Oct 31, 2013
Executives
Kip A. Rupp - Vice President of Investor Relations James F.
O'Neil - Chief Executive Officer, President, Director and President of Infrasource FI LLC Derrick A. Jensen - Chief Financial Officer
Analysts
William D. Bremer - Maxim Group LLC, Research Division Will Gabrielski - Lazard Capital Markets LLC, Research Division Tahira Afzal - KeyBanc Capital Markets Inc., Research Division Vishal Shah - Deutsche Bank AG, Research Division Jamie L.
Cook - Crédit Suisse AG, Research Division Steven Fisher - UBS Investment Bank, Research Division Andrew J. Wittmann - Robert W.
Baird & Co. Incorporated, Research Division Daniel J.
Mannes - Avondale Partners, LLC, Research Division Adam R. Thalhimer - BB&T Capital Markets, Research Division Craig E.
Irwin - Wedbush Securities Inc., Research Division John B. Rogers - D.A.
Davidson & Co., Research Division Alexander J. Rygiel - FBR Capital Markets & Co., Research Division Noelle C.
Dilts - Stifel, Nicolaus & Co., Inc., Research Division Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division
Operator
Good morning, ladies and gentlemen. Thank you for standing by.
Welcome to the Quanta Services Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Thursday, October 31, 2013 at 9:30 a.m.
Eastern Time. I will now turn the conference over to Mr.
Kip Rupp, Vice President, Investor Relations. Please go ahead, sir.
Kip A. Rupp
Great. Thank you, Ron.
And welcome, everyone, to the Quanta Services conference call to review third quarter 2013 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's -- Quanta news releases and other information emailed to you when they occur, please sign up for email information alerts by going to the Investors & Media section of Quanta Services' website at quantaservices.com. In addition, Quanta has an Investor Relations app for iPhone, iPad and Android mobile devices, which is available for free at Apple's App Store and at Google Play.
The Quanta Investor Relations app allows users to navigate the company's Investor Relations materials, including the latest press releases, SEC filings, presentations, videos, audiocasts, conference calls and stock price information. 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 information reported on this call speaks only as of today, October 31, 2013, and therefore, you are 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, 2012, 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 now like to turn the call over to Mr.
Jim O'Neil, Quanta's President and CEO. Jim?
James F. O'Neil
Thank you, Kip. Good morning, everyone, and welcome to the Quanta Services Third Quarter 2013 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 third quarter results. Following Derrick's comments, we will welcome your questions.
For the quarter, revenues increased approximately 7% and GAAP diluted earnings per share from continuing operations increased 10% compared to the same quarter last year. Our 12-month and total backlog increased both sequentially and on a year-over-year basis, and both are at record levels.
Our Electric Power segment continues to experience strong demand for electric transmission and distribution services. The electric power industry continues to make significant investments in North America's power grid to improve reliability, address congestion issues, create renewable interconnections and upgrade and replace aging transmission and distribution infrastructure.
There are several near-term drivers of transmission spending. As coal generation is retired to comply with the Environmental Protection Agency's Mercury and Air Toxics Standards, utilities will need to modify existing transmission infrastructure to handle changes in energy flow to maintain grid reliability.
As a result, new transmission infrastructure will be required. For example, earlier this year, grid operator PJM, which manages grid reliability on an electric power system that serves more than 60 million people, identified the need for more than 130 grid updates to avoid reliability problems resulting from power plant retirements.
PJM's estimate of $2.4 billion in expenditures to address this challenge includes equipment upgrades, new substation and substation upgrades, as well as rebuilding existing transmission lines and the construction of new lines. Earlier this month, PJM approved an additional $1.2 billion in high-voltage transmission system upgrades and improvements to meet the challenging impacts of mother nature, such as Superstorm Sandy, and the ongoing reconfiguration of the grid associated with the shift from coal to natural gas generation.
We are also seeing significant growth opportunities throughout Canada and expect this trend to continue for several years. The drivers of transmission and distribution investment in Canada are similar to the United States and also include other drivers, such as the development of new or expanded hydrogeneration facilities, generating power to meet low-growth demands in Canada and for export into the U.S.
market. The current level of bidding activity on large transmission projects remains at high levels.
For example, during the third quarter, we were selected by PPL to construct approximately 69 miles of 500-kilovolt electric transmission infrastructure through environmentally-sensitive and challenging terrain in Pennsylvania. Work has begun on this project, and we expect to complete the project in the spring of 2015.
As the industry leader in North America, we continue to have ongoing discussions with many customers and have good visibility into future opportunities. We anticipate that several large transmission projects will be awarded in the coming months.
Keep in mind, for every large transmission project opportunity, there are a significant number of subtransmission and substation project opportunities. Construction associated with projects individually valued at less than $100 million remain strong and we do not anticipate any slowdown in activity for the foreseeable future.
Our proprietary Energized Services technology and work methods are being utilized by AEP to perform a 345-kilovolt energized reconductoring transmission project near Corpus Christi, Texas. Quanta is performing this work in an energized state to avoid service outages to AEP's customers during construction.
This 66-mile project represents the longest span of transmission line in the United States ever built, while -- ever rebuilt while remaining in an energized state, and is the first of a 5-phase, 266-mile program. The second phase of this project is expected to begin in mid-November and was not reflected in our September 30 backlog.
The substantial emergency restoration service work performed in last year's third quarter, as compared to this year's third quarter, was the primary reason for Electric Power segment revenues being down slightly in the quarter. However, excluding the impact of emergency restoration work in both quarters, our electric distribution activity increased in the third quarter, and we expect growth to continue through this year and in 2014.
We continue to add distribution crews for existing and new customers. Our distribution workforce has increased 50% over the past 18 months.
The major drivers of our distribution services are storm-hardening initiatives, upgrading aging infrastructure and housing recovery in certain parts of the country. Overall, for our Electric Power segment, we believe our current backlog, coupled with project opportunities on the horizon, can lead to double-digit growth opportunities for at least the next 2 years.
Our Natural Gas and Pipeline segment revenues increased substantially this quarter versus the third quarter of last year, and operating income more than doubled from the same period last year, resulting in a significant improvement in operating margin for the segment. We are pleased with the segment's ongoing profitability improvements, as it reflects continued awards, solid execution and contributions from our efforts to expand geographically.
Demand for pipeline services to support shale-gathering infrastructure was active in the third quarter and should remain so through the year and for many years to come in the future, as customers continue to invest in the infrastructure needed to support the development of unconventional shales, particularly liquid-rich formations. We have also commenced construction on 2 mainline projects in the third quarter.
While these projects started slightly later than anticipated during the quarter, our forecast continues to include an expectation of $100 million in mainline revenues in the second half of this year in North America. Also, as recently announced, Quanta was selected by TransCanada for the Houston Lateral pipeline project.
Quanta's Price Gregory operating unit will construct and install approximately 48 miles of 36-inch diameter steel pipe to interconnect TransCanada's Gulf Coast pipeline to refineries in Houston, Texas. Price Gregory has a limited notice to proceed on this project, and we expect the substantial majority of this project to be performed early next year, with completion in the spring of 2014.
We remain in active discussions with a number of pipeline companies regarding mainline projects and are bullish on this market. As we have stated in the past, we believe that mainline pipe project awards in the United States, Canada and Australia will continue through and could accelerate in 2014.
Subsequent to the quarter, we acquired T.G. Mercer, which is based in Willow Park, Texas.
Founded in 1910, Mercer specializes in pipeline logistics for the oil and gas pipeline construction industry. Mercer's field offices are strategically located in and near key shale plays in the United States.
Mercer has developed a proprietary pipe-tracking system that enables pipeline owners to effectively track information pertaining to pipe infrastructure from the mill yard to final construction. This system provides pipeline owners with the solution to address growing regulatory concerns regarding traceability of information pertaining to their pipeline infrastructure.
Mercer's industry-leading pipeline logistics and proprietary technology, coupled with Quanta's leadership position in pipeline construction, maintenance and integrity services, enhances our turnkey service offering, which we believe is unmatched in our industry. In our Fiber Optic Licensing and Other segment, revenues from the quarter decreased about 10% as compared to the prior year due to the fluctuations in telecom service revenues.
Within the segment, however, we continue to see strong demand for our fiber optics services across all of our markets and from a wide variety of industries, including health care, media and entertainment, financial services, education and government, as well as wireless and wireline carriers. There's continued appetite for increasing bandwidth for business continuity, cloud computing, data center connectivity and private wide area network services.
We continue to invest in our network to expand our service offerings to meet our customer's demands and to capitalize on new opportunities in the marketplace. It's a dynamic time in the industries we serve, and we see a clear opportunity for profitable growth.
One of our key strategic objectives is to leverage our leadership position and move into select new geographies and adjacent service lines. Over the years, we have strived to stay 2 to 3 years ahead of industry trends, enabling Quanta to capitalize on opportunities.
We have successfully launched our renewable energy engineering, procurement and construction services group in 2008. We acquired a North American leadership position in pipeline construction in 2009.
In 2010, we acquired Valard Construction, the leading electric transmission and distribution company in Canada, and we have subsequently completed the acquisition of several other Canadian C&D contractors. We acquired a pigging technology for pipeline integrity services in 2011, and made a sizable acquisition of pipeline -- of a pipeline construction company in Australia in the third quarter of this year.
Today, we are announcing an expansion into infrastructure services serving the offshore and inland water energy markets. We believe there are meaningful opportunities for us to penetrate these markets and replicate the services we perform today onshore.
We are following several of our existing customers who own assets both onshore and offshore, and we are utilizing Quanta's expanded service offering to secure new customers, both onshore and offshore. Demand offshore pipeline infrastructure services is very similar to that on land, as the vast majority of the thousands of miles of pipeline and the related production facilities are at or beyond their useful life.
We believe the continued stringent regulatory environment that has affected our onshore customers will impact the offshore industry and should accelerate customer actions to address aging infrastructure. We believe the offshore oil and gas industry is a growing and vibrant market.
However, we believe the infrastructure service providers in the offshore market lack the ability to provide sole-sourced solutions, including differentiated technologies that many customers desire. We see a clear opportunity for Quanta to grow in this market.
An integral part of this strategy was Quanta's recent acquisition of Performance Energy Services, or PES, which is headquartered in Houma, Louisiana. PES is a leading specialty contractor to the oil and gas industry, specializing in mechanical installations, fabrication of steel structures, commissioning and decommissioning services and electrical instrumentation services.
PES is ISO 9000-certified and serves the Gulf of Mexico market and also has a presence in select international offshore markets, serving U.S. exploration and production companies.
In addition to the PES acquisition, Quanta has invested $24 million in certain multipurpose construction vessels to enhance our offshore oil and gas infrastructure strategy. These vessels complement the service offerings of PES, as well as our existing service offerings.
The PES and Mercer acquisitions are included in our Natural Gas and Pipeline segment, on examples of our efforts to enhance our comprehensive infrastructure solution offerings for our customers and expand into adjacent markets that we believe will deliver profitable growth for our shareholders. In summary, we had an excellent third quarter.
And we expect 2013 to be another record year for Quanta. We believe the momentum continues to build in all of our end markets and we believe there's an opportunity for double-digit growth in 2014.
Our employee count at the end of the quarter stood at a record 21,000 employees, up 18% from the beginning of this year. I want to thank our employees for their dedication to safety and their hard work.
I believe we have the very best employees in the industry, and our people are the key to our past and future success. I will now turn the call over to Derrick Jensen, our CFO, for his financial review of the third quarter.
Derrick?
Derrick A. Jensen
Thanks, Jim, and good morning, everyone. Today, we announced revenues of $1.65 billion for the third quarter of 2013 compared to $1.53 billion from the prior year's third quarter, reflecting growth of approximately 7% quarter-over-quarter.
Net income from continuing operations attributable to common stock for the quarter was $92.9 million or $0.43 per diluted share, as compared to $83.6 million or $0.39 per diluted share in the third quarter of last year. Included in our results for the third quarters of 2013 and 2012 were the release of income tax contingencies of approximately $6.6 million and $5.2 million of income, or a net benefit of $0.03 per diluted share for the third quarter of 2013 and a net benefit of $0.02 per diluted share for the third quarter of 2012.
Both were due to the expiration of various federal and state statute of limitations periods and settlement of certain income tax audits. Adjusted diluted earnings per share from continuing operations, as calculated in today's press release, was $0.46 for the third quarter of 2013 and grew approximately 10% as compared to adjusted diluted earnings per share from continuing operations of $0.42 for the third quarter of 2012.
The growth in consolidated revenues in the third quarter of 2013 was primarily due to a 40% increase in revenues from our Natural Gas and Pipeline Infrastructure Services segment, partially offset by a 4% decrease in revenues from our Electric Power Infrastructure Services segment. Our consolidated gross margin increased to 16.6% in the third quarter of 2013 from 16.4% in 3Q '12.
The increase in gross margin was primarily a result of improved performance and an increase in revenues from our Natural Gas and Pipeline segment in this year's third quarter as compared to last year's third quarter. This increase was partially offset by a $57 million quarter-over-quarter decrease in higher-margin electric power emergency restoration services revenues.
Selling, general and administrative expenses were $124.9 million, reflecting an increase of $10.4 million as compared to last year's third quarter. This increase is primarily attributable to $6.5 million of higher salary and incentive compensation costs associated with increased levels of operating activity and profitability.
Also contributing to the overall increase in selling, general and administrative expenses was approximately $4.1 million in incremental and administrative costs related to acquired companies. As a percentage of revenues, selling, general and administrative expenses increased slightly to 7.6% in the third quarter of 2013 from 7.5% in the third quarter of 2012.
Our consolidated operating margin before amortization expense remained constant at 9% for 3Q '13 and 3Q '12. Amortization of intangible assets decreased from $10.3 million in 3Q '12 to $7 million in the third quarter of 2013, primarily due to reduced amortization expense from previously acquired intangible assets as certain of these assets became fully amortized, partially offset by amortization of additional intangible assets associated with the 2013 acquisitions.
To further discuss our segment results, the Electric Power segment's revenues were $1.05 billion, reflecting a decrease of $40.2 million quarter-over-quarter or approximately 4%. Revenues were negatively impacted by a $57-million decrease quarter-over-quarter in emergency restoration services, with approximately $18.6 million occurring in the third quarter of 2013 compared to $75.1 million occurring in the third quarter of 2012.
Additionally, revenues during the quarter were negatively impacted by a decline in activity related to renewable energy projects, as the prior year's third quarter had substantial contributions from a large-scale solar project. In the third quarter of 2013, we neared completion on some smaller renewable projects, but due to the lumpiness on projects in this area, we've had few new awards.
These decreases were partially offset by higher revenues associated with the electric power transmission and distribution projects that resulted primarily from increased capital spending by our customers. Also included in the overall increase in revenues for the third quarter of 2013 were approximately $27.5 million in revenues from companies acquired in 2013.
12-month and total backlog increased both quarter-over-quarter and sequentially for the Electric Power segment. Sequentially, 12-month backlog increased by 9% from the end of the second quarter of 2013, and total backlog for the segment is at a record $5.32 billion.
Contributing to the increase in backlog is roughly $100 million from acquisitions in the third quarter. In addition, backlog increased due to incremental transmission awards, as well as the renewal of certain master service agreements.
Operating margin in the Electric Power segment decreased to 11.7% in the third quarter of 2013 as compared to 12.6% in last year's third quarter, primarily due to the lower levels of higher-margin emergency restoration services in the current period, as well as last year's third quarter being positively impacted by higher-margin contributions from the large-scale solar project, which did not occur in -- recur in the current period. Natural Gas and Pipeline segment revenues increased quarter-over-quarter by 40% to $552.4 million in 3Q '13, primarily as a result of increased revenues from projects related to unconventional shale developments in certain regions of North America.
Revenues for the third quarter of 2013 were also favorably impacted by the contribution of approximately $56 million in revenues from the acquisition of Nacap in late July, 2013. Operating income for the Natural Gas and Pipeline segment, as a percentage of revenues, increased to 9% in 3Q '13 from 5.9% in 3Q '12.
The increase is due primarily to continued successful execution on higher revenues, the combination of mainline activity from Nacap and, to a lesser extent, the start of the mainline projects that Jim referenced earlier, as well as the overall increase in segment revenues, which improved this segment's ability to cover fixed and overhead costs. Similar to the Electric Power segment, backlog is higher both quarter-over-quarter and sequentially for the pipeline segment, with 12-month and total backlog increasing 34.8% and 8.2% compared to the end of the second quarter of 2013.
These increases are primarily due to backlog associated with the Nacap acquisition. Also, as we've commented before, Keystone XL is not in any of the backlog figures presented for our pipeline segment.
Fiber Optic Licensing and Other segment revenues were down $4.8 million or 10% to $44.4 million in 3Q '13 as compared to $49.2 million in 3Q '12, primarily due to lower levels of ancillary telecommunication service revenues. However, operating margin increased to approximately 31.8% in 3Q '13 as compared to 30.7% in 3Q '12, as a result of a larger proportion of Fiber Optic Licensing revenues earned during 3Q '13, which yield higher margins than the ancillary telecommunications and wireless infrastructure projects underway in 3Q '12.
When calculating operating margins by segment, we do not allocate certain selling, general and administrative expenses and amortization expense to our segment. Therefore, the previous discussion about operating margins by segment excludes the effects of such expenses.
Corporate and unallocated costs decreased $3.5 million in the third quarter of 2013 as compared to 3Q '12, primarily as a result of a $3.3-million reduction in amortization expense as previously acquired intangible assets became fully amortized, partially offset by amortization related to 2013 acquisitions. EBITA for the third quarter of 2013 was $141.8 million or 8.6% of revenues compared to $132.8 million or 8.7% of revenues for the third quarter of 2012.
Adjusted EBITDA was $185.8 million or 11.3% of revenues for the third quarter of 2013 compared to $171.4 million or 11.2% of revenues for the third quarter of 2012. The calculation of EBITA, EBITDA and adjusted EBITDA, all non-GAAP measures, and the definitions of these and day sales outstanding or DSOs, can be found in the Investors & Media section of our website at quantaservices.com.
Operating cash flow from continuing operations was approximately $83 million for the third quarter of 2013 as compared to cash used of $47 million for the third quarter of 2012. Capital expenditures net of proceeds from equipment sales were about $47 million, resulting in approximately $37 million in free cash flow for the third quarter of 2013.
This compares to $112 million in negative free cash flow for the third quarter of 2012. Also during the third quarter of 2013, we acquired J.W.
Didado Electric and Nacap Australia in unrelated transactions, which included the use of approximately $118 million in net cash. The improvement in operating cash flow from continuing operations for the quarter was primarily due to higher overall levels of operating activity and performance improvements, as well as decreased working capital requirements on certain projects during the 2013 period as compared to the 2012 period.
Our DSOs were 82 days at September 30, 2013, compared to 93 days at June 30, 2013, and 91 days at September 30, 2012. Contributing to the decrease in DSOs was the favorable impact of 9 days from reclassifying the change order receivable balance of $165 million on the Sunrise Powerlink project from current assets to other long-term assets.
Since completion of the project, Power Electric, a Quanta subsidiary, and SDG&E have had ongoing meetings to review project scope, costs and performance criteria in order to reach resolution on the additional work performed and pricing of our change order. As of early October, we were unsuccessful in agreeing on the amount owed to par, and as a result, have recently agreed to submit the change order to formal arbitration as per the contract.
While the total change order being pursued by Quanta with respect to this matter is higher than the amount presented on Quanta's balance sheet, management has taken a more conservative position with respect to its financial statements and continues to believe that the company will be successful in collecting the amount recognized. At September 30, 2013, we had about $226 million in letters of credit outstanding, primarily to secure our insurance program, and we had no borrowings outstanding under our credit facility.
In addition, at the end of the quarter, we had approximately $309 million in cash, with approximately $184 million of the balance related to foreign operations. Considering our cash on hand and availability under our credit facility, we had nearly $783 million in total liquidity as of September 30, 2013.
As Jim previously commented, subsequent to the end of the third quarter, we completed 2 additional acquisitions in our pipeline segment for an aggregate combined consideration of approximately $181 million, of which approximately $125 million was paid with cash on hand and short-term borrowings under the credit facility. In consideration of Quanta's acquisition strategy and continued approach to leveraging our balance sheet capacity on larger-scale infrastructure projects, we also amended our revolving credit facility yesterday to increase our availability under the facility to $1.325 billion and extended the maturity date to October 30, 2018.
Concerning our outlook for 2013. We expect revenues for the fourth quarter of 2013 to range between $1.65 billion and $1.75 billion, and diluted earnings per share from continuing operations to be $0.39 to $0.41 on a GAAP basis.
Included in our estimate of GAAP diluted earnings per share for the fourth quarter of 2013 is a net tax benefit of approximately $0.02 per share associated with the release of certain income tax contingencies due to the expiration of certain statute of limitation periods during the fourth quarter. In addition, the company's outlook for the fourth quarter of 2013 continues to reflect nominal emergency restoration service revenues as compared to the fourth quarter of 2012, which included record emergency restoration service revenues of $130 million.
These estimates compare to revenues of $1.67 billion and GAAP diluted earnings per share from continuing operations of $0.48 in the third quarter of 2012, which also included a $2.7 million benefit from the release of income tax contingencies impacting the prior year fourth quarter by $0.01 per diluted share. Our GAAP EPS forecast for the fourth quarter of 2013 includes an estimate of $7.6 million for noncash compensation expenses and $9.5 million for amortization expense.
Excluding these expenses and the impact of income tax contingency releases, our non-GAAP adjusted diluted earnings per share from continuing operations for the fourth quarter of 2013 are expected to be $0.42 to $0.44, and compared to our non-GAAP adjusted diluted earnings per share from continuing operations of $0.51 in the fourth quarter of 2012. This non-GAAP measure is estimated on a basis similar to the calculations of historical adjusted diluted earnings per share from continuing operations presented in our release.
We are currently forecasting net income attributable to noncontrolling interests to be approximately $4 million to $5 million in the fourth quarter of 2013. And for additional guidance, we are currently projecting our GAAP tax rate to be around 33% for the fourth quarter and our diluted share count to be about 217 million shares.
We expect CapEx for all of 2013 to be approximately $260 million to $270 million, which includes CapEx for our Fiber Licensing and Other segment of about $45 million to $50 million, as well as an increase associated with the $24 million in vessels Jim previously discussed. This compares to CapEx from continuing operations for 2012 of about $209 million.
This concludes our formal presentation, and we'll now open the line for Q&A. Operator?
Operator
[Operator Instructions] Your first question comes from William Bremer from Maxim Group.
William D. Bremer - Maxim Group LLC, Research Division
Can we talk a little bit on pricing, what's currently in your backlog now for each segment? Has that been improving sequentially or has it been improving year-over-year?
Just give a little sense on the pricing power of the end markets that you are working on now.
Derrick A. Jensen
Sure, Bill. This is Derrick.
Relative to pricing, we like to look at things as though we have the same level of pricing discipline throughout. So what I would say is, the margins we're seeing in backlog today are comparable to the margins that you've seen in both the Electric Power and in the pipeline segment.
William D. Bremer - Maxim Group LLC, Research Division
Okay. Now let's go into international.
Can we get an update on Australia? This something a little bit out of -- a little bit on the newer side in terms of your business mix, what you're seeing there?
And then also, touch base on the offshore opportunity for you, given -- and give us a sense of what is the current capacity that you could do there. And I'm sure you'll be investing with that continuously as projects come up, but a little more granularity would be appreciated.
James F. O'Neil
Okay. First Australia, Bill.
We're seeing similar drivers that we're seeing in the U.S., probably more so than in the U.S. and in Canada.
There's significant opportunity to build out the pipeline infrastructure and certainly, we're at or ahead of schedule on where we expected to be when we made the acquisitions. So things are moving along nicely there.
As far as the offshore environment, what we're trying to do is replicate the services that we're performing on land today, offshore. The main reason we're doing that is some of our primary customers that we're doing work for on their pipeline infrastructure and facilities on land have asked us to move into the offshore environment, because they don't feel they've got a viable solution with the amount of work that they've got going forward.
We thought Performance Energy is an excellent company that has a strong management team and customer relations, that has differentiating services in the Gulf, primarily, today, and certain international markets. And we're going to leverage that with some of our technologies in-house, such as our integrity services, our engineering capabilities and program management to build that business.
So we're very excited about that opportunity. Certainly, we're just getting our toe on the water on that and we'll just take it slowly and build opportunities with our customers as they present themselves.
Operator
Your next question comes from Will Gabrielski with Lazard Capital.
Will Gabrielski - Lazard Capital Markets LLC, Research Division
As you look at the offshore market, I guess, can you comment, it sounds like your -- the part of the market that you want to address is fairly fragmented from your comments. Is that true?
And how do you view this work? I mean, is it more MSA-style work and recurring opportunity or will it be discrete projects?
James F. O'Neil
A significant part of what PES does today is MSA work. It's recurring revenue with margins that are actually better than what we do in our core business today.
And then there are other parts of that business that are adjacencies, that are highly fragmented, that lack technology and the sole-source solution that we see an opportunity to provide going forward.
Will Gabrielski - Lazard Capital Markets LLC, Research Division
Okay. And then can you give us some color on up in the Canadian market?
Just over the past 48 hours, a few big oil sands projects were sanctioned and there seems to be some pipelines associated with those. How that market is shaping up on the pipeline side for you and what the opportunity and competitive landscape looks like?
James F. O'Neil
Well, the competitive landscape there is less than the U.S. because they just don't have been the industry capacity in Canada that they do in the lower 48, and we anticipated that the Canadian pipeline market was going to be strong in the future years.
That's one of the reasons that we've been bullish on our commentary. And the recent announcements that you've seen, I believe you're referring to the [indiscernible] announcement that just came out, is the primary -- one of the drivers.
So we have a significant presence in Canada. I would -- I think that we're probably one of the leading, if not the leading, contractor in Canada and we're well-positioned to take advantage of those opportunities.
Operator
Your next question comes from Tahira Afzal with KeyBanc.
Tahira Afzal - KeyBanc Capital Markets Inc., Research Division
First question is in regards to, Jim, something you said about 2014. Typically, you guys are pretty conservative as you look out, but, I guess, backlog has grown fairly notably.
So could you elaborate a bit on that double-digit quantitative commentary you gave on 2014? Is that in regard to what you think the revenues can do or whether that -- the earnings growth you see going into next year?
And really what gives you the confidence you seem to be indicating in regards to that?
James F. O'Neil
Well, Tahira, we're seeing continued momentum in all of our -- all portions of our business. So we see top line growth.
We see solid execution, which we've demonstrated over the past several years. Derrick talked about backlog and the margins in backlog.
So everything is leading toward a growth year in all aspects of our bottom line and revenue growth and so forth. So we're excited about the opportunities going forward.
That's why we've been bullish as early as we -- typically, we're not bullish until February about these comments. But we just see clear visibility going forward into '14 today than we have in the past this time going into any given year.
Tahira Afzal - KeyBanc Capital Markets Inc., Research Division
Got it. Okay.
And the second question I had was really in regards to the acquisition commentary. Jim, it seems like you -- with the capacity, increasing your revolver, perhaps, and your commentary today, you're looking at doing something more sizable as you go into 2014.
Could you give us -- make us a little more comfortable around the offshore opportunities you might be looking at there? We kind of have a mixed record in terms of some of the offshore names we cover because the pipeline from the subsea side sometimes tend to have most -- more risk associated with them.
So anything on the risk side would be helpful.
James F. O'Neil
Well, let me be clear that the expansion of the credit facility is not associated with our movement to offshore. We made comments that we're going to take it slow and steady moving into the offshore environment.
The expansion of the credit facility is for the typical reasons that we mentioned in the past. It's working capital in all segments of our business as we continue to grow, and it's capital for -- it's capital for acquisitions across all segments, as well as CapEx for growth.
Those are the primary reasons, but it's not because we're trying to make some big play into oil and gas. That is not accurate, whatsoever, and I'm glad you asked that question because I'm sure there's some concerns about that out there.
But that's not what the use of that credit facility is for.
Operator
Your next question comes from Vishal Shah with Deutsche Bank.
Vishal Shah - Deutsche Bank AG, Research Division
I just wanted to clarify your comments on the margins in the bookings as book margins in pipeline and transmission segment. Did you say that they were consistent with third quarter margins?
And I have a follow-up.
Derrick A. Jensen
Yes, this is Derrick. I mean, our margins that we're seeing in backlog or in the pipeline segment are consistent with the historical bidding margins that we have.
So from your perspective of -- we target 9% to 12% from an operating perspective, which is inclusive of the costs that we incurred, but that's not necessarily representative of the margins that we're bidding. But the margins that you see from the bidding side of the equation and what's in backlog are consistent with our bidding approach historically.
Vishal Shah - Deutsche Bank AG, Research Division
Okay. That's helpful.
And then can you just talk a little bit about the transmission segment, how your book-to-bill would look like in the U.S. versus Canada.
And also, your expectations for growth in 2014 with these markets?
Derrick A. Jensen
Yes, we continue to see opportunities in the U.S. and Canada comparable.
I think that the growth rate in Canada has the ability to maybe be at slightly higher, simply because of the fact that it's growing on a smaller base. But the overall award activity we see between the U.S.
and Canada is comparable. And then I think the second part of your question was really as it relates to '14.
I think that we continue to see margins within the segment, specific Electric Power, in that 9% to 12% range that we continue to see throughout this year. You're seeing it in that performance of the 11% range.
But as we look forward, I continue to say that, overall, a 9% to 12% is what we feel comfortable with.
Operator
Your next question comes from Jamie Cook with Credit Suisse.
Jamie L. Cook - Crédit Suisse AG, Research Division
Just a couple of -- question one, on the quarter specifically. It was fairly a good quarter, the revenues were sort of at the low-end of what you guided.
Can you just talk about was there anything different than your expectation? The Electric Power revenues struck me as a little light relative to what I thought, but I don't know if that was just me.
And then, I guess, just my second question, again on the Electric Power margin, is there any reasons -- if we look at the margins in the first 9 months relative to where you were last year, I understand that there's less storm work. But as I look to sort of 2014, is there any reason, structurally, assuming that execution margins couldn't exceed or be more towards the higher end of the range or does like mix from distribution or smaller projects sort of bring the margin profile down [indiscernible]?
Derrick A. Jensen
Yes, Jamie, relative to the revenues, we did have some delay from the third quarter out associated with some of the transmission work up in Canada. It got a little bit later start than we anticipated.
On a consolidated basis, we also had a little bit of delay on mainline. It came through -- those few projects started 3 to 4 weeks, a little bit later than what we had anticipated.
So that's somewhat what pushed some of the revenues out and ended up putting us at the lower end of our revenue guidance. When thinking about '14 and the margins, as I said earlier, we continue to look at the 9% to 12%.
Do I think that we could be at the higher end of that range throughout? From a normal perspective.
I would say yes. But as you then, you talked about the growth of distribution.
Distribution historically may have been at a little bit lower margins, but we continue to push ourselves into additional program management solutions and we're providing additional solutions to our customers, which is moving us up the value chain with them on the distribution side. So I think that we actually look at being able to push the margins and distribution up a little bit more than what we've seen historically.
Operator
Your next question comes from Steven Fisher with UBS.
Steven Fisher - UBS Investment Bank, Research Division
Jim, on the electric transmission bigger prospects you mentioned in the next few months, what's driving the confidence in those projects and timing? Have they gotten all the regulatory and permitting issues behind them?
James F. O'Neil
There are some projects that are in the final stages of trying to get permitting, and that's just -- we see that on every project, which could affect the timing, whether it gets awarded at the end of this year or in the first quarter of next year. But we do see 2 to 3 big projects that could be coming out here in the near term that -- we don't expect any major hurdles for those projects to be -- to move toward construction in '14.
Steven Fisher - UBS Investment Bank, Research Division
Okay. And then on the pipeline, we're heading into what was the more traditional bidding season for the larger pipelines.
Do you think that seasonality still holds for some of these bigger mainlines? And what's your base case for when we could see more of these mainlines get awarded?
James F. O'Neil
Well, we said it past that really this traditional bidding season that we historically have seen over the past, probably last year and this year, has really kind of gone away. It's kind of like a year-round process now that occurs.
So there's really no bidding season. It's more having discussion with customers on these bigger programs and they could be lighted anytime during the year.
So I wouldn't focus so much on the bidding season anymore. It's just not -- that dynamic just isn't occurring like it did, as it has historically.
Operator
Your next question comes from Andy Wittmann with Robert W. Baird.
Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division
You've touched on this question a little bit already. But in the new business, in the offshore stuff, you kind of mentioned that it's MSA or maybe it's MSA-like.
Does that mean it's not fixed pricing, it's done on a reimbursable basis? I just want to get a little bit better sense of what that risk profile looks like.
James F. O'Neil
Well, a lot of it is crews that are working on these production platforms, maintaining the engineering, the -- excuse me, the electrification and instrumentation and mechanical maintenance of the platform. So those folks are typically on some type of fixed-fee basis that -- on a 7-day on, 7-off basis or whatever.
It's year-round work. It's MSA work that the margins are predictable, and they're certainly accretive to the company as we stand today.
Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division
Got it. Okay.
And then, you mentioned that in the -- I guess, in the electric segment that there's an MSA renewal. You don't see that every quarter, was that -- how much is the MSA backlog up sequentially?
Maybe just give us a better sense of how much the MSA contribution helps -- was contributing to backlog this quarter.
Derrick A. Jensen
Yes, I don't know that I'd say how much the MSA backlog was up per se, but I'll tell you that of the non-acquisition-related backlog, the remaining piece was probably roughly half of it was MSA work and most of that was in the beyond '12 period.
Operator
Your next question comes from Dan Mannes from Avondale.
Daniel J. Mannes - Avondale Partners, LLC, Research Division
A couple of quick follow-up questions. First, you mentioned, Jim, in your prepared comments that you picked up the work from PPL.
Without going into the details of this one, can you talk a little bit about maybe historical precedent for replacing other contractors, number one, and your positioning there? And then secondly, why would that occur in the first place, without specifically talking about this one?
James F. O'Neil
Yes, I mean, it's difficult to get into that. I mean, we don't typically know the reasons why we get put on projects, because why other people might get replaced, I mean, it could be of various -- there could be various reasons for that.
So I don't want to get into that, Dan. I mean, I -- what's exciting for us is that we were called in to help finish the project, and I believe we're doing very well on that project.
We're ahead of schedule and we're excited to build that relationship with PPL and do more work for them going forward.
Daniel J. Mannes - Avondale Partners, LLC, Research Division
Okay. I just wanted to see if this was something that had happened in the past to other contractors and if this had been something you've been a beneficiary, not just this time, but maybe historically as well.
James F. O'Neil
Yes, we've -- I mean, we've replaced folks in the past on projects. And that's happened recently over the last several years because of the uptick in work.
Labor is tight, the experienced leadership is tight and certainly some of these projects are becoming more difficult to complete, because there's aggressive time frames, it's more difficult terrain and more populated areas. So certainly, that's in our sweet spot from an execution standpoint, and we have replaced contractors over the last several years to finish projects.
Operator
Your next question comes from Adam Thalhimer from BB&T Capital.
Adam R. Thalhimer - BB&T Capital Markets, Research Division
Jim, I just wanted to ask you about -- you've talked about this in the past, your strategy in the pipeline business was to, I think, let others fill up on the early work, thinking that might be lower margin and then hold back some capacity for the later bidding. I just -- maybe you could reflect on kind of that strategy and where you are in that cycle?
James F. O'Neil
Yes. Adam, I don't know if that's exactly right.
I mean, I think what we do is we're disciplined on pricing. And we've got several of our customers that we have more strategic relationships with that have more difficult builds in geographic areas where we typically excel, that have come out later than some of the other projects that came out earlier, a couple of -- again, earlier last year.
So it's just the timing of when projects in certain geographical areas come up and when our key customers start their build programs more than waiting and holding capacity. Certainly, if there's a project for anyone that meets our margin profiles, we're going to take advantage of that opportunity.
Adam R. Thalhimer - BB&T Capital Markets, Research Division
Okay. And then the second question, I wanted to ask about the -- Jim, your long-term outlook for offshore oil and gas.
And, I guess, the question for me is how did the production costs offshore compare to the production cost onshore because -- and I don't know much about offshore, but you would just think that with all the development of onshore that offshore would be in secular decline. But maybe that's totally false, I really don't know.
James F. O'Neil
Well, let me just -- I want to say this again. We're not changing the profile of the company, okay?
We're taking advantage of it in an adjacent market opportunity. So this isn't any big shift in strategy.
It's a natural progression as we follow our customers into an opportunity that we believe we can execute on. When you look at the cost profile of this business, certainly, we believe that it's going to be more profitable than our core business today, and PES is a good example of that.
Their margins are higher than our core business today, and their return on invested capital is higher than our margins today. I just want to make another comment that our primary service is not to be a marine support -- to provide customers with marine support activities.
We see opportunities to provide solutions using technology and leverage our capabilities in-house today, and the marine vessels are just one aspect of supporting that, okay? And this is going to be very limited.
I mean, we're not going to -- we're not going out to buy a bunch of vessels. We're here to support our customers in providing solutions that we don't believe are in place today, where our customers have comfort that there's a contractor that can provide those solutions today.
Operator
Your next question comes from Craig Irwin with Wedbush Securities.
Craig E. Irwin - Wedbush Securities Inc., Research Division
So in your outlook statement in your release, you lead off with an indication that there might be some regulatory or permitting risks in the fourth quarter. My understanding is previously you had looked to include a little of these potential risks in your guidance.
Can you comment as far as whether or not anything's changed or if there's anything specific or unique that you're looking at in the fourth quarter and why would -- you would choose to put something in versus out, given that there might be a little bit of risk?
James F. O'Neil
Craig, we usually put that statement in our outlook every quarter. It's just the nature of -- our customers always have delays, projects never start on time.
That's been like that for decades. And I don't see anything material or different.
In fact, I think the environment is probably better today than it's been in quite some time. But we deal with delays all the time, and we have 2 or 3 of our the big transmission projects that are delayed right now.
But people don't see that because we're on 16 major transmission projects. But delay is just something that we have to deal with, our customers have to deal with, and that's why it's in the outlook.
And it will be in there in the future as well.
Craig E. Irwin - Wedbush Securities Inc., Research Division
Great. Great.
And then the next question is really just a housekeeping question. Can you maybe share with us the mainline gas contribution in the quarter to bookings, revenue, backlog and where we stand on those numbers?
Derrick A. Jensen
Yes, we don't typically get into the specifics of the quantification of how much revenue came from that subsegment. And then in relation to backlog, I'm not certain I understood your question.
I think you're just asking kind of how much of the incremental awards were mainline?
Craig E. Irwin - Wedbush Securities Inc., Research Division
Yes, that would directly answer it, yes.
Derrick A. Jensen
Okay. Well, as it stands right now, we also don't go through and really get into that level of detail on the specifics of kind of how mainline works, but our mainline is a component of that.
But the reality is that the increase in backlog quarter-over-quarter is really all associated with Nacap within the pipeline group, and Nacap's revenues are historically mainline.
James F. O'Neil
Craig, TransCanada's not in backlog yet since that was announced subsequent to the quarter. So that will be added at the end of fourth quarter.
Operator
Your next question comes from John Rogers with Davidson.
John B. Rogers - D.A. Davidson & Co., Research Division
Jim, could you talk a little bit about where you are on the pipeline capacity utilization? I mean, Derrick, you mentioned that you're pretty disciplined on pricing, but you've seen margins climb quite a bit.
And is that just better utilization of what you have? And kind of where are we and how much excess capacity do you still have going into 2014?
James F. O'Neil
Well, I wouldn't say we have excess capacity right now. I mean, if you remember, we deployed our field leadership into the shales, and we've been very active in the shales doing gathering work.
We probably generated over $1 billion in gathering revenues. And now the mainline work is beginning to accelerate and that does help, obviously, leverage some of the fixed costs we have on specialized pipeline, large-diameter pipeline handling equipment.
So certainly, we have the ability to expand the spreads that we have to take advantage of opportunities. Strategically we've been planning this move in -- the increase in mainline activity while remaining in the shales, working for the customers we're working for today.
So I wouldn't say that we've got excess capacity sitting around though. But certainly, we have an opportunity to take advantage of mainline price as it comes out over the next several years.
John B. Rogers - D.A. Davidson & Co., Research Division
But, Jim, if you can expand the spreads, not an exact number, but can you give us a sense of how much more work you can do with your capacity that you have now? I mean, I'm thinking about with TransCanada, hopefully, starts up and -- or that Keystone starts up.
James F. O'Neil
We have 9 to 12 spreads of capacity in the lower 48. And right now, we're on a couple of jobs.
So certainly we can -- we've got the capacity to move -- to take on more opportunities in the lower 48. We've certainly got Australia, don't forget about that.
I mean, Australia and Canada, there's certainly opportunities for growth there, too. We have capacity in those areas as well to take advantage of growth opportunities.
So we're well positioned to take advantage of growth. We -- if there's an opportunity, being the largest specialized contractor in the industry, if there's a will there's a way.
We'll be able to man those projects. We're not concerned right now about having limitations on pursuing additional work.
We're not going to turn down work for our key customers or any project that has margins that meet our profile.
Operator
Your next question comes from Alex Rygiel with FBR.
Alexander J. Rygiel - FBR Capital Markets & Co., Research Division
Very excited about the backlog growth. Very excited about the pipeline margins being the highest in the last couple of years.
And obviously, your commentary about bidding in the next quarter or so with regards to transmission and pipeline, all very bullish. You've answered most of the questions out there.
But I did want to find out a little bit more color on the timing of the Sunrise arbitration. How should we think about that over the next 6 to 12 months?
Derrick A. Jensen
Yes, to the extent that we've moved it noncurrent, that's a direct statement that we're not anticipating any settlement within the next 12 months. I would think, in my own mind, that it's probably something in the 18- to 24-month time frame.
Alexander J. Rygiel - FBR Capital Markets & Co., Research Division
That's perfect. And then, Jim, as it relates to sort of other acquisitions in the offshore arena, sort of in the near term, is that something we should be expecting or is this initial acquisition sort of an acquisition that you're going to use to sort of test the waters for the next year or 2 to see how much further you want to go?
James F. O'Neil
Yes, I think the latter is more accurate. I mean, PES is a nice platform to grow on.
We may do some smaller selective-type acquisitions, but it's going to be more around technology-driven opportunities versus trying to build more mass. I don't see any big acquisitions in oil and gas in the near future.
Operator
Your next question comes with a line of Noelle Dilts with Stifel.
Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division
I actually wanted to start off with a few housekeeping questions. So first on the pipeline backlog, I know you talked about most of the growth coming from acquired operations.
But could you just talk -- could you give us the exact number of -- amount of acquired backlog in both the next 12 months and total in pipeline?
Derrick A. Jensen
On the pipeline side, I would say that actually, it's -- if I'm not mistaken, I think most of the components of the 12-month and beyond are effectively from the acquisition of Nacap, probably in the $150 million range.
Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division
Okay. And then when you look at the acquisition-related expenses that hit the quarter, did that fall into the electrical segment or did it fall into kind of unallocated corporate?
Derrick A. Jensen
It will fall in unallocated.
Operator
Your next question comes from Martin Malloy with Johnson Rice.
Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division
I was wondering, could you talk a little bit more on the -- and John Rogers asked this question, but a little bit more on the margin -- potential margin increases? You have more consistent work on the large-diameter pipeline.
So I'm just trying to get a feel for, is there a couple of hundred basis points of upside potential there as you more fully utilize your equipment?
Derrick A. Jensen
Yes, in general, I mean, we look at the pipeline segment being able to get back into a 9% to 12% operating margin to the extent that more mainline work is provided. We reached the 9% level this quarter.
We did have the contribution of the mainline work with Nacap and a little bit of mainline work here in the U.S. For us to get into that true 9% to 12% range on a recurring basis, we think that we're going to need to have some level of recurring mainline work.
And I -- as we look at 2014 with some of the projections that Jim has talked about, we think that we have that opportunity.
Operator
And there are no further questions at this time. I will now turn the call over to Mr.
Jim O'Neil for closing comments.
James F. O'Neil
Well, I'd like to thank all of you for participating in our third quarter 2013 conference call. And we appreciate your questions and ongoing interest in Quanta.
Thank you. This concludes our call.
Operator
Ladies and gentlemen, this does conclude the conference call for today. Thank you for participating.
You may now disconnect your lines.