Kip A. Rupp - Quanta Services, Inc. Earl C. Austin, Jr. - Quanta Services, Inc. Derrick A. Jensen - Quanta Services, Inc..

Tahira Afzal - KeyBanc Capital Markets, Inc. Andrew John Wittmann - Robert W. Baird & Co., Inc. Jamie L. Cook - Credit Suisse Securities (USA) LLC Noelle Dilts - Stifel, Nicolaus & Co., Inc. Matt Duncan - Stephens, Inc. Alan Fleming - Citigroup Global Markets, Inc. Chad Dillard - Deutsche Bank Securities, Inc. Adam Robert Thalhimer - Thompson Davis & Co.

Stefan Neely - Avondale Partners LLC Alex J. Rygiel - FBR Capital Markets & Co. Steven Michael Fisher - UBS Securities LLC.

Greetings and welcome to the Quanta Services Conference Call to Review Fourth Quarter and Full Year 2016 Results. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Kip Rupp, Vice President, Investor Relations. Please go ahead..

Great. Thank you, operator, and welcome everyone to the Quanta Services conference call to review fourth quarter and full year 2016 results. Before I turn the call over to management, I have the normal housekeeping details to run through.

If you would like to be notified when Quanta publishes news releases and other information, please sign up for e-mail alerts by going to the Investors and Media section of quantaservices.com, or download the Quanta Services Investor Relations app.

We encourage investors and others interested in our company to also follow Quanta on the social media channels listed on our website. Please note that in today's call, we will present certain non-GAAP financial measures.

In the Investors and Media section of our website, we have posted reconciliation of the differences between these measures and their most directly comparable GAAP financial measures. Please remember that information reported on this call speaks only as of today, February 21, 2017.

And therefore, you are advised that any time-sensitive information may no longer be accurate as of any replay of this call. This call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance or that do not solely relate to historical or current facts.

Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or that are beyond Quanta's control, and actual results may differ materially from those expressed or implied.

For additional information concerning some of these risks, uncertainties and assumptions, please refer to the company's 2015 Annual Report on Form 10-K and its other documents filed with the Securities and Exchange Commission, which are available on Quanta's or the SEC's website.

Management cautions that you should not place undue reliance on these forward-looking statements, and Quanta does not undertake any obligation to update any forward-looking statements, and disclaims any written or oral statements made by any third-party regarding the subject matter of this call.

Finally, Quanta Services is hosting an Investor Day on April 4 at our training facility in LaGrange, Texas with other activities taking place in Austin, Texas. This event is for institutional investors and sell-side analysts only. If you would like to attend the event, please contact me for additional information.

We'll webcast the event live and we'll have an audio replay available both from the Investors and Media section of our website. With that, I would like to now turn the call over to Mr. Duke Austin, Quanta's President and CEO.

Duke?.

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services fourth quarter and yearend 2016 earnings conference call. On the call, I will provide operational and strategic commentary before turning it over to Derrick Jensen, Quanta's Chief Financial Officer, who'll provide a detailed review of our fourth quarter results.

Following Derrick's comments, we welcome your questions. We finished 2016 on solid footing, with significant revenue and profitability momentum in the second half of the year. While I'm pleased with this substantial improvement, we're not satisfied and remain committed to returning our operating margins to historical levels.

Our third and fourth quarter results demonstrate progress towards that goal and our commitment to realizing the long-term earnings potential of the company. We ended the quarter with record 12-month backlog.

I would note that our backlog does not yet include various projects we have been awarded that have ongoing permitting requirements, and which have an aggregate contract value well in excess of $1 billion.

We are confident that these projects will move forward and expect to include them in backlog when we have better visibility into final contract terms and probable construction starts. The American election and the potential positive impact the new administration's policies could have on our business has created a lot of press and speculation.

We are hopeful that the regulatory reform will progress and owners permitting and approval processes will ease.

It is important to note however, that our end markets and related project opportunities do not rely on government funding to move forward and any additional government infrastructure support is incremental to our positive multi-year outlook.

We remain committed to providing dynamic and self-performed infrastructure solutions to improve America's infrastructure. Electric Power segment revenues for the quarter were comparable to the fourth quarter of 2015, however, operating income and margins for the segment showed solid improvement.

We continue to have a positive long-term outlook for our Electric Power segment, and believe we are entering an upward multiyear cycle. The end market drivers we have spoken about for some time continue to spur demand for our Electric Power Infrastructure Services.

These drivers, including the need to maintain and replace aging infrastructure, generation mix shifting to more renewables and natural gas and regulation aimed at improving the reliability of the grid, are what we believe will continue to provide opportunities to grow our base business.

Based exclusively on these projects, we are working on and have in backlog, our larger transmission project revenues should increase in 2017 as compared to 2016. Additionally, we believe larger transmission project awards will likely increase over the next 18 months, and should this occur, could provide improved visibility for the next several years.

I believe we are uniquely well-positioned to provide solutions for these potential projects, some of which are the size and scope the industry has rarely experienced. The macro environment in Canada has been challenging for the past couple of years for both our Electric Power and Oil and Gas operations.

However, we are seeing signs of recovery that could have a positive effect going forward, such as the Alberta Utilities Commission approval of the Fort McMurray West 500 kV Transmission Project in Canada, which we expect to start full-scale construction in the second half of this year.

We have adjusted the cost structure of our Canadian operations as we move through these challenges, and we'll continue to do so as necessary. We are positioned to increase profitability, compete on our track record for safely executing projects on time and on budget, and we remain disciplined on pricing and project risk.

It is important to note that we do not operate our business to just accept only what the market brings us. We continually strive to innovate our solution offering and remain well ahead of industry trends. Our success in doing so over the years has played a critical role in establishing the leadership position we have today.

I believe our scope and scale and competitive distinction in the markets puts us in a position to provide solutions that our end markets did not have in the past. We've valued the collaborative relationships we have with our customers, and we'll continue to partner with them as they execute their capital deployment plans.

Turning to our Oil and Gas segment. Revenues were strong, and operating income and margins increased substantially in the fourth quarter versus the same quarter as last year.

Though we experienced some project timing issues on larger pipe projects during 2016, the year largely played out as we anticipated with the second half of the year being meaningfully stronger than the first, driven by a significant increase in larger pipeline project activity.

We have been in active discussions and negotiations on a number of large pipeline projects that depending on construction start timing could give us incremental growth for the second half of 2017.

While we expect to generate more larger pipeline project revenue in 2017 than in 2016, we believe 2018 could be even better and that the next several years could be a very good larger pipeline markets.

The vast majority of pipeline opportunities we see are driven by the need to move natural gas from the Marcellus and Utica shale regions to various demand centers. However, we believe out-year larger pipeline projects opportunities could include larger oil and natural gas pipeline projects in Canada.

These projects will provide desperately needed takeaway capacity for resources to access various markets in North America and meet the need for natural gas to fuel LNG export projects on the West Coast of Canada.

Additionally, development of liquid-rich natural gas formations in the Montney and Duvernay shales is beginning to increase demand for midstream infrastructure that could provide opportunity for us later this year. If production volumes increase over time, larger pipelines would also be needed to reach various end markets.

Quanta's pipeline operating units are some of the most established and respected companies in the industry and are well-positioned to capitalize on these opportunities as market activities increase. In addition to larger pipe projects, we see opportunity for our base business to continue to grow over the coming years.

Our base business includes supporting midstream infrastructure, downstream support services, natural gas distribution, pipeline integrity, pipeline logistics management, horizontal directional drilling and engineering.

Like our electric operations, larger projects complement our base business in this segment and we continue to develop unique infrastructure solutions for our customers.

For example, we recently completed the REX Zone Three Capacity Enhancement project for the Rockies Express Pipeline LLC, where we provided turnkey engineering, procurement and construction services for the installation of three new compressor stations and the upgrade of two existing compressor stations.

This project is an example of our base business services providing a solution that led to a larger project. And finally, on our first quarter earnings call last year, we announced that following the expiration of our telecom non-compete arrangement in December 2016, we intended to resume broad activity in the U.S.

telecom infrastructure services market. We have done that. A strength of Quanta is our ability to be opportunistic and one of our strategic initiatives for the long-term growth is to find adjacent markets and new market opportunities.

Over the past several years, we have performing limited telecom and telecom-related infrastructure services in the U.S., consistent with the terms of our non-compete arrangement. At the same time, we have been growing our telecom infrastructure service operations in Canada by leveraging our electric power resources, reputation and relationships.

We have also successfully greenfielded and grown our telecom infrastructure services operations in various Latin American markets. There's a natural progression of these efforts in our success to expand our telecom infrastructure services operations in the U.S. market, which we believe offers significant long-term growth opportunities.

In light of a trial scheduled this week in the litigation around our non-compete, we will not be, as we had previously expected, in a position to talk more fully about our U.S. telecom expansion strategy on this call. Once the litigation has concluded, I will comment further about our U.S. telecom expansion strategy.

That said, I would note that we do not believe there is any merit to the plaintiff's claims. In the pending litigation regarding the non-compete, the plaintiff has informed the court that it does not intend to seek any lost profit damages as a result of Quanta's activities.

On December 3, 2016, the non-compete expired and Quanta is currently not subject to any restrictions on providing telecom infrastructure services in the U.S. In summary, overall, we had solid operating performance in the fourth quarter and believe the momentum we experienced in the second half of 2016 should continue into 2017.

Our guidance announced this morning reflects growth expectations for both the Electric Power and Oil and Gas segments over the next 12 months.

As we typically do at the beginning of the year, we have taken a prudent approach to the revenue and margin range expectations in our guidance to reflect what we believe are possible outcomes based on the risk inherent in our business.

As the year progresses and we gain better visibility in our performance, project timing and industry dynamics, we will adjust our guidance in commentary if needed. That said, we remain committed to and are strategically positioning Quanta to profitably grow over the longer term.

I hope my comments this morning have confirmed that we continue to have a positive multiyear view of end markets we serve. We believe we are entering a renewed multiyear up cycle for our Electric Power and Oil and Gas operations and are confident that we are well positioned to provide unique solutions to our customers.

Our qualitative outlook for our business is largely shaped by our collaborative relationships with our customers, which give us valuable insight into their multiyear infrastructure capital programs.

We are focused on operating the business for the longer term and continuing to distinguish ourselves through safe execution and best-in-class field leadership. We will pursue opportunities to enhance Quanta's core business and leadership position in the industry and provide innovative solutions to our customers.

We believe Quanta's unique operating model and entrepreneurial mindset will continue to provide us the foundation to generate long-term value for all our stakeholders. We faced some challenges this year, and our employees performed well in a tough environment.

As we close out 2016 with this call, I want to recognize their efforts and thank them for their commitment to supporting Quanta's unwavering dedication to health, safety, the environment and quality. We ended the year with more than 28,000 employees who I believe are the very best in the industry. They are the key to our past and future success.

With that, I will now turn the call over to Derrick Jensen, our CFO, for his review of our fourth quarter results.

Derrick?.

Thanks, Duke, and good morning, everyone. Today, we announced revenues of $2.1 billion for the fourth quarter of 2016, reflecting a 10.7% increase from the fourth quarter of 2015.

Net income from continuing operations attributable to common stock was $88.5 million, or $0.57 per diluted share, compared to a net loss from continuing operations attributable to common stock of $2.6 million or a loss of $0.02 per diluted share in the fourth quarter of 2015.

Impacting the quarter and reflected as adjustments in Quanta's adjusted diluted earnings per share calculation were tax benefits of $20.5 million or $0.13 per diluted share, associated with the release of tax contingencies as a result of the expiration of various federal and state tax statute of limitations periods.

These benefits were partially offset by approximately $8 million, or $0.05 per diluted share, of asset impairment charges primarily due to a pending disposition of certain international renewable energy services operations in our Electric Power segment.

This compares to a $6.6 million property and equipment impairment charge reflecting the last year's fourth quarter results. After last year's charge and through 2016, we evaluated various avenues for profitability improvement, but determined near the end of 2016 that the disposal of these operations best fit our ongoing strategy.

We would expect no further losses associated with these assets. Adjusted diluted earnings per share from continuing operations attributable to common stock, a non-GAAP measure, was $0.56 for the fourth quarter of 2016, compared to $0.30 for the fourth quarter of 2015.

Also negatively affecting the fourth quarter of 2016 were litigation costs incurred of approximately $6 million, or $0.02 per diluted share, resulting from Quanta's defense of allegations that it violated the non-compete agreement entered into in connection with the disposition of certain telecommunication construction operations in December of 2012.

The trial scheduled for this matter was aggressive, and a significant amount of discovery was compressed into the latter half of the fourth quarter.

The increase in consolidated revenues for the fourth quarter of 2016 as compared to the fourth quarter of 2015 was primarily associated with an increase in the size and number of larger oil and gas pipeline projects that moved into full construction in the latter half of 2016.

Also contributing to these increases was a favorable impact of approximately $25 million in revenues generated by acquired companies, primarily in our Electric Power Infrastructure Services segment. Our consolidated gross margin was 14.6% in the fourth quarter of 2016 as compared to 11.7% in the fourth quarter of 2015.

This increase was driven by substantially improved margins in both segments, which I'll discuss later in my prepared remarks. Selling, general and administrative expenses were $173.9 million in the fourth quarter of 2016, or 8.3% of revenues, reflecting an increase of $22.1 million as compared to the fourth quarter of 2015.

This increase was primarily due to $8.3 million in higher incentive compensation costs associated with levels of profitability. We accrue incentive compensation proportionate to the levels of income for the year.

Therefore, the accrual in the fourth quarter of 2016 was much higher based on the higher operating income and the proportion of 2016 operating income represented by the quarter.

Other increases include the previously mentioned higher legal costs, higher salaries and benefits from increased personnel and annual compensation increases, as well as incremental general and administrative costs associated with the acquired companies.

To further discuss our segment results, Electric Power revenues were comparable quarter-over-quarter with approximately $15 million in incremental revenues from acquired companies and slight increases in emergency restoration service revenues, offset by less power plant revenues due to the completion of the Alaskan power plant earlier this year as well as the timing of electric transmission projects.

Operating margins in the Electric Power segment increased to 8.9% in the fourth quarter of 2016 as compared to 6.8% in the fourth quarter of 2015. Operating margins were impacted by 45 basis points in 4Q 2016 and 201 basis points in 4Q 2015 by items described in the notes to our segment results as presented in today's earnings release.

Aside from these items, operating margin improvement reflects better utilization of certain large transmission resources and improved performance on ongoing projects. As of December 31, 2016, 12-month backlog for the Electric Power segment was comparable, while total backlog for the segment increased 2.1%, both as compared to September 30, 2016.

As compared to the fourth quarter of last year, total backlog for this segment increased to 5.5%. Oil and Gas segment revenues increased 35.1% quarter-over-quarter to $821 million in 4Q 2016.

This increase was primarily due to the number and size of projects that moved into full construction in the latter half of 2016, and approximately $10 million in incremental revenues from acquired companies. The increase in revenues from larger projects also drove the substantial operating margin increase to 8.1% in 4Q 2016 from 3.9% in 4Q 2015.

12-month backlog for the Oil and Gas Infrastructure Services segment increased by 3.4% when compared to September 30, 2016, and by 30.7% compared to December 31, 2015. Total backlog for this segment as of year-end is $3.1 billion.

As Duke commented in his prepared remarks, we had been in active discussions on a number of pipeline projects, which gives us confidence that backlog in this segment will remain strong.

Corporate and non-allocated costs decreased $47 million in the fourth quarter of 2016 as compared to last year, primarily as a result of a $51.9 million charge recorded in 4Q 2015 associated with the goodwill and intangible asset impairments discussed in today's release.

We closed the year with significant cash flows from operating activities from continuing operations for the fourth quarter of 2016 of approximately $184.2 million, leading to net repayments of $124.6 million under our credit facility.

The fourth quarter operating cash flow contributed to $381.2 million in total cash flows from operating activities of continuing operations for the year. Net capital expenditures of approximately $190.6 million for the year resulted in approximately $191 million of year-to-date free cash flow.

This compares to free cash flow of approximately $434.4 million for the year ended December 31, 2015.

The decrease in cash flows from operating activities from continuing operations in 2016 was primarily due to additional working capital requirements associated with the increase in the size of oil and gas infrastructure projects that move into full construction in the latter part of 2016 and the impact of the invoicing challenges and billing delays on an electric transmission project in remote regions of northeastern Canada, which we have discussed in previous calls.

The overall AR and unbilled position for this project remains at levels comparable to the third quarter of 2016 in part due to the recognition of some changed orders and, to a lesser extent, claims associated with customer scope changes and access and delay item.

However, we are working very collaboratively with the customer, which has led to significant improvement in invoice processing. In addition, the stronger fourth quarter 2016 cash flows benefited from improved cash collections on this project, with continued favorable progress thus far post year-end.

Despite the larger balances here, DSOs were 74 days at December 31, 2016, compared to 79 days at September 30, 2016, and 75 days at December 31, 2015. At December 31, 2016, we had approximately $112.2 million in cash.

Also, we had about $305.6 million in letters of credit and bank guarantees outstanding to secure our casualty insurance program and other contractual commitments. And we had $351.3 million of borrowings outstanding under our credit facility, leaving us with approximately $1.27 billion of liquidity as of December 31, 2016.

Turning to our guidance for 2017. For the full-year 2017, we expect consolidated revenues to range between $7.9 billion and $8.5 billion. This range contemplates Electric Power segment revenues increasing between 5% and 10% from 2016 levels, driven in part by the recent approval of the Fort McMurray West Transmission Project.

Oil and Gas segment revenues are expected to range from revenues remaining comparable to 2016 to growth of around 10%. As discussed in last quarter's earnings call, current 12-month backlog for the segment has 2017 construction activity weighted towards the first half of the year.

The low end of revenue guidance for the segment therefore requires no additional larger pipeline awards. However, active discussions with customers lead us to believe that additional awards are available which could provide second-half construction opportunity.

As it relates to seasonality, for consolidated revenues, due to the timing of larger pipeline projects, we could see substantial quarter-over-quarter variances in 2017. We believe there will be quarter-over-quarter consolidated revenue growth through the third quarter of 2017 with revenue growth in the first quarter likely exceeding 20%.

I would generally assume revenues will increase through the year from the first quarter into the second and into the third, although we anticipate less of a seasonal effect.

As we forecast today, we would say that even at the high end of our forecasted revenue guidance, we believe there is likely a meaningful decline in consolidated revenues for the fourth quarter of 2017 as compared to the fourth quarter of 2016.

We currently estimate operating margins for the Electric Power segment will be in the low to mid-9% range, and Oil and Gas segment operating margins are forecasted to be between 5% and 6%.

We anticipate seasonal effects will continue to impact our margins, with the first quarter operating margins for both segments expected to be lower and margins rising through the third quarter.

Both segments will likely see operating margin compression in the fourth quarter, or perhaps more so in the Oil and Gas segment, due to the potential meaningful revenue decline. We estimate interest expense will be approximately $10 million for 2017 and are currently projecting our GAAP tax rate for 2017 to be between 35% and 36.5%.

Contributing to the lower projected tax rate for 2017 is a higher mix of international earnings, which are generally taxed at lower tax rates. In addition, a change in GAAP accounting will now require companies to record all tax effects related to stock-based compensation at settlement through income tax expense rather than through equity.

It is anticipated that we will experience increased period-to-period volatility of income tax expense as the calculation is based on the stock price as of the date of vesting, which is difficult to estimate.

We expect this GAAP accounting change will impact Quanta's first quarter results more significantly than subsequent quarters, and could reduce the first quarter tax rate to as low as 32.5% to 33%. We are forecasting minority interest for the year to be between $1.5 million and $2 million.

Our annual 2017 guidance also reflects the current foreign exchange rate environment. Fluctuations of foreign exchange rates could make comparisons to prior periods difficult and could cause actual financial results to differ from guidance.

For purposes of calculated diluted earnings per share for the year ended December 31, 2017, we are assuming around 156 million weighted average shares outstanding.

We currently anticipate GAAP diluted earnings per share from continuing operations for the year to be between $1.52 and $1.77 and anticipate non-GAAP adjusted diluted earnings per share from continuing operations to be between $1.80 and $2.05.

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. CapEx for all of 2017 should be approximately $210 million to $225 million. This compares to CapEx for all of 2016 of $212.6 million.

Reflecting on 2016, we ended the year with record fourth quarter revenues, record annual Oil and Gas segment revenues and record 12-month backlog. We experienced solid improvement in our Electric Power segment operating margins, and as expected, realized significant second half improvement in our Oil and Gas segment operating margins.

We finalized repurchases of stock under our accelerated stock repurchase program in April of 2016, successfully acquiring 35.1 million shares for $750 million at an average price of $21.36. This concluded our two-year buyback effort totaling 71.7 million shares for $1.7 billion at an average price of $23.72.

Despite this significant deployment of capital, we ended the year with a conservative leverage profile, and we believe that we are operationally and financially well positioned for continued profitable growth in 2017 and beyond.

We are committed to our strong balance sheet and financial flexibility which positions the company for continued internal growth and the ability to execute on strategic initiatives.

We will continue to focus on the strong cash flow of our base business and on mitigating the more pronounced fluctuations in cash flow associated with the working capital requirements of larger projects.

Overall, our capital priorities remain the same, with the focus on ensuring adequate resources for working capital, capital expenditures and organic growth with an opportunistic approach towards acquisitions and other strategic investments. This concludes our formal presentation and we will now open the line for Q&A.

Operator?.

Thank you. Our first question is coming from the line of Tahira Afzal with KeyBanc. Please proceed with your question..

Thanks. Good morning, and congrats on a great quarter..

Thank you, Tahira..

Thank you, Tahira..

Okay. So first question is, Duke, I mean these pipeline projects, expected backfill second half potentially. I guess they're pretty fast done, so as we look at the timeline by which it's too late for them to contribute, I assume we're kind of safe as long as you book them by maybe June, July..

Yeah, Tahira. The market is robust right now with some of the other projects, larger projects going into construction. We're certainly optimistic that most of the projects on the back half will have the ability to fill it. We're a little bit worried with Canada, just the overall economy there.

So, we'll be cautious on how we guided the back half with the Canadian market as it is. But we're optimistic that we can fill the back half here in with large pipe for the second half 2017..

Got it. Okay, Duke. And second question is in regards to the transmission side. You mentioned something pretty interesting which is, you're seeing projects that are of a size you haven't seen before in the U.S.

Is it partly because they're now different in terms of how they're being structured, as in they're more merchant, or is there something more sizeable shaping up outside of that?.

Really, Tahira, I think the industry is trying to move renewables across multi states, multi jurisdictions so you're seeing a lot of larger longer projects from a DC voltage even, AC voltage. So, you're starting to see us move across state lines, ISOs, independent operators. So as you start to see that, the projects get bigger, larger.

Some of them are long in nature from a standpoint of the beginning to the end. So you hear a lot about them and nothing happens for a long time. So permitting, siting, all those things take a very – that's a long cycle on those larger projects. So, you hear a lot. We see a lot of them out there. We're around the edges.

We're optimistic that a few of them will go over the next three to five years here..

Got it. Thanks very much. And I'll hop back in the queue..

Thank you..

Our next question comes from the line of Andy Wittmann with Robert W. Baird. Please proceed with your question..

Hey. Great. Guys on the $1 billion of awards that you mentioned in the prepared remarks that were won in the quarter, I was hoping you could give a little bit of context.

It sounds like those are pipeline driven, but could you talk about the split between electric and pipeline and the visibility at which, or the steps that need to happen for those to actually get permitted and therefore wind up in your backlog?.

I think the projects that on the $1 billion or $1 billion plus is primarily pipeline.

We'll talk about them as we get a firm contract to start date to get the ability for us to understand the scope and the commitments that we have with our customers and be able to explain that in a firm nature, in a firm contract we'll, as they go into backlog, we'll make sure we communicate to the Street.

But we're confident, these will go into construction..

Okay. Maybe just as a follow-up on the pipeline side. I guess you mentioned the kind of the out-year opportunity for Canadian-driven pipelines and clearly there's been the Trans Mountain, Kinder Morgan's Trans Mountain pipe is getting some traction. Keystone is potentially back on the table.

Enbridge is thinking about upgrading their Alberta Clipper lines into the U.S.

I guess, Duke, from talking to the customers that you can talk to and looking at the market out there, how many or all of these do you believe can go? Or is that too much maybe offtake from Western Canada? I'd love to get your thoughts on the economics of those as well as the timing at which you might see some of those first ones start moving into backlog and then maybe into construction..

Yeah. I'm not privy to obviously what the shippers are saying. But, I would say that in general, if you're moving heavy oil out of Canada, you want optionality. And I think as long as they are able to move to different geographic areas, you'll start to see pipe move. You're railing most of it now.

So anywhere you have a rail line, it makes a lot of sense to have a piece of pipe. So that alone will create markets on both coast lines there in Canada. As we start to look to the lower 48 and some of the larger pipe here, same dynamics.

Shippers want optionality and our clients are in a robust environment to build pipe and we see it in Canada and the lower 48. We're in great positions on both sides of the border there. We're optimistic. We like the markets in the next three to five years. It's robust in my mind from a bidding cycle, everything we can say about it.

Basically, it's permitting delays and things of that nature that concern us..

Thank you..

Our next question is from the line of Jamie Cook with Credit Suisse. Please proceed with your question..

Hi. Good morning. Nice quarter.

I guess my first question relates – I guess just given the backlog that you have and your confidence that you can backfill the back half of the year within Oil and Gas, why are we still only sort of targeting a 5% to 6% operating margin for the year just given the visibility you have and the prospects that you have in place? And then my second question, just with regards to the Canadian outlook, obviously, Fort McMurray, that's a – the approval is a good sign.

But can you just help us with what your sort of assumptions are for the Canadian market in 2017 and then how would you characterize the potential for upside if you could frame that for us? Thank you..

Yeah. Thank you, Jamie. From the standpoint of you filling the back side and our margin capability there, I think utilization is a big part of that. As we fill it, we're optimistic that our margins will improve. We need to fill the pipe. We need to see it. We need to see it go. We'll be conservative until we do big pipes fast, book and burns fast.

So we'll be cautious on how we guide to that. And as we fill it, we'll talk to you about it in the next quarter or the next quarter, whenever we fill it, if we fill it. Again, we're optimistic. The end markets are there, and I think we – I think, from our standpoint, we'll improve. Our guidance will improve as we move forward through the year.

On the Wolfmack (37:26) project in Canada, I think we would say, in general, that that does strengthen our guidance. And so, but from that standpoint, I'm worried about the overall economic position in Canada and just in general the pressing of the business as far as going down on our margins and what Canada can do to the overall business.

So, we're cautious on the Canadian markets..

Jamie, I'll add one bit of color as well that it's a segment mix and seasonality. I mean, at this stage in the game, we have a fair amount of that pipeline work – majority of the pipeline work we have in backlog today loaded to the front half of the year.

And to that end, the seasonality of the rest of the business has a tendency to put pressure on margins. As we get to the latter part of the year, to the extent we see those awards, that's where you probably see the ability to see some of that expansion.

But right now, we think it's prudent to guide to the margin range of that 5% to 6% until we see how those other mainline-type opportunities are playing and offset the seasonality..

Okay. Thanks. I'll get back in queue..

Our next question comes from the line of Noelle Dilts with Stifel. Please proceed with your question..

Thanks, everyone. Good morning. I wanted to expand on that margin expectation conversation. So looking at your margin targets for 2017, both ranges are below the 10% to 12% targeted range you've been talking about for Electric and well below the 9% to 12% range I think you've been looking at in Oil and Gas.

So can you just give us some thoughts on, are those ranges still targets over the long term, or has something kind of fundamentally changed in both of those segments that's shifting your thinking? For example, in Electric, how is the shift toward EPC driving your thinking around margin? Thanks..

Yeah. I think what I would say is that our goals and targets for both segments are still to be at or near the double-digit range. The biggest thing driving Electric Power is the headwinds relative to the Canadian market.

If you were to look at 2016 and remove the effects of the power plants, in Canada, the rest of the electric operations are operating solidly in the double-digit range. So, the headwinds right now are still the softness in the Canadian market.

The larger transmission opportunities that we see here coming into 2017 in Canada obviously give us some potential for the upside. With the remaining portion of the business, you're still dealing with some degree of headwinds, and we try to factor that into the overall range – factor in the degree of prudency to the overall execution.

But again, it's pretty important, I think, to recognize the rest of the business is operating strongly in the double-digit range. For the Oil and Gas segment, it's a complement in the mix of work.

We've talked extensively over the last few years about how the degree of mainline opportunities and how they flow into the year will heavily influence our ability to be at the stronger margin profile.

In our original commentary, over the years, has also – before we ran into some of the headwinds associated with the broader energy market, as oil prices might decline, the remaining portion of our business is still yet functioning in a depressed oil price environment to an extent, and that is putting pressure on some of the other areas of our business, working against some of the complements or upside potential we see on the mainline side.

So, as the mainline gets a complement of work that happens to be more spread through the given year rather than just being front-end or back-end loaded, as well as the mix of work and energy dynamics changing, we still believe that we can see upward momentum for those margins in the long term..

Okay. And then second question. Could you update us and give us some thoughts on what your equipment spread utilization was in Oil and Gas Infrastructure in the back – in the fourth quarter and then as we move into 2017? And then also how are you thinking about the legal expenses moving into next year as well? Thanks..

Yeah. The spread capacity, Noelle, we're not at capacity in the either side. So, again, the way those spreads come on and off projects, it's very difficult to give you numbers. But in either case, we're not at capacity and certainly have room in the first quarter here and onward to book work. As far as....

The legal costs, as it relates to how it goes in 2017, I wouldn't anticipate right now anything truly abnormal. This was more from the fourth quarter accelerated timing. But as we go into 2017, we haven't factored into any substantial uptick or downtick in that regard..

Okay. Thanks. Appreciate it..

Yeah..

Our next question is from the line of Matt Duncan with Stephens. Please proceed with your question..

Hey. Good morning, guys..

Good morning..

I want to dig a little bit more on this Oil and Gas margin. I think we're all kind of struggling with the delta between first half and back half of the year. I mean, it sounds like if we're talking 5% to 6% for the year, the back half probably got to be kind of in the 3% to 4% range.

Is that in the ballpark of what you guys are thinking, kind of 7%, 8% first half and maybe, I guess, maybe 3% to 5% back half? Is that the way you're assuming in the guide?.

I would say that as we stand here today with the potential for the fourth quarter to have a lack of an uncommitted filling, as an example, then the fourth quarter is probably where you'd see the biggest portion of the pressure for the margins.

So, I don't know if I necessarily say it relative to the entire back half of the year, but the third quarter has a tendency for us to have the highest overall margin profile because of the good seasonality. But yes, there could be specific softness in the fourth quarter if we're not able to fill it with other larger diameter work..

And then, Derrick, what are you assuming in terms of the rest of the Oil and Gas business outside a large pipe, because I would think that you would start to see that recovering as rig count has gone up here.

And then last thing from me just on FERC with the lack of a quorum right now, is there anything in your backlog that needs a FERC order to move forward or how do you think that may impact you guys?.

On the first part, from the margins, the remaining portion of work, we haven't factored in any sizeable uptick in our margins there despite what we're seeing potential on a rig count type dynamic.

I think it in our mind may be a bit too soon to have an expectations of 2017 immediate benefit, but we do look at that as a potential for the positive upside..

Yeah, Matt, and also just in general on the pipe margins and the seasonality, there's normal seasonality in the business. And so I think as you see us fill up work and execute, the margins have the potential to move upward and we'll be cautious about how we guide again.

As far as FERC, our forecast, we don't need any large pipe to meet the midpoint of the range, so we're confident in our year-end guidance on the Gas side..

Thank you. Our next question is from the line of Alan Fleming with Citibank. Please go ahead with your question..

Good morning, guys. Derrick or Duke, can you guys talk about how much impact storm work or the storm that you talked about last quarter had on your 4Q results. I think the last quarter you said you expected storm work to be higher, but it might come at the expense of other electric transmission work.

Maybe it seems like it was a little more modest than you had thought, but maybe can you comment on that and comment on if there were any delays that you saw in your Oil and Gas revenue this quarter because of that storm that had impacted, I think – that had been in 3Q?.

Yes. Storm came in at around $35 million for the quarter, maybe just slightly above what we had otherwise forecasted in our original thoughts for the year. But from a margin perspective, I mean, there wasn't any substantial difference realistically.

If you recall, in our previous commentary, we had said that the number of customers that we were working for were customers that we've dealt with on a regular basis. And so from a strategic perspective, you don't see maybe quite as much upside from a margin perspective. So very much in line with our original expectations.

And then overall for the quarter itself, I mean, just having some degree of seasonality which we had already factored in and expected to somewhat offset that margin expansion. And then the second part of your question was kind of the timing.

We did come in at the lower end of our overall revenue guidance, and most of that came out of the Oil and Gas segment. There was a degree of some level of push of that revenue from 2016 into 2017 some of which would have been attributable to some of the heavier rainfall..

Yeah, and on the Oil and Gas side, it did impact some of those spreads, and we were delayed some time there. So you had some revenue impact there. And then the Southeast where the storm hit, we have a large concentration of day-to-day MSA-type work, and that work was delayed along with it. So there's some offset in the storm..

Okay. That's helpful, guys. And then shifting to Electric Power, I mean, if I look at your Electric Power backlog, I think on a 12-month basis, it's been relatively flattish for the last year. And I think it seems like your base business there, the small to mid-sized work has been growing at a pretty healthy clip.

So, maybe you can comment on kind of what you're expecting in that base business in 2017, and if you combine that with some of the growth that you're, or the visibility that you seem like you have on the larger project side, I mean, what's your confidence that 12-month backlog here in Electric Power can grow in 2017?.

We see our customers expanding their capital budgets in multiyear fashion the next three to five years. You start to see visibility in those capital programs. So as that happens, we'll continue to grow that base business. The recurring revenue type MSA work will continue to grow with our customers' capital budgets.

As far as the larger projects, as we see Canada, as you see Wolfmack (48:14) go in, some other larger projects that are out there, there's certainly the opportunity to win and execute on those. I do think the Electric segment is in a multiyear cycle, an upward cycle, and we're optimistic in the environment that we're in..

Okay. Thank you, guys..

Our next question comes from the line of Chad Dillard with Deutsche Bank. Please proceed with your questions..

Hi. Good morning..

Good morning..

So, just help me think through the moving pieces on the transmission margin guidance side. So, if I back out those one-time items you're talking about in 2016, I mean you're effectively guiding margins to be flat to down despite having more marginal transmission work.

I know that you mentioned that there's some issues in Canada, but I'm just trying to understand, is Canada getting worse or is there issues with pricing, or is utilization coming down? Just trying to understand what the difference is between 2016 versus 2017 that's not leading to raise margins..

Yeah. No. There's nothing that's unique or specific. I think what we've just done is we've not factored in a market improvement in the Canadian environment. We know as we've talked through 2016, we saw a degree of stabilization.

But I think it's too soon in the year to factor in some sort of distinctive improvement in the non kind of larger transmission side of the equation. We do have those larger projects that are coming in, specifically at Fort McMurray, but that's going to be kind of probably back-end loaded into the year.

And so the first half of the year, I think you still see with seasonality the aspect of being able to have some degree of margin pressure in the broader Canadian side of the equation. But we think we've got the ability to go through and potentially see some degree of upside to the extent that you'll be looking at.

But I think it's just too soon in the year to factor that in..

Okay.

And then just secondly, over to the Oil and Gas side of the business, can you just speak a little bit more about what your expectations are for growth in the base business either gathering or your pipeline distribution work? And then also with your additional year earnings guidance, is that including contribution from telecom expansion in the U.S.? And if so, how much? If you can speak about that..

Yeah. The base business on the gas side continues to improve like the LDC market, local distribution market with the PHMSA rules that are in place to repair infrastructure, we're in a good environment to continue to see CapEx in those markets. I think we'll continue to expand albeit off a smaller base. But that will continue to grow.

As far as telecom, we have our Latin American and Canadian construction going. They're good markets. We have about $150 million to $200 million in our forecast that with those along with the Lower 48 here getting started..

Great. Thank you..

Our next question is from the line of Adam Thalhimer with Thompson Davis. Please go ahead with your questions..

Hey. Good morning, guys..

Good morning..

Good morning..

You talked about a little bit of a hole in Q4 2017 in terms of the large pipe projects.

Does that situation get better as you move into 2018 and ACP gets started?.

We'll be cautious about how we talk about large pipe. The book and burn and the amount of regulatory process that's involved in those projects, they're distinct, and we need to make sure that we have them, we're moving and we're mobilized before we communicate on them. I do like the end markets in 2018. It's a robust market.

I do think we'll fill up early and be able to talk more about that. If we get some ease on regulation through the administration, we'll continue to talk to the Street about, as we get more positive and move into construction. Those things slip three months, it's a big impact to us, and we'll be cautious about how we talk to you..

Okay. And then I think somebody else asked it, but just wanted to ask again on the impact of oil prices and the rig counts being up.

In any of your businesses, are you seeing an impact from that?.

I think the midstream business is a good business. We need to take away that capacity to go to the end markets.

As you start to see larger pipe get built, you'll see the midstream pick-up and the rig counts, obviously, there's takeaway and we're starting to see more rigs, so you'll start to see all those things happen and we're optimistic in that as well..

Thank you. Our next question is from the line of Stefan Neely with Avondale Partners. Please proceed with your question..

Hey. Good morning, guys. Thanks for taking my questions..

Good morning..

Real quick, I wanted to follow up again on the margins for Electric in the back half of the year.

Can you help me a little bit think through the impact of the ramp up of the Fort Mc job, I mean does that impact sort of your outlook or are you mostly expecting any improvement in margins to be offset sort of by headwinds in the market in general?.

Yeah. I think that as I've said in my prepared comments, that we could see the margins rising into the third quarter. Part of that will be a contribution of the work associated with Fort McMurray, but at the same time, I think it's just broader to the seasonality of our business.

I think I'd still factor in a degree of decline potentially in the fourth quarter, again just driven largely by seasonality. One individual project is not going to offset the broader overall segment seasonality is what I'd expect at this stage..

Okay. Thanks.

And for my follow-up, was curious if you guys have any update on any sort of cost recoveries from the Alaskan power plant job that you guys finished up last year?.

We're continuing to work on those items. We had not anticipated those items to be solved in the latter part of 2016. We've not factored in any recovery of that into 2017. The work is ongoing. We're in the process of quantifying and having those discussions with the customer. But as of today, we're not in a position to quantify..

Okay. Perfect. Thanks a lot, guys..

Yes..

Our next question is from the line of Alex Rygiel with FBR. Please proceed with your questions..

Thank you. Good morning, guys..

Hey. Good morning..

Duke, you had mentioned that you have resumed operations in telecom. I understand you don't want to talk about strategy.

But can you update us on what activities you've resumed?.

Yeah. We never got out of the telecom business, to be clear. We were always in the telecom business. We had certain things under the non-compete we cannot do. And basically, the primary drivers were we were the telecom contractor or the contractor in the lower 48. We have the ability to do that today.

So as we move forward, you'll see us in that market on the general side of this, and not just the Electric make-ready work. So we're optimistic. The market is good. It's a robust market. We built our Canadian operations and our Latin American operations. So we'll participate both in North America as well as Latin America.

We like the markets we've stayed at all along. And I'll talk more about strategy as we move forward. I'll leave it at that..

And as it relates to the international, Latin America and Canada, can you just give us a little bit more color on kind of wireless versus wireline and how that business has been growing over the last two years?.

Yeah. It's both. In Latin America, I'd say 70% wireline, 30% wireless. Canada is primarily wireline, and the business has been growing double digits plus year-over-year..

Excellent. Thank you..

Our next question is from the line of Steven Fisher with UBS. Please proceed with your questions..

Thanks. Good morning. Just to clarify, to what extent does fill in Q4 rely on Canadian project specifically in Oil and Gas? And sorry if I missed that earlier in the call..

Yeah. I think in general, it does rely on some Canadian work to fill the back half, but again, I think the markets are there, the lower 48 could fill as well and bring the back half up. So the opportunity on both sides of the border are there in the back half..

Okay. Thanks.

And then can you just frame the potential Oil and Gas backlog or revenue opportunity if you were fully utilizing all your large diameter spreads and max that on your regional gathering business? I'm just trying to think about whether you could add a couple of billion dollars to this business and get it to be on par from a revenue basis with the Electric business or is there just capacity constraint to prevent that from reaching that kind of scale?.

We're building our base business nicely. The opportunities are there. It becomes – you're getting people constrained at some point and so you have to be careful about where you're at in the world geographically, mountainous terrain and the qualified personnel that we have in the field.

And we'll be cautious about how we move forward in those markets due to the constraints on some of the people in the field. And we train people every day, we're hiring every day. So as we get people trained, we'll put them in the market and how fast we can do that will dictate how our revenues go in the future..

Okay. Thanks..

Thank you. I'll turn the floor back to management at this time for closing remarks..

Yeah. I'd like to thank you for participating in the fourth quarter 2016 conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you. This concludes our call..

Thank you. You may now disconnect your lines at this time and thank you for your participation..