My Fellow Stockholders

2016 unfolded largely as expected and while we are pleased with the substantial improvement, we are not satisfied. Our core business faced regulatory-driven project delays and generally soft end markets in Canada during the first two quarters of the year. However, markets began to recover and a significant number of our mainline pipeline projects moved into construction. Additionally, our core U.S. electric power infrastructure operations continued to perform well, demonstrating our ability to execute profitably and safely. As a result, our operations began to accelerate in the third quarter, gained momentum and finished the year strong.

Compared to 2015, our 2016 revenues increased slightly, and adjusted diluted earnings per share from continuing operations increased 36%. The end markets we serve are dynamic and present opportunities for multi-year profitable growth. There is considerable need to both maintain existing and to build new energy infrastructure, and we believe no company is better positioned to benefit from this trend than Quanta. As evidence, we ended 2016 with record twelve-month backlog, and Quanta is confident that we are well positioned to capitalize on profitable growth opportunities for years to come.

Electric Power Infrastructure Services

Our core electric power operations encountered several challenges in 2016. We faced a sluggish economy in Canada and project delays due to regulatory headwinds as well as encountering significant losses on an Alaskan power plant project that we completed during the year. Despite this difficult environment, the segment performed well. Operating income margins increased nearly 100 basis points and we are confident we can return these margins to historical levels in a reasonable timeframe.

The end market drivers that support growth in our customers’ capital budgets are also firmly in place. The North American power grid is aging, the generation mix is shifting from coal to renewables and natural gas, reliability requirements and storm hardening initiatives are on the rise, and regulation encouraging infrastructure investment is in place. As the market leader and with the largest workforce in our industry, Quanta is ideally positioned to provide unmatched solutions to our customers in the electric power market.

We believe larger electric transmission project activity experienced a trough in 2016, and expect recovery going forward. Some of the potential projects we are pursuing would be the largest in the history of the high-voltage transmission industry. With our strong resume of safely completing large, complex projects on time and on budget, we believe Quanta has a clear competitive edge in pursuing and winning these projects.

Oil & Gas Infrastructure Services

The Oil & Gas segment finished 2016 on solid footing, with significant revenue and profitability momentum in the second half of the year. This improvement was driven by a sharp increase in larger pipeline projects. To put the midyear change into perspective, segment revenue and operating income were $1.16 billion and $17.7 million for the first half of the year and $1.64 billion and $131.8 million for the second half. We expect larger pipeline project activity to remain robust for several years.

The increased pipeline activity is being driven primarily by demand for the abundant natural gas in the Marcellus and Utica shale regions. More and more gas-fired power plants are being built, replacing coal and adding required stability to the intermittency of renewable generation. Plus, liquefied natural gas exports from the U.S. have finally begun to gain traction. As the largest specialty contractor in the pipeline space, Quanta is poised to capitalize on these opportunities.

Furthermore, we expect steadily rising demand for our ongoing base business services, such as natural gas distribution, midstream gathering and pipeline integrity. For example, regulations are in place to accelerate the replacement of more than 100,000 miles of North America’s aging iron and bare steel gas pipeline infrastructure, an undertaking likely to require decades of work. We continue to enhance our core services and expand our turnkey capabilities to further strengthen our ability to capitalize on these long-term growth opportunities.

Financial Strength as a Strategic Advantage

Quanta has proven time and again that we know how to execute well on projects. I’m proud to say that we execute equally well on our balance sheet. Our financial strength is the bedrock that supports our strategies for capital deployment and growth. Through financial discipline, we have the working capital and liquidity necessary to support large projects and grow our company. We have the resources to fund the capital expenditures, acquisitions and investments that are vital to our strategic initiatives. We are able to invest and partner with customers to drive projects forward and differentiate our offerings.

Our focus on maintaining a strong balance sheet gives us great flexibility. It allows us to be patient when markets are challenged and ready for action when the right opportunities arise. For example, our financial strength enabled us to complete a two year stock repurchase effort in 2016, through which we bought back $1.7 billion in stock and reduced our outstanding shares by almost a third. We believe that every share of Quanta stock holds significantly greater earnings potential today than perhaps any time within the last 10 years. And we are determined to realize that potential.

Initiatives for Future Growth

Regardless of market cycles, Quanta pursues growth – by geography, by market and through new solutions. On the international front, we are strategically focused on Australia and Latin America. Australian oil and gas markets remain challenged in the near term, but we have been improving our operations and honing our skills and believe we will be even better positioned as the market recovers. Our Australian electric power business has been solid, and we have completed several acquisitions to increase our capabilities, which have been well received by our customers.

In Latin America, Quanta has grown its business primarily through telecommunications infrastructure projects. Among other successes, we have won two large fiber concession projects and are leveraging that experience to pursue more telecom opportunities throughout the region. We are also using our presence to pursue select opportunities in electric power and oil and gas infrastructure.

Telecom also promises to play an increasing role in our business in North America. We have grown our telecom operations in Canada by leveraging our electric power resources, reputation and relationships. In addition, Quanta has been in the U.S. telecom market since its inception, yet over the past several years we have performed limited services in the U.S. due to a non-compete arrangement associated with the sale of legacy telecom operations in 2012. Our non-compete arrangement has expired, and Quanta’s U.S. expansion efforts are now unencumbered. We believe the U.S. market offers significant growth opportunities. Telecom companies have major multi-year capital programs to push high-speed fiber and wireless technologies to meet customer demand. The complexity and scale of these programs is requiring high levels of sophistication in project management and, in some cases, full EPC capabilities. Quanta stands among few companies that can deliver. We plan to build out the business in 2017 and position our operations for long-term profitable growth.

We are also well positioned to grow through the increasing infrastructure investments that are coming in the form of concessions, private infrastructure and public-private partnerships. This market shift offers Quanta opportunities to partner with and provide comprehensive solutions to our customers. Our ability to offer price certainty on projects, our track record of safe execution and our financial strength all result in Quanta increasingly being sought out as the partner of choice in these large complex projects. To that end, we recently closed on a strategic capital partnership with select institutional infrastructure investors that provides access to a multi-billion dollar capital pool to support infrastructure projects in Quanta’s core markets which further allows Quanta to provide our customers with broad-based, fully integrated solutions.

Investing in Our Most Important Asset

We believe Quanta’s future is bright and is supported by dynamic end markets. We are competitively differentiated, the leader in our industries, financially solid, and well positioned to capitalize on growth opportunities. The primary reason we have garnered these advantages is our outstanding people. Our highest priority is to attract and retain a workforce of the highest caliber, and give them a working environment where they can deliver results for our customers effectively, and most important, safely.

We believe the key to accomplishing this priority is training. This is why we built our state-of-the-art training facility in La Grange, Texas, and operate it with world-class training programs. There is nothing like it in our industry, and though its development is primarily for the benefit of our employees and customers, we believe it also gives us a competitive advantage.

Additionally, we are establishing a workforce development program with a local university that provides students with industry-leading curriculum, field experience, and internships for engineering, construction and project management. Quanta has committed to an endowment of $3 million to support this initiative, $2.3 million of which was contributed in 2016. This relationship is an important step to ensuring we have access to high-quality, well-trained individuals capable of becoming successful mid-level managers and future leaders of Quanta.

Looking Forward

In 2016 we were able to protect our leadership position, solidify our customer relationships, execute on our strategic initiatives and maintain a strong balance sheet. We were steadfast in operating the business with a long-term strategic focus and distinguishing ourselves through safe execution and best in class field leadership. As a result, we believe we continue to be in a position to aggressively pursue our customers’ capital spend, book backlog, and expand our markets and geographies.

No matter where we are in any economic cycle, we will always take the long-term view. We will continue to distinguish ourselves through outstanding field leadership and safety. We will pursue opportunities to enhance Quanta’s core business, provide innovative solutions to our customers, and further distance ourselves from competitors. We will continue to leverage our unique operating model and entrepreneurial mindset to generate long-term value for all stakeholders. We will continue to connect in meaningful ways – to our customers, our suppliers, our stockholders, and every employee in the Quanta family.

In closing, we would like to thank you, our stockholders, for your continued support and confidence in Quanta. As always, we extend our thanks to our employees for their dedication, hard work and commitment to Quanta and our industry. We are excited to move forward with you, in prosperity and safety.

Earl C. (Duke) Austin, Jr.
President, Chief Executive Officer
and Chief Operating Officer