Kip A. Rupp - Vice President of Investor Relations James F. O'Neil - Chief Executive Officer, President and Director Derrick A. Jensen - Chief Financial Officer and Principal Accounting Officer.
Tahira Afzal - KeyBanc Capital Markets Inc., Research Division Adam Robert Thalhimer - BB&T Capital Markets, Research Division Noelle C. Dilts - Stifel, Nicolaus & Company, Incorporated, Research Division Jamie L. Cook - Crédit Suisse AG, Research Division Daniel J.
Mannes - Avondale Partners, LLC, Research Division Steven Fisher - UBS Investment Bank, Research Division Alexander J. Rygiel - FBR Capital Markets & Co., Research Division John B. Rogers - D.A. Davidson & Co., Research Division Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division William D.
Bremer - Maxim Group LLC, Research Division Michael Shlisky - Global Hunter Securities, LLC, Research Division Vishal Shah - Deutsche Bank AG, Research Division.
Good day, and welcome to the Quanta Services First Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kip Rupp. Please go ahead, sir..
Great. Thank you, Taylor, and welcome, everyone, to the Quanta Services' conference call to review first quarter 2015 results. Before I turn the call over to management, I have the normal housekeeping details to run through.
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A replay of today's call will be available on Quanta's website at quantaservices.com. In addition, a telephonic recorded instant replay will be available for the next 7 days, 24 hours a day, that can be accessed as set forth in the press release. Please remember that information reported on this call speaks only as of today, April 30, 2015.
Therefore, you are advised that any time-sensitive information may no longer be accurate as of the time of any replay of this call. This conference call will include forward-looking statements intended to qualify under the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance 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, in any forward-looking statements.
For additional information concerning some of the risks, uncertainties and assumptions that could affect Quanta's forward-looking statements, please refer to the company's annual report on Form 10-K for the year ended December 31, 2014, and its other documents filed with the Securities and Exchange Commission, which may be obtained on Quanta's website or through the SEC's website at sec.gov.
Management cautions that you should not place undue reliance on Quanta's forward-looking statements.
And Quanta does not undertake and disclaims any obligation to update or revise any forward-looking statements based on new information, future events or otherwise, and disclaims any written or oral statements made by any third party regarding the subject matter of this call. With that, I would now like to turn the call over to Mr.
Jim O'Neil, Quanta's President and CEO.
Jim?.
Thank you, Kip, and good morning, everyone. Welcome to the Quanta Services First Quarter 2015 Earnings Conference Call. I will start the call with an operational overview 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. Revenues in the first quarter increased approximately 7% as compared to last year's first quarter. However, earnings per share came in below our expectations. Our earnings shortfall was due to several factors.
The largest contributor was various weather dynamics occurring throughout Canada on several major electric transmission projects. We experienced an early fall in Alberta, continuous heavy snow in Newfoundland and dense fog in northern Saskatchewan. In our previous estimates for the quarter, we had considered weather effects on these projects.
However, in each of these areas, the impact to our production was more prolonged than expected. Other factors that impacted our first quarter results, as well as details about our annual guidance, which we revised downward to take into account the first quarter results, will be covered by Derrick in detail in his commentary.
Despite the challenging quarter, we believe the industry drivers that have fueled the electric power segment's growth over the past several years have not changed and will continue for at least the next several years. For example, according to a report released last week from the WIRES Group, since 2010, U.S.
transmission investment has ranged from $10 billion to $16 billion per year. And despite year-to-year fluctuations, transmission spending is forecasted to remain at high levels through the year 2030.
Our utility customers have made significant investment in their electric power infrastructure throughout North America, and we expect continued strong levels of investment by utilities in transmission and distribution infrastructure going forward.
Most of our top industrial and utility customers have forecasted an increase in their capital spending on transmission and distribution infrastructure over the next several years. Additionally, the size, scope and complexity of projects are increasing.
We anticipated this change in market dynamics and have positioned our company to capitalize on these trends. As a result, we have been awarded transmission projects such as Nalcor's Muskrat Falls and Labrador-Island Link projects in the Fort McMurray West concession in Alberta.
The aggregate contracted revenue of these projects is in excess of $2 billion. We expect additional projects of similar magnitude in both Canada and the United States in the coming years as North America's electric grid will continue to be developed for years, if not decades.
For example, we are encouraged by the California Independent [indiscernible] Operators or Cal ISO's Energy Imbalance Market initiative that was announced earlier this month and other efforts that will require grid solutions to deal with the intermittent generation resources in the western United States.
We believe Cal ISO's initiatives will result in the construction of major transmission programs designed to interconnect western states to enhance reliable power delivery in the region, which should create a significant number of opportunities for Quanta.
Despite this robust activity, the sighting and permitting of energy infrastructure, including major electric transmission programs, continues to be our customers' biggest challenge. And we are encountering delays on certain projects that we previously expected to be awarded and moved to construction in the second half of 2015.
These delays have impacted our electric power segment growth rate expectations for this year, but do not change our overall positive multi-year outlook for growth potential of this market. The regulatory environment can delay projects and create pauses in our growth rate from time to time.
However, we do not believe electric infrastructure spending has peaked, and we do believe we are still in a multi-year growth cycle. While it is frustrating when project delays happen, typically, it's not a question if the project will move forward, but when.
While large transmission projects are high profile and attract a lot of attention, we continue to seize opportunities to provide services in the sub transmission market that address system reliability, substation hardening and the replacement of aging infrastructure.
We have visibility into a healthy mix of sub transmission and major transmission project opportunities on the horizon. In addition, our distribution services continue to grow as customers increase spending to upgrade aging infrastructure and to hardened systems to better withstand extreme weather events.
Third-party industry market data and our discussions with key customers support our belief that our electric power segment remains in a multi-year growth environment. And we remain confident in our view that revenues and backlog will continue to increase over the next several years. Turning your attention to our oil and gas infrastructure segment.
Revenues increased nicely compared to the same period last year, and operating margins were favorable in what is typically a seasonally challenging quarter for the oil and gas infrastructure segment. We continue to have a positive outlook for the mainline pipe market for at least the next 3 to 5 years.
Our customers' capital programs in this market are significant. And we believe the number of mainline pipe projects that can move to construction this year and over the next several years is larger than we have ever seen since Quanta entered the mainline business.
A substantial majority of these mainline pipe projects have already secured contractual commitments for producers on a minimum volume or take-or-pay contracts and should move forward towards construction, assuming required permits and approvals are obtained.
A noteworthy pipeline project that we secured in the first quarter is our turnkey engineering procurement and construction, or EPC, contract with SemGroup Corporation for the Maurepas Pipelines Project in Louisiana.
Engineering, permitting, right-of-way acquisition and material procurement has commenced for this project, and construction is expected to begin in the third quarter of 2015 with completion expected in the third quarter of 2016.
Once completed, the pipeline system should enable local refineries to integrate and optimize their operations and should provide the refineries with pipeline access to domestically produced crude oil.
This project is a good example of how the decline in oil prices can increase downstream demand for oil and have a positive impact on demand for new pipeline infrastructure.
Also this morning, I am pleased to announce that Quanta has recently been selected by Columbia Pipeline Group, a business unit of NiSource Inc., for segment 2 of a major natural gas pipeline project.
Our scope of work includes right-of-way clearing and the construction of approximately 46 miles of new 36-inch diameter natural gas mainline pipe in Ohio and West Virginia. Right-of-way clearing is expected to begin in the first quarter of 2017.
Mainline pipe construction is expected to begin in the spring of 2017 with project completion expected in the fourth quarter of 2017. We achieved record backlog of $2.68 billion in our oil and gas infrastructure segment at the end of the first quarter.
We expect backlog to remain healthy throughout 2015 in this segment, as we anticipate sizable mainline pipeline awards this year potentially offsetting the delays of certain electric power transmission project contract awards that I mentioned earlier.
Additionally, we believe the increase in mainline project activity in 2015 will more than offset any decline in revenues we may experience in certain markets due to lower oil prices. As a result, we anticipate revenues and operating income growth in the oil and gas infrastructure segment this year.
Regarding our fiber optic licensing operations, as announced this morning, we have entered into a definitive agreement to sell our fiber optic licensing operations to Crown Castle International for approximately $1 billion in cash, subject to various regulatory approvals and other customary conditions prior to closing.
We expect the transition to close by the end of this year. I would like to thank all of our fiber optic licensing operation employees for their contribution to our organization over the past years.
This transaction enables us to enhance our strategic focus on energy infrastructure markets, which we continue to believe will undergo substantial development in the coming years. The purchase price represents a 15x trailing EBITDA multiple, which recognizes the significant value these operations have created as part of Quanta.
Sunesys provided Quanta growth opportunities at high margins and a differentiated service offering, which has always been appealing to Quanta. Since our acquisition of Sunesys in 2007, the business has more than tripled in size.
Although we have continued to pursue various strategic initiatives within this space to continue to create incremental value, we have been mindful of the increasingly competitive environment and market activity and felt that ultimately, a more appropriate owner could better serve the growth opportunities for Sunesys.
With that in mind, we concluded that the proceeds we will receive in this transaction offered our shareholders more certainty versus a changing market environment that added risk to Quanta's potential execution, and we are pleased to have reached an agreement with Crown Castle.
In summary, while our full year guidance was revised downward, primarily to take into account the shortfalls that occurred in the first quarter, we remain confident that the industry drivers of our electric power and oil and gas infrastructure segments remain intact.
In 2015, we anticipate some headwinds in our electric power segment, primarily due to project delays associated with the regulatory environment. However, we believe any softness in the electric power segment this year could be offset by the robust environment for our oil and gas infrastructure segment, driven by mainline pipe opportunities.
We continue to expand and develop our employee base and broaden our service offerings to meet our customers' growing needs. And we are executing on strategies that differentiate Quanta and position the company for both near- and long-term growth. Finally, the definitive agreement to sell our fiber optic licensing operations comes at an opportune time.
It will enable us to enhance our strategic focus on energy infrastructure markets, which we believe will undergo substantial development in the coming years. With that, I will now turn the call over to Derrick Jensen, our CFO, for his review of our financial results.
Derrick?.
the largest component is the impact on production of the various weather factors in Canada, which Jim noted in his comments. Our previous first quarter guidance of $0.31 to $0.37 per diluted share considered these factors. However, the number of days of productivity impacted for certain projects was as much as 2 to 3x our original estimates.
We would estimate that these impacts were roughly half of the shortfall against our expectations for the quarter. An additional project-related variance was a power plant project, which we've recorded at breakeven margins during the quarter as compared to our typical electric power margins.
Lastly, largely due to the weather impacts of the first quarter, our ratio of expected earnings from foreign operations, to total earnings for the year is now lower, which has the effect of increasing our overall tax rate for the year.
The combination of the impact from the power plant project and the change in the effective tax rate for the quarter was roughly $0.03. We are currently evaluating potential change orders or claims in response to certain aspects of these projects' circumstances. However, none will reflect in our first quarter results.
Turning to a discussion of the broader release, the increase in consolidated revenues in the first quarter of 2015 as compared to the same quarter last year was primarily due to a 39.3% increase in revenues from our Oil and Gas Infrastructure Services segment, partially offset by a 4.1% decrease in revenues from our Electric Power Infrastructure Services segment.
Quantifying the impact of changes in foreign exchange rates between the quarters, consolidated revenues and earnings were negatively impacted by approximately 4% when compared to the first quarter of last year. Our consolidated gross margin was 13.4% in the first quarter of 2015 as compared to 15.4% in the first quarter of 2014.
This decrease was primarily due to the negative operational impacts I described previously. Selling, general and administrative expenses as presented in this quarter's earnings release were $150.2 million in the first quarter of 2015, reflecting an increase of $15.8 million as compared to the first quarter of 2014.
This increase is primarily due to $7.3 million in incremental G&A costs associated with acquired companies and approximately $2.9 million in higher compensation and incentive costs associated with current levels of operations and $2.3 million in higher costs associated with ongoing technology and business development initiatives.
Selling, general and administrative expenses as a percentage of revenues were 8% in the first quarter 2015 as compared to 7.6% in the first quarter of 2014. This increase is primarily attributable to the reduced revenues associated with foreign currency exchange rates and its impact on the absorption of consolidated overhead costs.
Our consolidated operating margin before amortization expense was 5.4% for 1Q '15 and compares to a 5.6% consolidated operating margin before amortization expense in 1Q '14, which was impacted by 220 basis points due to the arbitration expense in the prior year.
Amortization of intangible assets increased to $8.7 million in the first quarter of 2015 from $8.2 million in 1Q '14, primarily due to amortization of intangible assets associated with acquisitions that have closed since the first quarter of last year.
To further discuss our segment results, electric power revenues were $1.23 billion, reflecting a decrease of $52.4 million quarter-over-quarter or approximately 4.1%.
Revenues during the quarter were negatively impacted by approximately $32 million as a result of the fluctuations in foreign currency exchange rates in the first quarter of 2015 as compared to the first quarter of 2014.
In addition, due to normal fluctuations in project timing, certain larger projects were ongoing in last year's first quarter, which were at or near completion by the first quarter of this year. Lastly, emergency restoration revenues decreased approximately $17.7 million [ph] quarter-over-quarter to $19.5 million.
This decrease was offset by approximately $20 million in incremental revenues from companies acquired subsequent to the first quarter of last year.
Operating margin in the electric power segment decreased to 8.8% in the first quarter of 2015 as compared to 11.3% in last year's first quarter, primarily due to the effects outlined in my previous comments.
Sequentially as of March 31, 2015, 12-month and total backlog for the electric power segment decreased by 4.6% and 3.9%, largely as a result of an approximate $140 million decrease due to changes in currency rates.
Oil and Gas segment revenues increased quarter-over-quarter by $175.2 million or 39.3% to $621.1 million in 1Q '15, largely as a result of revenue contributions of approximately $130 million from companies acquired subsequent to the first quarter of last year, but additionally from strong organic growth associated with increased capital spending by our customers.
Partially offsetting these increases is the negative impact of fluctuations in foreign currency exchange rates in the first quarter '15 as compared to the first quarter '14, [indiscernible] estimated to have negatively impacted revenues by approximately $33 million.
Also partially offsetting the increase in revenues is the reduction in demand for some of our services due to the recent decline in oil prices. Operating income for the Oil and Gas segment as a percentage of revenues increased to 3.9% in 1Q '15 from negative 4.7% in 1Q '14.
This increase was primarily due to the impact in the prior year for the arbitration expense mentioned previously, which negatively impacted the segment by 870 basis points in the first quarter of 2014. The 12-month and total backlog for the Oil and Gas Infrastructure Services segment increased sequentially by 2.1% and 6.3%.
Backlog for this segment is at the highest level since we have identified it as an operating segment. I will comment later in my prepared remarks on the disposition of our fiber licensing operations.
But as far as the first quarter's performance, our Fiber Optic Licensing and Other segment revenues were up $1.6 million or 4.1% to $40.1 million in 1Q '15 as compared to $38.5 million in 1Q '14 due to higher levels of ancillary telecommunication service revenues.
Operating margin decreased to 28.7% in 1Q '15 as compared to 31.4% in 1Q '14, primarily due to a change in [indiscernible] the higher proportion of revenues derived from ancillary telecommunication services as well as incremental lit fiber activities, both of which typically carry lower margins versus dark fiber services.
Corporate and non-allocated costs increased $5 million in the first quarter of 2015 as compared to 1Q '14, primarily as a result of $3.8 million in higher compensation and incentive costs, $1.7 million higher costs associated with ongoing technology and business development initiatives and $1.2 million in higher consulting and professional fees.
These increases were partially offset by $3.2 million in lower acquisition and integration costs. EBITA for the first quarter of 2015 was $97.5 million or 5.2% of revenues compared to $95.1 million or 5.4% of revenues for the first quarter of 2014.
Adjusted EBITDA was $153 million or 8.1% of revenues for the first quarter of 2015 compared to $185.6 million or 10.5% of revenues for the first quarter of 2014. The calculation of EBITA, EBITDA and adjusted EBITDA are all non-GAAP measures.
And the definitions of these and day sales outstanding or DSO can be found in the Investors & Media section of our website at quantaservices.com. For the first quarter of 2015, cash flow provided by operations was approximately $189 million.
And net capital expenditures were approximately $65 million, resulting in approximately $124 million of free cash flow as compared to negative free cash flow of approximately $130 million for the first quarter of 2014.
The increase in free cash flow was primarily driven by the timing of the collection of various receivables, including $65 million associated with the previously delayed payments on the Sunrise Powerlink Project as well as lower taxes payable due to the charge to provision for long-term contract receivables in 2014 and its impact on our 2015 estimated tax payment as well as reduced incentive compensation payments based upon the company's performance against incentive metrics in 2014 as compared to 2013.
DSOs are flat at 83 days at March 31, 2015 compared to 83 days at December 31, 2014 and 80 days at March 31, 2014. Investing cash flows during the first quarter of 2015 were impacted by aggregate cash consideration paid of approximately $34.7 million net of cash acquired related to 3 acquisitions closed during the quarter.
Financing cash flows during the first quarter of 2015 were impacted by the repurchase of 6.7 million shares of our common stock for approximately $182 million. At March 31, 2015, we had approximately $135.5 million in cash, with approximately $103.8 million in U.S. funds and $31.7 million relating to our foreign operations.
In addition, at the end of the quarter, we had about $328.5 million in letters of credit and bank guarantees outstanding to secure our casualty insurance program and other contractual commitments. And we had $106.4 million of borrowings in Canada outstanding under our credit [ph] facility.
Including our cash on hand and availability under our credit facility, we had nearly $1 billion in total liquidity as of March 31, 2015. Concerning our outlook for 2015, we expect revenues for the second quarter to range between $1.95 billion and $2.05 billion, and diluted earnings per share to be $0.36 to $0.42 on a GAAP basis.
These estimates compare to revenues of $1.86 billion and GAAP diluted earnings per share of $0.37 in the second quarter of 2014. Our GAAP EPS forecast for the second quarter of 2015 includes an estimate of $10.6 million for noncash stock-based compensation expense and $8.9 million for amortization expense.
Excluding these expenses, our non-GAAP adjusted diluted earnings per share for the second quarter of 2015 is expected to be $0.42 to $0.48 and compares to our non-GAAP adjusted diluted earnings per share of $0.43 in the second quarter of 2014.
Specific weather dynamics that impacted certain projects in the first quarter have, to an extent, carried over into the beginning of the second quarter, such that we currently do not expect to be able to make up for lost productivity and we have factored that into our estimates for the second quarter.
On an annual basis, we expect revenues to range between $8.1 billion and $8.5 billion. And we currently anticipate GAAP diluted earnings per share for the year to be between $1.70 to $1.90.
In addition, we estimate $41.5 million for noncash stock-based compensation expense and $35.5 million for amortization expense for the full year of 2015 and anticipate non-GAAP diluted earnings per share to be between $1.94 to $2.14.
Our forecasted non-GAAP measures are estimated on a basis similar to the calculations of historical adjusted diluted earnings per share from continuing operations presented in our release. We lowered our annual guidance primarily due to the impact of the first quarter shortfall in EPS.
However, the additional factor contributing to our reduced guidance is the overall increase in our annual effective tax rate. Our current expectations for the year is for a smaller proportion of our earnings to be earned in Canada, which has a lower tax rate as compared to earnings in the United States.
This change in the proportion of foreign earnings increased our estimated effective tax rate for the year by as much as 200 basis points, which had the effect of lowering our annual EPS expectation by as much as $0.06. We are currently projecting our GAAP tax rate to be between 36% and 36.5% for 2015.
As a result of some of the project delays Jim referred to, at the midpoint of our guidance for the year, we see electric power revenue showing flat to modest growth.
As a reminder, this forecast takes into consideration the current foreign exchange rate environment as compared to 2014, which results in a reduction of 3% to 5% when comparing the annual period.
Also similar to our year-end commentary, we are holding our estimated operating margin guidance for the year to 10% to 11% in the Electric Power segment, which reflects our expectation to perform within the 10% to 12% range in the third and fourth quarters of this year.
For the Oil and Gas segment, as Jim commented, oil price uncertainty has created incremental softness in demand for certain of our services. And as such, the midpoint of our range now reflects operating margin slightly lower than 9%, and our midpoint revenue guidance requires no incremental mainline pipe project starts for this year.
For additional guidance, we expect net income attributable to noncontrolling interest to be approximately $1.3 million in the second quarter of 2015. However, these JV relationships wind down by the middle of the year, and therefore, we expect no noncontrolling interest deduction in the latter half of 2015.
We currently estimate our diluted share count to be about 215 million shares for the year. Both the second quarter and annual 2015 guidance reflect the current foreign exchange rate environment. Continued movement in -- for foreign currency rates in the future could make comparisons to prior periods difficult.
We expect CapEx for all of 2015 to be approximately $275 million to $305 million when factoring in 2015-to-date acquisitions, which includes CapEx for our Fiber Licensing and Other segment of about $50 million to $60 million without regard to the planned disposition of these operations later this year.
This compares to CapEx for all of 2014 of $301 million. I'll now turn my commentary to a discussion of our announcement to divest of our fiber optic licensing operations. As discussed in today's release, we entered into an agreement to divest of these operations subsequent to the end of the first quarter for approximately $1 billion in gross proceeds.
We currently estimate net proceeds from the transaction to be approximately $800 million. We expect to record a gain upon closing of the transaction. However, as the timing of the close is uncertain, my previous guidance comments include the contribution of the fiber operations as though we maintain their operations through the entire year.
As such for the 12-month period ending December 31, 2015, Quanta's fiber licensing operations are estimated to generate approximately $105 million to $110 million in revenue and contribute $0.12 to $0.13 in diluted earnings per share.
The transaction was committed to in the second quarter, and we will be evaluating whether to treat the operations as assets held for sale as part of our second quarter reporting.
In any event, upon closing, the results of operations would be expected to be treated as discontinued operation, at which time we will provide supplemental information to restate previous periods for comparability.
We believe there is opportunity to create incremental shareholder value with the proceeds from this transaction by our repurchasing our stock, acquiring energy infrastructure services companies and/or making strategic investments.
We will continue to evaluate all of the opportunities we could -- we believe could create shareholder value going forward. However, we expect to use the proceeds for a combination of these purposes.
As a reminder of our recent activity in these regards, through the date of this call, we have invested approximately $322 million in cash to acquire companies and approximately $275 million in cash to repurchase stock since January 1, 2014. We currently have $225 million available under our current stock repurchase program.
Overall, our capital priorities remain the same with a focus on ensuring adequate resources for working capital and capital expenditure growth and an opportunistic approach towards acquisitions, investments and repurchases of Quanta stock. This concludes our formal presentation, and we'll now open the line for Q&A.
Operator?.
[Operator Instructions] We'll take our first question from Tahira Afzal with KeyBanc..
Jim, first question for you. Given the confidence you have on your -- the momentum in your core markets, clearly, your stock is undervalued.
So as you look at the opportunity with the fiber optic sale and really how you see investments, would your stock not be the best investment? And when we look at that $800 million in net proceeds you'll be getting from there, would it -- can you at least try to give us a bit of an idea of how much of a chunk of that could potentially go towards the acquisition at this point -- sorry, towards repurchases at this point?.
Yes, I'm going to let Derrick talk about that briefly. I'll just say that the uses of capital, we've got the significant amount of working capital to fund on pipeline projects. There's M&A activity and certainly, there's an opportunity to buy back stock.
So I don't think there's going to be much change in use of capital, at least the strategy for our uses of capital, but I'll let Derrick add some additional commentary..
Yes, Tahira, I agree with Jim's comments. I mean, although we do see opportunities there, you can see with our original repurchase program that we've used a good portion of that all the way through the first quarter of this year. And we have $225 million remaining under that program to date.
So we obviously see that being one of the uses of capital and a good use of capital. Having said that, M&A and investments we still believe are significant contributor, and in fact, we believe create greater long-term value. And so we will still be looking at that. We still consider ourselves to be an acquisitive company.
But I think it will be a combination of those things, is what you'll see. And we'll be opportunistic at how we balance those based upon the M&A and investment-type pipeline, looking back and forth between that versus capital repurchase.
The other thing I'll comment that although we announced the transaction today, it's still subject to regulatory approval, and there's a timing issue to when that may close. And although we anticipate a very low risk to closing, there is still a bit of risk to that.
And I think that she -- we will be, in our minds, a little premature to make a significant move in a permanent capital play until we see how that plays out..
Fair enough, folks. Second question is in regards to the electric transmission side. Clearly, there are some very large projects still out there, as you mentioned.
As revenues slow down because these projects are being delayed, can you still see backlog grow as some of these hit by the end of the year? Or does it seem like on the electric T&D side, we are now looking at maybe backlog investing flattish?.
It should remain strong and grow over a multi-year period..
And we'll take our next question from Adam Thalhimer with BB&T Capital Markets..
Now that we're a little bit further into the oil downturn, gentlemen, what do you -- you guys have $1 billion shale business on the pipe side. And then I assume you're doing some electrification in the shales of -- in your power segment.
I mean, what are you seeing in the shales right now?.
I think on the last call, I said that the low price of oil would affect us about 5% of our total business. It's probably a little bit more than that right now.
Fortunately, we weren't really concentrated in the Eagle Ford and the Bakken, where those oil-rich sands and those areas have been impacted from the wellhead to the midstream gathering programs. Those are down. The Marcellus, we're still active there.
We have seen a little bit of slowdown but that's primarily because of the inability to get permitting for the main pipelines to take product out of there, not the low price of oil.
But overall, the gathering work we anticipate will still run about the same revenue -- at the same revenue level as we -- have been experiencing over the last several years.
And if it did fall off, we certainly believe that any fall off in the oil and gas sector, whether it's a downturn in gathering or services impacted by the low price of oil will be offset by mainline additions that we expect here, not only this year, but over the next several years..
That's my follow-up question on the mainline additions.
Why would Columbia be -- award this job now for something that starts in 2017?.
Well, because customers are concerned about capacity. And to our comments over the last several quarters, there are some customers that are trying to plan their -- plan out their construction strategy earlier in the game.
So you are going to see some awards, I believe, over the next several quarters that will have some time in between the contract award and when the project's start date is. And a lot of that is being driven by these projects are very large in size and scope. They need to be planned early.
And they need to have a certainty that the construction resources will be available to do the work..
And we'll take our next question from Noelle Dilts with Stifel..
For my first question, I just wanted to dig into the free cash flow profile of the business a little bit.
First, just on the kind of core business, given that you're expecting somewhat lower growth in transmission this year, how are you thinking about working capital investment? Do you think it's still going to be an investment this year? Or that it could be a source of cash? And then, also am I thinking about this correctly, with the fiber optic licensing sale, that it should actually be free cash flow, accretive, given that you're losing some net income but obviously, you've been investing heavily in CapEx for that business? So overall, you could actually see a bit of the benefit..
Yes, as it relates to the kind of global free cash flow, I've made comments last year that I thought 2015 might have the opportunity to have overall stronger free cash flow.
We're seeing that here in the first quarter to the extent that there is a little bit of a flatness in revenues that generally offers opportunity for a stronger bit of free cash flow. But right now, I'm still looking at my DSOs to still run probably in the 80-day range throughout the year, so that will create that kind of a regular pace.
And to the extent that mainline opportunities come about, mainline is actually where I see a bigger need for working capital and some of the demand. So I think that will offset some of that creation of cash that might happen on the electric power side.
Most specifically, we think that we'll see -- continue to see those jobs ramp up throughout the rest of the year, which will continue to draw on working capital. On the fiber side, yes, what I would say is we have historically invested CapEx about equal to the cash flow that, that segment created.
So net-net, we were about a 0 dollar free cash flow for fiber. So once you take that out, at least as ratio perspective, it seems to improve the ratio..
Okay.
Second, just given that you have these funds coming in, can you just expand a little bit on your appetite for acquisitions? You've been making a lot of smaller bolt-on acquisitions, would that -- is that what you continue to plan to do? Or would you look to maybe make some larger acquisitions? And then, you talked about wanting to increase your presence in the energy space.
Would this be kind of continuing to look in electric and pipeline? Or do you think you might look to maybe just a tangential energy market?.
Noelle, this is Jim. I think we're going to continue to be opportunistic on acquisitions. I don't think -- our strategy has not changed. I do believe that we will see the same number of acquisitions that we've, as far as the number that we've transacted on, will be comparable to the last several years.
The dollar value will probably be a little bit lower. So the total consideration we pay for acquisitions in '15 will probably be less than what we did in '13 and '14. I don't see any big acquisition out there.
And I think that's probably the concern of investors that we're going to take this money go make a big play in M&A, and we don't see that right now. I think we're going to continue to be very selective and continue to follow the same strategy that we've embarked on the last several years..
One bit additional color to that is that of those acquisitions, you might see the cash-stock mix switch a little bit. As you've seen throughout the first quarter and second quarter, actually most transactions, if not all, have effectively been all cash transactions.
The size of those transactions dictate a little bit of that, such that you might see us using a little bit more cash because of those smaller-sized deals..
And we'll take our next question from Jamie Cook with Crédit Suisse..
The 15x. That's interesting. But is there -- should I read anything, Jim or Derrick, into the timing? I mean, you obviously got a very good multiple.
And we can also argue that the multiples for the businesses that you're in are probably fairly depressed, given the market short-term view on sort of energy? So are you trying to be, I guess, opportunistic here just because these multiples are depressed for the potential acquisitions you're looking at?.
Yes, first on your question on transmission projects, I think it's pervasive throughout both larger projects and also projects we're doing under MSAs to where it's just more difficult to cite any infrastructure. The larger projects I do want to reiterate, they're not canceled. They just get pushed out.
It's very difficult to sight and permit some of these larger lines, and we do see delays of up to years here. We were in some of the final stages of permitting and sighting. We thought projects would move forward by the end of this year, but they slipped into '16.
And again, the smaller MSA-type transmission projects, we also see some issues there, especially in areas that have a population concentration. It's just difficult to even site projects that are just a mile or 2 long if this transmission and not reconductoring of any existing right-of-ways.
As far as Sunesys, there was no rhyme or reason to why, there was no -- we didn't sell Sunesys because the M&A multiples were down in the Oil and Gas sector. This is something that we've been contemplating primarily for several different reasons, but the fiber market has continued to accelerate. The competitive environment has continued to change.
There's been a lot of mergers, acquisitions, private equities involved, very -- a lot of aggressiveness by competition to penetrate Sunesys' footprint. We don't have the capital to compete in that environment today. I mean, that business has changed significantly over the last 5 years in a good way.
We've done our best to create, and we have created value for our investors but we think that at the rate that the market is accelerating, we felt that we could lose our competitive advantage because we didn't have the capital to compete. I mean, you're seeing hundreds of millions of dollars deployed by customers -- or by competitors into this space.
And it does -- that business takes a lot of cash to compete, and that's not who we are. We're an energy infrastructure company and we had to pick our priority. And our priority is certainly to build out opportunities in the energy infrastructure space, and that's where our capital is going to go.
So it's just the best decision for the employees of Sunesys and it's the best decision for our shareholders and it did happen at a very opportune time, I think, in the industry. In our industry, both from on the energy side and on the fiber side for Crown Castle..
And we'll take our next question from Dan Mannes with Avondale Partners..
So another follow-up on the electric side, Jim. So just so I understand, this sounds like an evolution from maybe the fourth quarter as to incremental delays. When you think about your guidance for this year, your second half guidance doesn't look like it was materially changed.
So is this essentially a bet that you're going to get sufficient pipeline to backfill? Or is that pipeline on the mainline side that you already have that's going to backfill for these delays?.
No, we've got -- at the midpoint of our guidance, we have, in hand, the mainline work this year. So if there aren't any delays, I mean, these are projects that are permitted or ready to go, that some of them are even on construction now.
We would, on the higher end of our guidance, would require some new awards, which is a possibility in the fourth quarter of this year because we do see things on the mainline side beginning to accelerate. But we would require some uncommitted mainline to get to the top end of our guidance.
I think on the electric side, I mean, transmission, we're not -- we have not peaked, but we've -- we have taken a pause. And that's going to happen. I mean, we've had significant growth in transmission over the last several years. Some of these delays -- we are pausing.
I mean, we're still going to generate revenues at a high level, consistent with where we've been here over the last several quarters, but we're not going to see a fall off. But I think our growth -- any falloff can be -- will be replaced or augmented by mainline pipe on a consolidated basis..
Got it. And then real quick, as it relates to the fiber business, obviously, you have pretty attractive takeout multiple. But just wondering, as you thought through this process, were there other opportunities to do this, i.e.
was there consideration of spin-off? Was this an auction? Or was this just a bilateral negotiation with you and Crown Castle? If you could just give a little bit more color on the decision-making?.
Well, we've had a great working relationship with Crown Castle over the last several years. They've licensed our fiber for their small-cell deployment. And it just evolved into a discussion from working together as strategic partners to try to deploy their small-cell.
And it moved into a situation where we did consider other options at the time, very hard. We did bring in JPMorgan from the standpoint of helping us work through those decisions. They've done more fiber deals than anybody in this space.
We felt that the offer that we received from Crown Castle was very attractive compared to historical multiples that have been paid in this business. And so we felt that it was in the best interest to move forward with them to see if we can strike a deal. One of the main reasons we did that is I didn't need disruption of the Sunesys' workforce.
And very public processes can create a negative impact on operations. So it just worked out really well. I think it was the cleanest way to do a deal. We got outside advisers. We did consider options, but the multiple that they were offering us in the process was, I think, the most efficient way and the quickest way to get to an SBA..
And we'll take our next question from Steven Fisher with UBS..
I'm wondering if you can just give us a sense for the oil and gas booking activity that's going on in Canada, both on the smaller side and at Banister.
What kind of work is being booked there right now? And how are you managing the resources there, given the uncertainty of some of the bigger projects?.
I think Canada is a very robust environment. It's -- Banister is the #1 player in that market in Canada in mainline. We have seen some delays here in '15 in some of Banister's.
The opportunities that we expected in '15 did get pushed, but I would say that our robustness and the outlook is for Banister is more than what we anticipated when we bought them.
And certainly, I think that mainline opportunities are going to play out for them in a big way as we move into '16 and beyond because they are the #1 player in Canada, and they have significant customer relationships with pipeline companies in Canada. So the Banister acquisition was very strategic for us.
And while '15 will be a little bit soft for them, we're going to see some nice opportunities in the outer years with Banister leading those mainline pipe efforts..
Okay. On the electric side, I think you mentioned the power plant that was not performing to expectations.
Can you just give a little more color there? Remind us of how big that project is? What's going wrong? How far along it is and how confident are you that there won't be any kind of further negative issues there?.
Yes, the main problem there was material delays. I mean, we were on schedule. We're not really having performance issues. It's about a $200 million job. I believe we're 50% complete on it. We had some material delays on critical components that -- from manufacturing that created some issues.
So we had to take some hits on that projects in the first quarter, but we believe things are heading in the right direction now there. But it was worthy of pointing out because it did have an impact on the quarter..
And we'll take our next question from Alex Rygiel with FBR Capital Markets..
To follow up on the last question, has the challenge with the power plant project changed your view on power generation at all?.
We've always said that we were going to be very selective in power generation. This is not an area that we see as a growth platforms per se but an area that we're going to be opportunistic on the smaller combined cycle plants.
It's unfortunate that we have this issue here, but we do see opportunities to capitalize in some specialized areas on power plants going forward but this isn't a third leg of a stool or growth platform for us. It's more like renewables, that we have the expertise in-house to execute at a certain level on these projects.
And we'll continue to be opportunistic when we can. Unfortunately, we've just had some issues on this 1 job, but I think there's opportunities going forward to take advantage of in this market at times..
Derrick, and I may have missed this.
What was the foreign currency impact on backlog for both 12 months and total backlog?.
Yes, from a foreign currency perspective quarter-over-quarter, I'd call it, roughly 3%. It's about $140 million in electric power, I think, I called out for backlog, and that's 12 -- that's sequential backlog..
And we'll take our next question from John Rogers with D.A. Davidson..
Jim, just following up on comments about some of the deferrals and delays on the power side and also on the pipeline side, that you're seeing owners try and line up projects earlier. What are you seeing in the pricing market? I mean, that would suggest that there is excess capacity in the electrical side and capacity's tight on the pipeline side..
Yes, I mean, some customers are traditionally bidding out projects as they've done in the past. Many have moved to a negotiated type stance to whether they're negotiating solely with 1 contractor, or 2 contractors on bigger programs. We're seeing a trend in that direction.
I would say on the bidding, you're always going to have competition and you're going to always have to people that are being irrational and we're going to use our same bidding discipline that we've employed over the last several years. So our margins that we're bidding are no different than the margins that we've bid on in the past.
But we are, on a positive note, seeing many customers again with these big capital programs that are moving toward a negotiating -- negotiated stance while -- exclusively with contractors. But margins in backlog right now are consistent with what we've historically generated over the last year or so..
And how far away are we from an improvement -- I mean, margins in the pipeline business that are double digits on an annual basis, that several years away still?.
Yes. I mean, I think margins in that segment are directly correlated to executing on mainline pipe projects and having a healthy amount of mainline revenue. And I think that's imminent. I mean, I think that as we get into '16, we should be in that 9% to 12% range if the mainline pipe programs play out as we expect.
So I know people have been waiting for this for quite some time. We've been speaking about it for a couple of years. It's probably slipped about 9 months to a year from when I thought it was going to happen. Instead of being a '15 dynamic, though, I really think '16, certainly.
We're starting to really get some visibility now that gives us some confidence that mainline pipe in '16 is going to happen..
And we'll take our next question from Andy Wittmann with Robert W. Baird..
Maybe Derrick, for you, just some these numbers you gave, but just on the acquisitions that were completed in the quarter.
Can you give us the backlog, the annualized revenue and maybe the aggregate capital deployed? The backlog and the annualized revenue by segment? Just to have -- give us a sense about how those things might be filtering in over the next year..
Yes, I assume you're talking about the ones that were closed here in the second quarter. There's a couple of small deals. I'd say run rate revenue is probably in the $25 million to $35 million range in electric power. And backlog, call it, probably about $35 million, $40 million..
Nothing on the pipeline side?.
No, not for the deals closed in the second quarter they were both electric power..
Got you.
And on the big 2017 gas pipeline, that didn't go in backlog yet, did it? Or will it be in the second quarter of '15 backlog?.
No, it's not in backlog as of 3/31..
And we'll take our next question from William Bremer with Maxim Group..
Many of my questions have been asked and answered.
Have there been many change orders in either of the segments at this time?.
Yes, I mean, change orders are a regular part of our business, both approved and unapproved change-orders. That's an ongoing part of our business. I'd say there's no one quarter per se that stands out more than another in that regard.
I did comment, as it relates to the specific activity we called out for -- here in the first quarter that we have not booked anything unique to that activity. So to the extent that are able to go through and do anything from a quantification perspective, that could lead to some potential upside in future quarters.
But as it stands for those projects, we have not recorded any change orders..
Okay, Derrick. And another question focused on the oil and gas arena, primarily on the margins there this first quarter.
Any one particular project that had an impact on margins? Or was it really just many of them in the weather areas that you voiced earlier?.
No, I mean, there wasn't any particular project performance that stands out really to cause an individual fluctuation per se on oil and gas. The margins for the first quarter, once you take out the arbitration cost for last year, are very comparable quarter-over-quarter and reflects, in our mind, a fairly normal seasonality.
We would expect that there would be a little bit of pressure in the oil and gas margins in the fourth -- first quarter and then continue to grow throughout the year, much like we saw in last year. So as we go out further, I think you'll see us back into that 9% to 12% range overall.
But I would still always anticipate that the first quarter have some degree of challenge just because of the normal seasonality..
And we'll take our next question from Michael Shlisky with Global Hunter Securities..
So in the quarter, your corporate costs were up 11%, but your revenues were only up 7%.
Are there any sort of onetime items in the quarter that are kind of worth pointing out? And what's the appropriate corporate cost rate going forward?.
There was -- there weren't anything particular to call out. I mean, we've got just kind of normal conversation adjustments, primarily associated with cost of living as well as that you have the full year effect or starting to get full effect, new employees that were hired last year.
A lot of that having to deal with a lot of the greenfield and strategic initiatives that we have going on and bringing on personnel to support those initiatives. So that's why you'll see a little bit of G&A front running some portion of revenue in that.
As far as guidance, overall, I think I'd say that corporate unallocated will continue to run somewhere in the 2.5% to 2.9% range; fairly consistent with what you saw in 2014..
Okay. Fair enough.
And then secondly, on Australia, can you maybe update us on kind of what's been going on there? And do you have any plans to accelerate or decelerate your investment there given all the cash coming in and the FX rates?.
We still look at Australia as a great opportunity for us to expand the Quanta footprint. They had a great year last year. Probably won't see growth there because of the economy and the price of oil, but don't see any big fall-off there either.
Coal seam gas projects are moving forward, but many of our customers in coal seam gas also have some oil interests. So they've been hit there on their other investments and their cash flows are down. So their pace of investment in the coal seam gas development has slowed somewhat.
But with that said, there's opportunities to take advantage of in the electric space as well, and we continue to look at opportunities to grow there.
There's just so many market drivers there that, with the deregulation that's occurring there, the aging infrastructure, renewable interconnections, there's a lot of opportunity to expand our electric and to maintain and grow our pipeline segment as well, as the opportunity exists.
So I would say that we're going to just be calculated and our investments in Australia and slowly and opportunistically grow that platform. But there won't be any big play in Australia because of the Sunesys transaction..
And we'll take our next question from Vishal Shah with Deutsche Bank..
Maybe talk about the expectations for the Electric Power segment margin in the long term? Do you think, given the changes in the backlog and product delays, that your expectations for the longer term outlook on the margins front have changed?.
No. I mean, we would still say that overall, we see electric power margins being able to be within the 10% to 12% range long term.
This year, we still see the opportunity, for the latter half of the year, for our margins to be in that 10% to 12% range once we get past some degree of the seasonality that we're having here in the first and second quarter.
And so with that, I mean, we are -- as Jim commented earlier, the margins on our backlog are very comparable to what we've seen over the last several years as far as -- from an execution and expectation standpoint. So I think that we'll see clearly opportunity for 10% to 12% margins in the Electric Power on a go-forward basis..
That's helpful. And then just on the mainline work, I mean, I must have missed this question, if you were already asked.
But are you seeing any impact at all on the pricing environment and the margins that you expect from that segment especially? And how should we think about, again, the back half of the year, given the mix of your expectations or given the mix of mainline work? Do you see that margins in the back half of -- will be much better than the first few quarters?.
Yes, I would say it's very similar to electric power. Our normal seasonality is that as you look through the years, the second, third and fourth quarters have a tendency to have both expansion in revenue and somewhat an expansion in margin throughout.
So to that end, I think that we'll see higher margin opportunities in the Oil and Gas segment for the third and fourth quarter. And your first part of that, which is speaking to mainline, I mean, we continue to see that also that margins are very capable of getting us back into the 9% to 12% range and executing at that level.
And over the long term, we very much see that those mainline contributions will be pushing us -- pushing the segment to that type of level of performance..
Yes, and I want to reiterate, our bidding discipline has not changed on mainline as well. And we continue to see additional opportunities come in, employing that discipline.
So as Derrick stated, once we get into next year and we have a significant level of mainline pipe, we should be able to get within the range that we expect in that 9% to 12% range..
And this concludes the question-and-answer session, and I would like to turn the conference back over to management for any additional or closing remarks..
Well, I'd like to thank all of you for participating on our first quarter 2015 conference call. We do appreciate your questions and your ongoing interest in Quanta Services. Thank you, and this concludes our call..
And this concludes today's conference. Thank you for your participation. You may now disconnect..