Hi, good morning, everyone. My name is Chad Dillard. I'm the lead analyst here at Bernstein covering the machinery sector and the electrical infrastructure companies. I'm really pleased to have Quanta Services here, who is a leading electrical infrastructure solutions provider. Joining me from the company is Duke Austin, CEO, and Jayshree Desai, CFO. If you have any questions during this fireside chat, there is a link somewhere around here where you can actually plug in your questions via Pigeonhole, and I'm more than happy to read them off, and we'll get your questions answered. We will begin with a brief prepared remark from Duke, and then we'll jump right into questions. Duke, over to you.
Yeah, thanks. Thanks for having us, and I appreciate everyone being here. Quanta, in general, is a solutions provider to three addressable markets, which are utility infrastructure, renewable infrastructure, and then the technology infrastructure. Really providing solutions around craft skilled labor at the core. We've bolted on engineering and technology and other things to really provide solutions. We do have some vertical supply chain initiatives that we have, but really around the pull-through through those solutions that address those markets. Markets are growing, they're converging, and we see that the nucleus of what I consider one of the biggest builds of infrastructure that we've seen. I'm really, really excited to be here to talk about the company and kind of tell you guys where we're going. Thank you for having us.
Great. Okay, Duke, first question for you. You have talked about Quanta as being evolving from an electrical contractor to an electrical infrastructure solutions provider. Why is owning more of the electrical supply chain a better way to do business for Quanta and its customers? I would love to get just any anecdotes on how this is being received by your customers.
Yeah, I mean, I think the companies that we've acquired or how we think about it is independently. When you acquire a company, typically they're a contractor, really try to stay not commoditized, but virtually commoditized as a contractor. When you think about a solution, the way I think about it, you're putting multiple companies together, providing multiple things when you're collaborating with a client to provide that solution that they're after. Really a good example, when we look at SunZia as a project that we built, it was putting wind, our transmission capabilities, all of our permitting, all of our front-end solutions towards one of the larger infrastructure projects in the country, and providing an interim key solution. I think as we see it before COVID, things like that, we could see supply chain constraints.
We acquired transformer capabilities there because we felt like the industry was necessary. So U.S.-based transformers, we've continued to lean into that. And really for the pull-through against substations in our own work, not really to be a manufacturer, we have invested, we'll continue to invest, but I wouldn't consider us a manufacturer. We're really that solution that the client's looking for, and not only our electric utility clients, but it's also our technology. Technology's buying transformers. As we sit and we talk to them about data centers, we talk to them about how the interconnections, it's just a holistic view of the markets that we see where we're working with the utilities and what I would consider technology renewables as we're backing up the grid for that overall solution. When you think about a data center, really the constraint is power.
We sit in the middle of that. We obviously want to build as much as we can of the data centers. One day you're talking to a technology company, utility, and a renewable customer the same day, but for some reason they can't connect. We are really in the middle of that trying to connect those things and provide those solutions that really are impediments to what I consider that solution about going forward. You hear a lot around constraints of power, getting in the queue. We do a lot of planning. Really on the front side of the business, trying to get to the customer, listen to what they're saying, and really be collaborative at the customer level, at the highest level, so we can see farther out and really talk about the company in a multi-year, multi-decade type situation at this point.
How does that change your addressable market? And then how do you think about the shift in the risk profile now that you're potentially doing the full turnkey project?
Yeah, I mean, I think a lot of, I would say the majority of our work's negotiated. When you put yourself in a position where you're talking about time, typically we have, like I said, three addressable markets, two big markets. Utility capital is around $250 billion-$300 billion. Your technology capital is around $200 billion-$300 billion, somewhere in there of what they're spending on the addressable markets that we're in. Let's just call it $200 billion. And growing at the technology and then your renewables and generation backing that up. So those three markets are large in nature, so we sit right in the middle of those markets and really try to address them. As they come together, Chad, I think that's important.
Independently, you may see us building a transmission line to feed a data center, or you may see us building a data center substation and a transmission line. I think our ability to really work with the client on what they're trying to accomplish early and address those markets is really making the company grow. As we look at service lines, you can see it. We're really craft-centric. When I say that, four generations in the business, know the craft business, understand electricians, line workers. It doesn't matter what craft it is. We self-perform 85%, which I think is really critical to your question because difference in the past or with others, they don't know their labor. You can say, "Yeah, I'm going to show up with 5,000 people," but who are they? We know exactly who we're showing up with on any given day.
We're looking at the work. We're looking at it. So we're able to understand cost on time, on budget. I really feel like we were resilient in markets and have not taken the risk of EPC lump sum, where there's some kind of commodity risk or output risk. I've been there in the past. I've seen it. Obviously, a decade ago, we're in the middle of those kind of builds. As it sits today, look, linear construction, the things that we do best, generation, it's really a collaborative effort with the client to look at total cost and drive the total cost down versus the risk and less risk. Sometimes you give up a little margin for less risk, but typically, I feel like we're trying to hit singles and doubles, and that's how the company's built, and it's built around craft and our craft.
Actually, yeah, speaking of craft, it's pretty well understood that Quanta was ahead of the curve when it comes to setting up craft labor and the training. Where to from here? Is there anything different that you need to do or more you need to do to further enhance that labor strategy?
I mean, I think we're always looking. The company's throwing a considerable amount of free cash. We look at three ways to deploy it. As we see, when I see great companies, great family businesses that we've known a long time, such as a Cupertino or a Blattner or others, we don't pass those up. We lean into them. We believe that the right management teams, the right culture, the way that we look at the markets, if they fit with us and where we're going and try to provide those solutions, the more that we can provide in a craft to those addressable markets, the larger the company can, the farther we can go. Really trying to leverage supply chains and the things that we can do in a centralized way to create that overall solution is really important.
Really, at the craft and the service lines and multiple crafts, like I said before, it does not matter. You could see us in one day we are putting gas distribution in, pipeline, transmission. So many ways that we can lean into craft, but philosophically, we think the same. Everyone thinks the same. The way we treat our people, I think, is really, really important for us. We have had colleges. We start early. We built colleges out a decade ago, started building training centers, all the things that we need to do to lean in. I mean, I know we are hearing a lot about Pell Grants and things like that. We do not need Pell Grants. We are, what I consider, we are taking them out of the military. We are bringing kids in. We are training, training, training, training.
Like I always say, if you want to be a surgeon of line work, then you want to come to us. If you do not care, maybe it is not us, but we want to train up, and we want to train where someone from the field can take my job or vice versa, someone from college can go into the field and come up the same way. We are really trying to work at that craft and lean into it and making sure that we can address the markets that are in front of us.
Moving on to the demand part of the equation. Investors have been very focused on data centers and AI as the main demand drivers for electricity. That is only part of the picture. Can you help us fill in the rest of what is driving load growth, what is needed from a grid infrastructure perspective, and based on your conversations from some of the largest utilities and renewable developers, and just ultimately, by how much does the grid need to grow to support this growth?
Yeah, I mean, I think when we look at it, knowing a lot about it generationally, transmission is the cheapest form of generation. The more transmission we can build, the more flexible the system becomes, much like a highway system. I know we talk a lot about, well, it's only about 60% utilized, things like that. I look at it, there's a 24-lane highway in Houston, I've said this before. If you took eight lanes, yeah, it could happen, but you would back all the way up to San Antonio and take about 10 hours to get into Houston. It's the same thing, congestion. You're building for peaks at times, and you need the transmission flexibility to move load. That's a fallacy to think you don't need. I think the grid could really double generation for sure.
What we see going out, call it 20 years or so, I think somewhere in there. In general, I see a great demand. Some of it is data center driven, some of it is onshoring, some of it is just growth. I mean, we had the appliances, and we made a lot of headway there. We do have battery vehicles. Probably I would say that slowed. It is slower than kind of how I thought about it, but I would say data centers and everything else has exceeded that demand. I think we can see out a decade or more of really kind of good builds, growth. I know sometimes these articles and big jobs, monuments, I will call them, they take the headlines, but underneath is just solid growth and just a very, very paced infrastructure build.
You can look at our capital on utility capital, or you can look at technology capital and see that growth coming. We can't meet demand today. I mean, if you look at turbines, they're out, I don't know, five years, I guess, is the average. Someone else would know better than me, but at least call it five years in turbines. When you look at gas being out that long, you have to come in with the renewables and things that you can, batteries, things that you can do today. That is really the angst, is to go faster in AI, push the data centers, push onshoring. You can't do that without generation and transmission.
I continue to believe you'll see significant amounts of transmission built as well as generation behind it, lots of renewables, probably solar batteries for the time being, some wind, and you'll get some gas generation built in here for really what I consider to probably double the load of the system.
I want to go back to that comment about 60% utilization. What is it? Are the transmission lines just in the wrong place, or is there something else going on? Why cannot we just go from 60% and let's just call it 80% without building more physical infrastructure?
Yeah, I mean, because it loads up, a line will load. Some of them are in the wrong places. That is a problem. The other part is you cannot load them all day. At times, they are 100%. On the average, they are 60%. Never 100%, but call it 90%. Sometimes they are at 60%. The average, it makes good headlines to say it is only utilized 60%. I venture to say if you go out early in the morning at 8:30 A.M. in New York, it is pretty crowded on the street. You go out at 3:00 A.M., and it is not very crowded. Why is the street only 50% loaded? It is the same scenario on a line. I think you will hear a lot of dialogue around it, and it is just wrong. I do not know how to say it any other way. It is wrong to think 60%.
60%, it's full when it needs to be. You have to build more line and more infrastructure in order to meet the demand. Some of it's point-to-point demand, like a data center, yes. Look, the more load you have, eventually you'll create MPV. We have not built a line in this country that is not MPV positive to the ratepayer. We haven't. It's a fallacy to think we're building line out there in the world or in North America that is not what I would consider a benefit to the ratepayer. It's just wrong. It's absolutely beneficial.
Let's shift over to Cupertino. That was the most recent acquisition you made and expanded your market into more of behind-the-meter opportunities. How has that acquisition changed Quanta's addressable market, and how are Cupertino and Quanta better together? Maybe you can give some specific examples to illustrate that.
I mean, we bought Cupertino for a couple of reasons. Great platform company. It was something that was a decade long in the making. Very, very good management team, young, just fit on top of us. We were primarily high voltage, and they were primarily low voltage. Two things. It gave us the ability to lean into more of the electric package of a data center and provide that solution in a broader way. I mean, we were building the substations, the high voltage, some of the medium voltage, but this allowed us to really go inside the center. They had been in San Jose for decades and grew up with technology. Really, when I think about it and think about the business, at the strategic level, it is really the client and access to the client and understanding the trust that goes into that.
You do not go up to Silicon Valley and say, "Hey, I am here. I am going to go to work." They laugh at you. You really have to have credibility up there. I think Cupertino gave us a lot of credibility and what we could do with that versus a contractor that they were into, a solution provider that we can be with multiple clients, not just hyperscalers, but across the board. The labor is fungible. It can be healthcare one day. It can be chip plants the next day. It can be other things. Look, it is all around some kind of technology or what I consider us leaning into the markets that we see where we can get the most value for the client.
Is the work that Cupertino is doing, is it becoming more programmatic compared to what your traditional heritage Quanta business has been? If so, why?
I would consider it repetitive in nature. We're certainly, look, we're not looking at a magazine looking for work. I'll say that. We can see out a decade or so with them. It is really how fast can we get there? What does the labor look like? Where can we go? As we sit and look at long-term plans of technology, we're afforded the opportunity to really lean into long-term plans of technology. The question is, what's the pull-through? What can we do to get you there quicker? Lots of the bottleneck is the interconnection queues and generation. I think that's the moat that we have is to really help there.
Once they see that we can actually help with the high voltage, with the generation, with the real issues that are out there, and not just say, "Hey, we're Quanta and we're going to be a knuckle-dragging contractor today." That's not who we are. We're there to say, "Okay, if you build here, we think there's an opportunity with this client. Let's go talk to that client. We can get the renewable client in here. Let's have that discussion and build what I consider a good consortium to try to go in and what do we want to do? We want to build it." The first thing they ask is, "Where do you have your transformers?" "Yeah, we have them." "Do you have your lots of different things?" It's just, "Where's your labor? How are you getting labor?" All those kinds of things that we can answer.
When you can answer all the hard questions and show up and do it and do it on time, that's where you get the solution that we talk about daily. They've allowed us really to access into that and that collaborative nature that we had, what I would consider in the renewable business. The same thing with Blattner, very much sits just like Blattner in the technology arena.
Gotcha. If we truly got serious about reshoring, what will we need to do to get the grid ready? How does your acquisition of Cupertino help Quanta participate behind the meter?
I think when you think about Cupertino, a lot of it, call it $1.5 billion backlog, is data center driven. That's not to say that there's not ancillary or things like that, but it's really straight-up data center driven. The majority of it is Cupertino, but it's other things that we do as well. When I think about that, we can build a chip plant too. I mean, we can go in and do all the electrification that you would do inside of a data center, same thing. Before there were data centers, there were hospitals, there were buildings, there were all kinds of things. Had a great business and continued. I don't think it's really, when I look at it, data centers are not even 10% of the business at this point. I think it could be much greater.
I think the business is going to grow anyway, but I think the data center piece will be our fastest growing piece of the business. It's not to say we won't build out the chip plant or other things, clean rooms, all kinds of different things that we can do. We do fabricate our fabrication facilities. I really like what we're doing there. We can go faster. Right now, it's not the top line of the company can continue to grow. It's just how fast can you get there and make sure that our quality and our word mean something, and we're going to continue to value that and make sure that we can deliver to that. I think that's the big thing here is us being able to deliver and execute and do the things that we've done over the last decade.
What's the biggest obstacle to scaling that business?
I think we can scale it. It's just a matter of us. I really want to be more of a solution to the client versus just do the electrical package. As we move forward, you'll see us, I believe, provide that holistic solution, other craft, other things that we can do in a data center because they're asking us to do it. Make sure the high voltages, all the supply chain, all the things that we can do. I'm not seeing a lot of impediments there. Scale it. It's much like we've done with the high voltage side. We need more craftsmen. It's probably the most constrained group that we have of craft would be that group. Colleges and a lot of people don't want to climb.
As we say, "Okay, you do not want to climb poles, well, come into this side." We are building out curriculum. We are building out pre-apprentice programs, things like that for low voltage type electricians. It takes four years. As we see that, we will look at fabrication. We will do all the other kind of things that we can do to speed it up. In general, we need more craft.
Let's shift gears to more current events. With the House version of the tax bill headed to the Senate and recognizing it could potentially change when it comes out of there, what are your thoughts on the impact on renewable project activity as the bill stands as it's currently drafted?
Yeah. I think, yeah, the House bill came out a little bit harder than initially expected. But I'll tell you the general view of the customers that we work with, right, which are the higher quality developers who've been in this industry for many, many years, decades, who've lived through the cycles of PTC on and off. They've done a really good job of anticipating the changes, getting ahead of it. A lot of them have strong balance sheets, have been very good about supply chain themselves, have worked through these things in the past, have a really robust pipeline to be able to manage through the complications that may arise with the bill. A lot of work with Safe Harbor in 2024. So I think you're going to see very good growth in the next few years. We'll see where the Senate bill comes out.
I think there's still some room for improvement in the bill. A lot of it is going to be hinged around the foreign entity of concern. Clarity is required more so than necessarily having to get it fully repealed, but there does need to be some clarity in the bill. The demand side for renewables continues to be as strong as ever, as strong as ever. In fact, PPA prices continue to reflect that. If you have a project ready to go, you're going to get that built. That is what we're seeing. We haven't seen any significant slowdown. The conversations, like Duke was saying, around our solutions-based approach is even stronger. I think another thing to point out is with the way the credits now are potentially going to fall out, you're going to see a rush to quality again.
You're going to see customers wanting to come to quality solution providers who can ensure that they meet the deadlines as now implemented, potentially. I think all we're seeing is opportunity. You may see some slowdown here and there as developers figure out which part of their portfolio best is suited for the new rules. The demand side continues to be so strong, and the build over the next few years continues to be very, very strong. Even post 2028, we're just not seeing any concern around the demand side, which means that the growth should be strong going forward.
Actually, let me double-click on that. I guess the question is, how necessary are the tax credits for sustained growth? Because I think through Duke talked about five years to get a turbine. Maybe you can talk about just where the levelized cost of energy of renewables are versus gas. Are there any other state-level mandates for renewables? Just kind of give some color on that.
Yeah. I mean, the levelized cost of energy for solar is the lowest LCOE. In many markets, it is even lower than even without the credits, right? It depends. In some areas, the credits are critical just because the resource is not as strong or the interconnection challenges around it. It depends. In general, the LCOE of solar continues to be very, very strong. I do think because investments were made around a certain view of where credits are going to be, what you do not want to do is create sudden changes around investment theses. If you give the industry time to work through any sort of changes around the regulatory framework, you are going to see the industry adjusting just like has happened in the past around supply chain. You will see the same thing around credits.
This four-year runway, even with this House version, there's effectively a four-year runway since a lot of this was Safe Harbor in late 2024 and you have until 2028. I believe that you're going to see, again, the quality developers be able to work through this with the right frameworks in place. Because again, the fundamental view is the demand is so strong. While gas is going to be necessary, you can't get to where you need to be on the gas side for at least five years with the supply chain constraints that we're seeing. You're seeing gas prices now at $2,500 a kW, and that's effectively a $100 MWh price of power. That's quite competitive. Solar and batteries are quite competitive against those.
If that market sustains, you're going to see this market still have a very strong mix of all forms of generation, including renewables, still be one of the biggest parts of that energy mix.
Yeah. I think it's a really important point. It's not one or the other. It's all the above. I do think if the right answer is to build the biggest line you can build, probably 765, you asked me, because you can drop load and fill it up with gas and renewables and some batteries across the board. If you do it and you blend it right, it creates the lowest cost to the customer. That's what you're trying to accomplish. Gas plants have gone up. I mean, they're probably 60% where they were up. That cost is up there. You're not going to get a turbine cheaper, and you're not going to get someone to build it at risk cheap. Like you can't. That's part of the issue.
The same labor force that's building a gas plant is also building a data center. It's also building other things. I mean, it's what I consider a good environment. When I look at it, the answers are going to be you've got to continue to build solar out here and batteries, some wind in areas that make sense, and just have a sensible plan going forward. Gas should have never been, like we always thought. I always thought it would be 20-25% or more of the system to balance the load. It's the right way to balance load. Some nuclear, obviously, the administration's pushing nuclear. SMRs are coming along. They haven't built anything in the States yet. I do think that's coming, but it's longer out. There is a cost there, and there will be a cost to it.
I think in general, the way you can see it today is a lot of solar, gas backed with batteries on peak and in the line full.
You answered some of this, but I guess longer term, where do renewables fit in the generation mix? How does your battery business complement this? If you can, how big is that today?
Yeah. I mean, the battery business, it's fastest growing. I mean, we're in excess of $1 billion, going on $2 billion probably. In general, the battery business is a nice business. I think if you look at Texas, I was looking at the curves the other day. Obviously, it's topical. The amount of batteries at peak that it's really holding the load there, I was astonished at how much it's really helping. I was probably a naysayer at some point. I'm not anymore. I do think batteries at peak make tons of sense. Obviously, we have to get them in country, tariffs, and all those, a lot of safe harboring going on. Batteries are making a lot of sense here in the markets that we're in, especially that you can build them quick, five-acre sites, you can build a lot of batteries.
Talk about the 765 kV transmission build-out that is ahead of us. What is driving it? Maybe you can contextualize the scale of that build versus what we have seen over the last decade. How do you think about Quanta's win rate for that sort of project?
I mean, I think the good part about 765 is you can move vast amounts of power across areas and bring in load. As you do that, you get flexibility. In Europe, you get a lot of DC lines. DC lines in the States, you cross states, you cross RTOs, and very, very difficult to build DC in the States for state rights mainly. I prefer 765. It's easier for permitting and everything else. That said, it's heavier. It's a heavier load, corridors, tough to build. We built, I don't know, probably well over 50%, probably in the 75% of non-states. I consider for us, that's a core competency to us. We've invested in it. We always have. I like our chances on building 765 all the time.
We do believe, as you see it, it will create the right, what I would consider load growth, where bringing load into load centers that's necessary for data centers, for onshoring, really just to you've got 4%-5% load growth in places. You need big corridors. Either you build two, three, 45 lines or a 765. You're building two lines. The corridors are much bigger. I think 765 allows a lot of flexibility for us as an industry.
Is the mix of transmission line moving towards 765?
I wouldn't go. I mean, I think, look, you build a 765 line, there's 25% more line coming behind it, either 345, 230, or 138, like coming right behind it. It's a good, what I would consider backbone infrastructure that we need in North America. As we see that get built out, a lot of 500, still a lot of 345 line out there. If you can build 765, it makes a lot of sense.
Gotcha. And how do I think about your win rate? The higher the kV, the higher Quanta's win rate?
Yeah. I mean, look, I do not really like to look at it like that. Obviously, I think it is I like our chances on it all. We do not really care whether it is a 69 line or a small line. We look at it all the same. I expect the company to not get enamored with bigger lines. I want the company to really concentrate on all the above. We are successful in bigger lines, for sure. I mean, we are around the edges and do quite a bit of bigger work just from helicopters and all the ways that we can construct. I like what we are doing there.
Okay. Shifting back to more near term. How are tariffs impacting final investment decisions for your utility customers as well as renewables? Is there any change in the volume or the type of work that you're seeing coming out of the utility customers?
Not really. I mean, I think the utilities, you've seen their CapEx. A lot of it is domestic sourced. We also, given our strong supply chain capabilities, our transformers, we've been able to help our customers be able to source materials. On the renewable side, we'll see there's still some noise around the House bill, really around the FEOC and some tariff language that's causing a little bit of just, "Wait, what's going on here? How do we manage through this?" More on the battery side than I would say on the solar and wind side. You may see a little bit of hiccup as people are working through that.
Again, because of how smart a lot of our customers have been on the renewable side as well, and by getting ahead of it and really sourcing around the globe, and because they just have the experience to understand and figure this stuff out, they've gotten ahead of a lot of this. Nothing so far is giving us any concern around dramatic shifts in our work thus far.
Yeah. I think the company's in a position to see it coming. We're not talking about 2026, 2027 today. I mean, we're talking about 2032. I think it's really important that when you look at the company and you see what we're doing, these decisions were made five years ago where we're at today. We're not just going, "Oh, let's go buy companies and that's who we are. We're going to be a habitual acquirer of companies and that's how we're going to grow the business." That's not true. There's a strategy around it. We see it. We can see multi-years out. We knew the administration would press renewables. We knew this. We said it. We've set the company, I believe, to withstand these things and not give a bunch of excuses on weather and politics and everything else that can come up. Yes, it's painful.
We read Twitter as well. We just do not run the company by Twitter. Look, we just have to put our heads down, execute. Everyone has issues. We have to operate through it and see where it is going and really set the company up for the long term. I think we have done that.
Quanta's compounded earnings at a high teens CAGR over the last decade, and that's when load growth was zero. Why shouldn't that be faster over the next 5 to 10 years when we do have positive load growth?
I mean, the company's bigger. I do think as you see load growth and you see the press, it will grow, and it will grow at, I'll consider, high, upper single-digit organic growth. As you look, it's bigger. Every year it gets bigger, the kegger gets bigger. It's hard for me to get my head around. Can we grow faster? We certainly can grow more. There's more verticals and more ways to provide solutions. The returns are better from my standpoint because our supply chain's a big piece of this as we go forward and how we look at the supply chain level. Look, I think our returns grow faster, kind of the same pace on organic growth. We'll have years at 5%, 6%, and we'll have years at 9%-10%. That's what you're going to see.
It depends on really how we deploy capital and what we deploy capital in, again, strategies and things like that. I would have said five years ago, our distribution business will be growing faster because I thought there would be more EV penetration. We're getting EV penetrations to the west. It's kind of slowing down in other areas. I still think grid hardening and all the other things that are out there are certainly in play. It's kind of like fiber, for example, until it gets to the home. Getting to the home build of electrification is so enormous that it goes on for decades because that's where, as the load gets down to the very house, you'll see just continued build as you see more electrification in vehicles and things of that nature.
I'm going to shift my questions over to the audience. Thinking about your exposure to utilities CapEx, what's the rough breakdown between maintenance CapEx, i.e., to modernize the grid versus growth CapEx to capture incremental load growth?
Yeah. I mean, we're doing both O&M and capital. I mean, capital just stacks on top of O&M. So you have a very good day-to-day business. I don't know what the breakdown is these days.
I mean, our base business is still over 80% of our revenues. In terms of the utility T&D, I'd say it's probably 35% O&M and 65% new build.
Yeah. That's kind of new construction.
Something around that 40-60. It can vary depending on the time.
I mean, the way capital works, about, call it 80+% of utilities' budget's capital, something like that. That's not generational T&D. So big numbers of capitalization in their budgets. So that's kind of how we would look. We look just like they look.
Looking at Quanta's contracts, about 60% of the contracts are fixed price. Given how dynamic things are today, how do, if any at all, how do you manage cost risk of these contracts?
The majority of the work's negotiated. When it says fixed, we know our cost. We're fixing a price, but it could be unit-based, fixed. It can be lots of ways to de-risk a fixed-price contract. I would just say we have a long track record of executing against these types of contracts, know the areas, know the geographic areas. It's not like a fixed firm nuclear plant by any means. It's more, I think the average contract's probably less than $5 million these days.
$6 million.
$6 million. Okay. $6 million. So you're in and out. We have our labor, like we said, self-performing. And the fixed-price nature is really negotiated. And look, we want to be productive. We want to give the client efficiencies and things like that. But really, you're looking at it on a megawatt basis on big fixed numbers, not little bitty numbers.
How are you thinking about Congress's new tax bill, particularly as it relates to the elements of the IRA that have been saved and some of the new factoring and bonus depreciation provisions?
Yeah. I think what we talked about earlier, I think, again, we'll see what the Senate version is. But based on the House bill, our customers are still plowing ahead. I think you're going to see some acceleration because of how the bill has been set up with the 60 days as well as the 2028 in-service date. I think you're going to see the benefits, the bonus depreciation go for a lot of these projects. The safe harbor provisions of 2024 were still kept in place. I think you're going to see, again, the better quality developers continue to push forward. And because demand side is so strong, there's a rush and speed to market that's far more important than maybe an extra 10%, 15%, 20% increase in cost. I think in general, we're not seeing any slowdown in our activity from our core customer base.
What can we expect from Quanta in terms of acquisitions? Are there any end markets, products, services that you would like to adjust through further consolidation through Quanta?
I mean, our customers push us to do more. I think as we're answering customer demands on craft, on different craft, we've talked about all the things that we get asked to do. I mean, mechanical somewhere, you could see us from a standpoint that that competency is being asked upon us too. We do not have really a platform there that I would say we can go lean on. As we look at that, that's certainly something that I would think we would look at. Nothing's imminent. We have to find the right companies that fit our culture. Really, the client dictates a lot of where we go, both regionally and how we look at it. There is not one single thing we're looking at. We're looking at, as the client's moving to different areas, they're asking us our front-end capabilities more, more, more.
As we think about it, if we can't provide the solution internally and we can't grow it fast enough, is there good companies to acquire? I do believe the family business today, generationally, lots in the third generations, they're all getting bigger. I see more inbounds on. They want to put their businesses somewhere that perpetuate the name, perpetuate the culture, take care of their people. We really don't get into auction processes for the most part in the companies that we acquire. They come to us or we see them and know who they are and look at that profile. It has to fit the culture, has to fit the strategy. Obviously, we look at our stock price and our dividends and things that we can do.
Typically, the best way that we can benefit the shareholder is to make great acquisitions that what I would consider returns are above where we're at today. The growth rates are higher on them. As long as we continue down the path we've done in the past and around craft, the front-end services, we continue to grow our engineering. I don't think we're invested in Australia and Canada, but primarily, the growth will be in the lower 48.
Do you expect renewable backlog to grow sequentially through the rest of this year? Will 2026 and 2027 be bigger than 2025?
Yeah. I mean, I think the beauty of the larger segment is the larger segment backlog will grow, whether it's renewable backlog, line backlog, line backlog, and renewables. I don't have to think about it anymore. I do think our backlog overall will grow sequentially.
The industry has several bottlenecks such as labor and permitting. Have you noticed any easing in those categories? What are your expectations for the future and how is Quanta positioned?
Yeah. I mean, I think permitting, all the things that on a linear infrastructure project, especially out west, that were giving us issues, the administration's really leaned into that. They've leaned into asking the question of, "What's wrong? Why can't you move?" Look, a lot of it's paper. Just paperwork balled up in someone's desk or things like that. I do think that they've tried to alleviate a lot of those things. I think permitting itself is going to move faster. We watch interest. We're watching things that from a utility standpoint, they'll look at, which would be affordability, things of that. Interest is a big piece of affordability as well as fuel pricing. As fuel prices come down, interest comes down, it's a great time to build. I think it's setting up nicely. We are getting some relief in permitting.
I think it'll get better and better from a permitting stance.
Over the last decade, if you look at your return on invested capital, it has grown by about 800 basis points. What levers do you have to pull to continue that improvement?
I mean, I still think we can expand margin. I do. I'm not saying I wouldn't lean into the company and say, "This is going to be a technology play, and we're going to expand margins that much." The returns from my standpoint, as our vertical supply chain gets better, really, the investment's minimal, and you take on more scope, and that scope creates more value. We need to get paid a little quicker in areas. I think utilities are vice versa. They'll hold cash till the end, put it in rate base at the end of the year. That profile's always been that way. Difficult for us to kind of get that piece of the DSOs up. As we take more, if we're taking more lump sum, if we're doing more EPC, our vertical supply chains, all of our front-end services require much less capital.
The company has become much less capital concentric to some degree. I do think the returns will continue to climb faster probably than margin.
Gotcha. Maybe just on the margin front, how would you kind of scaffold out the opportunities to drive margin higher?
I just think the supply chain and the things that we're doing there will allow some margin expansion. It's more of a utilization than it is like, "Oh, we're going to go out and get more out of the client." Because look, they got returns. They're pressed to. In order to really continue to grow the company the way we've grown in the past, we need to be cognizant of what we can do from a margin standpoint, but create the returns for us that I think we can get in a better spot. There are pieces of the business that just haven't performed like it can with leverage and things of that nature. Canada's been down. It's been a drag for five years. I see that picking back up. They're mad at us, and maybe that's rightfully so. They're going to build infrastructure in Canada.
It'll help us, I believe, in Canada. We're already seeing some of the better margins and better utilizations out of Canada today. That's coming into play. We're much better. Our big solar work's gone much better this year. You're seeing expansions. Our industrial business has come along nicely. There is some pipe around. I think even the pipe business is optimistic. We'll build some pipe these days. We're around all the, what I would consider, the edges and the places that we've been depressed or have the ability to go up. I do think we'll expand some.
Got it. Actually, maybe sticking with Canada. What green shoots are you seeing? How far out would you say recovery in that business segment is?
Canada's really cyclical. I mean, we've probably had a decade of down market there. I think you'll start to see it come back. It was already coming back some, certainly, with the way the tariffs have worked, really a lot of infrastructure that's on the board there to get built. I think it starts to speed up in Canada. Hydro and BM Public Health in Toronto, certainly a great customer. We're looking at their capital spend. I do see it moving back up. I think you got a decade there of kind of upward trends.
Okay. It looks like we've got one last question. It's been more than a year since you acquired Pennsylvania Transformer. You recently acquired Niagara. I'd love to get a sense for how you're seeing those acquisitions play out in your negotiations with customers and how is that better within the fold of Quanta?
Yeah. I mean, look, they're great acquisitions standalone. They're even more impressive of what we can do with them with the client. I think a lot of that will come to fruition this year. People will see really why we acquired the companies and what can be done. I like what we said. We'll continue to invest some and try to make sure that we being U.S.-based Transformer right now is a good thing. A lot of Chinese content that probably goes away here. I really like what we're doing there.
Okay. We're out of time. Thanks, Duke.
Thank you. Thanks to everyone for the.