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Quanta Services, Inc. (NYSE:PWR)

Q4 2008 Earnings Call

February 24, 2009 9:30 am ET

Executives

Kip A. Rupp – Managing Partner

John R. Colson – Chairman & Chief Executive Officer

James F. O'Neil – President & Chief Operating Officer

James Haddox – Chief Financial Officer

Analysts

Sanjay Shrestha – Lazard Capital Markets

Jamie Cook – Credit Suisse First Boston

Tahira Afzal – KeyBanc Capital Markets

Alexander Rygiel – Friedman, Billings, Ramsey & Co.

Jeffrey Beach – Stifel Nicolaus

Michael Coleman – Sterne, Agee & Leach

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Quanta Services Fourth Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Tuesday, February 24, 2009.

I’d now like to turn the conference over to Kip Rupp, Managing Partner with DRG&E. Please, go ahead, sir.

Kip A. Rupp

Great, thank you, [Mikael] and welcome everyone to Quanta Services’ conference call to review 2008 fourth quarter and full year results. Before, I turn the call over to management I have the normal housekeeping details to run through. If you’d like to be on the e-mail or fax distribution list to receive future press releases for Quanta, or if you had any technical difficulty this morning and did not receive your e-mail or fax, please call our offices at DRG&E, at 713-529-6600.

Also, if you’d like to listen to a replay of today’s call, it will be available via webcast by going to Quanta’s website at quantaservices.com. In addition, there is a telephonic recorded instant replay that will be available for the next seven days, 24 hours a day that can be accessed as set forth in the press release, by dialing 303-590-3000, and using the pass code 11126526#.

Please remember that information reported on this call speaks only as of today, February 24, 2009 and therefore you’re advised that any time-sensitive information may no longer be accurate as of the time of any replay of this call.

Also this conference call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, projected revenues, earnings per share, tax rates, and capital expenditures, and other projections of financial and operating results and information, the impact of current economic and market conditions, growth and opportunities in particular markets including as a result of renewable energy initiatives and the recently enacted economic stimulus package, anticipated future projects, Quanta’s strategies and plans, as well as any other 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 are beyond Quanta’s control and actual results may differ materially from those expected or implied as forward-looking statements.

For additional information concerning some of the risks, uncertainties and assumptions that could affect our forward-looking statements, please refer to the company’s annual report on Form 10-K for the year ended December 31, 2007, its quarterly reports on Form 10-Q for the quarters ended, March 31, 2008, June 30, 2008 and September 30, 2008 and its other documents filed with the Securities and Exchange Commission, which may be obtained through the SEC’s website at sec.gov. All forward-looking statements whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements.

Management cautions that you should not place undue reliance on Quanta’s forward-looking statements and Quanta does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after this call.

With that, I’d like to now turn the call over to Mr. John Colson, Quanta’s Chairman and CEO. John?

John R. Colson

Good morning everyone and welcome to the Quanta Services fourth quarter and year end 2008 conference call. To start the call this morning I will provide a general overview of the quarter, insight on the impact of the current economic conditions, developments in the industries we serve and perspectives on emerging opportunities.

Our comments will be followed by an operational review by Jim O’Neil, President and Chief Operating Officer, and a review of financial results by James Haddox, Chief Financial Officer. John Wilson, President of Electric Power and Natural Gas Operations, and Ken Trawick, President of Telecommunications and Cable Operations are also present and will be available for any questions. As always we welcome your questions following our remarks.

Final quarter of 2008 saw the further deterioration of our nation’s economy, but as you will hear throughout the call, our long-term outlook remains strong, and our customers remain committed to spending on their infrastructure for the long-term.

We believe Quanta’s opportunities continue to grow, and our outlook for the future remains optimistic. While discouraging economic news seems prevalent, it is in times like these that the strength of Quanta’s strategy becomes evident. Because of our diverse customer base, diverse service offerings, diverse industry focus and diverse workforce, we are able to quickly maneuver, adjust our focus and reallocate our resources to match the continually changing economic environment.

As a result, we believe we are better able to minimize the impact of industry, our economic downturns and fully leverage and maximize emerging our ongoing opportunities. This strength is evident in our fourth quarter and year 2008 financial performance and our growing backlog.

Revenues for the fourth quarter were $921.5 million, compared to $879 million in the prior year’s fourth quarter. Revenues for the full year 2008 were a record $3.78 billion, compared to revenues of $2.66 billion for 2007. In addition to the record revenue, we also reached a long-time goal of 9% to 12% for cash operating income in the fourth quarter and the year 2008.

Operating income was 9.6% and 9.1% of revenues for the fourth quarter and full year 2008 with amortization and non-cash stock compensation added back. You can see the calculation of these non-GAAP measures on our website at www.quantaservices.com.

We are proud of this performance and remain focused on maintaining markets throughout all the industries we serve as we navigate this challenging environment. Quanta’s customer base remains diverse, which as I mentioned previously lends strength to our revenue base.

For the year 2008, our largest customer made up only 4.4% of our revenues. Our top 10 customers represented 30.3% of our total revenues in 2008. And our top 20 customers made up approximately 43.3% of revenues. The breakout of revenues by type of work also shows diversity. When divided by type of work, our 2008 fourth quarter revenues were approximately 58% from electric power services, 22% from natural gas services, 12% of revenues from telecommunications and cable services, 6% from ancillary services such as horizontal directional drilling and commercial and industrial wiring, and 2% from dark fiber leasing.

Our employee count was 14,751 at December 31, 2008. This compares to 17,031 at the end of the third quarter and 15,261 at the end of 2007. The reduction in employee count is a little misleading, because at the end of the third quarter and at the end of the 2007, we were performing significant emergency restoration work. This year during the same time period, we had a more normalized headcount for the holiday season due to less emergency restoration work ongoing.

Also, the number of our employees serving in telecommunications underground and wireless industries has decreased, reflecting the variability of our workforce. As Jim will discuss shortly, our ability to shift and adjust our workforce to leverage skills and address areas with the strongest potential for growth is key to our ongoing success.

Looking forward with the American Recovery and Reinvestment Act adding opportunity, we remain optimistic that 2009 will be another strong year for Quanta. While certain industries we serve maybe impacted by the economic downturn, especially in the next quarter or two. We believe others will continue to grow and rely on Quanta for fast, efficient, reliable and safe infrastructure services. We remain committed to supporting our customers in this capacity, while maintaining our commitment to deliver value to all of other stakeholders.

Now, I will explain our outlook in the various industries we serve for 2009. Jim will provide further details of our operational performance, and other considerations in the industries we serve. The electric power industry still looks strong for 2009. Although there is some softening in the distribution spending of our customers, the transmission market remains solid.

Utilities are currently able to raise the debt needed to continue to build out proposed transmission projects. The vast majority of large transmission projects, which have not been delayed or canceled because of unavailable financing, in fact we continue to see additional projects proposed.

For instance, yesterday House Speaker Nancy Pelosi at the Energy Summit stated, what we need is a national framework for planning, developing and financing transmission infrastructure. Senate Majority Leader, Harry Reid said, he would propose giving the Federal Energy Regulatory Commission, the authority to trump states in deciding where to place new power lines as part of a bid to boost electrical transmission capacity nationwide.

Certain sectors of the natural gas industry have been impacted by the recent economic downturn. Specifically, gas distribution to homes, and the gas gathering in the pipeline business. The gas distribution business has been in decline for several years. The good news is that we think it probably can't get much worse.

The gas gathering and pipeline business has also slowed in the past five months in part due to the lower natural gas prices and the volatile credit markets. Yet we are still optimistic about this portion of our business. There continues to be activity in the new gas fields, which spurs the development of new infrastructure. We are more optimistic about the gas industry now than we were at the end of the third quarter.

For the week ending February 20, 2009, there were 14 more U.S. horizontal directional drilling rigs. The rigs used primarily in the new shales working than one year ago. We are also optimistic about the future demand for natural gas, as we expect more gas turbine generation plants in the future. Natural gas prices, the credit market and [weak] demand for natural gas will ultimately decide the outlook for this part of our business.

Moving to the telecom industry, we think the fiber to the premise, and fiber to the node projects will continue, but at a reduced pace for the next couple of quarters. The telecom business is negatively impacting our outlook for the first quarter, but long-term this business is promising.

Moving further into 2009, the renewable industry appears to be ready to grow significantly. While spending and project activity decreased in the later part of 2008. It appears that the credit markets are looking better for this industry, and we’re seeing signs that the production of wind energy may rebound in the first half of ’09.

The solar renewable industry looks strong as well. Many utilities proposing solar generation farms and as we mentioned earlier, utilities currently appear to have access to capital. We still foresee renewable revenues doubling from approximately $150 million in ’08 to approximately $300 million in '09.

The administration's economic stimulus package has been passed and all of the foregoing discussions are based on little or no effect from this spending bill in '09. Certainly, there are large number of programs in this package that are in Quanta sweet spot. And when implemented, it could be very positive for Quanta. We continue to see growth for Quanta in 2009, despite a slow first quarter, and if things don’t deteriorate from this point double-digit growth is still possible.

That concludes my remarks today, and I will turn the call over to Jim O'Neil.

James F. O'Neil

Thank you, John, and good morning everyone. As John stated, our operational and financial performance exceeded expectations in the fourth quarter, and contributed to a very strong year for Quanta. As we enter 2009, we remain optimistic about our business. We expect revenue growth this year, but we will experience challenges related to our telecom and natural gas operations.

I will speak the specific opportunities, as I will review each of the industries we serve, electric power, natural gas, telecommunications and dark fiber, as each is experiencing unique dynamics, legislative developments and emerging trends. First, the electric power industry. In the fourth quarter of 2008, revenues from electric power operations including emergency restoration were approximately $530 million. This compared to approximately $494 million in the fourth quarter of 2007.

2008 was a strong year for our electric power operations, particularly our transmission services. Throughout the fourth quarter and into the first quarter of this year, we see utilities continue to invest in their transmission infrastructure. Recently, Quanta executed a letter of intent with National Grid to provide engineering and installation services on their substation and transmission infrastructure.

Work under the five-year contract expected to be signed by April 1 of this year will be performed by New Energy Alliance, a joint venture between Quanta Services and Balfour Beatty Infrastructure. The contract is part of National Grid's investment of up to $1.7 billion over five years. The joint venture will perform work throughout National Grid's New England service territory.

Quanta has also secured an additional $200 million and services to be performed under its existing contract with Northeast Utilities, or NU, which also extends the agreement by two years through 2015. This expansion built on the success of the recently energized Middletown to Norwalk transmission line, where Quanta's expertise in providing transmission construction services in Connecticut aided NU and completing this major project ahead the schedule by one year and nearly $100 million below budget. NU has stated that the additional investment is required as New England’s energy future become more complex in demanding and it was critical to assure that it as the expertise and resources available to meet future project work.

Neither the $200 million from the NU contract nor our portion of the $1.7 billion investment by National Grid are represented in our 12-month or total backlog as of 12/31/08. Work under our contract with Oklahoma Gas and Electric got underway in the fourth quarter with four Quanta operating units working simultaneously on this project.

The 120 miles of 345,000-volt transmission line is on track to be completed over a 12-month period. Work on the Tehachapi transmission line for Southern California Edison continues to progress. If you recall, the contract encompasses installation of 75 miles of 500,000-volt transmission line. The line is part of a $1.8 billion program to bring renewable energy from the wind-rich hills of Tehachapi to customers throughout California.

We are also preparing to initiate work on the TrAIL project following the Public Service Commission of West Virginia’s authorization to commence with the construction and operation of the West Virginia segments of the 500,000-volt transmission line in related facilities. Today we’ve seen very few transmission projects delays or cancellations due to the economy.

Last month, the Texas Public Utility Commission or PUC assigned approximately $5 billion of transmission projects in the Competitive Renewable Energy Zones or CREZ to various utilities. The Texas PUC expects that the new lines will be in service within four to five years. Because of our strong presence in the region extensive experience in new transmission construction and multi-year relationships with many of these utilities, we believe we are well positioned to contribute to and benefit from the CREZ initiative. There is currently no CREZ work in our 12-month or total backlog.

Looking forward, we anticipate continued momentum over the long-term as utilities continue to invest in the transmission infrastructure. In the past week, there have been several additional transmission developments. ITC Holdings announced a multi-state plan called the Green Power Express. This project consists of 3,000 miles of multiple 765,000-volt transmission lines, which will stretch across the upper Midwest with interconnections in more than four states.

Bonneville Power Administration appears to be one of the first utilities to benefit from the new stimulus package. The company announced last week that the package’s loan guarantee program will increase Bonneville’s borrowing capacity to enable funding of its $246 million, 79 mile project in the Northwest. This project has been on hold since 2002. While neither of these projects have been awarded, we believe we are well positioned to provide services to both the ITC and Bonneville projects.

In late 2008, we experienced some softening in our electric distribution work. However, transmission revenues have more than offset any decline in distribution spending as many utilities have reallocated capital to invest in transmission infrastructure where they realize higher returns.

Emergency restoration work accounted for approximately $47 million in revenues in the fourth quarter of 2008. Contributing to these revenues was the diligent work of our employees in the Gulf Coast region to finish restoring power and communications in the communities impacted by Hurricane Ike. Additionally, during the quarter, our crews performed restoration work as ice storms caused power outages in various states throughout the nation.

In the fourth quarter of 2008, revenues from our natural gas operations were approximately $206 million. This compared to approximately $128 million in the fourth quarter of 2007. We are proud of the success we’ve achieved in our natural gas operations in 2008.

Our strategic initiative to exit lower margin gas distribution contracts and redeploy resources to gas gathering services has had a positive impact on the quality of our natural gas revenues. We will continue to be opportunistic in expanding our natural gas operations in areas that meet our margin expectations.

Last week, we secured a project for the installation of more than 70 miles of 36-inch natural gas pipeline in Central Mississippi for Midcontinent Express Pipeline, which is a joint venture between Kinder Morgan Energy Partners and Energy Transfer Partners.

We believe our strong balance sheet and our ability to quickly mobilize resources from other areas of our natural gas business contributed to this award. This is just one example of the benefit of our diverse operations. This project is expected to be completed in the third quarter of this year.

We expect first quarter results for our natural gas operations to be negatively impacted for two primary reasons. The vast majority of our distribution gas revenues are generated in the upper Midwest and Northeast United States. These areas have experienced harsh winter weather conditions and have delayed our normal construction and maintenance activities for this time of the year.

Secondly, some of our customers have delayed pipeline facility projects scheduled for construction during the first quarter of this year, which is likely attributable to lower natural gas prices and instability in the economy and financial markets.

However, over the past two weeks, we have seen an increase in bidding activity leading us to believe that capital is flowing back into the natural gas industry. We remain optimistic that this business may return to normal levels by the second half of this year.

Now turning to our telecom operations. The biggest impact to our business from the decline in the economy has been felt in our telecom operations. In the fourth quarter of 2008, revenues from telecommunications and broadband cable operations were approximately $108 million, this compared to approximately $160 million in the fourth quarter of 2007.

For the fourth quarter, telecom and broadband cable operations represented less than 12% of our total revenues. It is important to note, when comparing quarter-over-quarter results for these operations, the fourth quarter of 2007 represents a peak in the fiber-to-the-home build out and the positive contributions of a large wireless project.

AT&T considers fiber-to-the-node a long-term strategic initiative and reported that the company net key U-verse deployment goals in 2008. However, the company has recently announced the one-year extension of its U-verse deployment schedule, which will impact our revenues at least for the first half of this year.

Verizon has not made a similar announcement, but the company has stated that it will redeploy its capital in the near-term to focus on its FiOs build-out in the Northeast and to multi-dwelling units or MDUs. These circumstances will impact the work we are performing in certain states. However, it presents a potential opportunity for us to leverage our comprehensive experience in the MDU market for marketing and subscriber outreach to engineering and installation services.

In the fourth quarter of 2008, we renewed all of our existing master service agreements. However, expected revenues from these MSAs included in backlog have been adjusted to reflect lower telecom spending in 2009.

Our fiber network installation capabilities are another area where there is a potential for our business to be positively impacted long-term by the stimulus plan. The stimulus package includes more than $7 billion for the deployment of high-speed Internet to rural areas that lack sufficient bandwidth to adequately support economic development.

These initiatives will most likely be spearheaded by municipalities, states and rural telephone companies. We remain committed to bringing fiber network to our customers through our Dark Fiber segment. Demand for this segment of our business continues to be robust and we are aggressively expanding our networks in California, Georgia, Illinois and Pennsylvania.

We consider renewable energy the most rapidly emerging opportunity for Quanta. We achieved our renewable energy goal of $150 million in 2008 and we remain confident that we will double this number in 2009. Building on the success of the Denver International Airport solar project, we recently completed the installation of Sempra Generation's 10-megawatt photovoltaic power generation facility near Boulder City, Nevada. The project is the largest operational thin-film solar power project in North America. Construction began in July of 2008, and involving installation of more than 167,000 solar modules are more than 80 acres.

Over the past year, Quanta has streamlined the cost of engineering, design, procurement project management and construction solutions for utility scale and large commercial solar generation facilities to our customers.

Over the past six months, we have seen the price of solar panel technology become more competitive. The balance of the system costs must also decrease in order for solar to be a competitive viable source of generation. We believe our EPC capabilities in this area make us the service provider of choice by our customers.

Although, wind generation lost momentum in the fourth quarter, we’re now beginning to see capital funding flow back into this market. The new stimulus plan extended the renewable tax credits for wind energy production through 2012. Industry experts expect that the tax credit extension will stabilize the wind market and open the door to additional investment into new wind energy.

Under the new administration there is also increased potential for federal renewable portfolio standard to come into effect over the next year. This would like spur additional future development of renewable generation facilities and transmission infrastructure to interconnect into the power grid.

Just yesterday at the Energy Summit, North Dakota Senator Byron Dorgan stated, "right now, wind turbines in remote areas of the country are producing power, but it is often stranded and can’t get to market. If we’re going to maximize the ability to produce renewable energy there is an absolute requirement that we connect America".

Additionally, we believe highway transportation infrastructure called for by the stimulus plan could have a positive impact long-term to our company as it is likely that electric power, telecommunications and natural gas infrastructure will be relocated and are upgraded during construction. However, it is important to note that given its recent enactment our business outlook is exclusive of any anticipated positive impact from the stimulus plan.

In close, I would like to reiterate that considering the economic environment in the later half of 2008, our operations performed incredibly well. As James will discuss in more detail we achieved record revenue and operating income for the year. We have a dedicated workforce to thank for these results. They worked tirelessly to meet the ongoing demands of our customers, particularly in emergency restoration scenarios. While the economic environment continues to be a challenge, we will navigate through it as we have in the past.

We plan to continue to build our organization on the strength of our current operating platform through solid leadership, diverse service offerings, performance excellence and by providing a safe work environment for our employees.

Now, I will turn the call over to James Haddox our Chief Financial Officer.

James Haddox

Thanks, Jim and good morning everyone. Today, we announced record revenues of $921.5 million for the fourth quarter, compared to $879 million in the prior year’s fourth quarter, reflecting growth of approximately 4.8%. This year’s fourth quarter revenues included emergency restoration revenues of approximately $47 million, compared to approximately $56 million being earned in 4Q ’07. Excluding emergency restoration revenues from both periods, revenue growth would have been approximately 6.0% in the fourth quarter.

Revenues for fiscal year 2008 were record $3.78 billion, compared to revenues of $2.66 billion for fiscal year 2007, resulting in full-year 2008 revenue growth of approximately 42.3%. Pro forma revenues in fiscal year 2008 were $3.81 billion versus $3.33 billion in 2007 representing approximately 14% pro forma revenue growth in 2008.

During 2008, emergency restoration services produced approximately $208 million in revenues, compared to approximately $142 million in pro forma revenues in 2007. Excluding emergency restoration revenues from both periods, pro forma revenue growth in 2008 was approximately 13%. When I refer to pro forma information in my discussion, I am referring to data prepared on a combined company basis taking into account the acquisition of InfraSource and smaller acquisitions in 2007 and 2008 all of this they occurred on January 1, 2007.

Revenues from electric power work during the fourth quarter of ’08 increased by approximately $36 million or about 7% over the fourth quarter of 2007. Excluding all emergency restoration revenues from both periods, electric power revenues would have grown about 11%. For all of 2008 electric power work grew about 14% on a pro forma basis, from $1.89 billion to $2.15 billion. 2008 was an extraordinary year for storm restoration. However, after excluding these revenues from both periods, revenues from electric power work still grew about 12% on a pro forma basis.

Gas work increased approximately $78 million or 61% quarter-over-quarter and increased $294 million or about 60% year-over-year on a pro forma basis. Revenues from telecom and cable work decreased from about $160 million in 4Q ’07 to about $108 million in 4Q ’08 or about 33%. Pro forma telecom revenues grew 60% in 4Q ’07 compared to 4Q ’06, as revenues from AT&T and Verizon ramped up in the last half of ’07, creating difficult quarter-over-quarter comparisons for the last quarter of 2008.

For all of 2008, pro forma revenues from telecom and cable work increased about $6 million or about 1%. Revenues from ancillary work decreased approximately $25 million or about 30% quarter-over-quarter from about $83 million in 4Q ’07 to about $58 million in 4Q ’08.

Dark fiber revenues contributed approximately $19 million to the fourth quarter, compared to $13 million in last year’s fourth quarter for about 46% growth. For the year, dark fiber revenues totaled about $62 million equating to pro forma revenue growth of about 31% over 2007.

We generated gross margins of 18.1% for the fourth quarter of 2008 compared to gross margins of 17.2% during the fourth quarter of 2007, for an increase of 90 basis points. This growth in margins came from increased margins from electric power and gas work, partially offset by lower margins in telecom and ancillary work. Gross margins for all of 2008 reached 16.8%.

Our G&A expenses decreased from $84.7 million in 4Q ’07 to $82.3 million in the fourth quarter of ’08, primarily due to lower expenses associated with the InfraSource merger and lower cost associated with the sale of equipment. SG&A expenses are down from 9.6% of revenues in 4Q ’07 to 8.9% in 4Q ’08. SG&A expenses for all of 2008 were down to 8.2% of revenues compared to 9.0% of revenues in 2007.

Operating margins for the quarter were up 230 basis points over the fourth quarter of ’07. EBITDA for all of 2008 was about $325 million or 8.6% of revenues compared to about $188.2 million or 7.1% for 2007. The calculation of EBITDA is set forth in the financial news section of our website at quantaservices.com.

Amortization of intangible assets decreased from $12.4 million in 4Q ’07 to $6.8 million in 4Q ’08 primarily due to the run-off of the amortization of intangible assets associated with InfraSource’s backlog on the acquisition date. Interest income decreased from $4.6 million in the fourth quarter of ’07 to $1.7 million in the fourth quarter of ’08, primarily due to lower interest rates. Net income from continuing operations for the quarter was $47.1 million or $0.24 per diluted share compared to $33.5 million or $0.18 per diluted share in 4Q ’07.

Adding back non-cash amortization of intangibles and non-cash compensation expenses, net of taxes would have resulted in an adjusted net income of $53.9 million, our cash EPS per diluted share of $0.27 for the fourth quarter of ’08, compared to adjusted net income of $43.1 million or $0.23 per diluted share in the fourth quarter of 2007.

A reconciliation of GAAP to cash EPS is provided in the tables attached to our press release issued today. Cash flow from operations totaled approximately $192 million for the quarter, cash flow from operations less net capital expenditures of about $16 million resulted in approximately $176 million in free cash flow for the quarter.

For the year, cash flow from operations totaled approximately $243 million; subtracting net CapEx of $171 million yields approximately $72 million of free cash flow for all of 2008. This strong free cash flow was achieved while experiencing of 42% increase in revenues for the year on an as reported basis and a 14% increase on a pro forma basis. Our free cash flow would have been even stronger for the quarter and the year had it not been for certain customer payments that were delayed until after year-end.

We experienced free cash flow of approximately $50 million in the first two weeks of ’09. EBITDA was $403.5 million for all of 2008 representing an increase of approximately 66% over all of 2007 on an as reported basis. Calculation of this non-GAAP measure can be found in the financial news section of our website at quantaservices.com.

We’ve also posted to our website a calculation of adjusted EBITDA. Our days sales outstanding or DSO's, which we calculate by using the solid current accounts receivable plus costs and earnings in excess of billings, less billings in excess of costs divided by average revenues per day during the quarter were 80 days at December 31, versus 85 days at September 30, 2008 and 76 days at December 31, 2007.

Now, I will turn to the discussion of backlog, but first I want to take a moment to provide you with the definition of total backlog. Total backlog includes the amount of revenues we expect to drive in the future from signed contracts for project work and master service agreements.

Backlog for project work includes the remaining revenues to be earned on the lump sum projects and our estimate of the remaining revenues to be earned under time and equipment or unit price contracts. Backlog for master service agreements includes our estimate of future billings based on our knowledge of our customers budgets and spending patterns under T&E and unit price arrangements through the end of the initial contract periods and through the end renewal periods provided by the contract for which we reasonably expect the contract to continue.

Our total backlog of work at 12/31/08 was approximately $5.193 billion, which is $521 million or about 11% higher than total backlog at 12/31/07. Our 12-month backlog currently stands at $2.577 billion. This compares to 12-month backlog of $2.355 billion as of 12/31/07 an increase of $222 million or approximately 9% with about $219 million of the increase being attributable to electric and gas work, $47 million attributable to ancillary work and $17 million attributable to dark fiber work, offset by a decrease of about $61 million attributable to telecom and cable work.

At year-end, we had about $438 million in cash and $315 million on available borrowing capacity under our $475 million credit facility. We had about $160 million in the letters of credit outstanding, primarily to secure our insurance program. The combination of our cash balance and availability under our credit facility gives us about $750 million in liquidity going into 2009.

As I mentioned earlier, we’ve experienced substantial cash flow from operations so far in the first quarter of ’09. And our cash balance currently stands at over $500 million. Concerning our outlook for the future, we estimate our revenues for the first quarter of ’09 to be from $750 million to $800 million.

Our revenue forecast for 1Q ’09 includes about $25 million of expected emergency restoration work. Revenues for the first quarter of ’08 included approximately $23 million in emergency restoration revenues. Our estimate for 1Q ’09 EPS based upon revenues of between $750 million and $800 million is from $0.09 to $0.10 per diluted share on a GAAP basis.

Out GAAP EPS forecasts includes an estimate of about $10.2 million for amortization, non-cash compensation expenses and non-cash interest expense. Excluding these expenses, our cash EPS for the quarter is expected to be well to $0.13. For additional guidance, we’re currently projecting our tax rate for the first quarter of ’09 to be approximately 41.5%. We expect our diluted share count to be about $198 million shares during the first quarter.

Starting on January 1 of ’09 there will be an additional non-cash charge to consider when forecasting earnings. FSP 14-1 went into effect on that date, and requires us to record additional non-cash interest expense associated with our convertible debt of approximately $4 million for all of 2009 with $1 million related to the first quarter. We expect CapEx for all of ’09 to be approximately $180 million. This compares to CapEx for all of ’08 of $186 million.

In summary, we accomplished several initiatives during 2008 to strengthen Quanta. We accomplished 14% pro forma revenue growth, increased our total backlog by 11% compared to 12/31/07, increased operating margins before amortization of intangibles by 150 basis points and improved margins on all of the InfraSource operating units. We generated about $72 million in free cash flow resulting in a cash balance of about $438 million. We converted our $270 million in convertible debt-to-equity. We increased our bonding capacity and strengthened our renewable energy services and added new service offerings to our mix through acquisitions during the year.

We believe that we are in a better position now than we’ve ever been to capitalize on increasing opportunities in our end markets, and to pursue strategic acquisitions that will strengthen our geographic and service portfolio. As John and Jim said, we are confident that our customers remain committed to the enhancement of their infrastructure. Although the first quarter has presented some challenges, demand for our diverse services continues and we maintain a unique leadership position that enables us to leverage emerging opportunities, particularly in the transmission and renewable energy industries.

That concludes our formal presentation. And now, we will open the line for Q&A. [Mikael]?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question comes from the line of Sanjay Shrestha. Please state your company name followed by your question.

Sanjay Shrestha – Lazard Capital Markets

Thank you. Lazard Capital Markets. First of all, congratulations on a great quarter here guys.

John R. Colson

Thank you.

Sanjay Shrestha – Lazard Capital Markets

Couple of quick point of clarification if I may, you guys talked about still that double-digit growth year-over-year and 12-month backlog is up high single-digit year-over-year, you’re talking about the soft Q1. So, does that mean, seasonal strong Q2 and Q3 is even going to be stronger than sort of like what we’ve seen in the past. Can you guys sort of qualify that statement a bit more as to where exactly it’s going to come from and how you’re thinking about that?

John R. Colson

Yeah. I think obviously we’re depending on electric power to carry quite a bit of the load for 2009. Second quarter may not be as strong as you’re indicating there probably third and fourth quarter are going to be the stronger quarters of the year, but electric power is showing a strong growth for 2009, gas is showing growth for 2009. Telecom obviously now is down for 2009, but ancillary and of course our fiber is also showing growth. And if you do the calculation, if everything else breaks even, electric power only has to grow 13% in order to give us that double-digit growth.

Sanjay Shrestha – Lazard Capital Markets

Got it. So, one more follow-up on that and so in terms of all this announcement, so the LOI with the National Grid and even $200 million incremental with Northeast utilities and the Allegheny project and none of them are actually in the backlog right now. So, all of them are probably going to go into backlog at the end of Q1, and second question on that, when do you guys realistically think CREZ might actually move into the backlog during 2009?

John R. Colson

To correct you there Allegheny, some of Allegheny is in backlog, the other two that you mentioned in the pipeline are not in backlog. CREZ there might be some probably not much coming in the backlog in 2009. Probably, won't start those projects, really put people on the ground until next year.

James F. O'Neil

But they maybe added to backlog.

John R. Colson

But they will be added to backlog.

James F. O'Neil

Backlog but revenue realization will be minimal.

Sanjay Shrestha – Lazard Capital Markets

Thank you, James.

Operator

Thank you. Our next question comes from the line of Jamie Cook. Please state your company name followed by your question.

Jamie Cook – Credit Suisse First Boston

Hi, good morning, just a follow-up on Sanjay's question. You think about 2009 and you’re suggesting we see the earnings acceleration happen in the back half of the year. Is that based on, I mean are you expecting additional transmission awards that hit in the first half of the year to get that earnings acceleration growth or do we or are based on the National Grid award, and the one was that Northeast utility, are those two awards enough I guess to see the earnings acceleration in the back half of the year?

John R. Colson

Well, what we have in backlog are not necessarily those projects, the Northeast utilities announcements really future work, none of that is going to be in 12-month backlog…

Jamie Cook – Credit Suisse First Boston

But basically there is nothing, I mean based on what you have in backlog today. You feel comfortable that the trends on electric power side is strong enough, to see the back half earnings acceleration?

John R. Colson

That is right.

James F. O'Neil

We’re hoping to that telecom will improve some as the year goes on; it gives us a more time to shuffle those resources into other projects and other areas. And so, we’re hoping to see some pick-up from telecom as well as time goes on, maybe not necessarily in the telecom industry, but in other industries as well. We also expecting fairly strong growth on renewables and really having some revenues coming in from renewables in third and fourth quarter.

Operator

Thank you. Our next question comes from the line of Tahira Afzal. Please state your company name, followed by your question.

Tahira Afzal – KeyBanc Capital Markets

Hi. This is Tahira from Key. Good morning gentlemen, how are you?

John R. Colson

Great, thank you.

Tahira Afzal – KeyBanc Capital Markets

Just wanted to find out in terms of your CapEx, first of all, what are your assumptions within that for dark fiber?

James F. O'Neil

Tahira this is James. This year we did about $94 million in CapEx for dark fiber and next year we expect that number to be about $85 million.

Tahira Afzal – KeyBanc Capital Markets

Got it, okay. And then in terms of awards and the timeline, I think you indicated that in terms of contribution obviously CREZ is not really going to take place until 2010, but in terms of awards timeline would it be possible to get some color over there and then I noticed that I think FERC has approved the rate for a couple of trans-Canada projects would love some update or color on that and perhaps the Sunrise link and the Path projects?

John R. Colson

Yeah well there is a number of projects that are yet probably to be awarded this year, you named some of them there and certainly we will be competitive on most if not all of those projects, not saying that we'll get them all, but we will get our share. CREZ being, the award of CREZ being probably the largest opportunity for us, but Sunrise project, Gateway project, the Trans-Canada projects, Path projects, there are several nice projects that we expect now, not that those large projects necessarily will bring us any revenue this year, but they should be in backlog.

Operator

Thank you. Our next question comes from the line of Alex Rygiel. Please state your company name followed by your question.

Alexander Rygiel – Friedman, Billings, Ramsey & Co.

Thank you, Friedman, Billings, Ramsey. A couple of quick questions, James could you run though 12-months backlog by end market?

James Haddox

Yeah, 12 months backlog at December 31st is $1.534 for electric and $528 million for gas, $289 million for telecom, $154 million for ancillary, and about $72 million for dark fiber.

Alexander Rygiel – Friedman, Billings, Ramsey & Co.

Great. And then, John with regards to your double-digit growth outlook in 2009, you still feel comfortable that earnings per share will be growing in excess of revenue growth in 2009?

James Haddox

That is been the history in our past, that is typically grown better than revenues. This year I think we’re going to have a challenge with margins, I wouldn’t be surprised to see some margin deterioration in 2009, but EPS may still grow faster than our revenues.

Operator

Thank you. Our next question comes from the line of Scott Levine. Please state your company name followed by your question. Pardon me. Mr. Levine your line is open at this time. (Operator Instructions). Our next question comes from the line of Jeff Beach. Please state your company name followed by your question.

Jeffrey Beach – Stifel Nicolaus

Stifel Nicolaus. Good morning John and James. Again congratulations on a good quarter.

John R. Colson

Thank you.

Jeffrey Beach – Stifel Nicolaus

A couple of questions, you’d indicated that at this point you are more optimistic about the outlook for natural gas than at the third quarter of ’09 what’s been occurring over the past several months to influence you?

John R. Colson

Well we continue to see activity from our gas customers. There was a hiatus there in the fourth quarter that had us concerned, but now we’re beginning to see projects come back out for bid. And there is more activity than we’ve seen in, say the last four, five months occurring now, which gives us some reasonably that natural gas is business is going to be good in 2009. Now, don’t misunderstand it, don’t think it’s going to be as hard as it was in 2008, but I think it’s going to be good in 2009.

Jeffrey Beach – Stifel Nicolaus

And with the likelihood what I am seeing is a pretty good decline in gas drilling this year. If the outlook for gas is down next year, what your flexibility, do you just reduce your headcount and operations along with that is there any other strategy to help maintain profitability in 2010 in gas in the face of down drilling?

John R. Colson

Yeah, I think that as I gave those rig counts to you, the horizontal rigs which are primarily used in the new tight shale formations. They’re still higher this year than they were at the same time last year, although they have been declining. But we’re still seeing activity in the new shale formations, which require the new infrastructure, which again gives us some optimism about the gas business for ’09 and somewhat ’10. Obviously, if that doesn't come about, we have to move those resources into another area, the obvious area is the transmission business. Some of that equipment and some of those talents of those people can be utilized in the transmission business, particularly on the underground side but also for hauling pipe and hauling steel, is not much different than hauling wood poles or steel poles. So, there is a lot of things, where you could transfer folks and equipment back and forth. Hopefully, we won't need to do that on the gas side.

Operator

Thank you. Our next question comes from the line of Michael Coleman. Please state your company name followed by your question.

Michael Coleman – Sterne, Agee & Leach

Good morning. It's Sterne, Agee. Just a followup on a previous question, you mentioned that there may be some challenge with margins in 2009. Given the double-digit growth, what are the puts on the margin side, and do you have any further clarity on that?

John R. Colson

Well, first on the margin side as far as pressure is concerned would be telecom, with telecom revenues being down as much as they are, projected to be down as much as they are. There is going to be lower margins in telecom work. And there may be lower margins on the gas side too of the business. Those are the margin challenges for this year.

Michael Coleman – Sterne, Agee & Leach

Okay.

John R. Colson

Our backlog margins are still overall better than they are today. Is that right James?

James F. O'Neil

That is right.

Michael Coleman – Sterne, Agee & Leach

Okay. And could you break out the 12-month backlog between distribution and transmission, I think you gave an overall number for electric power?

James F. O'Neil

Mike, we don’t calculate that number.

Michael Coleman – Sterne, Agee & Leach

You don’t?

James F. O'Neil

We don’t have the breakdown between transmission and distribution.

John R. Colson

The reason is, it’s not a good number, because you have too much – we give an estimate from time-to-time of how much revenues looking into the past, but there is too much transmission work that is related to distribution or distribution work that is related to transmission work and it’s not a clearcut line.

Operator

Thank you. We have a follow-up question from the line of Tahira Afzal. Please go ahead.

Tahira Afzal – KeyBanc Capital Markets

Hi, gentleman. Just in regards to your earlier comment, where you said that CREZ would probably be the larger of those opportunities that you’re looking at. Would it be possible to just put it in size or in terms of context, you’ve got the Northeast award, which was well over a $1 billion. And then, some of the ones that we have from TrAIL and all have been more in the $300 million size? Would I put it somewhere in the middle of those two, how should I try to model this one out?

John R. Colson

Well, I think it would be pretty difficult to model it out, but the opportunity is certainly larger than anything else out there over the next several months…

Tahira Afzal – KeyBanc Capital Markets

Okay. Would it be even bigger than some of the bundled arrangements you are getting as in from Northeast and from Natural Grid?

John R. Colson

It could be, but if that is all we have to play out, I wouldn't want to try to give any guidance based on how much CREZ work we would get, it's just the opportunity is bigger than most that we see out there.

Tahira Afzal – KeyBanc Capital Markets

Fair enough. Thank you very much.

John R. Colson

Thank you.

Operator

You have a follow-up question from the line of Alex Rygiel. Please go ahead.

Alexander Rygiel – Friedman, Billings, Ramsey & Co.

Thank you. John, could you again circle back to the political environment as it relates to the outlook for electrical transmission. From my standpoint it doesn't seem to be any better than it’s ever been right now, particularly with the number of politicians talking about renewable portfolio standards as well as potentially empowering the FERC with transmission line, siting responsibility. So, could you talk about the political environment a little bit? And then talk about what your plans are to use the cash balance that is growing pretty quickly right now?

John R. Colson

Sure, well we of course were busy preparing for this earnings release yesterday and didn't pay a lot of attention to the news, but this morning we saw the headlines in the paper, where Nancy Pelosi and Harry Reid and various other politicians have met in Washington yesterday at what is called an Energy Summit. And if I were going to write the quotes, I couldn't have written them any better, it looks like maybe John Wilson wrote those quotes. That was probably shocking to everyone in the room, how politicians have realized certainly what the issues are and how to solve those issues in transmission. So, I have to agree, I have never seen anything like it and I am amazed to that they are seeing the problem. Now, we'll have to have an act on the problem, but at least they're talking a good game. So, let's see how that works out. And obviously talking about our balance sheet, it's very strong right now. It deals good to handle all of that cash on the balance sheet in this kind of an environment, but in order of priorities, number one priority is working capital, investing that cash in working capital is the best thing we can do. Number two, after that is acquisitions we think that the market is going to do some due diligence for us and acquisitions and we might be able to pick up bargain out there, or two. And then of course after those are exhausted and we still have too much then we will look at the potential for share buybacks or dividends or something along those lines. But right now, we are getting work because of that strong balance sheet some of these larger projects it gives our customers a lot of comfort to know they're dealing with someone with balance sheet as strong as ours.

Alexander Rygiel – Friedman, Billings, Ramsey & Co.

And one follow-up did you see any project cancellations within your natural gas business in the fourth quarter?

John R. Colson

We saw, I do not think we saw anything that we had under contract cancel. We saw slow-ups on the distribution gas, primarily related to weather, but I think some of it related to the economy and the economic outlook of those gas companies customers, but I do not think we had anything that we had in backlog deteriorate, but there was a lot less opportunity out there for new contracts.

Operator

Thank you. And at this time we have reached the end of the hour I would like to turn the call back over to management for any closing remarks.

John R. Colson

All right. Thank you very much. I want to thank you again for your participation in our fourth quarter conference call. We appreciate your questions and ongoing interest in Quanta.

Operator

Ladies and gentlemen this concludes the Quanta Services fourth quarter earnings conference call. The conference will be available for replay after 11:30 Eastern Standard Time today through March 3 at midnight. You may access the replay system at anytime by dialing 303-590-3000 and entering the access code of 11126526#. Thank you for your participation and at this time you may now disconnect.

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Source: Quanta Services, Inc. Q4 2008 Earnings Call Transcript
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