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

Noelle Christine Dilts - Stifel, Nicolaus & Co., Inc. Alan Fleming - Citigroup Global Markets, Inc. Tahira Afzal - KeyBanc Capital Markets, Inc. Jamie L. Cook - Credit Suisse Securities (USA) LLC Steven Fisher - UBS Securities LLC Andrew John Wittmann - Robert W. Baird & Co., Inc. Adam Robert Thalhimer - Thompson Davis & Co., Inc.

Brent Edward Thielman - D. A. Davidson & Co. Alex Rygiel - B. Riley FBR, Inc..

Greetings and welcome to the Quanta Services Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Kip Rupp, Vice President, Investor Relations..

Great. Thank you, and welcome everyone to the Quanta Services third quarter earnings conference call.

This morning, we issued a press release announcing our third quarter results, which can be found in the Investors & Media section of our website at quantaservices.com along with a summary of our 2018 outlook and commentary that we will discuss this morning.

Please remember the information reported on this call speaks only as of today, November 1, 2018, and therefore you're advised that any time-sensitive information may no longer be accurate as of any replay of this call.

This call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995.

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

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

For additional information concerning some of these risks, uncertainties, and assumptions, please refer to the cautionary language included in today's press release, along with the company's 2017 Annual Report on Form 10-K, and its other documents filed with the Securities and Exchange Commission, which are available on Quanta's, or the SEC's, website.

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

Please also note that we will present certain non-GAAP financial measures in today's call, including adjusted diluted EPS, backlog, and EBITDA. Reconciliations of these measures to their most directly comparable GAAP financial measures are included in our earnings release.

Lastly, if you'd like to be notified when Quanta publishes news releases and other information, please sign-up for e-mail alerts through the Investors & Media section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website.

With that, I would like to now turn the call over to Mr. Duke Austin, Quanta's President and CEO.

Duke?.

Thanks, Kip. Good morning, everyone and welcome to Quanta Services third quarter 2018 earnings conference call. On the call, I will provide operational and strategic commentary before turning it over to Derrick Jensen, our Chief Financial Officer, who'll provide a detailed review of our third quarter results.

Following Derrick's comments we welcome your questions. I'm pleased to report that Quanta achieved record revenues, operating income, adjusted EBITDA and adjusted earnings per share for the quarter and first nine months of the year. We ended the quarter with record total and 12-month backlog of $12.2 billion and $7.5 billion.

At the end of the third quarter, Quanta had more than 41,000 employees who worked nearly 63 million man-hours during the first nine months of the year and we are well on pace to finish the year with record man-hours.

This is indicative of record levels of activity in our end markets and strong demand for Quanta's solutions, which provide world-class execution and cost certainty for our customers' maintenance and capital programs.

We have executed well this year and believe our record year-to-date results and full year guidance demonstrate our strong competitive position in the marketplace and favorable multi-year demand for our services. We also believe our results reflect the benefits of operational diversity and our portfolio approach to managing risk.

We continue to expect that 2018 will be a record year for Quanta. To that end, we are increasing our revenue expectations, maintaining the midpoint of our adjusted diluted earnings per share expectations, and increasing the midpoint of our adjusted EBITDA expectations for 2018.

Perhaps, more importantly, we are experiencing strengthening demand in our base business and for larger projects, which solidifies our outlook for earnings growth in 2019. Our Electric Power operations continue to perform well from both a top line and margin perspective.

The strong performance in the third quarter was driven by solid execution across our Electric Power operations from base business activity to storm response and larger transmission projects.

In response to Hurricanes Florence and Michael, we deployed several thousand line workers and support personnel, who worked safely and tirelessly to restore power alongside our customers. They have worked long hours for many days and I want to thank them for their dedication to safety and hard work.

Our customers continue to deploy capital in multi-year electric transmission and distribution programs for grid modernization to accommodate a changing fuel generation mix towards natural gas and renewables, address aging infrastructure, strengthening systems for resiliency against extreme weather events and support long-term economic growth.

For example, Fortis recently increased their five-year capital plan by more than 19% to $17.3 billion. American Electric Power's $24 billion five-year capital plan allocates 75% of its planned spending to transmission and distribution.

Approximately 90% of Eversource Energy's four-year capital plan is allocated to electric transmission, electric and gas distribution and solar. And Southern California Edison's capital expenditure forecast for 2020 is more than 20% higher than it spent in 2017, with more than 90% allocated to transmission, distribution, and grid modernization.

Furthermore, as announced in our press release this morning, in September, we signed a transmission alliance agreement with the Lower Colorado River Authority for a period up to five years and with a contract value of up to $400 million.

Additionally, we recently renewed a multi-year master services agreement with CenterPoint Energy to provide electric and gas distribution services on their system. We have multi-decade relationships with these customers and these agreements reflect the value Quanta brings them and together the value we expect to bring to consumer.

These are just a few examples of the growing multi-year investment programs at North American utility industry is deploying, which are primary drivers of our business.

Quanta is embedded in the fabric of the North American utility industry, an important resource supporting our customers' efforts to execute capital programs that are designed to benefit the rate payer and grow earnings and dividends for their investors.

Due to these favorable industry trends and our strong competitive positioning, we have an excellent multi-year visibility in growth opportunities as we partner with our customers. We continue to see opportunities for larger transmission projects picking up and believe several of them would be awarded over the coming quarters.

We continue to pursue more than $3 billion in aggregate contract value of larger electric transmission projects in various stages of tender in North America. We do not expect to win all of these projects, but we believe we are well-positioned to compete for these or any other larger projects.

To that end, we announced this morning that Quanta was recently selected by PacifiCorp to provide engineering, procurement and construction solutions for the Aeolus to Jim Bridger Transmission Line.

This new high-voltage electric transmission project consists of approximately 138 miles of single circuit 500-kilovolt transmission line and approximately five miles of single circuit 345 kilovolt transmission line that will connect several substations in Wyoming.

This project is a segment of the Gateway West Transmission Line Project, which is part of PacifiCorp's Energy Vision 2020 plan. We will include this project in our fourth quarter 2018 backlog and expect to begin engineering and procurement activities for this project by year-end. The construction plan to begin in the spring of 2019.

We expect to complete this project in late 2020. Within our Electric Power segment, our communications operations are performing well, led by our U.S. operations, which were profitable in the third quarter. We have improved profitability month-by-month and quarter-by-quarter.

We are in the construction phase for many of our projects, which gives us confidence as we move towards 2019. We continue to believe we have the opportunity to operate our communications business with double-digit margin profile as we continue to scale our operations.

We ended the third quarter with a backlog of more than $800 million, representing a nearly 10% sequential increase. Further, subsequent to the end of the third quarter, we have been awarded more than $60 million of new work from two customers.

Also, during the third quarter, we acquired two communications infrastructure contractors one in Georgia and one in Texas. Both are successful companies with excellent management teams, strong customer relationships and growth prospects.

We believe these companies will allow us to profitably expedite our growth and expansion efforts in the markets they serve with Quanta's additional resources. We expect continued strong growth in 2019 with the opportunity to achieve more than $500 million of revenue and improved full year profitability. Turning to our Oil and Gas segment.

Revenues grew strongly, driven by base business activity in our industrial services, natural gas distribution and pipeline integrity operations as well as significantly higher larger pipeline project activity.

Though operating income margins increased as expected, we experienced challenges on two projects that adversely impacted segment profitability and concealed the underlying strength of the segment.

We are experiencing delays on a processing facility project that are expected to result in liquidated damages and we chose to take what we believe is a conservative position on a difficult horizontal drill project that resulted in additional cost for which we are pursuing an insurance claim.

The diversity and scale of our portfolio of operations and strong end markets mitigated the impact of these challenges on our full year expectations. Our gas distribution and integrity operations are expanding their margins as organic investments made last year began to pay off. Our industrial services group continues on a path towards a record year.

Further, we recently secured the largest turnaround project in company history, which could require up to 400 employees at peak activity. This project is expected to start this December and finish in late 2019.

We are on track for 2019 to be a record year for our industrial services group as we continue to profitably grow our operations, while synergies with our midstream customers' base materialize.

Our larger pipeline projects ramped up significantly in the third quarter, as we moved into full construction and performed well despite several external challenges. As a result of these challenges, a meaningful portion of our work on Atlantic Coast Pipeline and Mountain Valley Pipeline projects will push into next year.

However, these shifts in project timing actually strengthen our backlog and positive view for next year. With ongoing larger pipeline project work in the Appalachia, Canada and elsewhere, we expect to end this year with more than $1 billion in larger pipeline backlog.

As a result, we expect the first half of 2019 pipeline activity to be meaningfully greater than the first half of 2018. Further, we see numerous additional larger pipeline opportunities for 2019 and 2020 throughout North America and are actively pursuing approximately $3 billion of additional pipeline projects.

Quanta has strategically focused on diversifying its operations across service lines and geographies in a very deliberate manner. This approach is designed to help mitigate many aspects of risk in our business, including customer, project, permitting, geographic, execution, weather and other risks.

We believe Quanta's diversity, scope and scale, and execution capabilities are unique in our space and set us apart both operationally and as an investment.

Quanta is a construction-led infrastructure solutions provider and we believe our portfolio of companies, services and geographic diversity position us to profitably grow through various cycles over time.

We have talked for several years about how the majority of our revenues are generated from base business activity such as small and medium projects, multi-year master services agreements and maintenance work.

We estimate that approximately 80% of our revenues this year will come from those types of work, which tend to follow the growth in CapEx and OpEx plans of our customers.

I've discussed how our electric and gas utility customers have multi-year and, in some cases, multi-decade plans to upgrade and modernize their system and that Quanta plays an integral role in helping our customers achieve their plans. As a result, we have a very good visibility into multi-year growth opportunities.

These dynamics provide Quanta with a large regulated end market that is growing and is resilient to economic uncertainty. Our electric utility customers continue to moderate capital investment in generation assets in favor of growing their investment in transmission and distribution infrastructure.

Additionally, utilities are investing significantly to modernize gas distribution infrastructure with multi-decade programs. It is important to note, much of Quanta's core business is directly tied to regulated electric and gas utility customers, which account for more than 60% of our revenue.

We are in a prolific market environment, certainly the best market that I have seen in my career and we expect to continue. This is happening at a time when there is shortage of craft-skilled labor in our North American markets. As the largest employer and trainer of craft-skilled labor serving our markets, this is a good environment for Quanta.

Our dedication to our employees has made us the preferred employer in the industries we serve. And our ability to safely execute projects and enhance our customers' returns by efficiently deploying skilled resources to the field is a differentiator for Quanta. In summary, we executed well and delivered a number of quarterly records.

We are performing well operationally and against our strategic plan this year and expect to finish the year with momentum. Our end markets and visibility are strong and we continue to believe we're in a multi-year up-cycle, with the opportunity for continued record backlog in the coming quarters.

We have grown revenues considerably over the last three years, but more importantly, we have increased profits at a faster rate during that time.

While we'll provide our formal commentary and 2019 expectations on the fourth quarter earnings call next February, we are confident in our long-term strategy and are in a multi-year growth cycle in the markets we serve. We expect our base business to continue to grow.

We see continued opportunity for the award of larger high-voltage electric transmission projects and multi-year alliance programs over the near- and medium-term. We believe the large diameter pipeline project market will remain robust next year and expect our communications infrastructure services operation to grow with increasing profitability.

Given the valuation of our stock, our financial expectations for this year, visible and favorable multi-year and end-market trends, and our expectations for future growth over a multi-year period, we have been actively repurchasing our common stock. So far this year, we have repurchased more than $300 million of common stock.

I would also note that over the past four years, we have repurchased approximately $2.1 billion of our common stock, which equates to the retirement of 38% of the shares outstanding at the start of those repurchases. We believe these actions demonstrate our confidence in Quanta and our commitment to generating value for our stockholders.

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

We believe Quanta's diversity, unique operating model and entrepreneurial mindset is the foundation that will allow us to continue to generate long-term value for all our stakeholders. With that, I will now turn the call over to Derrick Jensen, our CFO, for his review of our third quarter results.

Derrick?.

Thanks, Duke, and good morning, everyone. Today, we announced record quarterly revenues of $2.99 billion for the third quarter of 2018, a 14.4% increase as compared to the third quarter of 2017.

Net income attributable to common stock was $124.6 million or $0.81 per diluted share compared to $89.3 million or $0.56 per diluted share in the third quarter of 2017. Adjusted diluted earnings per share, a non-GAAP measure, was a record $0.88 for the third quarter 2018, compared to $0.63 for 3Q 2017.

Certain items impacted the third quarter of 2018 and were reflected as adjustments in Quanta's adjusted diluted earnings per share attributable to common stock calculation. These items have been disclosed in today's earnings release, the net favorable impact of which was $0.04 on GAAP diluted earnings per share.

Discussing our segment results, Electric Power revenues increased 7.5% when compared to the third quarter of 2017 to $1.62 billion.

This increase was primarily due to higher customer spending, resulting in double-digit growth associated with both larger transmission projects and Quanta's base business, including continued favorable progress on a large transmission project in Canada.

Additional contributors were an increase in communications infrastructure services of $22.6 million and approximately $10 million in revenues from acquired businesses.

These increases were partially offset by a reduction in emergency restoration service revenues of $85.1 million as last year's third quarter included significant restoration efforts related to Hurricanes Harvey and Irma. Lastly, revenues were lower by approximately $17 million due to less favorable foreign currency exchange rates.

Operating margin in the Electric Power segment increased to 11.1% in the quarter as compared to 10% in the third quarter of 2017. This increase was primarily due to higher segment revenues, including the previously mentioned large transmission project in which we continue to perform favorably.

Communications infrastructure services operations, which are currently included within our Electric Power segment, improved overall to breakeven during the quarter with U.S. operations generating a slight profit. We expect continued incremental margin improvement for these operations during the fourth quarter.

As of September 30, 2018, our remaining performance obligations related to both segments were estimated to be approximately $5.29 billion. Approximately 77% of which is expected to be recognized in the 12 months subsequent to September 30 2018.

Also as of September 30 2018, 12-month non-GAAP backlog for the Electric Power segment was $4.2 billion, a slight decrease from the second quarter but an 8% increase when compared to the third quarter of last year. Total backlog for the segment was a record $7.9 billion, an increase of 19% when compared to 3Q 2017.

We believe these increases from the third quarter of last year reflect the continued strength of our end markets and opportunities, which Duke referenced in his comments. Oil and Gas segment revenues increased 23.8% when compared to the third quarter of 2017 to $1.37 billion.

Increased construction activities by our customers on larger diameter pipeline projects was a significant contributor to the overall revenue increase in the quarter. Many of our larger pipeline projects last year were performed in the front half of the year, so they did not contribute significantly to the third quarter of 2017.

For 2018, a majority of larger diameter pipeline projects began in the third quarter and will continue into the fourth quarter. This has a substantial impact on the comparability of quarters.

Also contributing were increased revenues from distribution-related projects and services and an estimated $35 million in revenues attributable to the incremental month of activity from Stronghold, which was acquired in late July 2018.

Increased revenues this quarter were also due in part to 3Q 2017 being negatively impacted by several projects that were temporarily suspended or deferred as a result of Hurricane Harvey. Operating margin for the Oil and Gas segment increased to 7% in 3Q 2018 from 5.3% in 3Q 2017.

This increase was primarily due to the higher level of larger diameter pipeline transmission work, which typically yields higher margins as well as increased revenues from Stronghold. The improvements in the Oil and Gas operating margin were partially offset by issues associated with two projects during the quarter.

As Duke spoke about, engineering and production delays on a processing facility project resulted in the recording of an unexpected loss on the project during the quarter of approximately $13 million, which contributed to a $20 million variance from our original forecasted project performance for the quarter.

This project was approximately 80% complete at quarter end. In addition, we experienced a partial collapse of a horizontal directional drill borehole on a gas transmission project. We believe the incident is covered by the customer's job specific insurance and are working collaboratively on a joint claim.

As a result, we've recorded an insurance receivable for a significant portion but not all of the impacts incurred through quarter end.

Although the mitigation plan for this issue is still in process and our current cost estimates may change, we believe we have conservatively positioned our potential recovery such that additional amounts may be recovered in future periods.

As of September 30, 2018, 12-month non-GAAP backlog for the Oil and Gas segment was a record $3.3 billion, which is an increase of 2% compared to the second quarter of 2018 and an increase of 43% when compared to 12-month backlog at last year's third quarter end.

Again, this increase is driven by the timing of larger diameter pipeline work being more robust in 3Q and 4Q this year versus 1Q and 2Q last year. Total backlog for the segment was $4.3 billion, which was an increase of 10% when compared to total backlog at last year's third quarter end and remains near record levels.

While aggregate total backlog of $12.2 billion represents a record for Quanta, we continue to see the opportunity for additional awards and expect our backlog levels can remain strong.

Corporate and non-allocated costs increased $14.6 million in the third quarter of 2018 as compared to 3Q 2017, primarily due to $5.3 million in higher compensation-related costs associated with increased annual and incentive compensation increases as well as increased personnel to support business growth, a $3.6 million increase in acquisition and integration costs, and $1.6 million in higher intangible amortization.

These increases were partially offset by the favorable impact of a $1.4 million decrease in fair value of contingent consideration liabilities during 3Q 2018.

In aggregate, consolidated revenues increased $376 million or 14.4% when compared to the third quarter of 2017, consolidated operating income increased $52 million or 37%, and adjusted EBITDA, a non-GAAP measure, grew 28.6% or $61 million to $274 million. All of these metrics represent quarterly records.

For the third quarter of 2018, cash flows provided by operating activities were $39 million and net capital expenditures were $68 million, resulting in $29 million of negative free cash flow. This compares to a free cash flow of $114.8 million for the third quarter of 2017.

This decrease in free cash flow was primarily due to higher working capital requirements related to higher levels of project activity as well as the timing and amounts of advance payments on larger projects. DSOs were 78 days at September 30, 2018 compared to 76 days at year-end and 79 days at the end of last year's third quarter.

In the third quarter of 2018, our Board of Directors approved a stock repurchase program that authorizes us to purchase from time-to-time through June 30, 2021 up to $500 million of our outstanding common stock.

During 2018, through to date of this earnings call, we have acquired 9 million shares of our common stock in the open market for a total cost of $303.9 million. This completed our prior $300 million repurchase program and leaves us $446.1 million in availability under our new stock repurchase program.

At September 30, 2018, we had $114 million in cash. We had $953 million of borrowings outstanding under our credit facility, and $450 million in letters of credit and bank guarantees outstanding, leaving us with $521 million in total liquidity as of September 30, 2018.

However, on October 10, 2018, we entered into an amendment to our credit agreement, which, among other things, increased the amount of revolving commitment under the credit agreement by $175 million to $1.985 billion and provided for a new term loan facility with total term loan commitments of $600 million.

We borrowed the full amount of the term loan facility and used the proceeds to repay outstanding borrowings under the revolving credit facility on the same date. This was an opportunistic capital raise, which improved our liquidity and provide significant financial flexibility as we pursue other strategic initiatives.

We determined this approach was the most cost-effective means and provided the most flexibility as amounts under the term loan can be prepaid at any time without penalty. For more details associated with these transactions, see our 8-K as filed with the Securities and Exchange Commission on October 15, 2018.

Turning to our guidance, as Duke commented, our view of the fourth quarter has strengthened and we now expect consolidated revenues to range between $10.95 billion and $11.05 billion for the full year 2018. This increased range contemplates Electric Power segment revenues of $6.35 billion to $6.4 billion.

Within this segment, we expect Q4 revenues to be comparable to the third quarter with fourth quarter operating margins between 10% and 11%. We expect full year 2018 operating margins for the Electric Power segment to be around 10% with our communications operations continuing to be slightly dilutive to overall segment margins.

We now see Oil & Gas segment revenues ranging from $4.6 billion to $4.65 billion for 2018. We expect Q4 revenues to decline moderately or remain comparable to third quarter.

We expect that margins will strengthen in the fourth quarter to be between 7.3% and 7.9%, aided by the expected increased revenues from larger diameter pipeline construction activities and continued improvement in our gas distribution and base business. We now anticipate Oil & Gas segment operating margin for the year to be between 5.3% and 5.5%.

This margin expectation reflects the impact of the previously mentioned projects that experienced negative impacts during the third quarter of 2018 and $4.6 million in charges recorded in the segment during the second quarter of 2018. We anticipate net interest expense for the year to be approximately $33 million.

As we have previously discussed, our other expense line item includes the deferral of a portion of the profit from the construction activity on projects in which we have investments.

We now expect the other expense line item to range between $48 million and $50 million for the year, primarily due to better-than-expected production on certain of those projects. As a result, absent other investments, other expense for 2019 could be reduced to approximately $10 million, likely to occur all in the first half of the year.

We are projecting our effective tax rate for 2018 to be approximately 28.3% for the year. These operating ranges support our expectation for net income attributable to common stock of between $348 million and $363 million and adjusted EBITDA of between $879 million and $904 million for the full year of 2018.

Due to our year-to-date share repurchase activity, we are now assuming around 151.3 million weighted average shares outstanding for the fourth quarter and 154.2 million weighted average shares outstanding for the year.

We now estimate our range of GAAP diluted earnings per share attributable to common stock for the year to be between $2.25 and $2.35 and anticipate non-GAAP adjusted diluted earnings per share attributable to common stock to be between $2.70 and $2.80.

Our forecasted non-GAAP measures are estimated on a basis similar to the calculations of historical adjusted diluted earnings per share presented in our release. Please review the outlook expectation summary in our website for additional details.

We believe our expected results for the year continue to reflect our opportunities for growth and our commitment to maintaining our strong balance sheet and financial flexibility. We feel we are operationally and financially well positioned and continue to focus on our ability to execute on strategic initiatives.

This concludes our formal presentation and we'll now open the line for Q&A.

Operator?.

At this time, we'll be conducting a question-and-answer session. Our first question comes from Noelle Dilts, Stifel. Please proceed with your question..

Hi. Good morning, Duke and Derrick..

Good morning..

Morning..

So, while I know you've been positive on your markets for some time, I thought you sounded maybe a bit incrementally more positive on the outlook for larger pipeline projects in 2019 and into 2020.

So is this a fair characterization? And if so, what's underpinning that optimism? Is it the amount of work out for bid? And then, do you have any initial thoughts on how to think about the mix of large diameter and base oil and gas work as we look out to 2019? And also, any initial thoughts on margins would be appreciated as well..

Yeah, Noelle. I think when we looked at what we see out in the marketplace, this year we see some push of the big pipe into 2019 on some of the larger projects. We backfilled really nicely with Canada. So we're starting to see more prolific market in our Canadian markets on the takeaway capacity.

So we are seeing some strength there as we move into 2019 and even some into 2020. But I think we've always had that commentary. I don't think we've changed our commentary at all on our outlook on that. It is a cyclical business when you see big pipe. But we do have some markets, it's an LNG takeaway. The Permian Basin looks really nice.

So, when we look at it, we see some long-term opportunities out there on big pipe takeaway. As far as the underlying business, it continues. It's probably 70% of the base business in gas is recurring revenue-type business. We've built a nice business in our industrial base. Our LDC markets are continuing to perform well.

We're extremely excited about the underlying business. Again, we talked a lot about big pipe, but the underlying business is extremely strong going into 2019 and beyond. It's a long-term market..

Okay. Thanks. And second question, I think, labor constraints, which you talked about a bit, are top of mind for both service providers and investors. I think we all appreciate a lot of the work you guys do around training.

But I guess, could you comment on the markets that are maybe most difficult right now or the most tight and where you feel that you have an advantage given some of the actions that you're taking? And I think the biggest question is are you seeing wage rate inflation? And how accepting have the customers been of accepting that through those higher input costs through price?.

Yeah. Noelle, I think if you look over quarter-over-quarter, we added 4,000 employees from 37,000 to 41,000 quarter-over-quarter. So we're able to deploy labor in the field and still remain productive. I think that's where us – with the investment in the college, with the investment in training, separates us from many others.

We're not having the labor issues in the field. Even on the problem projects we talked about, it's not a field labor issue. And so we're really productive in the field. We've worked on it and believe we're world-class on craft-skilled labor and we'll continue to train people and make sure that when they hit the field, they're productive day one.

As far as retaining people in the market, we've done very well. We have world-class operators across our regions, countries. So we're excited about it and we continue to believe that will be a differentiator as we move forward..

Thank you.

Our next question comes from Alan Fleming, Citi. Please proceed with your question..

Good morning..

Good morning..

Duke, you guys have historically tended to guide conservatively to start a new year, given potential delays in large projects and contingencies for potential weather issues.

But as you close out 2018 and you look at 2019, you mentioned large projects such as Atlantic Coast, even Mountain Valley, Fort McMurray should keep you especially busy in the first half. Momentum in your base businesses in both your core segment and in telecom seems to be improving.

Do you actually have more visibility than usual headed into 2019? And is it possible that that visibility might contribute to a less conservative guide for the year than we're used to seeing out of the gate?.

I would say, in general, we see 2019 as early. We've talked about opportunities that are out there. We've talked about the base business being 80% of our revenue. We have good visibility into that, I agree. The larger projects, we know we have $1 billion going into the first half of large pipe, so it's very positive there.

We have the opportunity to do very well. It's early. We need to see what we can do on backfilling the second half with large projects as well as watch our execution through the first three, four months of the year. So we'll continue to have a prudent nature in how we guide..

Okay. Let me follow up on Electric Power margin. I mean, 11.1%, I think, was the highest since you probably had to go back to 2014 and we know telecom is becoming less dilutive.

But was there anything in that margin that boosted performance in the quarter? Or is this just really good execution on the base business and maybe bigger projects such as Fort McMurray? And with telecom presumably becoming less dilutive and closer to segment average, is there any reason we shouldn't expect overall segment margin to continue to improve in 2019?.

We've talked a lot about the Electric margins being around 10%. You get some 9.5%, you get some 11.5%, you get some 10%. In general, the business over time will operate in double-digits. We've said it many, many times. I'll say it today. I think we had a great quarter.

We executed on a broad base from large projects to a little bit of storm work to our base business, we're doing very well. And I'm really proud of the guys and the way we're operating in the field. From a safety standpoint to productivity, we're doing very, very well. So, I think, in general, we have some nice projects. We had a nice project in Canada.

We continue to operate well in our base business, so I think for the sustainable future, we can operate in double-digits in E&P – I mean, yeah, Electric division..

Okay. Thank you, guys. Good luck..

Sure..

Our next question comes from Tahira Afzal, KeyBanc. Please proceed with your question..

Hi, Duke.

So, Gateway West is a very large project and I was wondering if you can size up what you've won and if this means that there could be a string of other awards for that project going to come?.

I'm sorry, I missed the last part. The single....

Basically wondering if Gateway West, if you can size up the opportunities won so far.

And it's a multi-billion dollar project, I would love to get a sense that if you've won a portion, if there are other portions for the same project that could come your way?.

It's a capital plan that PacifiCorp has, so it's one segment of many. I don't know how they're choosing to go forward with the rest of the segments but it's a nice project. Long-time customer, MidAmerican, they're Berkshire Hathaway company. So we're excited about it. It's – it'll help our West Coast operations. It's a larger project, we're excited..

Got it, Duke. And as was mentioned earlier on, Fort Mac provides you visibility in T&D segment maybe middle of the year.

As you look at these set of opportunities even in your base load business, are they sufficient to really offset (42:04) or we have to wait and see right now?.

No. I think we get fixated on those larger projects but what we're not seeing and what we're trying to communicate is the underlying smaller transmission. When I say smaller, the $200 million to $300 million projects that are out there.

As we see it, as we move forward, the base business, the CapEx, OpEx of our utility customers, there's a multitude on both coastlines across the Midwest and even into Canada. We talked about the East-West Tie that we've announced the $600 million. There's multitude of $200 million, $300 million projects that are supporting that.

The base is below that but even above – in between the base business and the $1 billion projects, there's many, many projects that we have opportunity to be successful on in the future. We talked about a $3 billion kind of what we see right now in house of what we're looking at, so there's plenty of projects..

Awesome. Thanks, Duke..

Sure..

Our next question comes from Jamie Cook, Credit Suisse. Please proceed with your question..

Hi, good morning. So, I guess, first, I think you said in the third quarter that process or the charge or something it was a $20 million variance versus what you thought for guiding. So if we do that calculation, it implies margins for Oil and Gas in the third quarter would have been about 8.5%, which is pretty good.

So, my question is like based in your guided revenues for Q4 versus Q3 shouldn't be that dissimilar? So why shouldn't – like but your implied margins are below 8%. So, why, I guess, is my question. And then my second question Duke, you mentioned, I think, $1 billion of visibility in big pipe in the first half of 2019.

Given that visibility, can we assume that first half of 2019 margins for Oil and Gas can be comparable to, you know what I mean (44:10), what we're seeing in the back half of 2018? Thanks..

Yeah, Jamie, I think in general when you look at the guide into the fourth quarter, it's seasonality in that, we'll be prudent about how we guide. We need to execute through the winter there and we'll always take caution to the winter months especially in the lower-48. Our Canadian spreads are going, we need it to freeze a bit here or there.

So, lots – some weather risk in there that we always take into account and are continuing to see in our guides. So, that's the fourth quarter. As far as visibility in the big diameter pipe, we do have some of that in backlog going into 2019. We're comfortable with that.

Our underlying business, both the Stronghold acquisition, which we said $500 million to $600 million, will be in the upper end of that range, the growth in that segment, the growth in the LDC segment, I believe will continue to underpin that whole margin trend and we're taking actions on the gas division to enhance margins into 2019..

Okay.

So net-net – I mean so net – I mean can margins be, in the first half, sort of in the 7-ish range or so or no or we don't want to go there yet?.

We don't want to start on 2019 guidance at this point..

Okay. Well then maybe if not just can you talk – let's shift back to – I'll ask a question about 2019, but just on communications, like, can you talk about the expectations for that business? And I know that had been a headwind to margins in Electric Power. How we should think about that sort of in the next 12 to 18 months? Thanks..

Yes. Sure. On the telecommunications business, we grew it organically for the most part. You've seen us make some small acquisitions. I think those are extremely incremental, it will expedite how we move to the field. We're getting through engineering. Many of our projects are in the field started now.

We did get a later start and we've been smart about just how we get to the field to make sure we're incrementally profitable. Its slowed growth a bit, but I think it was the right thing to do for us was to make sure that we're executing well for our customers.

We picked up a number of customers within the quarter, we have 10, 12 customers now that we're working for. Our Electric customers are also deploying some telecom. So it's a vibrant good robust bidding environment. We're getting to the field. We stated around $500 million into next year. We did that prudently and smartly.

Every one of those guys we're training, get them in the field. So I think when we look at it, we said $500 million, there's upside to that, but that's the number we feel good with as we sit today. We've got to get to the field. We've got to get the guys to the field, but the market is robust and I think we'll do very well next year..

Our next question comes from Chad Dillard, Deutsche Bank. Please proceed with your question..

Hi. This is (47:13) on for Chad. I wanted to ask if you could discuss the level of activity you're seeing out of the Permian and your midstream and long-haul sides of your Oil and Gas business.

Have you started to see that activity spread beyond the Permian?.

Yeah. Our midstream business in the Permian, we see a lot of activity up there. There's bids on both the union, non-union side coming out there. Also the electrification of the area is something that we're taking part in with our customers in that part of the world. It's a very, very vibrant area.

When we look at the Montney Shale up in Canada, same thing. There's a lot of things going on in Canada as well. So we're seeing some shale basins that are starting to come back a bit. I think a lot of it has to do with takeaway. If we can get takeaway capacity out of those areas, you'll see the midstream business come back in the shale.

So we are seeing activity even in the Bakken for that matter across the board on midstream..

Great. That's helpful. Thank you..

Our next question comes from Steven Fisher, UBS. Please proceed with your question..

Thanks, good morning. I'm wondering, you mentioned the $1 billion of large diameter work in the first half of 2019.

What, at the moment, is your large diameter in backlog for the second half? And then so based on what you know today, will the overall margin mix for 2019 in Oil and Gas be better than 2018?.

Yeah, I think in general when we look at it, I'm not sure that we're giving guidance on what's in large diameter backlog in the second half. But in general, I would say we have a good mix in the second half of the fourth quarter. It'll continue to grow. We have a lot of opportunities to do so in the back half of next year.

We're starting off, like we said, with $1 billion. So, again, I think when you look at it and you look at the opportunities we see with good customers going into the second half, have the opportunity to do as much as we did this year in 2019 or more..

Okay. That's helpful.

And then, I guess, I'm just trying to reconcile the message about higher mix of recurring services with what seems like could be a little bit more frequency of some of these execution challenges, are you doing maybe more first of a kind type project outside of the base work? And how should investors get comfortable with sort of the execution profile of the business going forward?.

No. I think, in general, we're executing on the same projects we have for a very, very long time. It's the company's – we did $3 billion or close to $3 billion in the quarter, thousands of jobs. We talked about these. One is a lost job due to some liquidated damages things, it's a front-end issue. We're working with our client.

We're not going to say a whole lot about it, but in general we're working with the client there to resolve that issue. The other project was in horizontal directional drill that we're working with a client, collaborating very well for an insurance claim.

Due to where we're sitting in the quarter, we made some prudent decisions on talking about it as well as adjusting for those challenges..

Okay. Thanks a lot..

Our next question comes from Andrew Wittmann, Robert W. Baird & Company. Please proceed with your question..

Great, thanks. Maybe Derrick, just to understand the Gas margins in the quarter a little bit more. Could you – your ACP project was, obviously, stood down for a while and then kind of resumed in pieces. But during that time, you guys were probably protected with some of your costs while your guys were a little bit idle.

Can you help us understand the magnitude of the revenue contribution and how that affected the margins in the quarter?.

Yeah. I mean, we don't make project-specific type commentaries. What I'll tell you is, is that from our original guidance we had a level of push to that work. But as it went from some of that work into the third quarter to fourth quarter.

But from the margin perspective, in the third quarter, a lot of that was ultimately replaced with strong base business contributions. We saw base business, we saw industrial contributions as part that contributed nicely.

And then as well as that, overall, broadly, we executed well, despite a few of the items that we've spoken about with those two problem jobs. As has already been discussed on the call here, absent the $20 million shortfall associated with the one project, that we actually executed quite well.

But a lot of that comes from a broad execution in the base business, irrespective of any of the deferral..

Okay. Got it. And then I just wanted to understand also in that segment how the accounting works on this directional drilling project, where you said – it sounds like you took some level of a charge, maybe I missed it, but I don't think you quantified that.

But then you also put in, what was that, an insurance receivable that you think that – presumably that hasn't been approved yet, but you think it's at a level at which you think you'll be reimbursed that much, or maybe a little bit more.

Are those the key moving pieces here on the income statement and the balance sheet?.

Yeah. For the directional drill project itself, yes. I mean, we've gone through and we've done an assessment. I mean effectively we have now, at this stage, recorded no profit on the project and we've only recorded the insurance receivable up to the amount of the cost of the project, basically booking at break-even.

When you're into an insurance situation, you generally are looking at it more from the standpoint of what you can look at on a cost basis rather than a profit basis. But as we stand here today, we feel very comfortable in our conclusion that, at this stage, the amounts that are associated with that cost are probable of recovery.

The upside that comes in the future is, is still yet we'll be claiming working with our customer a larger portion of the overall impact, which would include some level of profits, but that would be something we'll be looking at recovering in the future dates..

All right. Thanks..

Our next question comes from Adam Thalhimer, Thompson Davis. Please proceed with your question..

Hey. Good morning, guys. Nice quarter..

Hey. Thanks..

You seem a little more positive on large transmission than I've heard you, really, in a number of years. I mean, am I reading you correctly, is the first part of the question.

And the second part of the question is, I mean, how does this translate into award activity in the coming quarters?.

Yeah. Let me just comment on the company. We have a portfolio that we're building, that we've built, that it's a really nice portfolio across a broad base of service lines and geographies.

And so, when you look at the business, it's nothing that we haven't been saying for a couple years of the – the CapEx and OpEx of these utility customers that we have, which is basically 60% of our business, is growing, it's growing yearly and we can see it longer.

And so, yes, there are some bigger projects in that, but the underlying business is there and strengthening as we go forward. So we're incrementally positive. Our customers are incrementally positive. We're giving guidance that says that. So, as we follow that and we follow our industrial business as well, we just continue to strengthen..

Okay. And then, Derrick, just I was hoping you can give us a little bit of color maybe what your expectations are for cash flow in Q4..

Yeah. It's not uncommon for cash flow overall to this point in time to be break-even and even potentially negative free cash flow.

And typically, from a seasonal perspective, you see a little bit lower revenues in the fourth quarter, the fourth quarter being a stronger free cash flow, often times making up as much as the entire free cash flow for the year.

As we stand here today, we're seeing less seasonal effects such that, from a fourth quarter perspective, it's possible that we'll still have free cash flow of, let's call it, $100 million to $150 million range. But there are a lot of dynamics that are there pushing that around based upon the strength that we're seeing in the fourth quarter.

But I definitely would be modeling down a bit and then be looking for something that's maybe more along the lines on the annual free cash flow of $100 million, maybe up to $150 million for the year..

Great. Perfect. Thank you..

Our next question comes from Brent Thielman, D. A. Davidson. Please proceed with your question..

Great. Thank you. A couple of questions, Duke and Derrick, the near-term or fourth quarter growth outlook for Oil and Gas looks really strong, I guess, something more than 40% at the low end.

How much of that is related to Stronghold, which I think has some easier comps just because of the Harvey last year versus kind of expectations for big pipe in your regular way business?.

I'll comment a little bit and I'll let Derrick finish up. But, in general, I think what you're seeing is the strength of Canada coming in the back half. We talked about the awards of Line 3 and North Montney last quarter. We're seeing that come in into our fourth quarter this year as a comp. Stronghold is doing very well.

We continue to grow that business, double-digits plus. We couldn't be prouder of that acquisition and what it's done for the segment. Our LDC business is strong as well. But I think the majority of the Oil and Gas growth in the fourth quarter has to do with North Montney and Line 3 coming in on Canada. But I'll let Derrick comment..

Yeah. I have little to add. I mean, everything Duke said is correct. The only incremental piece would be is that we had little large diameter pipe activity in last year's fourth quarter. So, broadly, majority of it is expansion of large diameter pipe contributions as compared to last year.

And then as exactly you said, Stronghold has a very nice over double-digit growth considering the headwinds in the work last year..

Okay. Great. Thanks for that color.

And then the $3 billion-plus in pipeline opportunity that you're out there pursuing, is that work concentrated in any particular basins, or is it pretty broad-based? And you hear a lot about the Permian these days, but is this really across the board?.

Yeah. I think when we look at it, it's broad-based. We see it across the board really in our markets. There's opportunities for us in all markets for that matter. Also when we look at our tanks, we really like our tank business. It's starting to grow quite nicely.

Others are having issues there and we really like your ability to grow our tank business on the midstream side with some synergies there with Stronghold. So it's broad-based..

Okay, great. Thank you..

Our next question comes from Alex Rygiel. Please proceed with your question..

Thank you. Nice quarter, gentlemen..

Thanks, Alex..

As it relates to the $3 billion of large transmission jobs and $3 billion of pipeline projects, how many of those you think are going out for bid in 2019? What portion?.

I think most of those are out for bid today..

And therefore....

A majority of it..

...then get awarded for construction to start in 2019?.

Yeah, I would say the majority would, yes..

Excellent. And then as it relates to communications segment, I guess, it looks like the international business was a little bit unprofitable in the quarter. Why was that? Is there anything in particular going on there? And then as it relates to the U.S.

business what kind of work are you winning in the U.S.? Is it wireless, wireline, telco, cable? Are they discrete projects or MSAs? More specifics would be great..

Sure. Our LATAM operations, we had some slowdowns in some areas due to weather and this and that. So we've taken a real prudent approach in our LATAM markets to make sure that, obviously, we have a robust lower-48 North America market and we're really tempering our growth there.

So, in general, that's part of that just slowdown really from a weather standpoint and us pulling back some there. In general, when we look in the lower-48 in North America, we're supporting fiber deployment for 5G deployment as well as just backhaul data centers. It's really fiber bandwidth across the board, primarily wireline..

Thank you..

Ladies and gentlemen we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks..

Yeah. I want to thank our employees in the field for the work they're doing. The storms as well long hours hard work and the people that were affected with it, we send our regards. And hopefully we'll get the lights on. I believe we have them all on at this point. So in general I want to thank our people for doing that and working safely.

Also I thank all of you for participating in our third quarter 2018 conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you. This concludes our call..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..