Quanta Services, Inc. -- Moody's assigns P-3 rating to Quanta's new commercial paper program

Rating Action: Moody's assigns P-3 rating to Quanta's new commercial paper programGlobal Credit Research - 24 Aug 2022New York, August 24, 2022 -- Moody's Investors Service ("Moody's") assigned a first time Prime-3 commercial paper rating to Quanta Services, Inc. ("Quanta"). Concurrently, Moody's affirmed Quanta's Baa3 senior unsecured ratings. The rating outlook remains stable."We expect Quanta will use the new commercial paper program for short term operational liquidity, in lieu of revolver borrowings" said Sandeep Sama, Moody's Vice President – Senior Analyst and lead analyst for Quanta.Assignments:..Issuer: Quanta Services, Inc.....Senior Unsecured Commercial Paper, Assigned P-3Affirmations:..Issuer: Quanta Services, Inc.....Senior Unsecured Shelf, Affirmed (P)Baa3....Senior Unsecured Regular Bond/Debenture , Affirmed Baa3Outlook Actions:..Issuer: Quanta Services, Inc.....Outlook, Remains StableRATINGS RATIONALEQuanta's P-3 commercial paper rating reflects its excellent liquidity, underpinned by its strong free cash flow generation which should support its working capital needs and capital spending along with a measured pace of acquisitions and shareholder returns. The company's new $1.0 billion commercial paper program is supported by a $2.64 billion unsecured credit facility due October 2026. Quanta's credit facility is subject to maintenance covenants, including – a consolidated leverage ratio (debt to EBITDA) of under 3.5x, with a temporary higher ceiling of 4.0x around the time of any large acquisitions, and a consolidated interest coverage ratio (EBIT to interest expense) of greater than 3.0x. Moody's expects the company to remain in compliance with the covenants through 2023.Quanta's Baa3 senior unsecured ratings reflect its large scale, good end-market and customer diversity, mostly blue-chip customer base, good track record of completing projects within anticipated time frames and budgets, highly trained workforce and favorable dynamics in its key electric power and renewable energy end-markets. It also reflects its relatively conservative financial policies, consistent cash flow generation and excellent liquidity profile.Quanta's credit profile is also supported by favorable end market fundamentals as utilities focus on increasing their mix of energy generated from renewable sources, replacing aging infrastructure, modernizing and expanding the electricity grid and outsourcing more engineering and construction services to third parties due to an aging workforce. The company's master service agreements also support relative revenue stability with its utility customers. This should enable the company to produce a predictable and relatively stable operating performance over time.The rating is constrained by Quanta's weak profit margins in its Underground Utility & Infrastructure Solutions segment, exposure to fixed price contracts, limited geographic diversity and its reliance on utility customers, which may not always benefit from the current favorable sector dynamics. It also incorporates the company's focus on acquisitive growth and periodic sizeable share repurchases, and its willingness to take on debt to fund these initiatives.The stable ratings outlook presumes Quanta maintains robust liquidity and conservative financial policies and sustains credit metrics that are commensurate with an investment grade rating even as it periodically pursues shareholder friendly actions such as acquisitive growth and opportunistic share repurchases.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSQuanta's reliance on the electric power sector, its exposure to cyclical industries and its growth-by-acquisition strategy are factors that constrain the rating and limit the potential ratings upside. However, the rating could be upgraded if it sustains an adjusted leverage ratio (Debt/ EBITDA) at or below 2.0x or its funds from operations is consistently above 40% of total debt.Quanta's rating could be pressured by an increase in its leverage ratio above 3.0x, although the specifics surrounding the increase in leverage would be considered. We may tolerate higher leverage due to an acquisition if metrics are expected to improve within a reasonable time frame. Other factors that could downgrade the rating include a decline in Quanta's adjusted interest coverage ratio (EBITA/Interest Expense) below 5.0x.Quanta Services, Inc., headquartered in Houston, Texas, is a specialized contracting services company that provides infrastructure solutions including design, installation, repair and maintenance services to the electric and gas utility, renewable energy, pipeline, energy and communications industries. The company reported revenues of $15.5 billion for the LTM period ended June 30, 2022 and its backlog was $19.9 billion. The company reports its results in three segments: Electric Power Infrastructure Solutions (55% of LTM revenues; 59% of backlog at June 30, 2022), Renewable Energy Infrastructure Solutions (19%; 15%), and Underground Utility & Infrastructure Solutions (26%; 26%). Quanta has operations throughout the United States (85% of 6 month ending June 30, 2022 revenues), Canada (12%), Australia (2%) and select other international markets (1%), and completes its projects under fixed price (43% of 6 month ending June 30, 2022 revenues), unit price (34%) and cost-plus (23%) contracts.The principal methodology used in these ratings was Construction published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74957. 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