Nov 5, 2008
Executives
Kip Rupp - DRG&E John R. Colson - President and Chief Executive Officer John R.
Wilson - President, Electric Power and Gas Operations James F. O’Neil - President and Chief Operating Officer Kenneth W.
Trawick - President of Telecommunications and Cable Television Division James H. Haddox - Chief Financial Officer
Analysts
Jamie Cook - Credit Suisse First Boston Tahira Afzal - KeyBanc Capital Markets Sanjay Shrestha - Lazard Capital Markets Kurt Woodward - JP Morgan Jeffrey Beach - Stifel Nicolaus Alex Rygiel - Friedman, Billings, Ramsey Steve Gambuzza - Longbow Capital
Operator
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Quanta Services Third Quarter Earnings Conference Call.
During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.
[Operator Instructions]. This conference is being recorded today, Wednesday, November 5, 2008.
I’d like to turn the conference over to Mr. Kip Rupp, with DRG&E.
Please go ahead, sir.
Kip Rupp - DRG&E
Alright, thank you, Vince and welcome everyone to Quanta Services’ conference call to review 2008 third quarter results. Before I turn the call over to management, I have the normal housekeeping details to run through.
If you’d like to be on the e-mail or fax distribution list to receive future press releases for Quanta, or if you had any technical difficulty this morning and did not receive your e-mail or fax, please call our offices at DRG&E, at 713-529-6600. Also, if you’d like to listen to a replay of today’s call, it will be available via webcast by going to Quanta’s website, at quantaservices.com.
In addition, there is a telephonic recorded instant replay that will be available for the next seven days, 24 hours a day that can be accessed as set forth in the press release, by dialing 303-590-3000, and using the pass code 11122061#. Please remember that information reported on this call speaks only as of today, November 05, 2008 and therefore you’re advised that any time-sensitive information may no longer be accurate as of the time of any replay of this call.
Also this conference will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, projected revenues, earnings per share, tax rates, capital expenditures, and other projections of financial and operating results and information, growth in particular markets, Quanta’s strategies and plans, anticipated future projects, impact of current market conditions, expected benefits from the merger with InfraSource Services, and any other statements reflecting Quanta’s expectations, intentions, assumptions or beliefs about future events or performance or that do not solely relate to historical or current facts.
Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or are beyond Quanta’s control and actual results may differ materially from those expected or implied as forward-looking statements. For additional information concerning some of the risks, uncertainties and assumptions that could affect our forward-looking statements, please refer to the company’s annual report on Form 10-K for the year ended December 31, 2007, its quarterly report on Form 10-Q for the quarter ended, March 31, 2008 and June 30, 2008 and its other documents filed with Securities and Exchange Commission, which may be obtained through the SEC’s website at www.SEC.gov.
All forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements. Management cautions that you should not place undue reliance on Quanta’s forward-looking statements and Quanta does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after this call.
With that, I’d like to now turn the call over to Mr. John Colson, Quanta’s Chairman and CEO.
John?
John R. Colson - President and Chief Executive Officer
Good morning everyone and welcome to Quanta Services third quarter 2008 conference call. To start call this morning I will provide a general overview of the quarter, insight on developments in the industries we serve and perspectives on emerging opportunities.
Our comments will be followed by an operational review by John Wilson, President of our Electric Power and Gas Operations and a review of financial results by James Haddox, our Chief Financial Officer. Jim O’Neil, Quanta’s newly appointed President and Chief Operating Officer along with Ken Trawick, President of Quanta’s Telecommunications and Cable Operations are also present.
After our prepared remarks we will open the call for questions. The executive team is proud of Quanta’s third quarter results for many reasons.
First, despite an incredibly challenge economic environment, our operations remained strong and operating margins were 10% and are inline with our operational objectives. It appears that the impact of the current economic condition on our top customer has been minimal to date.
We believe our customers remain financially secure and committed to the maintenance and build up of their infrastructure. We recognized that some large utilities have recently announced reductions in capital spending.
We believe that most of these reductions are related to generation and other areas and will not materially affect the transmission build out. Second, we continue to achieve internal revenue growth.
Third, our capabilities are unique in the market place and continue to be on high demand in the industries we serve. And lastly, one of the most destructive hurricanes in US history Hurricane Ike devastated the Golf Coast region and directly impacted our corporate headquarters.
Our emergency response plan operated seamlessly. Our customers received the services they required and we were able to focus on the immediate task at hand ensuring the safety of our employees and getting the power back on.
The third quarter of 2008 continued the strong trend of revenue growth and margin expansion for Quanta. We continue to perform well and recent strategic announcements further position the company to leverage emerging opportunities including wind and silver.
Revenues for the quarter were approximately $1.05 billion compared to $655.9 million in the third quarter of 2007. Pro forma internal revenue growth was approximately 27% compared to the third quarter of 2007 including revenue from all acquisitions since 2007 in both periods.
In the third quarter operating income as a percentage of revenue was in our target range of 9% to 12%. Operating income was 10% with amortization added back and 9.1% of amortization deducted.
Quanta’s customer base remains diverse which plans strength to the ongoing growth of our revenue base. For the first nine months of 2008, our largest customer made up only 4% of our revenues.
Our top 10 customers for the first nine months represented 30% of our total revenues and our top 20 customers made up approximately 43% of revenues. The breakdown of revenues by the type of work also shows diversity.
When divided by type of work our 2008 third quarter revenues were approximately 57% from electric power services, 23% from natural gas services including pipeline integrity. 12% of revenues from Telecommunications and cable services, 7% from ancillary services such as horizontal directional drilling and commercial and industrial wiring, and 1% from Dark Fiber leasing services.
Our employee count was 17,031 at September 30, 2008. This compares to 16,659 at the end of the second quarter and 15,672 at the end of the September last year.
The increase in employees has occurred primarily at our operating units that serve the electric power industry, particularly high voltage transmission infrastructure. We had a decrease in the number of employees in certain of our Telecommunications, underground and wireless operating units.
Our workforce and our service scope remain flexible. Quanta was designed with scalability, flexibility and diversity in mind.
This enables us to quickly respond to market shifts and increases in demand for our services. This strategy is one with which Jim O’Neil is very familiar.
Jim, as previously announced, has accepted the promotion to President and CEO of Quanta. Since joining Quanta almost a decade ago, Jim has been instrumental in the strengthening of our operations as we have acquired and integrated companies into the Quanta culture and as we have evaluated methods of margin enhancement and strategic growth opportunities.
I’m excited that Jim has accepted this challenge, gives a strategic addition to the already strong executive team. I know he will apply his expertise, dedication and drive with continued emphasis on sustained growth and earnings, margin enhancement and safety as well as leveraging opportunities in the renewable energy industry.
Now, its time to look forward. Yesterday we elected a new President, at Bella package has been deployed, another one may come soon and the nation continues to need power and communications infrastructure.
A recurrent message, you will hear throughout today’s call is that most of our customers have not yet been affected by the current credit crisis and due to the fact that the most of them are regulated access to the credit market is not currently a critical item. Some utilities are proposing rate increases, others are leveraging tax incentives but the bottom line is that they remain committed to upgrading their infrastructure.
Our perspective that the markets remain strong is also supported of what we are hearing from our customers, regulators, industry associations, financial analysis and other thought leaders in the utility industry. We hosted our sixth annual and largest utility perspective symposium in Washington DC last month.
The utility perspective symposium is designed to be an environment for collaborating various financial, regulatory, independent and public perspectives on the industry. Speakers at the meting included Joseph Callahan Chairman of Merck, Barry Smitherman Chairman of the Public Utility Commission of Texas, Dale Klein, Chairman of the Nuclear Regulatory Commission, Tom Kuhn, President of Edison Electric Institute, Randall Swisher, the Executive Director of the American Wind Energy Association along with various current and Former Merck Commissioner.
In the message we heard from each of them as well as other state regulators financial and industry consultant experts and more than 40 utility executives in attendance was basically the same. Economic crises are not utilities must strengthen power delivery infrastructure, and the fund should be available to them although cost may be higher.
This is reinforced by announcements like the one we made this morning that we have been awarded a contract by Oklahoma Gas and Electric for the construction of approximately 120 miles of 345,000 volt transmission infrastructure just outside of Oklahoma City. John Wilson will discuss this award in more detail shortly.
This project will involve collaboration among at least four of our operating units, each contributing specialty service. We will provide all services related to foundations, helicopter transport, construction and installation of the new transmission line.
Despite the ongoing credit crisis renewable revenue for 2008 is forecasted to exceed our goal of $150 million. And, we expect these revenues to continue to increase in 2009.
So far in 2008, revenue from the renewable energy industry has been derived from approximately 40 different customers. Our renewables backlog continues to increase and we anticipate that renewable revenues will double in 2009, while win constitutes to majority of our renewable revenues today, we also see very attractive opportunities in solar power generation.
As we have previously discussed 29 states are mandated to achieve renewable portfolio standards designed to reduce the carbon footprints some of which include specific targets of between 7 and 9 gigawatts of required solar capacity. As additional incentive, investment tax credits have been extended for eight years under the recent financial rescue package.
These tax credits can reduce the initial investment for a solar system i.e., up to 30%. Quanta is well positioned to take advantage of these opportunities and we anticipate that solar power will become increasingly important for Quanta in the near feature.
We anticipate a softening on maintenance spending related to distribution simply because of lower returns and limited capital. We expect however, that utilities will invest their available capital in transmission as it produces a higher return.
We think that increases in transmission spending in the coming years will more than offset decreases in distribution spending. Looking now to a summarized performance of our telecom and cable operations, as mentioned in our second quarter conference call we are in the process of renewing several master service agreements that expire this year.
These impacts do appearance of our telecom backlog numbers, we’ve already secured renewals on some of the MSAs that continue to negotiate the remainder. We expect that most of the MSAs will be renewed.
Looking to the last quarter of the year there are couple of items to note when reviewing backlog numbers and compare into prior years. First, we have completed a significant wireless project in the Midwest, while we are optimistic that this will continue to be a growth area for us that currently is not a comparable project in our backlog.
Second, telecom and cable internal growth for the fourth quarter last year was 60%, creating some very difficult comparisons. Also AT&T has revealed capital expenditure reductions for the remainder of 2008.
Originally, it seemed AT&T is fibered to the note program was immune to CapEx reductions. However, in the third quarter we began to experience a decrease in revenues from this customer.
We expect this reduction will continue through the fourth quarter of this year. We have no indication that this is a strategic change in direction but our indications are that this appears to be timing issue relative to 2008 capital commitments.
For the year-to-date telecom and cable operations have shown 19% pro forma internal revenue growth when compared to the first nine months of 2007. Verizon is also slowing spending in the fourth quarter but we’ve been told that spending will return early next year and will be a substantial in the areas where we serve as in 2008.
There remains some M&A activity in the industry, [Century Tell] recently announced that it will acquire Embark, we do not anticipate that this will impact our existing MSAs with Century Tell. In fact, it provides broader access to additional markets for our operating units due to our strong relationship with this customer.
Reduction in spending of wireline customers and a lack of significant replacement project for our wireless group will effect our backlog growth and profitability for the fourth quarter of 2008. Over the next 12 months we would believe most of this spending will return and with the continued expansion of electric transmission and renewable energy markets our internal growth overall for the company will be in the double digit range.
For those I want to remind you that Quanta was founded with a vision to create a diverse customer and revenue base. We have navigated many pasts from the telecom deterioration early in this century to the aftermath of 9/11.
Strength of our executive team and our workforce will enable us to navigate these challenging times as well. As we move forward we will continue to meet the growing needs of our customers in the safest, nice quality, most cost efficient manner as possible.
Now, I’ll turn the call over to John Wilson, who will discuss the recent developments in our electric power and natural gas operations.
John R. Wilson – President, Electric Power and Gas Operations
Thank you, John. Good morning everyone.
As is evident in John’s remarks despite the current economic concerns in our country we believe this is a dynamic time for Quanta and the power industry as a whole. Even in the current credit situation people still need power.
Demand for power combined with the strong financial health of our customers influences us to maintain our positive outlook for the future. The current economic climate will not improve over now but with the election complete we hope a solid path to recovery may begin.
In the meantime we maintain our unwavering focus on meeting the needs of our customers who continue to be driven back increasing consumer and commercial demand for green power and an outdated power delivery system unable to deliver that product. Managing our business to optimize efficiencies and solidify margins and ensuring the safety of our workforce.
Ongoing demand for our services in the electric power, natural gas and renewable industry is evident in our performance in the third quarter of 2008 and in our 12 month and total backlog levels. In the third quarter of 2008, revenues from electric power and natural gas operation including renewables and emergency restoration were $837.7 million, this compared to $450.1 million in the third quarter of 2007.
Restoration work which I will discuss in more detail shortly account for approximately $114 million in revenues in the third quarter of 2008 and approximately $13 million as reported in the third quarter of 2007. Four months backlog for the electric power and natural gas operation as of September 30, 2008 was approximately $1.906 billion.
Total backlog for the electric power, natural gas operation as of September 30, ‘08 was approximately $3.967 billion compared to $3.75 billion at the close of 2007. James will discuss comparative backlog in more detail shortly.
Throughout the quarter Quanta crew supported several utilities following full hurricanes. Of the hurricanes that made US landfall during the third quarter Hurricane Ike was the largest and most destructive, in fact, Hurricane Ike was the third most destructive hurricane to ever hit the United States and the third costliest with damages in US coastal areas estimated at $27 billion.
Two of our largest customers Centerpoint and Entergy experienced a greatest damage to their infrastructure. The hurricane hit close to home, I know, I speak for entire executive team, when I say they proud of our employees of their ability to get the job done in a very challenging situation.
We initiated emergency response plan to continue our daily operations and support all of our customers those impacted by the hurricane as well as those who are not impacted. Many of our Houston based employees were significantly impacted or without power for more than two weeks, yet our operations did not mess it be and that is thanks to the skill and dedication of our employees throughout the nation.
While power has been restored to most of the area some of our personnel remain in the golf coast region and our focus on rebuilding the infrastructure that was swept away by the storm surge or severally damaged by the winds. Industry development, our industry is also in some lot of a perfect storm, demand is increasing and is expected to increase 30% by 2030 to over $6 billion kilowatt hours based on information from the Energy Information Administration.
New generation is required, 258 megawatts of new generating capacity will be needed to meet this growing demand, the estimated cost of this build on is $412 billion. Capacity margins are declining, capacity margins are the measurement of extra generating capacity required to be prepared to meet emergency situations Basel generation capacity margin was at 17% in 2007 down between 30% and 40% in the early 1990s and dangerously close to the 12% to 15% minimal requirement needed to ensure liability and stability of the nation’s power system.
Infrastructure is aging, the nation’s transmission grid consist of 200,000 (inaudible) most of which are 40 to 0 years of age or older. And in addition to all of this the industry needs to build a new grid to transport renewable energy from the source to the lower centers.
And, this is not just an urban issues according to USDA, the demand for new generating capacity is increasing just as fast in rural America as in urban areas. This will require cooperatives which generally serve rural areas to double generation capacity by 2020.
Because of the situation momentum of flood could be called the big transmission build out continues with no ending sign. This is good news for power consumers because they focus on expanding the country delivery system as loss, we believe there will be dark consequences.
I studies about our Next-gen energy counsel release just over a month ago states that the United States significant risk power down outs and blackouts as early as next summer. These brownouts and blackouts have the potential to cost tens of billions of dollars and threaten lives.
The study found the US will require more than 14,500 miles of new electric transmission lines by 2016 which is less in eight years away. All of these of the circumstances driving our electric power renewables and natural gas business, in a nutshell work under existing contracts continue to gain momentum.
New contracts are being signed and utilities are securing approval for hundreds of miles of transmission lines. I will provide an update on a few of our spotlight projects.
As announced this morning, Quanta was awarded a contract by Oklahoma Gas and Electric for the construction of approximately 120 miles or 345,000 volt transmission infrastructure just outside Oklahoma City. The contract is expected to be completed over a 12 month period.
Both of our operating units will work together to provide all installation services including foundation construction, structure installation and conductors screening. Work is projected to begin in the fourth quarter with estimated completion in the fourth quarter of 2009.
Allegheny energy, Trans Allegheny interstate law and trial projects, 500,000 transmission line has recently reached two significant milestones. The first milestone is the commencement of the work at the meadow Brook substation in Virginia, the construction on this substation is planned to start in November 2008 with all permit conditions being satisfied.
The construction on the 502 junction substation in Greene County, Pennsylvania is planned to start in December of 2008 with all permit conditions again being achieved. We will perform the work on both of these facilities as part of our previously announced contract with Keeny Construction for the construction of the substation and transmission lines for the trial project.
Allegheny has also indicated that it has secured $550 in financing and credit facilities for this and other transmission facilities and activities. We continue to perform work in Central Texas under the $190 million contract for Lower Colorado River Authority or LCRA.
Our work supports LCRA’s commitment to strengthen its transmission infrastructure and to build additional infrastructure to support increasing demand in its service territory, which may include the renewable generation sources being developed throughout the State of Texas. For North East utilities we continue preplanning and preconstruction services under our $750 million contract.
However, this work will continue to be minimal until the project gets into full swing in about a year. Other industry developments include the (inaudible) operation transmission highline warpath project, which is a joint venture of American Electric Power and Allegheny Energy.
BJM interconnection announced this month a reconfiguration of path to incorporate additional 765,000 volt segments on the proposed line. This reconfiguration is a result of constrains identified through comprehensive starting studies, interaction with governmental agencies, public input and a desire to identify a solution that reduces line mileages and minimizes the impact on communities in the environment.
The joint venture remains focused on identifying the complete line route and expects to file application for approval by State Regulatory Commissions during the first quarter of 2009. AT and Allegheny announced earlier this week that the deadline for this project has shifted slightly.
Development of the Texas competitive renewable energy zone or cress continues to progress. The Public Utility Commission in Texas has clearly stated that it does not expect the credit crisis to impact transmission spending in Texas.
The Texas PUC continues to work diligently through a commissioner testimony and official recommendations regarding which groups will build the transmission required by the additional 18,000 megawatts of power capacity. It is estimated that it will take approximately $5 billion and 2,400 miles of additional transmission infrastructure to interconnect these wind farms into the grid.
We believe this is a major opportunity for Quanta and that we are well positioned to leverage this opportunity and be part of this monumental task in our home state. There have been other significant developments in strengthening the nation’s transmission grid.
Merck has approved rate incentives for various transmission projects including energy gateway transmission expansion project that will deliver up to 3,000 megawatts of capacity in the West. The main power liability program, a 1.4 billion transmission project that will increase reliability capacity to export power to Southern New England.
The New York regional interconnect on the condition that New York Public Service Commission determines that the 190 mile transmission line either achieve reliability or reduces conjunctions and approve sliding for the project. We see a strong future for Quanta in the area of renewable energy infrastructure, this is a natural and logical application of our skills and strength and we might bring -- and we bring many years of experience to the industry.
According to the American Wind Energy Association, the US Wind Energy industry installed 1,389 megawatts in the third quarter bringing the total wind power projects completed to 4,204 megawatts and what is expected to be a another record year. The wind generation developments occurred in Texas, West Virginia, Utah and the Decodes.
Texas added 693 megawatts in the third quarter giving Texas the most wind power capacity of any state. The state with the fastest wind power capacity growth was West Virginia, which more than tripled at existing capacity with the addition of a 164 megawatt projects and another 100 megawatt project scheduled to come online in West Virginia by the end of the year.
Utah added its first multi turbine project, the man turbine Spanish works project. (Inaudible) Energy a wind turbine manufacture through about its first US turbines online at a 120 turbine project starting in North Dakota, South Dakota border.
Our work in wind is primarily related to construction of the wind farms as well as the collection system, required substation and transmission infrastructure required to transport the renewable power to the areas with the highest demand of power. Building on the success of the Denver International Airport solar project and leveraging the growth in commercial utility level solar systems, we also continue to be active participant in the development and construction process for photovoltaic and thermal solar systems.
I look forward to continuing to work with Jim O’Neil in his new positions as we secure honest position in this segment of the market. As you can see from these industry circumstances and Quanta’s operational developments, we expect we will continue to be busy over the next several years.
With transmission infrastructure spending somewhat oscillated from the impact of the credit process and with the continuing financial strength of our customers, we believe there exist a strong formula for success and growth. We also continue to aggressively pursue emerging opportunities in solar and ongoing opportunities in wind power.
We closely monitor the state of the economy, the strategic direction of our customers to ensure that we meet the evolving needs of our customers and deliver value to our shareholders. Now, I’ll turn the call over to James Haddox who will review our financial results for the third quarter.
James?
James H. Haddox – Chief Financial Officer
Thanks John and good morning everyone. Today we announced revenues of $1.05 billion for the third quarter compared to the $655.9 million in the prior year’s third quarter resulting in an increase of $397.5 million or 61%.
Pro forma revenues in the third quarter of 2007 were $832.4 million. We’ll now refer to the pro forma information throughout my discussion I’m referring to data prepared on a combined company basis taking into account the acquisition of InfraSource and smaller acquisition as if they occurred on January 1, 2007.
Pro Forma revenue growth for 3Q ‘08 compared to 3Q ‘07 totaled approximately 27%. As reported results of operations covered in my discussion in the third quarter of 2008 are compared to Quanta’s historic results for third quarter of 2007 which included only one month of results for InfraSource.
This year’s third quarter revenues included record, emergency restoration revenues of approximately $115 million compared to approximately $18 million being in Pro Forma revenues in 3Q ‘07. Excluding emergency restoration revenues from both periods pro forma revenues growth would have been about 15% in the third quarter.
On an as reported basis revenues from electric power work during the third quarter of ‘08 increased by approximately $233 million or about 64% over the third quarter of 2007. On pro forma basis, electric power work increased by about $145 million or 32% quarter-over-quarter.
Excluding all emergency restoration revenues from both periods, electric power revenues would have grown 12% on a pro forma basis. We believe however the not all emergency restoration revenues should be deducted to determine internal revenues growth for the quarter.
Since our cruise would have been working elsewhere had the storms not occurred, we should only remove incremental storm work in order to calculate internal revenue growth. Calculation of incremental storm work has emphasized and judgmental so we don’t calculate it because storm restoration revenues this quarter were considerably higher than normal.
We feel that we should point out at the electric power revenue percentage growth would have been higher had only the incremental storm restoration revenues been removed from the calculation of the internal revenue growth. Gas work increased approximately $154 million or 180% on an as reported basis and about a $108 million or about 81% on a pro forma basis quarter-over-quarter.
Telecom and cable work excluding dark fiber business increased approximately $4 million or 3% on an as reported basis and decreased about $24 million or 16% on a pro forma basis quarter-over-quarter. Ancillary work decreased about $6 million or 8% on an as reported basis and decreased about $12 million or 15% on a pro forma basis quarter-over-quarter.
Dark fiber revenues contributed $16.8 million to the quarter compared to $4 5 million in last year’s third quarter on an as reported basis. Dark Fiber revenues for the third quarter of 2007 included only one month of operations, this revenue was acquired as part of the InfraSource acquisition.
On a pro forma basis Dark Fiber revenues grew 38%. Keep in mind, many times we maybe performing all types of works on one job at the same time, which requires us to estimate revenues and cost by type of work.
However, we believe that the information we’ve just provided by type of work is directionally accurate. We generate gross margins of 17.6% for this quarter compared to 17.5% during last year’s third quarter.
On a pro forma basis last year’s gross margin was 16.9%. On an as reported basis gross margins only improved 10 basis points quarter-over-quarter, however, delving deeper into the discussion of margins electric power and gas margins improved quarter-over-quarter due to better pricing, market conditions and higher volumes of storm restoration revenues.
Dark Fiber margins also contributed to the net increase in margins during the quarter. These margin improvements were mostly offset by declines in margins in the telecom and ancillary areas due to lower revenues and experiencing losses on a telecommunications contract completed during the quarter and the couple of ancillary contracts.
We are not expecting any additional difficulties under these contracts. On an as reported basis G&A expenses were $80.1 million from the third quarter of ‘08 compared to $59.8 million in the third quarter of ‘07.
The increases over 3Q ‘07 was due primarily to the acquisition of InfraSource, higher salaries and benefits associated with increased personnel, salary increases and increased performance bonuses. G&A expenses were down to 7.6% of revenue in 3Q ‘08 compared to 9.1% in 3Q ‘07 and compared to 7.9% in 2Q ‘08, due to better absorption of overhead expenses as we achieve record revenues during the quarter.
Operating income before amortization or EBITDA on an as reported was approximately $105.4 million or 10.0% of revenues compared to $55.2 million or 8.4% for the third quarter of 2007 or an increase of 160 basis points quarter-over-quarter. A table showing the calculation of EBITDA is set forth in the Financial News section of our website, at quantaservices.com.
We believe that EBITDA has become an important metric as amortization expense associated with InfraSource and other acquisitions has become more material component of our income statement. Amortization of intangible assets increased from $4.9 million in the third quarter ‘07 to $9.0 million in 3Q ‘08 because ‘07 third quarter included only one month amortization related to InfraSource.
Interest income decreased approximately $3.4 million during the third quarter of ‘08 versus the third quarter of ‘07 as a result of a lower average cash balance and lower investment rates quarter-over-quarter. Effective tax rate during quarter was 41.1% compared to 5.9% during 3Q ‘07.
Effective rate for 3Q ‘07 was favorably impacted by the tax benefits of $17.9 million primarily associated with the reversal of tax contingencies due to the exploration of various federal and state tax spreadsheets of limitations during the period. Including these benefits in 3Q ‘07 effective tax rate would have been 41.7%.
Net income for the quarter was $54.9 million resulting in earnings per diluted share of $0.29 compared to net income from continuing operations of $47 million or $0.30 per diluted share in the third quarter of 2007, which included benefits of $0.11 per diluted share from the reversal of the tax contingencies previously mentioned. Adding back non-cash compensation intangibles and non-cash compensation expense, net of taxes, resulted in adjusted income from continuing operations of $62.8 million or cash earnings per diluted share of $0.32 in the third quarter of 2008.
This compares to adjusted income from continuing operations of $33.5 million or adjusted cash earnings per diluted share of $0.22 in the third quarter of 07. A reconciliation of GAAP EPS to cash EPS is provided in the tables attached to our press release issued today.
Cash flow from operations totaled approximately $16.8 million for the quarter. Cash flow from operations less $49.7 million of capital expenditures net of proceeds from sales resulted in approximately $32.9 million a negative free cash flow for the quarter.
Cash flow was negatively impacted by higher working capital requirements associated with the impact of storm restoration services that were performed late in the third quarter. The addition of IFS, specifically the dark fiber leasing operations, also impacted free cash flow, of the $49.7 million in net CapEx this quarter, $32 million related to dark fiber additions.
Adjusted EBITDA was $129.2 million or 12.3% of revenues for the third quarter of 2008, representing an increase of $57.0 million or 130 basis points over adjusted EBITDA in 2007 third quarter. For the nine month of 2008, adjusted EBITDA was $311.8million or 10.9% of revenues, which is a 140 basis points higher than adjusted EBDITDA on the first nine month 2007.
Calculation of this non-GAAP measure is detailed in a separate analysis in the financial news section of our web site at quantaservices.com. Cash flow from operations for the first nine months of 2008, totaled $50.1 million.
Subtracting net CapEx of $153.8 million yields $103.7 million in negative free cash flow year-to-date. We expect that free cash flow will be positive by a significant amount for all of 2008, as we are paid for the emergency restoration service provided late in the third quarter coupled with our forecast at fourth quarter produces lower revenues on a seasonal basis without requiring less working capital.
Turning to backlog, three quarters ago we began expanding our disclosure related to backlog by adding a discussion of total backlog to our normal discussion of 12 months backlog. I will take a moment to provide you with the definition of total backlog.
Total backlog includes the amount of revenues we expect to derive in the future from signed contracts, for project work and master service agreements. Backlog for project work includes the remaining revenues to be earned under lump sum projects and our estimate of the remaining revenues to be earned under time and equipment of our unit priced contracts.
Backlog for master service agreements includes our estimate of future billings, based on our knowledge of our customers’ spending patterns, under T&E and unit price arrangements through the end of the initial contracts periods and through the end of any renewal periods provided by the contract for which we reasonably expect the contract to continue. Our total backlog of work at September 30, 2008 was approximately $5 billion, $88 million which is approximately $201 million or 3.8% lower than total backlog at 06-30-08, just decreased during the quarter was due to burn off, of revenue under MSAs during the quarter.
While no material MSA renewals resigned and no material multi year contracts were added to backlog. For the past several quarters total backlog has increased due to the new contracts are renewals being fund and expect the contract burn.
While that did not occur this quarter, we feel that it was the timing issue relative to the award of new contract, such as the old G&A contract we’ve announced today, that was not in backlog at 9-30-08. based on current negotiations on several new contracts, we feel the total backlog will increase by year end.
Total backlog at the end of Q3 ‘08, increased by about $1.3 billion or 34% compared to the end of Q3, ‘07. Our current backlog of work to be completed during the next 12 months is approximately $2 billion, $428 million, which compared to $2 billion, $394 million in 12 months backlog as of the second quarter 2008, an increase of approximately $34 million.
Our 12 months backlog at 09-30-08, has increased by about $211 million or 9.5% compared to 9-30, of 07. Our days sales outstanding which we calculate by using the some of current account receivable, those costs and earnings in excess of billing, less billing in excess of cost divided by the average revenues per day generated in the third quarter, were 85.5 days at September 30, 2008 versus 83 days at September 30, 2007.
The increase in DSOs is partially attributable to a large volume of storm restoration revenues occurring during the last month of the quarter. At quarter end we had $266.4 million in cash on our balance sheet.
As of 9-30-08, we had approximately $197 million in letters of credit outstanding primarily to secure our insurance program, leaving us with approximately $278 million on the available borrowing capacity under our credit facility. Subsequent to the end of the third quarter we reduced our outstanding letters of credit by about $37 million, thereby increasing our available borrowing capacity to about $315 million.
Subsequent to the end of the third quarter, the holders of almost all of our $217 million, 4.5% convertible debt exchanged their notes for equity in Quanta. This placed Quant with no significant maturities of debt until September 2012.
And our strong cash position and credit viability, Quanta has the financial strength to continue to serve our customers need and has the ability to capitalize on opportunities that may arise as a result of tight credit markets. Concerning our outlook for the feature our fourth quarter results can vary significantly due to the effects of winter weather and emergency restoration work may have on the quarter.
Our estimate of revenues for the fourth quarter of ‘08 is from $875 million to $930 million. This estimate includes approximately $25 million of revenues from emergency restoration services versus $4 million earned in 4Q of ‘07.
Our estimates for 4Q ‘08 EPS is between $0.18 and $0.25 per diluted share on a GAAP basis. Our GAAP forecast includes an estimate of $10.7 million for non-cash amortization of intangible assets and non-cash compensation expenses.
Excluding these expenses, our cash EPS for the fourth quarter is expected to be $0.21 to $0.23 per diluted share. Additional guidance, we’re currently projecting our tax rate for the fourth quarter to be approximately 41.5%.
We expect our diluted share count to be about 202 million shares excluding the effects of any acquisitions. We continue to expect CapEx for all of ‘08 to be somewhere between $180 million and $190 million.
In summary, we’re very pleased with our performance during the third quarter and first nine months of 2008. With that this concludes our formal presentation.
I will now open the line for Q&A. Vince?
Operator
Thank you, sir. [Operator Instructions].
Our first question comes from the line of Jamie Cook with Credit Suisse. Please go ahead.
Jamie Cook
Hi, good morning and congratulations on nice quarter. My first question relates to the fourth quarter guidance, I understand the fourth quarter is difficult of forecast given seasonality, it’s the winter months but even if you exclude storm work, the mid point assumes about 6% top line growth, I am wondering if there is any one segment that’s driving that and also and also it implies nice deterioration on the margin front.
So, if you could just walk me through your thought process behind the guidance?
James H. Haddox
Sure I’ll start and maybe James can follow in there with some margin discussion. But, the telecom business is down as we indicated in our conference call from Verizon and from AT&T.
we think that’s not strategic shift and direction for them but merely case out of casing situation with them. We think revenues will increase again in 2009.
So, with that plus the difference between what we’re forecasting for storm and what we realized in storm in the fourth quarter of last year, pretty much makes up for any shortfall.
John R. Colson
Same things applies to margins, Jamie, I mean margins, we expect margins to hold up on electric power and gas, but we are seeing a lower margins on the telecom and ancillary side than we did in the fourth quarter of last year.
Jamie Cook
So, you are still forecasting double-digit growth, top line growth on the electric power side?
James H. Haddox
Yes, we are and we are pretty entire company its for what I -- for my presentation earlier we believe that with spending returning from the telecom customers back in 2009 and along with extreme growth in the transmission business and the renewable business in ‘09 as the whole company will have 10% internal growth in ‘09.
Jamie Cook
Okay, so 10% internal growth in ‘09. And then you know, its interesting to hear your positive commentary on the transmission spend but you know, at the same time we have had seen some CapEx reduction announcement from utilities you know, I think for a power in way you know, so they are going to cut their CapEx by 25% some of that was going to come from wind or an environment where financing is more difficult so, I mean what type when we think about your backlog growth in 2009, do you think you can see double-digit backlog growth, do you think that projects while the transmission set will happen at some point does it gets push to the right and does it become more of a 2010 story?
James H. Haddox
Well certainly, transmission line always get pushed and that’s pretty normal. And in discussions so that as I mentioned earlier at the utilities perspective conference where we had a number of industry experts, Chairman of Merck, the Chairman of Texas PUC, 40 customers in discussions with them they were all fairly optimistic they guess it was going to be more expensive to continue to build the transmission because of the credit crisis but they were going forward with those plans.
Now, things do change and have changed but that was just a little less than two weeks ago. So, I don’t think anything major changed since then.
The thing is most of these utilities are regulated and they are getting a guaranteed return on their money and a guaranteed return of their money for these transmission projects, and so its going to be fairly easy for them to raise capital. So, these projects are going forward, we have seen announcements by said major customers that they are cutting back on CapEx but we think most of that CapEx is related and they are saying that most of the CapEx is related to generation and other things rather than the transmission projects.
Jamie Cook
Beside the CREZ award that we hope to be announced sometime late 2008, early 2009 are there any major projects that you expect to move forward in 2009 that we should be tracking or what’s your latest update I guess?
James H. Haddox
I don’t want to be too specific because we are of course talking to our customers about those projects and we don’t give our competition all the projects that we know are going. But we haven’t seen the cancellation of any of the projects that we’ve talked about in the past.
Those projects are going forward pass as Wilson mentioned has been delayed but that’s not unusual for those kinds of things and it wasn’t delayed because of credit situation it was delayed because the PGM didn’t think that they needed it until 2013 -- complete at 2013.
Jamie Cook
Thanks guys. Okay, I’ll get back in queue.
Thank you.
James H. Haddox
Thank you.
Operator
Thank you. Our next question comes from the line of Tahira Afzal with KeyBanc.
Please go ahead.
Tahira Afzal
Good morning, gentlemen.
James H. Haddox
Good morning.
Tahira Afzal
Just wanted to go over a couple of projects I know off in the schedule sense, I know FPLE has cut their budgets on the wind side and so several other companies, but I believe there is another large project in -- that might be get awarded in the fourth quarter timeframe and you know, given your competitive advantage there I won’t give more details on it, is that still on track?
James H. Haddox
Well, I’m in a difficult situation because I have confidentiality agreement, but as far as I know everything is impact with the transmission group with FPLE.
Tahira Afzal
And that would be -- from what I can gauge it’s a fairly projects, they are much larger than what you’ve being seeing in the sense?
James H. Haddox
Its -- I can’t comment really because of confidentiality agreements.
Tahira Afzal
Okay, fair enough. Now the Pacific project that just got FERC approval for a higher rate that’s another $6 billion project?
John R. Wilson
I don’t know, Tahira I really don’t know what the size of it as far as dollar value but its very, very significant because the land now is in shallow.
Tahira Afzal
Right, and I think the official number that given out is around $6 billion and do you have an idea of the timing on that by any chance?
John R. Wilson
Yeah, I really don’t, I’m thinking that its somewhere around 2010 events but I don’t have exact date on that one.
Tahira Afzal
And, in terms of the sun rise power line cline it seems like an alternative line has been essentially, unofficially approved and that might go through, would that be a project that could potentially happen for you in 2009?
John R. Wilson
Tahira, as you mentioned remember that was one of the projects that we had listed several conference calls ago. But, one thing remember that everyday that goes by there continues to be reliability studies and focuses on these lines and these lines can shift in locations that could shift in magnitude, increasing in size and voltage.
So, everything is not static just because something has been out there ones in the public domain it can change quite significantly. So, we are well aware of all of those projects that you mentioned, there are still on track as John said earlier.
All the projects that we happened to be tracking we have mentioned we have not heard of any single cancellation of any of those projects and that happened to be one of them which you just mentioned.
Tahira Afzal
Okay. So, if I want to step back and look, I have a list of $56 billion of high voltage projects over the next three four years that could potentially awarded versus around $4 billion or so that is currently under progress.
But, if I look at what you are seeing in terms of what you are tracking right now was it what you were tracking let’s say three months ago, would you say that that list what you are seeing come up for bid that basket is increasing or decreasing?
James H. Haddox
I would say it’s probably increasing. Let me add a little bit of color to that the FERC filings for transmission lines have not decreased and in fact they have increased slightly over the past three months.
Tahira Afzal
Right.
James H. Haddox
One thing that was brought out at our utility perspective symposium that I thought was interesting is that if there is a $100 billion of money spent on transmission lines it would increase the average rate payers bill by $2 a month. So, its fairly insignificant even at a $100 billion of spend on transmission.
Tahira Afzal
And that would be incremental lines added or it just O&M?
James H. Haddox
The additional CapEx.
Tahira Afzal
And just one last question, the loss that you mentioned on the telecom side in the third quarter was that -- would it be possible to get an idea of the size?
James H. Haddox
If you combine the losses on the telecom side and the ancillary side for those projects it was about $10 million, equal to about a 100 basis points of margin.
Tahira Afzal
Right, okay and you said that it would be more like a one time issue could you provide some collar on that?
James H. Haddox
Well, we have some performance issues on those projects and those projects are pretty much down and they are substantially completed so we don’t expect any continuing deterioration on those projects.
Tahira Afzal
As you looked at your fourth quarter guidance and you came up with it would you have assumed some kind of a cushion on projects of a similar profile in the fourth quarter?
James H. Haddox
No, no we don’t think the fourth quarter is less storm work, less telecom work.
Tahira Afzal
So, I mean if I look at your margin then for third quarter it was more like a 11%, operating margin?
James H. Haddox
It hadn’t been for those losses but I have just mentioned it would have been closer to a 11%.
Tahira Afzal
Okay. And then, so if I look at 2009 obviously your telecom work is going to ceasing much tougher comparisons but when I look at margins for next year given what you are seeing right now would we assume -- and assuming no execution issues should one assume that margins could go back to those levels ex-storm work?
James H. Haddox
Back to which levels?
Tahira Afzal
Well let’s say that you take adjust numbers a bid for Storm work but whatever margins you saw in the third quarter underlying excluding Storm work?
James H. Haddox
Yes, there is no reason to think we have to exclude Storm work from that but there is no reason to think that they won’t. That is providing of course the telecom recovers.
Tahira Afzal
Fine alright, okay. Thank you very much.
James H. Haddox
Thank you.
Operator
Thank you. Our next question comes from the line of Sanjay Shrestha with Lazard Capital Markets.
Please go ahead.
Sanjay Shrestha
Thank you. Good morning guys and good quarter.
Kind of follow-up on that question so when you guys talk about 10% organic growth for 2009, so what is in an underlying assumption as to the growth dynamics that you guys see coming out of the electric, natural gas and telecom side of the business?
James H. Haddox
We are assuming that telecom will come back and be slightly positive and growth, we expect that our renewal revenues will double and we expect to electric utility to continue at the rights that it has over the past year.
Sanjay Shrestha
Okay. And then in terms of – I think you guys made a comment here that there is a decrease in the distribution side related work and increase in the transmission line related work and historically obviously transmission has always been a higher margin business so it is fair to say that organic growth is what is going to be top line for `09 but we could also see even an additional margin expansion during 2009?
John R. Wilson
Now that is difficult to say the real difference between transmission and distribution wasn’t transmission or distribution, it was the type of contract whether it was a fixed price contract or whether it was cost plus contract and to begin with we are anticipating that there will be some falloff in distribution. We haven’t seen a lot yet but we are anticipating that.
That is one of the messages that we received at the utilities symposium because maintenance, distribution, maintenance work is reliant somewhat on rate base and rate cases that the return on that investment is lower than transmission investment. Therefore in a limited capital environment, the utilities would focus more on transmission and less on distribution.
So that was a forecast that distribution spending being reduced but the real difference between the two is cost plus work or fixed price work and we have been able to negotiate significant amounts of work based on a transmission work, based on some type of cost basis. So, it may not in itself the switch between transmission distribution mean increased margins.
Sanjay Shrestha
Okay. Great that is very helpful.
One last question then guys, with your balance sheet where it is and industry obviously you are in one of them, best position given your scale, reach and all that sort of stuff. So, what do you think is the appropriate use of that cash at this point for you guys, do you know, are you potentially evaluating some acquisition candidate, can you talk about that a little bit?
John R. Wilson
Certainly. It certainly feels nice to have that cash on the balance sheet and these are the difficult times but obviously we have too much cash on the balance sheet and we are looking at alternatives at this time there -- There are good -- are some attractive acquisition opportunities out there and we have to decide when the right time to acquire is and if that is the best use of the capital and there are other uses as well but if we don’t do acquisitions, there could be some other uses for the capital whether it be stock buybacks or evident we haven’t decided that at all yet either.
Sanjay Shrestha
Okay that is terrific. Thanks a lot guys.
Operator
Thank you. Our next question comes from the line of Kurt Woodward with JP Morgan.
Please go ahead.
Kurt Woodward
Yes, hi good morning.
James H. Haddox
Good morning.
Kurt Woodward
In terms of the distribution network for next year in terms of maybe the capital allocation shift to more transmission projects. Is your thinking right now and maybe what you are seeing in the fourth quarter, that distribution spending will be down for you guys?
James H. Haddox
In the fourth quarter?
Kurt Woodward
In the fourth quarter and for 2009?
James H. Haddox
There was intensifying in the distribution spending for `09 will be down. I don’t think we are anticipating much of reduction distribution spending in the fourth quarter but `09 as I say that is kind of a forecast that, and it’s a theme that we heard from our customers and regulators in Washington D.C.
two weeks ago.
Kurt Woodward
And in terms of the telecom outlook for your ability to be positive on revenue growth’s in `09, you can face pretty difficult comparisons and it really feels like a next couple of quarters that at least in a spending it’s going to be you know, on a negative growth trajectory correct if me if I am wrong. So, you know, that would seem to imply you have to see pretty massive recovery in spending levels above where you are the first half of ‘08 to get positive in ‘09?
James H. Haddox
Yeah, we don’t expect to see telecom to be immensely positive in ‘09 but we expect revenue to come back to ‘08 levels in ‘09 and that’s what our customers are telling us. So, we don’t see a shift in strategic direction by our customers on the telecom side.
We just see a cash allocation problem on that side. And they are telling us that the work is coming back next year, they don’t say that it is increasing an extreme amount, but we have been gaining market share in that field and we expect that what they’re this correct and that telecom may not have a lot of growth but it shouldn’t be negative.
Kurt Woodward
Okay. And you know, if you look at -- if you take your telecom and distribution business together I think that’s about may be a little under 40% of your revenue, and if that’s going to be a kind of flattish next year the other 60% of the business would have to grow at a growth rate of roughly call it 33%, is that spare, and is that how you are coming up with your 10% forecast for ‘09?
James H. Haddox
Well, we -- there is a lot of moving parts in our forecast and we don’t want to get into the new shift, but the bottom line as we think that we can grow at double-digit level in 2009 and that’s because robust transmission growth plus renewal energy growth doubling the renewal energy as I said.
Kurt Woodward
Okay, great. Thank you very much.
Operator
Thank you. Our next question comes from the line of Jeff Beach with Stifel Nicolaus.
Please go ahead.
Jeffrey Beach
Good morning John and James.
John R. Colson
Good morning.
James H. Haddox
Good morning.
Jeffrey Beach
Can you talk a little bit about your gas business you’ve been going through a shift from the utilities into the private sector and where you stand with that and is there some vulnerability in 2009 to the growth opportunities from seeing gas price come down in the market for the last few months?
James H. Haddox
We’ve done very well with that transition and we all know that that’s highly cyclical business. But, right now we are anticipating continued growth from that side of the business for the foreseeable future.
It remains to be same whether there is going to be significant cut backs or not because of gas prices, but right now we have not see that.
Jeffrey Beach
All right. And the backlog is -- do you have a strong enough backlog in the natural gas business to give you good visibility ahead through 2009 for growth?
James H. Haddox
Yeah, we -- that natural gas backlog burns off very quickly because we bill those things -- those projects very quickly. But, their projects that we are seeing in our biding today and that we have end backlog give us fairly good confidence that pretty strong for the foreseeable future.
Jeffrey Beach
And then, just a little more expansion on the electric utility spending on distribution, maintenance you are saying is going to likely be reduced what about spending on the reliability aspect of this and if you look that combined spending and transmission and distribution next year do you see you know, a lower growth rate in ‘09 than you would have expected three to six months ago?
John R. Colson
Yeah, probably we see lower than we expected six months ago, that lets talk a little more detail on the distribution business. Many of our customers will not be heading back but expect that some will because they have or dependent upon getting reimbursed through rate cases for some of that spending, others and others states and particularly California is one, that’s not the case that their distribution spending will probably be robust, Texas the same way.
So, there are some space that won’t be true and if we are talking trying to be as honest and go forward as we can what heard at the conference and what we see going on.
Jeffrey Beach
And again, because some comments about the reliability part of this, is that becoming maybe less important in the near term?
James H. Haddox
Well, I think that. The maintenance can be put off for a period of time, months or maybe as much as a year, but certain reliability will catch up with you pretty quickly.
And so, they can put off maintenance for a while but certainly not long term. And one came I should point out, wind business that we do particularly the gathering lines in wind-farms is very much like the underground distribution business.
So, those assets can be transferred over to wind side fairly readily, pretty seamlessly actually.
Jeffrey Beach
Alright. Thank you.
John R. Colson
Thank you.
Operator
Thank you. Your next question comes from the line of Alex Rygiel with FBR.
Please go ahead.
Alex Rygiel
Thank you. Good morning, gentleman.
John R. Colson
Good morning Rig.
Alex Rygeil
Few questions, first John or James. Could you run through your top five customers on the natural gas side of your business?
John R. Colson
Do you get that James?
James H. Haddox
This is for nine months, enterprise products, energy transfer, down after that its, past our top 20 customers.
John R. Colson
Prospects we have done it.
James H. Haddox
Prospects but I don’t know where they rank him the top five this year. We only have the top 20 in front of me and those two were in the top 20, the rest are outside the top 20.
Alex Rygiel
And James can you possibly give us backlog by service type?
James H. Haddox
Yeah. We’ll may give you about 12 month in total?
Or total or what?
Alex Rygiel
Both would be great?
James H. Haddox
12 months, electric $1.424 billion, total (inaudible) gas 12 months, $482 million total $658 million, telecom $311 million 12 months, total $495 million, ancillary $140 million, 12 months, 226 total, dark fiber, $71 million 12 months, and $400 million in total.
Alex Rygiel
Thank you. And John, you mentioned that the outlook for distribution Electric in 2009, would likely be down.
What occurred with your Electrical distribution business in 08 versus 07?
John R. Colson
It showed growth over ‘07.
Alex Rygiel
Distribution was up in ‘08 versus ‘07 despite the headwind of the negative residential market?
John R. Colson
That’s correct. A Part of that; remember most of the trends in increased outsourcing come from the distribution market.
So, distributions’ spending throughout the 90s was relatively flat .If you look back and we had internal growth presently through increase outsourcing during that period of time. And also, remember that we didn’t have much residential impact to Quanta, very minimal.
Alex Rygiel
Is that on a pro-forma basis that come in?
John R. Colson
Yeah. Yes it is.
Alex Rygiel
Okay. And than lastly few word of represent total revenue?
John R. Colson
Fuel is down, so I don’t think we did a calculation this quarter I didn’t but it was running about 3% when the fuel was $3. And so, it has probably dropped down 2.5 to two and three quarter percent.
Alex Rygiel
Great. Thank you.
Operator
Thank you. Our next question comes from the line of John Rogers with D.A.
Davidson. Please go ahead.
John B. Rogers
Hi good morning. I was just curious, if you look out into especially in the ‘09 to ‘10 in the transmission becomes a larger portion of your revenue, will continue to be booked on a fixed price basis.
Is that you’re expectation? And what are you thinking about in terms of the split there versus in the 46 year I guess 50:50 revenue levels is to evolve to.
John R. Colson
What you are seeing is your smaller projects will probably still be bid on a lump-sum comp basis, but when you started get into your larger, what we call our mega-projects, we’re seeing those types projects that extend over several periods or several years, and sizable builds of being looked at differently in industry because of the amount of risk that we would have to put in them. So, we are looking at more hourly type work or guaranteed value return or something like.
But you’re still going to see a lot of big basis on your smaller projects of say less in $5 million, $10 million maybe, but you start to get that 2,3,4 $600 million projects, it kind of takes on a little different perspective.
John B. Rogers
And With those larger projects, will we see more I mean higher margins but also more especially short-term volatility as a result of it?
John R. Colson
I don’t necessarily, we see a little lumpiness in projects from time, you have one winding down and the other ready to start up or something like that, but I don’t see too much volatility. We mentioned we are getting ready to kick off the solid game line and you’ll see revenues building pretty significantly, that we just finished the Northeast utility.
So, that job was ramping down, this one Quant hadn’t started yet. So, could be a little lumpiness, but not volatility.
John B. Rogers
Okay. I guess that’s what I meant, the lumpiness.
In the terms of the mix between distribution in transmission work?
James H. Haddox
That is stands about the 50:50 at this point in time, the transmission has been growing rapidly, it used to be 70% distribution and 30% transmission and we are counting substations in the transmission number but it’s probably 50:50 and transmission I am sure we will pass it going forward.
John B. Rogers
Yeah I mean, John, could you go as for as 70/30?
James H. Haddox
Yes. We could.
John B. Rogers
Okay, okay great. Thank you.
Operator
Thank you. Our next question comes from the line of Steve Gambuzza with Longbow.
Please go ahead.
Steve Gambuzza
Good morning.
James H. Haddox
Good morning.
John R. Colson
Good morning.
Steve Gambuzza
On this distribution front, I think I’m overtime you guy’s have consistently been able to outgrow your end market in terms of the revenue growth, which is additional spending, do you expect that might be the case next year?
James H. Haddox
Yes I wouldn’t see any change in that at all.
Steve Gambuzza
Thanks, very much.
James H. Haddox
Thank you.
Operator
Thank you. Our next question is a follow up question from the line of Tahira Afzal with KeyBanc.
Please go ahead.
Tahira Afzal
Well. I forgot to ask you, your 9 to 12% operating margin range got you from on the long term indicated before hand, given the changing environment, would you like to stick to that?
James H. Haddox
Yes, we would.
Tahira Afzal
And, I know that it was supposed to be 18 months back earlier on in the year as we now look on to 2009 coming on, would you still expect margins to potentially expand in the 2009 timeframe basis, what seems to be in line with a second kind of 8% operating margin for 2008?
James H. Haddox
If a Telecom comes back as we suspect, and if the wind and solar renewals come on as they are projected to along with the transmission market and we should continue to see margins expand they probably won’t in the first quarter of next as we start cranking up the telecom again and because of winter weather. But then I think we should start to see some margin expansion again.
Tahira Afzal
Yes, I mean, if you look at, you are at 8% given based on what you implied for fourth quarter guidance, you are at 8% for 2008, and the lowest we can go within that guidance, would be 9% so would it be fair to say that in 2009 to expect 9% and then if you can -- I mean have you done any sensitivity analysis to see if it does not come back to the same extent what the impact could be?
James H. Haddox
Now we haven’t and we are not giving projections of ‘09 being 9% but we are still sticking with our goal of 9% to 12 % operating income margins.
Tahira Afzal
That was sort of earlier on industry and that would imply it you sticking to the same time frame that you would be at least entering lower end of that for the full year by ‘09, would that kind of seem okay?
James H. Haddox
That’s very possible what we’re seeing now is the -- I’m just not making projections to that I want to make that clear.
Tahira Afzal
Sure.
James H. Haddox
But the margins in our backlog higher than our existing margins so the both well for increases margin going forward that we can have a drag from significant part of margin like telecom business.
Tahira Afzal
And I mean if you look at the backlog in your margin right now you’ve moved up around lets take a close to 100 basis points over the year in 2000 versus 2007 if you look back to your back log at this point last year was it similar move up as well. What you see your backlog margin today in terms of lag out from last year is that similar?
John R. Colson
I don’t know if it is equated to that you have to also remember that we have storm works this year there was not in backlog last year. We did have higher margins in backlog than we were experiencing at this time last year, but I can’t tell you whether it was 100 basis points, I don’t recall.
I just know it was higher.
Operator
Thank you. Our final question comes from the line of Kurt Woodward with JP Morgan.
Please go ahead with your question.
Kurt Woodward
Yeah hi, in terms of once the allocations are made for the transmission capacity in Texas, the Texas Commission signed off on that, what is the estimated time line between that point and when you would expect bidding to occur in terms of necessary permitting, citing and potentially some engineering work? Would that be like a six month process from that point in time?
Or what would be your best guess?
James H. Haddox
I would say, you will see engineering work start fairly rapidly because I am assuming there is a lot of work going on behind the scenes already. Once those announcements are made it is going to be a pretty fast track project to get these things built and get them online.
You might even see some engineering work preliminary engineering work start prior to any announcement and as soon as the announcements are made, I think they will evaluate the need put which individual line and it will be pretty much peddled to the metal have that point not because they already have the wind built, the constraint transmission system and they can’t get the load to the load setters. There are a lot of dynamics going on out in West Texas where generators even having to pay people to take their power because of the constraints on the system.
It is going to be pretty fast track, fast moving.
Kurt Woodward
But, we are into permitting and sightings still need to get completed before you could?
John R. Colson
Once In Texas, it operates a little different. One thing you see, grant these allocations that process is over where the lips go.
Kurt Woodward
Okay. Thanks and In terms of the telecom margins, what would those margins look like say now when you are running it little bit lower revenue levels in a 12 months ago.
Like rough numbers from margin that?
James H. Haddox
Except for the losses we have shown in the quarter, they will be down a couple hundred, may be 300 basis points from what they would be normally.
Kurt Woodward
So, normally they are around like 7% or 8%? Is that correct?
John R. Colson
No, no I am saying that going forward margins will probably be less if you take out the losses, they probably 200/300, they have been running very well with electric power margins in the second quarter and first quarter of this year. Third quarter they were affected by losses as James mentioned.
And as they are running right now there probably because telecom spending is stand if probably 2 or 300 points, lower eclectic utility margins.
Kurt Woodward
Okay and the utility?
James H. Haddox
I guess 200 points.
John R. Colson
Yeah okay.
Kurt Woodward
And the utility margins are running here today around call it 8% or 9%?
James H. Haddox
No, they are better than that.
Kurt Woodward
Okay.
Operator
Thank you. And at this time there are no additional questions, I would like to turn it back to management for any closing remarks.
John R. Colson
Thank you very much for your attendance at our third quarter conference call. We look forward to seeing you at the next quarter call.
Good bye for now.
Operator
Thank you, sir. Ladies and gentlemen that does conclude our conference for today.
If you would like to listen to the replay of today’s conference please dial 303-590-3000 using the access code 11122061 followed by the pound key. ACT would like to thank you for your participation, you may now disconnect.