your appetite for both sides changed much over the last six to twelve months? Given any cash flow challenges you may be encountering in Canada, how selective do you expect to be, considering your base business appears to be performing well?

No, when we look at the large transmission, certainly, it's a robust environment. We're talking a lot. I do think the states have a lot of say even if it has good visibility and there is a large number of projects that get stated, it's still tough on those big projects. But that said, we are in the middle of quite a few, more so now than in the past. So we are looking at a lot of bigger products. I wouldn't say we're around the edges on the mall, try to collaborate with the client on these and certainly, for us, it's about planning and helping upfront. So we have success in the future. And I think that's our job is to work with the client to be successful on these larger projects. Canada, it's always we've been 5 or 6 projects, takes a little bit to get cash. We always work through those with the client. We worked through one successfully in the quarter, we'll work through the next one. The southern one did the remaining this year and the next. But we are executing well. We are known for northern camps. Our people in the field are world-class. And that project, it's remarkable what we've done through COVID. So I'm highly confident where we sit there and then our collectibility there as well as getting our cash flow a little better than it is today. Canada was certainly impacted more so than the Lower 48 when you look at COVID and things of that nature, especially with 12 camps on a job. So look, I think both Canada from the pipe side, even some in the Lower 48, there are some projects moving around. But our base business is robust. Those are all really additive in our thinking to the future versus where we sit, anything there would be additive the way I see it. We're really not going to chase shiny objects. We're really working on our base business. And if the shiny objects happen to come in, it will only increase our guidance going forward.

Nice quarter. First question, I wanted to ask about your MSAs. Did those have inflation protection baked into them coming into this year? Or is that something you need to work on as you renegotiate those going forward?

They're all different, but I would say we typically have some escalations, labor escalations for sure, which is typically around 60%, 70% of the project. So normally, that's in there, and some of the consumables would be in there; again, fuel is about 2% of the cost. And so it's really the buildup, your training, all the things that are necessary to put new people in the field, which we've done a nice job through the colleges and the pre-apprentices. But that, coupled with some of the inflationary pressures, certainly in the quarter, I would say we just took a prudent approach in the future on guidance. We're really on target the way I see it for the quarter.

I agree. Okay. And then I wanted to ask about the EV charging opportunity. Is the big opportunity for Quanta. Is it actually installing the bay? Or is there a substation and transformer work behind that that's more meaningful for you guys?

I believe it's both aspects; however, I want to emphasize that it's significantly more impactful downstream than it is at the station or bay level. The primary load is indeed at the distribution level, and getting the load there is quite substantial, especially when considering the generation aspect and how it connects through to the distribution side. It's like trying to force a large flow through a small pipe; it simply doesn't fit. Therefore, a larger capacity is required throughout the system. In my view, there is much within the system that requires modernization, and we are just beginning to undertake that distribution development across North America.

You've been through many different economic cycles. Can you talk to us a little bit about your experiences at the beginning or an inflection point of an economic cycle? And how many we might want to think about sort of the next 12 to 18 months as to how that kind of might impact your core electrical power business?

Thank you, Alex. Typically, during periods of inflation, the current price of natural gas at $8 does affect consumers. As bills increase, regulators take this into consideration. However, the unique challenge we face as a nation moving toward a carbon-free future is that the adoption of electric vehicles has accelerated. We must invest in modernizing our systems to adapt to these changes. Stopping investments isn’t an option, and it's clear that the country is committed to the carbon-free transition. While there isn't significant load growth right now, we are seeing some growth of 2%, 3%, or 5% in certain areas, which helps mitigate some of the capital costs. The effects on consumers from grid expansion aren’t evident yet, but I believe natural gas prices should stabilize to reflect their true value, which would alleviate some financial pressure. As of now, we haven’t observed the same impacts we would have in previous cycles, but we remain cautious about ongoing inflationary pressures and need to approach this situation carefully.

And then sorry if I missed this, but what is your backlog within the Telecom segment? And what is this backlog telling you about organic growth kind of on a go-forward 12-month basis? Is it accelerating? Can we see double-digit organic growth out of that segment?

Yes, we're about $1 billion in backlog in telecom. We stay about $1 billion in backlog and telecom. We could build it, Alex. It's just something I find the carriers to be more cyclical and more spontaneous than our regulated utilities as well as our developers. And so we'll be cautious about that as we grow the business. We faced that growth on purpose. I do think the margins are upper single digits going to double digits, which is really what we're after. So I'm happy where we sit. We could grow. I feel comfortable that our platform will allow us. The company has really worked hard on the portfolio. You're seeing it show up in the UI margins. I know we've talked a lot about electric, we talked a lot about renewables. But that portfolio, the way that we're displacing G&A and the things that we've done internally and this management team has really bought into one single brand, one single location. You're seeing the impacts across the board at Quanta as we pick up the adjusted EBITDA.

Maybe you could give us more color regarding your negotiations with utilities, regarding re-upping MSAs. Are MSAs of the existing customers continuing to increase given the amount of electric power work your customers have? Is there evidence of that moving to more outsourcing? And are you seeing evidence of new MSAs as your customers likely are quite tight with their own labor?

I think when we look at the customer collaborate quite a bit, Nothing's changed there. We continue to have a robust environment, good macro markets sit well in the marketplace and our ability to execute in the field safely, on time, on budget. It makes it an easy conversation, and it always has. As long as we continue to execute in the field. And those conversations are pretty easy.

It not only in the West, you're seeing undergrounding across the Gulf Coast for storm hardening. I do think undergrounding will be a big portion of the West going forward. But it is moving forward, all the capital budgets, if you look back and you see where per mile, what the utilities in the West are anticipating in '23 is substantially different than in '22. Early stages, the West is tough to work and the lot permitting, a lot of environmental planning. I do think our front-end business, we talked about it quite a bit that the engineering, permitting, all the things that we're doing on the front end are really helping us get prepared for those builds and helping us with the client to reduce cost on that. So I like what we said there. I think it is something that you'll see in '23 show up and off in the Gulf Coast.

I wanted to follow up on the comment regarding wind projects being accelerated. What can we expect on the wind side? Can you provide insight into the expected margin progression in the Renewables segment? I believe that much of the year-over-year decline we are observing in the Blattner business's margins in 2022 is related to the weaker wind dynamics. I wanted to clarify that.

I don't know; we are seeing any margin issues with Blattner. But that being said, it's down a little bit. I don't think it has anything to do with the Blattner or the platform whether it's on solar. I think it had everything to do with us taking a prudent approach to it, worry through inflationary pressures as well as guidance on not. We did that on a go-forward basis to scale, and I don't think the mix of work impacts the margins there in the segment. The segment does have large electric transmission as well as solar station interconnect. So those kind of things are in the segment. It's not just Blattner. And I do think as we move forward, certainly, the wind coming in helps, but wherever this is happy with solar is low. I think when we see it, we thought we would have some delay in '22; we did. But we took that into account early even when we made the acquisition. And we also reiterated a long-term kind of $3.6 billion in '26. I do think that's pulled in. I think you'll see a significant amount of growth there in '23 as well as and beyond.

Yes. And maybe color as well, as we commented that we felt the latter would be able to exit the double-digit EBITDA levels, and they continue to execute at those levels.

Yes, I want to thank Derrick for stepping in here. It certainly puts my mind at ease to have someone of his caliber on the management team, which reflects the family aspect of the company. Jayshree is doing great, and she's listening to the call. We appreciate all the work you've done this quarter to contribute to our success. Also, to all the men and women in the field who make our jobs easier and allow us to conduct this call smoothly, we truly appreciate you and everyone who participated today. Thank you for your interest in Quanta.