QUANTA SERVICES INC, QUANTA SERVICES MANAGEMENT ...

clean energy and energy independence for the United States will make abundant, low-cost natural gas the fuel of
choice to replace coal for power generation until renewable energy becomes a significant part of the overall
generation of electricity, creating the need for continued investment in natural gas infrastructure. We believe our
position as a leading provider of transmission pipeline infrastructure services in North America will allow us to
capitalize on these opportunities.
The natural gas and oil industry is cyclical and subject to volatility as a result of fluctuations in natural gas
and oil prices. In the past, these dynamics have negatively impacted the development of natural resources and
related infrastructure such as when natural gas and/or oil prices have declined or remained depressed for
sustained periods. In addition, environmental scrutiny, stringent regulatory requirements and cumbersome
permitting processes have caused delays in some transmission pipeline projects. During 2011, we participated in
numerous bidding opportunities for transmission pipeline projects, but some of these projects were delayed due
to permitting challenges and heightened environmental scrutiny. However, several delayed projects were
awarded and began to move toward construction in 2011, and similar activity has continued into 2012.
The project delays we experienced in 2011 negatively impacted our natural gas and pipeline segment
margins associated with our transmission pipeline operations, in part as a result of our inability to cover fixed
costs. Project delays in the future could have a similar impact on margins for this segment. Margins for our
transmission pipeline projects are also subject to significant performance risk, which can arise from weather
conditions, geography, customer decisions and crew productivity. Our specific opportunities in the transmission
pipeline business are sometimes difficult to predict because of the seasonality of the bidding and construction
cycles within the industry. Many projects are bid and awarded in the first part of the year, with construction
activities compressed in the third and fourth quarters of the year. As a result, we are often limited in our ability to
determine the outlook, including backlog, for this business until we near the close of the bidding cycle.
To address some of this cyclicality, we are diversifying our service offerings for the segment by focusing on
midstream gathering infrastructure opportunities. We have increased our presence in areas where unconventional
shale formations are located, including through the establishment of offices in several areas, to better position us
to successfully pursue projects associated with midstream gathering infrastructure development. The relatively
consistent nature of this work could offset some of the cyclical nature of the transmission pipeline business while
also providing us growth opportunities. Given the current attractive pricing environment for crude oil and natural
gas liquids, we see increased activity and more opportunities in the liquid-rich unconventional shales and are
therefore strategically focusing our efforts to provide services for midstream gathering systems in these shales.
We also see growth potential in some of our other pipeline services. The U.S. Department of Transportation
has implemented significant regulatory legislation through the Pipeline and Hazardous Materials Safety
Administration relating to pipeline integrity requirements that we expect will increase the demand for our
pipeline integrity, rehabilitation and replacement services over the long-term. As pipeline integrity testing
requirements increase in stringency and frequency, we believe more information will be gathered about the
condition of the nation’s pipeline infrastructure and will result in an increase in spending by our customers on
pipeline integrity initiatives. In early 2012, we acquired an engineering, research and development business that
develops and owns pipeline inspection tools, enhancing our pipeline integrity capabilities. We believe that our
ability to offer a complete turnkey solution to pipeline companies and gas utilities provides us an advantageous
position in providing these services to our customers.
Over the past several years, our natural gas operations have been challenged by lower margins in connection
with our natural gas distribution services, which were more significantly affected by the economic downturn than
other operations in this segment. To improve our ability to be competitive and to generate improved margins
from natural gas distribution projects, we restructured our natural gas distribution operations in 2011 to better
align our cost structure to the competitive environment, which we believe should enable us to improve margins
on natural gas distribution projects over time.
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