Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Quanta Services Inc. (NYSE:PWR)

March 07, 2012 8:00 am ET

Executives

Kip A. Rupp - Founder and Managing Partner

James F. O'Neil - Chief Executive Officer, President and Director

Earl C. Austin - President of Electric Power and Natural Gas & Pipeline Divisions

Kenneth W. Trawick - President of Telecommunications & Renewables Division

James Haddox - Chief Financial Officer

Unknown Executive -

Analysts

Jamie L. Cook - Crédit Suisse AG, Research Division

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

William D. Bremer - Maxim Group LLC, Research Division

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Unknown Analyst

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Craig E. Irwin - Wedbush Securities Inc., Research Division

Kip A. Rupp

Good morning, everyone, and thank you for joining us for the Quanta Services 2012 Investor Day. My name is Kip Rupp, and I'm Quanta's Vice President of Investor Relations.

We've got some interesting discussions and presentations about the business for you today. In addition to discussing industry trends we're seeing and what our various operating segments do, you'll be participating in a robust discussion about the strategies and initiatives in place to capitalize on opportunities and to grow the business over the next several years.

As you can see from today's agenda, our President, Chief Executive Officer, Jim O'Neil, will begin with a strategy presentation. Then we'll will get into executive presentations that will focus on a specific part of our business, with about 10 or 15 minutes of Q&A time allotted after each of those presentations.

Just kind of a housekeeping item, if you'd like to ask a question during this presentation, you'll see you've got push-to-talk mics on your table. Just push the button once you're identified. If you have a phone, please try and keep them away from the push-to-talks just because it will -- the signal can interfere with the push-to-talk signal.

After the Power Generation presentation, we'll take a 15-minute break and then we'll continue with the remainder of the agenda. Following Jim's closing remarks, we'll open up for general Q&A session. We're targeting to wrap up the event around 12:30 or so, if not a little earlier. After that, lunch will be available and we'll also either eat here or have boxed lunches that you can take back to the office with you, if you like.

This event is being webcast from our website and all the presentation materials we'll be discussing today can be found on our website at quantaservices.com for download. In addition, for the folks in the room who have a little folio on your table in front of you, there's a USB, a flash drive on it that also has all the presentations loaded there as well.

For those listening to our Investor Day webcast, you will be -- you'll see a box in your webcast pop up page where you can submit a question to be addressed during the Q&A session. I'll do my best to include as many of the questions in the queue in each session as possible.

Those in attendance here today will find a feedback survey in your Investor Day book. Those in attendance and also those participating via the webcast will receive this survey in e-mail form over the next day or so, with the email called investor survey. We appreciate you taking a few minutes to complete the survey and provide your feedback. It's important to always seek to improve what we do and your feedback will be valuable in helping us to that end.

If you would like to fill out the survey today in a hard copy, you can either give it to me or you can leave it out at the front table with Julie as well.

And then finally, another housekeeping item. All of the presentations and comments made here today are covered by the forward-looking statement language shown here. Please remember that information reported and discussed during this Investor Day speaks only as of today, March 7, 2012, and therefore, you're advised that any time-sensitive information may no longer be accurate as of the time of any replay of this event.

This Investor Day will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance or that they 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.

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 event.

For additional information concerning some of the risks, uncertainties and assumptions that could affect Quanta's forward-looking statements, please refer to the company's annual report on Form 10-K for the year ended December 31, 2011, its quarterly reports on Form 10-Q and its other documents filed with the Securities and Exchange Commission, which may be obtained on Quanta's website or through the SEC's website at sec.gov.

Now with that, I'd like to turn the presentation and the event over to Quanta's President and Chief Executive Officer, Jim O'Neil. Jim?

James F. O'Neil

Thank you, Kip. Good morning, everyone. Before I get started, I want to cover some housekeeping emergency procedures. If we have to leave this hotel in case of an emergency, we go out these doors to the back, down the stairs and out the front door. Okay, do not go out these doors here because it's going to be very confusing, it's a maze of hallways and you'll get lost.

So the hotel is also certified in CPR. We've got some people on standby. I know there's some other people in the audience, but you'll be well taken care of in the event that something like that happens, which hopefully nothing will happen, but that's covered.

So today, what I'd like to do in my agenda is -- first off, it's very important to the management team and to me that you have takeaways from this meeting that -- there's some key takeaways that we want you to leave here with about the company and the future of the company and the growth prospects and the health of the company going forward.

Secondly, I'm going to give a brief overview of the company. Now for those that are less familiar with Quanta, we'll take you through our normal presentation that we typically give at investor conferences about the company.

And then I'm going to spend some time talking about our strategies to grow our business over the next several years. I also want to talk about some of the things we're going to do to further differentiate our company from our competition to take advantage of key markets going forward.

Key takeaways. First, North America, we believe is in the very early stages of a multiyear investment cycle, particularly in the Electric Power and pipeline segments.

Secondly, the end market trends that we're seeing today and the record backlog levels that we're at today is going to provide Quanta with some significant near-term and long-term opportunities.

Third, Quanta is experiencing momentum in all segments of our business, all 4 of our segments, for the first time since 2008.

Fourth, we believe we are the best-positioned specialty infrastructure contractor, and we'll take advantage of opportunities in the markets that we serve.

And finally, we believe our financial strength and the diversity of our company is a foundation that will enable the company to execute on its growth strategies going forward.

So when you look at this slide, and you see that we're the largest specialty contractor. We have the scope and scale. We are the preferred employer in the industry. We lead the industry in safety performance. We've got an industry-leading balance sheet, and we have an entrepreneur business model. What does this mean? What does this mean?

This slide is a foundation of a premier service company in the industries that we serve. It means we're able to adapt to this ever-changing environment that we're in today to give our customers the comfort and satisfaction that we can provide them solutions. We also provide employees with job security and a safe place to work. And this is a very powerful slide and I believe this is what differentiates us from our competition in the eyes of our customers and our employees.

When you look back at 2011, our full year revenues were $4.6 billion. The breakdown by segment, approximately 66% of our revenues were from our Electric Power segment, 22% from our Natural Gas and Pipeline segment, 10% from Telecom and then 2% from our Fiber Licensing Segment.

Turning to the -- your attention to the graphs on the right, the estimated mix of revenues by contract type, we're seeing an increase. And the fixed-type contract amounts were about 40% fixed price, 40% unit price and 20% cost plus. Fixed-price, traditionally over the past few years, has been about 1/3 of the contract type. And then over the last few years, we're also seeing a trend toward more new construction. And that's really evident of the growth we're seeing in our electric transmission business, Telecom as well but primarily electric transmission.

One of the many strengths, we believe, is the diversity of our revenue mix, the type of contracts, the type of work because it diversifies the company's overall revenue base and the risk profile. We've talked in the past how fixed-price contracts command a higher margin, but that work could be more cyclical and there's more risk that needs to be managed in those projects where the cost plusing contracts are typically your MSA agreements since recurrent revenues. So the diversity of the strength, we believe, to our overall revenue portfolio.

We also have a very diverse customer base consisting of high-quality companies with low customer concentration, which is also a differentiator from our peers. No single customer accounted for more than 10% of our revenues in 2011. And our top 10 customers accounted for approximately 36% of our revenues during the same period. We have strong relations with customers in both the United States and Canada, with many of those relationships that go back for decades.

As you know, our headquarter office is in Houston, Texas. We have operations throughout North America and we continue to expand in Canada. We also have a presence in select international markets, and I'll discuss that more later in my presentation.

Because of our national presence, we can meet our customer needs in large geographic areas as they are acquiring and merging and form a larger geographical territories themselves.

We achieve this footprint largely through acquisitions over the last 14 years. Many of our field locations are led by the former owners who bring an entrepreneurial culture and continue to run these businesses like they would they were their own company. These individuals have a competitive drive, as well as very strong customer and employee relationships. This entrepreneurial culture is a key differentiator and a meaningful component of our past and future success.

The experience of our top executive team totals well over a century of industry experience. John Colson, who's here today, is Quanta's founder and executive Chairman after serving more than 14 years as Quanta's CEO. He came to Quanta after a 26-year career at Par electric, which is a founding company within Quanta where he was a majority shareholder.

James has 40 years of experience, including financial roles at 3 public companies prior to joining Quanta at its inception 14 years ago.

I assumed the CEO role in May of last year after serving as Quanta's COO for several years. I bring 32 years of experience to the executive team, including Quanta's renewable energy strategy, internal audit and running the acquisition program for many years in Quanta's early days.

Ken Trawick and Duke Austin, the Presidents of our industry segments, collectively bring over 5 decades of experience in the construction business. It's important to note that both Ken and Duke came from companies that Quanta acquired, and so that entrepreneurial culture that I talked about on my last slide extends all the way to the senior levels of this organization.

And finally, but just as important, the operating unit executives at our field locations bring an average of over 25 years of industry experience.

The first half of 2011 was very challenging period for Quanta, mostly because of the impact of project delays caused by stringent regulatory environment. All of our operating units -- or operating segments experienced delays due to the reinterpretation of existing regulations or new regulations that went into effect, which created havoc with our customers in trying to schedule projects throughout last year. The large diameter pipeline market was perhaps impacted the most by these project delays in 2011.

But there were positive events that did occur in the first half of last year that set the stage for a strong second half of the year. We were awarded a record number of large electric transmission projects during that period. Electric distribution, we started to see recovery in that market. I believe we ended the year with about 10% growth in that -- in electric distribution year-over-year.

Our Telecom segment, primarily driven by broadband stimulus and fiber-to-the-cell site awards, we began to build backlog in that segment. In addition, we made a strategic move in June of last year to move -- to pursue gathering system work local to the shale regions to diversify our Natural Gas and Pipeline segment.

During the second half of 2011, our electric transmission and Telecom segments that had previously been delayed moved into construction, large electric transmission of broadband stimulus projects that were awarded in the first half of '11 also moved into construction. We also began booking shale gathering work for the second half of 2011. As a result, we experienced significant revenue growth and margin growth and earnings improvement in the second half of 2011.

The momentum is carrying us into 2012 and beyond, which is why we're very optimistic about our business. We have record backlog levels. We have more than 10 large electric transmission projects in construction at this time. And we have visibility into more awards in 2012. Our Pipeline business is improving. Our Telecom business continues to ramp, and our Fiber Optic Licensing business is positioned to grow in 2012 as well.

I want to address our Natural Gas and Pipeline segment first thing this morning. This is a part of our business that is most misunderstood by analysts and investors. I need to do a better job of communicating our vision and industry drivers to demonstrate why we acquired Price Gregory over 2 years ago and established the leadership position in the pipeline construction industry.

The unconventional shale plays are an energy game changer for this country. The abundant supply of natural gas at low prices will drive demand. Shale gas discoveries are transforming market dynamics and creating pipeline demand outside traditional flow patterns. Shale gas drives the need for larger interstate pipelines, as well as expansion of smaller projects to gather and collect the gas. We are in the very early stages of development of this infrastructure.

Natural gas fuel growth will come from heating, standby power for renewable intermittency, petrochemical manufacturing and transportation. However, the biggest opportunity for natural gas fuel is fuel for electric generation. There are over 600 coal plants in the United States, and 1/3 of these plants are over 50 years of age.

The Department of Energy states that 90% of fossil fuel plants construction -- that is constructed in the future will be natural-gas-fired plant. Natural gas is the most economic choice in each of these sectors.

Today, we are experiencing significant activity in the shales with oil and natural gas liquids or NGLs. All of these areas that are rich in oil and NGLs require pipelines as the existing pipeline infrastructure is not sufficient to accommodate desired production levels.

The Canadian oil sands are also very active and lack the necessary pipeline infrastructure. These drivers are not changing and they will not change and will be in play for many years to come. And this is the primary reason we are in the pipeline business. We had a tough 2011 in our pipeline business. However, this year, as this year begins to materialize, I expect a much different result for this year and for many years to come.

James is going to drill down the details on the slide in his presentation, but I wanted to take a few moments to provide some comments as well. This slide takes a look at our Natural Gas and Pipeline segment in 2 different ways, and I'm going to show you the first right here, this graph. We'll show the segment results as a reported basis going back to 2007. Note that these results include the results of Price Gregory Services subsequent to October 1, 2009.

The graph on the right shows pro forma segment revenue and operating margins for the segment for 2 pipeline company acquisitions which were made during the period, one of which was Price Gregory. As you can see, these 2 acquired companies would have had significant positive effects on the historical results of our company had we owned them for the full years of 2008 and 2009. Yes, 2008 and 2009 were very exceptional years in the pipeline industry, but this slide represents the significance of the amount of earnings potential this segment can provide in good years.

I will tell you that 2011 was an anomaly year and that all we need is a normal year for our Natural Gas and Pipeline segment to generate higher revenue with operating margin profile that is consistent with our Electric Power and Telecom segments. The shale gas and Canadian oil sand development should provide us a better-than-normal operating environment for the next several years. My message to you is do not underestimate the value that our pipeline segment can add to this company in earnings growth in the years to come.

Now let's take a look at the typical -- how the typical pipeline bidding season works. Here we have a generic timeline, and the bidding season typically starts midway into the fourth quarter of a given year and runs through the following May. It is during this time that the majority of the long-haul projects that are built in a given year are bid and negotiated and awarded to contractors.

Depending on the activity level, early on in the bidding season, we may start to build backlog in the fourth quarter or we may build backlog in the first quarter or maybe most of backlog is built in the early second quarter.

As projects move into construction in the second quarter and gain momentum in the third quarter, your backlog typically burns very quickly. Then you complete projects into the fourth quarter and begin the bidding cycle all over again for the next year.

The dashed blue line shows you how revenue would typically flow for long-haul pipeline or large diameter pipeline work. You can see that revenue ramped sharply in the second and third quarter as projects ramp up, and then falls off into the fourth quarter as projects complete.

To provide some contrast, we could have 150-mile electric transmission project that takes 2 years to build and may generate $150 million. We could do that same 150-mile long-haul pipeline or large diameter pipeline job and generate $150 million in 3 to 4 months. So it's important to understand how the bidding season work and the correlation of backlog and revenues for large diameter pipeline projects.

We talked about how the bidding season typically works for large diameter pipeline business, the relatively steep Bell curve pattern for revenue generation and the quick book-and-burn nature of these projects. We have that depicted here again on this slide. You hear us talk a lot about diversity today or you'll hear Duke talk a lot about diversity today in the pipeline segment as we're executing on initiatives to diversify the segment.

One thing we did last year to diversify the segment was to strategically shift some of our pipeline resources into the shales to pursue gathering system pipeline opportunities. As Duke will discuss in more detail, the wet shales are extremely active and there's not enough midstream gathering infrastructure in place to get the product to market.

There's so much gathering system work to be done today that it almost has a recurring revenue feel to it. This type of work is currently occurring year round, so it does not have the annual cyclicality like the large diameter pipeline business and, therefore, has better visibility and predictability.

As Duke will also discuss, we think pipeline integrity services is going to be a huge opportunity going forward. So we believe these additional services will have more consistency in an increasing revenue profile as indicated by the green line on this slide.

We like to think that the large diameter pipeline -- we like the large diameter pipeline business and think there is a lot of opportunity going forward. But by diversifying this segment, we hope to mitigate some of the influence of the annual cyclicality of the long-haul pipeline or large diameter pipeline business so that over time, perhaps the revenue generation profile for this segment as a whole could look more like the red line with attractive margins.

Now I'm going to shift my focus -- the focus of my discussion to some of the strategies that we're undertaking to grow this company going forward and further differentiate from our competition in the coming years.

There are several key differentiators that support Quanta's growth strategies, and you'll hear more detail about these differentiators and Duke

[Audio Gap]

in his presentations today.

Safety. This is something that Wall Street doesn't seem to focus on too much but it's a core value to Quanta, and it's something we strive to improve every day. It is also very important for our customers and more importantly, me personally, that we continue to improve our safety performance over time.

Our diversity is a strength. It allows us to capitalize on multiple growth opportunities in adjacent businesses that we can capitalize on.

Technology. Quanta is much more than a contractor. We provide solutions. We lead the power industry in energized services. We own our own automatic welding technology for pipeline construction. We developed Q-Trench Solutions for our pipeline operations. We recently acquired an intelligent pigging company and we also recently acquired a leading micropile foundation technology company. I'll touch on some of these in great detail -- in greater detail later in my presentation, but these are examples of capabilities that we provide our customers that other companies don't or can't.

Our scope and scale enables us to provide infrastructure solutions for any size project across all of our operating segments. James will talk more in detail about our financial strength later in the presentation, but it gives us tremendous flexibility to pursue our growth strategies. And finally, our reputation and track record of safety -- safely executing products leads the industry.

I'm now going to talk to you about a few of the initiatives we have in place to grow Quanta over the next several years. First, we are going to leverage the existing leadership position we have in our core businesses to expand into new markets.

To do this, acquisitions will continue to play an important strategic role. We are not interested in burn-around companies. We want to acquire companies that bring leadership -- bring us a leadership position and a new geography or enhance our capabilities in existing geography.

Two examples of that would be Valard Construction. We bought Valard in 2010. It gave us a leadership position in the Canadian market, and everyone can see what's going on there in Canada in building out infrastructure. Coe Drilling established us a leadership position in the horizontal direction of drilling market in Australia. And we're going to use that platform to grow in Australia where opportunities present -- when opportunities present themselves.

We are also interested in acquiring companies that bring a unique service or technology that Quanta can leverage to further differentiate our solutions offerings. Examples of that would be our recent acquisition of Utilimap. It's a distribution asset management company that can help -- we can leverage that with our distribution services to provide total solutions to our customers.

Also, Crux Subsurface is the micropile technology company. Micropile foundations are becoming the norm in environmentally sensitive areas or areas that are difficult to access. And Crux has a significant market share on those types of projects. We made that acquisition earlier this year.

We are also interested in acquiring companies that bring leadership position in a new end market, but in a market that has an overlap or is complementary to our existing operations. Price Gregory is a great example of that, where we did have some activities and large pipeline work. But when bought Price Gregory, it gave as instant leadership in the pipeline construction business. So those are just some examples of how we're going to grow strategically through acquisitions.

On my last slide, I'll talk about how strategic acquisitions have and will continue to play an important role in enhancing, diversifying and differentiating our business to grow the company. On this slide, I'm going to talk to provide some examples of different things we've done in each of our operating segments to leverage our leadership position in our existing markets and expanding the new markets.

Acquisition of several leading T&D contractors in Canada, we talked about that, and EPC Solar. These are areas that we leverage our existing operations to move upstream into EPC. We're also using -- in Canada, we're using some of our North American resources to enhance our Canadian operations.

Establish our presence for midstream gathering in the key shales, that's in June where we've actually talked about relocating some of our resources local to the shales, especially the ones, the shales with NGLs to help build out that infrastructure. We've acquired proprietary in-line technology, the pigging capability. It gives us -- now we're the only service contractor that has full-service capabilities in doing pipeline integrity work for customers. And the pigging is a very important aspect because it provides internal data of the pipeline integrity that we can analyze and provide the remediation, and they can do that with -- our customers can do that all with Quanta's -- within Quanta's capabilities.

And then development of micro-trenching, the Q-Trench technology and equipment. It's very difficult to perform trenching operations in urban areas or in areas that doesn't have the right of way in order to do the trenching and may interrupt traffic flow and so forth. But this micro-trench capability allows us to cut a smaller trench and install fiber and -- all in one swoop. It takes about 1/3 of the time and half or 1/3 of the disruption of traditional trenching operation. It is a very popular capability that we have, especially in the California markets and areas where they're trying to build out fiber in very dense urban areas.

One of the strategic initiatives is to expand internationally outside of the United States as well. We will be deliberate and cautious in our international expansion strategies. We have been working on this initiative for the better part of 3 years now. One thing you may not know is that over the last 14 years, we've performed projects all over the world. But now we're establishing our permanent presence in certain international markets.

There are significant infrastructure needs and development opportunities throughout the globe and many of these opportunities are in our core operations. Emerging markets in particular present very interesting opportunities.

We are evaluating countries with the following characteristics: countries that have abundant natural resources that require infrastructure to be built to harvest these resources; growing and emerging middle class that will drive increased energy consumption; countries that are politically stable and are friendly to the United States; and countries that have some sort of catalyst, whether it be a changing political environment or an event like the World Cup or Olympics that will drive significant infrastructure spending.

Again, we're being very cautious and deliberate in our evaluation and pursuit of international opportunities. But we believe strongly that to grow this company into the future, we need to begin to develop our international presence and capabilities today.

As I commented earlier, safety is a major focus for Quanta and its customers. The most important objective we have in this company is to continually improve safety and operational performance standards and results.

This requires my active leadership which cascades down to our front-line employees. As you can see from this chart, our total injury and illness rate and our total lost time injury rate, indicated by the red lines, are well below the industry averages indicated by the black line. These numbers represent the incidents that occur for every 200,000 man-hours. We will strive to continually improve these results.

To summarize, we're at the inflection point of the beginning of a multiyear growth cycle. Quanta is pursuing a major pronged -- a multipronged strategy to differentiate this company -- further differentiate this company from our specialty contractor and engineering and construction peers. We're also executing on a comprehensive strategy that will enable the company to grow significantly over the near term and long term. We look forward to the coming years and to sharing our success with all of our stakeholders.

I will be available to answer any questions you may have at the end of each industry segment. Now I'm going to turn the call -- the presentation over to Duke Austin, our electric segment President. But before Duke comes up, we're going to show a few slides of some of our men at work, men and women at work in the Electric Power segment. Thank you.

[Presentation]

Earl C. Austin

Thanks, Jim. Good morning, everyone. In this presentation, I'm going to talk to you about what we do in our Electric Power segment, the growth drivers and opportunity we are seeing for our business and some of the things we do to differentiate ourselves from the competition. Here is the agenda for what I'm going to discuss with you today.

As I go through my presentation, on our Electric Power segment, I hope that it will leave you with a few key takeaways. First, the electric grid in North America requires a significant amount of investment to improve reliability and meet future electricity demand. Second, transmission spending is increasing significantly. The transmission investment boom that we have been waiting for is here. Third, Quanta is the leading electric power infrastructure solution provider in North America, and we're well-positioned to meet our customers' needs. And finally, Quanta has a tremendous opportunity, and we're focused on safe execution.

We have turnkey capabilities in all areas of the electric grid from building renewable generating facilities on an EPC basis, turnkey solutions for interconnections to the grid for generating sources, EPC substation services, connecting to and building transmission lines up to 765 volts, building and maintaining distribution networks including smart grid initiatives, emergency restoration services and energized service solutions.

As you can see from the graph in the upper-right hand portion of the slide, our pricing discipline and solid execution has resulted in attractive and relatively stable operating margins. Our revenues have been impacted over the past couple of years due to the recession and a few project delays. But our electric segment grew significantly in 2011, and we expect continued growth in this segment this year.

The significant increase in electric transmission spending and our success in project awards is driving our Electric Power Business. And we estimate that transmission accounted for roughly 60% of our electric segment revenues in 2011.

The need to maintain and upgrade the electrical grid in North America has been building for decades due to underinvestment, growing electricity demand and changing needs. The electric grid that was built many decades ago was built to serve local areas. It was not built with redundancy or with interconnections to other grids in mind and is not well-equipped to port renewable energy, power or cheaper power from generating sources to other parts of the country. In addition, approximately 30% of the grid is beyond its useful life, and another 1/3 is rapidly approaching its useful life.

These issues are the foundation why grid investment is sorely needed. In addition, there are several additional dynamics that are driving investments in the transmission and distribution today. Some of the drivers in the transmission will be the NERC Act. In the distribution, you have your smart grid initiatives.

Transmission investment is increasing significantly and lines are getting larger and more complicated. The Energy Policy Act of 2005 was a major catalyst for what we are seeing today. Various industry sources transmit -- expect transmission spending to increase 2x to 3x historical spending levels for the next several years. We expect solid growth in transmission investment by our customers for at least the next 3 to 5 years.

The drivers of increased transmission spending in the U.S. are the same drivers of increased spending in Canada. There are also several factors unique to Canada that are driving transmission and distribution investments.

First, Canada generates a significant amount of electricity from hydro plants. These plants tend to be in the remote northern areas of the country and require long transmission lines to transport electricity down to load centers. Second, Canada is implementing initiatives to expand electrical infrastructure to remote mining areas and to the Canadian oil sands to facilitate development.

Building electrical infrastructure to these areas is more economically sensible, environmental-friendly than using diesel-powered generators to power these operations which many facilities are using today.

While historical and estimated T&D spending can sometimes be incomplete, we anticipate significant increases in T&D spending for several years in Canada, and we are experiencing strong growth today.

To put some of the expected increases in spending estimates into visual form, this map shows more than 260,000 miles of transmission lines in various stages of planning. As indicated by the yellow lines on the map, clearly, there is a lot of transmission work to do in North America.

While the investment community is very interested in the large transmission projects, it is important for you all to realize there's a lot more activity that is creating opportunity for Quanta. After almost 3 years of reduced distribution spending through the recession, distribution spending is gradually recovering. The market for smaller transmission project, that is projects less than $30 million, and construction value is also active and pricing has improved.

We estimate that our core everyday master-service-agreement-type work on transmission, distribution and substations grew about 15% in 2011. In addition, there are NERC reliability requirements that begin to be enforced later this year and into 2013 that is creating quite a bit of reliability-focused work.

Quanta is, without a doubt, a leader in providing energized services in North America and probably the world. Our Energized Services allows us to work on lines while they are fully energized. This is a key differentiator for Quanta because our customer does not have to take out their infrastructure out of service to do maintenance or upgrades or repairs.

Quanta is the only company with a patented LineMaster Robotic Arm. As you can see from the pictures on the right side of the slide, the arm is able to grab multiple transmission lines and manipulate the lines away from the structure or work area.

This capability enables us to perform repairs, replace infrastructure and also to re-conductor transmission infrastructure while the transmission lines remain in a fully energized state.

I mentioned a couple of slides ago that there are NERC reliability standards that are being enforced at the end of this year and into 2013.

As a result, utilities across the U.S. are moving to comply with these regulations and are investing in their grids' reliability.

Further, we believe that a significant amount of the upgrade, replacement and maintenance work to comply with the NERC requirements will need to be done while the lines are in an energized state.

In November last year, we announced the Quanta was selected by American Electric Power, or AEP, to rebuild or replace more than 900 miles of their existing transmission infrastructure in Oklahoma and Ohio for an aggregate value of more than $300 million. We will utilize our Energized Services to perform portions of this work.

We believe we are very well-positioned to provide solutions to our customers to comply with NERC standards and reliability requirements and believe our Energized Services capabilities provide a solution no other company can match.

Distribution services is a core part of our business. While it is often overshadowed by the transmission opportunities, we believe it provides attractive growth opportunities.

After being down as much as 50% from 2008 levels, the recession -- through the recession, our distribution business started to pick up in the later part of 2010 and continue through 2011. For the full year of 2011, we estimate that our distribution business increased about 10% versus 2010.

The low level of distribution spending over the past several years has resulted in increased reliability issues. Further, severe weather last year and early this year had damaged the distribution systems in various parts of the country which further impacts reliability. It is estimated there are 10x the miles of distribution lines in the U.S. as compared to the transmission lines, so there's a lot of work to be done over many years.

Smart grid initiatives, too, require modifications, upgrades and installations of equipment on a distribution system. Quanta has worked with a number of utilities to help them implement smart grid initiatives.

Further, we recently formed the intelligent infrastructure alliance with IBM and CenterPoint Energy. The alliance will work with utilities around the world to help them implement smart grid initiatives.

Substation development is a growing opportunity as well. Any new generating facility that is built like renewables or gas-fired plants require additional [ph] infrastructure. In addition, compressors and pumping stations for pipeline infrastructure require substations and electrical infrastructure to power the facilities.

Given the activity in the shale plays and oil sands that is driving development of pipeline infrastructure, that development is also creating demand for our substation services. Further, new transmission lines typically require new substations or upgrades to existing substations.

We are a leader in providing a wide array of substation solutions to utilities and provide these services on an à la carte basis or a complete turnkey solution.

Quanta is also a leader in providing EPC substation development solutions for our customers. EPC substation projects can range in the size from a few million dollars to up to $100 million in value.

As a result of a decade -- decades of safe execution and strong customer relationships, we have won more than our fair share of large transmission projects over the last 18 to 24 months. The aggregate estimated value of all these projects is approximately $3.1 billion. Three of the projects on the list finish in the middle of this year. However, at the same time, 4 of the projects on this list will be ramping into construction about the same time.

Most of the projects on the list go through 2013 and some go into 2015. So we have a nice basis -- base portfolio of large transmission projects, and we expect to add more projects to this list in 2012 and subsequent years. As a result, we have a good growth visibility in our electric power segment.

Quanta does not have capacity issues on our labor or equipment. Quanta is the preferred employer in the electric power industry. We pay the best wages, have the best equipment, have the best safety record and best reputation. As a result, we think we have the best workforce in the industry. And when you have as much work as we have, we have a large supply of labor that we can move from job to job. Those companies that are not as busy are finding it difficult to get labor needed to win and execute projects.

We have been investing in the specialty equipment required for transmission for years. We also have preferred relationships with all major equipment dealers and rental firms. As a result, we do not have any issues with equipment access.

Our labor and equipment resources is a significant differentiator for Quanta, given the tight market we're in today and expect for the next several years.

In summary, the electric grid in North America is in need of significant investment. We believe we are in the early stages of a multiyear increase in transmission and distribution investments by utilities across North America, in particular, investment in transmission infrastructure. Our scale, scope, unmatched resources, expertise and reputation position us well to capitalize on these opportunities.

Our leadership position and our ability to partner with our customers and sell our value has resulted in record level -- backlog levels. The industry drivers in place, we believe, our strategies for growth and meeting our customer needs are sound. We're focused on safely executing the work we have which will position us for further success.

Thank you, and I'm happy to take any questions you might have. Questions? Yes, sir?

Question-and-Answer Session

Unknown Attendee

The utilities' need or the utilities' desire to fill out transmission and distribution networks has been around for a long time. Their interest in spending has been around for a long time. They're actually putting dollars on the table. That's always somewhat uncertain. So as you look out and you say, "Well, utilities are going to start spending," how do you know that they really are? And can you calibrate at all what kind of levels you think you're going to see?

Earl C. Austin

Yes, I think I may not -- you can see our backlog growing. And so obviously, we've got work from utilities, and it's continuing to increase. We're with them every day. We've been tracking projects for many years that are coming to fruition. We continue to see major builds both in Canada, as well as the lower 48. So we're seeing the work, it's here.

James F. O'Neil

The Energy Policy Act of 2005 is driving a lot of this. And we have the first wave of projects come through. You've got additional projects that are well within our visibility right now. I mean, you look at what's going on in the Northeast and in the Midwest, there's significant programs that are in development that should move to construction this year and next. And also you have all of these renewables that are being built. There's 30 states with mandatory standards. They've got to interconnect that generation to load centers. That's what's driving our business. And now you have NERC standards that are coming up, that are more stringent. But like Duke said, it's in our backlog, you ask how do you know it's coming, it's here.

Unknown Attendee

But you say the same thing though about some of your gas pipeline projects that are in your backlog and you've been having troubles getting those out.

James F. O'Neil

Well, it's -- now that's 2 different things. Right now, we've got a record level of backlog in our electric business. There's more visibility. That business goes through 2016. The pipeline business is a very annual cyclical process. So we've got nice backlog build right now. We announced we had at least $450 million at the end of the year in our pipeline business. We've booked additional $200 million, so we've got about $650 million in backlog in our pipeline business at this point in the year. That's a very good result for early in the season. We expect to have more awards by the time we announce in May our first quarter results, which should kind of give us a nice snapshot of where we are for the year. But the pipeline business is very cyclical and annual in nature, that was the point of my slide on the bidding season. Each year starts in the fourth quarter, goes through May. And they're only going to -- you're only going to build backlog for that year. Keystone's an anomaly. That project may take 18 months or 2 years to build. That will be a project that you'll have a couple of years of backlog, but that's an anomaly. Most of this work is very annual in nature -- not on the transmission side. Jamie?

Jamie L. Cook - Crédit Suisse AG, Research Division

Few questions. Jim, [indiscernible] the gas business getting into shale gathering [indiscernible] cyclicality of revenue over time. Can you talk about what you think that means to margins over time, sort of how we think about normalized margins or peak trough margins? And then, Duke, to the Electric Power side, you talked about $3.1 billion in awards that you guys have -- that you booked. If we're looking at over the next years, what's the bidding opportunity for you? I mean, take out -- is it greater than $3.1 billion on the Electric Power side?

James F. O'Neil

Well, I'll take the Electric Power first. We're saying that backlog is going to remain strong in our transmission, our Electric segment, okay? It's a very -- we could get 2 awards in the second quarter and none in the third. I -- we hesitate saying that we're going to build backlog quarter after quarter, because the minute we don't get a project in the quarter and backlog might be slightly down, people are going to say, "Oh, the business is going away." But backlog in our electric segment will remain strong. I believe that it should grow over time, okay, with what we're seeing out there.

Jamie L. Cook - Crédit Suisse AG, Research Division

But do you have a dollar amount of what your bidding? I don't care about the second -- I don't care about the quarters.

James F. O'Neil

There's at least $1 billion out there right now that we're looking at right now, that will come to move to construction this year.

Jamie L. Cook - Crédit Suisse AG, Research Division

Okay, so for 2012?

James F. O'Neil

Yes, right now, okay? And there's more to come. But I can tell you that we're looking at over $1 billion right now.

Jamie L. Cook - Crédit Suisse AG, Research Division

What would that number have been last year?

James F. O'Neil

About -- I don't know. I mean, it's all, again, the cyclical nature. I mean, we didn't book some of the CREZ work that was done in -- I would say it's probably comparable.

Jamie L. Cook - Crédit Suisse AG, Research Division

Comparable? Okay. And then back to the gas margins?

James F. O'Neil

For the gas margins, we're seeing margins in the shale work that is very consistent with what we would see on large diameter pipe. But you've got to be careful, the seasonality aspect of it. We're trying to build pipeline in a difficult period from a weather standpoint right now. And that's the seasonality -- and it's seasonally low as well. Your pipeline business is going to be seasonally low in the first quarter. So we really get momentum in the second and third quarter. But over a year period, the margins in that sector should be in the same range as the Electric Power and Telecom segment, the 9% to 12% operating income.

Kip A. Rupp

Next?

Unknown Attendee

You said you're at capacity right now [indiscernible] in the Telecom or transmission business and Electric Power. What gives you the confidence that you have the capacity to take on all the work that you see in that markets, particularly looking at a multiyear growth base with the industry capacity. Is that a competitive advantage for you guys versus other contractors in the industry?

Earl C. Austin

Yes. I mean, we've been investing in this, for this build for several years getting ready for this. We've trained a lot of people. We bought great companies over the years that have very deep bench strengths. And so we're not near capacity at this point. We have plenty of resources. We've developed good relationships with our suppliers. We've got build dates, build slots on larger transmission equipment. We think we're well positioned for the growth. And we've been planning for this and it's here and we're ready for it.

Unknown Attendee

Is there a point, though, where you guys are maybe more maxed out and other guys that haven't won as much work as you have are better positioned to take advantage of future jobs? Or is that not the right way to think about it [indiscernible]?

Earl C. Austin

No, that's -- no. We're in good shape. We're -- we think we're well positioned to be a leader on a go-forward basis as well as today. I don't see us at that capacity whatsoever.

James F. O'Neil

There's a misunderstanding that, when people may not have won their level of awards, that they've got bench strength sitting there going to work. And the industry in general -- I mean, we have a significant amount of our resources accounted today on projects because we're busy, okay? People are going to go to work where people have work. So if someone doesn't have a lot of activity going on right now, that doesn't mean they've got capacity to go catch those projects if they were to win a job. So it's people have that misunderstanding that, if there's a contract that has no work going on, that they've got hundreds of people sitting there, right, and they go to work on the job. That's not the case, that's not the case. But Duke talked about moving off 3 projects and going on to 4. I mean, having that bandwidth, that scope and scale, is misunderstood. When you're working with that many people and that much equipment, you're able to move equipment and people around more effectively than if you only have one job going on and you are trying to move to 3 projects.

Unknown Attendee

So not an issue today, nor is it going to be an issue.

James F. O'Neil

Not an issue today. It is not going to be an issue, going forward, not for us.

Unknown Attendee

Two questions on margins. I think, on Page 2 of your presentation, you've got remarkably stable operating margins in that high-10s range. But you increased sales dramatically, I mean, almost by 1/3 in 2011. Is there some reason you weren't able to leverage all that equipment and get better margins with that increased -- is there something, I guess, embedded in the model that doesn't allow you to get better margins despite that much of an increase in sales?

James F. O'Neil

We did better. In the third and fourth quarter, the margins were significantly better in that segment. So you are looking at a full year number, and the first year -- first half year is when we had some challenges. So I think we did 13.4%-or-something operating income in the fourth quarter in the electric segment.

Unknown Attendee

Would that be a more normalized margin and, I guess, carrying on to that? Because you did show that margins for gas -- or for the pipeline business, and they are running at about 8%. But in the past, based on a pro forma basis, you were up around 14%. Would that -- as we think about you, as you leverage or as you create revenues in that segment, can you get back to that 14% operating margin on a sustainable basis?

James F. O'Neil

Are you talking about pipeline there?

Unknown Attendee

Pipeline, yes.

James F. O'Neil

Well, 2008 and 2009 were exceptional years in the pipeline business so we should do much better than what we're doing today. And we're at -- the point I was trying to make was that was exceptional years. In a normal year, we should be able to make margins that are consistent with what we're doing in telecom and electric, which is 9% to 12% operating income. We should have better-than-normal years, going forward, because of all the activity in the shales and in Canada.

Kip A. Rupp

Tahira?

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

I've got 2 questions: One for Jim, one for Duke. So Jim, we've got a lot of E&C companies which have a nice problem, a lot of cash on the balance sheet. A lot of them have started indicating they're taking more equity stakes in projects. Could you talk about what your strategy is going to be in regards to taking equity stakes in projects, how that impacts your competitive standing on projects and how that changes the scope of the backlog and margins or particular projects?

James F. O'Neil

Well, any investment that we make, and if we were to make an investment in the transmission infrastructure, it would be because we're trying to build construction backlog. We would take an equity stake if our customers wanted us to participate, to align maybe to the interest of -- I mean, I see our market moving more towards EPC. We're seeing some of those trends today in the U.S. Some of that will require maybe the contractor taking an equity stake to have more alignment between the asset owner and the contractor. We're willing to take a small position if that helps us to get that alignment. Our margin profile should be where it is today, if not better. So -- but we're prepared to use our balance sheet that way if that's the direction our customers want us to move, and it'll be a customer-driven initiative. For the quarter [ph], 1,000 is probably -- we're going to present some opportunities for asset ownership investment potentially, going forward.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

And the second question is for Duke. Actually, looking at 2008 to 2012, clearly, you've seen some large transmissions projects moving forward for everyone, but we've seen -- probably seen one getting pushed out, Bosque, for example, being an example, Susquehanna being another. So as you look forward over the next 5 years, would you say the addressable market could be relatively much larger? You are still seeing reliability projects, you're still seeing renewables-oriented projects. You have yet to see distribution come into play with the residential market hopefully picking up. And then you have potentially a replacement cycle on the generation side and that might benefit you from the substation side. So would it be fair to say, over a 3- to 5-year period, the market could be much larger? Or have you kind of seen such a strong set of activity on the renewables side, but it will be difficult?

Earl C. Austin

Yes, I think, from a standpoint, it's -- some of it is about geographic areas where the growth centers occur. I mean, CREZ is the lower-labor market and there's -- although there's a lot of models that cause to build a model line, it's not as great as it could be in the east or the west or Canada. So I -- if it goes on an EPC basis or not, but to answer your question, I think it's difficult to look out 5 years. But I think we're in the early stages of a 3- to 5-year growth cycle. That's really nice, and I think we can grow the business year-over-year.

James F. O'Neil

Bill?

William D. Bremer - Maxim Group LLC, Research Division

Yes. Given the seasonally light winter that we currently experience, can you give us an update on your execution, primarily on electric and pipeline?

Earl C. Austin

Yes. I mean, I -- in some places, that's real good, in some places, it's not so good. So when you -- where you needed some freeze in places, it's not freezing. And then but it offsets on the elec, so the gas side, you may need it to freeze. And on the electric side, it's good if it doesn't. So one offsets the other. But for the most part, I think we're able to execute through the winter real nicely on our businesses. I mean, we've seen some abnormal weather here and there, but we've taken that into account in our bidding process so far. Alex?

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Duke, can you discuss the growth rates in Canada versus the United States? [indiscernible] transmission [indiscernible]?

Earl C. Austin

Yes, Alex, I'll try. I'm not sure -- I can just tell you that Canada is better than the U.S. as far as what I see on the horizon. I think there is more growth as far as where it is today versus where it's going. Obviously, it's a smaller geographic area. It will -- I mean, not geographically, but as far as a base, it's not as large. But it's growing rapidly and there's some big transmission in gas both on the gas and the electric side and a lot of opportunity in Canada. We're extremely excited about Canada. We think we have a real good platform there to grow.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

And remind us what the competitive market is up in Canada. How many competitors [indiscernible]?

Earl C. Austin

We're -- I try not to look at it too much. We try to be disciplined on what we're doing and focus on ourselves. It's a nice market that we're doing very well in and able to attain our margin profile up there fairly nicely.

Unknown Analyst

[indiscernible] -- sorry. Thanks. You touched on the emerging market opportunity earlier in the presentation. Can you talk about your approach there? We were just in Brazil a few weeks ago. And given the World Cup coming in 2014 and the Olympics -- we met with the electricity regulators and their -- they foresee a huge, a pretty large-sized infrastructure build in the country. Can you talk about what your approach is to some of these emerging markets? How you -- do you have an office in terms of these markets already? Are you working with local parties there? How should we think about that? And how should we think about the margins, the margin profiles of some of these emerging markets versus the U.S.?

James F. O'Neil

Yes. I mean, Brazil is really not a target for us right now, but I would say the Middle East is. Qatar is an area of growth that is going to host the World Cup, I believe, going forward. We've got Australia. It's going to be the -- I mean, obviously, it surpassed Qatar as the world's leading exporter of LNG to Southeast Asia. There's tremendous pipeline infrastructure that needs to be built, and there's significant electric infrastructure that needs to be upgraded too. They're in a very similar situation that we're here in the States. It's probably worse. And they're desperately in need of upgrading that infrastructure. We made an acquisition in Australia. We spent a lot of time doing due diligence in that market, found a small company just to establish a presence. We can build not only our pipeline business through that entity, but perhaps even our electric and telecom capabilities as well. We like Australia. We think it's a good opportunity. South Africa, we've been there. We were there for the World Cup as well to reenergize or to do energize upgrades with their existing transmission system. And we've been there 3 years under a contract -- several contracts that we have. We are working with a local partner. Again, we continue to be deliberate and explore ways how do we expand that footprint in South Africa and do it in a way that it will bring increased revenues and margins while understanding the risk of what we're getting into in that area. India, we're in India, doing solar work right now. We're going to work on -- I think we're going to probably generate revenues there this year, also some solar projects in Gujarat. We've been there for quite some time, probably over close to 2 years, trying to establish ourselves there and see where we could participate, where we could compete profitably. We're doing that with our technology group, with our Energized Services group and with our EPC experience and capabilities in renewables. The margin profile we should make there obviously should be higher, as high or a little bit higher than what we do in our transmission segment today. It should be in that 18% to 20%, even north of that, because after you repatriate that money, it needs to be at margins that are acceptable to the shareholders and for the risks that you're taking. But we're going to continue to be deliberate. I mean, I don't think -- our international revenues outside of Canada aren't even worth discussing today. It's probably $15 million, $20 million, $30 million. But we expect to build on that, and then 8 to 10 years or so, it could be something very meaningful. And it needs to be.

Earl C. Austin

I mean, one -- let me answer one thing. One of the things that we're trying to do is take our Energized Services' capabilities in the emerging markets, such as Latin America. I think they can't take their lines out. They have real issues there. It's a technology that we've developed. We have -- we spent a lot of money on R&D. It's a lead-in for us to do -- to other works. So we're really excited about the opportunities in Latin America and many other places to take our Energized Services capabilities into those countries and then maybe we develop different lines of business off that. But it's definitely our Energized Services' capabilities on the electric side as the entry into different markets such as Latin America, Brazil, wherever it may be.

James F. O'Neil

Our Energized Services technology and capability is sought after throughout the world. I mean, it is truly a differentiator. We don't compete in that area. And it's us evaluating whether we want to go in that country under those laws in that environment to do the work or not. So again, we're being pretty deliberate of about where we work. Yes, Jamie? Sorry.

Jamie L. Cook - Crédit Suisse AG, Research Division

Can you just talk about your expectations for -- Tahira sort of asked about acquisitions or -- no she actually asked about equity and projects. But I guess, on a competitive landscape, just given some of these large projects that are coming forward and you look at your competitive landscape out there, there's a lot of small players, I mean, do you see the potential for some of the smaller players for -- that are actually merging so you have, I guess, more confident competitive base -- not bigger. You know what I mean, a more realistic competitive base than what you're looking at today just based on what you see in the industry. Or the larger guys getting in, like, the floors. Would that -- you were asked and we talked about being a player and power, which...

James F. O'Neil

We need to be aware of all those dynamics, but we really don't let that distract us on our focus right now. I mean, if E&C moves into this space, for instance, they're going to compete really with the Burns and max [ph] of the power engineers. They're going to be an owner's agent performing those duties. We're the ones that have the performance capabilities. So whoever moves in this space is going to need the performance capabilities that we have and some of our peer group has. As far as our peers merging and form a larger company, I don't know. I mean, I guess, we need to stay tuned to what's going on in that area, but it's not a focus of ours right now. Our focus is to safely execute the work with our customers today. We've done real well through this downturn of winning all the jobs that we expected to win and plus more. We're real happy with our competitive position today, and it's about executing today. And we feel real good about winning future projects as well. Yes, sir?

Unknown Attendee

The question is on Energized Services. Can you just size that opportunity, how much of that was your business in 2011? And where could that be in, say, 2 to 3 years?

Earl C. Austin

Well, I -- we don't keep track of it specifically in that manner, but I'll tell you that we do a significant amount of energized work across North America. And it continues to grow and be a leading -- a lead-in to many other countries. I think our technology on the transmission, able to -- we're able to reconductor on an energized state. And that ability alone, I think, we can grow that market exponentially from where it's at today, which is we don't do much of that. [indiscernible] many years ago is probably the last one we've done on a reconductor. So I think, on the transmission side, the reconductoring of large transmission on an energized state will be a catalyst for our growth across the world.

James F. O'Neil

And their expanders are going to drive, like Duke said in his presentation, that's going to drive a significant amount of energized upgrades. But they can't take the line out of service. They can't interrupt that service. So it should be a big opportunity for us, going forward. Bill?

William D. Bremer - Maxim Group LLC, Research Division

Could you update on [indiscernible] pipeline [indiscernible]

Earl C. Austin

Yes, we're going to talk about pipeline here in a minute and have some slides on it. It's a big market. I hate to say where it could go. It's real nice. We're doing a real nice business in the integrity pipeline market and we'll continue to grow it. I don't know the exact...

William D. Bremer - Maxim Group LLC, Research Division

Can you give us a range of in terms of the operating margins that accompany that type of inspection?

Earl C. Austin

It's our normal margin profile, double digits. Jeff?

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

The margin differential between transmission and distribution, what is it, then, historically? What is it now? What do you think it'll be in the next 2 or 3 years?

James F. O'Neil

It's about 400 basis points and you're not going to see that very much. And it's driven by the type of contracts. That's why there's a difference, because transmission projects are fixed-price contracts where you take in risks and you're pricing that risk into your job so that, if you can successfully negotiate through those risks, you'll deliver higher margins to the bottom line. Most of your distribution work is cost plus and that just commands a lower margin. So there's about a 400 basis points different at the gross margin line. Yes?

Unknown Analyst

There's been a lot of talk between utilities and utility commissioners about FERC 1000. So I wanted to see, on your side, what you guys are seeing with how FERC 1000 could impact the business going forward in the near term to long term?

James F. O'Neil

I mean, I think it's too early to tell. I see some of our existing customers and new players positioning right now, but it's just way too early to tell how it's going to affect us. I think it's going to be a net-net positive, I just don't know how much right now. But it should drive significant or additional -- hopefully, significant additional transmission construction in the next -- in the foreseeable future, but it's not going to be this year or next year. It will probably be something out several years, which will be nice because that will just continue this 3- to 5-year growth cycle that Duke talked about. But it's too early to tell.

Earl C. Austin

Yes, I mean, it's really early. We're seeing some people kind of get in there. But I don't think you'll see a concession market that you do in other parts of the world. I think it's -- you'll have some regional structure, like you do today. I don't think it will go into this concession market. I mean, it's in my opinion only.

Unknown Attendee

Jim, can you tell if you're foreseeing increase in fixed-price contracts based on your business overall? And [indiscernible]

James F. O'Neil

The question was...

Unknown Attendee

Fixed price [indiscernible] to the total costs is growing. And what's your [indiscernible] fixed price?

James F. O'Neil

Yes, I mean, a fixed price increase in our business going from about 1/3 of our overall contract mix to 40% of our mix is largely driven by the amount of electric transmission awards that we've received over the last year. That was -- were all fixed price, mostly all fixed-price contracts with the exception of Northeast Utilities where we've got -- we've announced there. There are some customers we have strategic alliances with. They're not fixed price but most of those projects that Duke showed, I would say, at least 10 of them, are fixed-price contracts.

Unknown Attendee

Is the [indiscernible]shale related work with the pipeline business cost plus or is that fixed?

James F. O'Neil

It's fixed. Fixed price.

Earl C. Austin

And then market moves. I mean, as demand goes one way or the other, you can see the markets move from fixed to, on some, to back, and then it moves. It varies on the market.

Kip A. Rupp

Okay. Anything else?

James F. O'Neil

Yes, sir?

Unknown Attendee

You've mentioned that the transmission work is about $3 billion...

Kip A. Rupp

I can't hear you.

James F. O'Neil

Could you talk here to the mic, please?

Unknown Attendee

You've mentioned that, the transmission work, it's about $3.1 billion in aggregate value. What's the distribution work? How much is that in terms of backlog or are you couching it together?

Earl C. Austin

I think what we said was that we've booked about $3.1 billion of value. I mean, that's about 60% of our current revenue stream, and I think you can look at it that way. I mean, I...

James F. O'Neil

Transmission, generally, is a -- I mean, distribution is about 30% to 35% of our overall segment revenues for the year.

Earl C. Austin

On our distribution side, we have a lot of MSAs, MSA type of work. That's continuing in nature. It has been for many, many years so...

James F. O'Neil

We have [ph] as well. As far as backlog, you've got -- we've got multiyear distribution contracts, so there's probably a significant amount of backlog. I mean, there's CenterPoint, Puget Sound, those are all 5-year-type agreements. And so you've got significant backlog in not only 12 month but in beyond 12 month for distribution. But we don't measure it to that segment, we just look at it as total electric backlog.

Kip A. Rupp

Okay. Thank you. We're moving on to a break. No?

James F. O'Neil

Ken's coming up. But first, before Ken comes up, we're going to show a slide -- or video or picture show of some of the telecom men and women at work. And then Ken will be up in a minute or 2 to start the telecom presentation.

[Presentation]

Kenneth W. Trawick

Good morning. Thanks, Duke and Jim. In this presentation, I'm going to talk and we'll focus for a few minutes on Quanta Power Generation. Here's the agenda for what we'll discuss over the next few minutes. And once I'm finished with the formal remarks, we'll have the Q&A period to follow.

Here are some key takeaway points that I hope to leave you with. First, that Quanta Power Generation is well positioned to capitalize on EPC opportunities in the renewables and the fossil fuel generation industries. Second, that our capability to leverage our leading construction capabilities to self-performed constructions on EPC projects is a differentiator for us. And third, Quanta's financial strength enables us to selectively utilize our balance sheet to financially support projects that generate construction backlog for Quanta. And finally, that the growth in our EPC Power Generation business should provide revenue and growth diversity with exposure to attractive end markets and good margins.

We previously called this operation our Quanta renewable energy services and you've probably heard us talk about that. We're expanding this operation's target markets to include additional renewable and fossil generation markets. And we've rebranded this division Quanta Power Generation. QPG is obviously a part of our electric operating segment.

It's a leading power generation contractor that leverages Quanta's strength as a specialty contractor, a leading specialty contractor to provide EPC solutions to renewable and fossil fuel generation industries.

Quanta entered the solar EPC space several years ago, and since then the company has accomplished about 240 megawatts of projects around the country. Over the years, Quanta has completed various projects and performed a range of work on a number of gas turbine projects in the Lower 48 as well as in Alaska. Quanta's financial strength, reputation and track record gives our current and potential customers confidence in our ability to facilitate their current project goals. And we bring unique solutions to the table that many of our competitors do not bring.

There are several dynamics that are driving the development of renewable-generating plants. First, there's some 30 states in the United States that have renewable portfolio standards. They have put these in place and they require renewable-generating sources to be built to meet those requirements. Today, the states have some of the -- that have some of the most aggressive strategies in place are the ones with the richest solar resources.

Prices for solar panels and other favorable cost dynamics continue to push the cost of renewable energy down towards parity with fossil fuel generation. And the general public has a favorable view of renewable energy and would like to see it to be a larger part of our energy mix.

Quanta entered the EPC solar market organically several years ago. Without the other -- we were the company best positioned to bring down the balance of system costs for utility-scale solar installations. Most of the solar industry's focus has been on bringing down technology or panel prices. So Quanta, we chose to focus on the balance of system -- cost of balance of system because we understood that, unless that part of the total cost came down as well, we wouldn't have a future in the solar business.

Our ability is to self-perform all of the construction aspects of a solar installation. It enables us to keep costs low and avoid double mark-ups. And we have developed best practices and proprietary methods that help us get more efficient with each project that we perform.

We are also technology agnostic so that we can provide an objective recommendation to our customers for the technology that we believe is best suited for their project, and each project is different and has a best solution from a technology perspective.

And because of Quanta's financial strengths, we are able to selectively provide project financing solutions to our customers to help get projects going, which is an important differentiator for us as well and will drive construction backlog for Quanta.

We continue to focus on EPC solar in the renewable space, but we're also pursuing biomass and geothermal opportunities.

The key point on this slide is that QPG offers a complete comprehensive end-to-end solution for solar plants that encompass the facility's entire life cycle. We can provide project development support on the front end to help developers with the critical aspects of ensuring the success of the project.

The core part of our solution are the engineering, procurement and construction capabilities that we provide. I've mentioned in an earlier slide that we're technology agnostic. We found this is important to our customers. Since we don't have our own technology to promote, we can provide an unbiased recommendation on the best technology to optimize a particular project's success.

On the construction side, I'll talk about the benefits because we bring the self-perform capabilities. The other benefit of being able to self-perform is where we have the ability to share the best practices that we develop on a project across our labor force. Ingraining those methodologies in our workforce enables us to continue to execute and get better with every project and continue to drive costs out of the execution model.

If you're dealing with subcontractors, you're probably using different companies on each job, which is like starting from scratch from a training and quality perspective with every new project. The operations and maintenance piece is not a big part of the equation today, but we think the operations and maintenance will gain more importance over time as these generation facilities age. And we're currently, with, in some of our projects that we're the EPC contractor and we're doing it, providing the construction services, we're also signing up for the operations and maintenance follow-on work.

We have the capabilities to operate and maintain these facilities after we build them, so we truly do offer a total renewable generation solution.

This slide shows the EPC solar projects that we've been involved with over the last 4 years. And this project resumé indicates that QPG is one of the largest utility-scale EPC contractors in the industry. You will notice on this slide that, in Southern California, that there's a project labeled confidential. I can announce today that QPG has been selected by GCL Solar Energy to provide the comprehensive EPC services for 2 photovoltaic facilities totaling 70 megawatts. This project is located near the city of Alpaugh in Tulare County, California. Preconstruction activities began in February, and the project will be completed by year end. When this facility is completed, it will be one of the largest photovoltaic facilities in the world.

We're well positioned for EPC renewable generation opportunities, but there are challenges out there and we have strategies in place to address them. As you know, the continuation of various federal subsidies and incentives that have been in place to encourage renewable generation development is uncertain, going forward. This is caused and could continue to cause some dislocation in the marketplace and lumpiness on project timing.

We believe the ultimate driver of renewable generation development over time are the Renewable Portfolio Standards. We've not seen any states back away from these standards. In fact, we have seen a few states strengthen them or accelerate their timeline to achieve their goals. As a result of these standards, we believe renewable generation will continue to be built. And our strategy is to focus on the larger utility-scale solar projects, which are key for the utilities to meet their RPS standards.

There have been issues recently with respect to solar panel supply and pricing and the potential for a tariff on Chinese panels. That's -- and this has impacted the financing ability of some projects with the oversupply of solar modules and low price concerned about the long-term viability of some of the panel manufacturers. These are dynamic issues that obviously we can't control. Our strategy is to focus on working with those panel manufacturers that are financially strong and have the balance sheet to withstand the storm. And we think these companies are best suited to have the confidence of developers as well as our confidence and the financing community as well.

New entrants and low-cost competitors is a challenge in all parts of Quantas' business and something that we deal with obviously every day. The ability to selectively use our balance sheet is a differentiator from us, as we've mentioned. Our ability to self-perform is a differentiator. And we need to be price competitive. But we also need to be successful in selling to our customers that added value that being a partner with Quanta Services brings.

To provide a little more detail on our target markets, our existing target markets are utility scale solars, so as we mentioned, simple-cycle gas turbine, reciprocating engine and small combined-cycle generating plants. The last 3 target markets I mentioned are newer initiatives for Quanta that we are pursuing, so those end markets are not a meaningful revenue contributor at this time.

Quanta has attractive opportunities in these existing target markets. And we're also, as I mentioned, exploring markets, emerging markets such as biodiesel, biomass, geothermal, waste-to-energy and other technologies. These end markets offer attractive growth opportunities and, again, an opportunity to diversify our revenue base.

Across these end markets today, the largest EPC contract that we would probably pursue measured in megawatts would be probably in the 350-megawatt range, 300 to 350 megawatts. The cost of a project of that size is going to be dependent on the location and which technology it is, but you'd be probably be looking at something in the neighborhood of $400 million to $500 million.

In conclusion, we believe QPG is an attractive and -- oh, is involved in attractive end markets and, we see, particularly offers nice opportunities in solar and natural gas generation facilities. Our success and track record in EPC solar positions us well to expand into these new EPC markets. For non-solar EPC, our niche market focus, coupled with our self-performed, again, capabilities and selective use of our balance sheet, are competitive differentiators for us. That should continue to drive backlog.

As we grow and expand QPG's operations, it will provide business diversity with attractive growth and margin characteristics that will further enhance Quanta's infrastructure solutions offerings to our customer base.

With that, I'm happy to answer any questions, along with Jim, that you might have. Yes?

Unknown Attendee

Ken, [indiscernible] about Quantas [indiscernible] simple-cycle [indiscernible]. You have a long history at Quantas [indiscernible] contracts [indiscernible]

James F. O'Neil

I'll start with that and then you can help. Yes, we are -- Price Gregory operating unit has built some gas plants. IMG electric operating unit has built some plants up. I'm thinking that, and the answer to the last part of your question is we see a really nice opportunity in the small gas turbine market that we intend to focus on and capitalize on. And we're -- I don't think, at least at this point in time, we want to get distracted by a really large gas plant or combined-cycle plant. Jim...

James F. O'Neil

Yes. I mean, we built -- we've organically grown our solar business. We've built up our EPC capabilities there. As Ken mentioned, we have operating units that have experience in building gas plants throughout the U.S. And this is just a natural extension of that because we've got -- again, this is scope and scale of our organization. It's a natural. It's our ability to launch into new markets and do that comfortably because we have that capability and skill set in-house. But like Ken said, we're not going to take on these megaprojects. These are going to be the smaller projects that are primarily for renewable intermittency that we see a tremendous market opportunity in those -- in that size of gas plant market.

Kenneth W. Trawick

To an extent, it's more of a rebranding and a focus and making it a priority because what we see is opportunities coming out in the near future in the gas space. So it's more like a rebranding.

Unknown Attendee

Can you frame out for us maybe a little bit better what you want to accomplish there as far as work volume? Obviously, I think pretty much everyone in this audience will be in agreement that we're going into a golden age of gas, but there could be a very significant opportunity there. And with -- any metrics that you can share on a number of projects or backlog, what sort of opportunity you'd like to capitalize and how you'd like to slice and dice that?

James F. O'Neil

I think the revenue ramp is going to be very similar to what you've seen our solar business do over the last few years. So I mean, obviously, if we can land 1 or 2 projects -- and we're looking at several. We're looking at several opportunities right now, but it is a competitive market. So we are -- if we can get 1 or 2 projects under our belt this year, that would be a home run, and then we can build from there. There's going to be something that'll ramp slowly as we build capability. There's no rush to try to make it a $500 million piece of our business this year. We're going to ease our way into it and grow the capability as we win more. But we do think it's a huge market and there's tremendous opportunity in the marketplace, going forward.

Kenneth W. Trawick

And we have the capabilities in-house. Again, it's self-perform.

Kip A. Rupp

Adam?

Unknown Attendee

What's the value of the 70-megawatt contract you're announcing this morning?

Kenneth W. Trawick

I'd say between $120 million and $140 million.

James F. O'Neil

Yes, sir?

Unknown Attendee

Can you talk about [indiscernible] you've announced. You see, if you could give us a little bit of [indiscernible] the project [indiscernible] hurdles are in the projects [indiscernible].

[Technical Difficulty]

James F. O'Neil

Can you repeat that? The mic didn't work. I'm having a hard time hearing.

Unknown Attendee

Okay. I was just wondering if you could talk about, when you mentioned selective use of the balance sheet on projects, what are the types of projects you'd look at potentially doing that? And what is the process that you go through in determining a situation that warrants that type of a capital allocation?

James F. O'Neil

Well, right now, we're looking at renewables, pipeline and pipeline of big areas of opportunity today. Going forward, that could change, maybe more transmission, electric transmission opportunities because of some of the reasons we mentioned. Obviously, if we're going to put any type of capital up through our Quanta capital group, it's going to be to try to build backlog. Our typical rule of thumb is we won't put any more than margins at risk. And certainly, we're not going to take very much development risk. I mean, it's going to be a secured either subdebt or financing to where we're very clear that, that capital is not going to be at risk other than through our construction. I mean, construction is the biggest risk in these projects. And a lot of time, we put capital forward because, in this economy, a lot of our customers are having a hard time, especially as these developers, are having a hard time getting financing because the banks were skittish about construction risk. But if someone like Quanta puts a little skin in the game and puts some capital up in the way of working capital, then the project is able to get financing. So but the returns that we look at, I mean, obviously they need to be acceptable to our shareholders. That could vary, depending upon what type of construction margins we're getting and so forth. But certainly, it will be that market rate are somewhat below market, just slightly below market in order to give a competitive advantage if we can make it up on the margin side on the construction revenue. So that's a more difficult question because every deal is different, but we will use our balance sheet if we can drive construction backlog.

Kenneth W. Trawick

Yes, ma'am?

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

I -- just a follow-up on that question, Jim, and this is a hypothetical. If you were to look at that $3 billion of work you booked on transmission projects -- and I know a lot of those don't qualify for taking equity stakes given their profile, but if you were to hypothetically assume that you've taken a certain amount of an equity stake, what would the potential scope of that $3 billion be in terms of what you can recognize as backlog?

James F. O'Neil

Well, I mean, the -- and again, James is probably should be up here, but just a basic rule of thumb is, if you make a 10% investment on the value of a project, then you can recognize 90% of the construction value in the backlog. So I mean, that's just a basic rule.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

And right now, you booked something like 20%, 30% typically or, let's say, a $200 million to $300 million project? Right now, your scope would be 20% to 30%, maybe 50%, so that 50%...

James F. O'Neil

Which project are you talking about?

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Just generally electric transmission projects.

James F. O'Neil

Would it be what? I can't -- I don't understand.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

I guess I'm trying to see where your scope would go potentially?

James F. O'Neil

Where we grow? It's...

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

the scope, the scope, sir. Right now, on a traditional transmission project, what's this if you took an equity stake?

James F. O'Neil

Well, the scope -- typically, if we're going to take equity stakes, stakes will probably be an EPC type of role. And there are some EPC projects that are -- PacifiCorp has a few. SCANA has done a few EPC projects. There's other customers moving toward EPC in the U.S. I would think, if we took an equity stake, it could be in an EPC role to where we would take on more the engineering -- or partner with an engineering firm that we have a good relationship with. And -- but we could also take an equity stake in a construction role as well so -- which our scope wouldn't change. So it just depends upon the circumstance. But we're not looking at any equity position in electric transmission right now in the market as it is today. Any more questions for Ken on renewables? We will have a general Q&A session after we finish all of the presentation. So if there's anything that's not specific to the topic that we're presenting, we could perhaps move it to the end, that would be more efficient.

Kenneth W. Trawick

Thank you.

James F. O'Neil

We're going to take a 15-minute break now, and then we'll resume here in 15 minutes. Thank you.

[Break]

Earl C. Austin

Yes, the pictures are great. We see it every day. It amazes me, it gets my blood going a little bit just to see them. It's, yes, 17,000-plus employees out there doing this work. And it's amazing to see what they can do, on these slides. It just makes your blood boil a little bit.

Anyways, in this presentation, I'm going to talk a little bit about our natural gas business, the growth drivers and opportunities we are seeing in our core business and some of the things we do to differentiate ourselves from the competition.

Here's the agenda of what I'm going to discuss today.

Here's a few key takeaways that I hope you come away with regarding our natural gas and pipeline business.

North America is in the early stages of a very dynamic energy development due to the advent of unconventional shale plays and the Canadian Oil sands. These resources are game changers for the North America's ability to meet future energy needs, but a significant amount of infrastructure will need to be developed to harvest these resources. Our leadership position in this space and comprehensive service offering positions us well to capitalize on both near-term and long-term infrastructure opportunities.

There are some unique characteristics to our long-haul pipeline business that I hope to help you understand. The long haul pipeline business is a good business. We think it provides good opportunity for earnings and cash flow over time.

And finally, we are implementing strategies in pursuing business opportunities to have attractive growth profiles that we believe will also provide diversity to our natural gas and pipeline segment.

We believe we offer the most comprehensive pipeline infrastructure service solutions in North America. Our services include gas and oil pipeline construction and facility services, natural gas distribution services and other services which include pipeline integrity, horizontal directional drilling services. The largest portion of the segment's revenues comes from natural gas and oil pipeline construction activities. Since the end of 2011 year, we have booked $200 million of additional awards. While it is relatively early in the year, we are encouraged by what we are seeing so far. We expect 2012 to be a better year for this segment as compared to 2011.

The unconventional shales in the U.S. are a game changer. Our domestic supply of natural gas has more than tripled to over 100 years at today's usage rates. We believe lower natural gas prices bode well for increased demand over time and will continue to encourage pipeline development as natural gas becomes a larger part of energy consumption.

Shales that have a liquid component in them, such as oil or NGLs, are particularly active given the price of those products, which makes shale development economics more attractive. The Bakken, Eagle Ford and Marcellus shales in particular are wet shales and are very active.

Given the location of the new shale formations and the lack of pipeline infrastructure available to get products to market, a significant amount of infrastructure will need to be built for quite some time.

As I mentioned on my last slide, shales with a liquid component are currently the most active shales. Here is an example. As you can see from the chart on the lower left, Chesapeake's natural gas rig count has been and is anticipated to continue to decline in favor of increasing the liquid-oriented rig count.

The chart on the lower right side shows Chesapeake's corresponding estimated CapEx shift from natural gas activities to liquid development efforts. With our presence throughout North America, Quanta can move and allocate resources to any shale to capitalize on E&P movement and development plans to provide them pipeline infrastructure solutions.

Due to many of the E&Ps shifting their rigs and CapEx to liquid production to capitalize on attractive pricing, production of liquid products is increasing significantly. However, the pipeline infrastructure required to transport the product to market in the most economical manner is not in place yet. This is forcing producers to ride on rail and trucks, which is not as cost effective or as safe as using pipelines.

Significant pipeline infrastructure will need to be built over the coming years to allow products to be efficiently transported to markets for consumption.

Here are some estimates for pipeline spending in some of the wet or liquid-rich shales in the U.S. The graph on the left shows spending estimates for several of the wet shales in the U.S. The graph on the right consolidates the pipeline spending estimates from those of individual shales for the next couple of years.

We have established local offices in several of these wet shales to capitalize on spending opportunities. Further, there are shales that are in early stages of E&P testing and evaluation. Examples of these potentially emerging plays include the Granite Wash, the Rene [ph] Shale in Canada, the Tuscaloosa Marine Shale, the Smackover Brown Dense Shale and the Mississippian.

We're also seeing activity and opportunity in the Canadian oil sands, leading to development of pipelines across Canada and also for pipelines from Canada into the U.S. to bring oil sands crude down to the U.S. for refining. The map above depicts several major proposed new pipelines and pipeline extensions to serve anticipated supply and demand for oil sands crude between 2011 and 2020. Of note, this map does not include several pipelines that are coming -- that are being evaluated for development in the coming years.

The demand for Canadian oil crude in the U.S. Midwest market will grow as heavy oil refining capacity in the region it's added. The growing demand for crude oil in Asia is expected to create a new market for Canadian oil -- crude oil as well, which will require a pipeline to be built to the West Coast of Canada.

We see a number of pipeline infrastructure opportunities. And to capitalize on them, we have assembled a complete pipeline infrastructure service offering: so long-haul transmission pipeline, our HDD services, our gathering pipeline services, our pipeline integrity solutions and our distribution business. We provide each of these services on an a la carte basis and can also perform projects on an EPC basis.

The long-haul pipeline business has some unique characteristics to it that are different from the rest of our businesses. We think some of these unique characteristics can create some confusion and misunderstanding, so I wanted to take a few slides to discuss them.

First, the long-haul pipeline business has some attractive characteristics. It has high barriers to entry. It is pretty capital-intensive and require specialized equipment and very experienced capable people. A spread is a complement of people and equipment needed to build 1 mile of large diameter pipeline per day. A spread can cost as much as $50 million in a matter of months to run.

Most projects are lump-sum priced. This creates the opportunity to differentiate with the execution. Long-haul pipe projects tend to be large, many in excess of $100 million. These projects are fast book and burn, so they can generate very good cash flow, and we are the largest pipeline contractor in North America.

But there are some unique challenges and characteristics that can be difficult to understand. This business is cyclical annual business. You typically do not have multi-year projects. So the projects you book get built within a few months in a year. They can make backlog visibility challenging for us and for investors.

There is a distinct bidding season each year for long-haul pipeline projects, which is different versus the rest of our businesses. Given the timing of when will the bidding season occurs relative to the timing of when we give our initial financial guidance for the year, the lower visibility at the time can make forecasting challenging for us and for investors. And finally, the backlog build-and-burn pattern of long-haul business tends to be much faster than the rest of our business.

Every long-haul pipeline project is different, but I want to walk you through the general stages of a long-haul project, the timing of the project and the general revenue profile of a long-haul project. It is more expensive to build pipeline in the winter due to weather, so long-haul projects typically do not start construction until the spring. In the early months of the year, the customers acquiring right of way and getting permits for the pipelines to be built. Typically, I want to walk you through a little bit on in stages of a pipeline build now and then kind of walk through the whole scenario of what we do when we start a pipeline project.

First, you go and you clear it. So you're clearing your pipeline and your right of way, and you go on to grading, stringing and you bend it. So as your pipeline right of way has the contour to it, so you're bending your pipes to go to the contour and then you weld. So we're welding it, and we can either stick weld it or automated weld it, which we own our own proprietary welding system, RMS. And so we're able to have that flexibility on when our shacks get into automated welding systems. And that's mainly on long-haul. On our shale work, we've really -- most of it's stick work.

We trench it, we lower our pipe in, we test it and clean up and all that can be running simultaneously. You can have up to 1,000 people out there doing different tasks. It's not systematic, so it can be one piece goes before the other. The ATDs are really important to get done first and have them environmental so there's no -- nothing gets in our way to keep the spreads moving. So that's kind of how that works.

And you can see from the example, this is a generic project within about 6 months. The majority of the revenues we generate on a project like this will be concentrated over about 3 months. This is a fast book-and-burn business that can generate significant cash flows as a result.

In my earlier remarks, I said that our customers experience increased regulatory environmental scrutiny in 2011 that resulted in significant long-haul pipeline project delays and in some cases, project cancellations. 2011 was an abnormal year in that regard, and we believe it was an anomaly.

We are seeing attractive opportunities for long-haul projects that are expected to begin construction in 2012. We're also seeing quite a bit of long-haul activities shaping up for 2013. The slide shows you just a small sample of different long-haul projects that we see on the horizon to move into construction in 2012, and we have also included a few examples of projects that could begin in 2013.

We believe development drivers of the unconventional shales in the Canadian Oil Sands will result in a need for significant investment in the long-haul pipeline infrastructure over many years, which is the primary reason we're in the pipeline business.

Now I'm going to touch on the opportunity we are seeing for our integrity operations. There are about 2.5 million miles of pipelines in the U.S. and around 1/3 of them are beyond their useful life and probably another 1/3 are approaching the end of their useful life. As a result, the unfortunate pipeline incident of Northern California and some pipeline incidents in the Northeast, local and federal regulators are significantly increasing testing requirements.

Establishing and enforcing tougher pipeline safety standards and allocating more resources to pipeline safety regulation. This will cause utilities and pipeline owners to spend significantly more money on pipeline integrity initiatives over the coming years.

Quanta is a leading pipeline integrity solutions provider with a complete turnkey capabilities. We offer a complete scope of engineering, technical services and construction services to help companies with their pipeline integrity programs. I want to highlight that we are the only pipeline integrity contractor that owns its own pigging and in-line inspecting technology. Having our own pigging capabilities is a significant differentiator for Quanta's turnkey pipeline integrity solutions offerings.

The long-haul pipeline businesses is a good business with a great deal of opportunity, but we believe there are initiatives we can pursue to enhance the diversity of our Natural Gas and Pipeline segment that could temper some of the annual cyclicality and visibility challenges inherent to the long-haul pipeline business.

Here are several initiatives we are undertaking. First, we have established offices in several of the shales to pursue smaller diameter midstream gathering work. We have locations in the Marcellus, Eagle Ford and Bakken shales and in the Permian Basin. We can move into other shales as well like the Utica, where the demand for pipeline infrastructure develops. These gathering projects tend to be smaller in size, typically ranging from $5 million to $40 million, but they are relatively quick projects and there are some of them and you can do the work year-round. It is almost like a recurring revenue field to the business.

Midstream infrastructure is currently the bottleneck for getting product to market. Customers are increasingly looking for pipeline contractors like Quanta that can turnkey all aspects of completing these gathering projects on time and on budget.

Second, as I've discussed, we expect significant growth demand for our pipeline integrity services, and we are the leading company in that area. This type of work has less seasonality, good visibility and we think a very good growth profile.

And finally, there are other aspects of our business that we are pursuing to provide growth opportunities and diversity. Oftentimes, pipeline work in Canada occurs in the winter time when the ground is frozen. This is because it's more efficient and cost-effective to work the permafrost areas where during the warm parts of the year they would be boggy and muddy. This would hamper production. Pursuing projects in Canada and pipeline maintenance work in Alaska could help to soften some of the seasonality of our long-haul business.

We're also pursuing whole system gas distribution outsourcing arrangements with customers, which would provide high visible revenues with little seasonality. And finally, we are evaluating opportunities where we can take minority ownership positions in pipeline infrastructure where we had also gained pipeline construction backlog. These investments typically provide stable and visible earning streams with attractive returns.

To summarize, we believe there is strong secular drivers for our business that are creating growth opportunities for Quanta, and our comprehensive service offering positions us well to capitalize on these opportunities. The unconventional shales across North America and the Canadian Oil Sands will require significant infrastructure development to be built over many years. Our customers are increasingly looking for comprehensive and creative solutions to help them meet their pipeline infrastructure challenges, and our experienced reputation in turnkey capabilities differentiates us from our competitors.

While certain characteristics of our long-haul pipeline business are unique and can be challenging at times, we believe it is a good business and an important piece of our total pipeline solution offering. The business can generate a nice growth for us, and importantly, we believe 2012 will be better than 2011. Finally, we are pursuing several initiatives to further diversify our Natural Gas and Pipeline segment that we think could provide better visibility and attractive growth opportunities.

With that, I'm happy to take any questions you might have.

Unknown Analyst

Can you please talk about pricing for -- in the shales for pipeline work?

Earl C. Austin

Yes, I mean with any of our businesses, we have a margin profile that we adhere to, and I think the margins you're seeing in our long-haul business is very similar to the shale work on double digits.

Unknown Analyst

Well, just curious also how competitive that market is versus long-haul market where you maybe only have a handful of national players?

Earl C. Austin

The shales are very busy, and it's about capacity somewhat in the shale plays and timing.

Unknown Analyst

Duke, as we all know, pipeline projects can often get delayed versus the initial -- initially targeted timing due to permitting, environmental, better [ph] issues, et cetera. Of the projects, the long-haul projects that you put on the slide, I mean you listed several projects. Would you expect that all of those could be awarded this year? Should we assume taking out kind of a haircut, assume some of them maybe get pushed out or are deemed not economically feasible? And how would you say that list compares to a similar list that you would've had this time last year?

Earl C. Austin

I think in general, the pipeline opportunities that we see today are much more robust than they were a year ago. The slide obviously -- we put projects on the slide that we think are going to go. We have many, many projects the we track on a daily basis that obviously, one goes before the other or it might move around. But from my standpoint, I think anything that we have on the slide we think goes, and it's a very nice robust market at this point.

James F. O'Neil

Just a rule of thumb, any project that goes through BLM or federal land is subject to delays. So if it's up there and it has that aspect to it, you got to expect the unexpected now. It's almost to be expected now so...

Unknown Analyst

A year ago, first quarter 2011 backlog and pipeline declined from December, second quarter backlog and pipeline declined from the first quarter. Was that abnormal seasonal trend? And would you expect this year's trend to look more positive rather than negative?

Earl C. Austin

I think the difference, Alex, is this year we've concentrated on our shale business, and I believe our backlog will increase quarter-over-quarter depending on the burn. But I do think we're able to continue to let our backlog increase over quarter, quarter-over-quarter. '11 is going to be a nice year for us in the shale plays, and I think there's a lot of business there that if we can get our margin profile that our backlog will follow it.

Unknown Analyst

Can you give a little more color on the integrity services? Are there any regulatory regulations coming down that is going to spur growth in that particular sector? Just a little more color on what you're seeing there?

Earl C. Austin

Sure. There are already some regulations out with PHMSA and FERC both. PHMSA mainly, they require the pipeline operators to test their pipe. And some of the unpiggable lines will have to be piggable over time. And I'm not sure the time frame on that, but there is regulations that says your lines will have to be piggable. And so that's the case. There's a lot of launcher receivers. A lot of work around the integrity piece of a pipeline that they're going to have to go in and fix. So I think you see California kind of a PG&E, has a big build. There's probably all through -- Sempra will be next, and it's all across the country where you're seeing integrity programs enhanced because of the regulations coming down from San Bruno.

Unknown Analyst

Just going to say on with respect to the pigging, because pigging people may not understand what that kind of is, maybe describe what a pig is, what it does, kind of what it looks like just functionally?

Earl C. Austin

There's all kinds of pigs. So I don't really know how to say it, but it is what it is. So you have intelligent pig, which is the device that run through a piece of pipe and can go from 12-inch up to 48-inch. And through -- when it goes through, when it runs through, it allows data to be come back to the pipeline operators and engineers will read the data and they can give all kinds of coding issues, internal cracks, all kinds of issues. I mean like a pen, I mean it's amazing the technology. It tells everything that's going on inside that pipe. The way it's been tested in the past, the hydro test, which is a water test, and you put water in and you pressure up your pipe to a certain amount and then that allows it. That's what it's been done in the past. And you can tell if water -- if your pressure goes down after you pressure it up, then you have a problem with your pipeline. But the smart tools are the game changers as far as I'm concerned on the way you look at pipe, and that technology will continue to be enhanced and I think it's a big market for us all.

Unknown Analyst

You have a list of the projects here. I was just wondering if you could maybe size up what revenue opportunity that, that list of projects will represent?

James F. O'Neil

Let's say many of the miles are rough cut. So take the mileage and just say $1 million a mile.

Earl C. Austin

Yes, it's fair enough.

Unknown Analyst

[indiscernible]

Earl C. Austin

I'm sorry?

Unknown Analyst

Can you comment on the fungibility or the applicability of the large diameter equipment into small diameter, whether that capacity is directly transferable, easily transferable, it's difficult? Can you just give us some color on that?

Earl C. Austin

I mean in some cases, we can use it. It's not ideal. I would say that our large pipe equipment, especially our sidebooms, are not applicable down in the shale plays. But it's mainly just our sidebooms, not everything else. Everything else are trucks, binders, welders, whatever it may be we're able to use in the shale play. So it's mainly just your sidebooms, which is a big piece. But our sidebooms, bigger sidebooms, you will not use up in hills of West Virginia.

Unknown Analyst

If I may follow up, and what is the capital expenditure implied in this shift of capacity into the shales?

Earl C. Austin

Not -- we're not spending a lot of capital on our pipeline business to get in a shale work. We have abundant resources there on the equipment side, not a whole lot of capital there involved.

James F. O'Neil

The capital that's deployed right now is just maintenance capital for placement of all the equipment. No new capital expenditures on pipeline because of the shift in strategy to go into the shales.

Earl C. Austin

You can rent as well. There's a robust rental market there that we're able to rent some of that equipment. It gets -- keep going good.

Unknown Analyst

Just wanted to follow up on Diego's question. If you look at the capacity you have in terms of spreads right now, how would you divide that? I know you break it up in terms of spreads, in terms of equipment that you have and labor that you have. And if you can talk about how much of that is really now given sidebooms are specialized in the sense, how many side -- how much sideboom capacity you have in essence that could support your long-haul business versus the shale business?

Earl C. Austin

I'll just answer like it's -- I mean our sidebooms, we have 20 sidebooms to run 10 spreads, and so we can run our spreads with our sidebooms. We see no issue with equipment to hurt us or -- anything go forward on equipment, we don't see any issues there. We own about half of our equipment as a rule of thumb.

James F. O'Neil

And we own most -- all of the specialized equipment.

Unknown Analyst

Jim, I think you whet our appetite with the $2 billion 2008, 2009 pro forma numbers. But just a question, if you look at the long-haul large diameter pipeline and the impact of the shale, it would seem with the Marcellus being as big as it is. Some of their opportunities for these long-haul pipelines especially are limited and will be limited going forward. Is it realistic to think about the $2 billion as the number? And if it isn't, how much of a headwind do you have to fill in with all these other projects? And then I have a follow-up.

James F. O'Neil

I think it would be good to have our segment revenues outside of the large diameter work to be in the $800 to $1 billion range, and then anything above that on big diameter pipe work would be in addition to that. So I mean I think in a good year, you could get to the $2 billion, again, because we are trying to diversify and increase revenues in other parts of that segment. So -- but I think our goal is to cover the fixed cost of some of the sidebooms and everything else by diversifying where we can make some nice margins even when the big pipe business is down cyclically, which that graphic was supposed to depict that. This other recurring revenues should lift everything up to where you're running a profitable business year-round versus the boom and the bust cycle of the cyclicality. That can occur in the big pipe 5 business.

Unknown Analyst

And as a follow-up, can you give us your update on Keystone, kind of what you're seeing with everything out there?

James F. O'Neil

Yes, but I think what you guys are hearing, that's public is about the information we have as well. So we're hopeful that it could go as early as the end of this year and probably more likely next year after the election.

Unknown Analyst

But I'm thinking more the part that was announced kind of Quanta's opportunity...

James F. O'Neil

Well, that's still open. I mean there is a section from Cushing to the Gulf Coast that we hear could move forward and don't know if that's been awarded yet or not so...

Earl C. Austin

Yes, some of it has, some of it has.

James F. O'Neil

Yes, some of -- it's still open. There's an opportunity there perhaps.

Earl C. Austin

They did definitely pulls capacity out of the market at the least case. One of your questions about Marcellus, one of the things to think about also is your NGLs and your oil. Oil, that has to be piped out and usually goes into a Gulf Coast refiner. So from the Marcellus down, it's a long way. It's a long run [ph]. Good, nice long-haul type, lot of projects out there on the NGL side and as well as the oil side. So don't just think about it as natural gas. I mean with the pipeline, it doesn't matter what goes through them. So when you think about that, there might be double whammy. You have a line of gas going one way and an NGL coming into the south or going north into Canada. So the shales, what's nice about them is there's liquids in them as well as oil. So think about it as 3 lines instead of 1, and many of those things are going into refiners, other places. So that makes a real nice business.

James F. O'Neil

There's some huge potential here, guys. I mean we just got to give it some time to materialize. We're in the very early stages of development in these shales, especially the shales with the NGLs. So...

Earl C. Austin

And I think as you see our power sector switch from coal to more of a gas-fired, you're going to see -- you're going to have to bring more gas out of the shales down into the south or wherever it may be and as economics dictate.

Unknown Analyst

Just a broader question. But in some of the other companies I talked, they speak a lot about potential defers or customers holding off on making any decisions just as we're coming up on election year. So as you think about your businesses coming up on election year historically, has that caused any delays? Or do you see any potential delays or perhaps accelerated after the fall? I mean in either in the electric power or the gas business. Also, I mean just in general, is that a risk out there that your customers seem to talk about?

Earl C. Austin

I mean I think Keystone is a political football. So besides that one, everything else is somewhat interstate. So if you think about like a shale play, it's interstate. It's not FERC-mandated typically. And so they can prospect and permit a lot quicker as long as they're not going into a national forest or something federal. Typically, those permits are easier, stream crossings and things like that are a little bit difficult. But typically, interstate lines are much, much easier to get done and that's -- the shale plays are all interstate and I don't see any election moving that one way or the other. There's a real robust market in the shale plays.

Unknown Analyst

Any other projects besides Keystone that could potentially move forward after next -- a big...

Earl C. Austin

Yes, there's a lot of large projects that are out there. Now whether they go, their economic -- I think economics will dictate whether they go or not. It won't be a political.

Unknown Analyst

Could you refer to the slide with a list of projects and walk us through those projects, which ones are interstate and which ones have intrastate characteristics?

Earl C. Austin

Yes, let me do that. I'll do it with Kip and then follow that [indiscernible].

Kip A. Rupp

We can go through it.

James F. O'Neil

The longer lines are...

Earl C. Austin

The 16, the 12 is intrastate; 100 miles, interstate; 580 miles is an interstate; 266 miles is an intrastate; 525 miles is an interstate; 103 miles is intrastate; 120 miles is intrastate; 600 miles is interstate; 530 miles is interstate; and 170 miles is intrastate.

James F. O'Neil

So you got the tras from the ers.

Earl C. Austin

Sorry. We'll get Kip to write it down a little better there and get it out if you'd like. Tahira?

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Sorry, last question for me. Just wanted to do find out, obviously, when you announced fourth quarter earnings, you said that the pipeline business and really the short visibility that you've explained today really is the key driver to your guidance. And I guess that includes execution and weather and also the amount of projects you're going to book. Given what you've explained in terms of the bidding cycle, do you think by the first quarter you can have a really good handle on really whether the low end is too low in terms of the drivers your building?

James F. O'Neil

We'll have a much better handle in May. Obviously, we'll have a lot of better visibility, and we should be able to provide a lot more color from the full year, yes.

Kip A. Rupp

We've got one -- a question from the webcast asking to discuss Quanta's market share versus competitors on kind of large diameter pipeline space and maybe think about it from the longer mileage type projects versus the competitive dynamics and market share dynamics within the shales for the gathering systems.

James F. O'Neil

We don't look at pipeline work as market share. We look at -- because we do have a disciplined margin profile, we have 1/3 of the industry capacity.

Earl C. Austin

Yes, Jim's right. The capacity, I mean, we have 1/3 of the capacity. But at any given time, someone could be doing much more work than we are because of the margin profiles that we have. Any questions? Okay. Thank you.

James F. O'Neil

Thank you. [indiscernible] video clip on our telecom operations.

[Presentation]

Kenneth W. Trawick

Okay. Here's kind of the agenda for the Telecom presentation, and then of course once I get finished, then we'll have another Q&A on Telecom if you guys have some questions.

As I talk to you about our Telecom and Fiber Licensing segments, I hope to leave you with a few key takeaways. Demand for and use of data-intensive services and applications is a primary driver for infrastructure development of wireline and wireless broadband investment. As a result, Quanta is experiencing an increase in demand for the services that we provide to the telecom industry, which we believe provides good growth visibility for the next several years.

Our Fiber Optic Licensing segment is a very different business from the other segments of our operations. It only accounts for about 2% of Quanta's total revenues and as a result, we believe it's often overlooked by Wall Street, but is a unique and a very attractive business.

Quanta is a leading provider of telecom and broadband infrastructure solutions to service providers and carriers across North America. We can provide a complete menu of services around design engineering, construction and maintenance of telecommunications and data networks. Our differentiators include our large North American service area; our ability to provide services either à la carte, EPC or a complete outsourcing solution; and our reputation and ability to execute large network deployments while meeting tough, aggressive timelines.

As you can see from the graph in the upper right-hand corner, our Telecom business was impacted by the recession over the past several years, but experienced significant growth and margin improvement in 2011. And most of that came in the second half of the year, and we expect that to continue through 2012 and beyond.

Our pie graph in the lower right-hand corner shows that most of the work we do relates to wireline outside plan, which would include fiber to the cell site stuff, which arguably can be in the wireless space. It just depends on how you want to look at it because these fiber networks are built to sell sides or for cellular backhaul. And some of you asked me, do we put that in wireline, do we put it in wireless? We put it in wireline, but a case can be made to put it in wireless as well. We also do wireless work overhead tower antenna kind of work and as well as the radio installation and the base station and telecommunications central offices. And of course, traditional business as usual, top wireline construction and maintenance.

There are 3 primary opportunities over the near and medium term that we see driving growth for our Telecom segment: the ARRA broadband stimulus projects; our fiber to the cell site that I just mentioned, which is being implemented actually by the wireline carriers for the wireless carriers. So you have the Windstream, CenturyLinks, AT&T, Verizons of the world, providing wireline services to support the wireless carriers such as AT&T, Verizon, T-Mobile and others.

Wireless network optimization, 4G and Long Term Evolution or LTE network deployments, and all 3 of these opportunities have gained momentum as indicated by the growth in our 12-month and total backlog over the last couple of years.

As most of you are aware, through the ARRA or the broadband stimulus program, $7.2 billion in federal funding has been provided to support the development of broadband deployment in unserved and underserved areas of the country. These broadband stimulus projects were the most significant contributor to Quanta's Telecom segment backlog and revenue growth in 2011.

As you may recall, we anticipate a construction of broadband stimulus projects would start to ramp in the second half of 2010. But this was delayed by about a year actually, primarily due to -- if you got to pick one single most impactful factor, it was the environmental permitting associated with these stimulus projects. And bear in mind, for 50 years, we've been doing the same work, but it wasn't called a stimulus and it didn't have to be from an environmental permit. But because it was a stimulus project, it required an environmental impact statement, which delay these projects in some cases 15 to 18 months. And that was not anticipated by either the awardees or, of course, folks like us that have to do a forecast. But these broadband stimulus projects finally began moving into the construction phase in the second half of 2011.

As a result of the delayed projects starts, many of these projects have compressed project timelines, which we think will, next year, will play into our advantage. And the reason is I think our customers will be looking for a Quanta-like -- for a company like Quanta to that has the capability and the scale and the ability to manage all aspects of the project and then to complete an aggressive time-compressed rollout.

Once the broadband stimulus projects reach completion towards the end of 2013, we expect these customers to continue to invest additionally in network expansion. And in addition, money from the universal service fund is being reallocated to support broadband network deployment in unserved and the underserved areas, which could provide additional opportunities going forward.

The universal service fund has recently been -- the goals and the distribution method of funds has recently been changed and revised going forward. And very frankly, a lot of folks don't know exactly what that's going to mean. But one of the stated goals is broadband deployment in underserved areas, which logically should support goals similar to what the stimulus package goals were.

As you can see from the graph on the lower left corner, this is absolutely amazing to me. Mobile data traffic more than doubled from 2009 to 2010 and is expected to grow at 83% compound annual growth rate from 2010 through 2015. As a result, this explosive growth in mobile data traffic, the network that carries wireless voice and data traffic, a lot of folks referred to it as the back-haul network, has been extremely and severely capacity constrained and resulting in service quality issues, which you know ever had a dropped call or interruption to your cell service.

To handle existing mobile data traffic and network capacity issues and to position their backhaul networks for the anticipated continued growth in wireless data traffic, wireless carriers are implementing initiatives to upgrade and replace their legacy backhaul networks with fiber optic cables and networks enabled with the ethernet technology.

We expect several more years of opportunity related to the wireless carrier fiber to the cell site initiatives to upgrade their backhaul network. There are tens of thousands of cell sites in the United States, most of which will need to be enabled with or provided with a fiber pathway.

We're also seeing opportunity driven by wireless carriers continuing to improve network quality for their 3G networks. All the talk is about 4G and LTE, but the 3G rollout is not 100% done either. So they're also in the early stages of deploying, obviously, 4G, LTE networks, and we believe the deployment of these networks will take several years and provide many years of opportunity for us and companies like us.

Now I'm going to focus my presentation briefly on the Fiber Optic Licensing business. Our Fiber Optic Licensing business is very different as we mentioned. We design, build, operate, maintain and own fiber optic networks in 9 markets in the United States. Our target customer is any entity that wants to secure, scalable, high-bandwidth, private network with a predictable cost structure.

The pie chart in the upper right corner shows the revenue contribution to the business by market in 2011. It also shows the geographic diversity our markets provide.

As you can see from the pie chart on the lower right, our largest customer base is K-12 educational school systems. School districts get government subsidies under the E-rate program administered by the federal government and FCC to encourage and help them fund the development of broadband communication networks amongst schools and libraries.

Our model here is to get an anchor customer for the network and their lease contract pays for construction of what becomes the initial network backbone. We installed fiber optic cable with more fiber strands in the network, then the anchor requires and there we market the additional fiber strands to other users in the market. As we build out the network and increase network density, the network attracts more customers and over time, revenue cash flow and returns grow nicely by market.

As I mentioned in my opening remarks, this segment, we think, is often overlooked by Wall Street because it only generates 2% of our revenues. However, it's very high margins, and it generates a significant amount of profits for Quanta. And looking at the favorable characteristics of the business, it generates recurring revenue and cash flow with high margins, and this provides good visibility and high returns on invested capital and is a relatively low-risk business.

The challenging characteristics of the business include that it is capital intensive. To maximize the value of our fiber assets, revenue and cash flow generation, we need to continue to invest in our newer markets to increase their scale and market penetration. In addition, revenue and cash flow generation tends to lag by 12 to 18 months behind our capital deployment as we build out the network. On balance, we believe the positives make this a very attractive business, and we're eager to allocate capital to grow it.

These are the 9 markets that we have today, just to kind of give you a feel for it, what it looks like. As you can see, each market is in various stages of development with some being more mature and some of these markets being relatively new. Our Philadelphia market, which is on the upper left on this slide, is the most mature and has the greatest network density.

Our focus is on continue to build out and develop these markets at a prudent pace to maximize revenues, cash flow and the value of the assets over time. Many of our markets are still in the relatively early stages of their development cycle, and our goal is to increase their density over time. Here, we have our most mature market on the, again, Philadelphia on the right-hand side this time as compared to a much younger market on the left-hand side, which is Chicago. As our last mature markets get built out, getting density and to add customers, our revenue, cash flow and returns will increase and become more attractive.

Very quickly, I want to give you a quick case study on -- you may be familiar with the PennREN project. You'd certainly heard us talk about it. This -- we announced this the early part of last -- this project the early part of last year. It was an absolutely perfect fit for Quanta and enabled us to leverage the strength of our Infrastructure Services segment, the build things and our Fiber Optic Licensing segment.

Out Telecom Infrastructure Segment was awarded the $118.5 million stimulus project funded to build the 1,600-mile PennREN network, which services educational institutions across the state. We also secured over-lash rights from the network such that once it's completed, our Fiber Optic Licensing business can over-lash its own network on the PennREN network.

The cost for us to over-lash our fiber network will be a fraction of what it would typically cost to build a new fiber network from scratch, obviously giving us a competitive advantage in the marketplace. We'll then be able to lease the fiber on our network to customers along the route.

The over-lash right has a potential to connect our existing Pittsburgh and Philadelphia networks and add about 1,400 route miles to our existing as Pennsylvania network. And you ask, well, we get 1,600 miles in one place and 1,400 miles in the other. Would the other 200 miles is actually portions of our network that we own, that we used to over-lash PennREN's fiber on our network. So numbers do supposedly add up. By expanding our network, it would expose us to a number of new customers throughout the state and provide additional growth opportunities across our footprint.

In summary, Quanta's Telecom Infrastructure Services segment is in the relatively early stage, we believe, of the growth cycle that's driven by the stimulus projects, fiber the cell sites and 4G, LTE upgrades and deployments. Quanta's national presence and complete turnkey capabilities positions the company well to further capitalize on these opportunities and new opportunities which will certainly come over time.

While our Fiber Optic Licensing business is a small portion of our total base, it's a steady growing business that provides us with recurring revenue, high margins, strong cash flow and high returns.

With that, Jim and I will be happy to take your questions. Alex?

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Ken, I have heard that wireline vendor consolidation is accelerating. Can you discuss that trend either over the last 5 to 10 years and what your views are going forward for vendor consolidation [indiscernible]

Kenneth W. Trawick

Oh, you mean our competitors' consolidation contractors?

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Your customers using less contractors.

Kenneth W. Trawick

Oh yes, we've seen that, absolutely. I've seen that in the wireless space. We've seen it in the wireline space. We've been so far the beneficiary of some of that in some of the legacy wireline carriers, Frontier, for instance, folks, Tier 2s. Windstream has been doing some of that. So absolutely, yes. We've seen it too.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Over the last couple of years, 2 of your competitors get pretty aggressive in the wireless market, winning some sizable turf agreements. Where do you stand on your interest for pursuing wireless turf agreements?

Kenneth W. Trawick

There's actually another round coming out. I think it's AT&T is coming out with another round of those. We've looked at that and haven't had a lot of success primarily because in our view, the margins were not what we were looking for. We've been pretty successful from a margin perspective on our wireless business, and it seemed to us in some of the cases -- and then we just weren't very well positioned geographically in others. But some of the cases, we thought we have fairly good -- pretty good foot forward but we didn't think we were going to be able to reach our margin goals. Yes, sir?

Unknown Analyst

In your licensing business, can you give us a sense of the margin difference between what are your mature markets like Philadelphia versus the younger markets, so we can kind of get a sense for what the ultimate potential is there?

Kenneth W. Trawick

Jim, do you want to jump on that one? I got to bring in some reinforcements.

James Haddox

Yes, the margins on the emerging markets are quite a bit lower than they are on the mature markets. I mean, our focus in the new markets is really just to cover our cost of capital initially. So we go in and we try to develop what we call the anchor tenants in those markets. So you'll see a significant difference in the margins in the market, like a Chicago market, significant difference in the returns and margins in a market like Chicago versus Philadelphia because Philadelphia has -- the margins, what you're seeing up there, the margin profile in Philadelphia is actually quite a bit higher than you're seeing in the consolidated margins for the Fiber Optic Licensing business, whereas the margins in the new markets are more like our cost of capital, $13 million, $15 million, they're in that range and they are coming up. But our challenge is to maintain the margins overall for that segment. So we try to balance the capital that we spend in the mature markets like Philadelphia with the capital the we're spending in the immature markets so that we don't see material margin deterioration overall.

Kenneth W. Trawick

Yes, sir?

Unknown Analyst

Ken, one of the things we've been hearing is that, that market had been decelerating for school districts, your core education customers. Even though they see very high paybacks and actually switching to use your services, being a little bit cautious about putting out announcements of capital investment or capital commitment in an environment where school budgets in general have been under some significant pressure. Can you comment whether or not the abatement of that pressure, many of those districts have handled what they needed to handle, has potentially improve the overall environment for your licensing business to see a re-acceleration over the next few quarters?

Kenneth W. Trawick

We did hear that late in 2008, early 2009 especially. It seemed like and talks with our guys over the school systems around the country, not in any one single part of the country, that were not pulling the trigger as they had been in the years past on signing up for a 5-year lease on a fiber optic network. And we heard a little bit about it last year. But for some -- and it doesn't make a lot of sense to me, but I think folks have just decided to move on, move forward. And we don't hear that like we did 2 years ago. So yes, it was very real. We heard the stories. And you can imagine the conversation of that, and you don't want an article in the paper of your own school board that says, "We just spent $500 million on fiber optic network and oh, by the way, we laid off 60 teachers, their voters." So -- but in the last year and this year, we've not heard that story. It doesn't seem as much.

Craig E. Irwin - Wedbush Securities Inc., Research Division

And in the past, you've also shared with us -- maybe this is more appropriate question for James, but you've shared with us your outlook for capital investment in this business. Is there something like that you might be able to shed some color on today?

Kenneth W. Trawick

I think we're still in $40 million...

James Haddox

$40 million to $50 million.

Kenneth W. Trawick

$40 million to $50 million this year, $40 million to $50 million this year. This is the forecast currently.

James F. O'Neil

Craig, I might add to that though, that we are -- their bidding season for this type of work is typically ends right around the end of February. So we're in the middle of that. That number could be revised upward or downward based on where they ended up in their sales cycle for school districts this year. Because they just ended -- the guidance we gave you guys was really as of December 31, and that could be updated. I don't expect it to be materially different -- it's not going to be double or half.

Unknown Analyst

You talked about wireline carriers replace some T1 backhaul networks with fiber optic. Listening to different sponsors, a lot of them are saying they're anywhere from 60% to 80% complete with the process. Is that -- would you say that's correct?

Kenneth W. Trawick

60% to 80% complete with providing fiber to cellular networks?

Unknown Analyst

Yes, and this is a round number from a few major ones. Just want to hear about the same as what you're hearing from the rural providers like CenturyLink, Windstream, Frontier, those guys?

Kenneth W. Trawick

No, that's not what we heard. What the carriers have been telling us in the past is it's a multi-year deployment. It would -- that they would be getting the low hanging fruit, and maybe there's a definition around in urban areas that, that -- in some urban areas that could be true. But what we've been hearing is a 4- to 6-year deployment. And I'm sure there will be a curve to it at some point, but I don't think it's 60% through and basically 2.5 years of this, 2 years. I haven't heard that. I haven't heard that 60% number. Yes, sir, in the back.

Unknown Analyst

A question on the over lashing. Two questions. One is, how much of that is kind of dark and can market to your future customers? I'm trying to get an incremental revenue from that portion? And two, who are the typically marketing those capacity to?

Kenneth W. Trawick

Right. The first question was around over lash and the question -- was the question how much of those fibers are dark, was that the question you asked?

Unknown Analyst

Yes.

Kenneth W. Trawick

Okay. Well, on the PennREN project, the stimulus required that there would be 48 fiber cable installed for PennREN that they own 100% of. And what we have is the right to go back where we choose to an over-lash another fiber cable on that same strand and actually to their cable as well, which we haven't done yet. So it's whatever we want it to be. There's no limit actually to how large the fiber cable we can install, 24 fiber, 288 fiber, 436 fiber, and we can install multiple fibers. So we haven't installed any of our fiber, we're installing PennREN's fiber at this point. But when we have a sale and a way to pay for it, then we'll decide at that point how many fibers to lash. And what was the second...

James F. O'Neil

I would guess, though, that a significant portion will be dark when we do the over-lash.

Kenneth W. Trawick

Oh yes, yes. Oh yes, well -- I'm making this up, but we'll do something like install 144 fibers and light 8 or 12. I mean that's just hypothetical.

James F. O'Neil

Our potential is not that...

Kenneth W. Trawick

Yes, the delta in the cost between say a 24 fiber and 188 fiber or whatever is mostly labor. And so the labor is about the same whichever you do. And what was the second question, please?

Unknown Analyst

[indiscernible]

Kenneth W. Trawick

oh, yes. It's -- you -- look at our slide. I mean, healthcare, enterprise carriers, the AT&Ts and Level 3s of the world, education. The PennREN network is built in this basic backbone. But there will be legs or laterals off of the basic backbone to go out to this school system or that school system. And so that will be a market for us. Same customer base. Carriers, enterprise, healthcare as well as education community. Any others? Thank you very much.

James Haddox

Good morning, everybody. I was kind of halfway expecting Kip to have a collage of accountants and finance people with computers and calculators. But I suspect that you guys might already be familiar with what that looks like, so I didn't have get a collage. What happened to the clicker, Ken? Did you take it in your pocket or...

Kenneth W. Trawick

[Indiscernible].

James Haddox

Here it is.

Here's the agenda for my presentation today. I'm going to cover various aspects of our historical financial results related to our income statement, backlog trends, cash flows, balance sheet and capital allocation, and I'll also spend a few moments talking about our guidance and our forward-looking expectations. And after my remarks, I'll take questions just like the other guys have been.

Here are some key takeaways that I hope you'll get from my presentation: first, that Quanta's business is experiencing momentum across all of its operating segments; second, that our record backlog at the end of 2011 supports our positive outlook for 2012 and beyond; third, that our strong balance sheet and the consistent cash flow that Quanta generates will support our growth strategies going forward; and finally, that the revenue and EPS guidance that we've established for 2012 reflects our confidence for the year, while taking into consideration the regulatory and economic uncertainties that our industry is faced.

This slide shows selected income statement data for the last 4 years. We had been consistently increasing margins quarter-over-quarter for 12 quarters until we got into the third quarter of 2010 when we encountered severe weather issues on certain lump sum gas pipeline contracts that affected margins in the first -- last half of 2010 and the first half of 2011.

At about the same time in 2010, we also began experiencing project delays in our Electric Power and Telecom segments due to permitting delays, which were -- which resulted from regulatory and environmental scrutiny. During the first half of 2011, most of our operating segments continued to experience project delays due to these regulatory obstacles. In addition, the significantly lower amount of large-diameter pipeline revenues throughout most of the year was not enough to cover fixed costs in our Natural Gas and Pipeline segment, which negatively impacted that segment's margins along with consolidated operating margins.

In addition, as most of you know, we recognized the $32.6 million charge recorded in cost of services related to a pension plan withdrawal liability, which negatively impacted our gross margins for the year. If you were to exclude that $32.6 million charge, gross margin for the full year of 2011 would have been 14.1% instead of the 13.4% shown here, with the decrease in margins in '11 compared to '10 being predominately related to gas, which you've already seen in a slide a couple of times and I'm going to have the same slide to show you here in a second. Quanta's operations began to experience significant growth and improved margins during the second half of 2011, which I'll also talk about more in my upcoming slides.

Here's our revenues by segment for the last 4 years. Looking at the annual numbers, total revenues declined about 12% in '09 versus '08 as parts of our business were negatively impacted by the effects of the recession. Total revenue then increased over 18% in 2010 primarily due to the acquisition of Price Gregory that occurred in October of '09 and 22% revenue growth by our Fiber Optic Licensing segment. The rest of our segments generally experienced stability in 2010.

Total revenue increased more than 17% in 2011 over 2010 primarily due to an increase in the number of projects moving into construction particularly in the second half of 2011 and, to a lesser extent, from several acquisitions we completed during the year. Organic revenue growth in 2011 was about 12%.

Also, during 2011, the Electric Power segment revenues increased 48% and increased about 40% organically. Natural Gas and Pipeline segment revenues declined 27%, Telecom segment revenues increased 23% and Fiber Optic Licensing segment revenues increased 5%.

For the next few slides, I'm going to touch on the financial results of each of our operating segments in a little more detail. Here's the historical revenue and operating margin data for Electric Power for the last few years. Looking at revenues, you can see the revenue decline in '09 versus '08. Once again, that was because of -- mostly due to the recession and its effects on our customers' spending plan. In 2010, the segment experienced stability, but also began to see delayed starts on a few large transmission projects that we were previously awarded.

As highlighted on my last slide then, segment revenue grew 48% in '11 versus '10 primarily due to the previously delayed large transmission projects moving into construction as well as additional large transmission projects that we've been awarded in the first half of 2011 moving into construction in the second half of 2011. As Jim mentioned earlier, the segment also benefited from an improvement in distribution revenues. Further also during 2011, we saw an increase in emergency restoration work. It went from $96 million in 2010 to $173 million in 2011.

As you can see on this slide, the operating margins, which is the red line for this segment, had been relatively consistent over the past 5 years.

2011 operating margin of 10.9% was an 80-basis-point improvement over the operating margins in '10, and we expect operating margins for the segment to remain consistent with our historical results over time, with the opportunity of improvement in 2012 as our revenues from the high-margin transmission work increases.

Jim touched on this slide in his opening presentation, but I'll give you a little bit more color on it. This is natural gas displayed in 2 different ways. The graph on the left shows the segment results on an as-reported basis. You should note that these figures include the results of Price Gregory services subsequent to October 1,'09. Revenues declined in '09 versus '08 primarily due to the effect of the recession. Revenues increased significantly in '10 over '09 primarily due to having the results of Price Gregory for the entire year.

As discussed a couple of slides ago, revenues declined in '11 primarily due to significantly reduced revenues from long haul and large-diameter pipeline projects as a result of a difficult regulatory environment that caused many of the projects to be delayed and some canceled.

Operating margins were relatively stable for the period from '08 through '10, but operating margins were negative in 2011. And most of you know the reasons for that, but there were several unusual operating conditions in '11 that occurred, from regulatory impediments, unlike the industry has ever seen to unusual and severe weather patterns that occurred and impacted projects, to a labor union strike. It just seemed like in 2011 if something could go wrong, it did for this segment.

As Jim commented earlier, the graph on the right shows pro forma segment revenue and operating margin results for the segment for pipeline and company acquisitions we made during this period. As you can see, the -- these acquisitions would have had a significant positive effect to our historical results have they been included in the full years of '08 and '09. We think 2011 was an anomaly year given the unusual circumstances that occurred. As Jim said, we just need a normal year for this segment to do well. And at a minimum, we don't expect 2012 to be like 2011.

One thing that Jim touched on also was that you see the very high margins of 14.5% in 2009 on a pro forma basis. '08 and '09 were unusually high years, unusually profitable years. What we're showing you here is that this is -- that there is the capability of making these margins within the business that we have today. However, we're not forecasting that. I mean, if we can -- as Jim said, the margins in this business in a normal pattern ought to be more like the other segments, and the -- so they should be between that 9% and 12% area. But we do have the capability of going higher than that if the market conditions allow it.

The graph on the left here shows you historical results for our Telecom segment. The segment grew in '08 from '07 primarily due to network build activity for FTTx initiatives. We experienced a significant revenue decline in '09 from '08 as the recession kicked in and carriers significantly reduced their FTTx network development and reduced CapEx plans in general.

Revenue in 2010 showed general stabilization and then increased nicely in '11 primarily due to fiber-to-the-cell site projects and also from broadband stimulus projects ramping into construction in the second half of 2011.

Operating margins directionally followed industry trends over the period shown. Operating margins can fluctuate more dramatically for this segment because telecom, broadband, cable TV and wireless companies tend to outsource most of the infrastructure work they need to have done. So pricing and margins are more influenced by contractor resource availability in our Telecom segment. Segment operating margins in 2011 increased significantly over 2010 due to the increase in fiber-to-the-cell site, broadband stimulus and wireless work, as Ken discussed in his presentation.

The graph on the right shows the financial -- historical financial results for our Fiber Licensing segment. Ken touched on some of the reasons why we like this business. As you can see, the segment experienced significant revenue growth from 2008 through 2010 and experienced a deceleration in growth from 2010 to 2011 mostly due to tighter budgets for K through 12 school districts, which is the segment's largest customer base. However, operating margins remain relatively consistent and at high levels.

I want to clarify something I said a second ago, too, because when I was talking about the margins in the business, I was interchanging at the same time I was talking about returns on capital and I was talking about gross or operating margins kind of interchanging them.

Directionally, it still holds true. The markets in L.A. are not going to be 10% or 15% operating margins. They're going to be higher operating margins. But when I was saying 10% to 15%, I was talking about returns on capital versus operating margins. But directionally, what I said is still true. The operating margins in the new markets are significantly lower than the operating margins in the mature markets.

Looking at our 12-month and total backlog, as you can see, our backlog has been a steady upward trend for the past few years. Our 12-month and total backlog were both at record levels as of December 31, 2011. Much of our backlog growth is attributable to the number of large electric transmission projects that we've been awarded and also from increases in Telecom segment backlog. Broadband stimulus work has been the largest driver of our increase in Telecom segment backlog. Backlog in our Natural Gas and Pipeline segment has improved as of December 31, 2011, as compared to '10. And as we commented on our recent fourth quarter earnings announcement or earnings conference call, subsequent to the end of '11, we've been awarded about $200 million. That was as of the conference call and that number continues to go up, although it's not going up materially. No real large projects. So in other words, we've been awarded but a lot of small ones. And most of that relates to additional pipeline projects for shale gathering systems, which are expected to be completed this year.

We go through a -- this is a new slide that we want to show you guys. In the past, in our earnings calls and various investor-related events, we've commented on how our business has experienced momentum in the second half of 2011. I think the graphs on the slide do a good job in quantifying that for you guys.

As I commented on a couple of my earlier slides, we had a pretty tough half, first half of '11, primarily due to project delays and a challenged pipeline job in the first quarter of '11. If you compare the first half of 2011 with the first half of 2010, revenues increased by a nice amount, but operating income and operating margins were down significantly.

Then the second half of '10 versus the second half of '11, Quanta's business and most of its end markets began to improve in the second half of '11. Comparing the second half of '11 to the same period in 2010, revenues increased by more than 19%, and operating income grew 25% and operating income margins improved by 40 basis points.

And this one shows you the comparison of the first half of '11 to the second half of '11, from our perspective the best depiction of improvement and momentum Quanta experienced in its businesses if you compare the second half of '11 to the first half.

Revenues increased over 48%, operating income increased fivefold and operating income margin improved by 510 basis points. This improvement is due to a significant number of projects of all sizes and across all our Infrastructure Services segments moving into construction in the second half of the year and, in particular, the large electric transmission projects moving into construction.

While the first quarter of a given year has always been the lowest quarter for Quanta due to seasonality, our 1Q '12 guidance indicates a strong quarter for the first quarter. 2011 saw revenues increase by a significant amount in each sequential quarter, the first time this has happened in several years where every quarter of the year was larger than the previous quarter and where the fourth quarter of the year was $250 million higher than the third quarter of the year. We saw that.

We've seen it before but it had -- it's -- goes back probably to '01, '02 since we've seen something like that to happen. We do expect 2012 to return to a more seasonal -- normal seasonal pattern where you won't see every quarter sequentially get bigger than the previous quarter. However, that then just depends on project awards during the year. It's possible, but I -- I'm not projecting it right now.

This slide shows 2 graphs. The graph on the left shows our cash flow from operations going back to 2007, and the graph on the right shows our free cash flow going back to '07. The takeaway point from this slide is that Quanta has consistently generated solid levels of cash flow from ops and free cash flow that has funded our growth over the years.

Two periods I'll highlight here for further explanation. You can see that cash flow from operations and free cash flow was very high in 2009. There were several reasons for this. If you'll recall, the end of 2008 was when the recession was beginning to kick in and the capital markets were in significant decline. We had a number of our customers who delayed payments to us, who delayed payment receivables to us in the latter part of '08 to address their balance sheets at year end. And as I've said in the past, here in the first 2 weeks of '09, we saw free cash flow of $50 million because of that phenomenon.

We also acquired Price Gregory in the fourth quarter of '09, and they generated a significant -- quite a bit of cash flow in 4Q '09. And in addition, you'll recall the revenues in '09 were about $460 million less than '08, which required less working capital. So that caused that spike there.

The other period I'll highlight is 2011. Despite the significant increase in revenues and working capital requirements to fund projects as they move into construction, we still generated solid cash flow from operations and free cash flow.

Revenues in 4Q '11 were about -- as I mentioned a minute ago, about $250 million higher than 3Q '11, which is typically our busiest quarter seasonally. I expect that free cash flow will be significantly better in 2012 than it was in 2011. However, as I've said in the past, that's highly dependent on the level of revenues in the fourth quarter of 2012 and also the milestone status of major projects, which allow us to bill and collect, both of which affect our working capital requirements and, therefore, affect our cash flow for the year.

As you can see from this slide, we've maintained a strong and conservative balance sheet over the past several years. We redeemed our convertible subordinated notes in 2010. And as of 12/31/2011, we effectively had no debt.

Our liquidity position remained strong with about $824 million in liquidity as of December 31, 2011. With our strong balance sheet and liquidity positions, our customers have confidence that they're dealing with a financially sound company when they rely on us to provide infrastructure solutions to them. Quanta's strong financial position also supports our strategic growth initiatives, which Jim, Duke and Ken discussed with you today.

This is a new slide that we've never shown you guys before. What we did was we showed you how we've allocated our capital over the last couple of years. As you can see, Quanta's largest use of capital has been CapEx to ensure that we have a healthy fleet of equipment to capitalize on growth opportunities we're experiencing. In particular, for several years, we've been investing in specialty electric transmission equipment, which tends to be expensive and has long lead times. This CapEx investment has positioned us well for the transmission opportunities we see for the next several years. Anecdotally, we've been hearing that equipment shortages are beginning to develop and that there are long lead times out there. But that's beginning to become an issue in our industry. But as Duke and Jim indicated, we've been buying throughout this, particularly the long lead time items, so we don't expect equipment shortages to be an issue for Quanta.

We spent $210 million on acquisitions over this period, which have been primarily for companies in the electric power space and, in particular, Canadian transmission and distribution companies. We've used $39 million for investments, $35 million of which was our Howard Energy Partners pipeline investment in the Eagle Ford Shale and the balance is for project financing.

I view the redemption of our convertible notes as a quasi stock repurchase. So if you combine that with the shares we repurchased in 2011 on the open market, we spent approximately $294 million in stock repurchases.

As you can see in the upper right portion of this slide, our use of capital priorities more or less ranked in order of priority. We're optimistic in how we allocate capital -- opportunistic in how we allocate capital based on the opportunities we see in the marketplace. So I can't give you an accurate prediction of what our capital allocation will be over the next 2 years. But the top right-hand corner, this shows you our priorities. And we have a lot of financial flexibility, as you can see from our balance sheet, that allows us to use our capital in the most opportunistic way.

We provided first quarter '12 and full year 2012 guidance in our 4Q '11 earnings release a couple of weeks ago. I would characterize the financial guidance that we've established as reflective of confidence in our business and the opportunities we see ahead for the year, but also reflective of continued regulatory and economic uncertainties.

We had a number of project delays that caught our customers and us by surprise in 2011, and it caused us to have to lower our guidance a couple of times last year. So we wanted to make sure that our 2012 guidance better reflects the realities of our operating environment. We will review our financial guidance each quarter and make adjustments to our outlook as we move through the year should they be required.

As you can see from the general segment expectations for 2012, we're looking for revenue and margin improvement for Quanta for the full year. For your modeling and expectation purposes, I would expect that the comparable growth and margin improvements in the first half of 2012 versus the first of 2011 to be the most significant on a relative basis because we expect to be at higher levels of activity in the first half of 2012 versus the same period in 2011.

Based on our backlog at the end of 2011 and where we sit today, from a comparable perspective, I would expect that revenue and growth -- revenue growth and margin profile for the second half of 2012 relative to the second half of 2011 to be of lesser magnitude than the revenue growth and margin improvement when comparing the first half of '12 to the first half of '11. The reason for this is simply due to the tougher results comparisons in the back half of '12 versus the back half of 2011.

I'll conclude my presentation by showing the key takeaways that I started my presentation with. I hope that you've heard from our presentations today that it's -- the Quanta's businesses are in an uptrend that we think we should last for several years. Our Quanta experienced significant momentum during the second half of '11 that we're seeing continuing for the full half of 2012. We've managed our balance sheet in a conservative manner for the past several years, which has served us well as we weathered the effects of the recession and a changing regulatory environment.

We have the liquidity to fund our working capital needs as projects accelerate into construction and the financial strength and flexibility to be opportunistic in strategically deploying our capital. Our 2011 financial guidance reflects confidence in Quanta's business and opportunities while taking into consideration regulatory and economic uncertainties.

We look forward to a good year in 2012 and reporting our progress and success to you guys. With that, I'll conclude my formal presentation, and I'll take any financial questions that you guys may have. Jamie?

Jamie L. Cook - Crédit Suisse AG, Research Division

Just on Electrical Power margin guidance for 2012, the low end of it, I struggle with just because of the tough first quarter in Electric Power that you had. When I think about 2012 relative to 2011, I don't know how your, I mean, margins are increasing. So what has to happen to get to the flat margins for your 2012 margin guidance? And then just longer term, trying to think about what some of these larger projects do you see more contingency, how that impacts. And if so, can you just sort of talk about that and how that impacts margins going forward? Just with closeouts coming, I'm assuming that's a positive. And then offsetting that, how does the uptick in distribution in the smaller transmission stuff impact margins?

James Haddox

Yes. That's a -- you pretty much asked the question and answered the question for me. No, no. I mean, what you're saying, though, is the first quarter is a seasonally low quarter for us. I mean, it can be impacted. The first quarter can be both good and bad from a margin perspective because...

Jamie L. Cook - Crédit Suisse AG, Research Division

[Indiscernible]?

James Haddox

Yes, I'll try.

Jamie L. Cook - Crédit Suisse AG, Research Division

[Indiscernible].

James Haddox

So what's the question about the first quarter?

Jamie L. Cook - Crédit Suisse AG, Research Division

Your margins in 2012 you've [indiscernible] is flat given that your first quarter in 2011 had unusually low margins, which reflect, I think, [indiscernible] that?

James Haddox

Yes. Well...

Jamie L. Cook - Crédit Suisse AG, Research Division

[Indiscernible].

James Haddox

The bigger...

Jamie L. Cook - Crédit Suisse AG, Research Division

I guess what [indiscernible]?

James Haddox

I think -- no, it's not me. I think that the bigger answer there is there is a big portion of our revenues this year coming from large transmission projects. And what you were talking about in the second half of your question is impacting our margin guidance for 2012 more than anything else, which is we've got a lot of big projects going on in there moving through the year. So we are putting contingencies into those jobs from an accounting standpoint. From a percentage of completion standpoint, we're recognizing lower margins in the beginning parts of all those of projects because we don't want to come back at the -- as those projects get to be 95% complete and then have to take a big hit because they're not really 95% complete from a cost perspective. So you're seeing some conservatism built into percentage of completion accounting. Hopefully, if everything goes right and we don't need those contingencies, you should see some margin pickup as we move through those projects. But I think it's prudent for us now to take a conservative approach on the guidance and on the profit recognition on those projects.

Jamie L. Cook - Crédit Suisse AG, Research Division

Is there anything [indiscernible]?

James Haddox

I can't tell you, Jamie. I don't know how conservative we're being. I mean, I hope we're being adequately conservative, but I can't tell you what that could equate to.

Jamie L. Cook - Crédit Suisse AG, Research Division

[Indiscernible]?

James Haddox

No, because it depends. And the answer to that question is if we're building a pipeline and we're just going out across to -- not a pipeline, a transmission line and we're just going out across the open prairie and it's on private land that we know we've got the right of ways and there's no governmental interference, we don't put as much contingency than if we're in a national forest and there's permitting contingencies, there's some environmental contingencies, there's terrain, all those types of things, we have to deal with. So we put a higher percentage contingencies depending on what -- where the project is. So I can't really give you an overall rule of thumb for contingency.

Jamie L. Cook - Crédit Suisse AG, Research Division

All right. And just -- if -- just based on the performance you have to date on some of these large projects, are you feeling better about the potential to harvest these contingencies relative to where you were potentially?

James Haddox

I don't think I can answer that question right now.

Jamie L. Cook - Crédit Suisse AG, Research Division

It's all right.

James F. O'Neil

Okay. Any other questions? Craig?

Craig E. Irwin - Wedbush Securities Inc., Research Division

James, you've been very clear about the low end of our guidance, basically assuming that they're roughly 40% of your gas business, the long-distance transmission stuff coming in at breakeven. But as we look at the high end of guidance, does this factor in the difficult environment as far as the regulatory process and overall approval process? And then just if I could tack on to that. Over the long term, you talked about 9% to 12% operating margins. All of your businesses are working, backlogs going up in every segment. As we look out, do we need something like a Keystone or a megaproject to pull in the industry capacity to drive us to '12? Or is this something that you think is becoming a lot more achievable with the overall environment out there that you're experiencing?

James Haddox

To drive us to '12 in the...

Craig E. Irwin - Wedbush Securities Inc., Research Division

Operating margin.

James Haddox

Pipeline business or in...

Craig E. Irwin - Wedbush Securities Inc., Research Division

Consolidated.

James Haddox

Consolidated?

Craig E. Irwin - Wedbush Securities Inc., Research Division

Yes.

James Haddox

Yes, I mean, to get to the upper end, to get to the '12, if that's what your question is, we're going to need all the businesses to be in good shape and on the upper end of the demand curve, I mean, particularly Natural Gas. We're already looking at margins for '12 for Electric Power and for Telecom and most certainly for Fiber Optic Licensing to get us into that range. But what's pulling us down as far as our guidance is concerned is the Natural Gas business. If the Natural Gas business has what I would characterize as a more normal year for them, that should get us much closer to the bottom part of that. If the Natural Gas business gets up there to sort of -- and an XL project comes in and you see a lot of capacity absorbed, then we should start moving up higher in that range. But I can't -- at this point in time, were not going to tell anybody we're going to do above that. I mean, that would be kind of unreasonable. But I think you could see us move to the upper end of that if the Pipeline business is performing like we think it's going to over the next 3 or 4 years. We're just in that transitional state right now where it's tough for me to give that kind of guidance. But the Pipeline business is what's -- the guidance that we're giving you this year is below the 9% operating margin, and that's solely due to Pipeline.

Craig E. Irwin - Wedbush Securities Inc., Research Division

So then, just to make sure I understand this perfectly clearly, the top end of your guidance range on EPS on '12, that factors in the difficult environment that we're in, not improving. And that is something that you view as a very rational take on business conditions continuing?

James Haddox

Yes, that's right.

Other questions? Okay. Well, thanks, guys. Appreciate your attention.

James F. O'Neil

Okay. I'm going to wrap up the day with a summary. And then after that, I'll bring the entire management team up here to answer any questions that you may have.

In my earlier presentation when I opened the day, I talked about some of the key takeaways that I wanted you to leave here with. So I wanted to recap that.

I hope it's clear that North America is in the very early stages of a multiyear infrastructure investment cycle that will provide opportunities for our company for many years to come, both in the near term and long term. I want to point out that the Electric Power and Natural Gas and Pipeline segments is where we are seeing a significant opportunity, and that made up about 88% of our revenues, those 2 segments, last year. We'll also continue to see opportunities in Telecom as well as that business continues to ramp as we move into 2012.

Our end market trends are very favorable. We ended 2011 with record levels of backlog. We experienced momentum in all parts of our business in the second half of 2011, and that momentum is carrying us into 2012.

As a result of these 3 dynamics, both our near-term and long-term growth opportunities are improving. I also hope that we've shown that Quanta's performance, track record, capabilities and service offerings and the diversity of our organization and financial strength are key differentiators that makes Quanta best positioned to take advantage and capitalize on opportunities going forward.

As we talked about today the significant need for North America's electric grid to be further developed, updated and maintained, annual transmission investment is expected to more than double over the next several years versus the last 10 years, and we are in the very early stages of experiencing that increase in transmission spending.

We see solid transmission spending and growth opportunities for at least the next 3 to 5 years and perhaps longer.

Distribution spending is gradually recovering and the impact of the recession -- after the impact of the recession, and we are pursuing initiatives to further differentiate our distribution service offerings with the goal of growing our distribution revenues in excess of utility industry distribution spending growth rates over time.

We've made strategic moves into Canada and capitalized on robust T&D opportunities in that area. We're seeing those opportunities materialize today, and we're the leading electric T&D contractor in Canada and are well positioned to increase revenues.

While 2011 was a very disappointing year in our Natural Gas and Pipeline segment, we believe 2011 was an anomaly. And we expect 2012 and beyond to be better years than 2011. We are the pipeline infrastructure solution leader in North America and believe that our diverse service offerings position us well to participate in a number of growth opportunities within the pipeline infrastructure space, particularly for long haul pipeline, shale pipeline gathering systems, horizontal directional drilling and pipeline integrity opportunities.

The unconventional shales in the United States are a game changer for our energy industry, and there is significant need for pipeline infrastructure development that -- in those areas for many, many years.

The Canadian oil sands, too, require significant pipeline infrastructure to get product to exporting locations and to refineries in the United States. Between 2011 and 2020, it is estimated that more than $100 billion will be invested in the pipeline infrastructure in this country, which is the core of the Natural Gas and Pipeline segment.

Over this period, approximately $78 billion is forecasted to be spent on natural gas, natural gas liquids and oil transportation pipeline infrastructure and about $30 billion on pipeline laterals and gathering system infrastructure. There is arguably greater long-term visibility into our -- the pipeline spending requirements in North America because of the unconventional shales and Canadian oil sands than there is into our electric transmission spending outlook.

As we've talked about in meetings with many of you in the past, our -- and on our earnings calls and here today, all of our end markets have strong multiyear drivers that are improving our business visibility. We have a record amount of backlog to execute on, and we expect our backlog to remain strong going forward due to the drivers and trends we have discussed today.

While the regulatory environment remains very challenging for our customers, projects across all of our operating units that had been delayed in the past have worked through these challenges and are in construction. As these delayed projects move into construction in the second half of last year, our revenues and earnings have grown significantly. And importantly, now that we have a portfolio of numerous projects across all of our operating segments in construction, this should mitigate the effect on potential future project delays in our business. The risk of our business has shifted more towards execution, which is something that we control.

We expect our Natural Gas and Pipeline segment to have a much better year in 2012 than we did in '11. Part of the reason for this expectation is because of the diversity initiatives we're implementing to pursue additional growth opportunities. We have moved successfully into shale gathering system markets, which is very attractive and have reoccurring revenue profile due to the high activity levels we see today. At this time last year, we had $0 in shale gathering system backlog. Today, I would estimate that almost 1/2 of our segment backlog is in shale gathering system projects.

Our long haul pipeline -- on the long haul pipeline side, we are encouraged by what we see so far in 2012 and expect 2013 to be a good year, too. And if Keystone XL is approved and moves into construction, our Natural Gas and Pipeline segment could have good visibility and good, solid results well into 2014.

As spending on pipeline integrity increases over the coming years, that, too, should grow revenues and further increase the revenue diversity of this segment.

We have a leadership position in all of our end markets with particular strengths in Electric Power and pipeline infrastructure services. Our safety record, industry diversity, technology offerings, scope and scale, financial strength and reputation are key differentiators that position us not only to maintain our leadership position, but to continue to expand our market share in existing markets and enter adjacent markets with strong positions as opportunities arise.

This is one of my favorite slides. We believe that 2012 could be the first time since 2008 that all of our operating segments increased in both revenues and margins. The past few years have been challenging due to the recession and significantly more difficult regulatory environment. The diversity of our business enabled Quanta to maintain a stable financial profile and to become a stronger company despite those challenges. The diversity benefits of Quanta's business is the most underappreciated aspect of the Quanta story.

As we've shown -- or we hope we've shown here today, we are confident about our prospects the next couple of years. The opportunities that we see ahead of us are the reason Quanta was founded 14 years ago.

Thank you for your time today and participating in our Investor Day. With that, I would like to invite the rest of the management team up here to answer any question and answers -- questions you may have before we close out the session.

James F. O'Neil

Any questions? Alex?

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Jim, you have a nice slide up here. Cash flow over the last 3, 4 years and your uses of that cash flow. If 2012 and '13 become record cash flow years, do you think you might change how you spend that cash over the next 2 to 3 years? In other words, allocate more cash towards a buyback program or allocate more cash towards an acquisition program? Because you've been fairly balanced in your cash use over the last 3 or 4 years, does that cash use change dramatically over the next years?

James Haddox

Alex, I understand your question, but I don't know how to answer it, though, and I'm going to just say it depends. I mean, we're seeing a lot of growth opportunities. We're seeing lots of opportunities to use our capital, some of the initiatives Jim talked about, such as project financing or taking equities, small equity interest in projects. We're opportunistic as to our stock buyback program. I don't think you're going to see a heavy increase in CapEx or anything like that being a use of -- and like I said, I think that there's a possibility depending on what fourth quarter 2012 looks like, but this could be one of our highest cash flow years. Everything is on the table, and we'll consider the other sides of it as far as increasing our buyback program. We've discussed dividends in the past. That's at the lower end of our priorities right now. But we'll just have to see where we are when we get to the end of 2012 as far as our growth prospects for '13, '14 acquisition availability, project financing, all those types of things.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

On the electric side, how should we think about the balance of bookings in 2012 between MSA-type opportunities relative to discrete projects? Does that really depend on how regulatory environment plays out?

James F. O'Neil

I think the regulatory environment could affect distribution. The election could affect distribution. And that should -- more of your MSA work on the Electric segment is going to be tied to your distribution business. We have seen some recovery in '11 over '10. We hope that continues into '12, and we should -- hopefully -- MSA backlog related to distribution hopefully will continue to increase. We also -- and we believe that the Utilimap acquisition and moving into asset management in that sector will help us build additional backlog, too. But by far, the electric transmission awards, the backlog should be very strong there. I don't see a mix of that segment moving more toward distribution. If anything, it might go more towards transmission because it will continue to be healthy. Or close to 60% to even 70% of that segment's revenues should be from transmission business going forward. And that's going to be more of a cyclical type of award. I mean, those are big projects, lumpy awards. So how much backlog we book is going to be the timing of the awards on transmission.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

James, you mentioned that the margins on transmission jobs have the potential to get better as you get towards the end. When you look at the 13-or-so jobs you're on right now, what's the concentration of the end dates? I mean, do a lot of these end in mid-'12, late '12, early '13, mid '13?

James F. O'Neil

Duke, you know the answer to that, but I think that most of them are going to be '13 or '14. I don't think that there's that many. What there 2 or 3 of the jobs sort of this year?

Earl C. Austin

Yes, I think some of the credit comes right into '12, late '12, early '13. And then the other pieces are later on in '13 and '14.

Unknown Analyst

Just a question on the earnings power. And if you take the numbers you've given us on the Pipeline business and not even assuming annualized it can reach your last peak but somewhere in the middle of, let's say, $1.5 billion in revenue and really taking the midpoint of your margin guidance there, 9% to 12%, I think, are obviously the implications in terms of where you GAAP EPS is right now and where it go could just from that beta [ph] EBITDA [ph]. So as we look at your internal projections and assume that you have continuing regulatory environment pickup, et cetera, but you continue to grow on the shale side, how many years out do you think you could sort of see that business really peaking in terms of revenues and margins?

Unknown Executive

Excellent question, is when do you see gas peaking?

Earl C. Austin

Yes, I think it's hard to say, from a regulatory environment that you have, when some of those larger projects go. But we think '13 -- '12 is good, '13 is better, '14 looks good. And that's the only way I can characterize the gas, but it's not bad as -- you can't see that far out. But the next 3 years is when we see really nice robust environment with the shale plays and now the oil sands in Canada.

Unknown Analyst

Do you think around 2014 you could start hitting that range based on some of the things go as you planned?

Earl C. Austin

It somewhat depends on where the projects land. If they land all in '13 and if it lands '13, '14. It just depends on how it all plays out because I think the next 3 years are nice years for the gas business.

Unknown Executive

That's the visibility that we have. I don't think you're going to have near the infrastructure built out in 3 years, okay? So we expect that market will be active beyond that. But we have visibility with customers and what they're going to spend over the next 2 to 3 years. It looks really good.

Unknown Analyst

Duke, you mentioned that you guys on the Pipeline side have the capacity to get to '10 spreads. Do you think [indiscernible] how many spreads there are in the North American industry at this point? Is that -- and has that number gone up or down over the past couple of years?

Earl C. Austin

It's varies, 24 to 42. 24 down. But, I mean, the larger part, spreads is around 30 that are natural spreads. But you got -- some of the smaller shale gas spreads and things like that, I can't tell you. But you could probably put 30 spreads that were in North America. It's probably 10 in Canada, and then the rest are in the low 40, I think.

Unknown Analyst

And the number you gave for Quanta '10, did that includes spreads that you could apply both to the shale work and the long haul?

Unknown Executive

Yes, I mean, our superintendents, obviously, can go to shale or to long haul. But those guys can also go back and do the long haul. So they're interchangeable somewhat. Equipment, somewhat as well.

Unknown Analyst

James, you almost answered the question about margins in the Gas business, so I want to come back to you and give you a chance. The guidance that you're giving for '12 is to be -- kind of at a similar level, revenue possibly up. Does that mean we're kind of counting on the anomaly of the similar 3 events happening that you listed for the reason for the margins, where they were in 2011? And then at the same time, does that mean that you're bidding the same margins in '12 as you were in '11 for the work that you're seeing?

Earl C. Austin

I mean, we had a margin profile that we adhere to, and I don't think it's changed at all. As far as '11 versus '12, I think it's the anomaly that happened in '11 is the difference between '12. And that's somewhat equipment utilization as well. So if we do more than what we're saying, I mean, if our revenues increased, I'll probably use more equipment. And obviously, our margins will pick up.

Unknown Analyst

But I guess that's a bit of a struggle because you're guiding on the low end for the margins to be similar in '11. But if you're saying '11 was an anomaly, the margins shouldn't be lower in the work we're bidding and the revenue should be up.

James Haddox

The reason we guided to the lower end on Pipeline breaking even is because we didn't have the visibility into the market because of the bidding cycles. We didn't want to get caught like we did last year and baked all of that into the guidance and then in May come to you and say, "Oops, we didn't get it, okay?" So that's the low end of the guidance. If we do a lot of the shale work, like we think is going to happen throughout the year and that's recurring, and that -- we should be more toward the middle of guidance. If, in addition to that, we land a big transmission job or 2, then you should start moving toward the upper end of guidance. So -- but we don't have that visibility right now. That's why we're giving you that wide range, and we're taking the $0.90 look that we're breakeven, until that materializes. And it's materializing every day. So in May, we should give you a pretty good snapshot of where we are on the work that's local in the shales. I may not -- should be able to maybe give you some insight on some big transmission projects, but I'm not worried about that boom and bust anymore because I've got the shuttle work here that I'm doing, and I'm keeping people in equipment busy other than the specialized side booms that we can't work on the shale work. So that's kind of how we thought through guidance. And it's just because of the nature of when we have to provide it and the lack of visibility we have at that time going into the year. We're going to take a conservative approach on our Gas business until we get more visibility because I don't want to get in a situation like we were in last year.

Earl C. Austin

And to clarify what Jim is saying, that when he's talking about breakeven on the gas business, he's talking about breakeven on the gas transmission business...

James Haddox

Big Pine [ph].

Earl C. Austin

On the Big Pine [ph], just not on the whole segment.

Unknown Analyst

Could you tell us how large in the Pipeline segment does integrity testing business goes? Or can you give us a sense of how much of that integrity work within Pipeline and some sense of where we are now versus where that could grow? Given the drivers over time, the aging infrastructure and all that, is that a material part of Pipeline?

Earl C. Austin

Yes, it's somewhat intertwined into our pipe [ph] business because we're trying to create construction revenue. So it's got -- it's very difficult to say what's part of it is integrity versus what part may be a small piece of pipe that we're laying in. And we don't really characterize. It'd be very difficult for us to break it out anything like that. It's kind of like doing shale work and starting work, long haul work, and then it's just gets intertwined.

James F. O'Neil

Directionally, it's probably -- distribution and integrity is probably less than 20% of that segment revenue. And it has a significant upside potential. We're growing off a smaller base, though, but it has significant upside over the next many, many years.

Earl C. Austin

Yes, we're excited about the integrity business. It's a great business and it's growing.

James F. O'Neil

Any more questions? Alex?

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Somewhere during one of the presentations, you mentioned that there would seem to be an increasing opportunity to fully provide outsourced services to one of your customers, sort of like the Puget Sound transaction. We haven't heard you talk about that in a couple years. Is that kind of a redeveloping theme here where some are looking to fully outsource their maintenance to contractors like yourself?

James F. O'Neil

I think that there will be opportunities over the next 5 to 10 years to have additional outsourcing agreements, and our customers continue to get faced with the -- their cost of maintenance and their increasing cost and the pressure on the reliability versus cost of systems. And one of their options is to look at outsourcing, and that's what Puget did. Puget did that because they were having reliability issues. And by the way, we saved them 30%, by their own admission, in their operating costs. So it's a tough decision for a utility to make, but I think that over time, with the economy we're in, with the reliability requirements and everything else, it's going to be an increasing opportunity for us down the road.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

So is that -- are you saying there's nothing imminent? It's just a long-term opportunity?

James F. O'Neil

Well, if it's something imminent, I don't think I could talk about it. So that's always out there. I mean, we just won the gas outsourcing agreement from Puget, and we were pretty stealth about that. But that's a 5-year agreement. Now we do not only electric but gas outsourcing for Puget. I think you'll see that model with more utilities in the future. But it's not something that you're going to book that every -- one a year or whatever. I mean, that's a -- that's just a step change. It's a completely different direction a utility may take in their strategic thinking on how they should manage their T&D infrastructure to the reliability standards. So I -- it's a good question, but we'll just have to see how that plays out.

Unknown Executive

And they outsource like they're no-compliance, what made it what the outsourcers believe is the right solution for their compliance -- so we provide the solution for their compliance. So they outsource pieces of it as well -- for integrity, they may hand us integrity and say handle my integrity. But we're seeing those kind of...

James F. O'Neil

Smart meter.

Unknown Executive

Smart meter. "Here, handle my smart meter applications versus a Puget model." So I think that's somewhat where we're becoming more of a solution provider versus a normal [indiscernible] a la carte.

James F. O'Neil

And making those inroads helps get to that ultimate stuff, too, because that's where you keep building that trust and relationship over time. So you're advancing your current relationship to that level. I mean, it could go up from there potentially. Anybody else? Kip?

Kip A. Rupp

Sure. I just want to echo Jim and Duke and Ken and James and just thank you all for coming today and taking the time, 4 hours to start to listen to us up here doing a presentation. From my perspective, it's good to have an opportunity like this so we can try and talk to you more about what we're doing strategically, what our operations are doing. Oftentimes, the 30-minute speed dating meetings and investor conferences aren't very conducive to that.

So just a couple of reminders. In the pat [ph] Folios, there is the survey, feedback survey of the event. We really would appreciate if you guys could take a couple minutes. If you want to fill them out while you're here, we're going to -- lunch is outside. If you want to sit here and eat and kind of fill it out, give it to me or give it to Julie upfront. But also, you should be getting that e-mail tomorrow or the day after that with the same survey. So we'd like to collect that.

Copies of all the presentations again are on your little flash drive in the folio. We're going to have them posted. They are posted on the website as well. I think we have some of the videos that we've shown today in the Investor Day section of our website, and we'll continue to try to beef that up and make it into a nice, little landing page for some content of our crews in action and kind of see what we do.

So with that, lunch should be outside, and thanks again for your participation today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Quanta Services, Inc. - Analyst/Investor Day

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts