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13 Mar 2006
MOODY'S AFFIRMS THE RATINGS OF QUANTA SERVICES, INC. AND CHANGES THE OUTLOOK TO POSITIVE
Approximately $185 million of Debt Securities Affected
New York, March 13, 2006 -- Moody's Investors Service has affirmed the ratings of Quanta Services,
Inc. ("Quanta") and changed the ratings outlook to
positive from negative.
The following ratings for Quanta Services, Inc. have been
$35 million Revolving Credit Facility due 2007, affirmed
$150 million ($147 million current amount outstanding) Senior
Secured Term Loan due 2008, affirmed at Ba3;
Corporate Family Rating, affirmed at B1.
The ratings outlook has been changed to positive from negative.
The change in the outlook to positive from negative reflects the company's
improving profitability and leverage metrics. Quanta's EBITDA
margin in 2005 increased to approximately 7% from 4.5%
in 2004 and the company's cost of goods sold as a percentage of
sales in 2005 declined to approximately 86% from 89% for
the same period a year earlier. Furthermore, there has been
a significant improvement in Quanta's leverage metrics; namely,
in 2005 debt to EBITDA declined to 3.4 times from 6.4 times
a year ago and debt as a percentage of revenues declined to approximately
24% from 29% the previous year.
Quanta's ratings benefit from the company's strong competitive
position, anticipated industry expansion as reflected by Quanta's
increasing backlog and diversified customer base. Quanta is one
of the largest providers of specialty contracting services in the electric
power, gas, telecommunications, cable television,
and specialty services industries. The company's backlog
in 2005 (defined as work to be completed during the next 12 months) increased
by 21% to $1.3 billion from $1.1 billion
in 2004. Furthermore, Quanta should benefit from the Energy
Policy Act of 2005, increased outsourcing of the networking services
by the providers of electric power, gas, telecommunications,
and cable television providers, and from the nation's aging
and overloaded infrastructure. In terms of customer concentration,
the company is relatively well diversified with the top 20 customers accounting
for approximately 40% of revenues and its largest customer accounting
for 6% of revenues.
At the same time, Quanta's ratings are constrained by significant
off-balance sheet liabilities, including operating leases,
letters of credit, and surety bonds. In 2005, the company's
rent expense was $64.5 million which translates into a $387
million liability if using Moody's standard 6 times rent multiple
for the industry. Furthermore, as of December 31, 2005,
the company had approximately $143 million in letters of credit
outstanding under the credit facility. Quanta also uses surety
bonds to provide its customers a guarantee that work will be executed
according to the terms and conditions set forth in its contracts.
As of December 31, 2005, the approximate amount of surety
bonds was approximately $577 million. However, Moody's
notes that the total projected liability on a cost-to-complete
basis is projected by the company to be $148 million. The
ratings consider that 44% of Quanta's employees are unionized.
The company is strongly positioned in the current ratings category.
The ratings could be upgraded if the company continues to execute its
current strategy according to Moody's expectations and/or if the
company's free cash flow generation improves above 11% on
a sustainable basis. The ratings could be downgraded and/or the
outlook changed if the company's leverage were to increase above
4.5 times, margins were to weaken, or if its contract
backlog were to decline to under $1 billion. Additionally,
a meaningful reduction in the company's access to surety bonds could
adversely impact the ratings' outlook and/or ratings.
Headquartered in Houston, Texas, Quanta Services, Inc.
is a leading provider of specialized contracting services, offering
end-to-end network solutions to the electric power,
gas, telecommunications, and cable television industries.
Revenues for FYE 2005 were approximately $1.9 billion.
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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