Duke Austin is the CEO and COO of Quanta Services (PWR). Quanta is classified as an E&C company. The E stands for engineering and the C stands for construction. Sometimes you’ll even hear EPC, with stands for engineering, procurement, and construction. There are a lot of EPC companies out there, but Quanta is different from most because the company provides specialty contracting services in the infrastructure space, and a huge portion of the work they do is self-perform. So what do I mean by that – well, here’s an example. Let’s say an electric utility needs to build a thousand mile long transmission line. Once the utility gets approval from the regulator, the utility will ask contractors like Quanta to submit a lump-sum bid to design the transmission line, procure the equipment and materials, and then construct the transmission line – and they do nearly all the work in-house. It’s a huge undertaking that requires a lot of manpower, experience and expertise – and it’s one of the many things that distinguishes it from other EPCs who do a significant amount of subcontracting.
In addition to electric infrastructure, Quanta does the same sort of work for oil and gas companies that need to build pipelines and other related infrastructure to get hydrocarbons from the wellhead to markets. And finally, Quanta has exposure to the 5G build-out that is taking place across the US. The point is, if you’re someone who’s interested in the infrastructure build-out in the US, you should get a lot of information out of this interview. It’s also worth mentioning that Duke and his team have made great strides in reducing the revenue cyclicality in the business. One of the biggest misconceptions about the business is that Quanta’s top-line fluctuates with large project awards. Duke emphasizes the inherent stability of having regulated and deregulated utilities as part of their customer base. Regardless of economic trends, utilities still need to invest in their systems to maintain reliability.
With regard to the company’s financials when this episode was published, Quanta has a market cap of about $5.4B, $73M in cash, and almost $1.6B in debt, which puts the enterprise value at about $7B. I should note that those figures are prior to the recently announced acquisitions Quanta made last week.
If you’re interested in learning more about utilities, you should check out the interviews with Vistra Energy‘s CEO Curt Morgan, NRG Energy‘s CFO Kirk Andrews, Spark Energy‘s CEO Nathan Kroeker, and Pattern Energy Group‘s CEO Mike Garland.
Interview Transcript
Quanta Services Interview Transcript
Participants
Duke Austin, CEO and COO at Quanta Services (PWR)
Nate Abercrombie, The Stock Podcast
Interview Transcript
Nate: Duke Austin, thank you very much for joining The Stock Podcast. I’m excited to talk to you about your background and your business.
Duke: Yeah, good morning. Happy to be here.
Nate: If we could just first start our hearing about your background, anything you’d like to share about your background, how you first started at Quanta, and I know that you have an interesting history in the sense that your dad had a company that you started working for a long time ago, and then it eventually became part of the Quanta family, and I would just love to hear as much as you’d like to share.
Duke: Yeah. You know, native Houstonian, family’s from here, and we had a family business here in town, fourth generation. My great grandad, grandad, dad all worked for a public utility company here in Houston, and eventually my father went in to work for a small, he was the third employee, at a company here in Houston, ended up buying it in the ’80s, so I was always… always grew up in the business and went to the field with him, and went and worked in the fields when I was a kid through the summers and even after that. And, so I knew where I was going out of college, and came back into the family business with my father. You know, we internally grew it. It was about a, let’s call it, seven or $8M company originally, and then we grew it to close to seventy and in 2001 sold it to Quanta. I had a health issue. I had cancer when I was 31, so which is a unique story of three babies in diapers, and we needed a great place to sell our company, and John Colson who founded the company was here in town. We knew him well, and we wanted our people in a good place and knew Quanta was a great fit for ourselves and our people. Perfectly healthy now. I’ve been 16 years out, so which is a great story as well. But, a great place to put your people in a family business. And, the company now is the same company, let’s call it $800M, and so it has quite the growth story as well.
Nate: So, could you tell us just a little bit about Quanta’s genesis story?
Duke: Yeah, sure.
Nate: So, when was the company first established? And, you mentioned the original founder, but if you could just share a little bit of the background there, that’d be helpful.
Duke: Yeah, I mean, Quanta IPO’d in 1997 around 150 million. Really, the genesis around it was is the utilities were consolidating and still are in many ways, and there was smaller contractors, you know, that were in the business regionally, locally, and the utilities would continue to look for larger, more sophisticated ways of contracting. And, John had the fortitude to consolidate the industry a bit with, I think it was four or five founding companies, and IPO. And, I guess the rest is somewhat history. It continued to make acquisitions. I believe the company’s made over 200 acquisitions over time, and one of the success stories of what you would consider a roll up, certainly we’re more mature than that now. But, back then, that was where it started, and it was based around the consolidation of utilities.
Nate: Yeah. And, so could you just talk about what Quanta does?
Duke: Yeah, sure. I mean, at the very core of Quanta, we’re really all about craft skill labor and understanding that labor force, and using that labor force and our ability to execute and cost certainty and layer on top engineering, engineering capabilities, technology, solutions. So, we’ve become more of a solutions provider around utility based infrastructure and energy based infrastructure when we look at it. It’s very similar to a reverse model that you would see to your traditional E&Cs where we lead with construction verse leading with engineering, and it provides cost certainty to our customers, which is what we’re trying to accomplish. So, whether it be telecom, energy services on the downstream markets, we primarily work in the electric markets, not the power plant side. So, typically we would take it from the power plant to the house but not in the house, so kind of anything with a bed in it, we don’t do. So, we would not be in the electric company that would go inside a hotel or a hospital, but anything on the high voltage side we do. And, on the gas side, same thing really. We don’t go down hole. We come out of the well all the way to the downstream markets, and we really don’t build balance of plant downstream. So, large multi-faceted plants we’re not, that’s not us, LNG we’ll do peripherals around it, but not to actually build the LNG plant. Primarily, the craft skill labor around energy, utility, infrastructure.
Nate: Yeah. And, you said that you guys lead with construction as opposed to the back-end engineering. Could you just sort of describe what that means? And, just full disclosure, my wife actually works for AECOM, but I don’t think maybe listeners who are first looking at ENC companies understand exactly what you’re talking about.
Duke: Sure.
Nate: So, could you just explain a little bit more what that means to lead with construction as opposed to back end engineering.
Duke: Yeah, sure. So, primarily when you look at a construction job, you know, a big piece of it will be labor and material. Engineering’s only less than ten percent, so we lead with the labor piece of that project. So, we can lump sum a project. We still perform 85% to 90% of work, so we don’t use subcontractors. So, having that labor force, having the certainty around it, it allows us to tell our customer within… very quickly what we believe the cost will be, and by the way, we’ll stand by it. So, I would say a good portion of our business we have certainty in, and we’re not scared to stand behind the construction risk. Because, that’s what we are. We understand those risks, and we can price them. And, the customer, in the end, they get a good product that they want, that’s bankable, that we can lead and be certain that labor will show up. As you know, the US labor market’s extremely tight. Craft skill labor’s even tighter. You know, we’ll go into it later I’m sure on what we’ve done, but I would say in general, the ability for us to deploy craft skill labor to any job site in the world makes a big difference to our customers. Where, in the past, engineering companies could price subcontracts and things of that nature, but today that’s not a certain thing. Subcontractors may or may not be there for them, and the client is unwilling to take that risk.
Nate: Yeah. Wow. I didn’t realize you guys self-perform on such a larger proportion of the work that you do. That’s impressive.
Duke: Yeah. It’s a big number. I think it’s a misnomer in kind of the company, and why we’re different. I believe if you’ll go to maybe AECOM or Fluor or some of those guys that are still performing construction, you’ll see that it’s much, much less than that. I would… Probably inverse of what I’m saying.
Nate: My wife, just going back to her and AECOM, a portion of the work that she does she deals with a lot of different vendors, but if you have that all in house that makes it a lot easier.
Duke: Yeah, and I think that’s the beauty about Quanta, the balance sheet, the things that we’ve done. I think the vision was always when we consolidated we could handle larger projects, and we just signed the largest project of the company. That’s really starting to come together. It’s taken this long to get there, but we’re here, and we’re starting to see kind of the vision come to pass here as we move into 2020.
Nate: Yeah. So, could you talk about who your customers are? And, you don’t have to name specific names if you can’t or don’t want to, but I’d love to hear just kind of some examples of who your customers are for each of your segments.
Duke: Yeah. So, if you… on the electric side of it would be primarily… we work for 95% of the utilities, such as Florida Power, Southern Company, Duke Energy, CenterPoint Energy, PG&E, Southern Cal Edison, and then we’ll work for municipalities, such as Lower Colorado River Authority, primarily invest around utilities. They can be gas or electric. Many of them are consolidated today, so you could get Atmos Gas that’s not or a CenterPoint Energy that is. So, many of our customers have consolidated, own gas assets, so it allows us on the distribution side of the business, what we call local distribution networks on the gas side, it could be the same customer. We’re working for them both gas and electric, which is really our model. About 60%, 65% of the business is a utility piece to it, whether it’s gas or electric. Then we got the telecom piece of the business, which is Verizon, AT&T, CenturyLink, Comcast carriers that deploy fiber and move data across their systems. So, that’s a big piece of the telecom business. On the gas side, we go anywhere from the Valeros, Exxon, Gulf Downstream, Exxon Chevron downstream, over into large pipe carries such as TransCanada, Enbridge, anyone that’s moving molecules across the systems, that’s where we’re at from that standpoint. So, we’ll go all across the board.
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