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QUANTA SERVICES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes thereto in Item 8. "Financial Statements and Supplementary Data." The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in "Uncertainty of Forward-Looking Statements and Information" below and in Item 1A. "Risk Factors." Introduction We are a leading provider of specialty contracting services, offering infrastructure solutions primarily to the electric power and oil and gas industries in North America and in select international markets. The services we provide include the design, installation, upgrade, repair and maintenance of infrastructure within each of the industries we serve, such as electric power transmission and distribution networks, substation facilities, renewable energy facilities, pipeline transmission and distribution systems and facilities, and infrastructure services for the offshore and inland water energy markets. We also own fiber optic telecommunications infrastructure in select markets and license the right to use these point-to-point fiber optic telecommunications facilities to customers. Effective December 31, 2013, Quanta's Natural Gas and Pipeline Infrastructure Services segment was renamed the Oil and Gas Infrastructure Services segment to better align with this segment's service offerings and end-customer markets. No changes have been made to this segment's financial results. We report our results under three reportable segments: (1) Electric Power Infrastructure Services, (2) Oil and Gas Infrastructure Services and (3) Fiber Optic Licensing and Other. This structure is generally focused on broad end-user markets for our services. Our consolidated revenues for the year ended December 31, 2013 were approximately $6.52 billion, of which 69% was attributable to the Electric Power Infrastructure Services segment, 29% to the Oil and Gas Infrastructure Services segment and 2% to the Fiber Optic Licensing and Other segment. Our customers include many of the leading companies in the industries we serve. We have developed strong strategic alliances with numerous customers and strive to develop and maintain our status as a preferred vendor to our customers. We enter into various types of contracts, including competitive unit price, hourly rate, cost-plus (or time and materials basis), and fixed price (or lump sum basis), the final terms and prices of which we frequently negotiate with the customer. Although the terms of our contracts vary considerably, most are made on either a unit price or fixed price basis in which we agree to do the work for a price per unit of work performed (unit price) or for a fixed amount for the entire project (fixed price). We complete a substantial majority of our fixed price projects, other than certain large transmission projects, within one year, while we frequently provide maintenance and repair work under open-ended unit price or cost-plus master service agreements that are renewable periodically. We recognize revenue on our unit price and cost-plus contracts as units are completed or services are performed. For our fixed price contracts, we record revenues as work on the contract progresses on a percentage-of-completion basis. Under this method, revenue is recognized based on the percentage of total costs incurred to date in proportion to total estimated costs to complete the contract. Fixed price contracts generally include retainage provisions under which a percentage of the contract price is withheld until the project is complete and has been accepted by our customer. For internal management purposes, we are organized into three internal divisions, namely, the electric power division, the oil and gas infrastructure division and the fiber optic licensing division. These internal divisions are closely aligned with the reportable segments described above based on the predominant type of work provided by the operating units within each division. 38 -------------------------------------------------------------------------------- Table of Contents Reportable segment information, including revenues and operating income by type of work, is gathered from each operating unit for the purpose of evaluating segment performance in support of our market strategies. These classifications of our operating unit revenues by type of work for segment reporting purposes can at times require judgment on the part of management. Our operating units may perform joint infrastructure service projects for customers in multiple industries, deliver multiple types of infrastructure services under a single customer contract or provide services across industries - for example, joint trenching projects to install distribution lines for electric power and natural gas customers. Our integrated operations and common administrative support at each of our operating units requires that certain allocations, including allocations of shared and indirect costs, such as facility costs, indirect operating expenses including depreciation, and general and administrative costs, be made to determine operating segment profitability. Corporate costs, such as payroll and benefits, employee travel expenses, facility costs, professional fees, acquisition costs and amortization related to certain intangible assets are not allocated. The Electric Power Infrastructure Services segment provides comprehensive network solutions to customers in the electric power industry. Services performed by the Electric Power Infrastructure Services segment generally include the design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities along with other engineering and technical services. This segment also provides emergency restoration services, including the repair of infrastructure damaged by inclement weather, the energized installation, maintenance and upgrade of electric power infrastructure utilizing unique bare hand and hot stick methods and our proprietary robotic arm technologies, and the installation of "smart grid" technologies on electric power networks. In addition, this segment designs, installs and maintains renewable energy generation facilities, consisting of solar, wind and certain types of natural gas generation facilities, and related switchyards and transmission infrastructure. To a lesser extent, this segment provides services such as the construction of electric power generation facilities, the design, installation, maintenance and repair of commercial and industrial wiring, installation of traffic networks and the installation of cable and control systems for light rail lines. The Oil and Gas Infrastructure Services segment provides comprehensive infrastructure solutions to customers involved in the development and transportation of natural gas, oil and other pipeline products. Services performed by the Oil and Gas Infrastructure Services segment generally include the design, installation, repair and maintenance of pipeline transmission and distribution systems, gathering systems, production systems and compressor and pump stations, as well as related trenching, directional boring and automatic welding services. In addition, this segment's services include pipeline protection, integrity testing, rehabilitation and replacement, and fabrication of pipeline support systems and related structures and facilities. We also serve the offshore and inland water energy markets, primarily providing services to oil and gas exploration platforms, including mechanical installation (or "hook-ups"), electrical and instrumentation, pre-commissioning and commissioning, coatings, fabrication, pipeline construction, integrity services and marine asset repair. To a lesser extent, this segment designs, installs and maintains airport fueling systems as well as water and sewer infrastructure. The Fiber Optic Licensing and Other segment designs, procures, constructs, maintains and owns fiber optic telecommunications infrastructure in select markets and licenses the right to use these point-to-point fiber optic telecommunications facilities to our customers pursuant to licensing agreements, typically with terms from five to twenty-five years, inclusive of certain renewal options. Under those agreements, customers are provided the right to use a portion of the capacity of a fiber optic network, with the network owned and maintained by us. We are also expanding our service offerings to provide lit services, with Quanta providing network management services to customers, as well as owning the electric equipment necessary to make the fiber optic network operational. We believe market opportunities exist for lit services that will enable us to leverage capacities of our dark fiber networks, as well as providing other attractive growth opportunities. The Fiber Optic Licensing and Other segment provides services to communication carriers as well as education, financial services, healthcare and other business enterprises with high bandwidth telecommunication needs. The telecommunication services provided through this segment are subject to regulation by the Federal Communications Commission and certain state public utility 39 -------------------------------------------------------------------------------- Table of Contents commissions. The Fiber Optic Licensing and Other segment also provides various telecommunication infrastructure services on a limited and ancillary basis, primarily to our customers in the electric power industry. Recent Investments, Acquisitions and Divestitures During 2013, we acquired six businesses, which included electric power and oil and gas infrastructure services companies. The electric power acquisitions expanded our geographic presence primarily in the Northeastern, Midwestern and Western regions of the United States and in the Central region of Canada, while the oil and gas infrastructure services companies increased our capacity to provide mechanical installations for the offshore oil and gas industry and pipeline logistics services throughout the United States and expanded our geographic presence to include pipeline construction services in Australia. The aggregate consideration paid for these acquisitions consisted of approximately $341.1 million in cash and 3,547,482 shares of our common stock valued, as of the respective dates of issuance, at approximately $88.9 million. The results for each company have been included in our consolidated financial statements beginning on the respective dates of acquisition. These acquisitions have enabled us to further enhance our electric power infrastructure service and oil and gas infrastructure service offerings in the United States and select international markets. On December 6, 2013, we sold all of our equity ownership interest in Howard Midstream Energy Partners, LLC (HEP) for proceeds of approximately $220.9 million in cash which resulted in a pre-tax gain of approximately $112.7 million. In the first and second quarters of 2012, we acquired four businesses, which included one electric power infrastructure services company based in Canada, two electric power infrastructure services companies based in the United States and one oil and gas infrastructure services company based in the United States. These businesses have been reflected in our consolidated financial statements as of their respective acquisition dates. The aggregate consideration for these acquisitions consisted of approximately $57.5 million in cash, 1,927,113 shares of our common stock valued, as of the respective dates of acquisition, at approximately $37.3 million and the repayment of $11.0 million in debt. These acquisitions have enabled us to further expand our capabilities and scope of services internationally and in the United States. The financial results of these businesses are generally included in the corresponding segment. On December 3, 2012, we sold substantially all of our domestic telecommunications infrastructure services operations and related subsidiaries. In the third and fourth quarters of 2011, we acquired five businesses, which included three electric power infrastructure services companies based in Canada, one electric power infrastructure services company based in the United States and one oil and gas infrastructure services company based in Australia. These businesses have been reflected in our consolidated financial statements as of their respective acquisition dates. The aggregate consideration for these acquisitions consisted of approximately $80.8 million in cash, 1,939,813 shares of Quanta common stock valued, as of the respective dates of acquisition, at approximately $32.4 million and the repayment of $3.4 million in debt. These acquisitions have enabled us to further expand our capabilities and scope of services internationally and in the United States. The financial results of these businesses are generally included in the corresponding segment. Seasonality; Fluctuations of Results; Economic Conditions Our revenues and results of operations can be subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, project timing and schedules, and holidays. Typically, our revenues are lowest in the first quarter of the year because cold, snowy or wet conditions can cause delays on projects. In addition, many of our customers develop their capital budgets for the coming year during the first quarter and do not begin infrastructure projects in a meaningful way until their capital budgets are finalized. Second quarter revenues are typically higher than those in the first quarter, as some projects begin, but 40-------------------------------------------------------------------------------- Table of Contents continued cold and wet weather can often impact second quarter productivity. Third quarter revenues are typically the highest of the year, as a greater number of projects are underway, and weather is more accommodating. Generally, revenues during the fourth quarter of the year are lower than the third quarter but higher than the second quarter. Many projects are completed in the fourth quarter, and revenues are often impacted positively by customers seeking to spend their capital budgets before the end of the year; however, the holiday season and inclement weather can sometimes cause delays, reducing revenues and increasing costs. Any quarter may be positively or negatively affected by atypical weather patterns in a given part of the country, such as severe weather, excessive rainfall or warmer winter weather, making it difficult to predict these variations and their effect on particular projects quarter to quarter. The timing of project awards and unanticipated changes in project schedules as a result of delays or accelerations can also create variations in the level of operating activity from quarter to quarter. These seasonal impacts are typical for our U.S. operations, but as our foreign operations continue to grow, we may see a lessening of this pattern impacting our quarterly revenues. For example, revenues in Canada are often higher in the first quarter as projects are accelerated so that work can be completed prior to the "break up", as productivity is adversely affected by wet ground conditions during the warmer spring and summer months. Also, although revenues from Australia and other international operations have not been significant to our overall revenues to date, their seasonal patterns may differ from those in North America and may impact our seasonality more in the future. Additionally, our industry can be highly cyclical. As a result, our volume of business may be adversely affected by declines or delays in new projects in various geographic regions, including the United States, Canada and Australia. Project schedules, particularly in connection with larger, longer-term projects, can also create fluctuations in the services provided, which may adversely affect us in a given period. The financial condition of our customers and their access to capital, variations in the margins of projects performed during any particular period, regional, national and global economic and market conditions, timing of acquisitions, the timing and magnitude of acquisition and integration costs associated with acquisitions, dispositions, fluctuations in our equity in earnings of unconsolidated affiliates, impairments of goodwill, intangible assets, long-lived assets or investments and interest rate fluctuations are examples of items that may also materially affect quarterly results. Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period. We and our customers continue to operate in an uncertain business environment, with heightened regulatory and environmental requirements, stringent permitting processes and only gradual recovery in the economy from recessionary levels. We are closely monitoring our customers and the effect that changes in economic and market conditions have had or may have on them. Certain of our customers reduced or delayed spending in recent years, which we attribute primarily to regulatory and permitting hurdles and negative economic and market conditions, and we anticipate that these issues may continue to affect demand for some of our services in the near-term. However, we believe that most of our customers, many of whom are regulated utilities, remain financially stable in general and will be able to continue with their business plans in the long-term. You should read "Outlook" and "Understanding Margins" for additional discussion of trends and challenges that may affect our financial condition, results of operations and cash flows. Understanding Margins Our gross margin is gross profit expressed as a percentage of revenues, and our operating margin is operating income expressed as a percentage of revenues. Cost of services, which is subtracted from revenues to obtain gross profit, consists primarily of salaries, wages and benefits to employees, depreciation, fuel and other equipment expenses, equipment rentals, subcontracted services, insurance, facilities expenses, materials and parts and supplies. Selling, general and administrative expenses and amortization of intangible assets are then subtracted from gross profit to obtain operating income. Various factors - some controllable, some not - impact our margins on a quarterly or annual basis. 41-------------------------------------------------------------------------------- Table of Contents Seasonal and geographical. As discussed previously, seasonal patterns can have a significant impact on margins. Generally, business is slower in the winter months versus the warmer months of the year, resulting in lower productivity and consequently reducing our ability to cover fixed costs. This can be offset somewhat by increased demand for electrical service and repair work resulting from severe weather. Additionally, project schedules, including when projects begin and when they are completed, may impact margins. The mix of business conducted in different parts of the country will also affect margins, as some parts of the country offer the opportunity for higher margins than others due to the geographic characteristics associated with the physical location where the work is being performed. Such characteristics include whether the project is performed in an urban versus a rural setting or in a mountainous area or in open terrain. Site conditions, including unforeseen underground conditions, can also impact margins. Weather. Adverse or favorable weather conditions can impact gross margins in a given period. For example, snow or rainfall in the areas in which we operate may negatively impact our revenues and margins due to reduced productivity, as projects may be delayed or temporarily placed on hold until weather conditions improve. Conversely, in periods when weather remains dry and temperatures are accommodating, more work can be done, sometimes with less cost, which would have a favorable impact on margins. In some cases, severe weather, such as hurricanes and ice storms, can provide us with higher margin emergency restoration service work, which generally has a positive impact on margins. Revenue mix. The mix of revenues derived from the industries we serve will impact margins, as certain industries provide higher margin opportunities. Additionally, changes in our customers' spending patterns in each of the industries we serve can cause an imbalance in supply and demand and, therefore, affect margins and mix of revenues by industry served. Service and maintenance versus installation. Installation work is often performed on a fixed price basis, while maintenance work is often performed under pre-established or negotiated prices or cost-plus pricing arrangements. Margins for installation work may vary from project to project, and may be higher than maintenance work, as work obtained on a fixed price basis has higher risk than other types of pricing arrangements. We typically derive approximately 30% of our annual revenues from maintenance work, but a higher portion of installation work in any given period may affect our gross margins for that period. Subcontract work. Work that is subcontracted to other service providers generally yields lower margins. An increase in subcontract work in a given period may contribute to a decrease in margins. We typically subcontract approximately 20% to 25% of our work to other service providers. Materials versus labor. Typically, our customers are responsible for supplying their own materials on projects; however, for some of our contracts, we may agree to procure all or part of the required materials. Margins may be lower on projects where we furnish a significant amount of materials, as our mark-up on materials is generally lower than on our labor costs. In a given period, an increase in the percentage of work with higher materials procurement requirements may decrease our overall margins. Depreciation. We include depreciation in cost of services. This is common practice in our industry, but it can make comparability of our margins to those of other companies difficult. This must be taken into consideration when comparing us to other companies. Insurance. Margins could be impacted by fluctuations in insurance accruals as additional claims arise and as circumstances and conditions of existing claims change. We are insured for employer's liability, general liability, auto liability and workers' compensation claims. On August 1, 2013, we renewed our employer's liability, general liability, auto liability and workers' compensation policies for the 2013 - 2014 policy year. As a result of the renewal, the deductibles for general liability and auto liability increased from $5.0 million to $10.0 million per occurrence, while the deductible for workers' compensation remained at $5.0 million per occurrence and the deductible for employer's liability remained at $1.0 million per occurrence. We also have employee health care 42 -------------------------------------------------------------------------------- Table of Contents benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of $375,000 per claimant per year. Performance risk. Margins may fluctuate because of the volume of work and the impacts of pricing and job productivity, which can be affected both favorably and negatively by weather, geography, customer decisions and crew productivity. For example, when comparing a service contract between a current quarter and the comparable prior year's quarter, factors affecting the gross margins associated with the revenues generated by the contract may include pricing under the contract, the volume of work performed under the contract, the mix of the type of work specifically being performed and the productivity of the crews performing the work. Productivity can be influenced by many factors, including where the work is performed (e.g., rural versus urban area or mountainous or rocky area versus open terrain), whether the work is on an open or encumbered right of way, the impacts of inclement weather or the effects of environmental restrictions or regulatory delays. These types of factors are not practicable to quantify through accounting data, but each of these items may individually or in the aggregate have a direct impact on the gross margin of a specific project. Foreign currency risk. Our financial performance on a U.S. dollar denominated basis is subject to fluctuation in currency exchange rates. Fluctuations in exchange rates from our operating units with functional currencies other than the U.S. dollar, primarily our operating units with Canadian dollar and Australian dollar functional currencies that translate their results into U.S. dollars for reporting purposes, could cause material fluctuations in our results of operations. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, office rent and utilities, communications, professional fees, bad debt expense, acquisition costs, gains and losses on the sale of property and equipment, letter of credit fees and maintenance, training and conversion costs related to the implementation of an information technology solution. Results of Operations As previously discussed, we completed the acquisition of six businesses in 2013, four businesses in 2012 and five businesses during 2011. The results of these acquisitions have been included in the following results of operations beginning on their respective acquisition dates. Additionally, the results of operations of the telecommunications subsidiaries disposed of on December 3, 2012 have been reclassified from continuing operations to income from discontinued operations for all applicable periods presented. The following table sets forth selected statements of operations data and such data as a percentage of revenues for the years indicated (dollars in thousands). 43-------------------------------------------------------------------------------- Table of Contents Consolidated Results Year Ended December 31, 2013 2012 2011 Revenues $ 6,522,842 100.0 % $ 5,920,269 100.0 % $ 4,193,764 100.0 % Cost of services (including depreciation) 5,467,389 83.8 4,982,562 84.2 3,632,048 86.6 Gross profit 1,055,453 16.2 937,707 15.8 561,716 13.4 Selling, general and administrative expenses 501,010 7.7 434,894 7.3 337,835 8.1 Amortization of intangible assets 27,515 0.4 37,691 0.6 29,039 0.7 Operating income 526,928 8.1 465,122 7.9 194,842 4.6 Interest expense (2,668 ) - (3,746 ) (0.1 ) (1,803 ) - Interest income 3,380 0.1 1,471 - 1,066 - Equity in earnings of unconsolidated affiliates, including gain on sale of investment 112,744 1.7 2,084 - - - Other income (expense), net (1,135 ) (0.1 ) (351 ) - (597 ) - Income from continuing operations before income taxes 639,249 9.8 464,580 7.8 193,508 4.6 Provision for income taxes 217,940 3.3 158,859 2.6 63,096 1.5 Net income from continuing operations 421,309 6.5 305,721 5.2 130,412 3.1 Income from discontinued operations, net of taxes - - 16,935 0.3 14,004 0.3 Net income 421,309 6.5 322,656 5.5 144,416 3.4 Less: Net income attributable to noncontrolling interests 19,388 0.3 16,027 0.3 11,901 0.2 Net income attributable to common stock $ 401,921 6.2 % $ 306,629 5.2 % $ 132,515 3.2 % Amounts attributable to common stock: Net income from continuing operations $ 401,921 6.2 % $ 289,694 4.9 % $ 118,511 2.9 % Net income from discontinued operations - - 16,935 0.3 14,004 0.3 Net income attributable to common stock $ 401,921 6.2 % $ 306,629 5.2 % $ 132,515 3.2 % 2013 compared to 2012 Revenues. Revenues increased $602.6 million, or 10.2%, to $6.52 billion for the year ended December 31, 2013. This increase was primarily due to higher revenues from the Oil and Gas Infrastructure Services segment, which increased $334.9 million, or 21.8%, to $1.87 billion, primarily due to increased revenues from pipeline projects related to unconventional shale developments in certain regions of North America and $167.7 million in revenues generated from companies acquired in 2013. Additionally, revenues from electric power infrastructure services projects increased $274.1 million, or 6.5%, to $4.48 billion primarily as a result of increases in capital spending by our customers and $83.6 million in revenues generated from companies acquired in 2013. These increases were partially offset by a decrease of $139.7 million in electric power revenues from emergency restoration services during 2013 as compared to 2012. Emergency restoration services revenues were higher in 2012 primarily as a result of Hurricane Sandy, which impacted the Northeastern United States in the fourth quarter of 2012. Gross profit. Gross profit increased $117.7 million, or 12.6%, to $1.06 billion for the year ended December 31, 2013. Gross profit as a percentage of revenues increased to 16.2% for the year ended December 31, 2013 as compared to 15.8% for the year ended December 31, 2012. These increases were primarily due to the impact of higher revenues and a result of overall performance improvements in the Oil and Gas Infrastructure Services segment during the year ended December 31, 2013 as compared to the year ended December 31, 2012, which was negatively impacted by increased project costs as a result of performance issues caused by adverse weather conditions on certain projects that did not recur to the same extent during 2013. These increases were partially offset by the decreased contribution of emergency restoration services revenues, which typically yield higher margins. 44-------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses. Selling, general and administrative expenses increased $66.1 million, or 15.2%, to $501.0 million for the year ended December 31, 2013. The increase was primarily attributable to approximately $42.7 million in higher salary and incentive compensation costs associated with increased levels of operating activity and profitability. Included in this increase in compensation costs was approximately $4.3 million of expense related to the accelerated vesting of equity-based awards associated with the retirement of our Executive Chairman of the Board of Directors in the second quarter of 2013. Also contributing to the overall increase in selling, general and administrative expenses was approximately $21.3 million in incremental administrative expenses related to companies acquired in 2013 and $5.1 million in higher costs associated with Quanta's ongoing technology and business development initiatives. Selling, general and administrative expenses as a percentage of revenues increased from 7.3% for the year ended December 31, 2012 to 7.7% for the year ended December 31, 2013, due to the impact of higher salary and incentive compensation costs previously discussed coupled with the impact from lower levels of emergency restoration services revenues in 2013 as compared to 2012. Amortization of intangible assets. Amortization of intangible assets decreased $10.2 million to $27.5 million for the year ended December 31, 2013. This decrease was primarily due to reduced amortization expense from previously acquired intangible assets as certain of these assets became fully amortized, partially offset by increased amortization of intangibles associated with businesses acquired during 2013. Interest expense. Interest expense decreased $1.1 million to $2.7 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012 due to lower levels of borrowings under our credit facility during the year ended December 31, 2013. Interest income. Interest income was $3.4 million and $1.5 million for the years ended December 31, 2013 and 2012. The increase was primarily due to higher average cash balances and interest rates during the year ended December 31, 2013 as compared to the year ended December 31, 2012. Equity in earnings of unconsolidated affiliates. Equity in earnings of unconsolidated affiliates was $112.7 million for the year ended December 31, 2013 as compared to $2.1 million for the year ended December 31, 2012. During the fourth quarter of 2013, we sold all of our equity ownership interest in HEP for proceeds of approximately $220.9 million in cash which resulted in a pre-tax gain of approximately $112.7 million. Provision for income taxes. The provision for income taxes was $217.9 million for the year ended December 31, 2013, with an effective tax rate of 34.1%. The provision for income taxes was $158.9 million for the year ended December 31, 2012, with an effective tax rate of 34.2%. The effective tax rates for 2013 and 2012 were primarily impacted by the recording of net tax benefits in the amount of $10.0 million in 2013 and $7.9 million in 2012 associated with decreases in reserves for uncertain tax positions resulting from the expiration of various federal and state statute of limitation periods and settlement of certain tax audits. Excluding the tax benefits from decreases in reserves for uncertain tax positions, the effective tax rates would have been 35.7% and 35.9% for the years ended December 31, 2013 and December 31, 2012. 2012 compared to 2011 Revenues. Revenues increased $1.73 billion, or 41.2%, to $5.92 billion for the year ended December 31, 2012, primarily due to an increase in the number and size of electric and natural gas transmission projects as a result of overall increases in capital spending by our customers. Electric power infrastructure services revenues increased $1.18 billion, or 39.2%, to $4.21 billion and oil and gas infrastructure services revenues increased $523.5 million, or 51.8%, to $1.53 billion for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Also contributing to the overall revenue increase was the contribution of $231.6 million in revenues from acquired businesses and an increase of $77.2 million in revenues from emergency restoration services during 2012 as compared to 2011. 45 -------------------------------------------------------------------------------- Table of Contents Gross profit. Gross profit increased $376.0 million, or 66.9%, to $937.7 million for the year ended December 31, 2012. This increase was primarily due to the impact of higher overall revenues earned across all segments during the current period. Gross profit as a percentage of revenues increased to 15.8% for the year ended December 31, 2012 from 13.4% for the year ended December 31, 2011. Contributing to the increase in gross margin from 2011 to 2012 were overall performance improvements across all segments during the year ended December 31, 2012. In addition, the higher revenues earned during the current period also enhanced our ability to cover operating overhead costs. Gross profit for the year ended December 31, 2011 was also negatively impacted by a $32.6 million charge to the Oil and Gas Infrastructure Services segment's cost of services which occurred in the fourth quarter of 2011 in connection with the withdrawal of certain of our subsidiaries from an underfunded multi-employer pension plan. Selling, general and administrative expenses. Selling, general and administrative expenses increased $97.1 million, or 28.7%, to $434.9 million for the year ended December 31, 2012. This increase was primarily attributable to $50.0 million in higher salary and benefits costs associated with higher personnel and incentive compensation expenses as a result of current levels of operating activity and profitability, $14.7 million in higher professional fees primarily associated with certain legal matters, business development initiatives and ongoing technological development costs and a $3.7 million increase in bad debt expense. Also contributing to the overall increase were $17.5 million in additional administrative expenses associated with acquired companies. Selling, general and administrative expenses as a percentage of revenues decreased from 8.1% for the year ended December 31, 2011 to 7.3% for the year ended December 31, 2012 primarily due to the impact of higher overall revenues described above. Amortization of intangible assets. Amortization of intangible assets increased $8.7 million to $37.7 million for the year ended December 31, 2012. This increase was primarily due to increased amortization of intangibles associated with businesses acquired during 2012 and the end of 2011, partially offset by reduced amortization expense from previously acquired intangible assets as certain of these assets became fully amortized. Interest expense. Interest expense increased $1.9 million to $3.7 million for the year ended December 31, 2012, primarily due to higher levels of borrowings under our credit facility during the year ended December 31, 2012 as compared to the year ended December 31, 2011. The increase was partially offset by lower average cash balances during the year ended December 31, 2012 as compared to the year ended December 31, 2011. Interest income. Interest income increased $0.4 million to $1.5 million for the year ended December 31, 2012. This increase was primarily due to higher interest rates earned for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This increase was partially offset by lower average cash balances during the year ended December 31, 2012 as compared to the year ended December 31, 2011. Equity in earnings of unconsolidated affiliates. Equity in earnings of unconsolidated affiliates was $2.1 million for the year ended December 31, 2012 as compared to none for the year ended December 31, 2011. This primarily related to our investment in HEP. Provision for income taxes. The provision for income taxes was $158.9 million for the year ended December 31, 2012, with an effective tax rate of 34.2%. The provision for income taxes was $63.1 million for the year ended December 31, 2011, with an effective tax rate of 32.6%. The effective tax rates for 2012 and 2011 were impacted by the recording of tax benefits in the amount of $7.9 million in 2012 and $8.4 million in 2011 associated with decreases in reserves for uncertain tax positions resulting from the expiration of various federal and state statute of limitations periods and settlement of certain tax audits. Excluding the tax benefits from decreases in reserves for uncertain tax positions, the effective tax rates would have been 35.9% and 37.0% for the years ended December 31, 2012 and 2011. After excluding the tax benefits recorded, the lower effective tax rate in 2012 was primarily due to a higher proportion of income from continuing operations earned from international jurisdictions which are taxed at lower statutory rates. 46-------------------------------------------------------------------------------- Table of Contents Segment Results The following table sets forth segment revenues and segment operating income (loss) for the years indicated (dollars in thousands): Year Ended December 31, 2013 2012 2011 Revenues: Electric Power $ 4,480,647 68.7 % $ 4,206,509 71.1 % $ 3,022,659 72.1 % Oil and Gas Infrastructure 1,869,615 28.7 1,534,713 25.9 1,011,248 24.1 Fiber Optic Licensing and Other 172,580 2.6 179,047 3.0 159,857 3.8 Consolidated revenues from external customers $ 6,522,842 100.0 % $ 5,920,269 100.0 % $ 4,193,764 100.0 % Operating income (loss): Electric Power $ 521,855 11.6 % $ 520,834 12.4 % $ 337,726 11.2 % Oil and Gas Infrastructure 138,543 7.4 55,410 3.6 (78,307 ) (7.7 ) Fiber Optic Licensing and Other 55,415 32.1 61,299 34.2 53,476 33.5 Corporate and non-allocated costs (188,885 ) N/A (172,421 ) N/A (118,053 ) N/A Consolidated operating income $ 526,928 8.1 % $ 465,122 7.9 % $ 194,842 4.6 % 2013 compared to 2012 Electric Power Infrastructure Services Segment Results Revenues for this segment increased $274.1 million, or 6.5%, to $4.48 billion for the year ended December 31, 2013. Revenues were positively impacted by increased activity in electric power transmission and distribution projects, which resulted primarily from increased capital spending by our customers. Revenues in 2013 were also favorably impacted by the additional contribution of approximately $83.6 million in revenues from companies acquired in 2013. Partially offsetting these increases was a decline in revenues from emergency restoration services, which decreased approximately $139.7 million to approximately $110.5 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012. Emergency restoration services revenues were higher in 2012 primarily as a result of Hurricane Sandy, which impacted the Northeastern United States in the fourth quarter of 2012. Revenues for the year ended December 31, 2013 were also negatively impacted by lower revenues related to renewable energy projects due to decreased capital spending by our customers primarily as a result of a change in the tax incentives associated with these types of projects. Operating income increased $1.0 million, or 0.2%, to $521.9 million for the year ended December 31, 2013, while operating income as a percentage of segment revenues decreased to 11.6% for the year ended December 31, 2013 from 12.4% for the year ended December 31, 2012. Operating income was positively impacted in 2013 by higher overall levels of infrastructure service revenues. However, these increases were substantially offset by lower levels of operating income contributed from emergency restoration services revenues in 2013 as compared to 2012, which typically yield higher margins. Oil and Gas Infrastructure Services Segment Results Revenues for this segment increased $334.9 million, or 21.8%, to $1.87 billion for the year ended December 31, 2013 as compared to the year ended December 31, 2012 primarily due to an increase in revenues from pipeline projects related to unconventional shale developments in certain regions of North America. Revenues for the year ended December 31, 2013 were also favorably impacted by approximately $167.7 million in revenues from companies acquired in 2013. 47-------------------------------------------------------------------------------- Table of Contents Operating income increased $83.1 million to $138.5 million for the year ended December 31, 2013 from $55.4 million for the year ended December 31, 2012. Operating income as a percentage of segment revenues increased to 7.4% for the year ended December 31, 2013 from 3.6% for the year ended December 31, 2012. These increases were primarily due to continued performance improvements in project execution and the overall increase in segment revenues described above, which improved this segment's ability to cover fixed and overhead costs. Operating margins for the year ended December 31, 2012 were negatively impacted by increased project costs as a result of performance issues caused by adverse weather conditions on certain projects which did not recur to the same extent during 2013. Fiber Optic Licensing and Other Segment Results Revenues for this segment decreased $6.5 million, or 3.6%, to $172.6 million for the year ended December 31, 2013. This decrease in revenues was primarily due to a decrease in revenues related to ancillary telecommunications and wireless infrastructure projects, partially offset by increased revenues from the installation of a statewide fiber optic network in Pennsylvania and from increased licensing of point-to-point fiber optic telecommunications facilities as a result of our continued network expansion activities. Operating income decreased $5.9 million, or 9.6%, to $55.4 million for the year ended December 31, 2013. Operating income as a percentage of segment revenues for the year ended December 31, 2013 decreased to 32.1% compared to 34.2% for the year ended December 31, 2012. These decreases were primarily due to a $3.2 million charge associated with a revised assessment of state gross receipts tax requirements on fiber optic licensing revenues as a result of a recent industry related legal proceeding, as well as higher network maintenance costs during 2013, startup costs for new lit service offerings, and the decrease in segment revenues described above. Corporate and Non-allocated Costs Certain selling, general and administrative expenses and amortization of intangible assets are not allocated to segments. Corporate and non-allocated costs for the year ended December 31, 2013 increased $16.5 million to $188.9 million. Contributing to this increase was approximately $24.8 million in higher salary and incentive compensation costs associated with increased levels of operating activity and profitability. Included in this increase in compensation costs was approximately $4.3 million of expense related to the accelerated vesting of equity-based awards associated with the retirement of our Executive Chairman of the Board of Directors in the second quarter of 2013. Also contributing to the increase was approximately $4.6 million in higher acquisition and integration costs and $2.7 million in costs associated with our ongoing technology and business development initiatives. Partially offsetting these increases was a $10.2 million decrease in amortization expense as previously acquired intangible assets became fully amortized, partially offset by amortization expense related to 2013 acquisitions. 2012 compared to 2011 Electric Power Infrastructure Services Segment Results Revenues for this segment increased $1.18 billion, or 39.2%, to $4.21 billion for the year ended December 31, 2012. Revenues were positively impacted by increased revenues from electric power transmission projects and solar power generation projects as a result of increased capital spending by our customers. Revenues in 2012 were also favorably impacted by the contribution of approximately $201.3 million in revenues from acquired companies. Also contributing to the increase was a $77.2 million increase in revenues from emergency restoration services, primarily resulting from Hurricane Sandy, which impacted the Northeastern United States in the fourth quarter of 2012. Operating income increased $183.1 million, or 54.2%, to $520.8 million for the year ended December 31, 2012. Operating income as a percentage of segment revenues increased to 12.4% for the year ended 48-------------------------------------------------------------------------------- Table of Contents December 31, 2012 from 11.2% for the year ended December 31, 2011. These increases were primarily due to the overall increase in segment revenues described above, which improved this segment's ability to cover fixed and overhead costs, as well as higher margins earned on certain major transmission projects ongoing during 2012. The increase in operating margins was partially offset by the completion of certain higher margin solar power generation projects in 2011. Oil and Gas Infrastructure Services Segment Results Revenues for this segment increased $523.5 million, or 51.8%, to $1.53 billion for the year ended December 31, 2012. The increase in revenues was primarily due to an increase in the number and size of pipeline transmission projects primarily related to unconventional shale developments in certain regions of North America. Revenues from distribution services also increased during the year ended December 31, 2012 as compared to the year ended December 31, 2011, primarily as a result of the incremental contribution of revenues from certain new master service agreements, as well as increased spending by our customers in certain regions of the United States. Revenues were also favorably impacted by the contribution of approximately $30.3 million in revenues from acquired companies. Operating income increased $133.7 million, or 170.8%, to $55.4 million for the year ended December 31, 2012 from an operating loss of $78.3 million for the year ended December 31, 2011. Operating income as a percentage of segment revenues increased to 3.6% for the year ended December 31, 2012 from a negative 7.7% for the year ended December 31, 2011. Operating margins in 2011 were negatively impacted by increased costs resulting from performance issues on certain gas transmission projects completed during the first quarter of 2011 associated with adverse weather conditions and regulatory restrictions. Operating income for the year ended December 31, 2011 was also negatively impacted by a $32.6 million charge to this segment's results in connection with the withdrawal of certain of our subsidiaries from an underfunded multi-employer pension plan. Operating income as a percentage of revenues in 2012 also increased as a result of the overall increase in segment revenues during 2012, which improved this segment's ability to cover operating overhead and administrative costs. Fiber Optic Licensing and Other Segment Results Revenues for this segment increased $19.2 million, or 12.0%, to $179.0 million for the year ended December 31, 2012. The increase in revenues was primarily due to increased spending on ancillary telecommunications and wireless infrastructure projects by customers operating within the electric power energy industry. Operating income increased $7.8 million, or 14.6%, to $61.3 million for the year ended December 31, 2012. Operating income as a percentage of segment revenues for the year ended December 31, 2012 remained relatively constant at 34.2% compared to 33.5% for the year ended December 31, 2011. Corporate and Non-allocated Costs Certain selling, general and administrative expenses and amortization of intangible assets are not allocated to segments. Corporate and non-allocated costs for the year ended December 31, 2012 increased $54.4 million to $172.4 million. This increase was primarily due to an increase of $28.4 million associated with higher personnel and incentive compensation costs associated with current levels of operating activity, an increase of $8.7 million in amortization expense, an increase of $7.6 million in professional fees associated with ongoing technology development costs, business development initiatives and legal matters and a $2.8 million increase in bad debt expense. 49 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash Requirements Our cash and cash equivalents totaled $488.8 million as of December 31, 2013. As of December 31, 2013 and 2012, cash and cash equivalents held in domestic bank accounts were approximately $236.7 million and $254.1 million, and cash and cash equivalents held in foreign bank accounts were approximately $252.1 million and $140.6 million, primarily in Canada and Australia. We were in compliance with our covenants under our credit facility at December 31, 2013. We anticipate that our cash and cash equivalents on hand, existing borrowing capacity under our credit facility, and our future cash flows from operations will provide sufficient funds to enable us to meet our future operating needs and our planned capital expenditures, as well as facilitate our ability to grow in the foreseeable future. Our industry is capital intensive, and we expect the need for substantial capital expenditures to continue into the foreseeable future to meet the anticipated demand for our services. Capital expenditures are expected to total $300 million to $325 million for 2014. Approximately $50 million to $60 million of the expected 2014 capital expenditures are targeted for the expansion of our fiber optic networks. We also evaluate opportunities for strategic acquisitions from time to time that may require cash, as well as opportunities to make investments in customer-sponsored projects where we anticipate performing services such as project management, engineering, procurement or construction services. These investment opportunities exist in the markets and industries we serve and may require the use of cash in the form of debt or equity investments. Management continues to monitor the financial markets and general national and global economic conditions. We consider our cash investment policies to be conservative in that we maintain a diverse portfolio of what we believe to be high-quality cash investments with short-term maturities. Accordingly, we do not anticipate that any weakness in the capital markets will have a material impact on the principal amounts of our cash investments or our ability to rely upon our existing credit facility for funds. To date, we have experienced no loss of or lack of access to our cash or cash equivalents or funds under our credit facility; however, we can provide no assurances that access to our invested cash and cash equivalents or availability under our credit facility will not be impacted in the future by adverse conditions in the financial markets. Through December 31, 2013, we have not provided U.S. income taxes on approximately $218.0 million of unremitted foreign earnings because such earnings are intended to be indefinitely reinvested outside the U.S. It is not practicable to determine the amount of any additional U.S. tax liability that may result if we decide to no longer indefinitely reinvest foreign earnings outside the U.S. If our intentions or U.S. tax laws change in the future, there may be a significant negative impact on the provision for income taxes and cash flows, as a result of recording an incremental tax liability, in the period such change occurs. Sources and Uses of Cash As of December 31, 2013, we had cash and cash equivalents of $488.8 million and working capital of $1.27 billion. We also had $240.3 million of letters of credit outstanding and no revolving loans outstanding under our credit facility, with $1.08 billion available for borrowing or issuing new letters of credit under our credit facility. Operating Activities Cash flow from operations is primarily influenced by demand for our services and operating margins but can also be influenced by working capital needs associated with the various types of services that we provide. In particular, working capital needs may increase when we commence large volumes of work under circumstances where project costs, primarily associated with labor, equipment and subcontractors, are required to be paid before the receivables resulting from the work performed are billed and collected. Working capital needs are generally higher during the summer and fall months due to increased demand for our services when favorable weather 50-------------------------------------------------------------------------------- Table of Contents conditions exist in many of the regions in which we operate. Conversely, working capital assets are typically converted to cash during the winter months. These seasonal trends can be offset by changes in the timing of major projects which can be impacted by project delays or accelerations and other economic factors that may affect customer spending. Operating activities from continuing operations provided net cash of $446.6 million during 2013 as compared to $166.8 million during 2012 and $204.1 million during 2011. The increase in cash flows for operating activities from continuing operations for 2013 as compared to 2012 and 2011 was primarily a result of the collections on receivables during the first quarter of 2013 attributable to significantly higher levels of emergency restoration services provided in the fourth quarter of 2012 as compared to the fourth quarter of 2011 and decreased working capital requirements in 2013 as compared to 2012. The higher working capital requirements in 2012 were primarily due to the ramp up of multiple large electric transmission projects and more emergency restoration services projects, primarily as a result of Hurricane Sandy, which impacted the Northeastern United States in the fourth quarter of 2012. Also contributing to the increase in cash from operating activities from continuing operations were overall improved operating results in 2013 and 2012 as compared to 2011. Investing Activities During 2013, we used net cash in investing activities from continuing operations of $320.0 million as compared to $321.1 million and $272.3 million used in investing activities in 2012 and 2011. Investing activities from continuing operations in 2013 included $263.6 million used for capital expenditures, $283.8 million used in connection with acquisitions and $10.0 million used for other investments (primarily comprised of the capital lease of an internally constructed electric power transmission asset). These amounts were partially offset by investments in and return on equity from unconsolidated affiliates of $186.2 million, which includes gross proceeds from the sale of all of our equity ownership in HEP of approximately $220.9 million, the release of $36.5 million of restricted cash balances associated with a newly acquired company, and $14.8 million of proceeds from the sale of equipment. Investing activities from continuing operations in 2012 included $209.4 million used for capital expenditures, partially offset by $12.4 million of proceeds from the sale of equipment. Additionally, investing activities from continuing operations in 2012 included $68.7 million used in connection with business acquisitions and $53.8 million used in equity investment contributions, primarily to HEP. Investing activities from continuing operations in 2011 included $162.3 million used for capital expenditures, $79.7 million used in connection with business acquisitions and a $35.0 million capital contribution to acquire an initial equity interest in HEP, partially offset by $9.1 million of proceeds from the sale of equipment. Our industry is capital intensive, and we expect the need for substantial capital expenditures to continue into the foreseeable future to meet the anticipated demand for our services. In addition, we expect to continue to pursue strategic acquisitions and investments, although we cannot predict the timing or magnitude of the potential cash outlays for these initiatives. Financing Activities During 2013, net cash used by financing activities from continuing operations was $16.7 million as compared to cash used by financing activities of $15.3 million and $158.7 million in 2012 and 2011. Financing activities from continuing operations during 2013 included $17.6 million of cash payments to noncontrolling interests as distributions of joint venture profits, $3.2 million of loan costs related to the amendment and restatement of our credit facility on October 30, 2013 and the positive impact of $3.7 million related to the tax impact of stock-based equity awards. Financing activities from continuing operations in 2012 included $18.0 million in cash payments to noncontrolling interests as distributions of joint venture profits. Financing activities from continuing operations in 2011 primarily related to $149.5 million in common stock repurchases under our stock repurchase program, $6.0 million of cash payments to noncontrolling interests as distribution of joint venture profits as well as $4.1 million of loan costs related to the amendment and restatement of our credit facility on August 2, 2011. 51-------------------------------------------------------------------------------- Table of Contents Debt Instruments Credit Facility On October 30, 2013, we entered into a credit agreement which amended and restated our prior credit agreement with various lenders. The credit agreement provides for a $1.325 billion senior secured revolving credit facility maturing on October 30, 2018. Up to $400.0 million of the facility is available for revolving loans and letters of credit in certain alternative currencies in addition to the U.S. dollar. The entire amount of the facility is available for the issuance of letters of credit. Up to $50.0 million of the facility is available for swing line loans in U.S. dollars, up to $30.0 million of the facility is available for swing line loans in Canadian dollars and up to $20.0 million of the facility is available for swing line loans in Australian dollars. In addition, subject to the conditions specified in the credit agreement, we have the option to increase the revolving commitments under the credit agreement by up to an additional $300.0 million from time to time upon receipt of additional commitments from new or existing lenders. Borrowings under the credit agreement are to be used to refinance existing indebtedness and for working capital, capital expenditures and other general corporate purposes. As of December 31, 2013, we had approximately $240.3 million of letters of credit issued, $184.2 million of which was denominated in U.S. dollars and $56.1 million of which was denominated in Australian and Canadian dollars, and no outstanding borrowings under the credit facility. The remaining $1.08 billion was available for borrowings or issuing new letters of credit. Prior to April 1, 2014, amounts borrowed under the credit agreement in U.S. dollars bear interest, at our option, at a rate equal to either (a) the Eurocurrency Rate (as defined in the credit agreement) plus 1.25%, or (b) the Base Rate (as described below) plus 0.25%. Amounts borrowed as revolving loans under the credit agreement in any currency other than U.S. dollars bear interest at a rate equal to the Eurocurrency Rate plus 1.25%. Standby letters of credit issued under the credit agreement are subject to a letter of credit fee of 1.25%, and Performance Letters of Credit (as defined in the credit agreement) issued under the credit agreement in support of certain contractual obligations are subject to a letter of credit fee of 0.75%. We are also subject to a commitment fee of 0.20% on any unused availability under the credit agreement. Effective April 1, 2014, amounts borrowed under the credit agreement in U.S. dollars will bear interest, at our option, at a rate equal to either (a) the Eurocurrency Rate plus 1.125% to 2.125%, as determined based on our Consolidated Leverage Ratio (as described below), or (b) the Base Rate plus 0.125% to 1.125%, as determined based on our Consolidated Leverage Ratio. Amounts borrowed as revolving loans under the credit agreement in any currency other than U.S. dollars will bear interest at a rate equal to the Eurocurrency Rate plus 1.125% to 2.125%, as determined based on our Consolidated Leverage Ratio. Standby letters of credit issued under the credit agreement will be subject to a letter of credit fee of 1.125% to 2.125%, based on our Consolidated Leverage Ratio, and Performance Letters of Credit issued under the credit agreement in support of certain contractual obligations will be subject to a letter of credit fee of 0.675% to 1.275%, based on our Consolidated Leverage Ratio. We also will be subject to a commitment fee of 0.20% to 0.40%, based on our Consolidated Leverage Ratio, on any unused availability under the credit agreement. The Consolidated Leverage Ratio is the ratio of our Consolidated Funded Indebtedness to Consolidated EBITDA (as defined in the credit agreement). For purposes of calculating the Consolidated Leverage Ratio, Consolidated Funded Indebtedness is reduced by available cash and Cash Equivalents (as defined in the credit agreement) in excess of $25.0 million. The Base Rate equals the highest of (i) the Federal Funds Rate (as defined in the credit agreement) plus 1/2 of 1%, (ii) Bank of America's prime rate and (iii) the Eurocurrency Rate plus 1.00%. Subject to certain exceptions, the credit agreement is secured by substantially all of our assets and the assets of our wholly owned U.S. subsidiaries and by a pledge of all of the capital stock of our wholly owned U.S. subsidiaries and 65% of the capital stock of our direct foreign subsidiaries of our wholly owned U.S. subsidiaries. Our wholly owned U.S. subsidiaries also guarantee the repayment of all amounts due under the credit agreement. Subject to certain conditions, at any time we maintain an Investment Grade Rating (defined in the credit 52-------------------------------------------------------------------------------- Table of Contents agreement as two of the following three conditions being met: (i) a corporate credit rating that is BBB- or higher by Standard & Poor's Rating Services, (ii) a corporate family rating that is Baa3 or higher by Moody's Investors Services, Inc. or (iii) a corporate credit rating that is BBB- or higher by Fitch Ratings, Inc.), all collateral will automatically be released from these liens. The credit agreement contains certain covenants, including a maximum Consolidated Leverage Ratio and a Consolidated Interest Coverage Ratio, in each case as specified in the credit agreement. The credit agreement limits certain acquisitions, mergers and consolidations, indebtedness, asset sales and prepayments of indebtedness and, subject to certain exceptions, prohibits liens on assets. The credit agreement also allows for cash payments for dividends and stock repurchases subject to compliance with the following requirements on a post-incurrence basis: (i) no default or event of default under the credit agreement; (ii) continued compliance with the financial covenants described above; and (iii) at least $100 million of availability under the credit agreement and/or cash and cash equivalents on hand. As of December 31, 2013, we were in compliance with all of the covenants in the credit agreement. The credit agreement provides for customary events of default and carries cross-default provisions with our underwriting, continuing indemnity and security agreement with its sureties and all of our other debt instruments exceeding $75.0 million in borrowings or availability. If an Event of Default (as defined in the credit agreement) occurs and is continuing, on the terms and subject to the conditions set forth in the credit agreement, amounts outstanding under the credit agreement may be accelerated and may become or be declared immediately due and payable. Between April 2, 2011 and October 30, 2013, we had a credit agreement that provided for a $700.0 million senior secured revolving credit facility with a maturity date of August 2, 2016. The entire amount of the facility was available for the issuance of letters of credit. Borrowings under the credit agreement were to be used to refinance existing indebtedness and for working capital, capital expenditures and other general corporate purposes. Amounts borrowed under the credit agreement in U.S. dollars bore interest, at our option, at a rate equal to either (a) the Eurocurrency Rate (as defined in the credit agreement) plus 1.25% to 2.50%, as determined based on our Consolidated Leverage Ratio (as described below), plus, if applicable, any Mandatory Cost (as defined in the credit agreement) required to compensate lenders for the cost of compliance with certain European regulatory requirements, or (b) the Base Rate (as described below) plus 0.25% to 1.50%, as determined based on our Consolidated Leverage Ratio. Amounts borrowed under the credit agreement in any currency other than U.S. dollars bore interest at a rate equal to the Eurocurrency Rate plus 1.25% to 2.50%, as determined based on our Consolidated Leverage Ratio, plus, if applicable, any Mandatory Cost. Standby letters of credit issued under the credit agreement were subject to a letter of credit fee of 1.25% to 2.50%, based on our Consolidated Leverage Ratio, and Performance Letters of Credit (as defined in the credit agreement) issued under the credit agreement in support of certain contractual obligations were subject to a letter of credit fee of 0.75% to 1.50%, based on our Consolidated Leverage Ratio. We were also subject to a commitment fee of 0.20% to 0.45%, based on our Consolidated Leverage Ratio, on any unused availability under the credit agreement. The Consolidated Leverage Ratio was the ratio of our total funded debt to Consolidated EBITDA (as defined in the credit agreement). For purposes of calculating both the Consolidated Leverage Ratio and the maximum senior debt to Consolidated EBITDA ratio discussed below, total funded debt and total senior debt were reduced by all cash and Cash Equivalents (as defined in the credit agreement) held by us in excess of $25.0 million. The Base Rate equaled the highest of (i) the Federal Funds Rate (as defined in the credit agreement) plus 1/2 of 1%, (ii) Bank of America's prime rate and (iii) the Eurocurrency Rate plus 1.00%. Prior to August 2, 2011, we had a credit agreement that provided for a $475.0 million senior secured revolving credit facility maturing September 19, 2012. Subject to the conditions specified in the prior credit agreement, borrowings under the prior credit facility were to be used for working capital, capital expenditures and other general corporate purposes. The entire unused portion of the prior credit facility was available for the issuance of letters of credit. 53 -------------------------------------------------------------------------------- Table of Contents Amounts borrowed under the prior credit facility bore interest, at our option, at a rate equal to either (a) the Eurodollar Rate (as defined in the prior credit agreement) plus 0.875% to 1.75%, as determined by the ratio of our total funded debt to Consolidated EBITDA (as defined in the prior credit agreement), or (b) the base rate (as described below) plus 0.00% to 0.75%, as determined by the ratio of our total funded debt to Consolidated EBITDA. Letters of credit issued under the prior credit facility were subject to a letter of credit fee of 0.875% to 1.75%, based on the ratio of our total funded debt to Consolidated EBITDA. We were also subject to a commitment fee of 0.15% to 0.35%, based on the ratio of our total funded debt to Consolidated EBITDA, on any unused availability under the prior credit facility. The base rate equaled the higher of (i) the Federal Funds Rate (as defined in the prior credit agreement) plus 1/2 of 1% or (ii) the bank's prime rate. Off-Balance Sheet Transactions As is common in our industry, we have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Our significant off-balance sheet transactions include liabilities associated with non-cancelable operating leases, letter of credit obligations, commitments to expand our fiber optic networks, commitments to purchase equipment, surety guarantees, certain multi-employer pension plan liabilities and obligations relating to our joint venture arrangements. Certain joint venture structures involve risks not directly reflected in our balance sheets. For certain joint ventures, we have guaranteed all of the obligations of the joint venture under a contract with the customer. Additionally, other joint venture arrangements qualify as a general partnership, for which we are jointly and severally liable for all of the obligations of the joint venture. In our joint venture arrangements, typically each joint venturer indemnifies the other party for any liabilities incurred in excess of the liabilities such other party is obligated to bear under the respective joint venture agreement. Other than as previously discussed, we have not engaged in any material off-balance sheet financing arrangements through special purpose entities, and we have no material guarantees of the work or obligations of third parties. Leases We enter into non-cancelable operating leases for many of our facility, vehicle and equipment needs. These leases allow us to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather than purchasing them. We may decide to cancel or terminate a lease before the end of its term, in which case we are typically liable to the lessor for the remaining lease payments under the term of the lease. We have guaranteed the residual value of the underlying assets under certain of our equipment operating leases at the date of termination of such leases. We have agreed to pay any difference between this residual value and the fair market value of each underlying asset as of the lease termination date. As of December 31, 2013, the maximum guaranteed residual value was approximately $304.8 million. We believe that no significant payments will be made as a result of the difference between the fair market value of the leased equipment and the guaranteed residual value. However, there can be no assurance that future significant payments will not be required. Letters of Credit Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under our self-funded insurance programs. In addition, from time to time, certain customers require us to post letters of credit to ensure payment to our subcontractors and vendors under those contracts and to guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution, typically pursuant to our credit facility. Each letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions. If this were to occur, we would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, we may also be required to record a charge to earnings for the reimbursement. We do not believe that it is likely that any material claims will be made under a letter of credit in the foreseeable future. 54-------------------------------------------------------------------------------- Table of Contents As of December 31, 2013, we had $240.3 million in letters of credit outstanding under our credit facility primarily to secure obligations under our casualty insurance program. These are irrevocable stand-by letters of credit with maturities generally expiring at various times throughout 2014. Upon maturity, it is expected that the majority of these letters of credit will be renewed for subsequent one-year periods. Performance Bonds and Parent Guarantees Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial institution known as a surety. These bonds provide a guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If we fail to perform under a contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs. Under our underwriting, continuing indemnity and security agreement with our sureties and with the consent of our lenders under our credit facility, we have granted security interests in certain of our assets to collateralize our obligations to the sureties. Subject to certain conditions and consistent with terms of our credit facility, these security interests will be automatically released if we maintain a corporate credit rating that is BBB- (stable) or higher by Standard & Poor's Rating Services and a corporate family rating that is Baa3 (stable) or higher by Moody's Investors Services. We may be required to post letters of credit or other collateral in favor of the sureties or our customers in the future. Posting letters of credit in favor of the sureties or our customers would reduce the borrowing availability under our credit facility. To date, we have not been required to make any reimbursements to our sureties for bond-related costs. We believe that it is unlikely that we will have to fund significant claims under our surety arrangements in the foreseeable future. As of December 31, 2013, the total amount of outstanding performance bonds was approximately $2.68 billion, and the estimated cost to complete these bonded projects was approximately $671.4 million. From time to time, we guarantee the obligations of our wholly owned subsidiaries, including obligations under certain contracts with customers, certain lease obligations, certain joint venture arrangements and, in some states, obligations in connection with obtaining contractors' licenses. We are not aware of any material obligations for performance or payment asserted against us under any of these guarantees. Contractual Obligations As of December 31, 2013, our future contractual obligations were as follows (in thousands): Total 2014 2015 2016 2017 2018 Thereafter Operating lease obligations $ 158,635 $ 51,113 $ 30,297 $ 23,667 $ 17,733 $ 11,999 $ 23,826 Capital lease obligations 2,234 2,234 - - - - - Pension plan withdrawal liability associated with a demand letter 4,301 675 721 770 823 879 433 Equipment purchase commitments 13,728 13,728 - - - - - Committed capital expenditures for fiber optic networks under contracts with customers 38,790 38,790 - - - - - Total $ 217,688 $ 106,540 $ 31,018 $ 24,437 $ 18,556 $ 12,878 $ 24,259 The committed capital expenditures for fiber optic networks represent commitments related to signed contracts with customers. The amounts are estimates of costs required to build the networks under contract. The actual capital expenditures related to building the networks could vary materially from these estimates. We have also committed capital for the expansion of our vehicle fleet in order to accommodate manufacturer lead times on 55-------------------------------------------------------------------------------- Table of Contents certain types of vehicles. As of December 31, 2013, production orders for approximately $13.7 million had been issued with delivery dates occurring throughout 2014. Although we have committed to the purchase of these vehicles at the time of their delivery, we intend that these orders will be assigned to third party leasing companies and made available to us under certain of our master equipment lease agreements, which will release us from our capital commitment. As of December 31, 2013, the total unrecognized tax benefits related to uncertain tax positions was $48.8 million. Although the Internal Revenue Service completed its examination related to calendar year 2010 during 2013, certain of our subsidiaries remain under examination by various state and Canadian tax authorities for multiple periods, and the amount of unrecognized tax benefits could therefore increase or decrease as a result of the expiration of certain statute of limitations periods or settlements of these audits. We believe it is reasonably possible that within the next 12 months unrecognized tax benefits may decrease up to $6.7 million due to the expiration of certain statute of limitations periods or settlements of the audits. The previously presented table of estimated contractual obligations does not reflect the majority of the obligations under the multi-employer pension plans in which our union employees participate. Some of our operating units are parties to various collective bargaining agreements that require us to provide to the employees subject to these agreements specified wages and benefits, as well as to make contributions to multi-employer pension plans. Our multi-employer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on an annual basis), and contributions are made to the plans on a "pay-as-you-go" basis based on our union employee payrolls. Our obligations for contributions to multi-employer pension plans cannot be determined for future periods because the location and number of union employees that we have employed at any given time and the plans in which they may participate vary depending on the projects we have ongoing at any time and the need for union resources in connection with those projects. We may also have additional liabilities imposed by law as a result of our participation in multi-employer defined benefit pension plans. The Employee Retirement Income Security Act of 1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980, imposes certain liabilities upon employers who are contributors to a multi-employer plan if the employer withdraws from the plan or the plan is terminated or experiences a mass withdrawal. These liabilities include an allocable share of the unfunded vested benefits in the plan for all plan participants, not merely the benefits payable to a contributing employer's own retirees. Other than as noted below, we are not aware of any material amounts of withdrawal liability that have been or are expected to be incurred as a result of a withdrawal by any of our operating units from any multi-employer defined benefit pension plans. We may also be required to make additional contributions to our multi-employer pension plans if they become underfunded, and these additional contributions will be determined based on our union employee payrolls. The Pension Protection Act of 2006 added special funding and operational rules generally applicable to plan years beginning after 2007 for multi-employer plans that are classified as "endangered," "seriously endangered" or "critical" status. Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of a surcharge on benefit contributions) and/or modifications to retiree benefits. A number of multi-employer plans to which our operating units contribute or may contribute in the future are in "endangered," "seriously endangered" or "critical" status. The amount of additional funds, if any, that we may be obligated to contribute to these plans in the future cannot be reasonably estimated and is not included in the above table due to uncertainty of the future levels of work that require the specific use of the union employees covered by these plans, as well as the future contribution levels and possible surcharges on contributions applicable to these plans. We recorded a partial withdrawal liability of approximately $32.6 million in the fourth quarter of 2011 related to the withdrawal by certain of our subsidiaries from the Central States, Southeast and Southwest Areas Pension Plan (the Central States Plan). The partial withdrawal liability we recognized was based on estimates received from the Central States Plan during 2011 for a complete withdrawal by all of our subsidiaries 56-------------------------------------------------------------------------------- Table of Contents participating in the Central States Plan. During the third quarter of 2012, the Central States Plan provided additional estimates of the potential withdrawal liability, indicating that the withdrawal liability would be approximately $32.8 million based on a partial withdrawal in the fourth quarter of 2011, approximately $39.7 million based on a partial withdrawal in the first quarter of 2012, or approximately $40.1 million based upon a complete withdrawal in 2012. Certain of our subsidiaries continued participation in the Central States Plan, and we subsequently effected a complete withdrawal as of December 31, 2012. The consequences of the complete withdrawal of our subsidiaries from the plan will depend on various factors, including interpretations of the terms of the collective bargaining agreements under which the subsidiaries participated and whether exemptions from withdrawal liability applicable to construction industry employers will be available. Based on the previous estimates of liability associated with a complete withdrawal from the Central States Plan, and allowing for the exclusion of amounts we believe have been improperly included in such estimate, we will seek to challenge and further negotiate the amount owed in connection with this matter. In December 2013, Central States filed a lawsuit against certain of our subsidiaries alleging that contributions made to a new industry fund, which was created after we withdrew from the Central States Plan, should have been made to the Central States Plan. We have disputed these allegations on the basis that we have properly provided contributions to the new industry fund based on the terms of the collective bargaining agreements under which our subsidiaries participate. Given the unknown nature of some of these factors, the final withdrawal liability cannot yet be determined with certainty; therefore, such amount could be materially higher than the $32.6 million we recognized in the fourth quarter of 2011. As a result of these various factors, the estimated partial withdrawal liability of $32.6 million has not been included in the Contractual Obligations table. For additional information regarding the partial withdrawal liability, see Note 15 of the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." Additionally, on October 9, 2013, we acquired a company that experienced a complete withdrawal from the Central States Plan prior to the date of our acquisition. Central States issued a notice and demand, dated March 13, 2013, to the acquired company for a withdrawal liability in the total amount of $6.9 million payable in installments. Based on legal arguments, the acquired company took the position that the amount of withdrawal liability payable to Central States as a result of its complete withdrawal was $4.8 million, of which approximately $4.3 million remained outstanding as of December 31, 2013. The acquired company, and now Quanta, has taken steps to challenge the amount of the assessment by the Central States Plan; however, payments in accordance with the terms of the Central States demand letter are required to be made while the dispute process is ongoing. Accordingly, the $4.3 million is included in the previously presented table of contractual obligations. In addition, $2.1 million of the cash proceeds related to the sale were deposited into an escrow account on October 9, 2013 to fund any additional obligation beyond the $4.8 million. Accordingly, the acquired company's withdrawal from the Central States Plan is not expected to have a material impact on our results of operations, financial condition and cash flows. Also excluded from the Contractual Obligations table is interest associated with letters of credit fees and commitment fees under our credit facility because the outstanding letters of credit, availability and applicable interest rates and fees are variable. For additional information regarding the interest rates under our credit facility, see Note 9 of the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." We have also excluded from the Contractual Obligations table additional capital commitments associated with investments in unconsolidated affiliates related to planned midstream infrastructure projects of approximately $13.1 million because we are unable to determine the timing of these capital commitments but anticipate them to be paid before the end of 2015. Self-Insurance We are insured for employer's liability, general liability, auto liability and workers' compensation claims. On August 1, 2013, we renewed our employer's liability, general liability, auto liability and workers' compensation policies for the 2013 - 2014 policy year. As a result of the renewal, the deductibles for general liability and auto liability increased from $5.0 million to $10.0 million per occurrence, while the deductible for 57-------------------------------------------------------------------------------- Table of Contents workers' compensation remained at $5.0 million per occurrence and the deductible for employer's liability remained at $1.0 million per occurrence. Additionally, in connection with this renewal, the amount of letters of credit required by us to secure our obligations under our casualty insurance programs has increased. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of $375,000 per claimant per year. Losses under all of these insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate. As of December 31, 2013 and 2012, the gross amount accrued for insurance claims totaled $161.8 million and $160.8 million, with $122.6 million and $120.2 million considered to be long-term and included in other non-current liabilities. Related insurance recoveries/receivables as of December 31, 2013 and 2012 were $9.1 million and $22.2 million, of which $0.7 million and $2.3 million are included in prepaid expenses and other current assets and $8.4 million and $19.9 million are included in other assets, net. We renew our insurance policies on an annual basis, and therefore deductibles and levels of insurance coverage may change in future periods. In addition, insurers may cancel our coverage or determine to exclude certain items from coverage, or we may elect not to obtain certain types or incremental levels of insurance if we believe that the cost to obtain such coverage exceeds the additional benefits obtained. In any such event, our overall risk exposure would increase, which could negatively affect our results of operations, financial condition and cash flows. Concentration of Credit Risk We are subject to concentrations of credit risk related primarily to our cash and cash equivalents and our accounts receivable, including amounts related to unbilled accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts. Substantially all of our cash investments are managed by what we believe to be high credit quality financial institutions. In accordance with our investment policies, these institutions are authorized to invest this cash in a diversified portfolio of what we believe to be high quality investments, which primarily include interest-bearing demand deposits, money market mutual funds and investment grade commercial paper with original maturities of three months or less. Although we do not currently believe the principal amount of these investments is subject to any material risk of loss, changes in economic conditions could impact the interest income we receive from these investments. In addition, we grant credit under normal payment terms, generally without collateral, to our customers, which include electric power, oil and gas companies, governmental entities, general contractors, and builders, owners and managers of commercial and industrial properties located primarily in the United States and Canada. Consequently, we are subject to potential credit risk related to changes in business and economic factors throughout the United States and Canada, which may be heightened as a result of uncertain economic and financial market conditions that have existed in recent years. However, we generally have certain statutory lien rights with respect to services provided. Historically, some of our customers have experienced significant financial difficulties, and others may experience financial difficulties in the future. These difficulties expose us to increased risk related to collectability of billed and unbilled receivables and costs and estimated earnings in excess of billings on uncompleted contracts for services we have performed. As of December 31, 2013, two customers accounted for approximately 15% and 11% of our consolidated net position, which includes accounts receivable (including long-term balances and costs and estimated earnings in excess of billings on uncompleted contracts), less billings in excess of costs and unearned revenue. As of December 31, 2012, the same two customers accounted for approximately 16% and 11% of consolidated net position. The services provided to these customers relate primarily to our Electric Power Infrastructure Services segment. Substantially all of the balance for the customer with 11% of consolidated net position at December 31, 2013 and 2012 relates to the Sunrise Powerlink project with a long-term receivable balance related to a 58-------------------------------------------------------------------------------- Table of Contents significant change order that is subject to a contractually agreed upon arbitration process. During the third quarter of 2013, we reclassified the receivable related to this matter from costs in excess of billings on uncompleted contracts to other assets, net due to the expected timetable for resolution of the matter. For additional information, see Litigation and Claims - Sunrise Powerlink Arbitration in Note 15 of the Notes to Consolidated Financial Statements. Additionally, the customer with the 11% of consolidated net position at December 31, 2013 and 2012 also accounted for 11% of consolidated revenues for the year ended December 31, 2011. No other customers represented 10% or more of revenues for the years ended December 31, 2013, 2012 and 2011, and no other customers represented 10% or more of consolidated net position as of December 31, 2013 and 2012. Litigation and Claims We are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, employment-related damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we record a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In addition, we disclose matters for which management believes a material loss is at least reasonably possible. See Note 15 of the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional information regarding litigation and claims. Related Party Transactions In the normal course of business, we enter into transactions from time to time with related parties. These transactions typically take the form of facility leases with prior owners of certain acquired companies. Inflation Due to relatively low levels of inflation experienced during the years ended December 31, 2013, 2012 and 2011, inflation did not have a significant effect on our results. New Accounting Pronouncements Adoption of New Accounting Pronouncements On January 1, 2013, we adopted an update that gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that its indefinite-lived intangible assets are impaired. If, based on its qualitative assessment, an entity concludes that it is more likely than not that the fair value of its indefinite-lived intangible assets is less than their carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. The adoption of this standard did not have a material effect on our consolidated financial statements. Accounting Standards Not Yet Adopted In July 2013, the FASB issued an update that provides guidance on the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists as of the reporting date. The update is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements and are planning to adopt this guidance effective January 1, 2014. 59 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist as of the date the consolidated financial statements are published and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our beliefs and assumptions derived from information available at the time such judgments and estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. There can be no assurance that actual results will not differ from those estimates. Management has reviewed its development and selection of critical accounting estimates with the audit committee of our Board of Directors. We believe the following accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue Recognition Infrastructure Services - Through our Electric Power Infrastructure Services and Oil and Gas Infrastructure Services segments, we design, install and maintain networks for customers in the electric power and oil and gas industries. These services may be provided pursuant to master service agreements, repair and maintenance contracts and fixed price and non-fixed price installation contracts. Pricing under these contracts may be competitive unit price, cost-plus/hourly (or time and materials basis) or fixed price (or lump sum basis), and the final terms and prices of these contracts are frequently negotiated with the customer. Under unit-based contracts, the utilization of an output-based measurement is appropriate for revenue recognition. Under these contracts, we recognize revenue as units are completed based on pricing established between us and the customer for each unit of delivery, which best reflects the pattern in which the obligation to the customer is fulfilled. Under our cost-plus/hourly and time and materials type contracts, we recognize revenue on an input basis, as labor hours are incurred and services are performed. Revenues from fixed price contracts are recognized using the percentage-of-completion method, measured by the percentage of costs incurred to date to total estimated costs for each contract. These contracts provide for a fixed amount of revenues for the entire project. Such contracts provide that the customer accept completion of progress to date and compensate us for services rendered, which may be measured in terms of units installed, hours expended or some other measure of progress. Contract costs include all direct materials, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Much of the material associated with our work is owner-furnished and is therefore not included in contract revenues and costs. The cost estimation process is based on professional knowledge and experience of our engineers, project managers and financial professionals. Changes in job performance, job conditions and final contract settlements are factors that influence management's assessment of total contract value and the total estimated costs to complete those contracts and therefore, our profit recognition. Changes in these factors may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined. These factors are routinely evaluated on a project by project basis throughout the project term, and the impact of corresponding revisions in management's estimates of contract value, contract cost and contract profit are recorded as necessary in the period in which the revisions are determined. Provisions for losses on uncompleted contracts are made in the period in which such losses are determined to be probable and the amount can be reasonably estimated. If actual results significantly differ from our estimates used for revenue recognition and claim assessments, our financial condition and results of operations could be materially impacted. Our operating results for the year ended December 31, 2013 were impacted by less than 5% as a result of changes in contract estimates related to projects that were in progress at December 31, 2012. 60-------------------------------------------------------------------------------- Table of Contents The current asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed for fixed price contracts. The current liability "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized for fixed price contracts. We may incur costs subject to change orders, whether approved or unapproved by the customer, and/or claims related to certain contracts. We determine the probability that such costs will be recovered based upon evidence such as past practices with the customer, specific discussions or preliminary negotiations with the customer or verbal approvals. We treat items as a cost of contract performance in the period incurred if it is not probable that the costs will be recovered or will recognize revenue if it is probable that the contract price will be adjusted and can be reliably estimated. As of December 31, 2013 and 2012, we had approximately $241.8 million and $205.0 million of change orders and/or claims that had been included as contract price adjustments on certain contracts which were in the process of being negotiated in the normal course of business. The December 31, 2013 and 2012 balances of recognized change orders and claims included a change order from the Sunrise Powerlink project, an electric power infrastructure services project, primarily as a result of multiple customer-directed changes to the construction schedule which required PAR Electrical Contractors, Inc. (PAR), a wholly owned subsidiary of Quanta, to significantly increase its resources allocated to the project in order to meet the customer-required completion date. Revenues associated with this change order of approximately $165 million were accrued and recognized as a component of costs and estimated earnings in excess of billings on uncompleted contracts. Following completion of the project, PAR and San Diego Gas & Electric Company (SDG&E) had ongoing meetings to review project scope, costs and performance criteria in order to reach resolution on the additional work performed and pricing of the change order under the contract, which resulted in PAR and SDG&E being in agreement as to PAR's direct costs incurred in completing the project. Although the parties agreed upon PAR's direct costs, the parties have been unsuccessful in agreeing on the final amount owed to PAR. As a result, PAR initiated arbitration proceedings in the fourth quarter of 2013 pursuant to a contractually agreed upon dispute resolution process. See Litigation and Claims -Sunrise Powerlink Arbitration in Note 15 of the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional information. We have reclassified the recognized balance related to this contract from costs and estimated earnings in excess of billings on uncompleted contracts into other assets, net since this process is not expected to conclude within the next twelve months. As of December 31, 2013, no interest has been accrued related to this long-term receivable since the arbitration process is still ongoing. The aggregate contract price adjustments discussed above represent management's best estimate of additional contract revenues which have been earned and which management believes are probable of collection. The amounts ultimately realized by us upon final acceptance by our customers could be higher or lower than such estimated amounts. Although we believe that we are entitled to the amount PAR is seeking in the matter related to the Sunrise Powerlink project, due to the nature of those proceedings, an adverse result in that matter could have a material adverse effect on our consolidated financial condition, results of operations and cash flows. Fiber Optic Licensing - The fiber optic licensing business constructs and licenses the right to use fiber optic telecommunications facilities to its customers pursuant to licensing agreements, typically with terms from five to twenty-five years, inclusive of certain renewal options. Under those agreements, customers are provided the right to use a portion of the capacity of a fiber optic facility, with the facility owned and maintained by us. Revenues, including any initial fees or advance billings, are recognized ratably over the expected length of the agreements, including probable renewal periods. As of December 31, 2013 and 2012, initial fees and advance billings on these licensing agreements not yet recorded in revenue were $48.8 million and $46.4 million and are recognized as deferred revenue, with $40.2 million and $37.7 million considered to be long-term and included in other non-current liabilities. Actual revenues may differ from those estimates if the contracts are not renewed as expected. Self-Insurance. We are insured for employer's liability, general liability, auto liability and workers' compensation claims. On August 1, 2013, we renewed our employer's liability, general liability, auto liability and workers' compensation policies for the 2013 - 2014 policy year. As a result of the renewal, the deductibles for general liability and auto liability increased from $5.0 million to $10.0 million per occurrence, while the deductible for workers' compensation remained at $5.0 million per occurrence and the deductible for employer's 61 -------------------------------------------------------------------------------- Table of Contents liability remained at $1.0 million per occurrence. Additionally, in connection with this renewal, the amount of letters of credit required by us to secure our obligations under our casualty insurance programs, which is discussed further below, has increased. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of $375,000 per claimant per year. Losses under all of these insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate. As of December 31, 2013 and 2012, the gross amount accrued for insurance claims totaled $161.8 million and $160.8 million, with $122.6 million and $120.2 million considered to be long-term and included in other non-current liabilities. Related insurance recoveries/receivables as of December 31, 2013 and 2012 were $9.1 million and $22.2 million, of which $0.7 million and $2.3 million are included in prepaid expenses and other current assets and $8.4 million and $19.9 million are included in other assets, net. We renew our insurance policies on an annual basis, and therefore deductibles and levels of insurance coverage may change in future periods. In addition, insurers may cancel our coverage or determine to exclude certain items from coverage, or we may elect not to obtain certain types or incremental levels of insurance if we believe that the cost to obtain such coverage exceeds the additional benefits obtained. In any such event, our overall risk exposure would increase, which could negatively affect our results of operations, financial condition and cash flows. Valuation of Goodwill. We have recorded goodwill in connection with our historical acquisitions of companies. Upon acquisition, these companies have been either combined into one of our existing operating units or managed on a stand-alone basis as an individual operating unit. Goodwill recorded in connection with these acquisitions is subject to an annual assessment for impairment, which we perform at the operating unit level for each operating unit that carries a balance of goodwill. Each of our operating units is organized into one of three internal divisions: the Electric Power Division, the Oil and Gas Infrastructure Division or the Fiber Optic Licensing Division. As most of the companies acquired by us provide multiple types of services for multiple types of customers, these divisional designations are based on the predominant type of work performed by each operating unit at the point in time the divisional designation is made. Goodwill is required to be measured for impairment at the operating segment level or one level below the operating segment level for which discrete financial information is available, and we have determined that our individual operating units represent our reporting units for the purpose of assessing goodwill impairments. We have the option to first assess qualitative factors to determine whether it is necessary to perform the two-step fair value-based impairment test described below. If we believe that, as a result of our qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. We can choose to perform the qualitative assessment on none, some or all of our reporting units. We can also bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then resume performing the qualitative assessment in any subsequent period. Qualitative indicators including deterioration in macroeconomic conditions, declining financial performance, or a sustained decrease in share price, among other things, may trigger the need for annual or interim impairment testing of goodwill associated with one or all of the reporting units. Our goodwill impairment assessment is performed at year-end or more frequently if events or circumstances arise which indicate that goodwill may be impaired. For instance, a decrease in our market capitalization below book value, a significant change in business climate or loss of a significant customer, as well as the qualitative 62 -------------------------------------------------------------------------------- Table of Contents indicators referenced above, may trigger the need for interim impairment testing of goodwill for one or all of our reporting units. The first step of the two-step fair value-based test involves comparing the fair value of each of our reporting units with its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the reporting unit's goodwill to the implied fair value of its goodwill. If the implied fair value of goodwill is less than the carrying amount, an impairment loss would be recorded as a reduction to goodwill with a corresponding charge to operating expense. We determine the fair value of our reporting units using a weighted combination of the discounted cash flow, market multiple and market capitalization valuation approaches, with heavier weighting on the discounted cash flow method, as in management's opinion, this method currently results in the most accurate calculation of a reporting unit's fair value. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating margins, discount rates, weighted average costs of capital and future market conditions, among others. We believe the estimates and assumptions used in our impairment assessments are reasonable and based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated. Under the discounted cash flow method, we determine fair value based on the estimated future cash flows of each reporting unit, discounted to present value using risk-adjusted industry discount rates, which reflect the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. Cash flow projections are derived from budgeted amounts and operating forecasts (typically a one-year model) plus an estimate of later period cash flows, all of which are evaluated by management. Subsequent period cash flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur, along with a terminal value derived from the reporting unit's earnings before interest, taxes, depreciation and amortization (EBITDA). The EBITDA multiples for each reporting unit are based on trailing twelve-month comparable industry data. Under the market multiple and market capitalization approaches, we determine the estimated fair value of each of our reporting units by applying transaction multiples to each reporting unit's projected EBITDA and then averaging that estimate with similar historical calculations using either a one, two or three year average. For the market capitalization approach, we add a reasonable control premium, which is estimated as the premium that would be received in a sale of the reporting unit in an orderly transaction between market participants. The projected cash flows and estimated levels of EBITDA by reporting unit were used to determine fair value under the three approaches discussed herein. The following table presents the significant estimates used by management in determining the fair values of our reporting units at December 31, 2013, 2012 and 2011: Operating Units Providing Predominantly Electric Power and Oil and Gas Operating Unit Providing Infrastructure Services Fiber Optic Licensing 2013 2012 2011 2013 2012 2011 Years of cash flows before terminal value 5 5 5 15 15 15 Discount rates 12% to 14% 12% to 13% 13% 12% 12% 14% EBITDA multiples 5.0 to 8.0 4.5 to 8.0 4.5 to 8.0 9.5 9.5 9.5 Weighting of three approaches: Discounted cash flows 70% 70% 70% 90% 90% 90% Market multiple 15% 15% 15% 5% 5% 5% Market capitalization 15% 15% 15% 5% 5% 5% 63 -------------------------------------------------------------------------------- Table of Contents For recently acquired reporting units, a step one impairment test may indicate an implied fair value that is substantially similar to the reporting unit's carrying value. Such similarities in value are generally an indication that management's estimates of future cash flows associated with the recently acquired reporting unit remain relatively consistent with the assumptions that were used to derive its initial fair value. During the fourth quarter of 2013, a two-step fair-value based goodwill impairment analysis was performed for each of our reporting units, and no reporting units were evaluated solely on a qualitative basis. The analysis indicated that the implied fair value of each of our reporting units, other than recently acquired reporting units, was substantially in excess of its carrying value. Following the analysis, management concluded that no impairment was indicated at any reporting unit. As discussed generally above, when evaluating the 2013 step one impairment test results, management considered many factors in determining whether or not an impairment of goodwill for any reporting unit was reasonably likely to occur in future periods, including future market conditions and the economic environment in which our reporting units were operating. Additionally, management considered the sensitivity of its fair value estimates to changes in certain valuation assumptions and, after giving consideration to at least a 10% decrease in the fair value of each of our reporting units, the results of the assessment at December 31, 2013 did not change. However, circumstances such as market declines, unfavorable economic conditions, the loss of a major customer or other factors could impact the valuation of goodwill in future periods. The goodwill analysis performed for each reporting unit was based on estimates and industry comparables obtained from the electric power, oil and gas and fiber optic licensing industries, and no impairment was indicated. The 15-year discounted cash flow model used for fiber optic licensing was based on the long-term nature of the underlying fiber optic network licensing agreements. We assigned a higher weighting to the discounted cash flow approach in all periods to reflect increased expectations of market value being determined from a "held and used" model. Discount rates for the 2012 analysis declined from those of the prior year for the reporting units providing predominately electric power and oil and gas infrastructure services due to generally more favorable market conditions for these reporting units in 2012 as compared to 2011. Additionally, discount rates for the 2012 analysis declined from those of the prior year for the reporting unit providing predominately fiber optic licensing due to generally more favorable market conditions for this reporting unit in 2012 as compared to 2011. As stated previously, cash flows are derived from budgeted amounts and operating forecasts that have been evaluated by management. In connection with the 2013 assessment, projected annual growth rates by reporting unit varied widely with ranges from 0% to 38% for reporting units in the electric power and the oil and gas infrastructure divisions and 0% to 12% for the reporting unit in fiber optic licensing. Estimating future cash flows requires significant judgment, and our projections may vary from cash flows eventually realized. Changes in our judgments and projections could result in a significantly different estimate of the fair value of reporting units and intangible assets and could result in an impairment. Variances in the assessment of market conditions, projected cash flows, cost of capital, growth rates and acquisition multiples applied could have an impact on the assessment of impairments and any amount of goodwill impairment charges recorded. For example, lower growth rates, lower acquisition multiples or higher costs of capital assumptions would all individually lead to lower fair value assessments and potentially increased frequency or size of goodwill impairments. Any goodwill or other intangible impairment would be included in the consolidated statements of operations. Based on the first step of the goodwill impairment analysis, we compared the sum of fair values of our reporting units to our market capitalization at December 31, 2013 and determined that the excess of the aggregate fair value of all reporting units to our market capitalization reflected a reasonable control premium. Our market capitalization at December 31, 2013 was approximately $6.83 billion, and our total stockholders' equity was approximately $4.23 billion. We determined that there was no goodwill impairment at December 31, 2013. 64-------------------------------------------------------------------------------- Table of Contents Increases in the carrying value of individual reporting units that may be indicated by our impairment tests are not recorded, therefore we may record goodwill impairments in the future, even when the aggregate fair value of our reporting units as a whole may increase. We and our customers continue to operate in an uncertain business environment, with increasing regulatory requirements and only gradual recovery in the economy from recessionary levels. We are closely monitoring our customers and the effect that changes in economic and market conditions have had or may have on them. Certain of our customers have reduced spending in recent years, which we attribute to the negative economic and market conditions, and we anticipate that these negative conditions may continue to affect demand for some of our services in the near-term. We continue to evaluate the impact of the economic environment on our reporting units and the valuation of recorded goodwill. Although we are not aware of circumstances that would lead to a goodwill impairment at a reporting unit currently, circumstances such as a continued market decline, the loss of a major customer or other factors could impact the valuation of goodwill in the future. Our goodwill is included in multiple reporting units. Due to the cyclical nature of our business, and the other factors described under "Risk Factors" in Item 1A, the profitability of our individual reporting units may suffer from downturns in customer demand and other factors. These factors may have a disproportionate impact on the individual reporting units as compared to Quanta as a whole and might adversely affect such fair value of individual reporting units. If material adverse conditions occur that impact our reporting units, our future estimates of fair value may not support the carrying amount of one or more of our reporting units, and the related goodwill would need to be written down to an amount considered recoverable. Valuation of Other Intangibles. Our intangible assets include customer relationships, backlog, trade names, non-compete agreements, patented rights and developed technology, all subject to amortization, along with other intangible assets not subject to amortization. The value of customer relationships is estimated as of the date a business is acquired based on the value-in-use concept utilizing the income approach, specifically the excess earnings method. The excess earnings analysis consists of discounting to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals, the importance or lack thereof of existing customer relationships to our business plan, income taxes and required rates of return. We value backlog for acquired businesses as of the acquisition date based upon the contractual nature of the backlog within each service line, using the income approach to discount back to present value the cash flows attributable to the backlog. The value of trade names is estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset. We amortize intangible assets based upon the estimated consumption of the economic benefits of each intangible asset or on a straight-line basis if the pattern of economic benefits consumption cannot otherwise be reliably estimated. Intangible assets subject to amortization are reviewed for impairment and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for interim impairment testing of intangible assets. An impairment loss would be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Valuation of Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be realizable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if an impairment of such asset is necessary. This requires us to make long-term forecasts of the future revenues and costs related to the assets subject to review. Forecasts require assumptions about demand for our products and future market conditions. Estimating future cash flows requires significant judgment, and our projections may vary from the cash flows eventually realized. Future events and unanticipated changes to assumptions could require a provision for impairment in a future period. The effect of any impairment would be 65 -------------------------------------------------------------------------------- Table of Contents to expense the difference between the fair value of such asset and its carrying value. Such expense would be reflected in income (loss) from operations in the consolidated statements of operations. In addition, we estimate the useful lives of our long-lived assets and other intangibles and periodically review these estimates to determine whether these lives are appropriate. Current and Long-term Accounts and Notes Receivable and Allowance for Doubtful Accounts. We provide an allowance for doubtful accounts when collection of an account or note receivable is considered doubtful, and receivables are written off against the allowance when deemed uncollectible. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, our customer's access to capital, our customer's willingness or ability to pay, general economic and market conditions and the ongoing relationship with the customer. We consider accounts receivable delinquent after 30 days but do not generally include delinquent accounts in our analysis of the allowance for doubtful accounts unless the accounts receivable have been outstanding for at least 90 days. In addition to balances that have been outstanding for 90 days or more, we also include accounts receivable balances that relate to customers in bankruptcy or with other known difficulties in our analysis of the allowance for doubtful accounts. Material changes in our customers' business or cash flows, which may be impacted by negative economic and market conditions, could affect our ability to collect amounts due from them. Should customers experience financial difficulties or file for bankruptcy, or should anticipated recoveries relating to receivables in existing bankruptcies or other workout situations fail to materialize, we could experience reduced cash flows and losses in excess of current allowances provided. Income Taxes. We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. The estimation of required valuation allowances includes estimates of future taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable income and tax planning strategies in making this assessment. If actual future taxable income differs from our estimates, we may not realize deferred tax assets to the extent estimated. We record reserves for income taxes related to certain tax positions in those instances where we consider it more likely than not that additional taxes may be due in excess of amounts reflected on income tax returns filed. When recording reserves for expected tax consequences of uncertain positions, we assume that taxing authorities have full knowledge of the position and all relevant facts. We continually review exposure to additional tax obligations, and as further information is known or events occur, changes in tax reserves may be recorded. To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and are classified in the provision for income taxes. The income tax laws and regulations are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our tax positions that could materially affect amounts recognized in our future consolidated balance sheets, statements of operations and comprehensive income. Outlook We currently see growth opportunities across all the industries we serve. However, we and our customers continue to operate in a somewhat uncertain business environment, with gradual improvement in the economy yet continuing uncertainty in the marketplace. Our customers are also facing stringent regulatory and environmental requirements as they implement projects to enhance and expand their infrastructure. These 66-------------------------------------------------------------------------------- Table of Contents economic and regulatory factors have negatively affected our results in the past and may continue to create some uncertainty as to the timing of anticipated customer spending. We believe that our financial and operational strengths will enable us to manage these challenges and uncertainties, and we remain optimistic about our near-term and long-term opportunities. Electric Power Infrastructure Services Segment The North American electric grid is aging and requires significant upgrades and maintenance to meet current and future demands for power. Over the past several years, many utilities across North America have begun to implement plans to improve their transmission systems in order to improve reliability and reduce congestion. Among other things, these activities include new construction, structure change-outs, line upgrades and maintenance projects on many transmission systems. In addition, state renewable portfolio standards, which set required or voluntary standards for how much power is to be generated from renewable energy sources, can result in the need for additional transmission lines and substations to transport the power from these facilities, which are often in remote locations, to demand centers. Other factors, such as the reliability standards issued by the North American Electric Reliability Corporation (NERC) and other regulatory actions, are also driving transmission system upgrades and expansions. We believe these factors create significant opportunities for our transmission infrastructure services. We believe that utilities remain committed to the expansion and strengthening of their transmission infrastructure with planning, engineering and funding for many of their projects in place. The regulatory and environmental permitting processes remain a hurdle for some proposed transmission and renewable energy projects, and these factors continue to create uncertainty as to timing of this spending. The timing and scope of projects can also be affected by other factors such as siting, right-of-way and unfavorable economic and market conditions. We anticipate many of these issues to be overcome and spending on transmission projects to be active over the next few years. We currently have a number of these projects underway, and we expect this segment's backlog to remain strong throughout 2014. Several existing, pending or proposed legislative or regulatory actions may also positively affect demand for the services provided by this segment in the long term, particularly in connection with electric power infrastructure and renewable energy spending. For example, legislative or regulatory action that alleviates some of the siting and right-of-way challenges that impact transmission projects would potentially accelerate future transmission line construction. We also anticipate increased infrastructure spending by our customers as a result of legislation requiring the power industry to meet federal reliability standards for its transmission and distribution systems and providing incentives to the industry to invest in and improve maintenance on its systems. Developments in environmental regulations concerning fossil fuel power generation plants are expected to result in the need to retire or upgrade older coal-fired generation facilities to comply with new environmental and emission rules. Much of the electricity previously generated from retired coal-fired generation facilities is expected to be replaced over the coming years by newly developed natural gas-fired generation facilities. We believe this "coal to gas" dynamic will require old transmission lines to be updated, rebuilt or replaced with higher voltage transmission infrastructure as well as the construction of new transmission infrastructure to connect new natural gas-fired generation facilities to the grid. The Federal Energy Regulatory Commission (FERC) issued FERC Order No. 1000 to promote more efficient and cost-effective development of new transmission facilities. The order establishes transmission planning and cost allocation requirements intended to facilitate multi-state electric transmission lines and to encourage competition by removing, under certain conditions, federal rights of first refusal from FERC-approved tariffs and agreements. We believe FERC Order No. 1000, which was affirmed by FERC in May 2012 with the issuance of FERC Order No. 1000-A, will have a favorable impact on electric transmission line development, although the impact of its implementation is not expected to occur for several years. We benefited from increases in distribution spending throughout 2011, 2012 and 2013, despite continued economic and political uncertainties. However, as a result of reduced spending by utilities on their distribution 67-------------------------------------------------------------------------------- Table of Contents systems during 2009 and 2010, combined with the need to meet reliability requirements, we believe there is an ongoing need for utilities to resume sustained investment in their distribution systems in order to properly maintain their systems. In addition, a number of utilities are implementing system upgrades or "hardening" programs in response to severe weather events that have occurred over the past few years, which is also increasing distribution investment in some regions of the United States. We also anticipate that utilities will continue to integrate "smart grid" technologies into their transmission and distribution systems over time to improve grid management and create efficiencies. Development and installation of smart grid technologies and other energy efficiency initiatives have benefited from stimulus funding under the ARRA, as well as the implementation of grid management initiatives by utilities and the desire by consumers for more efficient energy use. The economic feasibility of renewable energy projects, and therefore, the attractiveness of investment in the projects, may depend on the availability of tax incentive programs or the ability of the project developer to take advantage of such incentives, and there is no assurance that the government will extend existing tax incentives or create new incentive or funding programs in the future. Although we see additional developments of renewable energy projects, primarily utility-scale solar facilities which could create increased demand for our engineering, procurement and construction services, we believe there is some uncertainty with these projects advancing towards award and construction. Several industry and market trends are also prompting customers in the electric power industry to seek outsourcing partners. These trends include an aging utility workforce, increasing costs and labor availability issues. We believe the economic recession in the United States slowed employee retirements by many utility workers, causing the growth trend in outsourcing to temporarily pause. As the economy and financial markets continue to recover, we believe utility employee retirements could return to normal levels, which should result in an increase in outsourcing opportunities. The need to ensure available labor resources for larger projects also drives strategic relationships with customers. Oil and Gas Infrastructure Services Segment We see growth opportunities in our oil and gas infrastructure operations, primarily in the installation and maintenance of mainline pipe, gathering systems, production systems and related facilities, as well as pipeline integrity and specialty services such as horizontal directional drilling. We believe opportunities for this segment exist as a result of the increase in the ongoing development of unconventional shale formations in North America that produce natural gas, natural gas liquids and/or crude oil, as well as the development of Canadian oil sands and the development of coal seam gas and unconventional shale formations in Australia, which will require the construction of mainline pipe infrastructure to connect production with demand centers and the development of midstream gathering infrastructure within areas of production. We also believe the goals of clean energy and energy independence for North America, as well as more stringent environmental regulations, will make abundant, low-cost natural gas the fuel of choice versus coal for power generation over time, creating the need for continued investment in natural gas infrastructure. We believe our position as a leading provider of mainline pipe and gathering system infrastructure services in North America and Australia will allow us to capitalize on these opportunities. The oil and gas industry is cyclical and subject to volatility as a result of fluctuations in natural gas, natural gas liquids and oil prices. In the past, sustained periods of low prices for these products have negatively impacted the development of these natural resources and related infrastructure. In addition, environmental scrutiny, stringent regulatory requirements and cumbersome permitting processes have caused delays in some mainline pipe projects during the past several years. These dynamics resulted in below average mainline pipe construction opportunities for us and the industry in 2011 and 2012. The lack of mainline pipe opportunities in 2011 and 2012 negatively impacted our Oil and Gas Infrastructure Services segment margins, in part as a result of our inability to adequately cover certain fixed costs. Margins for mainline pipe projects are also subject to significant performance risk, which can arise from 68 -------------------------------------------------------------------------------- Table of Contents adverse weather conditions, challenging geography, customer decisions and crew productivity. Our specific opportunities in the mainline pipe business are sometimes difficult to predict because of the seasonality of the bidding and construction cycles within the industry. A number of large mainline pipe projects are proposed from the Canadian oil sands and U.S. shale developments to refineries and other demand centers. Many of these projects are still developing, though several mainline projects have been awarded to us and various pipeline construction contractors. While there is risk that some of these projects will not occur or could be delayed, we are encouraged by these proposed mainline pipe development plans and the progression of some mainline projects being awarded to contractors, which could create an improved and favorable mainline pipe market in 2014 for us and the industry in North America. We also believe there are significant mainline pipeline opportunities in Australia driven by the production of coal seam gas for LNG export. A number of LNG export facilities are under construction and proposed for development, and pipelines and related infrastructure will be required to serve these facilities. In addition, unconventional shale plays in Australia constitute, according to the U.S. Energy Information Administration, the seventh largest potential natural gas and sixth largest potential oil resources in the world. Development of Australia's unconventional shale plays are in the early stages and will require construction of significant gathering, mainline and related infrastructure. We believe we will gain more visibility into these evolving dynamics during 2014. Our customers continue to invest in infrastructure needed to support the development of unconventional shales, particularly liquid rich formations. We continue to increase our presence in areas where unconventional shale formations are located, to continue to position us to successfully pursue projects associated with midstream gathering infrastructure development. Demand for pipeline services to support shale gathering infrastructure continues to be active, and we believe it will remain so into the foreseeable future. We have also expanded our service offerings in this segment through several recent acquisitions, including an acquisition in Australia, which has different market drivers and seasonality as compared to North America. In addition, recent acquisitions of companies that provide pipeline logistics services to the natural gas and oil industry in the United States and specialty services to the offshore oil and gas industry further enhance the segment's service offerings, customer base and end markets. We also see growth potential in some of our other pipeline services. The U.S. Department of Transportation has implemented significant regulatory legislation through the Pipeline and Hazardous Materials Safety Administration relating to pipeline integrity requirements that we expect will increase the demand for our pipeline integrity, rehabilitation and replacement services over the long-term. As pipeline integrity testing requirements increase in stringency and frequency, we believe more information will be gathered about the condition of the nation's pipeline infrastructure and will result in an increase in spending by our customers on pipeline integrity initiatives. We also operate an engineering, research and development business that develops and owns pipeline inspection tools, enhancing our pipeline integrity offerings. We believe that our ability to offer a complete pipeline integrity turnkey solution to pipeline companies and gas utilities provides us an advantageous position in providing these services to our customers. We are also experiencing an increase in demand for our natural gas distribution services as a result of continuing improvement in economic conditions and lower natural gas prices. We believe there are meaningful opportunities for us to penetrate the offshore and inland water energy markets in providing various infrastructure design, installation and maintenance services primarily to the Gulf of Mexico region but also in select international markets. The offshore service opportunities we see are very similar to what we perform onshore in this segment, and several of our existing onshore customers who also have offshore assets have expressed interest in our ability to provide offshore services. Demand for offshore energy infrastructure services is similar to that on land, including the need for engineering, construction and maintenance services for new and existing offshore exploration and production platforms. In addition, the majority of the thousands of miles of marine based pipelines and related production facilities are approaching or are beyond the end of their useful lives. We see this as an opportunity to leverage our onshore pipeline integrity services and 69-------------------------------------------------------------------------------- Table of Contents technology to the offshore market's aging infrastructure. Further, new regulations and the more stringent enforcement of existing regulations administered by the Bureau of Safety and Environmental Enforcement should create opportunities for offshore energy infrastructure construction, repair and replacement services. Overall, we are optimistic about this segment's operations going forward. We continue to believe that mainline pipe opportunities can provide strong profitability, although these projects and the profits they generate are often subject to more cyclicality than our other service offerings. We have also taken steps to diversify our operations in this segment through other services, such as pipeline integrity, pipeline logistics, and offshore specialty services. We believe these measures, together with the potential for mainline pipe opportunities, will position us for profitable growth in this segment over the long-term. Fiber Optic Licensing and Other Segment Our Fiber Optic Licensing and Other segment is experiencing growth primarily through geographic expansion, with a focus on markets where secure high-speed networks are important, such as markets where enterprises, communications carriers, educational, financial services and healthcare institutions are prevalent. We continue to see opportunities for growth both in the markets we currently serve and new markets. The education market, which comprises a significant portion of this segment's revenue, has been negatively impacted over the last few years by challenging economic conditions and budgetary constraints. These constraints eased through the end of 2012, and we currently see spending patterns providing renewed opportunities for growth. However, expanding the markets we serve continues to create competitive pressure which may impact this segment's prospects for future growth. We are also expanding our service offerings to provide lit services. For lit services, we procure and own the electronic equipment necessary to make the fiber optic network operational and provide network management services to customers. The addressable market opportunity for lit services is larger than the dark fiber services market, and we believe providing lit services should enable us to leverage the fiber optic network capacity in our existing and future fiber networks. We have been investing in the necessary people and equipment needed to expand and grow our lit services and believe lit services will provide attractive growth opportunities. Our Fiber Optic Licensing and Other segment typically generates higher margins than our other operations, but we can give no assurance that the Fiber Optic Licensing and Other segment margins will continue at historical levels. Additionally, we anticipate the need for continued capital expenditures to support the build-out of our networks and growth of this business. The Fiber Optic Licensing and Other segment also provides various telecommunications infrastructure services on a limited and ancillary basis, primarily to our customers in the electric power industry. Due to the disposition of our telecommunications subsidiaries, telecommunications services are no longer a strategic priority for us. We will continue to provide these services to utility customers on an as needed basis. However, we believe that expected increases in this segment's revenues associated with fiber optic licensing services could be offset by decreases in other telecommunications infrastructure service revenues. Conclusion We continue to see growth opportunities in all of the industry segments we serve, despite continuing challenges from restrictive regulatory requirements and uncertain economic conditions. We are benefiting from utilities' increased spending on projects to upgrade and expand their electric power transmission infrastructure to improve system reliability and to deliver renewable electricity from new generation sources to demand centers. Favorable industry legislation is also creating incentives and a positive environment for utilities to invest in their electrical infrastructure, in particular for transmission infrastructure. Additional environmental regulations concerning fossil fuel power generation emissions create opportunities for transmission lines to be updated, rebuilt or replaced due to "coal to gas" facility replacements. We also expect utilities to outsource more of their work to companies like us, due in part to their aging workforce issues. We believe that we remain the partner of choice for many utilities in need of broad infrastructure expertise, specialty equipment and workforce resources. 70-------------------------------------------------------------------------------- Table of Contents We believe that we are one of the largest full-service providers of oil and gas infrastructure services in North America, which positions us to leverage opportunities driven by the development and production of resources from North American unconventional shale developments, the Canadian oil sands and coal seam gas and unconventional shale formations in Australia. Development activity in liquid-rich shale areas in North America is strong, increasing the need for gathering system infrastructure, and we are seeing encouraging indications that the increases in mainline pipe project activity in 2013 could continue in 2014. We also believe that our strategy to pursue midstream gathering system opportunities in liquid-rich unconventional shales in the U.S., as well as the anticipated increase in demand for our pipeline integrity, rehabilitation and replacement services from pipeline integrity initiatives, and other services in adjacent markets that we have gained through recent acquisitions, will create attractive growth potential for us and also further diversify the services provided by our Oil and Gas Infrastructure Services segment. Our electric distribution and gas distribution services were both significantly affected by the uncertain economic conditions that existed during the recent recession. Demand for our electric distribution services has increased over the past three years as the economy has stabilized and spending on maintenance to improve reliability has returned. We are optimistic that continued implementation of electric distribution reliability programs and the potential for improvement in the housing market will facilitate moderate growth in demand for our electric distribution services. Gas distribution spending has been driven primarily by improving economic conditions and the lower cost of natural gas. Competitive pricing environments, project delays and effects from restrictive regulatory requirements have negatively impacted our margins in the past and could affect our margins in the future. Additionally, margins may be negatively impacted on a quarterly basis due to adverse weather conditions, timing of project starts or completions and other factors as described in "Understanding Margins" above. We continue to focus on the elements of the business we can control, including costs, the margins we accept on projects, collecting receivables, ensuring quality service, rightsizing initiatives as needed to match the markets we serve, and safely executing on the projects we are awarded. Capital expenditures for 2014 are expected to be between $300 million to $325 million, of which approximately $50 million to $60 million of these expenditures are targeted for fiber optic network expansion, with the majority of the remaining expenditures for operating equipment. We expect 2014 capital expenditures to be funded substantially through internal cash flows, cash on hand and borrowings under our credit facility. We continue to evaluate potential strategic acquisitions and similar investments to broaden our customer base, expand our geographic area of operation, grow our portfolio of services and increase opportunities across our operations. We believe that additional attractive acquisition candidates exist primarily as a result of the highly fragmented nature of the industry, the inability of many companies to expand and modernize due to capital constraints, and the desire of owners for liquidity. We also believe that our financial strength and experienced management team are attractive to acquisition candidates. Certain international regions present significant opportunities for growth over time across many of our operations. We are evaluating ways in which we can strategically apply our expertise to strengthen infrastructure in various foreign countries where infrastructure enhancements are increasingly important. For example, we are actively pursuing opportunities in growth markets where we can leverage our technology or proprietary work methods, such as our energized services, to establish a presence in these markets. We believe that we are well-positioned to capitalize upon opportunities and trends in the industries we serve because of our proven full-service operations with broad geographic reach, financial strength and technical expertise. Additionally, we believe that these industry opportunities and trends will increase the demand for our services over the long-term, although the actual timing, magnitude and impact of these opportunities and trends on our operating results and financial position is difficult to predict. 71-------------------------------------------------------------------------------- Table of Contents Uncertainty of Forward-Looking Statements and Information This Annual Report on Form 10-K includes "forward-looking statements" reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended to qualify for the "safe harbor" from liability established by the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "project," "forecast," "may," "will," "should," "could," "expect," "believe," "plan," "intend" and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following: • Projected revenues, earnings per share, margins, capital expenditures, and other projections of operating or financial results; • Expectations regarding our business outlook, growth or opportunities in particular markets; • The expected value of contracts or intended contracts with customers; • The scope, services, term and results of any projects awarded or expected to be awarded for services to be provided by us; • The impact of renewable energy initiatives, including mandated state renewable portfolio standards, the economic stimulus package and other existing or potential energy legislation; • Potential opportunities that may be indicated by bidding activity or similar discussions with customers; • The potential benefits from acquisitions; • The outcome of pending or threatened litigation; • The business plans or financial condition of our customers; • Our plans and strategies; and • The current economic and regulatory conditions and trends in the industries we serve. These forward-looking statements are not guarantees of future performance and involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or beyond our control. These forward-looking statements reflect our beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecasted by our forward-looking statements and that any or all of our forward-looking statements may turn out to be wrong. Those statements can be affected by inaccurate assumptions and by known or unknown risks and uncertainties, including the following: • The effects of industry, economic or political conditions outside our control; • Quarterly variations in our operating results; • Adverse economic and financial conditions, including weakness in the capital markets; • Trends and growth opportunities in relevant markets; • Delays, reductions in scope or cancellations of anticipated, pending or existing projects, including as a result of weather, regulatory or environmental processes, project performance issues, or our customers' capital constraints; • The successful negotiation, execution, performance and completion of anticipated, pending and existing contracts, including the ability to obtain awards of projects on which we bid or are otherwise discussing with customers; • Our ability to attract skilled labor and retain key personnel and qualified employees; • The potential shortage of skilled employees; 72 -------------------------------------------------------------------------------- Table of Contents • Our dependence on fixed price contracts and the potential to incur losses with respect to these contracts; • Estimates relating to our use of percentage-of-completion accounting; • Adverse impacts from weather; • Our ability to generate internal growth; • Competition in our business, including our ability to effectively compete for new projects and market share; • Potential failure of renewable energy initiatives, the economic stimulus package or other existing or potential legislative actions to result in increased demand for our services; • Liabilities associated with multi-employer pension plans, including underfunding of liabilities and termination or withdrawal liabilities; • The possibility of an increase in the liability associated with our withdrawal from a multi-employer pension plan; • Liabilities for claims that are self-insured or not insured; • Unexpected costs or liabilities that may arise from lawsuits or indemnity claims asserted against us; • Risks relating to the potential unavailability or cancellation of third party insurance, the exclusion of coverage for certain losses, and potential increases in premiums for coverage deemed beneficial to us; • Cancellation provisions within our contracts and the risk that contracts expire and are not renewed or are replaced on less favorable terms; • Loss of customers with whom we have long-standing or significant relationships; • The potential that participation in joint ventures exposes us to liability and/or harm to our reputation for acts or omissions by our partners; • Our inability or failure to comply with the terms of our contracts, which may result in unexcused delays, warranty claims, failure to meet performance guarantees, damages or contract terminations; • The effect of natural gas, natural gas liquids and oil prices on our operations and growth opportunities; • The future development of natural resources in shale areas; • The inability of our customers to pay for services; • The failure to recover on payment claims against project owners or to obtain adequate compensation for customer-requested change orders; • The failure of our customers to comply with regulatory requirements applicable to their projects, including those related to awards of stimulus funds, which may result in project delays and cancellations; • Budgetary or other constraints that may reduce or eliminate tax incentives for or government funding of projects, including stimulus projects, which may result in project delays or cancellations; • Estimates and assumptions in determining our financial results and backlog; • Our ability to realize our backlog; • Risks associated with operating in international markets, including instability of foreign governments, currency fluctuations, tax and investment strategies and compliance with the laws of foreign jurisdictions, as well as the U.S. Foreign Corrupt Practices Act and other applicable anti-bribery and anti-corruption laws; 73 -------------------------------------------------------------------------------- Table of Contents • Our ability to successfully identify, complete, integrate and realize synergies from acquisitions; • The potential adverse impact resulting from uncertainty surrounding acquisitions, including the ability to retain key personnel from the acquired businesses and the potential increase in risks already existing in our operations; • The adverse impact of impairments of goodwill and other intangible assets or investments; • Our growth outpacing our decentralized management and infrastructure; • Requirements relating to governmental regulation and changes thereto; • Inability to enforce our intellectual property rights or the obsolescence of such rights; • Risks related to the implementation of an information technology solution; • The impact of our unionized workforce on our operations, including labor stoppages or interruptions due to strikes or lockouts; • Potential liabilities relating to occupational health and safety matters; • Our dependence on suppliers, subcontractors and equipment manufacturers; • Risks associated with our fiber optic licensing business, including regulatory and tax changes and the potential inability to realize a return on our capital investments; • Beliefs and assumptions about the collectability of receivables; • The cost of borrowing, availability of credit, fluctuations in the price and volume of our common stock, debt covenant compliance, interest rate fluctuations and other factors affecting our financing and investing activities; • The ability to access sufficient funding to finance desired growth and operations; • Our ability to obtain performance bonds; • Potential exposure to environmental liabilities; • Our ability to continue to meet the requirements of the Sarbanes-Oxley Act of 2002; • Rapid technological and structural changes that could reduce the demand for our services; • The impact of increased healthcare costs arising from healthcare reform legislation; and • The other risks and uncertainties as are described elsewhere herein and under Item 1A. "Risk Factors" in this report on Form 10-K and as may be detailed from time to time in our other public filings with the SEC. All of our 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 or that are otherwise included in this report. In addition, we do not undertake and expressly disclaim any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise. 74-------------------------------------------------------------------------------- Table of Contents |