Quanta Services, Inc.

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Quanta Services, Inc.

1360 Post Oak Boulevard, Suite 2100
Houston, Texas 77056
U.S.A.
Telephone: (713) 629-7600
Fax: (713) 629-7676
Web site: http://www.quantaservices.com

Public Company
Incorporated: 1997
Employees: 1,450
Sales: $1.86 billion (2005)
Stock Exchanges: New York
Ticker Symbol: PWR
NAIC: 238210 Electrical Contractors

Quanta Services, Inc. is a Houston-based public company that on an outsourcing basis provides network infrastructure design, engineering, construction, and maintenance services to the electric power, gas pipeline, telecommunications, and broadband cable industries. The company also provides specialty services to other private-sector and government clients, including airport fueling, emergency restoration engineering, intelligent highway systems, light rail control systems, rock trenching, vegetation control, and wind generation. Listed on the New York Stock Exchange, Quanta maintains operations in all 50 states and Canada.

FOUNDER: A VIETNAM VETERAN

The man behind the creation of Quanta Services was its longtime chief executive officer and chairman, John R. Colson. Growing up on a farm in Blue Spring, Missouri, he became accustomed at an early age to hard work, which he used to his advantage later in life. "Unfortunately, I wasn't born the smartest guy in the world, so I have to work a lot harder than some of my contemporaries," he once told Investor's Business Daily. "I've found that I can make up for things I don't know if I just work hard at it." After earning a degree in geology from the University of Missouri at Kansas City, Colson entered the military and served one year in Vietnam. He was discharged from the Army in 1971 and returned to Kansas City, taking temporary employment at Par Electrical Contractors, Inc., which built high-voltage transmission lines, distribution lines, and substations, and provided other electric utility infrastructure services. His job was to carry stakes for a survey team, a menial task given that as a geology major he had surveying experience. Nevertheless he took the job seriously and because of his diligence was kept on after the stint was up. Colson was interested in the oil business and sent out his resumes while working with Par, but he never did leave the company and launched an unintended career in the electrical contracting business.

Soon after becoming a permanent employee at Par, Colson was put in charge of work crews installing utility lines in Missouri, and he took advantage of his military training to organize his men into a coordinated unit. His abilities and dedication to the work caught the eye of his superiors who began to promote him through the organization. Within three years he was named manager of engineering services, and after six he had worked his way up to vice-president of operations. After becoming executive vice-president and general manager in the early 1980s, he began buying the company, became president in 1991, and ultimately emerged as its owner.

In the 1990s a number of factors came together that led to the creation of Quanta Services and other companies that participate in a consolidation of the electrical contracting industry, populated by more than 50,000 companies, the vast majority of which were small, owner-operated enterprises. Deregulation in the electric utility industries in a number of states prompted utilities to become more cost-competitive, leading to the outsourcing of infrastructure work to contractors who could do the job more efficiently. Moreover, much of the transmission and distribution infrastructure in the United States was aging and in need of repair or replacement. In 1997 Colson spearheaded the combination of four contractors to form Quanta Services, Inc., which then established its headquarters in Houston with Colson as its head.

In addition to Par, Quanta consisted of Union Power Construction Co., Trans Tech Electric Inc., and Potelco, Inc. By this time Par was generating more than $42 million a year in revenues while doing business in 11 states, including Colorado, California, and Hawaii. Union Power, based in Englewood, Colorado, operated in six western states and did about the same amount of business as Par. The third partner, Trans Tech, was based in South Bend, Indiana, and served customers in Indiana, Kentucky, and Michigan. It added about $24 million in annual sales. Finally, Seattle-based Potelco contributed about $14.5 million in business from customers in Washington, Oregon, and Idaho.

Quanta's initial vision was to focus on outsourcing opportunities with electric utilities, but it soon became apparent that the old boundaries between transmission industries were becoming blurred, as utilities now launched telecommunications subsidiaries. The buzzword became "convergence," as electric power, telecommunications, cable television, and, to some extent, gas pipelines were becoming parts of larger enterprises. Hence, Quanta soon began expanding into the telecommunications and cable TV fields.

A major part of Quanta's business plan was to grow through acquisitions, and Colson now had to decide if it was wise to take Quanta public in order to raise money and have stock to use in making purchases. According to Investor's Business Daily, Colson pondered his decision by going hunting in 1998. After some reflection he decided to try for an initial public offering (IPO) of stock, although he had some misgivings about dealing with Wall Street. "Then he decided that all he had to do was change his attitude toward investors," wrote Investor's Business Daily. "He'd treat them like a new group of customers. All he had to be, he saw, was honest. 'The best thing is to tell the story just as straight as you can. There's no magic, no science to it,' he said. 'We know what we're doing, and we just need to tell Wall Street what we're doing and why we're doing it and why we think it will work.'"

COMPANY PERSPECTIVES

With more than 13,000 employees, major offices in 40 states, and field and support offices in all 50 states and Canada, Quanta Services has the manpower, resources and expertise to complete projects that are local, regional, national or even international in scope.

1998 IPO

With BT Alex Brown Incorporated, BancAmerica Robertson Stephens, and Sanders Morris Mundy Inc. serving as underwriters, Quanta completed its IPO in February 1998, raising $45 million. Of that amount $21 million was used to pay the cash portion of the buyouts of the four founding companies. Much of the balance, along with a $175 million line of credit arranged with a consortium of nine banks, was used on a dozen acquisitions completed in 1998. They included telecommunications contractors Manuel Bros., Inc. of Grass Valley, California; Minnesota-based Smith Contracting; Telecom Network Specialists, Inc., operating out of Kirkland, Washington; North Pacific Construction Co., based in Woodland, California; Oregon's NorAm Telecommunications, Inc.; Spalj Construction Company, located in Deerwood, Minnesota; and Golden State Utility Co., a Turlock, California company. Electric contractors included Las Vegas-based Harker & Harker, Inc.; Sumter Builders, Inc. of Sumter, South Carolina; and Environmental Professional Associates, Ltd., a Marysville, California company. In addition, Quanta acquired Wilson Roadbores, Inc., a Princeton, Missouri-based company involved in both electric and telecommunications contracting, and Underground Construction Co., Inc., a Benecia, California company that served the telecommunications, transportation, commercial, and industrial markets. Of these acquisitions, three-quarters were considered platform companies, averaging $24 million in annual sales and 34 years in business.

Another significant development in 1998 was the acquisition of the patent to the Linemaster Robotic Arm, a remote control device that could safely perform work on energized high-voltage power lines. Because the lines did not have to be shut down to perform maintenance work, customers were not only spared an inconvenience, they saved money because the utility did not have to contend with as many costly outages. Quanta also forged what, at the time, it perceived to be an important alliance when it established a partnership with Enron, which was beginning to install thousands of miles of fiber optic cable. Enron also invested $50 million in Quanta. When the results for 1998 were posted it revealed that revenues for Quanta jumped from $179.4 million in 1997 to more than $333.8 million in 1998. Net income improved from $9.8 million to $16.8 million. The company was also well diversified in its mix of customers. About half of Quanta's revenues came from the electric utility sector, 37 percent from telecommunications, and 9 percent from transportation.

Investors were impressed with Quanta's quick start and snapped up shares of stock that became available in a secondary offering completed in late January 1999. The company had planned to sell 3.5 million shares at $21 per share, but interest was so strong that in the end 4.6 million shares were sold at $23.25 per share. All told, Quanta realized $101.1 million, money used to fund the acquisition of 40 additional companies, which in total cost $323.6 million in cash and notes and 15 million shares of stock. Many of these additions were made to expand Quanta's business in gas transmission and cable television. As a result, the company's business mix experienced a significant shift by the end of 1999, when it recorded sales of $925.7 million and net income of nearly $54 million. Now just 30 percent of sales were from the electric power sector, while 35 percent came from telecommunications, 13 percent from cable television, and 22 percent from ancillary services, which included transportation services, gas pipeline work, and rock-boring and trenching for water and sewer lines.

The acquisition binge continued in 2000 when Quanta paid $282.4 million in cash and issued 4.4 million shares of stock to add another 25 companies. As a result of these new assets and internal growth, Quanta increased revenues to the $2 billion mark in 2000 and net income increased to $85.8 million. The company was now more committed to telecommunications than to any other sector, contributing 43 percent of sales. Electric utilities accounted for 19 percent and 15 percent came from Cable TV. As a result, the sagging fortunes of the telecommunications industry, as well as a struggling economy, would begin to cause a drag on Quanta's growth.

DECLINING REVENUES AT THE START OF THE 21ST CENTURY

Quanta completed a pair of acquisitions in 2001, adding Utility Construction & Technology Solutions L.L.C. and North Houston Pole Line Corp., but for the most part the company looked to improve the integration of the operations already in the fold. The executive team was beefed up and a regional management structure was implemented to allow operating units to create business opportunities for one another. Although revenues in 2001 dipped to $1.79 billion in 2001, the company was able to improve its profits to $105.7 million.

Quanta experienced a more difficult year in 2002; not only did business conditions not improve, the company found itself the target of a hostile takeover bid after the price of its once high-flying stock languished.

In 2001 UtiliCorp United Inc., an energy company with whom Par Electrical had been doing business since the 1950s, began taking steps to gain control of Quanta. UtiliCorp owned a sizable stake in Quanta, about 36 percent, an investment that was originally part of a strategic alliance between the two companies when UtiliCorp outsourced all of its maintenance needs to Quanta. Quanta resisted UtiliCorp's overtures to increase its stake, and in October 2001 the two parties signed a standstill agreement.

KEY DATES

1997:: The company is formed.
1998:: An initial public offering of stock is made.
2000:: Sales reach $2 billion.
2002:: A hostile takeover bid is defeated.

A month later Quanta adopted a so-called "poison pill" plan to prevent a takeover, prompting UtiliCorp to sue, claiming that its three Quanta directors had not been properly notified of the board meeting at which the plan was approved. An all-out proxy fight ensued in the spring of 2002. Quanta maintained that UtiliCorp, which was enduring difficult times, wanted to gain a controlling interest in order to consolidate Quanta's earnings with its own balance sheet to keep its number in line with Wall Street expectations and buoy the price of its own stock. This agenda, Quanta insisted, was not in the best interests of its shareholders. In the proxy fight, UtiliCorp told shareholders that it wanted to gain control of the board in order to improve the value of Quanta for the benefit of all shareholders, listing an outright sale of the company as a possible strategy. The fight came to an end in May 2002, as Quanta fended off the takeover bid. But the effort cost Quanta $12 million and also proved to be a major distraction for management.

Quanta's customers continued to be wary of new capital spending in 2003. As a result, revenues fell to $1.64 billion and the company lost $32.9 million. Quanta took steps to control costs and reorganized its operations along industry lines, but beyond that there was nothing management could do until customers began spending money again. Sales dipped slightly to $1.63 billion in 2004, and Quanta narrowed its loss to less than $10 million. The company appeared to turn the corner in 2005 when it returned to profitability, recording net income of $29.6 million on sales of $1.86 billion. A good portion of that revenue was attributed to work performed in response to the hurricanes that lashed the Gulf Coast in the autumn of 2005, but the industries Quanta served were also beginning to ramp up spending. Given that maintenance work could not be postponed indefinitely, the long-term prospects for Quanta remained positive.