Quanta Services Management Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 2.12 | About: Quanta Services (PWR)

Quanta Services (NYSE:PWR)

Q2 2012 Earnings Call

August 02, 2012 9:30 am ET

Executives

Kip A. Rupp - Founder and Managing Partner

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

Derrick A. Jensen - Chief Accounting Officer and Senior Vice President of Finance & Administration

Analysts

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

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Saagar Parikh - KeyBanc Capital Markets Inc., Research Division

Zach Larkin - Stephens Inc., Research Division

Scott J. Levine - JP Morgan Chase & Co, Research Division

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

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Shawn E. Lockman - Piper Jaffray Companies, Research Division

William D. Bremer - Maxim Group LLC, Research Division

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

Adam R. Thalhimer - BB&T Capital Markets, Research Division

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Quanta Services Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Following the presentation, the conference will be opened for question. [Operator Instructions] This conference is being recorded today, August 2, 2012. I would now like to turn the conference over to Kip Rupp, VP of Investor Relations. Please go ahead, sir.

Kip A. Rupp

Great. Thank you, Arianne, and welcome, everyone, to the Quanta Services conference call to review second quarter 2012 results.

Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to have Quanta news releases and other information e-mailed to you when they occur, please sign up for e-mail information alerts by going to the Investors & Media section of Quanta Services' website at quantaservices.com.

A replay of today's call will be available on Quanta's website at quantaservices.com. In addition, a telephonic recorded instant replay will be available for the next 7 days, 24 hours a day that can be accessed as set forth in the press release. Please remember that the information reported on this call speaks only as of today, August 2, 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 call.

This conference call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance or that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or are beyond Quanta's control, and actual results may differ materially from those expected or implied as forward-looking statements. Management cautions that you should not place undue reliance on Quanta's forward-looking statements, and Quanta does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after this call.

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.

With that, I would like to now turn the call over to Mr. Jim O'Neil, Quanta's President and CEO. Jim?

James F. O'Neil

Thanks, Kip. Good morning, everyone, and welcome to Quanta Services Second Quarter 2012 Earnings Conference Call. I will start the call with an operational overview before turning it over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a detailed review of our second quarter financial results. Following Derrick's comments, we will welcome your questions.

Our second quarter results demonstrate continued solid execution by our operations and reflects strong demand for our services. Our revenues in the second quarter grew 50% compared to the second quarter of 2011, and revenues for the first 6 months of this year have increased 58% compared to the same period last year. Our GAAP diluted earnings per share of $0.31 in the second quarter increased 107% compared to the second quarter of last year.

Our second quarter results were driven by strong performance in our electric power segment due to the significant volume of electric transmission projects underway and our ability to safely execute on those projects. Quarter over quarter and sequentially, improved performance from our natural gas and pipeline segment also contributed to the strong results.

Our employee count at the end of this year's second quarter was approximately 19,300, up 30% compared to the second quarter of last year and up 10% since the end of 2011.

Our electric power segment revenues increased approximately 52% in this year's second quarter compared to the same period last year. At the end of the second quarter, 12-month backlog for the electric power segment increased 27.4%, and total backlog for this segment increased 4.1% compared to the second quarter of 2011.

In the second quarter, Quanta completed the installation of San Diego Gas & Electric Sunrise Powerlink transmission line, which was energized on June 17. This was an extremely challenging project due to the environmental sensitivities, difficult geology and geography, and an accelerated construction timeline. For environmental reasons, nearly 75% of the project's towers were set by helicopters, resulting in more than 28,000 flight hours being logged to complete the aerial construction. The timely completion of the Sunrise Powerlink transmission line was critical due to the recent shutdown of the San Onofre nuclear plant. Because this plant supplied a significant amount of electricity to San Diego, energizing the Sunrise Powerlink line on the accelerated schedule was critical. This project, in almost every aspect, is an excellent example of Quanta's industry-leading transmission capabilities and our ability to meet our customers' expectations under challenging circumstances.

Also during the second quarter, we completed construction of Hydro One's Bruce to Milton transmission line. This 79-mile, double circuit, 500,000-volt transmission line is the largest expansion of Ontario's electric transmission system in more than 2 decades and should bring enough nuclear and renewable energy to provide more than 10% of the province's electricity needs. It is worth noting that this project was accomplished with 0 lost time injuries to Hydro One employees or contractors working on this job, demonstrating the safety commitment of everyone involved.

While Quanta was successfully completing these 2 projects in the second quarter, we also were ramping up on construction activities on 3 projects: the Devers to Palo Verde 2 project for Southern California Edison; Texas Competitive Renewable Energy Zone or CREZ project for Sharyland and ETT; and the Northwest Transmission Line project for BC Hydro. We believe the industry is in a multiyear transmission investment trend.

It has been more than 40 years since significant transmission investment occurred in North America, and various industry sources indicate approximately 2/3 of North America's transmission infrastructure is in poor condition. Four quarters of meaningful transmission construction does not solve this challenge. The replacement or repair of aging electrical infrastructure, the installation of new transmission networks to improve reliability and the need for transmission interconnection or renewable power sources are only a few of the drivers of transmission investment. We believe certain near- and medium-term dynamics are not currently reflected in various third-party transmission spending forecast, which will require additional transmission infrastructure spending. These dynamics include the implementation of mandatory compliance with NERC reliability standards, the implementation of FERC Order 1000, which we believe will spur merchant transmission investment, and the impact of new transmission or upgraded transmission lines resulting from the retirement and conversion of older coal-fired generation plants to cleaner burning generation sources, such as natural gas-fired plants due to federal environmental regulations. For example, ICF International recently estimated that more than 50 gigawatts of coal-fired generation will be retired over the next 4 years.

Earlier this week, Quanta announced that ATCO Electric has selected Valard Construction, a Quanta services company, to install transmission infrastructure for their Hanna Region Transmission Development Project. Under the terms of the contract, Valard will install approximately 149 miles of 240-kilovolt transmission infrastructure in the Hanna region of Southeast Alberta, Canada. Resources have mobilized to begin this project, which is expected to be completed in 2013. This project is included in our backlog figure at June 30. We believe this award is indicative of the level of transmission opportunities that exist in the market. As we have highlighted in our past few earnings conference calls, we expect the timing of large transmission projects awards to be lumpy going forward. Therefore, we recommend that investors focus on new award activity over a longer term rather than on a quarterly basis.

Turning to our natural gas and pipeline segment. Revenues increased approximately 62% in the second quarter of 2012 compared to the same quarter last year. Importantly, operating income in the quarter improved from a loss of $1.2 million in last year's second quarter to $15.3 million of operating income in this year's second quarter. With the strategic moves we have made to date, we believe this segment will be profitable for the remainder of the year.

At the end of the second quarter of 2012, 12-month and total backlog for this segment increased about 59% and 20%, respectively, compared to the end of the second quarter of 2011. The significant increase in quarter-over-quarter backlog reflects the strategic shift Quanta made last year to pursue shale-gathering work and also the master service agreement we signed with Puget Sound Energy last year for natural gas infrastructure maintenance.

Despite declines in crude oil and NGL prices, we have seen increased demand for our pipeline construction services. Aggregate horizontal or directional rig counts and liquid-rich shales remain at high levels, and companies continue to maintain or increase exploration and production activities for liquids and wet shale formations, such as the Bakken, Eagle Ford and Marcellus shales. In addition, there is minimal existing infrastructure in these shales, and hundreds of wells are shut in because they do not have the pipeline-gathering infrastructure to transport the product from the wells to processing facilities. Therefore, strategic investment in gathering infrastructure is required to transport product to market in the near and long term.

We continue to see signs that a significant volume of long-haul, large-diameter projects could be awarded and moved into construction in 2013. Should most of these projects move forward, the industry could experience the most active pipeline construction market it has seen in the past several years. We will continue to gain more clarity on these projects as we approach year end. This dynamic, coupled with expectations for continued shale-gathering pipeline infrastructure development, will require significant pipeline construction resources and could result in tightening of industry capacity.

Our telecommunications segment experienced solid growth in the quarter. Revenues increased almost 26% in this year's second quarter compared to the same period last year, driven by increases in the base of construction on broadband stimulus projects and fiber-to-the-cell site projects.

Compared to the end of last year's second quarter, 12-month and total backlog for this segment decreased 2.4% and about 10%, respectively. The decrease in segment backlog was due to backlog burn associated with the significant increases in projects in construction during this year's second quarter, as well as the exploration of several multiyear master service agreements at the end of this year. However, we are actively working with these customers and are optimistic about renewing these master service agreements before year end.

In our Fiber Optic Licensing segment, revenues for the quarter increased approximately 3.5% compared to the second quarter of last year. We continue to balance the build-out of our newer markets to increase network penetration while investing in our more mature markets that generate higher margins and returns in the near term. This balanced approach should enable us to grow revenues while maintaining high margins and acceptable rates of return on investment.

As a result of our strong first and second quarter results, the expectation of continued strength in our electric power segment and ongoing opportunities and better visibility for our natural gas and pipeline segment, we're increasing our 2012 full year outlook. Derrick will provide additional detail about our outlook during his comments.

In summary, total company backlog remains strong and we see continued opportunity to profitably grow our business. We are confident that 2012 will be a strong year for Quanta and believe that the momentum and the strength of our business should continue into the foreseeable future.

Before I turn the call over to Derrick Jensen, our new CFO, I would like to recognize James Haddox for his contributions to Quanta's overall success. As CFO since our inception, James has participated in 57 quarterly conference calls, which is a substantial tenure considering the growth of the company from an annual IPO revenue of $152 million back in 1998 to where we are today. James, a big thank you to you for your service to this organization.

Now, I would like to turn the call over to Derrick. Derrick?

Derrick A. Jensen

Thanks, Jim, and thanks, James. Good morning, everyone. Today, we announced revenues of $1.52 billion for the second quarter of 2012 compared to $1.01 billion in the prior year's second quarter, reflecting growth of about 50% quarter-over-quarter. Net income attributable to common stock for the quarter was $65.5 million or $0.31 per diluted share, as compared to net income of $31.8 million or $0.15 per diluted share in the second quarter of last year.

The growth in consolidated revenues in the second quarter of 2012 was driven by growth across all of Quanta's segments. Second quarter 2012 revenues were also favorably impacted by the incremental contribution of approximately $58 million in revenues from companies acquired since the second quarter of 2011.

Our consolidated gross margin increased to 15.5% in the second quarter of 2012 from 15.2% in 2Q '11. This increase was due to strong performance in each of our segments, as well as the impact of higher revenues, which improved our ability to cover fixed costs.

Selling, general and administrative expenses were $115 million, reflecting an increase of $25 million as compared to last year's second quarter. This increase is primarily attributable to $14.5 million in higher salary and incentive compensation costs associated with increased levels of activity and profitability, approximately $5.7 million in additional administrative expenses associated with companies acquired since the second quarter of 2011, and $5.2 million in increased professional fees associated with ongoing legal matters. As a percentage of revenues, selling, general and administrative expenses decreased from 8.9% in the second quarter of 2011 to 7.6% in the second quarter of 2012, primarily due to the higher overall revenues as previously discussed.

Our consolidated operating margin before amortization expense increased from 6.3% in 2Q '11 to 8.0% in 2Q '12.

Amortization of intangible assets increased from $6.9 million in 2Q '11 to $9.5 million in the second quarter of 2Q '12 due to the acquisitions since June of last year.

To further discuss our segment results, the electric power segment's revenues were up about $347 million quarter-over-quarter or approximately 52%. Revenues were positively impacted by higher revenues from electric power transmission services, resulting from an increase in the number and size of projects that were ongoing in 2Q '12 compared to 2Q '11. The increase in revenues is also attributable in part to the incremental contribution of $49 million in segment revenues from acquired company. These increases were partially offset by $36 million in lower emergency restoration services versus 2Q '11.

Operating margin in the electric power segment increased to 11% in the second quarter of 2012, compared to 10.4% in last year's second quarter, primarily due to higher overall revenues from services on higher-margin transmission projects. Additionally, the overall increase in this segment's revenue contributed to this segment's improved ability to cover fixed and overhead costs. Partially offsetting the increase was a decrease in emergency restoration service revenues, which typically carry higher margins.

Natural gas and pipeline revenues increased quarter-over-quarter by 62% to about $340 million in 2Q '12 primarily due to an increase in the number of shale-gathering system projects currently under construction. Additionally, we saw increases in revenues from natural gas distribution services as the outsourced gas distribution work for Puget Sound Energy was just starting up in the second quarter of 2011. Operating income for the natural gas and pipeline segment as a percentage of revenues increased to 4.5% for 2Q '12 from a negative 0.6% for 2Q '11. This improvement was primarily due to the overall increase in the volume of this segment's revenue due to the shift to more shale-gathering system projects, which improved the segment's ability to cover fixed and overhead costs, as well as the prior year being significantly impacted by productivity issues on certain transmission pipeline projects that were hampered by unusual weather -- winter weather and complicated by restrictive governmental regulations. Although significant rainfall did adversely impact the profitability of certain projects in the second quarter of 2012, the impact was not as extensive as what was experienced in 2Q '11.

Revenues from our telecommunications segment increased $27.2 million or 26% to $133.6 million in 2Q '12, primarily due to an increase in the volume of work associated with stimulus-funded fiber optic network projects and higher revenues from fiber-to-the-cell site and wireless initiatives, resulting from higher capital spending by our customers. Operating margin in the telecommunications segment was 10.3% in 2Q '12, compared to 8.5% in 2Q '11. This increase in margin is primarily due to increased demand for our services, allowing for margin expansion, as well as the impact of revenue increases on the segment's ability to cover fixed costs.

Fiber Optic Licensing segment revenues were $28.7 million for the second quarter of 2012, reflecting an increase of 4% over 2Q '11. Operating margin was 53% in 2Q '12, compared to operating margin of 47.5% in 2Q '11.

When calculating operating margins by segment, we do not allocate certain selling, general and administrative expenses and amortization expense to our segments. Therefore, the previous discussion about operating margins by segment excludes the effect of such expenses.

Corporate and non-allocated costs increased $11.8 million in the second quarter of 2012 as compared to 2Q '11, primarily as a result of $5.7 million in higher salary and incentive compensation cost associated with current levels of operating activity, $2.8 million in increased professional fees associated with ongoing legal matters and $2.7 million in higher amortization expense associated with intangible assets.

Adjusted diluted earnings per share, as calculated in today's press release, were $0.36 for the second quarter of 2012 compared to an adjusted diluted income per share of $0.19 for 2Q '11.

Cash flow provided by operations was approximately $86.3 million for the second quarter of 2012. Capital expenditures, net of proceeds from sales, were about $43.7 million, resulting in approximately $42.6 million in free cash flow for the quarter.

Our days sales outstanding or DSOs were 81 days at June 30, 2012, versus 79 days at March 31, 2012, and 75 days at June 30, 2011. Although DSOs were comparable to the first quarter, our cost in excess to billing balance is higher during the period. A significant component of the balance is associated with the Sunrise Electric transmission project, which was substantially accelerated during the first half of this year. This acceleration created considerable workarounds impacting the sequence of production. This out-of-scope work, which is directed by the customer in order to meet the accelerated completion date, created change order requests and delays in the final billing as reconciliations of final project activity had only just begun since the project was so recently completed. Although not fully approved yet by the customer, the change order has been billed subsequent to June 30. And in discussions with the customer, we are not aware of any circumstances that would prevent these amounts from being collected in subsequent periods.

EBITA for the second quarter of 2012 was $116.1 million or 7.7% of revenues, compared to $62.3 million or 6.2% of revenues for the second quarter of 2011. Adjusted EBITDA was $155.9 million or 10.3% of revenues for the second quarter of 2012, compared to $97.4 million or 9.6% of revenues for the second quarter of 2011. The calculation of EBITA, EBITDA and adjusted EBITDA, all non-GAAP measures, and the definitions of these and DSOs can be found in the Investors & Media section of our website at quantaservices.com.

At June 30, 2012, we had about $174 million in letters of credit outstanding, primarily to secure our insurance program, and we had borrowings of approximately $39 million outstanding. In addition, at the end of the quarter, we had approximately $173 million in cash. Considering our cash on hand and availability under our credit facility, we had nearly $660 million in total liquidity as of June 30.

Concerning our outlook for 2012, we expect revenues for the third quarter of 2012 to range between $1.6 billion and $1.7 billion, and diluted earnings per share to be $0.34 to $0.37 on a GAAP basis. These estimates compare to revenues of $1.25 billion and diluted earnings per share of $0.25 in 3Q '11. Our forecast for 3Q '12 includes an estimate of $7.1 million for noncash compensation expenses and $10.4 million for amortization expenses. Excluding these expenses, our non-GAAP adjusted diluted earnings per share for the third quarter are expected to be $0.39 to $0.42 and compare to non-GAAP adjusted diluted earnings per share of $0.29 in 3Q '11. This non-GAAP measure is calculated on the same basis as the historical calculations of adjusted diluted earnings per share presented in the release.

We currently expect revenues for the full year of 2012 to range between $5.9 billion and $6.1 billion and diluted earnings per share to be between $1.15 to $1.25 on a GAAP basis. These estimates compare to revenues of $4.6 billion and $0.62 in 2011. Our forecast for 2012 includes an estimate of $29 million for noncash compensation expenses and $38 million of amortization expense. Excluding these expenses, our non-GAAP adjusted diluted earnings per share for 2012 are expected to be between $1.35 to $1.45. We are currently forecasting net income attributable to noncontrolling interests to be approximately $3.5 million in the third quarter of 2012 and between $15 million and $15.5 million for the year. For additional guidance, we are currently projecting our GAAP tax rate to be between 36% and 37% for 2012, and we expect our diluted share count to be about 213 million shares. We expect CapEx for all of 2012 to be approximately $200 million to $220 million, which includes CapEx for our Fiber Optic Licensing segment of about $40 million to $50 million. This compares to CapEx for all of 2011 of $172 million.

As Jim commented, we continue to execute within all of our segments and believe our pipeline segment will continue to be profitable throughout the rest of the year. We believe that we're operationally and financially well positioned for continued solid growth in 2012 and beyond.

This concludes our formal presentation. We'll now open the lines for Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Alex Rygiel with FBR Capital Markets.

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

A couple of questions, first, Jim, you finished 2 big transmission projects. You started 3 big transmission projects. How should we think about the positives or negatives that came through your P&L because of all that activity? Was it a net positive? Was it a net negative because of the transition of the 2 and the 3?

James F. O'Neil

I think it's neutral, Alex. I mean, we have [indiscernible] costs that typically go into our POC accounting. So I mean, if it is a little bit negative, it would be immaterial. So it's neutral. I mean, I think the important thing is that we continue to have momentum and we're able to fill any burn with backlog in large transmission projects going forward.

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

As I look at your book-to-bill and your new awards, I focus a lot more attention on 12-month backlog. And the new awards in your 12-month backlog, I think, was the third highest in history, which is an amazing number here. Do you continue to believe that new awards can remain at a very high level like they are right now for the foreseeable future?

James F. O'Neil

Yes, I mean one thing you guys don't see are projects below $100 million, and a lot of our smaller projects continue to accelerate. I'd say our small transmission market is growing faster than the big projects. And that's our everyday work, distributions growing. Every aspect of our business has growth in it today. The big projects, we had a light quarter on awards, but that -- I expect in the third quarter, we're going to see more activity there. So I feel very confident that the backlog will be strong as we go into '13.

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

And it sounds like storm activity in the second quarter was maybe even somewhat of a negative. Do you expect that to kind of reverse and be a little bit more of a positive in the third quarter?

James F. O'Neil

It will be. We only have $13 million in storm revenue in the second quarter. And the storm work that we started on here in the third quarter was significantly more than $13 million that began in the first week of July. So I can tell you with confidence that storm revenues in the third quarter will be higher than in the second.

Operator

And our next question comes from the line of Dan Mannes with Avondale Partners.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Talking real quick about your guidance. It's a really nice increase on the -- for the year and really not because of the quarter. I mean, it seems like a pretty significant move up. Can you talk a little bit about what increases your confidence or what changes your view for the balance of the year given what you've experienced, I guess, over the last quarter?

James F. O'Neil

Dan, it's really just better visibility. I mean, we're in an election year, we didn't -- we did hedge a little bit on timing on some of these project starts. But we're getting better visibility that these projects will start on time. And it's really just visibility between what we see today versus what we saw back in May.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Is there any impact from the tightness, i.e. the margins in your backlog? Have they been improving relative to where they were 3, 6, 9 months ago? Or is that not as much of an indicator?

James F. O'Neil

Margins and backlog are strong or stronger than what we're experiencing today.

Operator

And our next question comes from the line of Jamie Cook with Credit Suisse.

Jamie L. Cook - Crédit Suisse AG, Research Division

So I guess, can you just talk about your confidence level on the gas side with the margins that you put up with -- the worst is behind us, and how you see margins trending in the back half of the year, specifically, and what you think the implications could be for 2013? With and without big gas -- with regards to 2013, how we think about things if big gas or if it doesn't pick up, I guess.

James F. O'Neil

Well, the good thing, under Duke's leadership and trying to shift resources into these gathering fields, which we moved into that initiative about a year ago, now we're well established in these liquid-rich fields. That works almost like an MSA work. It's recurring revenues, and it is profitable. And the second quarter's a good example that we don't have to have any big pipework to gain profitability in that segment. So we expect that work to continue, that shale-gathering work. There will be some seasonality due to weather in the fourth and first quarter, but it should be more predictable going forward. Any big pipework would be incremental to that. Because those are lump-sum type projects, the margins on large pipe are 400 to 500 basis points higher than what we experience in the shale-gathering work on an average basis. So we're very excited about where we're going with the segment. Everything that we expected and communicated to you guys is playing out as expected. And we do expect to be profitable for the year in that segment. And I look forward to good things next year.

Operator

And our next question comes from the line of Will Gabrielski with Lazard Capital Markets.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Two questions, one on electric. We have heard from a few different power generating companies that the EPA rules are starting to -- around emissions, are starting to drive some incremental transmission spending and you touched on that. I'm wondering if you could give a little more detail of whether or not you're doing that work now and what the visibility is like there. And then I'll have a follow-up.

James F. O'Neil

Not a whole lot right now, Will. We think that'll play out over the next -- probably be more significant 2, 3 years from now, even into 2020. I mean, it's a longer play for us. I mean, the main thing is that the rule will drive coal switching to gas primarily. And while those rebuilds are occurring, whether it's a rebuild or a new gas plant that's being built, transmission will either be upgraded or will be built new and -- but we think that will play out over a longer period of time. But certainly, it will be incremental to our business.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay. And then on the natural gas pipeline side, I guess you're getting your hands dirty in some of the different basins that are out there now and expanding beyond the Marcellus. I'm wondering what the competitive environment looks like, union versus nonunion, and what type of progress you're making in the different fields.

James F. O'Neil

We're seeing capacity just tighten overall in that market, both union and nonunion labor. And it is presenting opportunities for us to get the pricing that we aspire to have in that business even in nonunion markets. So I did make comments in my script that capacity is tightening and we do see that continuing in the shale fields today. And we expect that will continue. And once big pipe construction moves forward in a meaningful way, we think we're going to be really tight. The industry is going to be really tight in capacity. So the momentum that we're seeing and -- our expectations are very positive for that segment.

Operator

Our next question comes from the line of Tahira Afzal with KeyBanc Capital Markets.

Saagar Parikh - KeyBanc Capital Markets Inc., Research Division

This is Saagar on for Tahira. My first question relates again to the pipeline business, and I know that you've touched on a little bit of this. But the second quarter pipeline profitability was -- is it really a reflection of what the base pipeline margins on a clean level should be going forward? And along with that, how many of your spreads were utilized in the second quarter because as we saw, overall pipeline revenue was down sequentially?

James F. O'Neil

Yes, I think we did have some weather impact in the second quarter. So I think margins should be just -- should be a little bit better than what we experienced on a go-forward basis provided we have good weather. We should be closer to the mid to upper mid single digit operating income with just shale-gathering work. And I think we did 4.5% for the segment. Other than that, I think, going forward, if we get big pipework in the mix, we should be up in the 9% to 12% range. And I'm sorry, I didn't catch the second part of the question.

Saagar Parikh - KeyBanc Capital Markets Inc., Research Division

Oh, I just -- how many of your spreads were utilized in the second quarter because as I saw, the overall pipeline revenue was down sequentially?

James F. O'Neil

We look at spreads in 2 ways. One is equipment, and one is people. And I would say that from a personnel standpoint, we're fairly utilized in the shale-gathering work right now and in Canada. As far as spreads are concerned, we do have some underutilization on some of our specialized equipment for big pipe. But other than that, our equipment is being utilized fairly well on the equipment that can be used in both big pipe and in shale-gathering work. So I would say overall, our utilization is pretty high right now.

Operator

And our next question comes from the line of Zach Larkin with Stephens.

Zach Larkin - Stephens Inc., Research Division

First question, Jim, I wondered if you could talk a little bit more about the small transmission work, the positive indications there. And I wondered if there's any kind of a geographic impact where you're seeing the most strength in the small transmission markets. Or is it something that's pretty broad-based across the country?

James F. O'Neil

It's broad-based across the country right now. I mean, it's NERC compliance standards that all of our customers have to meet. And those went into effect late last year, and we're starting to see momentum there. So we expect that will continue -- it's a multiyear trend. And it's a significant amount of work that needs to be done. So it's -- the day-to-day work, the $5 million, $10 million, $20 million, $30 million projects, but there are some specific requirements that NERC has put out that our customers need to meet, and that's driving a lot of our construction activity today.

Zach Larkin - Stephens Inc., Research Division

Great, thanks. And then Derrick, I wondered if you could give a little bit more color on the legal expense. Is that something that you expect to kind of continue through the end of the year? Or do you have any sense on when those expenses might curtail?

Derrick A. Jensen

I think we'll have some form of expense through probably the rest of this year.

Operator

And our next question comes from the line of Scott Levine with JPMorgan.

Scott J. Levine - JP Morgan Chase & Co, Research Division

So I was hoping you might be able to provide a little bit more color on priorities for cash for deployment. I know you made some discussion about investing in individual projects on a select basis, maybe any thoughts there, as well as your current M&A outlook and appetite for acquisitions either in the U.S. or overseas.

Derrick A. Jensen

Sure. I'd say that it remains somewhat constant. And as you saw from the second quarter, I mean, our first demand is working capital to support our projects. And as we talked about, we have capital expenditure needs for this year. We are optimistic still on the acquisition and investment side. I mean, we've talked about some smaller investments that are out there. And at the same time, from an acquisition standpoint, I'd say that we closed 10 acquisitions in the last 12 months. And I believe we'll continue to see that -- a similar type of opportunistic activity over the next 12 months.

Scott J. Levine - JP Morgan Chase & Co, Research Division

Got it. And Jim, I'm not sure if I caught this as well in your prepared comments. Is there any update regarding your thoughts on the renewables business for this year, in particular the solar side?

James F. O'Neil

Renewables will be strong this year, particularly solar, as we take advantage of -- our customers take advantage of the 1603 tax grant that expired at the end of last year. So we do have significant activity. We will experience strong double-digit growth in solar this year and renewables overall. And I expect that, that trend will last into '13. Beyond that, I think a lot of it has to do with what state RPS does because federal subsidies are expiring, but for the foreseeable future, it's going to be a very active business for us.

Operator

And our next question comes from the line of Jeff Beach with Stifel, Nicolaus.

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

A couple of questions. One, the electric margin in this quarter at 11% on record revenues, below the margins of the last 3 quarters at least, and you had a couple of major project close-outs, can you describe why the margin is lower this quarter than the past 2 or 3?

Derrick A. Jensen

Yes, this is Derrick. The primary reason is actually the amount of storm work. I mean, when you look at the amount of the storm work we had in the fourth quarter of last year and the second quarter of last year, as well as even the first quarter of this year, we had substantially higher revenues from storm and yet, in all of those periods. And those things come in at higher margin. This quarter, we only had $13 million of storm work that compares to numbers of -- in the neighborhood of like $50 million from the previous period. So that's a pretty big driver. And then kind of sequentially, I mean, from the first quarter to second quarter, we had great weather in the first quarter, allowing us to have substantially higher productivity. That contributed to both revenues and reduced costs in the first quarter that when we come to the second quarter, those weren't quite the same.

Relative to close-outs, there wasn't anything unusual in the second quarter relative to any close-out jobs. So there wasn't anything negatively impacted in the quarter.

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

And as the follow-up, can you tell us what the growth rate was in your electric distribution revenues this quarter year-over-year?

James F. O'Neil

Yes, I mean, I think last year, we said we had about 10%. And again, we don't measure this segment. There is some gray line between small transmission and large distribution. But it's not a bright line. But I would say that we're experiencing close to 15% to 20% growth in distribution year-to-date, compared to 10% year-over-year last year over the prior year. So distribution does continue to accelerate, and we're real pleased about that.

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

Does any of that have to do with the extreme hot weather?

James F. O'Neil

It has to do with extreme hot weather, NERC reliability standards, pent-up demand because distribution has been at very low levels. Distribution mainly has been at low levels since '08, and it's really catch-up. So it's also housing. Housing reports over the last quarter have started to turn, and we do have some new housing starts. So it's a combination of different things, Jeff.

Operator

Our next question comes from the line of Andrew Wittmann with Robert W. Baird.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

I was just wondering a little bit about the guidance. And Jim, you kind of mentioned some better visibility is giving you the confidence to raise the guidance. Is there any change in your overall approach, where you try to be real conservative and really put in there what you know you have? Or has the execution success here over the first 2 quarters of the year maybe encouraged you to have a little bit more confidence just broadly speaking as you go into the second half?

James F. O'Neil

I think the midpoint of our guidance is consistent with the approach that we've taken since the first of the year when it comes to the timing and start of large projects and our visibility into the gas business. So I would say the midpoint of our guidance has very little uncommitted gas in there. Our non -- no uncommitted gas for the year.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just as it relates to the pipelines. Typically, the winter months have been the bidding season for the large-diameter stuff. You kind of mentioned in your press release here that you're expecting a couple of large projects come forward. With the winter months a few months off still, do you think that the seasonality of those pipeline bookings could maybe change this year and come earlier than it normally has in the past?

James F. O'Neil

Yes, I think you're going to see a change in the seasonality of awards probably over the next 2 to 3 years because of the amount of large, multiyear potentially projects that are going to be proposed to bring liquids from Canada and from these liquid shale plays to refinery centers. So the normal cyclicality of this business could provide more visibility on big diameter -- large-diameter, long-haul pipe for probably at least 2 to 3 years. That's what we think will occur. We're pretty confident that, that's what we're going to see going forward.

Operator

Our next question comes from the line of Ahmar Zaman with Piper Jaffray.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

This is Shawn on for Ahmar. I noticed on the balance sheet, you guys took out some long-term debt this quarter. I'm wondering if you could kind of walk us through what prompted that and how you're using it.

Derrick A. Jensen

I'm not sure I understood the second part of your question or heard the second part. But relative to the debt, back to the working capital demands in the quarter, we've had substantial growth. And then as we talked about some of the aspects of Sunrise, it takes some draws on our cash. But in addition, we closed an acquisition in the quarter, which was about $26 million of cash. And we also put the additional investment in Howard Energy, which we talked about in the first quarter, which is an additional $52 million of cash. So those things combined just took some short-term cash needs. I'd say that by the end of the year, we wouldn't expect to have any borrowings outstanding.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Great. That's helpful. And I wonder if you could just take a bigger picture question here. I mean, we talk a lot about kind of the challenges of an election year. The outlook that as we get past the election this year that we're going to see some acceleration of work in 2013 or just to kind of get your thoughts on that.

James F. O'Neil

Well, we haven't quantified or given any guidance for '13, but there is nothing that doesn't lead us to believe that '13 is going to be a very strong year from what we have in backlog today and what we expect will happen going forward in all of our segments, really. I mean, we have momentum in all of our segments and we haven't seen any reason to believe that '13 won't be a very strong year. It doesn't matter who wins the election. Infrastructure is still going to be one of the primary objectives of either administration. So we're feeling confident going forward.

Operator

Our next question comes from the line of William Bremer with Maxim Group.

William D. Bremer - Maxim Group LLC, Research Division

My first question is on pipeline integrity. Can you give us an update on that aspect of pipeline. And my second question specifically deals with Canada. Can you give us a little more color on Canada's operations both in the electrical and the pipe side for this last quarter?

James F. O'Neil

Yes, I mean, I think the Hanna award is just -- reflects the opportunities in Canada. There is a similar build opportunities in Canada as there are in the U.S. It's just occurring probably a year or 2 later than what the U.S. experienced. I mean, that's reflected not only by Hanna, but the Northwest Transmission Line. So that works out in about those 2 projects and we look forward to executing and growing our businesses in the Canadian market. The pipeline integrity business, it's going to be a strong business. I think that's an area of our business that can grow more than any other part of our business, but it's growing off of a smaller base and I think that's going to materialize over time. That's a longer-term growth opportunity for us that, I think, could be something material in 3 to 4 to 5 years from now but it seems the regulations are going to draw a significant amount of construction and rehabilitation efforts in the pipeline market.

Operator

Our next question comes from the line of Craig Irwin with Wedbush Securities.

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

Jim, you mentioned that you have a pretty high level of utilization. I was hoping that you might be able to shed some color on whether or not this makes you a little bit more selective in the jobs that you accept and how you see potentially expanding the utilization and -- or at least your capacity to handle similar levels of utilization going forward, and then whether or not the current high levels of activity are impacting labor rates and if you see that out there on the horizon.

James F. O'Neil

Well, the labor -- let me address the labor rates first. We're under multiyear agreements with -- we're in the pipeline unions, the different unions that are associated with the pipeline industry. Those are multiyear agreements. Labor rates aren't going crazy right now for us. I mean, they're multiyear agreements that we negotiate when they expire, very similar to the electric business. We're not utilizing our big pipe equipment right now. And we're very comfortable that when the big pipework comes that we're going to be able to provide the necessary resources and execute on those projects. It was imperative for us to maximize utilization of our people and what equipment that we could share on shale pipework to move back toward a profitable segment. So that was an imperative objective for us. But we're certainly well positioned strategically to not only keep that work ongoing in the shales, but to capitalize on opportunities in the big pipework. Very similar to the electric route. Everybody was worried about how we were going to move from being on 2 transmission projects to 12, and we were able to deliver there, from a resource standpoint. And we're just as confident that we're going to be able to capitalize on the pipeline market as it expands as well.

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

My follow-up question, I wanted to ask if you could give us an update on your initiative in combined cycle power plants, where you stand on that and what your potential outlook is for bookings in that market over the course of the year.

James F. O'Neil

That's a niche market for us that we're trying to greenfield into. And some of that work has been pushed out a little bit further than what we thought it would from a standpoint of accelerating, the market accelerating, which is okay, because we're using our renewable folks into that type of business. And our renewable folks are very active right now, building solar plants. And the wind market has also picked up somewhat. So it's a niche market for us. It's not immaterial today. Hopefully, we'll be able to talk more about that. It's a growth area for us in '13 or even in '14, but it's more of a future opportunity for us, not something that is really going to materialize anytime near soon.

Operator

Our next question comes from the line of Adam Thalhimer with BB&T Capital Markets.

Adam R. Thalhimer - BB&T Capital Markets, Research Division

On the -- with regards to your outlook for the long-haul pipeline segment, are you bidding on those jobs yet? And if not, when do you expect to see those bids come out?

James F. O'Neil

We're having discussions with customers, okay, and nothing's really formally come out to bid right now. We're just having discussions with customers about capacity concerns into '13 and '14 because the industry is going to be tight. So we -- like I said in my prepared remarks, we think that this will become clear to everyone as we get into the fourth quarter. And certainly into the first quarter, we'll have much more visibility on what's going on in the big pipe market. But we haven't bid anything to date yet, no.

Adam R. Thalhimer - BB&T Capital Markets, Research Division

Okay. And then I wanted to ask secondly on telecom. What are the atmospherics like in that business right now? And are there any catalysts there, say, over the next 12 months?

James F. O'Neil

Yes. I mean, I think right now, we're at the height of stimulus construction and things are going really, really well. And I don’t anticipate that, that is going to lighten up anytime soon. I mean, stimulus is going to take us well into '13 and probably to the end of '13. The Universal Services Fund is a big opportunity. That's a program that's almost like a federal stimulus that we think will provide subsidies to the telecom market equal to what we're seeing in stimulus today as we get beyond '13. So that's a huge potential opportunity that could keep our telecom business strong beyond stimulus as well as many of our customers are starting to move forward with capital projects beyond stimulus. Stimulus really got them a head start on their strategic objectives. So we're feeling pretty good about telecom right now going forward.

Operator

[Operator Instructions] And our next question comes from the line of Joe Ritchie with Goldman Sachs.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

The first question is on the gas business, just a follow-up to a question earlier. Your revenues were down sequentially the last 2 quarters in that business, but the margins improved significantly. So I'm just trying to get an understanding, get my head around that, what were the big changes between this quarter and the last couple of quarters where you were able to increase the profitability of that business?

Derrick A. Jensen

Yes, this is Derrick. Actually, it's similar to our discussion of second quarter of this year versus second quarter of last year in that there were some weather impacts that impacted a few of the jobs in the fourth quarter and the first quarter. At the same time, from a revenue perspective, we had the wrap-up of at least one large diameter pipeline job in the first quarter. We didn't have any of that work in the second. So you had kind of a decrease in revenue because of that.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

So the right way to think about it is, weather impacts really have that kind of ability to change your profitability on those projects, and it seems like this quarter was a much cleaner, from a weather perspective, than it had been in previous quarters. Is that right?

James F. O'Neil

Yes, weather actually is an impact, but we also established ourselves in the shales. And we weren't in the shales last year at this time as well. So that's going to help us as well in the second quarter of this year, certainly, against the second quarter of last year.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Okay. And I guess just a follow-up question there is, you're still not at your target of 9% to 12% margins in that business and my understanding is that there is -- in order to get to 9% to 12%, you're likely going to need to book some of these large-diameter pipe projects. And so maybe help me understand your confidence, I guess, on the timing of some of these projects, Keystone being one of them, one that we haven't talked about yet today.

James F. O'Neil

Well, again, we're confident that Keystone and other projects will go forward in '13 and '14 because of the discussions we've been having with customers. And not only us, but other contractors in the industry have -- will give you that same data point. You will see big pipe taking liquids from these liquid-rich shale plays and the Canadian oil sands go to refining centers primarily in the Gulf of Mexico. Look at the expansion plans in the capital that's going into expanding these refineries. You haven't seen that in decades. That's all associated -- or primarily associated with liquids coming from these shales. Right now, they're railing and trucking product. That's a very inefficient means of transporting products. Once they get enough gathering in place, gathering systems in place, you will start seeing big pipe built. And I think that, from what we're hearing from our customers, the big pipelines are going to start coming in '13 and '14. We do need to get some of that big pipework in order to get to that 9% to 12% operating income target. And we're confident that we'll see that big pipework come sometime in '13 and certainly into the '14 and '15 time frame.

Operator

And we have a follow-up question from the line of Will Gabrielski with Lazard Capital Markets.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Jim, can you quantify what underutilization of the big pipeline equipment, what impact that had on the natural gas margin in Q2?

James F. O'Neil

It's mid single digit operating income to the 9% to 12% operating range. I mean, the primary reason that we have that delta in margins is because we have higher margin work on the big pipework, as well as underutilization of equipment. So I don't think we can quantify it any better than that, really. I mean that direction is what it does for you.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay, that's helpful. And then just quickly on working capital, where that's going to trend maybe over the next few quarters based on what you have in hand today?

Derrick A. Jensen

Yes. I think that the biggest driver of working capital is obviously our receivables and DSOs, and I think that what we'll see is that by the time we get to the end of the year that, that will start to trend downward. Historically, working capitals run about 15% of revenues and -- but as we go forward, a lot of revenue is coming up right now. And some of these things can get tied up in some of these larger jobs, but I'd say that you can look at DSOs being able to be improved.

Operator

And our next question is from the line of Tahira Afzal with KeyBanc Capital Markets.

Saagar Parikh - KeyBanc Capital Markets Inc., Research Division

This is Saagar again. I have a quick question -- I apologize if I missed this in Derrick's commentary earlier. But the rise that you -- the ramp that you guys had with the Sunrise Powerlink project, just finishing that up in the second quarter, did that have -- how much of a damper did that have on your electric power operating margins? What sort of impact could we see going forward from the change order? And is that built into your updated guidance?

Derrick A. Jensen

Yes, there wasn't any impact relative to margins. I mean, that job has recorded consistent margins throughout the period. And as it relates to -- I think the second part of your question is kind of what risk profile. And we believe that we're in substantial conversation with the customers such that the change order will come through and be collected at some point in time between now and the end of the year. It's tough to predict, I guess, the change order effect as far as when it will be settled, but we're pushing for settlement as soon as possible.

Saagar Parikh - KeyBanc Capital Markets Inc., Research Division

Okay, perfect. And I'm assuming that's built into your guidance then?

Derrick A. Jensen

Well, that job is complete at this point. So relative to an income impact, there wouldn't -- there will not be any income impact.

Operator

And ladies and gentlemen, this does conclude the question-and-answer session. I would like to turn the call back to management for any closing remarks. Please go ahead.

James F. O'Neil

I'd like to thank you all for participating in our second quarter 2012 conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you. This concludes our call.

Operator

If you'd like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030 and enter access code 455817.

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