QUANTA SERVICES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-13831

QUANTA SERVICES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 74-2851603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1360 POST OAK BOULEVARD, SUITE 2100
HOUSTON, TEXAS 77056
(Address of principal executive offices, including ZIP Code)

(713) 629-7600
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF EACH CLASS

None

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of March 20, 2002, the aggregate market value of the Common Stock and
Limited Vote Common Stock of the Registrant held by non-affiliates of the
Registrant, based on the last sale price of the Common Stock on such date, was
approximately $1.1 billion and $14 million, respectively (for purposes of
calculating these amounts, only directors, officers and beneficial owners of 5%
or more of the outstanding capital stock of the Registrant have been deemed
affiliates).

As of March 20, 2002, the number of shares of the Common Stock of the
Registrant outstanding was 67,982,756. As of the same date, 1,112,905 shares of
Limited Vote Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.
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QUANTA SERVICES, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001

INDEX

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PART I

ITEM 1. BUSINESS

GENERAL

Quanta is a leading provider of specialized contracting services, offering
end-to-end network solutions to the electric power, gas, telecommunications and
cable television industries. Our comprehensive services include designing,
installing, repairing and maintaining network infrastructure. Deregulation,
continued outsourcing by our customers and the convergence of the electric
power, gas, telecommunications and cable television industries have resulted in
demand for our services. We have made strategic acquisitions to expand our
geographic presence, generate operating synergies with existing businesses and
develop new capabilities to meet our customers' evolving needs. Quanta was
organized in the state of Delaware in 1997.

We currently have offices nationwide, providing us the presence and
capability to quickly, reliably and effectively complete projects nationwide. We
work for many of the leading companies in the industries we serve.

Representative customers include:

- Adelphia Communications
- AOL Time Warner
- AT&T
- Carolina Power & Light
- CenturyTel
- Charter Communications
- Entergy
- Excel Communications
- Georgia Power
- Nevada Power
- Pacific Bell
- Puget Sound Energy
- Qwest
- Reliant Energy
- Sprint PCS
- Velocita
- Verizon

Our reputation for responsiveness, performance, geographic reach and a
comprehensive service offering has also enabled us to develop strong strategic
alliances with numerous customers.

INDUSTRY OVERVIEW

Based on our review of industry sources, we estimate that network
infrastructure spending by electric power, gas, telecommunications and cable
television providers was more than $45 billion in 2001 and will continue to
grow. We believe the following trends are impacting demand for our services:

Increasing Need to Upgrade Electric Power Transmission and Distribution
Networks. We believe that the aging of many electric power networks and the
increase in competition in the electric power industry will continue to spur
increased investment in electric power transmission and distribution networks.
As competition gives consumers and businesses more choice as to their provider
of electric power, we believe that concerns about power quality and reliability
will result in increased investment in transmission and distribution
infrastructure. Additionally, as deregulation accelerates the selling of
electricity across regional networks, capacity and reliability will become even
more important.

Increased Outsourcing. Competitive pressures on electric power, gas,
telecommunications and cable television providers caused by deregulation and an
increased focus on core competencies have caused an increased focus on
outsourcing of network services. For instance, although investor owned utilities
have increased the services they provide and the amount of power generated,
total employment at these companies has declined dramatically in the last decade
due, in part, to increased outsourcing. Outsourcing network services reduces
costs, provides flexibility in budgets and improves service and performance for
many of our customers.

Deregulation. Electric power companies have responded to deregulation of
the utility markets by seeking new lines of business and innovative methods to
reduce their costs. Deregulation of the telecommunications markets has spurred
investment by cable television companies, local exchange carriers and long
distance companies as they seek to protect and expand their customer bases. The
movement from a regulated

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business environment to an environment exposed to market forces has led our
customers to increase outsourcing of non-core activities, particularly network
development.

Increased Demand for Comprehensive End-to-End Solutions. We believe that
electric power, gas, telecommunications and cable television companies will seek
service providers who can rapidly and effectively design, install and maintain
their networks and continue to meet their needs as they enter new geographic and
product markets. The strategic and financial value to these companies of
geographically expanded and technologically improved networks has caused them to
place a premium on the provision of quick and reliable network solutions within
increasingly challenging scale, time and complexity constraints. Accordingly,
they are partnering with proven full-service network providers with broad
geographic reach, financial capability and technical expertise.

STRATEGY

The key elements of our growth strategy are:

Focus on Internal Growth and Integration. We believe we can improve our
internal revenue growth by providing our customers comprehensive end-to-end
solutions for their infrastructure needs. Our operating units cooperate to
spread their best practices and innovative technology and also share equipment
and human resources. Accordingly, each operating unit is well-positioned to
deepen its relationship with current customers and develop relationships with
new customers. By introducing the capabilities of our other operating units, we
offer our customers solutions to their network needs in all service areas in
which we serve.

Expand Portfolio of Services to Meet Customers' Evolving Needs. We offer
an expanding portfolio of services that allows us to develop, build and maintain
networks on both a regional and national scale and adapt to our customers'
changing and growing needs. We intend to expand further our geographic and
technological capabilities through both internal development and innovation and
through selective acquisitions.

Focus on Expanding Operating Efficiencies. We intend to:

- continue to focus on growth in our more profitable services;

- combine overlapping operations of certain of the businesses we acquire;

- use our assets more efficiently;

- increase our purchasing power to gain volume discounts in areas such as
vehicles and equipment, materials, marketing, bonding, employee benefits
and insurance;

- share pricing, bidding, licensing and other business practices among our
operating units; and

- develop and expand the use of management information systems to
facilitate financial control and asset allocation.

Pursue Strategic Acquisitions. We plan to continue to selectively pursue
acquisitions of profitable companies with strong management teams and good
reputations to broaden our customer base, expand our geographic area of
operation and grow our portfolio of services. Disciplined acquisitions allow us
to cost-effectively meet our strategic needs. Between our initial public
offering in February 1998 and December 31, 2001, we have acquired 86 companies.
We expect that there will continue to be attractive acquisition candidates due
to the highly fragmented nature of the industry, the inability of many companies
to expand and modernize due to capital constraints, and the desire of owners of
acquisition candidates for liquidity. We believe that our financial strength and
experienced management will be attractive to acquisition candidates.

SERVICES

We design, install and maintain networks for the electric power, gas,
telecommunications and cable television industries as well as commercial,
industrial and governmental entities. Increasingly, we find cross-

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over among the various service areas in which we work and many of our customers
utilize more than one service area. The following provides an overview of the
types of services we provide:

Electric Power and Gas Network Services. We provide a variety of
end-to-end services to the electric power and gas industries, which generated
approximately 40% of our pro forma combined revenues for the year ended December
31, 2001. These services include:

- installation, repair and maintenance of electric transmission lines
ranging in capacity from 69,000 volts to 760,000 volts;

- installation, repair and maintenance of electric power distribution
networks;

- design and construction of IPP transmission and substation facilities;

- design and construction of substation projects;

- installation and maintenance of natural gas transmission and distribution
systems;

- provision of cathodic protection design and installation services;

- installation of fiber optic lines for voice, video and data transmission
on existing electric power infrastructure;

- installation and maintenance of joint trench natural gas distribution
systems;

- trenching and horizontal boring for underground installations;

- cable and fault locating; and

- storm damage restoration work.

Telecommunications Network Services. We provide a variety of end-to-end
services to the telecommunications industry, which generated approximately 30%
of our pro forma combined revenues for the year ended December 31, 2001. Our
telecommunications network services include:

- fiber optic, copper and coaxial cable installation and maintenance for
video, data and voice transmission;

- design, construction and maintenance of DSL networks;

- engineering and erection of cellular, digital, PCS(R), microwave and
other wireless communications towers;

- design and installation of switching systems for incumbent local exchange
carriers, newly competitive local exchange carriers, regional Bell
operating companies and long distance providers;

- trenching and plowing applications;

- horizontal directional boring;

- rock saw, rock wheel and rock trench capabilities;

- vacuum excavation services;

- splicing and testing of fiber optic and copper networks; and

- cable locating.

Cable Television Network Services. We provide a variety of end-to-end
services to the cable television industry, which generated approximately 14% of
our pro forma combined revenues for the year ended December 31, 2001. Our cable
television network services include:

- fiber optic and coaxial cable installation and maintenance for voice,
video and data transmission;

- system design and installation;

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- upgrading power and telecommunications infrastructure for cable
installations;

- system splicing, balance, testing and sweep certification; and

- residential installation and customer connects, both analog and digital,
for cable television, telephone and Internet services.

Ancillary Services. We provide a variety of comprehensive ancillary
services to commercial, industrial and governmental entities, which generated
approximately 16% of our pro forma combined revenues for the year ended December
31, 2001. These services include:

- installation of intelligent traffic networks such as traffic signals,
controllers, connecting signals, variable message signs, closed circuit
television and other monitoring devices for governments;

- installation of cable and control systems for light rail lines, airports
and highways;

- design, installation, maintenance and repair of electrical components,
fiber optic cabling and building control and automation systems; and

- provision of specialty rock trenching, directional boring and road
milling for industrial and commercial customers.

For additional discussion concerning the revenues derived from these services,
see Notes to Consolidated Financial Statements.

CUSTOMERS, STRATEGIC ALLIANCES AND PREFERRED PROVIDER RELATIONSHIPS

Our customers include electric power, gas, telecommunications and cable
television companies, as well as commercial, industrial and governmental
entities. Our 10 largest customers accounted for 26% of our pro forma combined
revenues in 2001.

Although we are developing a centralized marketing theme, management at
each of our operating units is responsible for developing and maintaining
successful long-term relationships with customers. Our management is
incentivized to cross-sell additional services of other operating units to their
customers. In addition, our business development group promotes and markets our
services for prospective large national accounts and projects that require
services from multiple business units. Many of our customers and prospective
customers have qualification procedures for approved bidders or vendors based
upon the satisfaction of particular performance and safety standards set by the
customer. These customers typically maintain a list of vendors meeting such
standards and award contracts for individual jobs only to such vendors. We
strive to maintain our status as a preferred or qualified vendor to such
customers.

We believe that our strategic relationships with large providers of
electric power and telecommunications services will offer opportunities for
future growth. Many of these strategic relationships take the form of a
strategic alliance or long-term maintenance agreement. Strategic alliances are
typically agreements for periods of approximately two to four years that may
include an option to add a one to two year extension at the end of a contract.
Many of the strategic alliance agreements we have secured are "evergreen"
contracts with exclusivity clauses providing that Quanta will be awarded all
contracts, or a right of first refusal, for a certain type of work or in a
certain geographic region. None of these contracts, however, guarantees a
specific dollar amount of work to be performed by Quanta. Strategic alliance
agreements typically indicate an intention to

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work together and many provide us with preferential bidding procedures. Certain
of our strategic alliances and long-term maintenance relationships are listed in
the following table:

ACQUISITIONS

During 2001, we acquired nine network service or related businesses which,
when combined with our existing operations, resulted in pro forma combined
revenues for the year ended December 31, 2001 of $2.1 billion. We acquired these
nine businesses for a combined consideration of $119.9 million in cash and 2.4
million shares of our common stock.

We have developed a set of financial, geographic and management criteria
for the evaluation of acquisition candidates. These criteria evaluate a variety
of factors, including:

- historical and projected financial performance;

- experience and reputation of the candidate's management and operations;

- whether the geographic location of the candidate will enhance or expand
our market area or ability to attract other acquisition candidates;

- whether the acquisition will augment or increase Quanta's market share or
services offered or help protect our existing customer base;

- potential synergies gained by combining the acquisition candidate with
our existing operations; and

- liabilities, contingent or otherwise, of the candidate.

EMPLOYEES

As of December 31, 2001, Quanta had 2,081 salaried employees, including
executive officers, project managers or engineers, job superintendents, staff
and clerical personnel and approximately 11,406 hourly employees, the number of
which fluctuates depending upon the number and size of the projects undertaken
by us at any particular time. We do not anticipate any overall reductions in
staff as a result of the consolidation of the businesses we acquire, although
there may be some job realignments and new assignments in an effort to eliminate
overlapping and redundant positions.

Approximately 33% of our employees at December 31, 2001, were covered by
collective bargaining agreements, primarily with the International Brotherhood
of Electrical Workers (IBEW). Under our

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agreements with our unions, we agree to pay specified wages to our union
employees, observe certain workplace rules and make employee benefit payments to
multi-employer pension plans and employee benefit trusts rather than
administering the funds on behalf of these employees. These collective
bargaining agreements have varying terms and expiration dates. The majority of
the collective bargaining agreements contain provisions that prohibit work
stoppages or strikes, even during specified negotiation periods relating to
agreement renewal, and provide for binding arbitration dispute resolution in the
event of prolonged disagreement.

Each of our operating units provides a variety of health, welfare and
benefit plans for their employees who are not covered by collective bargaining
agreements. Quanta has a 401(k) plan pursuant to which eligible employees who
are not provided retirement benefits through a collective bargaining agreement
may make contributions through a payroll deduction. Quanta makes matching cash
contributions of 100% of each employee's contribution up to 3% of that
employee's salary and 50% of each employee's contribution between 3% and 6% of
such employee's salary. Quanta also has an employee stock purchase plan which
provides that eligible employees may contribute up to 10% of their cash
compensation, up to $25,000 annually, toward the semi-annual purchase of our
common stock at a discounted price. Over 1,950 of our employees participated in
the employee stock purchase plan during the year ended December 31, 2001.

Our industry is experiencing a shortage of skilled workers in certain
fields. In response to the shortage, Quanta seeks to take advantage of various
IBEW and National Electrical Contractors Association (NECA) referral programs
and hire graduates from the joint IBEW/NECA apprenticeship program which trains
qualified electrical workers.

We believe our relationships with our employees and union representatives
are good.

TRAINING, QUALITY ASSURANCE AND SAFETY

Performance of Quanta's services requires the use of equipment and exposure
to conditions that can be dangerous. Although we are committed to a policy of
operating safely and prudently, we have been and will continue to be subject to
claims by employees, customers and third parties for property damage and
personal injuries resulting from performance of our services. We perform on-site
services using employees who have completed our applicable safety and training
programs. Our policies require that employees complete the prescribed training
and service program of the operating unit for which they work in addition to
those required, if applicable, by NECA and the IBEW prior to performing more
sophisticated and technical jobs. For example, all journeymen linemen are
required by the IBEW and NECA to complete a minimum of 7,000 hours of on-the-job
training, approximately 200 hours of classroom education and extensive testing
and certification. Each operating unit requires additional training, depending
upon the sophistication and technical requirements of each particular job. We
have established company-wide training and educational programs, as well as
comprehensive safety policies and regulations, by sharing "best practices"
throughout our operations.

REGULATION

Our operations are subject to various federal, state and local laws and
regulations including:

- licensing requirements applicable to electricians and engineers;

- building and electrical codes;

- permitting and inspection requirements applicable to construction
projects;

- regulations relating to worker safety and environmental protection; and

- special bidding and procurement requirements on government projects.

We believe that we have all the licenses required to conduct our operations
and that we are in substantial compliance with applicable regulatory
requirements. Our failure to comply with applicable regulations could result in
substantial fines or revocation of our operating licenses. Many state and local
regulations governing

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electrical construction require permits and licenses to be held by individuals
who have passed an examination or met other requirements.

COMPETITION

The markets in which we operate are highly competitive, requiring
substantial resources and skilled and experienced personnel. We compete with
other independent contractors in most of the geographic markets in which we
operate, and several of our competitors are large domestic companies that may
have greater financial, technical and marketing resources than we do. In
addition, there are relatively few barriers to entry into the industries in
which we operate and, as a result, any organization that has adequate financial
resources and access to technical expertise may become a competitor. A
significant portion of our revenues is currently derived from unit price or
fixed price agreements, and price is often an important factor in the award of
such agreements. Accordingly, we could be underbid by our competitors in an
effort by them to procure such business. We believe that as demand for our
services increases, customers will increasingly consider other factors in
choosing a service provider, including technical expertise and experience,
financial and operational resources, nationwide presence, industry reputation
and dependability, which we expect to benefit contractors such as us. There can
be no assurance, however, that Quanta's competitors will not develop the
expertise, experience and resources to provide services that are superior in
both price and quality to Quanta's services, or that we will be able to maintain
or enhance our competitive position. We may also face competition from the
in-house service organizations of our existing or prospective customers,
including electric power, gas, telecommunications and cable television
companies, that employ personnel who perform some of the same types of services
as those provided by us. Although a significant portion of these services is
currently outsourced, there can be no assurance that our existing or prospective
customers will continue to outsource services in the future.

RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS

The primary risks in our operations are bodily injury and property damage.
As of August 1, 2000, we entered into agreements to insure Quanta for workers'
compensation, employer's liability, auto liability and general liability,
subject to a deductible of $500,000 per accident or occurrence. Losses up to the
deductible amounts are accrued based upon Quanta's estimates of the ultimate
liability for claims incurred and an estimate of claims incurred but not
reported. The accruals are based upon known facts and historical trends and
management believes such accruals to be adequate.

Contracts in the electric power, gas, telecommunications and cable
television industries may require performance bonds or other means of financial
assurance to secure contractual performance. If we were unable to obtain surety
bonds or letters of credit in sufficient amounts or at acceptable rates, we
might be precluded from entering into additional contracts with certain of our
customers.

PROXY SOLICITATION

On February 8, 2002, Aquila announced its intention to conduct a proxy
solicitation to replace members of our board of directors with a slate of its
own nominees. We intend to oppose the Aquila proxy contest vigorously. The proxy
contest has resulted in, and will continue to result in, the incurrence of
substantial fees and expenses and the diversion of management's time and
efforts.

As explained more fully elsewhere in this report, in the event that Aquila
prevails in its proxy contest, an event of default could occur under certain of
our debt instruments. In addition, we may not be able to retain certain of our
key personnel and may also have difficulty attracting new employees until the
proxy contest is resolved.

RISK FACTORS

Our business is subject to a variety of risks, including the risks
described below. The risks and uncertainties described below are not the only
ones facing our company. Additional risks and uncertainties not known to us or
that we currently deem immaterial may also impair our business operations. If
any of the
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following risks actually occur, our business, financial condition and results of
operations could be materially and adversely affected.

The Industries We Serve Are Subject to Rapid Technological and Structural
Changes That Could Reduce the Demand for the Services We Provide. The electric
power, gas, telecommunications and cable television industries are undergoing
rapid change as a result of technological advances and deregulation that could
in certain cases reduce the demand for our services or otherwise adversely
affect our business. New or developing technologies could displace the wireline
systems used for voice, video and data transmissions, and improvements in
existing technology may allow telecommunications and cable television companies
to significantly improve their networks without physically upgrading them. In
addition, consolidation, competition or capital constraints in the electric
power, gas, telecommunications or cable television industries may result in the
loss of one or more customers.

We May Be Unsuccessful at Generating Internal Growth. Our ability to
generate internal growth will be affected by, among other factors, our ability
to:

- expand the range of services we offer to customers to address their
evolving network needs;

- attract new customers;

- increase the number of projects performed for existing customers;

- hire and retain employees;

- open additional facilities; and

- reduce operating and overhead expenses.

In addition, our customers may reduce the number or size of projects available
to us due to their inability to obtain capital or pay for services provided.
Many of the factors affecting our ability to generate internal growth may be
beyond our control, and we cannot be certain that our strategies will be
successful or that we will be able to generate cash flow sufficient to fund our
operations and to support internal growth. Our inability to achieve internal
growth could materially and adversely affect our business, financial condition
and results of operations.

A Continued Economic Downturn May Lead to Less Demand for Our Services. If
the general level of economic activity continues to slow, our customers may
delay or cancel new projects. A number of other factors, including financing
conditions for and potential bankruptcies in the industries we serve, could
adversely affect our customers and their ability or willingness to fund capital
expenditures in the future or pay for past services.

We May Be Unsuccessful at Integrating Companies That We Acquire. We cannot
be sure that we can successfully integrate our acquired companies with our
existing operations without substantial costs, delays or other operational or
financial problems. If we do not implement proper overall business controls, our
decentralized operating strategy could result in inconsistent operating and
financial practices at the companies we acquire, and our overall profitability
could be adversely affected. Integrating our acquired companies involves a
number of special risks which could materially and adversely affect our
business, financial condition and results of operations, including:

- failure of acquired companies to achieve the results we expect;

- diversion of our management's attention from operational matters;

- difficulties integrating the operations and personnel of acquired
companies;

- inability to retain key personnel of the acquired companies;

- risks associated with unanticipated events or liabilities;

- the potential disruption of our business; and

- the difficulty of maintaining uniform standards, controls, procedures and
policies.

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If one of our acquired companies suffers customer dissatisfaction or performance
problems, the reputation of our entire company could be materially and adversely
affected.

We May Not Have Access In The Future to Sufficient Funding to Finance
Desired Growth. If we cannot secure additional financing from time to time in
the future on acceptable terms, we may be unable to support our growth strategy.
We cannot readily predict the timing, size and success of our acquisition
efforts and therefore the capital we will need for these efforts. Using cash for
acquisitions limits our financial flexibility and makes us more likely to seek
additional capital through future debt or equity financings. Our existing debt
agreements contain significant restrictions on our operational and financial
flexibility, including our ability to obtain additional debt, and if we seek
more debt we may have to agree to additional covenants that limit our
operational and financial flexibility. When we seek additional debt or equity
financings, we cannot be certain that additional debt or equity will be
available to us at all or on terms acceptable to us. Our $350.0 million credit
facility contains a requirement to obtain the consent of the lenders for
acquisitions exceeding a certain level of cash consideration. In addition, an
event of default could occur under our credit facility and senior secured notes
in the event that Aquila prevails in its recently announced proxy contest for
control of our board of directors. No such event of default exists under our
convertible subordinated notes. We cannot be certain that the affected lenders
and note holders would waive such an event of default or that we or Aquila would
be able to refinance any defaulted indebtedness.

Our Operating Results May Vary Significantly From Quarter-to-Quarter.
During the winter months, demand for our services may be lower due to inclement
weather. Additionally, our quarterly results may also be materially affected by:

- the timing and volume of work under new agreements;

- regional or general economic conditions;

- the budgetary spending patterns of customers;

- payment risk associated with the financial condition of customers;

- variations in the margins of projects performed during any particular
quarter;

- the termination of existing agreements;

- costs we incur to support growth internally or through acquisitions or
otherwise;

- losses experienced in our operations not otherwise covered by insurance;

- a change in the mix of our customers, contracts and business;

- increases in construction and design costs;

- the timing of acquisitions; and

- the timing and magnitude of acquisition assimilation costs.

Accordingly, our operating results in any particular quarter may not be
indicative of the results that you can expect for any other quarter or for the
entire year.

Our Dependence Upon Fixed Price Contracts Could Adversely Affect Our
Business. We currently generate, and expect to continue to generate, a portion
of our revenues under fixed price contracts. We must estimate the costs of
completing a particular project to bid for such fixed price contracts. The cost
of labor and materials, however, may vary from the costs we originally
estimated. These variations, along with other risks inherent in performing fixed
price contracts, may cause actual revenue and gross profits for a project to
differ from those we originally estimated and could result in reduced
profitability and losses on projects. Depending upon the size of a particular
project, variations from the estimated contract costs can have a significant
impact on our operating results for any fiscal quarter or year.

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Many of Our Contracts May Be Canceled On Short Notice and We May Be
Unsuccessful In Replacing Our Contracts as They Are Completed or Expire. We
could experience a material adverse effect on our revenue, net income and
liquidity if any of the following occur:

- our customers cancel a significant number of contracts;

- we fail to win a significant number of our existing contracts upon
re-bid; or

- we complete the required work under a significant number of non-recurring
projects and cannot replace them with similar projects.

Many of our customers may cancel our contracts with them on short notice,
typically 30-90 days, even if we are not in default under the contract. Certain
of our customers assign work to us on a project-by-project basis under master
service agreements. Under these agreements, our customers often have no
obligation to assign work to us. Our operations could be materially and
adversely affected if the anticipated volume of work is not assigned to us. Many
of our contracts, including our master service contracts, are opened to public
bid at the expiration of their terms. We cannot assure you that we will be the
successful bidder on our existing contracts that come up for bid.

Our Business Growth Could Outpace the Capability of Our Corporate
Management Infrastructure. We cannot be certain that our systems, procedures
and controls will be adequate to support our operations as they expand. Future
growth also could impose significant additional responsibilities on members of
our senior management, including the need to recruit and integrate new senior
level managers and executives. We cannot be certain that we can recruit and
retain such additional managers and executives. To the extent that we are unable
to manage our growth effectively, or are unable to attract and retain additional
qualified management, our financial condition and results of operations could be
materially and adversely affected.

The Departure of Key Personnel Could Disrupt Our Business. We depend on
the continued efforts of our executive officers and on senior management of the
businesses we acquire. Although we have entered into an employment agreement
with each of our executive officers and certain other key employees, we cannot
be certain that any individual will continue in such capacity for any particular
period of time. In the opinion of management, the risk of loss of key personnel
has been heightened by Aquila's recent announcement of its intention to conduct
a proxy solicitation to replace members of our board of directors with a slate
of its nominees. We cannot be certain that our key personnel would remain in our
employment if Aquila prevails in its proxy contest for control of our board of
directors. The loss of key personnel, or the inability to hire and retain
qualified employees, could adversely affect our business, financial condition
and results of operations. We do not carry key-person life insurance on any of
our employees.

Our Business Is Labor Intensive and We May Be Unable to Attract and Retain
Qualified Employees. Our ability to increase our productivity and profitability
will be limited by our ability to employ, train and retain skilled personnel
necessary to meet our requirements. We, like many of our competitors, are
currently experiencing shortages of qualified personnel. We cannot be certain
that we will be able to maintain an adequate skilled labor force necessary to
operate efficiently and to support our growth strategy or that our labor
expenses will not increase as a result of a shortage in the supply of skilled
personnel. Labor shortages or increased labor costs could have a material
adverse effect on our ability to implement our growth strategy and our
operations.

Our Unionized Workforce Could Adversely Affect Our Operations and
Acquisition Strategy. As of December 31, 2001, approximately 33% of our
employees were covered by collective bargaining agreements. Although the
majority of these agreements prohibit strikes and work stoppages, we cannot be
certain that strikes or work stoppages will not occur in the future. Strikes or
work stoppages would adversely impact our relationship with our customers and
could materially and adversely affect our business, financial condition and
results of operations. In addition, our selective acquisition strategy could be
adversely affected because of our union status for a variety of reasons. For
instance, our union agreements may be incompatible with the union agreements of
a business we want to acquire and some businesses may not want to become
affiliated with a union based company.

10

Our Industry Is Highly Competitive. Our industry is served by numerous
small, owner-operated private companies, a few public companies and several
large regional companies. In addition, relatively few barriers prevent entry
into our industry. As a result, any organization that has adequate financial
resources and access to technical expertise may become one of our competitors.
Competition in the industry depends on a number of factors, including price.
Certain of our competitors may have lower overhead cost structures and may,
therefore, be able to provide their services at lower rates than we are able to
provide. In addition, some of our competitors may have greater resources than we
do. We cannot be certain that our competitors will not develop the expertise,
experience and resources to provide services that are superior in both price and
quality to our services. Similarly, we cannot be certain that we will be able to
maintain or enhance our competitive position within our industry or maintain a
customer base at current levels. Further, our relationships with major utility
companies could be jeopardized in the event that Aquila prevails in its proxy
contest for control of our board of directors. We may also face competition from
the in-house service organizations of our existing or prospective customers.
Electric power, gas, telecommunications and cable television service providers
usually employ personnel who perform some of the same types of services we do.
We cannot be certain that our existing or prospective customers will continue to
outsource services in the future.

Our Results of Operations Could Be Adversely Affected as a Result of
Goodwill Impairments. When we acquire a business, we record an asset called
"goodwill" equal to the excess amount we pay for the business, including
liabilities assumed, over the fair value of the tangible assets of the business
we acquire. Through December 31, 2001, pursuant to generally accepted accounting
principles, we amortized this goodwill over its estimated useful life of 40
years following the acquisition, which directly impacted our earnings. As stated
in Note 2 of Notes to Consolidated Financial Statements under New Accounting
Pronouncements, the Financial Accounting Standards Board (FASB) issued Statement
No. 142 which provides that goodwill and other intangible assets that have
indefinite useful lives will not be amortized, but instead must be tested at
least annually for impairment, and intangible assets that have finite useful
lives should continue to be amortized over their useful lives. Statement No. 142
also provides specific guidance for testing goodwill and other nonamortized
intangible assets for impairment. The Statement requires management to make
certain estimates and assumptions in order to allocate goodwill to reporting
units and to determine the fair value of reporting unit net assets and
liabilities, including, among other things, an assessment of market conditions,
projected cash flows, investment rates, cost of capital and growth rates, which
could significantly impact the reported value of goodwill and other intangible
assets. Statement No. 142 requires, in lieu of amortization, an initial
impairment review of goodwill in 2002 and annual impairment tests thereafter.
Based on a preliminary review of the new standard, we believe that we will
record a non-cash goodwill impairment charge upon adoption and that the amount
of such charge will be material in relation to our unamortized goodwill balance.
Such charge, however, will not impact cash flow or operating income but will be
reflected as a cumulative effect of a change in accounting principle.

We Could Have Potential Exposure to Environmental Liabilities. Our
operations are subject to various environmental laws and regulations, including
those dealing with the handling and disposal of waste products, PCBs, fuel
storage and air quality. As a result of past and future operations at our
facilities, we may be required to incur environmental remediation costs and
other cleanup expenses. In addition, we cannot be certain that we will be able
to identify or be indemnified for all potential environmental liabilities
relating to any acquired business, property or assets.

Certain Provisions of Our Corporate Governing Documents Could Make an
Acquisition of Our Company More Difficult. The following provisions of our
certificate of incorporation and bylaws, as currently in effect, as well as our
stockholder rights plan and Delaware law, could discourage potential proposals
to acquire Quanta, delay or prevent a change in control of Quanta or limit the
price that investors may be willing to pay in the future for shares of our
common stock:

- our certificate of incorporation permits our board of directors to issue
"blank check" preferred stock and to adopt amendments to our bylaws;

- our bylaws contain restrictions regarding the right of stockholders to
nominate directors and to submit proposals to be considered at
stockholder meetings;

11

- our certificate of incorporation and bylaws restrict the right of
stockholders to call a special meeting of stockholders and to act by
written consent;

- we are subject to provisions of Delaware law which prohibit us from
engaging in any of a broad range of business transactions with an
"interested stockholder" for a period of three years following the date
such stockholder became classified as an interested stockholder; and

- on March 8, 2000 we adopted, and on November 15, 2001, February 12, 2002
and March 13, 2002 we amended, a stockholder rights plan that could cause
substantial dilution to a person or group that attempts to acquire us on
terms not approved by our board of directors or permitted by the
stockholder rights plan.

Aquila owns approximately 34% of the voting power of Quanta. In the event we do
not prevail in the rights plan arbitration that is described in Item 3. Legal
Proceedings, Aquila may be able to acquire a majority of the voting power of
Quanta, which would enable it to elect a majority of the board of directors and
prevent a change in control of Quanta. Aquila may not desire to sell its
interest in Quanta. These circumstances could discourage potential proposals to
acquire Quanta, delay or prevent a change in control of Quanta or limit the
price that investors may be willing to pay in the future for shares of our
common stock.

ITEM 2. PROPERTIES

FACILITIES

We lease our corporate headquarters in Houston, Texas and maintain offices
nationwide. This space is used for offices, equipment yards, warehousing,
storage and vehicle shops. We own 28 of the facilities we occupy and lease the
rest. We believe that our facilities are sufficient for our current needs.

EQUIPMENT

We operate a fleet of owned and leased trucks and trailers, support
vehicles and specialty construction equipment, such as backhoes, excavators,
trenchers, generators, boring machines, cranes, wire pullers and tensioners. As
of December 31, 2001, the total size of the rolling-stock fleet was
approximately 20,400 units. Most of this fleet is serviced by our own mechanics
who work at various maintenance sites and facilities. We believe that these
vehicles generally are well-maintained and adequate for our present operations.
We believe that we will be able to continue to lease or purchase this equipment
at lower prices due to our larger size and the volume of our leasing and
purchasing activity.

ITEM 3. LEGAL PROCEEDINGS

On November 28, 2001, Aquila filed an arbitration demand against us with
the Kansas City, Missouri office of the American Arbitration Association. In its
demand, Aquila alleged that the amendment to our stockholder rights plan adopted
by our board of directors on November 15, 2001, and subsequently ratified and
reauthorized by a committee of our board of directors, violated the terms of our
1999 securities purchase agreement with Aquila. In its demand, Aquila seeks (i)
damages which may occur if the price of our shares rises during the period in
which the rights plan amendment is in effect, (ii) a declaratory judgment that
the rights plan amendment is void, and (iii) an order requiring us to take all
necessary steps to amend our rights plan to allow Aquila to acquire up to 49% of
our shares on a fully-diluted basis without any economic penalty. The
arbitration proceeding is in the discovery stage and no prediction can be made
as to the probable outcome of the proceeding at this time.

On November 28, 2001, Aquila also filed a complaint in the Delaware Court
of Chancery challenging the adoption of our rights plan amendment. The complaint
names as defendants Quanta and directors James R. Ball, John R. Colson, Vincent
D. Foster, Louis C. Golm, Jerry J. Langdon, Garry A. Tucci and John R. Wilson.
The Delaware complaint alleges that Aquila's nominees to our board of directors
did not receive proper notice of the meetings of the board on November 15, 2001
and November 18, 2001 at which the rights plan amendment was adopted. The
complaint seeks, among other things, an order declaring that all actions taken
at the November 15 and November 18 meetings are void and enjoining our directors
from implementing

12

or enforcing any action taken at the November 15 and November 18 meetings.
Aquila sought expedited treatment of its Delaware complaint, but the Chancery
Court denied Aquila's motion to expedite the proceedings and instructed Aquila
to file an amended complaint. To date, Aquila had not filed an amended
complaint. The action remains pending and no prediction can be made at this time
as to the outcome of this litigation.

On December 21, 2001, a purported stockholder of Quanta filed a putative
class action and derivative complaint against directors Vincent D. Foster, Jerry
J. Langdon, Louis C. Golm, James R. Ball, John R. Colson, John R. Wilson and
Gary A. Tucci. The complaint also names Quanta as a nominal defendant. The
complaint alleges that the named directors breached their fiduciary duties by
taking certain actions, including adoption of the rights plan amendment, in
response to the announcement by Aquila that it intended to acquire control of
Quanta through open market purchases of our shares. The complaint seeks an order
rescinding any actions taken by the named directors in response to the
announcement by Aquila and requiring the directors to take steps necessary to
maximize the value of Quanta. The complaint further seeks damages from the named
directors on behalf of a class of stockholders and purportedly on behalf of
Quanta for the alleged harm inflicted by the actions of the named directors. On
January 22, 2002, Quanta and the named directors filed a motion to dismiss the
stockholder complaint. It is anticipated that briefing on the motion to dismiss
will begin shortly. Although the ultimate outcome and liability, if any, cannot
be determined, management, after consultation and review with counsel, believes
that the facts do not support the plaintiff's claims and that the company and
the named directors have meritorious defenses.

On March 21, 2002, Aquila filed a complaint in the Delaware Court of
Chancery naming Quanta and each member of the Special Committee of our board of
directors, consisting of all directors other than those designated by Aquila, as
defendants. The Aquila complaint alleges that the Special Committee breached its
fiduciary duty in connection with the March 13, 2002 adoption of our Stock
Employee Compensation Trust (SECT) and the new employment agreements entered
into with certain of our employees and that under Delaware statutory law the
shares of our common stock sold to the SECT are not entitled to vote. The Aquila
complaint seeks, among other things, an order that disallows any shares of
common stock held by the SECT from being voted at our next annual meeting of
stockholders, rescinds the adoption of the SECT, and voids and rescinds the new
employment agreements. On March 25, 2002, the Court denied Aquila's request for
an expedited trial on the merits and set a May 7, 2002 hearing date for Aquila's
motion to preliminarily enjoin shares held in the SECT from voting at the
upcoming annual meeting of stockholders. The action remains pending and no
prediction can be made at this time as to the outcome of this litigation.

In addition, we are from time to time a party to other litigation or
administrative proceedings that arise in the ordinary course of business. We do
not believe that any of these other proceedings, separately or in the aggregate
would, in the opinion of management, be expected to have a material adverse
effect on our results of operations or financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the stockholders during the
fourth quarter of the year ended December 31, 2001.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

We initially offered our common stock to the public on February 12, 1998,
at a price of $6.00 per share. All price data in the following table have been
adjusted to give effect to a 3-for-2 stock split, paid as a stock dividend on
April 7, 2000. Our common stock is listed on the New York Stock Exchange (NYSE)
under the symbol "PWR." The following table sets forth the high and low sales
prices of our common stock per quarter, as reported by the NYSE, for the two
most recent fiscal years.

On March 20, 2002, there were 311 holders of record of our common stock, 31
holders of record of our Limited Vote Common Stock and one holder of record of
our Series A Convertible Preferred Stock. There is no established trading market
for the Limited Vote Common Stock or Series A Convertible Preferred Stock.
However, the Limited Vote Common Stock converts into common stock immediately
upon sale.

DIVIDENDS AND PREFERRED STOCK CONVERSION

Our Series A Convertible Preferred Stock accrues a dividend at a rate of
0.5% per annum on a stated amount per share currently equal to $53.99 per share.
Dividends of $930,000 were accrued on the Series A Convertible Preferred Stock
during each of the years ended 2000 and 2001. Dividends on the Series A
Convertible Preferred Stock accumulate until paid and must be paid in full prior
to the issuance of any common stock dividend. At our annual meeting on May 24,
2000 our stockholders approved a transaction that allowed Aquila to exchange
7,924,805 shares of common stock for 1,584,961 additional shares of Series A
Convertible Preferred Stock, at a rate of five shares of common stock for one
share of Series A Convertible Preferred Stock. The transaction did not adversely
affect our other holders of common stock or Limited Vote Common Stock. The
additional shares of Series A Convertible Preferred Stock issued to Aquila in
the exchange did not give Aquila any greater voting power than it previously had
as a holder of the common stock to be exchanged, and did not give Aquila any
additional veto power. In addition, the Series A Convertible Preferred Stock has
no liquidation preference, and its certificate of designation was amended so
that the aggregate dividend payable to Aquila on the Series A Convertible
Preferred Stock was, as a result of the change in the stated amount per share,
unaffected by the transaction.

We currently intend to retain our future earnings, if any, to finance the
growth, development and expansion of our business. Accordingly, we do not
currently intend to declare or pay any cash dividends on our common stock in the
immediate future. The declaration, payment and amount of future cash dividends,
if any, will be at the discretion of our board of directors after taking into
account various factors. These factors include our financial condition, results
of operations, cash flows from operations, current and anticipated capital
requirements and expansion plans, the income tax laws then in effect and the
requirements of Delaware law. In addition, the terms of our revolving credit
facility and convertible subordinated notes include prohibitions on the payment
of cash dividends without the consent of the respective lenders.

14

RECENT SALES OF UNREGISTERED SECURITIES

Between October 1, 2001 and December 31, 2001, we completed one acquisition
in which some of the consideration was unregistered securities of the Company.
The aggregate consideration paid in this transaction was $7.3 million in cash
and 304,576 shares of common stock. This acquisition was not affiliated with any
other acquisition prior to such transaction.

All securities listed on the following table were shares of Quanta common
stock. We relied on Section 4(2) of the Securities Act of 1933 as the basis for
exemption from registration. For all issuances, the purchasers were "accredited
investors" as defined in Rule 501 promulgated pursuant to the Securities Act of
1933. All issuances were to the owners of businesses acquired in privately
negotiated transactions or such owners' assignees, and not pursuant to public
solicitation.

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ITEM 6. SELECTED FINANCIAL DATA

For financial statement presentation purposes, in connection with the
combination of the founding companies concurrent with our initial public
offering, PAR Electrical Contractors, Inc. was identified as the "accounting
acquiror." Between our initial public offering in February 1998 and December 31,
2001, we acquired 86 specialty contracting businesses. Of these, 84 were
accounted for using the purchase method of accounting and two were accounted for
using the pooling-of-interests method of accounting. Through the date of our
initial public offering, Quanta's consolidated historical financial statements
represent the financial position and results of operations of PAR as restated to
include the financial position and results of operations of companies acquired
in pooling transactions. The remaining businesses we acquired are reflected in
the financial statements beginning on their respective dates of acquisition. All
per share amounts have been adjusted to give effect to a 3-for-2 stock split,
paid as a stock dividend on April 7, 2000.

- ---------------

(a) In December 2000, Quanta agreed to conclude its obligations under its
management services agreement with Aquila in exchange for a one-time
payment to Aquila of approximately $28.6 million. In June 1999, as a result
of the termination of an Employee Stock Ownership Plan associated with a
company acquired in a pooling transaction, Quanta incurred a non-cash
compensation charge of $5.3 million and an excise tax charge of $1.1
million. Quanta also incurred $137,000 in merger charges associated with a
pooling transaction in the first quarter of 1999.

(b) For the year ended December 31, 2000, the provision reflects the result of
no tax benefit being recognized for a portion of the merger and special
charges. For the year ended December 31, 1999, it includes a non-cash
deferred tax charge of $677,000 as a result of a change in the tax status
of a company acquired in a pooling transaction from an S corporation to a C
corporation.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with Item 6.
Selected Financial Data and our Consolidated Financial Statements and related
notes thereto included in Item 8.

INTRODUCTION

We derive our revenues from one reportable segment by providing specialized
contracting services and offering comprehensive network solutions. Our customers
include electric power, gas, telecommunications and cable television companies,
as well as commercial, industrial and governmental entities. Assuming all
companies we acquired prior to December 31, 2001 had been acquired on January 1,
2001, we had pro forma combined revenues for the year ended December 31, 2001 of
$2.1 billion, of which 40% was attributable to electric power and gas companies,
30% was attributable to telecommunications customers, 14% was attributable to
cable television operators and 16% was attributable to ancillary services, such
as installing intelligent traffic networks, cable and control systems for light
rail lines, airports and highways, and providing specialty rock trenching,
directional boring and road milling for industrial and commercial customers. We
acquired nine companies in 2001, three of which have continued as separate
operating and reporting subsidiaries, or "platform" companies, while the
remaining six acquired companies were "tuck-in" acquisitions whose operating and
accounting activities were absorbed into other operating subsidiaries.

We enter into contracts principally on the basis of competitive unit price
or fixed price bids, the final terms and prices of which we frequently negotiate
with the customer. Although the terms of our contracts vary considerably, most
are made on either a unit price or fixed price basis in which we agree to do the
work for a price per unit of work performed (unit price) or for a fixed amount
for the entire project (fixed price). We also perform services on a cost-plus or
time and materials basis. We complete most installation projects within one
year, while we frequently provide maintenance and repair work under open-ended,
unit price master service agreements which are renewable annually. We generally
recognize revenue when services are performed except when work is being
performed under fixed price contracts. We typically record revenues from fixed
price contracts on a percentage-of-completion basis, using the cost-to-cost
method based on the percentage of total costs incurred to date in proportion to
total estimated costs to complete the contract. Some of our customers require us
to post performance and payment bonds upon execution of the contract, depending
upon the nature of the work to be performed. Our fixed price contracts often
include payment provisions pursuant to which the customer withholds a 5% to 10%
retainage from each progress payment and remits the retainage to us upon
completion and approval of the work.

Cost of services consists primarily of salaries, wages and benefits to
employees, depreciation, fuel and other vehicle expenses, equipment rentals,
subcontracted services, insurance, facilities expenses, materials and parts and
supplies. Our gross margin, which is gross profit expressed as a percentage of
revenues, is typically higher on projects where labor, rather than materials,
constitutes a greater portion of the cost of services. We can predict materials
costs more accurately than labor costs. Therefore, to compensate for the
potential variability of labor costs, we seek to maintain higher margins on
labor-intensive projects. Certain of our subsidiaries were previously subject to
deductibles ranging from $100,000 to $1,000,000 for workers' compensation
insurance and, as of August 1, 2000, we have a deductible of $500,000 per
occurrence related to

17

workers' compensation, employer's liability, automobile and general liability
claims. In addition, effective January 1, 2002, we consolidated the various
non-union employee related health care benefits plans that existed at certain of
our subsidiaries into one corporate plan which is subject to a deductible of
$250,000 per claimant per year. Fluctuations in insurance accruals related to
these deductibles could have an impact on operating margins in the period in
which such adjustments are made. Due in part to the events of September 11,
2001, the insurance market for large risks, including specialty service
contractors, continues to experience increasing premiums. This increased pricing
pressure may cause us to increase our deductibles to defray certain of these
costs. We continue to build long-term relationships with our insurance carriers
to minimize such market swings.

Selling, general and administrative expenses consist primarily of
compensation and related benefits to management, administrative salaries and
benefits, marketing, office rent and utilities, communications, professional
fees and bad debt expense. Selling, general and administrative expenses can be
impacted by our customers inability to pay for services performed.

Through December 31, 2001, we have recorded goodwill of $1.1 billion, which
primarily equals the excess amount we have paid for businesses over the fair
value of the tangible and intangible assets of such businesses acquired using
the purchase method of accounting. Through December 31, 2001, we amortized this
goodwill over its estimated useful life of 40 years as a non-cash charge to
operating income. We are unable to deduct the majority of amortized goodwill
from our income for tax purposes.

SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS

Our results of operations can be subject to seasonal variations. During the
winter months, demand for new projects and new maintenance service arrangements
may be lower due to reduced construction activity. However, demand for repair
and maintenance services attributable to damage caused by inclement weather
during the winter months may partially offset the loss of revenues from lower
demand for new projects and new maintenance service arrangements. Additionally,
our industry can be highly cyclical. As a result, our volume of business may be
adversely affected by declines in new projects in various geographic regions in
the U.S. Typically, we experience lower gross and operating margins during the
winter months. The timing of acquisitions, variations in the margins of projects
performed during any particular quarter, the timing and magnitude of acquisition
assimilation costs, regional economic conditions and our customer's access to
capital may also materially affect quarterly results. Accordingly, our operating
results in any particular quarter may not be indicative of the results that can
be expected for any other quarter or for the entire year.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2001, we had cash and cash equivalents of $6.3 million,
working capital of $335.6 million and long-term debt of $500.3 million, net of
current maturities. Our long-term debt balance at that date included borrowings
of $109.3 million under our credit facility, $210.0 million of senior secured
notes, $172.5 million of convertible subordinated notes and $8.5 million of
other debt.

During the year ended December 31, 2001, operating activities provided net
cash to us of $210.0 million. Operating cash flow before changes in working
capital and other operating accounts totaled $196.6 million. Net changes in
working capital and other operating accounts generated $13.4 million, net in
2001, primarily as a result of management focus on working capital and a general
business slowdown. Cash flow from operations is primarily influenced by demand
for our services, operating margins and the type of services we provide.
Acquisitions created significant changes in our working capital accounts
throughout the year and such accounts are not comparable to prior periods. We
used net cash in investing activities of $221.8 million, including $119.5
million used for the purchase of businesses, net of cash acquired and $85.0
million used for additions of property and equipment. Financing activities
provided net cash of $0.8 million, resulting primarily from $16.5 million in net
borrowings under our credit facility and $8.7 million from the issuance of stock
under the employee stock purchase plan, partially offset by $15.0 million in net
repayments of long-term debt and $15.3 million used for the purchase of treasury
stock.

18

We currently have a $350.0 million credit facility with 14 participating
banks. The credit facility is secured by a pledge of all of the capital stock of
our operating subsidiaries and the majority of our assets. We use the credit
facility to provide funds to be used for working capital, to finance
acquisitions and for other general corporate purposes. Amounts borrowed under
the credit facility bear interest at a rate equal to either (a) LIBOR plus 1.00%
to 2.00%, as determined by the ratio of our total funded debt to EBITDA (as
defined in the credit facility) or (b) the bank's prime rate plus up to 0.25%,
as determined by the ratio of our total funded debt to EBITDA. We pay commitment
fees of 0.25% to 0.50% (based on the ratio of our total funded debt to EBITDA)
on any unused borrowing capacity under the credit facility. Our subsidiaries
guarantee repayment of all amounts due under the credit facility, and the credit
facility restricts pledges of material assets. We agreed to usual and customary
covenants for a credit facility of this nature, including a prohibition on the
payment of dividends on common stock, certain financial ratios and indebtedness
covenants and a requirement to obtain the consent of the lenders for
acquisitions exceeding a certain level of cash consideration. As of March 20,
2002, we had borrowing availability of $199.6 million under the credit facility.
The weighted-average borrowing rate on the credit facility for the year ended
December 31, 2001 was 5.55%.

As of December 31, 2001, we had $210.0 million of senior secured notes
which have maturities ranging from four to nine years with a weighted average
interest rate of 8.41% and, pursuant to an intercreditor agreement, rank equally
in right of repayment with indebtedness under our credit facility. The senior
secured notes have financial covenants similar to those under the credit
facility.

As of December 31, 2001, we had $172.5 million in convertible subordinated
notes that bear interest at 4.0% per year and are convertible into shares of our
common stock at a price of $54.53 per share, subject to adjustment as a result
of certain events. The convertible subordinated notes require semi-annual
interest payments until the notes mature on July 1, 2007. We have the option to
redeem some or all of the convertible subordinated notes beginning July 3, 2003
at specified redemption prices, together with accrued and unpaid interest. If
certain fundamental changes occur, as described in the indenture under which we
issued the convertible subordinated notes, holders of the convertible
subordinated notes may require us to purchase all or part of their notes at a
purchase price equal to 100% of the principal amount, plus accrued and unpaid
interest.

We have specifically provided for the possibility of a non-cash goodwill
impairment charge in our credit facility resulting from the adoption of SFAS No.
142 and, accordingly, expect no impact on our credit facility as a result of
this charge. We are currently seeking to avoid any potential covenant violations
through a similar amendment with holders of our senior secured notes and expect
the completion of an amendment prior to the occurrence of any covenant
violation. A goodwill impairment charge will not violate any covenants in our
convertible subordinated notes.

Other Commitments. As is common in our industry, we have entered into
certain off-balance sheet arrangements in the ordinary course of business that
result in risks not directly reflected in our balance sheets. Our significant
off-balance sheet transactions include liabilities associated with
non-cancelable operating leases, letter of credit obligations and surety
guarantees. We have not engaged in any off-balance sheet financing arrangements
through special purpose entities.

We enter into non-cancelable operating leases for many of our facility,
vehicle and equipment needs. These leases allow us to conserve cash by paying a
monthly lease rental fee for use of facilities, vehicles and equipment rather
than purchasing them. At the end of the lease, we have no further obligation to
the lessor. We may decide to cancel or terminate a lease before the end of its
term. Typically we are liable to the lessor for the remaining lease payments
under the term of the lease.

Some customers require us to post letters of credit to guarantee
performance under our contracts and to ensure payment to our subcontractors and
vendors under those contracts. Certain of our vendors also require letters of
credit to ensure reimbursement for amounts they are disbursing on behalf of us,
such as to beneficiaries under our self-funded insurance programs. Such letters
of credit are generally issued by a bank or similar financial institution. The
letter of credit commits the issuer to pay specified amounts to the holder of
the letter of credit if the holder demonstrates that we have failed to perform
specified actions. If this were to occur, we would be required to reimburse the
issuer of the letter of credit. Depending on the circumstances of such a
reimbursement, we may also have to record a charge to earnings for the
reimbursement. To date we
19

have not had a claim made against a letter of credit that resulted in payments
by the issuer of the letter of credit or by us and do not believe that it is
likely that any claims will be made under a letter of credit in the foreseeable
future.

Many customers, particularly in connection with new construction, require
us to post performance and payment bonds issued by a financial institution known
as a surety. These bonds provide a guarantee to the customer that we will
perform under the terms of a contract and that we will pay subcontractors and
vendors. If we fail to perform under a contract or to pay subcontractors and
vendors, the customer may demand that the surety make payments or provide
services under the bond. We must reimburse the surety for any expenses or
outlays it incurs. To date, we have not had any significant reimbursements to
our surety for bond-related costs. We believe that it is unlikely that we will
have to fund claims under our surety arrangements in the foreseeable future.

The Company's future contractual obligations, including interest under
capital leases, are as follows (in thousands):

The Company also had $46.4 million in letters of credit outstanding under
our credit facility primarily to secure obligations under our casualty insurance
program at year-end. While not actual borrowings, letters of credit do reflect
potential liabilities under our credit facility and therefore are treated as a
use of borrowing capacity under our credit facility. These are irrevocable
stand-by letters of credit with maturities expiring at various times throughout
2002. Upon maturity, it is expected that the majority of these letters of credit
will be renewed for subsequent one year periods. Borrowing availability under
our credit facility was $194.3 million as of December 31, 2001.

Stock Repurchase Plan. Our board of directors has authorized a Stock
Repurchase Plan under which up to $75.0 million of our common stock may be
repurchased. Under the Stock Repurchase Plan, we may conduct purchases through
open market transactions in accordance with applicable securities laws. During
2001, we purchased 986,000 shares of common stock for approximately $15.3
million. The amount of shares purchased and the timing of any future purchases
will be based on a number of factors, including the market price of the stock,
market conditions and as our management deems appropriate.

Stock Employee Compensation Trust. On March 13, 2002, our board of
directors approved the creation of a SECT to fund certain of our future employee
benefit obligations using our common stock. The SECT was established by selling
8.0 million shares of our common stock, including the 986,000 shares we
purchased during 2001 pursuant to our Stock Repurchase Plan, to the SECT in
exchange for a promissory note plus an amount equal to the aggregate par value
of the shares.

The SECT is a trust that holds shares of our common stock to be used to
fund our obligations during the term of the trust in respect of certain benefit
plans. The SECT will release the shares over 15 years, the life of the trust, as
the note is paid down through contributions by us to satisfy certain benefit
requirements of our benefit plans. In addition, we believe that the SECT will
reduce our cash obligations to fund these programs and provide us with a
pre-determined method to increase our equity base over time, which we believe
will have a positive impact on our credit ratios. We will recognize compensation
expense for certain shares released based on the fair value of such shares as
they are released from the SECT. Unallocated shares held by the SECT will not be
included in calculating our earnings per share. In all matters submitted to our
stockholders for a vote or any tender offers made to our stockholders, the
unallocated shares in the SECT will be voted or tendered based on the direction
of the participants in our broad-based Employee Stock Purchase Plan.

Litigation. On November 28, 2001, Aquila filed an arbitration demand
against us with the Kansas City, Missouri office of the American Arbitration
Association. In its demand, Aquila alleged that the amendment to our stockholder
rights plan adopted by our board of directors on November 15, 2001, and
subsequently ratified

20

and reauthorized by a committee of our board of directors, violated the terms of
our 1999 securities purchase agreement with Aquila. In its demand, Aquila seeks
(i) damages which may occur if the price of our shares rises during the period
in which the rights plan amendment is in effect, (ii) a declaratory judgment
that the rights plan amendment is void, and (iii) an order requiring us to take
all necessary steps to amend our rights plan to allow Aquila to acquire up to
49% of our shares on a fully-diluted basis without any economic penalty. The
arbitration proceeding is in the discovery stage and no prediction can be made
as to the probable outcome of the proceeding at this time or as to the amount,
if any, in damages we may be found to owe. In addition, defense fees will be
incurred associated with this case and other litigation with Aquila and no
prediction can be made as to the range of these fees.

In addition, we are from time to time a party to other litigation or
administrative proceedings that arise in the ordinary course of business. We do
not believe that any of these other proceedings, separately or in the aggregate
would, in the opinion of management, be expected to have a material adverse
effect on our results of operations or financial position.

Proxy Solicitation. On February 8, 2002, Aquila announced its intention to
conduct a proxy solicitation to replace members of our board of directors with a
slate of its own nominees. We intend to oppose the Aquila proxy contest. The
proxy contest has resulted in, and will continue to result in, the incurrence of
substantial fees and no prediction can be made as to the total amount of these
fees.

Change of Control. We entered into new employment agreements with certain
employees, as of March 13, 2002, which become effective upon a change of control
(as defined in the new employment agreements) of Quanta. The new employment
agreements supplemented existing employment agreements already in effect. The
new employment agreements provide that, following a change of control, if we
terminate the employee's employment without cause (as defined in the new
employment agreements), the employee terminates employment for good reason (as
defined in the new employment agreements), or the employee's employment
terminates due to death or disability, we will pay certain amounts to the
employee, which may vary with the level of the employee's responsibility and the
terms of the employee's prior employment arrangements. In addition, in the case
of certain senior executives, these payments would also be due if the employee
terminates his or her employment within the 30-day window period commencing six
months after the change in control.

In addition, an event of default could occur under our credit facility and
senior secured notes in the event that Aquila prevails in its recently announced
proxy contest for control of our board of directors. No such event of default
provision exists under our convertible subordinated notes. We cannot be certain
that the affected lenders and note holders would waive such an event of default
or that we or Aquila would be able to refinance any defaulted indebtedness.

Acquisitions. During 2001, we acquired nine companies for an aggregate
consideration of 2.4 million shares of common stock and $119.9 million in cash.
The cash portion of such consideration was provided by proceeds from borrowings
under the credit facility.

We anticipate that our cash flow from operations and our credit facility
will provide sufficient cash to enable us to meet our working capital needs,
debt service requirements and planned capital expenditures for property and
equipment for at least the next 12 months. However, if companies we wish to
acquire are unwilling to accept our common stock as part of the consideration
for the sale of their businesses, we could be required to utilize more cash to
complete acquisitions. If sufficient funds were not available from operating
cash flow or through borrowings under the credit facility, we may be required to
seek additional financing through the public or private sale of equity or debt
securities. There can be no assurance that we could secure such financing if and
when we need it or on terms we would deem acceptable.

Concentration of Credit Risk. The Company grants credit, generally without
collateral, to its customers, which include electric power and gas companies,
telecommunications and cable television system operators, governmental entities,
general contractors, builders and owners and managers of commercial and
industrial properties located primarily in the United States. Consequently, the
Company is subject to potential credit risk related to changes in business and
economic factors throughout the United States. However, the Company generally is
entitled to payment for work performed and has certain lien rights on that work
and concentrations
21

of credit risk are limited due to the diversity of the Company's customer base.
Further, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk. No
customer accounted for more than 10% of accounts receivable or revenues as of or
during the years ended December 31, 1999, 2000 or 2001.

Related Party Transactions. In the normal course of business, we from time
to time enter into transactions with related parties. These transactions
typically take the form of network service work for Aquila or facility leases
with prior owners. See additional discussion in Note 12 of Notes to Consolidated
Financial Statements.

INFLATION

Due to relatively low levels of inflation experienced during the years
ended December 31, 1999, 2000 and 2001, inflation did not have a significant
effect on our results.

SIGNIFICANT BALANCE SHEET CHANGES

Total assets increased approximately $171.0 million in 2001 compared to
2000. This increase is primarily due to the following:

- Goodwill, net increased $131.0 million resulting from acquisitions in
2001.

- Property and equipment, net increased $44.5 million due to expenditures
for equipment necessary to perform contracts and equipment obtained
through the acquisition of nine companies during 2001.

- Other assets, net increased $18.7 million due primarily to notes
receivable from one of our customers. We have agreed to long-term payment
terms while this customer is pursuing alternative financing. The
receivables are partially secured and bear interest at 9% per year. At
December 31, 2001, the total amount due under this arrangement was $27.6
million, with $23.4 million classified as non-current.

- Prepaid expenses and other current assets increased $12.2 million,
primarily as a result of $9.7 million of current deferred tax assets
associated with various expenses that are not currently deductible.

- The above increases were partially offset by decreased accounts
receivable and costs and estimated earnings in excess of billings on
uncompleted contracts of $29.4 million that resulted from a provision of
$20.2 million to allow for uncollectible receivables associated with the
continued decline in the financial strength of certain customers in the
telecommunications industry, continued emphasis on working capital
management and lower levels of revenue during the fourth quarter of 2001.

In 2001, total liabilities increased approximately $33.2 million and
stockholders' equity increased approximately $137.8 million. These increases
were primarily due to the following:

- Stockholders' equity increased $137.8 million during 2001. This was
primarily the result of the issuance of approximately $49.5 million in
shares of common stock for the acquisition of purchased companies, the
issuance of approximately $14.7 million in shares of common stock
pursuant to the employee stock purchase plan and stock option exercises,
and net income of $84.8 million. These increases were partially offset by
$15.3 million of purchases of common stock under the Stock Repurchase
Plan.

- Deferred income taxes and other non-current liabilities increased $29.0
million due to an increase of $21.8 million in deferred income tax
liabilities resulting primarily from timing differences associated with
property, equipment and goodwill and an increase of $8.7 million in
self-insurance accruals related to claims that are not expected to be
settled during 2002.

22

RESULTS OF OPERATIONS

The following table sets forth selected statements of operations data and
such data as a percentage of revenues for the years indicated (dollars in
thousands):

YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000

Revenues. Revenues increased $221.6 million, or 12.4%, to $2.01 billion
for the year ended December 31, 2001. This increase was attributable to strong
growth in electric power and gas revenues as a result of increased outsourcing
and deregulation, a full year of contributed revenues in 2001 for those
companies acquired in 2000 and revenues of $42.3 million from platform companies
acquired in 2001 which continued to exist as separate reporting subsidiaries.
The increase was partially offset by decreased revenues from telecommunications
customers due in part to the continued inability of certain of the customers to
raise new capital and the overall downturn in the national economy.

Gross profit. Gross profit decreased $0.3 million to $413.8 million for
the year ended December 31, 2001. Gross margin decreased from 23.1% for the year
ended December 31, 2000 to 20.5% for the year ended December 31, 2001. The
decrease in gross margin resulted from lower margins on work performed for
telecommunications customers due to increased pricing pressures, lower asset
utilization and the economic factors noted above, partially offset by higher
margins received on work performed for the electric power and gas customers.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased $51.0 million, or 35.5%, to $194.6 million for
the year ended December 31, 2001. Selling, general and administrative expenses
for the year ended December 31, 2001 include $20.5 million in charges consisting
of: a charge of $16.2 million to provide allowances for accounts receivable risk
associated with the continued decline in the financial strength of certain
customers in the telecommunications industry, $3.2 million in charges associated
with the realignment of field personnel and discontinuance of negotiations
regarding the acquisition of certain telecommunications contractors and $1.1
million in costs associated with negotiations with Aquila. In addition, $4.2
million of the increase was attributable to the platform companies we acquired
subsequent to December 31, 2000. Selling, general and administrative expenses
also included a full period of costs in 2001 associated with those companies
acquired during 2000. The remainder of the increase was attributable to tuck-in
acquisitions and the continued establishment of infrastructure to facilitate our
growth and to integrate our acquired businesses. As a percentage of revenues,
selling, general and administrative expenses increased due to the items noted
above.

Merger and special charges. In December 2000, we agreed to conclude our
obligations under the management services agreement with Aquila in exchange for
a one-time payment to Aquila of approximately $28.6 million.

23

Interest expense. Interest expense increased $10.4 million, or 40.3%, to
$36.1 million for the year ended December 31, 2001, due to higher average levels
of debt experienced during 2001.

Provision for income taxes. The provision for income taxes was $71.2
million for the year ended December 31, 2001, with an effective tax rate of
45.4% compared to $93.3 million for the year ended December 31, 2000 and an
effective tax rate of 46.9%. In 2000, the provision reflected a portion of the
merger and special charges for which no tax benefit had been provided.

Net income. Net income decreased $20.0 million, or 18.9%, to $85.8 million
for the year ended December 31, 2001, compared to $105.7 million for the year
ended December 31, 2000.

Diluted earnings per share before charges. For the year ended December 31,
2001, we incurred $20.5 million in charges, consisting of $16.2 million to
provide allowances for certain accounts receivable, $3.2 million in charges
associated with the realignment of field personnel and certain acquisition costs
and $1.1 million in costs associated with negotiations with Aquila. Diluted
earnings per share for the year ended December 31, 2001, excluding these charges
and the tax related impacts of these charges, was $1.27.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

Revenues. Revenues increased $867.6 million, or 93.7%, to $1.8 billion for
the year ended December 31, 2000. This increase was attributable to strong
growth in key business areas as a result of greater demand for bandwidth,
increased outsourcing, deregulation and industry convergence, a full year of
contributed revenues in 2000 for those companies acquired in 1999, revenues of
$226.5 million from platform companies acquired in 2000 which continued to exist
as separate reporting subsidiaries, as well as contributed revenues from tuck-in
acquisitions whose operations were absorbed into other operating subsidiaries.

Gross profit. Gross profit increased $199.8 million, or 93.2%, to $414.1
million for the year ended December 31, 2000 as a result of higher revenues.
Gross margin decreased slightly from 23.2% for the year ended December 31, 1999
to 23.1% for the year ended December 31, 2000. This decrease in gross margin
resulted from lower margins on work performed for gas transmission and inside
electrical customers.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased $63.4 million, or 79.2%, to $143.6 million for
the year ended December 31, 2000. This increase was attributable to a full year
of costs in 2000 associated with companies acquired in 1999, $15.3 million of
additional selling, general and administrative expenses attributable to the
platform companies we acquired in 2000 and the continued establishment of
infrastructure to facilitate our growth and integrate our acquired businesses.
As a percentage of revenues, selling, general and administrative expenses
decreased due to better absorption associated with a higher level of revenues.

Merger and special charges. Merger and special charges increased $22.0
million, or 334.5%, to $28.6 million for the year ended December 31, 2000. In
December 2000, we agreed to conclude our obligations under the management
services agreement with Aquila in exchange for a one-time payment to Aquila of
approximately $28.6 million. Merger and special charges for the year ended
December 31, 1999 included $5.3 million of non-cash compensation charges, which
were related to the allocation of shares of common stock to participants in an
employee stock ownership plan associated with one of the companies we acquired
in a pooling transaction, and $1.1 million of related excise tax charges.

Interest expense. Interest expense increased $10.5 million, or 69.3%, to
$25.7 million for the year ended December 31, 2000, due to higher levels of debt
resulting from the acquisitions of the companies we purchased in 2000. We also
borrowed funds under our credit facility for equipment purchases and other
operating activities to support higher levels of revenue. In addition, interest
expense increased due to higher interest rates under our credit facility during
2000 and from our issuance of the senior secured notes in March 2000. These
increases were partially offset by lower interest rates on the convertible
subordinated notes issued in July 2000.

Provision for income taxes. The provision for income taxes was $93.3
million for the year ended December 31, 2000, with an effective tax rate of
46.9% compared to $49.0 million for the year ended

24

December 31, 1999 and an effective tax rate of 47.6%. In 2000, the provision
reflected a portion of the merger and special charges for which no tax benefit
had been provided. In 1999, the provision reflected the non-deductibility of the
merger and special charges and a non-cash non-recurring tax charge of $677,000
as a result of a change in the tax status of a company acquired in a
pooling-of-interest transaction from an S corporation to a C corporation.

Net income. Net income increased $51.8 million, or 96.0%, to $105.7
million for the year ended December 31, 2000, compared to $53.9 million for the
year ended December 31, 1999.

Diluted earnings per share before charges. In December 2000, the Company
agreed to conclude its obligations under its management services agreement with
Aquila in exchange for a one-time payment to Aquila of approximately $28.6
million. Diluted earnings per share for the year ended December 31, 2000
excluding this charge and the related tax impact was $1.72.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 requires that all business combinations initiated after June 30, 2001,
be accounted for using the purchase method. The FASB also issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill be
assessed at least annually for impairment by applying a fair-value based test.
Goodwill will no longer be subject to amortization over its estimated useful
life. In addition, acquired intangible assets are required to be recognized and
amortized over their useful lives if the benefit of the asset is based on
contractual or legal rights. While most provisions of SFAS No. 142 are effective
for the Company beginning January 1, 2002, goodwill and intangible assets
acquired after June 30, 2001, are subject immediately to the non-amortization
and amortization provisions of the statement, respectively. At December 31,
2001, our net goodwill was $1.037 billion and annual amortization of such
goodwill was approximately $26 million.

Based on a preliminary review of the new standard, we believe that we will
record a non-cash goodwill impairment charge upon adoption and that the amount
of such charge will be material in relation to our unamortized goodwill balance.
Such charge, however, will not impact cash flow or operating income but will be
reflected as a cumulative effect of a change in accounting principle.

We have specifically provided for the possibility of a non-cash goodwill
impairment charge in our credit facility resulting from the adoption of SFAS No.
142, and accordingly, expect no impact on our credit facility as a result of
this charge. We are currently seeking to avoid any potential covenant violations
through a similar amendment with holders of our senior secured notes and expect
the completion of an amendment prior to the occurrence of any covenant
violation. A goodwill impairment charge will not violate any covenants in our
convertible subordinated notes.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of APB
Opinion 30. SFAS No. 144 addresses the financial accounting and reporting for
the impairment or disposal of long-lived assets and establishes criteria for
determining when a long-lived asset is held for sale. We are required to and
will adopt SFAS No. 144 on January 1, 2002, and believe that the adoption will
not have a material effect on our consolidated financial position or results of
operations.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent assets and liabilities
known to exist at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. The
Company evaluates its estimates on an ongoing basis, based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. There can be no assurance that actual results will not
differ from those
25

estimates. We believe the following accounting policies, which are also
described in Note 2 of Notes to Consolidated Financial Statements, affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:

Accounts Receivable and Provision for Doubtful Accounts. As discussed
in Note 2 of Notes to Consolidated Financial Statements, we provide an
allowance for doubtful accounts when collection of an account receivable is
considered doubtful. Inherent in the assessment of the allowance for
doubtful accounts are certain judgements and estimates including, among
others, our customer's access to capital, our customer's willingness to
pay, general economic conditions and the ongoing relationship with the
customer.

Goodwill. As stated in Note 2 of Notes to Consolidated Financial
Statements under New Accounting Pronouncements, FASB Statement No. 142
provides that goodwill and other intangible assets that have indefinite
useful lives will not be amortized, but instead must be tested at least
annually for impairment, and intangible assets that have finite useful
lives should continue to be amortized over their useful lives. Statement
No. 142 also provides specific guidance for testing goodwill and other
nonamortized intangible assets for impairment. The Statement requires
management to make certain estimates and assumptions in order to allocate
goodwill to reporting units and to determine the fair value of reporting
unit net assets and liabilities, including, among other things, an
assessment of market conditions, projected cash flows, investment rates,
cost of capital and growth rates, which could significantly impact the
reported value of goodwill and other intangible assets, as compared to our
accounting policy for the assessment of goodwill impairment in 2001, which
was based on an undiscounted cash flow model.

Revenue Recognition. We typically record revenues from fixed price
contracts on a percentage-of-completion basis, using the cost-to-cost
method based on the percentage of total costs incurred to date in
proportion to total estimated costs to complete the contract. Changes in
job performance, job conditions and final contract settlements, among
others, are the factors that influence the assessment of the total
estimated costs to complete these contracts.

Self-Insurance. We are insured for workers' compensation, employer's
liability, auto liability and general liability claims, subject to a
deductible of $500,000 per accident or occurrence. In addition, effective
January 1, 2002, we consolidated the various non-union employee related
health care benefits plans that existed at certain of its subsidiaries into
one corporate plan which is subject to a deductible of $250,000 per
claimant per year. Losses up to the deductible amounts are accrued based
upon our estimates of the ultimate liability for claims incurred and an
estimate of claims incurred but not reported. However, insurance
liabilities are difficult to assess and estimate due to unknown factors,
including the severity of an injury, the determination of our liability in
proportion to other parties, the number of incidents not reported and the
effectiveness of our safety program. The accruals are based upon known
facts and historical trends and management believes such accruals to be
adequate.

OUTLOOK

The following statements are based on current expectations. These
statements are forward looking, and actual results may differ materially.

We expect continued growth and demand for our services from our utility and
gas customers throughout 2002. We expect continued weakness in demand for our
services from our telecommunications customers and relatively level demand for
our services from our cable television and ancillary customers. The economic
conditions prevalent in 2001 impacted our ability to grow at historical levels
and a continued economic downturn may lead to less demand for our services.

We intend to continue to emphasize internal growth, although we also plan
to continue to selectively pursue acquisitions of profitable companies with
strong management teams and good reputations to broaden our customer base,
expand our geographic area of operation and grow our portfolio of services. We
regularly evaluate potential acquisition opportunities, but we are not currently
engaged in any negotiations to make any material acquisitions.
26

FORWARD LOOKING STATEMENTS

Except for the historical financial information contained in this report,
statements made or incorporated by reference in this report may be considered
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-
looking statements include, without limitation, declarations regarding our
intent, belief or current expectations, statements regarding the future results
of acquired companies and our gross margins and any other statement that may
project, indicate or imply future results, performance or achievements. Such
statements may contain the words "expect," "intend," "plan," "anticipate,"
"estimate," "believe," "will be," "will continue," "will likely result" and
similar expressions. Statements in this report that contain forward-looking
statements include, but are not limited to, discussions regarding future market
conditions and the effect of such conditions on our future results of operations
(see "Business -- Industry Overview," "-- Strategy" and "-- Customers, Strategic
Alliances and Preferred Provider Relationships") and future uses of and
requirements for financial resources including, but not limited to, expenditures
related to future acquisitions (see "-- Liquidity and Capital Resources"). Any
such forward-looking statements are not guarantees of future performance and are
subject to a variety of risks and uncertainties. Such risks and uncertainties
include, among others, general economic and business conditions, the pace and
nature of technological change, our ability to integrate companies we acquire,
our ability to generate internal growth, competition, regulatory initiatives and
compliance with governmental regulations, customer preferences and ability to
raise capital, the outcome of our proxy contest with Aquila and various other
matters, many of which are beyond our control. Actual results could differ
materially from those indicated by such forward-looking statements. Among the
important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are those discussed in
"Business -- Risk Factors" in this report. Given these risks and uncertainties,
investors should not place undue reliance on forward-looking statements. We
expressly disclaim any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statement to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any forward-looking statement is based.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk primarily related to potential adverse
changes in interest rates and, to a certain extent, commodity prices, as
discussed below. Management does not generally use derivative financial
instruments for trading or to speculate on changes in interest rates or
commodity prices. As of December 31, 2001, however, we had one derivative
contract outstanding which related to anticipated exposure in the price of gas.
We are exposed to credit risk in the event of non-performance by the derivative
counterparty. However, we monitor our derivative position by regularly
evaluating our position and the credit worthiness of the counterparty, which we
consider credit worthy at December 31, 2001. Management is actively involved in
monitoring exposure to market risk and continues to develop and utilize
appropriate risk management techniques. We are not exposed to any other
significant market risks, foreign currency exchange risk or interest rate risk
from the use of derivative financial instruments.

The sensitivity analyses below, which hypothetically illustrates our
potential market risk exposure, estimates the effects of hypothetical sudden and
sustained changes in the applicable market conditions on 2001 earnings. The
sensitivity analyses presented do not consider any additional actions we may
take to mitigate our exposure to such changes. The hypothetical changes and
assumptions may be different from what actually occurs in the future.

Interest Rates. As of December 31, 2001, we had no derivative financial
instruments to manage interest rate risk. As such, we are exposed to earnings
and fair value risk due to changes in interest rates with respect to our
long-term obligations. As of December 31, 2001, approximately 21.5% of our
long-term obligations were floating rate obligations. As of December 31, 2001,
the fair value of our variable rate debt of $109.3 million approximated book
value, and the fair value of our fixed-rate debt of $399.0 million was
approximately $357.1 million based upon discounted future cash flows using
incremental borrowing rates and current market prices. The detrimental effect on
our pretax earnings of a hypothetical 50 basis point increase in both variable
and fixed interest rates would be approximately $0.5 million and $2.0 million,
respectively.

27

Commodity Price Exposure. In October 2001, we entered into a forward
purchase contract with settlements through 2006, in order to secure pricing on
anticipated gas requirements related to a project in process at December 31,
2001. The objective is to mitigate the variability in the price of gas by fixing
the price we will have to pay to our counterparty. As of December 31, 2001, the
fair value of this derivative was $0.4 million and recorded as a liability on
the consolidated balance sheet. As of March 29, 2001, we entered into a
sub-services agreement with our customer whereby the customer assumed all
liabilities associated with this contract. We had no derivative instruments
outstanding as of or during the year ended December 31, 2000.

28

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

29

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Quanta Services, Inc.:

We have audited the accompanying consolidated balance sheets of Quanta Services,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 2001,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quanta Services,
Inc. and subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
February 14, 2002 (except for the matters
discussed in Note 16, as to which
the date is March 25, 2002)

30

QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

The accompanying notes are an integral part of these consolidated financial
statements.
31

QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

The accompanying notes are an integral part of these consolidated financial
statements.
32

QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
33

QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

The accompanying notes are an integral part of these consolidated financial
statements.

34

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Quanta Services, Inc. (Quanta) is a leading provider of specialized
contracting services, offering end-to-end network solutions to the electric
power, gas, telecommunications and cable television industries. Our
comprehensive services include designing, installing, repairing and maintaining
network infrastructure. Reference herein to the "Company" includes Quanta and
its subsidiaries.

Since its inception and through 2001, Quanta has acquired 86 businesses. Of
these businesses acquired, two were accounted for as poolings-of-interests and
the remaining acquired businesses were accounted for as purchases and have been
included in the Company's historical financial statements beginning on their
respective dates of acquisition. The Company intends to continue to acquire,
through merger or purchase, similar companies to expand its national and
regional operations.

In the course of its operations, the Company is subject to certain risk
factors, including but not limited to risks related to: rapid technological and
structural changes in the industries the Company serves, internal growth and
operating strategies, economic downturn, the collectibility of receivables,
acquisition integration and financing, significant fluctuations in quarterly
results, contracts, management of growth, dependence on key personnel,
availability of qualified employees, unionized workforce, competition,
recoverability of goodwill, potential exposure to environmental liabilities and
anti-takeover measures.

All share amounts and per share amounts in these notes to consolidated
financial statements have been adjusted to give effect to a 3-for-2 stock split,
paid as a stock dividend on April 7, 2000.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements of the Company include the accounts
of Quanta and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain reclassifications have been made in prior years' financial
statements to conform to classifications used in the current year.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of estimates
and assumptions by management in determining the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities known to exist as
of the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Reference is made to the "Accounts Receivable and Provision for
Doubtful Accounts," "Property and Equipment," "Goodwill," "Revenue Recognition"
and "Self-Insurance" sections of this footnote and Note 13 for discussion of
certain estimates reflected in the Company's financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

35

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Supplemental Cash Flow Information

The Company had non-cash investing and financing activities of
approximately $1.7 million during the year ended December 31, 2000 related to
the conversion of certain convertible subordinated notes. Aquila, Inc. (Aquila)
converted the convertible subordinated notes into approximately 5.4 million
shares of the Company's common stock on June 13, 2000.

In addition, pursuant to its acquisition program, the Company acquired
assets through purchase acquisitions with an estimated fair value, net of cash
acquired, of approximately $236.0 million and liabilities of approximately
$160.2 million resulting in the recording of approximately $484.9 million in
goodwill in 1999. The Company acquired assets through purchase acquisitions with
an estimated fair value, net of cash acquired, of approximately $215.8 million
and liabilities of approximately $119.5 million resulting in the recording of
approximately $301.0 million in goodwill in 2000. The Company acquired assets
through purchase acquisitions with an estimated fair value, net of cash
acquired, of approximately $20.9 million and liabilities of approximately $13.1
million resulting in the recording of approximately $156.9 million in goodwill
in 2001.

Accounts Receivable and Provision for Doubtful Accounts

The Company provides an allowance for doubtful accounts when collection is
considered doubtful.

The balances billed but not paid by customers pursuant to retainage
provisions in certain contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the majority of the retention balance at each balance
sheet date will be collected within the subsequent fiscal year. Current
retainage balances as of December 31, 2000 and 2001 were approximately $50.7
million and $50.2 million, respectively, and are included in accounts
receivable. Due to contractual provisions, the retainage balances not to be
collected within the next fiscal year are $0 and $5.9 million, as of December
31, 2000 and 2001, respectively, and are included in Other Assets, net.

Due to contractual provisions, certain balances, though the earnings
process is complete, are not billable to customers until defined milestones are
reached. These balances are considered to be unbilled receivables and are
included in accounts receivable at year-end. At December 31, 2000 and 2001,
these balances were approximately $29.0 million and $50.3 million, respectively.

Concentration of Credit Risk

The Company grants credit, generally without collateral, to its customers,
which include electric power and gas companies, telecommunications and cable
television system operators, governmental entities, general contractors,
builders and owners and managers of commercial and industrial properties located
primarily in the United States. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors
throughout the United States. However, the Company generally is entitled to
payment for work performed and has certain lien rights on that work and
concentrations of credit risk are limited due to the diversity of the Company's
customer base. Further, management believes that its contract acceptance,
billing and collection policies are adequate to minimize the potential credit
risk. No customer accounted for more than 10% of accounts receivable or revenues
as of or during the years ended December 31, 1999, 2000 or 2001.

Inventories

Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued by the Company at the lower of cost or market
using the first-in, first-out (FIFO) method.

36

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property and Equipment

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method, net of estimated salvage values, over the
estimated useful lives of the assets. Leasehold improvements are capitalized and
amortized over the lesser of the life of the lease or the estimated useful life
of the asset. Depreciation and amortization expense related to property and
equipment was approximately $24.3 million, $37.5 million and $53.4 million for
the years ended December 31, 1999, 2000 and 2001, respectively.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.

Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
realizable. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such asset is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
asset and its carrying value. To date, the Company has not recorded any such
impairments.

Debt Issuance Costs

Debt issuance costs related to the Company's credit facility, the
convertible subordinated notes and the senior secured notes are included in
Other Assets, net and are amortized to interest expense over the scheduled
maturity periods of the related debt. As of December 31, 2000 and 2001,
accumulated amortization was approximately $2.4 million and $4.2 million,
respectively.

Goodwill

Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair value of the net assets acquired. Through December 31, 2001, goodwill was
amortized on a straight-line basis over 40 years. As of December 31, 2000 and
2001, accumulated amortization was approximately $33.2 million and $59.1
million, respectively. Under Statement of Financial Accounting Standards (SFAS)
No. 121, management periodically evaluated whether events or circumstances had
occurred that indicated that the remaining estimated useful life of goodwill may
have warranted revision or that the remaining balance may not have been
recoverable. If an evaluation was required, the estimated future undiscounted
cash flows associated with the asset were compared to the asset's carrying
amount to determine if such an impairment existed. In accordance with SFAS No.
142, "Goodwill and Other Intangible Assets," goodwill resulting from business
combinations completed after June 30, 2001 has not been amortized but instead
will be tested at least annually for impairment. See discussion under "New
Accounting Pronouncements" below for the treatment of goodwill as of January 1,
2002.

Revenue Recognition

The Company recognizes revenue when services are performed except when work
is being performed under a fixed price contract. Revenues from fixed price
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred-to-date to total estimated costs for each contract.
Such contracts generally provide that the customer accept completion of progress
to date and compensate the Company for services rendered, measured typically in
terms of units installed, hours expended or some other measure of progress.
Contract costs typically include all direct material, labor and subcontract
costs and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation costs. Provisions for the total
estimated losses on uncompleted contracts are made in the

37

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.

The current asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The current liability "Billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.

Warranty Costs

For certain contracts, the Company warrants labor for new installations and
construction and servicing of existing infrastructure. An accrual for warranty
costs is recorded based upon management's estimate of future costs.

Income Taxes

The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred assets and liabilities are recorded for future tax consequences of
temporary differences between the financial reporting and tax bases of assets
and liabilities, and are measured using the enacted tax rates and laws that will
be in effect when the underlying assets or liabilities are recovered or settled.

Certain of the Companies acquired were S corporations for income tax
purposes and, accordingly, any income tax liabilities for the periods prior to
the acquisitions are the responsibility of the respective stockholders.
Effective with the acquisitions, the S corporations converted to C corporations.
Accordingly, at the date of acquisition an estimated deferred tax liability has
been recorded to provide for the estimated future income tax liability resulting
from the difference between the book and tax bases of the net assets of these
former S corporations. For purposes of these consolidated financial statements,
federal and state income taxes have been provided for the post-acquisition
periods.

Collective Bargaining Agreements

Certain of the subsidiaries are party to various collective bargaining
agreements with certain of their employees. The agreements require such
subsidiaries to pay specified wages and provide certain benefits to their union
employees. These agreements expire at various times.

Self-Insurance

The Company is insured for workers' compensation, employer's liability,
auto liability and general liability claims, subject to a deductible of $500,000
per accident or occurrence. In addition, effective January 1, 2002, the Company
consolidated the various non-union employee related health care benefits plans
that existed at certain of its subsidiaries into one corporate plan which is
subject to a deductible of $250,000 per claimant per year. Losses up to the
deductible amounts are accrued based upon the Company's estimates of the
ultimate liability for claims incurred and an estimate of claims incurred but
not reported. The accruals are based upon known facts and historical trends and
management believes such accruals to be adequate.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable,
accounts payable, the credit facility and notes payable to various financial
institutions approximate fair value. The fair value of the senior secured notes
is estimated based on interest rates for the same or similar debt offered to the
Company having the same or similar remaining maturities and collateral
requirements. At December 31, 2001, the fair value of
38

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company's senior secured notes of $210.0 million was approximately $223.5
million. The fair value of the convertible subordinated notes is estimated based
on quoted secondary market prices for these notes as of year-end. At December
31, 2001, the fair value of the Company's convertible subordinated notes of
$172.5 million was approximately $117.1 million.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (the FASB) issued
SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business
combinations initiated after June 30, 2001, be accounted for using the purchase
method. The FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires that goodwill be assessed at least annually for
impairment by applying a fair-value based test. Goodwill will no longer be
subject to amortization over its estimated useful life. In addition, acquired
intangible assets are required to be recognized and amortized over their useful
lives if the benefit of the asset is based on contractual or legal rights. While
most provisions of SFAS No. 142 are effective for the Company beginning January
1, 2002, goodwill and intangible assets acquired after June 30, 2001, are
subject immediately to the non-amortization and amortization provisions of the
statement, respectively. At December 31, 2001, the Company's net goodwill was
$1.037 billion, and annual amortization of such goodwill was approximately $26
million.

Based on preliminary review of the new standard, the Company believes that
it will record a non-cash goodwill impairment charge upon adoption and that the
amount of such charge will be material in relation to the Company's unamortized
goodwill balance. Such charge, however, will not impact cash flow or operating
income but will be reflected as a cumulative effect of a change in accounting
principle.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of APB
Opinion 30. SFAS No. 144 addresses the financial accounting and reporting for
the impairment or disposal of long-lived assets and establishes criteria for
determining when a long-lived asset is held for sale. The Company is required to
and will adopt SFAS No. 144 on January 1, 2002, and believes that the adoption
will not have a material effect on its consolidated financial position or
results of operations.

39

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. EARNINGS PER SHARE INFORMATION:

Earnings per share amounts are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. The weighted average number of shares used to compute basic and diluted
earnings per share for 1999, 2000 and 2001 is illustrated below (in thousands):

Pursuant to EITF Topic D-95, "Effect of Participating Convertible
Securities on the Computation of Basic Earnings Per Share," the impact of the
Series A Convertible Preferred Stock has been included in the computation of
basic earnings per share and prior period amounts have been restated
accordingly. For the years ended December 31, 1999, 2000 and 2001, stock options
for approximately 0.9 million, 0.3 million and 3.9 million shares, respectively,
were excluded from the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
Company's common stock. For the year ended December 31, 2001, the effect of
assuming conversion of the convertible subordinated notes would be antidilutive
and they were therefore excluded from the calculation of diluted earnings per
share.

4. BUSINESS COMBINATIONS:

During 2000 and 2001, the Company completed 34 acquisitions accounted for
as purchases. The aggregate consideration paid in these transactions consisted
of $407.2 million in cash and 7.1 million shares of common stock. The
accompanying balance sheet as of December 31, 2001 includes preliminary
allocations of the respective purchase prices of certain of these acquisitions
and is subject to final adjustment. The following summarized unaudited pro forma
financial information adjusts the historical financial information by

40

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assuming the acquisition of the companies acquired during 1999 and 2000 occurred
on January 1, 1999 (in thousands, except per share information):

The following summarized unaudited pro forma financial information adjusts
the historical financial information by assuming the acquisition of the
companies acquired during 2000 and 2001 occurred on January 1, 2000 (in
thousands, except per share information):

Pro forma adjustments included in the amounts above primarily relate to:
(a) contractually agreed reductions in salaries and benefits for former owners,
and certain key employees; (b) adjustments to amortization expense due to the
purchase price allocations; (c) an assumed increase in interest expense in
connection with financing the acquisitions; and (d) the adjustment to the
federal and state income tax provisions based on the combined operations. The
pro forma financial data does not purport to represent what the Company's
combined financial position or results of operations would actually have been if
such transactions had in fact occurred on the dates indicated and are not
necessarily representative of the Company's financial position or results of
operations for any future period.

5. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following (in thousands):

41

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):

Accounts payable and accrued expenses consists of the following (in
thousands):

Contracts in progress are as follows (in thousands):

42

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. LONG-TERM OBLIGATIONS:

The Company's long-term debt obligations consist of the following (in
thousands):

Credit Facility

The Company currently has a $350.0 million credit facility with 14
participating banks. The credit facility is secured by a pledge of all of the
capital stock of the Company's subsidiaries and the majority of the Company's
assets and is to provide funds to be used for working capital, to finance
acquisitions and for other general corporate purposes. Amounts borrowed under
the credit facility bear interest at a rate equal to either (a) the London
Interbank Offered Rate (the 30 day LIBOR rate was 2.44% at December 31, 2001)
plus 1.00% to 2.00%, as determined by the ratio of the Company's total funded
debt to EBITDA (as defined in the credit facility) or (b) the bank's prime rate
(which was 4.75% at December 31, 2001) plus up to 0.25%, as determined by the
ratio of the Company's total funded debt to EBITDA. Commitment fees of 0.25% to
0.50% (based on the ratio of the Company's total funded debt to EBITDA) are due
on any unused borrowing capacity under the credit facility. The credit facility
matures June 14, 2004. The Company's subsidiaries guarantee the repayment of all
amounts due under the facility and the facility restricts pledges on all
material assets. The credit facility contains usual and customary covenants for
a credit facility of this nature including the prohibition of the payment of
dividends on common stock, certain financial ratios and indebtedness covenants
and the consent of the lenders for acquisitions exceeding a certain level of
cash consideration. As of December 31, 2001, $109.3 million was borrowed under
the credit facility, and the Company had $46.4 million of letters of credit
outstanding, resulting in a borrowing availability of $194.3 million under the
credit facility. The weighted-average borrowing rate on the credit facility for
the year ended December 31, 2001 was 5.55%.

Senior Secured Notes

In March 2000, the Company closed a private placement of $150.0 million
principal amount of senior secured notes primarily with insurance companies. In
September 2000, the Company issued an additional $60.0 million principal amount
of senior secured notes. The resulting $210.0 million of senior secured notes
have maturities ranging from four to nine years with a weighted average interest
rate of 8.41% and, pursuant to an intercreditor agreement, rank equally in right
of repayment with indebtedness under the Company's credit facility. The senior
secured notes have financial covenants similar to the credit facility.

Convertible Subordinated Notes

On July 19, 2000, the Company issued $150.0 million principal amount of
convertible subordinated notes and, on August 7, 2000, the Company issued an
additional $22.5 million principal amount of convertible subordinated notes due
to the exercise of the underwriters' over-allotment option. The convertible
subordi-
43

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

nated notes bear interest at 4.0% per year and are convertible into shares of
the Company's common stock at a price of $54.53 per share. The convertible
subordinated notes require semi-annual interest payments beginning December 31,
2000, until the notes mature on July 1, 2007. The Company has the option to
redeem the notes beginning July 3, 2003.

The maturities of long-term debt obligations (excluding capital leases) as
of December 31, 2001, are as follows (in thousands):

An event of default could occur under the credit facility and senior
secured notes in the event that Aquila prevails in its recently announced proxy
contest for control of the Company's board of directors. No such event of
default provision exists under the Company's convertible subordinated notes. The
Company cannot be certain that the affected lenders and note holders would waive
such an event of default or that the Company or Aquila would be able to
refinance any defaulted indebtedness.

The Company has specifically provided for the possibility of a non-cash
goodwill impairment charge in its credit facility resulting from the adoption of
SFAS No. 142, and accordingly, expects no impact on the credit facility as a
result of this charge. The Company is currently seeking to avoid any potential
covenant violations through a similar amendment with holders of the Company's
senior secured notes and expects the completion of an amendment prior to the
occurrence of any covenant violation. A goodwill impairment charge will not
violate any covenants in the Company's convertible subordinated notes.

The Company leases certain buildings and equipment under non-cancelable
lease agreements including related party leases as discussed in Note 12. The
following schedule shows the future minimum lease payments under these leases as
of December 31, 2001 (in thousands):

44

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Rent expense related to operating leases was approximately $11.7 million,
$16.2 million and $24.1 million for the years ended December 31, 1999, 2000 and
2001, respectively. Assets under capital leases are included as part of property
and equipment.

8. INCOME TAXES:

The components of the provision for income taxes are as follows (in
thousands):

Actual income tax provision differs from the income tax provision computed
by applying the U.S. federal statutory corporate rate to the income before
provision for income taxes as follows (in thousands):

45

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):

Net current deferred tax assets are included in prepaid expenses and other
current assets.

At December 31, 2001, the Company has U.S. federal, state and local tax
loss carryforwards, the tax effect of which is approximately $4.4 million. These
carryforwards will expire as follows: 2005, $0.2 million; 2006, $0.6 million and
$3.6 million thereafter.

The Company's net deferred tax assets include amounts for these net
operating losses. Inability to achieve forecasted taxable income might affect
the ultimate realization of the net deferred tax assets; however, as of December
31, 2001, no valuation allowance has been recorded associated with these
deferred tax assets.

9. STOCKHOLDERS' EQUITY:

Series A Convertible Preferred Stock

In September 1999, the Company entered into a securities purchase agreement
with Aquila pursuant to which the Company issued 1,860,000 shares of Series A
Convertible Preferred Stock, $.00001 par value per share, for an initial
investment of $186.0 million, before transaction costs. In September 2000,
Aquila converted 7,924,805 shares of common stock into an additional 1,584,961
shares of Series A Convertible Preferred Stock at a rate of one share of Series
A Convertible Preferred Stock for five shares of common stock. The holders of
the Series A Convertible Preferred Stock are entitled to receive dividends in
cash at a rate of 0.5% per annum on an amount equal to $53.99 per share, plus
all unpaid dividends accrued. In addition to the preferred dividend, the holders
are entitled to participate in any cash or non-cash dividends or distributions
declared and paid on the shares of common stock, as if each share of Series A
Convertible Preferred Stock had been converted into common stock at the
applicable conversion price immediately prior to the record date for payment of
such dividends or distributions. However, holders of Series A Convertible
Preferred Stock will not participate in non-cash dividends or distributions if
such dividends or distributions cause an adjustment in the price at which Series
A Convertible Preferred Stock converts into common stock. At any time after the
sixth anniversary of the issuance of the Series A Convertible Preferred Stock,
if the closing price per share of the Company's common stock is greater than
$20.00, then the Company may terminate the preferred dividend. At any time after
the sixth anniversary of the issuance of the Series A Convertible Preferred
Stock, if the closing price per share of the Company's common stock is equal to
or less

46

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

than $20.00, then the preferred dividend may, at the option of Aquila, be
adjusted to the then "market coupon rate," which shall equal the Company's
after-tax cost of obtaining financing, excluding common stock, to replace
Aquila's investment in the Company.

Aquila is entitled to that number of votes equal to the number of shares of
common stock into which the outstanding shares of Series A Convertible Preferred
Stock are then convertible. Subject to certain limitations, Aquila is entitled
to elect three of the total number of directors of the Company. All or any
portion of the outstanding shares of Series A Convertible Preferred Stock may,
at the option of Aquila, be converted at any time into fully paid and
nonassessable shares of common stock. The conversion price currently is $20.00,
yielding 17,224,805 shares of common stock upon conversion of all outstanding
shares of Series A Convertible Preferred Stock. The conversion price may be
adjusted under certain circumstances.

Convertible Subordinated Notes

On June 13, 2000, Aquila converted the Company's $49.4 million of 6 7/8%
convertible subordinated notes into 5.4 million shares of the Company's common
stock.

Public Offerings

On January 27, 1999, Quanta completed a follow-on public offering, which
involved the issuance of 6.9 million shares of its common stock at a price of
$15.50 per share, resulting in net proceeds to the Company of $101.1 million
after deducting underwriting discounts and commissions and expenses related to
the offering.

Stockholder Rights Plan

On March 8, 2000, the board of directors of the Company adopted a
Stockholder Rights Plan. On November 15, 2001, the board of directors amended
the Stockholder Rights Plan and on November 18, 2001 and December 1, 2001 the
board of directors ratified such amendments to the Stockholder Rights Plan.
Under the Stockholder Rights Plan, a dividend of one Preferred Stock Purchase
Right (the Rights) was declared on each outstanding share of the Company's
common stock and Series A Convertible Preferred Stock (on an as-converted basis)
for holders of record as of the close of business on March 27, 2000. The Rights
also attach to all common stock and Series A Convertible Preferred Stock issued
after March 27, 2000. No separate certificates evidencing the Rights will be
issued unless and until they become exercisable. Each Right has an initial
exercise price of $153.33. The Rights will be exercisable if a person or group
(other than Aquila) becomes the beneficial owner of, or tenders for, 15% or more
of the Company's common shares. The Rights also will be exercisable if Aquila,
together with any affiliates or associates, becomes the beneficial owner of, or
tenders for more than 39.0% of the outstanding shares of the Company's common
stock on an as-converted basis, or if there is a change of control of Aquila.
Upon a "Flip-In Event" as defined in the Stockholder Rights Plan, the Rights
issued pursuant to the Stockholder Rights Plan would be exercisable for Series B
Junior Participating Preferred Stock of the Company at a discount. In addition,
the Rights held by an "Acquiring Person" as defined in the Stockholder Rights
Plan will become exercisable upon a Flip-In Event for Series C Junior
Convertible Preferred Stock. The Rights will expire in ten years.

On February 12, 2002, the board of directors further amended the
Stockholder Rights Plan to provide that only outstanding shares of the Company's
common stock and Series A Convertible Preferred Stock are to be counted in
calculating the number of shares that Aquila could acquire while remaining an
exempt person under the Stockholder Rights Plan. As amended, the Stockholder
Rights Plan permits Aquila to beneficially own up to 39.0% of the outstanding
shares of the Company's common stock (assuming conversion of all outstanding
shares of the Company's Series A Convertible Preferred Stock) or such greater
percentage as it may own as of the earlier of notice to Aquila of, or public
announcement of, the February 2002 amendment.

See Note 16 for further discussion of the Stockholder Rights Plan.

47

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Limited Vote Common Stock

The shares of Limited Vote Common Stock have rights similar to shares of
common stock, except that such shares are entitled to elect one member of the
board of directors and are entitled to one-tenth of one vote for each share held
on all other matters. Each share of Limited Vote Common Stock will convert into
common stock upon disposition by the holder of such shares in accordance with
the transfer restrictions applicable to such shares. In 2000 and 2001,
respectively, 1,980,108 and 649,674 shares of Limited Vote Common Stock were
converted to common stock.

Treasury Stock

The board of directors of the Company has authorized a Stock Repurchase
Plan under which up to $75.0 million of the Company's common stock may be
repurchased. Under the Stock Repurchase Plan, the Company may conduct purchases
through open market transactions in accordance with applicable securities laws.
During 2001, the Company purchased 986,000 shares of common stock for
approximately $15.3 million. The amount of shares purchased and the timing of
any purchases will be based on a number of factors, including the number of
shares needed for replenishment of employee benefit plans, the market price of
the stock, market conditions and as the Company's management deems appropriate.

Issuance of Restricted Stock

Under the 2001 Stock Incentive Plan discussed in Note 10 below, 72,701
shares of the Company's common stock were issued in 2001 at a price of $27.51
per share, which reflected the fair market value of the common stock at the date
of issuance. The shares of common stock issued pursuant to the 2001 Stock
Incentive Plan are subject to restrictions on transfer and certain other
conditions. During the restriction period, the plan participants are entitled to
vote and receive dividends on such shares.

Upon issuance of the 72,701 shares of the Company's common stock pursuant
to the 2001 Stock Incentive Plan, an unamortized compensation expense equivalent
to the market value of the shares on the date of grant was charged to
stockholders' equity and will be amortized over the six year restriction period.
The compensation expense taken with respect to the restricted shares during the
year ended December 31, 2001 was $230,000.

10. LONG-TERM INCENTIVE PLANS:

Stock Incentive Plan

In December 1997, the board of directors adopted, and the stockholders of
the Company approved, the 1997 Stock Option Plan. In May 2000, the 1997 Stock
Option Plan was amended to expand the definition of "stock" to include the
Company's Series A Convertible Preferred Stock, common stock and Limited Vote
Common Stock. In May 2001, the 1997 Stock Option Plan was amended and renamed
the 2001 Stock Incentive Plan. The purpose of the 2001 Stock Incentive Plan is
to provide directors, key employees, officers and certain advisors with
additional incentives by increasing their proprietary interest in the Company.
The aggregate amount of common stock of the Company with respect to which
options may be granted may not exceed 15% of the outstanding shares of common
stock.

The 2001 Stock Incentive Plan provides for the grant of incentive stock
options (ISOs) as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the Code), nonqualified stock options and restricted stock
(collectively, the Awards). The amount of ISOs that may be granted under the
2001 Stock Incentive Plan is limited to 3,571,275 shares. The 2001 Stock
Incentive Plan is administered by the Compensation Committee of the board of
directors. The Compensation Committee has, subject to the terms of the 2001
Stock Incentive Plan, the sole authority to grant Awards under the 2001 Stock
Incentive Plan, to construe and interpret the 2001 Stock Incentive Plan and to
make all other determinations and take any and

48

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

all actions necessary or advisable for the administration of the 2001 Stock
Incentive Plan; provided, however, that the Company's Chief Executive Officer
has the authority to grant nonqualified stock options to individuals who are not
officers, provided that such grants do not exceed in any calendar quarter
options to purchase 100,000 shares to all optionees and 20,000 to any
individual.

All of the Company's employees (including officers), non-employee directors
and certain consultants and advisors are eligible to receive Awards under the
2001 Stock Incentive Plan, but only employees of the Company are eligible to
receive ISOs. Options will be exercisable during the period specified in each
option agreement and will generally become exercisable in installments pursuant
to a vesting schedule designated by the Compensation Committee. Unless
specifically provided otherwise in the option agreement, options become
immediately vested and exercisable in the event of a "change in control" (as
defined in the 2001 Stock Incentive Plan) of the Company. No option will remain
exercisable later than ten years after the date of grant (or five years in the
case of ISOs granted to employees owning more than 10% of the voting capital
stock).

The 2001 Stock Incentive Plan also provides for automatic option grants to
directors who are not otherwise employed by the Company or its subsidiaries.
Upon commencement of service, a non-employee director will receive a
non-qualified option to purchase 15,000 shares of common stock, and each
continuing or re-elected non-employee director annually will receive an option
to purchase 7,500 shares of common stock. Options granted to non-employee
directors are fully exercisable following the expiration of six months from the
date of grant.

The exercise price for ISOs granted under the 2001 Stock Incentive Plan may
be no less than the fair market value of a share of the common stock on the date
of grant (or 110% in the case of ISOs granted to employees owning more than 10%
of the voting capital stock). No ISOs have been granted as of December 31, 2001.

The fair market value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for 1999, 2000 and 2001, respectively: (i) risk-free interest rates
ranging from 4.30% to 6.82%, 5.18% to 6.62% and 4.64% to 4.84%, (ii) expected
life of 6.0, 6.0 and 7.9 years, (iii) average volatility of 54.0%, 57.7%, and
66.9%, and (iv) dividend yield of 0%. The following table summarizes activity
under the 2001 Stock Incentive Plan for the years ended December 31, 1999, 2000
and 2001 (shares in thousands):

49

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Options exercisable at December 31, 2000 and 2001, as shown above, are
based on term vesting periods as outlined in each option agreement. Based on
Aquila's voting interest in the Company, options to purchase additional shares
of common stock of the Company may also be currently exercisable pursuant to the
change of control provisions of certain option agreements.

The following table summarizes information for outstanding options at
December 31, 2001 (shares in thousands):

50

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Employee Stock Purchase Plan

An Employee Stock Purchase Plan (the ESPP) was adopted by the board of
directors of the Company and was approved by the stockholders of the Company in
May 1999. The purpose of the ESPP is to provide an incentive for employees of
the Company and any Participating Company (as defined in the ESPP) to acquire or
increase a proprietary interest in the Company through the purchase of shares of
the Company's common stock. At the date hereof, all of the existing subsidiaries
of the Company have been designated as Participating Companies. The ESPP is
intended to qualify as an "Employee Stock Purchase Plan" under Section 423 of
the Internal Revenue Code of 1986, as amended (the Code). The provisions of the
ESPP are construed in a manner consistent with the requirements of that section
of the Code. The ESPP is administered by a committee appointed from time to time
by the board of directors. The ESPP is not subject to any of the provisions of
the Employee Retirement Income Security Act of 1974, as amended. During 2000 and
2001, respectively, the Company issued a total of 222,364 and 462,179 shares
pursuant to the ESPP. Compensation cost is computed for the fair value of the
employees' purchase rights, which was estimated using the Black-Scholes model
with the following assumptions for 2000 and 2001: dividend yield of 0%; an
expected life of 0.5 years; expected volatility of 69.4% and 66.9% and risk-free
interest rate of 6.2% and 4.7%, respectively. The weighted-average fair value of
those purchase rights granted in 2000 and 2001 was $25.40 and $2.51,
respectively.

The Company accounts for its stock-based compensation under APB No. 25
"Accounting for Stock Issued to Employees." Under this accounting method, no
compensation expense is recognized in the consolidated statements of operations
if no intrinsic value of the option exists at the date of grant. In October
1995, the FASB issued SFAS No. 123, "Accounting for Stock Based Compensation."
SFAS No. 123 encourages companies to account for stock based compensation awards
based on the fair value of the awards at the date they are granted. The
resulting compensation cost would be shown as an expense in the consolidated
statements of operations. Companies can choose not to apply the new accounting
method and continue to apply current accounting requirements; however,
disclosure is required as to what net income and earnings per share would have
been had the new accounting method been followed. Had compensation costs for the
2001 Stock Incentive Plan and the Employee Stock Purchase Plan been determined
consistent with SFAS No. 123, the Company's net income attributable to common
stock and earnings per share would have been reduced to the following as
adjusted amounts (in thousands, except per share information):

The effects of applying SFAS No. 123 in the as adjusted disclosure may not
be indicative of future amounts as additional awards in future years are
anticipated.

Employee Stock Ownership Plan

The Company issued shares of common stock to an Employee Stock Ownership
Plan (the ESOP) in connection with the acquisition of one of the companies
acquired in a pooling transaction. The ESOP was

51

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

terminated on July 31, 1998. In June 1999, after the receipt of a favorable
determination letter from the Internal Revenue Service, a portion of the
unallocated shares of the Company's common stock held by the ESOP were sold to
repay debt owed by the ESOP to the Company and the remaining portion of the
unallocated shares were distributed to the plan participants. The cost of the
unallocated ESOP shares was reflected as a reduction in the Company's
stockholders' equity. As a result of the above, the Company incurred an excise
tax of approximately $1.1 million equal to 10% of the value of the Company's
common stock distributed to the plan participants. In addition, the Company
eliminated the remaining balance reflected as Unearned ESOP Shares on the
Company's balance sheet and recognized a non-cash, non-recurring compensation
charge of approximately $5.3 million equal to the value of the unallocated
shares held by the ESOP.

11. EMPLOYEE BENEFIT PLANS:

Union's Multi-Employer Pension Plans

In connection with its collective bargaining agreements with various
unions, the Company participates with other companies in the unions'
multi-employer pension plans. These plans cover all of the Company's employees
who are members of such unions. The Employee Retirement Income Security Act of
1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980,
imposes certain liabilities upon employers who are contributors to a
multi-employer plan in the event of the employer's withdrawal from, or upon
termination of such plan. The Company has no plans to withdraw from these plans.
The plans do not maintain information on the net assets and actuarial present
value of the plans' unfunded vested benefits allocable to the Company, and the
amounts, if any, for which the Company may be contingently liable are not
ascertainable at this time.

401(k) Plan

Effective February 1, 1999, the Company adopted a 401(k) plan pursuant to
which employees who are not provided retirement benefits through a collective
bargaining agreement may make contributions through a payroll deduction. The
Company will make a matching cash contribution of 100% of each employee's
contribution up to 3% of that employee's salary and 50% of each employee's
contribution between 3% and 6% of such employee's salary. Prior to joining the
Company's 401(k) plan, certain subsidiaries of the Company provided various
defined contribution plans to their employees. Contributions to all non-union
defined contribution plans by the Company were approximately $5.0 million, $5.9
million and $7.3 million for the years ended December 31, 1999, 2000 and 2001,
respectively.

12. RELATED PARTY TRANSACTIONS:

As previously discussed, Aquila has made investments in the Company. The
Company has had transactions in the normal course of business with Aquila. In
addition, in September 1999, the Company entered into a strategic alliance
agreement with Aquila. Under the terms of the strategic alliance agreement,
Aquila will use the Company, subject to the Company's ability to perform the
required services, as a preferred contractor in outsourced transmission and
distribution infrastructure installation and maintenance and natural gas
distribution installation and maintenance in all areas serviced by Aquila,
provided that the Company provides such services at a competitive cost. The
strategic alliance agreement has a term of six years. Subsequent to the
investment by Aquila, revenues from Aquila in 2000 and 2001 were approximately
$14.4 million and $17.2 million, respectively, and balances due the Company at
year-end were approximately $1.8 million and $2.4 million, respectively. In
addition, the Company performed work for an affiliate of Aquila with revenues in
2000 and 2001 of $4.3 million and $19.3 million, respectively, and balances due
the Company at year-end were approximately $4.1 million and $3.4 million,
respectively.

52

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company entered into a management services agreement in September 1999
with Aquila for advice and services including financing activities; corporate
strategic planning; research on the restructuring of the electric power
industry; the development, evaluation and marketing of the Company's products,
services and capabilities; identification of and evaluation of potential U.S.
acquisition candidates and other merger and acquisition advisory services; and
other services that the Company may reasonably request. The management services
agreement required the Company to make quarterly payments to Aquila of
$2,325,000 through September 30, 2005. In December 2000, the Company agreed to
conclude its obligations under the management services agreement with Aquila in
exchange for a one-time payment to Aquila of approximately $28.6 million, which
has been reflected as a special charge during the year ended December 31, 2000.

Certain of the Company's subsidiaries have entered into related party lease
arrangements for operational facilities. These lease agreements generally have a
term of five years. Related party lease expense for the years ended December 31,
1999, 2000 and 2001, respectively, was approximately $1.2 million, $2.1 million
and $2.8 million.

13. COMMITMENTS AND CONTINGENCIES:

Litigation

On November 28, 2001, Aquila filed an arbitration demand against the
Company with the Kansas City, Missouri office of the American Arbitration
Association. In its demand, Aquila alleged that the amendment to the Company's
Stockholder Rights Plan adopted by its board of directors on November 15, 2001,
and subsequently ratified and reauthorized by a committee of the Company's board
of directors, violated the terms of the Company's 1999 securities purchase
agreement with Aquila. In its demand, Aquila seeks (i) damages which may occur
if the price of the Company's shares rises during the period in which the
Stockholder Rights Plan amendment is in effect, (ii) a declaratory judgment that
the Stockholder Rights Plan amendment is void, and (iii) an order requiring the
Company to take all necessary steps to amend its Stockholder Rights Plan to
allow Aquila to acquire up to 49% of the Company's shares on a fully-diluted
basis without any economic penalty. The arbitration proceeding is in the
discovery stage and no prediction can be made as to the probable outcome of the
proceeding at this time.

On November 28, 2001, Aquila also filed a complaint in the Delaware Court
of Chancery challenging the adoption of the Company's Stockholder Rights Plan
amendment. The complaint names as defendants Quanta and directors James R. Ball,
John R. Colson, Vincent D. Foster, Louis C. Golm, Jerry J. Langdon, Gary A.
Tucci and John R. Wilson. The Delaware complaint alleges that Aquila's nominees
to the Company's board of directors did not receive proper notice of the
meetings of the Company's board on November 15, 2001 and November 18, 2001 at
which the Stockholder's Rights Plan amendment was adopted. The complaint seeks,
among other things, an order declaring that all actions taken at the November 15
and November 18 meetings are void and enjoining the Company's directors from
implementing or enforcing any action taken at the November 15 and November 18
meetings. Aquila sought expedited treatment of its Delaware complaint, but the
Chancery Court denied Aquila's motion to expedite the proceedings and instructed
Aquila to file an amended complaint. To date, Aquila had not filed an amended
complaint. The action remains pending and no prediction can be made at this time
as to the outcome of this litigation.

On December 21, 2001, a purported stockholder of Quanta filed a putative
class action and derivative complaint against directors Vincent D. Foster, Jerry
J. Langdon, Louis C. Golm, James R. Ball, John R. Colson, John R. Wilson and
Gary A. Tucci. The complaint also names Quanta as a nominal defendant. The
complaint alleges that the named directors breached their fiduciary duties by
taking certain actions, including the Stockholder Rights Plan amendment, in
response to the announcement by Aquila that it intended to acquire control of
Quanta through open market purchases of the Company's shares. The complaint
seeks an order rescinding any actions taken by the named directors in response
to the announcement by Aquila and requiring the directors to take steps
necessary to maximize the value of Quanta. The complaint further seeks
53

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

damages from the named directors on behalf of a class of stockholders and
purportedly on behalf of Quanta for the alleged harm inflicted by the actions of
the named directors. On January 22, 2002, Quanta and the named directors filed a
motion to dismiss the stockholder complaint. It is anticipated that briefing on
the motion to dismiss will begin shortly. Although the ultimate outcome and
liability, if any, cannot be determined, management, after consultation and
review with counsel, believes that the facts do not support the plaintiff's
claims and that the Company and the named directors have meritorious defenses.

In addition, certain subsidiaries of the Company are involved in disputes
or legal actions arising in the ordinary course of business. Management does not
believe the outcome of such legal actions will have a material adverse effect on
the Company's financial position or results of operations.

Self-Insurance

The Company is insured for workers' compensation, employer's liability,
auto liability and general liability claims, subject to a deductible of $500,000
per accident or occurrence. In addition, effective January 1, 2002, the Company
consolidated the various non-union employee related health care benefits plans
that existed at certain of its subsidiaries into one corporate plan which is
subject to a deductible of $250,000 per claimant per year. Losses up to the
deductible amounts are accrued based upon the Company's estimates of the
ultimate liability for claims incurred and an estimate of claims incurred but
not reported. The accruals are based upon known facts and historical trends and
management believes such accruals to be adequate. At December 31, 2000 and 2001,
the amounts accrued for self-insured claims were $11.9 million and $28.3
million, respectively, with $6.0 million and $14.7 million, respectively,
considered to be long-term and included in Other Non-Current Liabilities.

Derivatives

SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, was effective
for the Company on January 1, 2001. These statements establish accounting and
reporting standards requiring that all derivative instruments be recorded as
either assets or liabilities measured at fair value. These statements also
require that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. In October 2001, the
Company entered into a forward purchase contract (the Contract) with settlements
through 2006, in order to secure pricing on anticipated gas requirements related
to a project in process at year-end. The objective is to mitigate the
variability in the price of gas by fixing the price the Company will have to pay
with the Contract counterparty. As of and for the year ended December 31, 2001,
the Company has recorded the fair value of the Contract as a liability of $0.4
million with a corresponding offset to direct costs in the statement of
operations.

Performance Bonds

In certain circumstances, the Company is required to provide performance
bonds in connection with its contractual commitments.

54

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. QUARTERLY FINANCIAL DATA (UNAUDITED):

The table below sets forth the unaudited consolidated operating results by
quarter for the years ended December 31, 2000 and 2001 (in thousands, except per
share information).

The sum of the individual quarterly earnings per share amounts may not
agree with year-to-date earnings per share as each period's computation is based
on the weighted average number of shares outstanding during the period.

15. SEGMENT INFORMATION:

The Company operates in one reportable segment as a specialty contractor.
The Company provides comprehensive network solutions to the electric power, gas,
telecommunications and cable television industries, including designing,
installing, repairing and maintaining network infrastructure. Each of these
services is provided by various Company subsidiaries and discrete financial
information is not provided to management at the service level. The following
table presents information regarding revenues derived from the industries noted
above. Certain reclassifications have been made to the prior periods in order to
conform to the current period presentation.

The Company does not have significant operations or long-lived assets in
countries outside of the United States.

55

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. SUBSEQUENT EVENTS:

Solicitation by Aquila

On February 8, 2002, Aquila announced it intends to conduct a proxy
solicitation to replace members of the Company's board of directors with a slate
of its nominees. The Company has announced that it intends to oppose the Aquila
proxy contest.

Stockholder Rights Plan Amendments

On March 13, 2002, the board of directors further amended the Stockholder
Rights Plan to render the Rights inapplicable to an offer for all outstanding
shares of the Company's common stock in a manner that treats all stockholders
equally if upon completion of the offer, the offeror owns shares of the
Company's voting stock representing 75% or more of the then outstanding voting
stock. The Stockholder Rights Plan as so amended would also require the bidder
to commit irrevocably to purchase all shares not tendered at the same price paid
to the tendering stockholders.

Exploration of Strategic Options

On March 13, 2002, the Company's board of directors authorized its
financial advisor, Goldman, Sachs & Co., to explore a range of strategic
options, including potential acquisitions, stock repurchases, recapitalizations
and other extraordinary transactions, provided that such transactions do not
enable Aquila to achieve a control position without offering appropriate value
and protections for the Company's other stockholders.

Adoption of Stock Employee Compensation Trust

On March 13, 2002, the Company's board of directors approved the creation
of a Stock Employee Compensation Trust (SECT), to fund certain of the Company's
future employee benefit obligations using the Company's common stock. The SECT
was established by selling 8.0 million shares of the Company's common stock,
including the 986,000 shares the Company purchased in 2001 pursuant to the
Company's Stock Repurchase Plan, to the SECT in exchange for a promissory note
plus an amount in cash equal to the aggregate par value of the shares.

The SECT is a trust that holds shares of the Company's common stock to be
used to fund the Company's obligations during the term of the trust in respect
to certain benefit plans. The SECT will release the shares over 15 years, the
life of the trust, as the note is paid down through contributions by the
Company, to satisfy certain benefit requirements of the Company's benefit plans.
The Company will recognize compensation expense for certain shares released
based on the fair value of such shares as they are released from the SECT.
Unallocated shares held by the SECT will not be included in calculating the
Company's earnings per share. In all matters submitted to our stockholders for a
vote or any tender offers made to our stockholders, the unallocated shares in
the SECT will be voted or tendered based on the direction of the participants in
our broad-based Employee Stock Purchase Plan.

Adoption of Change of Control Employment Agreements

The Company entered into new employment agreements with certain employees,
as of March 13, 2002, which become effective upon a change of control (as
defined in the new employment agreements) of the Company. The new employment
agreements supplemented existing employment agreements already in effect. The
new employment agreements provide that, following a change of control, if the
Company terminates the employee's employment other than for cause (as defined in
the new employment agreements), the employee terminates employment for good
reason (as defined in the new employment agreements), or the employee's
employment terminates due to death or disability, the Company will pay certain
amounts to the employee, which may vary with the level of the employee's
responsibility and the terms of the employee's prior
56

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

employment arrangements. In addition, in the case of certain senior executives,
these payments would also be due if the employee terminates his or her
employment within the 30-day window period commencing six months after the
change in control.

Litigation

On March 21, 2002, Aquila filed a complaint in the Delaware Court of
Chancery naming Quanta and each member of the special committee of the Company's
board of directors, consisting of all directors other than those designated by
Aquila, as defendants. The Aquila complaint alleges that the special committee
breached its fiduciary duty in connection with the March 13, 2002 adoption of
the Company's SECT and the new employment agreements entered into with certain
of the Company's employees and that under Delaware statutory law the shares sold
to the SECT are not entitled to vote. The Aquila complaint seeks, among other
things, an order that disallows any shares held by the SECT from being voted at
the Company's next annual meeting of stockholders, rescinds the adoption of the
SECT, and voids and rescinds the new employment agreements. On March 25, 2002,
the Court denied Aquila's request for an expedited trial on the merits and set a
May 7, 2002 hearing date for Aquila's motion to preliminarily enjoin shares held
in the SECT from voting at the upcoming Quanta annual meeting of stockholders.
The action remains pending and no prediction can be made at this time as to the
outcome of this litigation.

57

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is incorporated by reference to the
information set forth in Quanta's Definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11. is incorporated by reference to the
information set forth in Quanta's Definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12. is incorporated by reference to the
information set forth in Quanta's Definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13. is incorporated by reference to the
information set forth in Quanta's Definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following financial statements, schedules and exhibits are filed as
part of this Report:

(1) Financial Statements. Reference is made to the Index to
Consolidated Financial Statements on page 29 of this Report.

(2) All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes to
the financial statements.

(3) Exhibits

INDEX TO EXHIBITS

- ---------------

* Management contracts or compensatory plans or arrangements

(b) Reports on Form 8-K:

(1) Quanta filed a Form 8-K on November 16, 2001 in which it reported
the adoption of certain amendments to its stockholder rights agreement.

(2) Quanta filed a Form 8-K on November 19, 2001 in which it reported
the ratification of certain amendments to its stockholder rights agreement.

(3) Quanta filed a Form 8-K on November 30, 2001 in which it responded
to certain statements made by Aquila, Inc.

(4) Quanta filed a Form 8-K on December 3, 2001 in which it reported
the ratification of certain amendments to its stockholder rights agreement.

61

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Quanta Services, Inc. has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on April 1, 2002.

QUANTA SERVICES, INC.

By /s/ JOHN R. COLSON
------------------------------------
John R. Colson
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities indicated on
March 28, 2002.

63

INDEX TO EXHIBITS

- ---------------

* Management contracts or compensatory plans or arrangements