My Fellow Stockholders
Quanta had a strong year in 2017. We are pleased with our position in the marketplace and believe the operational and strategic investments we made last year will continue to separate Quanta in the utility, energy and communications infrastructure markets. We are proud of Quanta’s many financial and operational achievements during 2017, including:
- Maintained our industry-leading safety record and completed several key training and recruiting initiatives that we believe will ensure our access to the craft skilled labor needed for future growth, including the first class at our internal electric power line worker pre-apprentice program and the acquisition of Northwest Lineman College, which closed in January 2018;
- Increased revenue by more than 23 percent and adjusted earnings per share by approximately 30 percent;
- Achieved record backlog in excess of $11 billion at year-end, which does not include several larger projects announced in 2017 and early 2018;
- Supported our customers after natural disasters in 33 states, Canada and the Caribbean, including power restoration efforts in six states and on multiple Caribbean islands during a historic hurricane season;
- Demonstrated Quanta’s commitment to our employees and our family culture through the establishment of Quanta Cares, which raised more than $1.4 million to assist Quanta employees impacted by natural disasters through donations from our employees, friends and suppliers and company-matching funds;
- Focused on positioning our base business for long-term profitable growth, as evidenced by double-digit growth in master service agreement (MSA) revenues, which was accomplished through new agreements, increased MSA share and service line expansions with many existing customers;
- Demonstrated our ability to provide differentiated solutions to our customers by signing an engineer, procure and construct (EPC) contract for the largest electric transmission project in Quanta’s history and increasing our backlog attributable to EPC projects at year-end by an estimated 25 percent as compared to year-end 2016;
- Established a market-leading presence in the downstream industrial services space through the acquisition of Stronghold, Ltd. and Stronghold Specialty Ltd., which we believe provides multiple platforms for future growth, including critical path industrial services and storage tank construction and maintenance;
- Successfully launched our communications infrastructure services in the United States, booking approximately $400 million of backlog with eight U.S. customers, onboarding hundreds of employees and performing engineering and construction services on projects in 13 states.
- Established First Infrastructure Capital and secured up to $1 billion of available capital, including $80 million from Quanta, to invest in certain infrastructure projects, and began construction on two large EPC projects in which Quanta has minority investments, including the Fort McMurray West high-voltage transmission project in Alberta.
While we are pleased with these and our other achievements in 2017, there is always room for improvement. We continue to believe there is opportunity to create significant stockholder value as we execute on our strategic initiatives, which include returning our operating margins to historical levels.
Well-Positioned in Large & Growing End Markets
We continue to believe we are in a prolific environment across our United States end markets and in the early stages of a multi-year growth cycle. Both our electric power and oil and gas infrastructure services segments grew revenues by double digits in 2017, and we expect continued growth in 2018. While larger projects capture the headlines and generate excitement, smaller projects, maintenance and everyday work drive much of our growth. We estimate this type of work grew 20 percent in 2017 and accounted for more than 75 percent of our 2017 revenues. Looking forward, we expect this activity to remain strong.
Each of our addressable markets are large, accounting for several hundred billion dollars in aggregate annual spend, and we believe there is more room for growth. We believe our overall end markets could grow expenditures at a mid-single-digit compound annual growth rate over the medium term, with opportunity for double-digit growth in some periods. For example, our top ten electric power customers in 2017 are estimated to grow their transmission and distribution capital expenditures by greater than 10 percent in the aggregate over the next two years, and the majority of this spending drives the everyday work we perform.
Construction-Led Solutions Driving Growth
Quanta has been growing, expanding and investing in craft skilled labor for two decades and, with more than 33,000 employees, has the largest, and we think, best workforce in our industry. We are utilizing our craft skilled labor and construction expertise to provide advanced solutions offerings and expand into market adjacencies that allow us to capture more of our customers’ annual spend. For example, in 2017 we organically grew our gas distribution headcount by approximately 10 percent and extended our gas distribution operations into two new states, giving us a presence in a total of 25 states. These organic expansion efforts have created short-term margin pressure, but we are confident as crew productivity increases and these operations scale that pressure will subside. We will continue to focus on and invest in growing this recurring work across our service lines, which should provide a solid and consistent foundation for long-term success that can be complemented by larger projects.
We expect to see an increase in opportunities for larger electric transmission and mainline pipeline projects over the next few years. With respect to electric transmission, in 2017 we signed contracts for AEP’s Wind Catcher Generation Tie Line project, which has a contract value in excess of $1 billion (and is not yet reflected in our backlog) and NextBridge’s Ontario East-West Tie Line project in Canada. For larger pipeline projects, we signed contracts for two spreads of Enbridge’s Line 3 Replacement project in Canada and one spread of larger diameter pipeline work for a project in West Virginia and added the estimated value of our work on the Atlantic Coast Pipeline project to backlog.
We do not operate our business to only accept what the market brings us and strive to innovate our solutions offerings to remain well ahead of industry trends. Our success in doing so over the years has proven critical in establishing the leadership position we have today. We believe the combination of our scope, scale, safety record and balance sheet gives us a competitive advantage in the markets we serve and allows us to provide new solutions to our end markets. We value our collaborative customer relationships and will continue to partner with them as they deploy their capital plans.
Committed to Our Customers and Our People
The quality of our people and our strategic focus on safety, training and being the preferred employer in our industry, along with our self-perform model, has earned us a reputation for safely executing projects on time and on budget. This has allowed us to provide cost certainty to our customers and offer a self-perform EPC solution across many of our end markets and geographies that we believe is unmatched.
As a result of the historic levels of capital and operating investments, demand for skilled labor is high and industry resources are increasingly strained. The solutions we provide are specialized, and even though we have the largest skilled workforce in the industry and the ability to expand, meeting the growing needs of our customers is challenging. For many years Quanta has made strategic investments in safety, training and recruiting to become increasingly self-reliant and to ensure we have the qualified workforce needed to grow our business and meet the long-term needs of our customers. Our ongoing investment in Quanta’s world-class training facility, our partnership and affiliations with educational and trade groups, and our other regional activity all demonstrate our commitment to meeting those needs and set us apart in the marketplace.
To that end, in January 2018 we acquired Northwest Lineman College, or NLC, a strategic and transformative acquisition for Quanta. NLC is an accredited college that we believe is the country’s premier educational and training institution for pre-apprentice and apprentice line workers. We expect the addition of NLC to enhance our ability to meet the training and recruiting demands of our industry-leading craft skill workforce.
Opportunity for Another Record Year
Quanta ended the year strong, with record annual revenues, backlog and adjusted earnings per share. We anticipate our strong financial and operational performance in 2017 to carry into 2018 and provide us with another opportunity to achieve record revenues, backlog and adjusted diluted earnings per share. We continue to believe end market drivers are firmly in place, with opportunities for base business growth, larger project awards and multi-year customer alliance programs over the near- and medium-term, and further growth of our communications infrastructure services operations.
We are successfully executing on our strategic imperatives and are proud of our accomplishments in 2017. We believe we have multiple platforms for long-term growth and future value creation that will build on our successes last year. We believe the dedication of our more than 33,000 employees is unmatched and the backbone of our company.
We are focused on operating the business for the long term and will continue to distinguish ourselves through safe execution and best-in-class field leadership. We will pursue opportunities to enhance Quanta’s core business and leadership position and provide innovative solutions to our customers. We believe Quanta’s unique operating model and entrepreneurial mindset provide the foundation that will allow us to continue to generate long-term value for all of our stakeholders.
Thank you to our employees for your hard work and dedication and to our stockholders for your continued support and the trust you place in our team here at Quanta.