QUANTA SERVICES INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

OR

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

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NO. 001-13831

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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 BLVD.
SUITE 2100
HOUSTON, TEXAS 77056
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(713) 629-7600

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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 whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

115,554,481 shares of Common Stock were outstanding as of August 5, 2003.
As of the same date, 1,067,750 shares of Limited Vote Common Stock were
outstanding.
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QUANTA SERVICES, INC. AND SUBSIDIARIES

INDEX

1

QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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(a) Shares issued and outstanding as of December 31, 2002 do not include the
24,370,410 shares of Redeemable Common Stock valued at $72.9 million which

was reclassified to stockholders' equity on February 20, 2003.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2

QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these condensed consolidated
financial statements.
3

QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these condensed consolidated
financial statements.
4

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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. Quanta's
comprehensive services include designing, installing, repairing and maintaining
network infrastructure. The consolidated financial statements of Quanta include
the accounts of Quanta and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

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

INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION

These unaudited condensed consolidated financial statements have been
prepared pursuant to the rules of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures, normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted pursuant to those
rules and regulations. Quanta believes that the disclosures made are adequate to
make the information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim consolidated financial statements have been included. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year. The results of Quanta have historically
been subject to significant seasonal fluctuations.

It is suggested that these unaudited condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and notes thereto of Quanta Services, Inc. and subsidiaries included
in Quanta's Annual Report on Form 10-K, which was filed with the SEC on March
31, 2003.

USE OF ESTIMATES AND ASSUMPTIONS

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 the financial statements are published and the reported amount of
revenues and expenses recognized during the periods presented. Quanta reviews
all significant estimates affecting its consolidated financial statements on a
recurring basis and records the effect of any necessary adjustments prior to
their publication. Judgments and estimates are based on Quanta's beliefs and
assumptions derived from information available at the time such judgments and
estimates are made. Uncertainties with respect to such estimates and assumptions
are inherent in the preparation of financial statements. Estimates are primarily
used in Quanta's assessment of the allowance for doubtful accounts, valuation of
inventory, fair value assumption in analyzing goodwill and long-lived asset
impairments, self-insured claims liabilities, revenue recognition under
percentage-of-completion accounting and income taxes.

5

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CURRENT AND LONG-TERM ACCOUNTS AND NOTES RECEIVABLE AND PROVISION FOR DOUBTFUL
ACCOUNTS

Quanta provides an allowance for doubtful accounts when collection of an
account or note receivable is considered doubtful. Inherent in the assessment of
the allowance for doubtful accounts are certain judgments and estimates
including, among others, our customer's access to capital, the customer's
willingness or ability to pay, general economic conditions and the ongoing
relationship with the customer. Under certain circumstances, such as
foreclosures or negotiated settlements, Quanta may take title to the underlying
assets in lieu of cash in settlement of receivables. As of June 30, 2003, Quanta
has provided allowances for doubtful accounts of approximately $76.0 million.
Certain of Quanta's customers, several of them large public telecommunications
carriers, have filed for bankruptcy or have been experiencing financial
difficulties. Also, a number of Quanta's utility customers are experiencing
financial difficulties in the current business climate. Should additional
customers file for bankruptcy or continue to experience difficulties, or should
anticipated recoveries relating to receivables in existing bankruptcies or other
workout situations fail to materialize, Quanta could experience reduced cash
flows and losses in excess of current allowances provided. In addition, material
changes in our customers' revenues or cash flows could affect our ability to
collect amounts due from them.

In June 2002, a large Quanta customer, Adelphia Communications Corporation
(Adelphia), filed for bankruptcy protection under Chapter 11 of the Bankruptcy
Code, as amended. Quanta has filed liens on various properties to secure
substantially all of its pre-petition receivables. The carrying value is based
upon Quanta's understanding of the current status of the Adelphia bankruptcy
proceeding and a number of assumptions, including assumptions about the
validity, priority and enforceability of our security interests. Quanta
currently believes it will collect a substantial majority of the balances owed.
Should any of the factors underlying Quanta's estimate change, the amount of
Quanta's allowance could change significantly. Quanta is uncertain as to whether
such receivables will be collected within one year and therefore has included
this amount in non-current assets as Accounts and Notes Receivable. Also
included in Accounts and Notes Receivable are amounts due from another customer
relating to the construction of independent power plants. Quanta has agreed to
long-term payment terms for this customer. The notes receivable are partially
secured and bear interest at 9.5% per year. In the second quarter of 2003,
Quanta provided allowances for these notes receivable due to a substantial
deterioration in the estimated future cash flows of the plants, resulting in a
carrying value equal to the estimated value of the collateral securing these
notes. As of June 30, 2003, the total long-term balances due from both of these
customers was $81.2 million, net of an allowance for doubtful accounts of $46.3
million.

CONCENTRATION OF CREDIT RISK

Quanta 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, Quanta is subject to potential
credit risk related to changes in business and economic factors throughout the
United States. However, Quanta generally is entitled to payment for work
performed and typically has certain lien rights on the services provided.

STOCK-BASED COMPENSATION

Quanta accounts for its stock-based compensation under Accounting
Principles Board Opinion No. 25 (APB Opinion 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 Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 encourages companies to account for stock-based compensation awards based on
the fair

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QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 SFAS No. 123 been
followed. In addition, Quanta has an Employee Stock Purchase Plan (ESPP). SFAS
No. 123 requires the inclusion of stock issued pursuant to an ESPP in the as
adjusted disclosure.

Had compensation costs for the 2001 Stock Incentive Plan and the ESPP been
determined consistent with SFAS No. 123, Quanta'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):

See Note 7 for additional discussion of the restricted stock issued under
Quanta's 2001 Stock Incentive Plan and the effects thereof.

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QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. PER SHARE INFORMATION

Earnings (loss) 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 (loss) per share for the three and six months ended June 30, 2002 and
2003 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 (loss) per share, where applicable. For the three and six months
ended June 30, 2002, approximately 8.1 million and 7.9 million stock options
were excluded from the computation of diluted earnings (loss) per share because
the options' exercise prices were greater than the average market price of
Quanta's common stock. For the three and six months ended June 30, 2003,
approximately 1.6 million stock options were excluded from the computation of
diluted earnings (loss) per share because the options' exercise prices were
greater than the average market price of Quanta's common stock. For the three
and six months ended June 30, 2002, 452,366 and 464,494 stock options, with
exercise prices lower than the average market price of Quanta's Common Stock,
were excluded from the computation of diluted earnings (loss) per share because
the effect of including them would be antidilutive. For the three and six months
ended June 30, 2003, 8,569 and 5,556 stock options, with exercise prices lower
than the average market price of Quanta's Common Stock, were excluded from the
computation of diluted earnings (loss) per share because the effect of including
them would be antidilutive. For the three and six months ended June 30, 2002 and
2003, the effect of

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QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assuming conversion of the convertible subordinated notes would be antidilutive
and they were therefore excluded from the calculation of diluted earnings (loss)
per share.

3. INCOME TAXES

Quanta 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.

As of June 30, 2003, estimates of Quanta's income before taxes for the year
ended December 31, 2003 are at levels such that small fluctuations in estimated
income before taxes could produce large changes in the estimated annual
effective tax rate. Therefore, for the six months ended June 30, 2003, Quanta
has provided for taxes based upon the year-to-date loss without regard to year
end estimates.

4. NEW ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after June 30, 2003 (with certain exceptions) and for
hedging relationships entered into after June 30, 2003. We do not have any
financial instruments that fall under the scope of this statement and do not
believe that the adoption of SFAS No. 149 will have a material effect on either
our financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. Financial
instruments that fall within the scope of SFAS No. 150 will be classified as
liabilities (or assets in some circumstances). This statement is effective at
the beginning of the first interim period beginning after June 15, 2003.

5. GOODWILL AND OTHER INTANGIBLES

Effective January 1, 2002, Quanta adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS No. 142, all goodwill
amortization ceased effective January 1, 2002. Material amounts of recorded
goodwill attributable to each of Quanta's reporting units were tested for
impairment by comparing the fair value of each reporting unit with its carrying
value. Fair value was determined using a combination of the discounted cash
flow, market multiple and market capitalization valuation approaches. These
impairment tests are required to be performed at adoption of SFAS No. 142 and at
least annually thereafter or more frequently if events or changes in
circumstances indicate that the asset might be impaired. Significant estimates
used in the methodologies include estimates of future cash flows, future
short-term and long-term growth rates, weighted average cost of capital and
estimates of market multiples for each of the reportable units. On an ongoing
basis (absent any impairment indicators), Quanta performs impairment tests
annually during the fourth quarter.

Based on Quanta's transitional impairment test performed upon adoption of
SFAS No. 142 during the six months ended June 30, 2002, Quanta recognized a
$488.5 million non-cash charge, ($445.4 million, net of tax) to reduce the
carrying value of goodwill to the implied fair value of Quanta's reporting
units. Under

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QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No. 142, the impairment adjustment recognized upon adoption of the new
rules was reflected as a cumulative effect of change in accounting principle,
net of tax.

Quanta further recognized an interim non-cash goodwill impairment charge of
approximately $166.6 million during the quarter ended June 30, 2002. Impairment
adjustments recognized after adoption are required to be recognized as operating
expenses. The primary factor contributing to the interim impairment charge was
the overall deterioration of the business climate during 2002 in the markets
Quanta serves as evidenced by an increased number of bankruptcies in the
telecommunications industry, continued devaluation of several of Quanta's
customers' debt and equity securities and pricing pressures resulting from
challenges faced by major industry participants. Fair value was determined using
a combination of the discounted cash flow, market multiple and market
capitalization valuation approaches. Interim goodwill impairment assessments are
required whenever events or changes occur during the year that indicate that the
goodwill may not be recoverable.

Late in the second quarter of 2003, a dispute developed between one of our
subsidiaries and its primary customer, leading to a suspension of work for that
customer. It is unclear whether the dispute will be resolved favorably or
whether work for this customer will resume. If the dispute settles unfavorably
for the subsidiary or the subsidiary is unable to replace this work with
comparable cash flows, Quanta may record a non-cash goodwill impairment charge
of up to $6.5 million.

6. DEBT

CREDIT FACILITY

Quanta has a credit facility with 14 participating banks which matures on
June 14, 2004. On March 31, 2003, the commitment reduced from $250.0 million to
$225.0 million and will remain in effect at such amount through December 31,
2003. Effective January 1, 2004, the credit facility will reduce to $200.0
million and remain in effect at such amount through maturity of the credit
facility on June 14, 2004. Quanta's borrowing availability is further restricted
by $25.0 million until Quanta achieves, for two consecutive fiscal quarters
beginning with the fourth quarter of 2002, certain minimum EBITDA (as defined in
the credit facility) requirements. Quanta has not yet satisfied these EBITDA
requirements. In addition, Quanta's borrowing availability under the credit
facility is subject to reduction depending upon Quanta's degree of compliance
with certain quarterly financial ratios. The credit facility is secured by a
pledge of all of the capital stock of Quanta's subsidiaries and the majority of
Quanta's assets and is to provide funds to be used for working capital and for
other general corporate purposes. Quanta's subsidiaries guarantee the repayment
of all amounts due under the facility and the facility restricts pledges on all
material assets. 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 1.12% at June 30, 2003) plus 1.50% to 3.50%, as determined by the ratio
of Quanta's total funded debt to EBITDA or (b) the bank's prime rate (which was
4.0% at June 30, 2003) plus up to 2.00%, as determined by the ratio of Quanta's
total funded debt to EBITDA. Commitment fees of 0.375% to 0.50%, based on
Quanta's total funded debt to EBITDA, are due on any unused borrowing capacity
under the credit facility. The credit facility contains certain financial ratio
and indebtedness covenants, including a maximum funded debt to EBITDA ratio, a
minimum interest coverage ratio and a maximum senior debt to EBITDA ratio. The
credit facility also prohibits the payment of dividends and stock repurchase
programs and limits capital expenditures and asset sales. Additionally the
credit facility requires a mandatory reduction in the banks' commitment by a
portion of the proceeds from asset sales in excess of $5.0 million annually or
upon the issuance of additional debt in excess of $15.0 million. As of June 30,
2003, Quanta was in compliance with all of its covenants. However, the lower
than anticipated operating performance in the first six months of 2003, if
coupled with other conditions such as additional project delays or
cancellations, adverse weather conditions or poor contract performance, could
adversely affect Quanta's ability to comply with the covenants in the future. As
of June 30, 2003, Quanta had no outstanding borrowings under the credit facility
and $83.9 million of letters of credit

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QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

outstanding, primarily to secure Quanta's potential obligations under the
casualty insurance programs. Based on Quanta's senior debt to EBITDA ratio as of
June 30, 2003, Quanta has approximately $8.3 million in borrowing availability
under the credit facility.

SENIOR SECURED NOTES

In 2000, Quanta closed a private placement of $210.0 million principal
amount of senior secured notes, primarily with insurance companies, with
maturities currently ranging from March 2005 to September 2010. During 2002,
Quanta amended the senior secured notes and, as amended, they have financial
covenants and restrictions substantially identical to those of the credit
facility. The senior secured notes bear interest at a weighted average interest
rate between 8.41% and 9.91% as determined by the ratio of Quanta's total funded
debt to EBITDA. The current weighted average interest rate is 9.91%. In
addition, the senior secured notes carry a make-whole provision customary for
this type of debt instrument on prepayment of principal, including any mandatory
prepayments. The senior secured notes carry cross-default provisions and rank
equally in right of repayment with indebtedness under Quanta's credit facility.

CONVERTIBLE SUBORDINATED NOTES

During the third quarter of 2000, Quanta issued $172.5 million principal
amount of convertible subordinated notes. The convertible subordinated notes
bear interest at 4.0% per year and are convertible into shares of Quanta's
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 beginning December 31, 2000, until the notes mature on July 1,
2007. Quanta has the option to redeem the notes beginning July 3, 2003; however,
redemption is currently prohibited by Quanta's credit facility and senior
secured notes.

7. STOCKHOLDERS' EQUITY

SERIES A CONVERTIBLE PREFERRED STOCK

In September 1999, Quanta issued shares of Series A Convertible Preferred
Stock, $.00001 par value per share. All outstanding shares of Series A
Convertible Preferred Stock remaining were converted into common stock during
the first quarter of 2003 and the series was eliminated during the second
quarter of 2003.

FIRST RESERVE INVESTMENT

During the fourth quarter of 2002, First Reserve Fund IX, L.P. (First
Reserve) purchased from Quanta approximately 2.4 million shares of newly issued
Series E Preferred Stock at $30.00 per share. The Series E Preferred Stock was
converted into 24.3 million shares of common stock on December 31, 2002 and the
series was eliminated during the second quarter of 2003.

Through February 20, 2003, First Reserve had the right to require Quanta to
repurchase for cash the shares of common stock issued as a result of the
conversion of the shares of Series E Preferred Stock if Quanta had a change in
control. As such, the $72.9 million investment was reflected in the consolidated
balance sheet as Redeemable Common Stock at December 31, 2002. On February 20,
2003, at the expiration of this right, the Redeemable Common Stock was
reclassified to stockholders' equity.

In connection with their investment, First Reserve is entitled to a
pre-emptive right to purchase shares of common stock upon Quanta's issuance of
shares to third parties. During the first six months of 2003, First Reserve
acquired 1,201,128 shares pursuant to such right.

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QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RESTRICTED STOCK

Pursuant to the 2001 Stock Incentive Plan, Quanta issues restricted common
stock at the fair market value of the common stock as of the date of issuance.
The shares of restricted 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 common stock, an
unamortized compensation expense equivalent to the market value of the shares on
the date of grant is charged to stockholders' equity and is amortized over the
restriction period, typically three years.

On January 21, 2003, Quanta offered eligible employees and consultants the
opportunity to exchange certain outstanding stock options, with an exercise
price of $10.00 or more, for restricted shares of Quanta's common stock at an
exchange ratio of one share of restricted stock for every 2.24 option shares
tendered. As restricted stock, the shares are subject to forfeiture and other
restrictions until they vest. Regardless of the vesting schedule of the eligible
options offered for exchange, the restricted stock granted in the offer vests
over three years in equal annual installments on February 28 of each year,
beginning February 28, 2004, assuming the employee or consultant continues to
meet the requirements for vesting. On March 10, 2003, Quanta accepted for
exchange and canceled eligible options to purchase an aggregate of 6,769,483
shares of its common stock, representing approximately 93% of the 7,289,750
options that were eligible to be tendered in the offer as of the expiration
date. Pursuant to the terms of the offer, Quanta granted restricted stock
representing an aggregate of 3,022,112 shares of its common stock, or
approximately $9.0 million in value, in exchange for the tendered eligible
options. This restricted stock issuance will require Quanta to recognize a
non-cash compensation charge of approximately $3.0 million per year over the
three-year vesting period of the restricted stock. The remaining 520,267
eligible options that were not exchanged will be required to be accounted for
under variable plan accounting under APB Opinion No. 25. The weighted average
exercise price of these remaining eligible options is $23.92. In the future, to
the extent that Quanta's stock price exceeds an option's exercise price, the
difference will be recorded as a non-cash compensation charge with an offset to
additional paid-in capital. No charges have been recorded with respect to these
options under variable plan accounting through June 30, 2003.

As of June 30, 2002 and 2003, 63,614 and 3,314,152 million shares of
restricted stock, respectively, were outstanding. The compensation expense
recognized with respect to all restricted stock during the three and six months
ended June 30, 2002 was approximately $62,000 and $125,000, respectively, and
for the three and six months ended June 30, 2003 was approximately $878,000 and
$1,084,000, respectively.

8. SEGMENT INFORMATION

Quanta operates in one reportable segment as a specialty contractor. Quanta
provides comprehensive network solutions to the electric power, gas,
telecommunications and cable television industries, including designing,
installing, repairing and maintaining network infrastructure. In addition,
Quanta provides ancillary services such as inside electrical wiring, intelligent
traffic networks, cable and control systems for light rail lines, airports and
highways, and specialty rock trenching, directional boring and road milling for
industrial and commercial customers. Each of these services is provided by
various Quanta subsidiaries and discrete financial information is not provided
to management at the service level. The following table presents information

12

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

regarding revenues derived from the industries noted above. Certain
reclassifications have been made to the prior period in order to conform to the
current period presentation.

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

9. COMMITMENTS AND CONTINGENCIES

LITIGATION

Quanta is from time to time party to various lawsuits, claims and other
legal proceedings that arise in the ordinary course of business. These actions
typically seek, among other things, compensation for alleged personal injury,
breach of contract, property damage, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to such lawsuits,
claims and proceedings, Quanta accrues reserves when it is probable a liability
has been incurred and the amount of loss can be reasonably estimated. Quanta
does not believe that any of these proceedings, separately or in the aggregate,
would be expected to have a material adverse effect on Quanta's results of
operations or financial position.

SELF-INSURANCE

Through June 30, 2003, Quanta was insured for employer's liability, auto
liability and general liability claims, subject to a deductible of $1,000,000
per occurrence with a deductible for workers' compensation of $2,000,000 per
occurrence. In August 2003, Quanta increased the deductible for auto liability
claims from $1,000,000 to $2,000,000 per occurrence. Quanta's consolidated
non-union employee related health care benefits plan is subject to a deductible
of $250,000 per claimant per year. 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. At December 31, 2002 and June 30, 2003, the amounts
accrued for self-insured claims were $45.0 million and $53.8 million,
respectively, with $27.4 million and $34.4 million, respectively, considered to
be long-term and included in Other Non-Current Liabilities.

Quanta is contractually obligated to fund its casualty self-insurance
obligations applicable to the policy period from March 1, 2003 to February 29,
2004 with a combination of a cash trust account of $14.4 million and letters of
credit totaling $24.4 million. As of June 30, 2003, Quanta had funded the cash
trust account with $7.2 million and issued $11.7 million in letters of credit
pursuant to the policy period from March 1, 2003 to February 29, 2004. The $7.2
million of restricted cash is classified as non-current and is included in Other
Assets.

PERFORMANCE BONDS

In certain circumstances, Quanta is required to provide performance bonds
in connection with its contractual commitments. Quanta has indemnified the
surety for any expenses paid out under these

13

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

performance bonds. As of June 30, 2003, the total amount of outstanding
performance bonds was approximately $484.8 million.

LEASES

Quanta leases certain buildings and equipment under non-cancelable lease
agreements including related party leases. The following schedule shows the
future minimum lease payments under these leases as of June 30, 2003 (in
thousands):

Quanta has guaranteed a residual value on certain equipment operating
leases. Quanta guarantees the difference between this residual value and the
fair market value of the underlying asset at the date of termination of the
leases. At June 30, 2003, the maximum guaranteed residual value would have been
approximately $135.2 million. Quanta believes that no significant payments will
be made as a result of the difference between the fair market value of the
leased equipment and the guaranteed residual value. However, there can be no
assurance that future significant payments will not be required.

CONTINGENT PAYMENTS

Quanta is subject to an agreement with the former owners of an operating
unit that was acquired in 2000. Under the terms of this agreement and depending
upon the ultimate profitability of certain contracts obtained by the operating
unit and the collection of the underlying receivables, Quanta may be required to
make additional payments to such former owners with a combination of common
stock and cash. At June 30, 2003, the amount of additional payments based on
performance to date could equal up to $15.5 million. This amount may be adjusted
significantly higher or lower over the term of the agreement.

EMPLOYMENT AGREEMENTS

Quanta has entered into various employment agreements with certain
executives which provide for compensation and certain other benefits and for
severance payments under certain circumstances. In addition, certain employment
agreements contain clauses which become effective upon a change of control of
Quanta. Upon any of the defined events in the various employment agreements,
Quanta will pay certain amounts to the employee, which vary with the level of
the employee's responsibility.

14

QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

OTHER

Quanta is subject to audit by tax authorities for varying periods in
various federal, state and local foreign tax jurisdictions. Disputes arise
during the course of such audits as to facts and matters of law.

Quanta has indemnified various parties against specified liabilities that
those parties might incur in the future in connection with companies previously
acquired or disposed of by Quanta. These indemnities usually are contingent upon
the other party incurring liabilities that reach specified thresholds. As of
June 30, 2003, Quanta is not aware of circumstances that would lead to future
indemnity claims against it for material amounts in connection with these
transactions.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and related notes thereto included elsewhere
in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K,
which was filed with the SEC on March 31, 2003, and is available at the SEC's
Web site at www.sec.gov.

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.

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 or cost-plus 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 higher margins on our
labor-intensive projects. As of June 30, 2003, we had a deductible of $1,000,000
per occurrence related to employer's liability, automobile and general liability
claims and a deductible for workers' compensation insurance of $2,000,000 per
occurrence. In August 2003, we increased the deductible for auto liability
claims from $1,000,000 to $2,000,000 per occurrence. We also have a non-union
employee related health care benefit plan that 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.

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.

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 United States. Typically, we experience lower gross and operating margins
during the winter months due to lower demand for our services and more difficult
operating conditions. The financial condition of our

16

customers and their access to capital, variations in the margins of projects
performed during any particular quarter, the timing and magnitude of acquisition
assimilation costs, regional economic conditions and timing of acquisitions 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.

SIGNIFICANT BALANCE SHEET CHANGES

Total assets did not vary significantly as of June 30, 2003 compared to
December 31, 2002. However, specific asset fluctuations are due to the
following:

- Cash increased $58.2 million primarily due to the receipt of a $38.2
million income tax refund in the second quarter of 2003, the receipt of
$5.4 million associated with the issuance of stock and lower working
capital requirements.

- Accounts receivable and costs and estimated earnings in excess of
billings on uncompleted contracts decreased $14.3 million primarily due
to lower levels of revenue and collections on accounts that were
outstanding at December 31, 2002.

- Current deferred taxes decreased $24.1 million due to certain items that
we deducted for tax purposes in the 2002 tax return, which were
originally not expected to be deducted in 2002.

- Property and equipment, net decreased $18.9 million due to depreciation
expense of $29.7 million recorded during the period and the sale of
equipment that was no longer being used by certain of our subsidiaries,
partially offset by increases as a result of capital expenditures of
$12.5 million.

- Accounts and notes receivable, net decreased $15.4 million primarily due
to additional allowances recorded during the six months ended June 30,
2003.

- Other assets, net increased $9.2 million primarily due to the funding of
a cash trust account for self-insurance in the amount of $7.2 million.

As of June 30, 2003, total liabilities increased approximately $1.6
million, redeemable common stock decreased $72.9 million and stockholders'
equity increased approximately $67.1 million compared to December 31, 2002.
These fluctuations were primarily due to the following:

- Accounts payable and accrued expenses decreased $10.7 million primarily
due to a $6.9 million decrease in trade accounts payable resulting from
lower levels of costs incurred during 2003 associated with lower revenues
and the payment during 2003 of $3.3 million in accrued debt amendment
costs incurred during December 2002 associated with amendments of certain
of our debt agreements.

- Deferred income taxes and other non-current liabilities increased $15.0
million primarily as a result of the recording of $8.2 million in
additional long-term deferred tax liabilities due to increased
differences between the book and tax bases of certain of our assets and
an increase of $7.0 million in the long-term portion of our
self-insurance reserves.

- Redeemable common stock decreased $72.9 million. On December 20, 2002,
First Reserve purchased from us approximately 2.4 million shares of newly
issued Series E Preferred Stock at $30.00 per share, for an investment of
approximately $72.9 million. The shares of Series E Preferred Stock were
converted into 24.3 million shares of common stock on December 31, 2002.
Through February 20, 2003, First Reserve had the right to require us to
repurchase for cash the shares of common stock issued as a result of the
conversion of the shares of Series E Preferred Stock if we had a change
in control. As such, the investment had been reflected in the
consolidated balance sheet as redeemable common stock at December 31,
2002. On February 20, 2003, at the expiration of the right, the
redeemable common stock was reclassified to stockholders' equity.

- Stockholders' equity increased $67.1 million during the first six months
of 2003. This was primarily the result of the reclassification of
redeemable common stock of $72.9 million to stockholders' equity, the
issuance of approximately $1.9 million of common stock pursuant to our
Employee Stock Purchase Plan and the issuance of approximately $3.5
million of common stock pursuant to First Reserve's
17

exercise of their preemptive rights. These increases were partially
offset by a net loss attributable to common stock of $12.6 million.

RESULTS OF OPERATIONS

The following table sets forth selected unaudited statements of operations
data and such data as a percentage of revenues for the periods indicated:

THREE AND SIX MONTHS ENDED JUNE 30, 2003, COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 2002

Revenues. Revenues decreased $24.2 million and $106.3 million, or 5.6% and
12.1%, to $408.3 million and $775.4 million for the three and six months ended
June 30, 2003. The decrease was due to the continued decrease in capital
spending by our customers, the inability of certain of these customers to raise
new capital, and the continued downturn in the national economy, which have
negatively impacted the award of work to specialty contractors. Pricing
pressures have also contributed to lower revenues as the competitive bid
environment tightens.

Gross profit. Gross profit increased $5.4 million, or 11.1%, to $53.5
million for the three months ended June 30, 2003. As a percentage of revenues,
gross margin increased from 11.1% for the three months ended June 30, 2002 to
13.1% for the three months ended June 30, 2003. This increase in gross margin
resulted primarily from increased margins on telecommunications revenues during
the three months ended June 30, 2003. Gross profit decreased $32.6 million, or
26.3%, to $91.3 million for the six months ended June 30, 2003.

18

As a percentage of revenue, gross margin decreased from 14.0% for the six months
ended June 30, 2002 to 11.8% for the six months ended June 30, 2003. The
decrease in gross margin was attributable to shutdowns, delays and substantial
operating inefficiencies resulting from severe snowfall in the Northeast and
Mountain regions of the United States during the first quarter of 2003,
substantially higher than normal rainfall amounts in the South and Southeast and
negative impacts due to the economic factors and pricing pressures noted above,
partially offset by increased margins on telecommunications revenues during the
three months ended June 30, 2003.

Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $1.4 million, or 2.3%, to $58.1 million for
the three months ended June 30, 2003. During the three months ended June 30,
2003, we recorded $19.0 million in bad debt expense related primarily to notes
receivable from one customer. During the second quarter of 2002, we recorded
$8.4 million in bad debt expense and proxy defense costs in the amount of $5.9
million. Excluding bad debt expense and proxy costs, selling, general and
administrative expenses for the three months ended June 30, 2003 decreased $6.1
million primarily due to reductions in salary and benefit expenses, facility
related costs and travel and entertainment costs as a result of reductions in
personnel and the closure of certain offices. Selling, general and
administrative expenses decreased $13.1 million, or 11.9%, to $97.1 million for
the six months ended June 30, 2003. During the six months ended June 30, 2003,
we recorded $19.3 million in bad debt expense. During the six months ended June
30, 2002, we recorded $8.6 million in bad debt expense and proxy defense costs
in the amount of $10.5 million. Absent these items, selling, general and
administrative expenses for the six months ended June 30, 2003 decreased $13.3
million primarily due to reductions in salary and benefit costs, facility
related costs and travel and entertainment costs as a result of reductions in
personnel and the closure of certain offices.

Goodwill impairment. During the six months ended June 30, 2002, we
recognized an interim non-cash SFAS No. 142 goodwill impairment charge of $166.6
million. Any interim impairment adjustments recognized after adoption are
required to be recognized as operating expenses. The primary factor contributing
to the interim impairment charge was the overall deterioration of the business
climate during 2002 in the markets we serve. We did not recognize an interim
non-cash goodwill impairment charge during the six months ended June 30, 2003.

Interest expense. Interest expense increased $0.1 million, or 1.3%, to
$8.1 million for the three months ended June 30, 2003. This increase was due to
higher interest rates, partially offset by lower levels of debt in 2003.
Interest expense increased $0.2 million, or 1.3%, to $16.1 million for the six
months ended June 30, 2003, also due to higher interest rates, partially offset
by lower levels of debt in 2003.

Provision (benefit) for income taxes. The benefit for income taxes was
$3.2 million and $7.3 million for the three and six months ended June 30, 2003,
with effective tax rates of 24.7% and 33.3%, respectively, compared to a benefit
of $7.6 million and $0.3 million for the three and six months ended June 30,
2002, with effective tax rates of 4.1% and 0.2%, respectively. As of June 30,
2003, estimates of our income before taxes for the year ended December 31, 2003
are at levels such that small fluctuations in estimated income before taxes
could produce large changes in the estimated annual effective tax rate.
Therefore, for the six months ended June 30, 2003, we have provided for taxes
based upon the year-to-date loss without regard to year end estimates. The tax
rates in 2002 reflect the recording of the net realizable benefit relating to
the goodwill impairment charge offset by tax expense on permanent differences.

Cumulative effect of change in accounting principle, net of tax. Based on
our transitional impairment test performed upon adoption of SFAS No. 142 in
2002, we recognized a charge, net of tax, of $445.4 million to reduce the
carrying value of the goodwill of our reporting units to its implied fair value.
Under SFAS No. 142, the impairment adjustment recognized at adoption of the new
rule was reflected as a cumulative effect of change in accounting principle in
the six months ended June 30, 2002.

Dividends on preferred stock, net of forfeitures. For the six months ended
June 30, 2003, we recorded approximately $2.1 million in forfeitures of
dividends on the Series A Convertible Preferred Stock. On January 9, 2003,
939,380 shares of Series A Convertible Preferred Stock were converted into
shares of common stock and on February 27, 2003, all remaining outstanding
shares of Series A Convertible Preferred Stock were converted into shares of
common stock. There are currently no outstanding shares of Series A
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Convertible Preferred Stock and the series was eliminated during the second
quarter of 2003. Any dividends that had accrued on the respective shares of
Series A Convertible Preferred Stock were reversed on the date of conversion.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2003, we had cash and cash equivalents of $86.1 million,
working capital of $350.6 million and long-term debt of $384.4 million, net of
current maturities. Our long-term debt balance at that date included borrowings
of $210.0 million of senior secured notes, $1.9 million of other debt and $172.5
million of convertible subordinated notes. We also had $83.9 million of letters
of credit outstanding under the credit facility.

During the six months ended June 30, 2003, operating activities provided
net cash flow of $73.2 million after considering $30.2 million in depreciation
and amortization, $19.3 million for provision for doubtful accounts, $32.3
million for deferred income taxes and lower working capital requirements. We
used net cash in investing activities of $18.8 million, including $12.5 million
used for capital expenditures and $7.2 million used to fund a cash trust account
for our self-insurance. Financing activities provided a net cash flow of $3.8
million, resulting primarily from $1.9 million from the issuance of stock under
the Employee Stock Purchase Plan (ESPP) and approximately $3.5 million for
shares of common stock sold pursuant to First Reserve's exercise of their
preemptive rights, offset by $1.6 million of net repayments of other long-term
debt.

We have a credit facility with 14 participating banks that matures on June
14, 2004. On March 31, 2003, the commitment was reduced from $250.0 million to
$225.0 million and will remain in effect at such amount through December 31,
2003. Effective January 1, 2004, the credit facility will reduce to $200.0
million and remain in effect at such amount through maturity of the credit
facility on June 14, 2004. Our borrowing availability is further restricted by
$25.0 million until we achieve, for two consecutive fiscal quarters beginning
with the fourth quarter of 2002, certain minimum EBITDA (as defined in the
credit facility) requirements. We have not yet satisfied these EBITDA
requirements. In addition, our borrowing availability under the credit facility
is subject to reduction depending upon our degree of compliance with certain
quarterly financial ratios. The credit facility is secured by a pledge of all of
the capital stock of our subsidiaries and the majority of our assets and is to
provide funds to be used for working capital and for other general corporate
purposes. Our subsidiaries guarantee the repayment of all amounts due under the
facility and the facility restricts pledges on all material assets. Amounts
borrowed under the credit facility bear interest at a rate equal to either (a)
LIBOR plus 1.50% to 3.50%, as determined by the ratio of our total funded debt
to EBITDA or (b) the bank's prime rate plus up to 2.00%, as determined by the
ratio of our total funded debt to EBITDA. Commitment fees of 0.375% to 0.50%,
based on our total funded debt to EBITDA, are due on any unused borrowing
capacity under the credit facility. The credit facility contains certain
financial ratio and indebtedness covenants, including a maximum funded debt to
EBITDA ratio, a minimum interest coverage ratio and a maximum senior debt to
EBITDA ratio. The credit facility also prohibits the payment of dividends and
stock repurchase programs and limits capital expenditures and asset sales.
Additionally the credit facility requires a mandatory reduction in the banks'
commitment by a portion of the proceeds from asset sales in excess of $5.0
million annually or upon the issuance of additional debt in excess of $15.0
million.

As of June 30, 2003, we were in compliance with all of our covenants.
However, our lower than anticipated operating performance in the first six
months of 2003, if coupled with other conditions such as additional project
delays or cancellations, continued adverse weather conditions or poor contract
performance, could adversely affect our ability to comply with the covenants in
the future. As of June 30, 2003, we had no borrowings under the credit facility
and $83.9 million of letters of credit outstanding, primarily to secure our
potential obligations under our casualty insurance programs. Based on our senior
debt to EBITDA ratio as of June 30, 2003, we have approximately $8.3 million in
borrowing availability under the credit facility. Our current borrowing rate is
LIBOR plus 3.50%.

As of June 30, 2003, we had $210.0 million of senior secured notes that
have maturities ranging from March 2005 to September 2010. The senior secured
notes bear interest at a weighted average interest rate between 8.41% and 9.91%
as determined by the ratio of our total funded debt to EBITDA. The current

20

weighted average interest rate is 9.91%. During 2002, we amended the senior
secured notes, and as amended, they have financial covenants and restrictions
substantially identical to those under the credit facility. In addition, the
senior secured notes carry a make-whole provision customary for this type of
debt instrument on prepayment of principal, including, any mandatory
prepayments. The senior secured notes carry cross-default provisions and rank
equally in right of repayment with indebtedness under our credit facility.

As of June 30, 2003, 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;
however, redemption is currently prohibited by our credit facility and senior
secured notes. 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. In the event of such circumstance, consent to
repurchase the convertible subordinated notes would be required under our credit
facility and senior secured notes.

On December 20, 2002, First Reserve purchased from us approximately 2.4
million shares of newly issued Series E Preferred Stock at $30.00 per share, for
an investment of approximately $72.9 million. The Series E Preferred Stock was
converted into 24.3 million shares of common stock on December 31, 2002 and the
series was eliminated during the second quarter of 2003. Through February 20,
2003, First Reserve had the right to require us to repurchase for cash the
shares of common stock issued as a result of the conversion of the shares of
Series E Preferred Stock if we had a change in control. As such, the investment
was reflected in the consolidated balance sheet as redeemable common stock at
December 31, 2002. On February 20, 2003, at the expiration of this right, the
redeemable common stock was reclassified to stockholders' equity.

On January 9, 2003, 939,380 shares of Series A Convertible Preferred Stock
were converted into shares of common stock and on February 27, 2003, all
remaining outstanding shares of Series A Convertible Preferred Stock were
converted into shares of common stock and the series was eliminated during the
second quarter of 2003. Dividends of $2.3 million that had accrued on the
respective shares of Series A Convertible Preferred Stock, which included $0.2
million accrued during the first quarter of 2003, were reversed on the date of
the conversion.

We anticipate that our cash on hand, 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, further
deterioration in the markets we serve, material changes in our customers'
revenues or cash flows or adverse weather conditions may negatively impact our
revenues and cash flows and the ability to meet our financial covenants in the
credit facility and senior secured notes. These factors, coupled with the
lowered capacity and restrictive covenants of our credit facility and senior
secured notes, may negatively impact our ability to meet such needs.

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, in which case we are typically liable to the lessor for the remaining
lease payments under the term of the lease.

We have guaranteed a residual value on certain equipment operating leases.
We guarantee the difference between this residual value and the fair market
value of the underlying asset at the date of termination of the

21

leases. At June 30, 2003, the maximum guaranteed residual value would have been
approximately $135.2 million. We believe that no significant payments will be
made as a result of the difference between the fair market value of the leased
equipment and the guaranteed residual value. However, there can be no assurance
that future significant payments will not be required.

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 our behalf,
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 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.

We had $83.9 million in letters of credit outstanding under our credit
facility primarily to secure obligations under our casualty insurance program at
July 31, 2003. 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
2003 and 2004. Upon maturity, it is expected that the majority of these letters
of credit will be renewed for subsequent one-year periods.

We are contractually obligated to fund our casualty self-insurance
obligations applicable to the policy period from March 1, 2003 to February 29,
2004 with a combination of a cash trust account of $14.4 million and letters of
credit totaling $24.4 million. As of June 30, 2003, we had funded the cash trust
account with $7.2 million and issued $11.7 million in letters of credit pursuant
to the policy period from March 1, 2003 to February 29, 2004.

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. As
of June 30, 2003, the total amount of outstanding performance bonds was
approximately $484.8 million.

Our future contractual obligations, including interest under capital
leases, are as follows (in thousands):

Concentration of Credit Risk. We grant credit, generally without
collateral, to our customers, which include electric power and gas companies,
telecommunications and cable television system operators, governmental entities,
general contractors, and builders, owners and managers of commercial and
industrial properties located primarily in the United States. Consequently, we
are subject to potential credit risk related to changes in business and economic
factors throughout the United States. However, we generally are entitled to
payment for work performed and have certain lien rights on our services
provided. Under certain circumstances, such as foreclosures or negotiated
settlements, we may take title to the underlying assets in lieu of cash in
settlement of receivables. As previously discussed herein, our customers in the
telecommunications business have experienced significant financial difficulties
and in several instances have filed for bankruptcy.

22

Our utility customers are also experiencing business challenges in the current
business climate. These economic conditions expose us to increased risk related
to collectibility of receivables for services we have performed.

In June 2002, a large customer, Adelphia Communications Corporation
(Adelphia), filed for bankruptcy protection under Chapter 11 of the Bankruptcy
Code, as amended. We have filed liens on various properties to secure
substantially all of our pre-petition receivables. Our carrying value is based
upon our understanding of the current status of the Adelphia bankruptcy
proceeding and a number of assumptions, including assumptions about the
validity, priority and enforceability of our security interests. We currently
believe we will collect a substantial majority of the balances owed. Should any
of the factors underlying our estimate change, the amount of our allowance could
change significantly. We are uncertain as to whether such receivables will be
collected within one year and therefore have included this amount in non-current
assets as accounts and notes receivable as of June 30, 2003. Also included in
accounts and notes receivable are amounts due from another customer relating to
the construction of independent power plants. We have agreed to long-term
payment terms for this customer. The notes receivable are partially secured and
bear interest at 9.5% per year. In the second quarter of 2003, Quanta provided
allowances for these notes receivable due to a substantial deterioration in the
estimated future cash flows of the plants, resulting in a carrying value equal
to the estimated value of the collateral securing these notes. As of June 30,
2003, the total long-term balances due from both of these customers was $81.2
million, net of an allowance for doubtful accounts of $46.3 million.

Litigation. We are from time to time a party to various lawsuits, claims
and other legal proceedings that arise in the ordinary course of business. These
actions typically seek, among other things, compensation for alleged personal
injury, breach of contract, property damage, punitive damages, civil penalties
or other losses, or injunctive or declaratory relief. With respect to all such
lawsuits, claims and proceedings, we accrue reserves when it is probable a
liability has been incurred and the amount of loss can be reasonably estimated.
We do not believe that any of these proceedings, separately or in the aggregate
would be expected to have a material adverse effect on our results of operations
or financial position.

Change of Control. We have employment agreements with certain employees
that become effective upon a change of control of Quanta (as defined in the
employment agreements). The employment agreements provide that, following a
change in control, if we terminate the employee's employment without cause (as
defined in the employment agreements), the employee terminates employment for
good reason (as defined in the 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 except Mr. Colson, our chief executive
officer, 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.

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 facility leases with prior owners.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after June 30, 2003 (with certain exceptions) and for
hedging relationships entered into after June 30, 2003. We do not have any
financial instruments that fall under the scope of this statement and do not
believe that the adoption of SFAS No. 149 will have a material effect on either
our financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. Financial
instruments that fall within the scope of SFAS No. 150 will be classified as
liabilities (or an asset in some
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circumstances). This statement is effective at the beginning of the first
interim period beginning after June 15, 2003.

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. We
evaluate our 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 estimates. Management has reviewed its development and selection of
critical accounting estimates with the audit committee of our board of
directors. We believe the following accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:

Current and Long-Term Accounts and Notes Receivable and Provision for
Doubtful Accounts. We provide an allowance for doubtful accounts when
collection of an account or note receivable is considered doubtful.
Inherent in the assessment of the allowance for doubtful accounts are
certain judgments and estimates including, among others, our customer's
access to capital, our customer's willingness or ability to pay, general
economic conditions and the ongoing relationship with the customer. For
example, certain of our customers, primarily large public
telecommunications carriers, have filed for bankruptcy or have been
experiencing financial difficulties, and as a result we increased our
allowance for doubtful accounts to reflect that certain customers may be
unable to meet their obligations to us in the future. Should additional
customers file for bankruptcy or experience difficulties, or should
anticipated recoveries relating to the receivables in existing bankruptcies
and other workout situations fail to materialize, we could experience
reduced cash flows and losses in excess of current reserves.

Goodwill and Other Intangibles. As stated in Note 5 of Notes to
Condensed Consolidated Financial Statements, SFAS No. 142 provides that
goodwill and other intangible assets that have indefinite useful lives 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. SFAS No. 142 also provides specific
guidance for testing goodwill and other nonamortized intangible assets for
impairment. Goodwill of a reporting unit shall be tested for impairment
between annual tests if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount. Examples of such events or circumstances may include a
significant change in business climate or a loss of key personnel, among
others. SFAS No. 142 requires that management 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, cost of capital and growth rates, which could
significantly impact the reported value of goodwill and other intangible
assets. Estimating future cash flows requires significant judgment and our
projections may vary from cash flows eventually realized.

Late in the second quarter of 2003, a dispute developed between one of
our subsidiaries and its primary customer, leading to a suspension of work
for that customer. It is unclear whether the dispute will be resolved
favorably or whether work for this customer will resume. If the dispute
settles unfavorably for the subsidiary or the subsidiary is unable to
replace this work with comparable cash flows, we may record a non-cash
goodwill impairment charge of up to $6.5 million.

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 factors that influence the assessment of the total estimated
costs to complete these contracts.

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Self-Insurance. We are insured for employer's liability, auto
liability and general liability claims, subject to a deductible of
$1,000,000 per occurrence, and for workers' compensation insurance subject
to a deductible of $2,000,000 per occurrence. In August 2003, we increased
the deductible for auto liability claims from $1,000,000 to $2,000,000 per
occurrence. We also have a corporate non-union employee related health care
benefit plan that 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.

Stock Options. We account for our stock-based compensation under
Accounting Principles Board Opinion No. 25 (APB Opinion 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 costs 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.

As a result of our stock option exchange offer during the first
quarter of 2003, certain stock options are required to be accounted for
under variable plan accounting. See additional discussion in Note 7 to the
Notes to Condensed Consolidated Financial Statements.

OUTLOOK

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

Like many companies that provide installation and maintenance services to
the electrical power, gas, telecommunications and cable television industries,
we are facing a number of challenges. The telecommunications and utility markets
experienced substantial change during 2002 as evidenced by an increased number
of bankruptcies in the telecommunications market, continued devaluation of many
of our customers' debt and equity securities and pricing pressures resulting
from challenges faced by major industry participants. These factors have
contributed to the delay and cancellation of projects and reduction of capital
spending that have impacted our operations and ability to grow at historical
levels.

We continue to focus on the elements of the business we can control,
including cost control, the margins we accept on projects, collecting
receivables, ensuring quality service and right sizing initiatives to match the
markets we serve. These initiatives include aligning our work force with our
current revenue base, evaluating opportunities to reduce the number of field
offices and evaluating our non-core assets for potential sale. Such initiatives
could result in future charges related to, among others, severance, facilities
shutdown and consolidation, property disposal and other exit costs as we execute
these initiatives.

We expect consistent demand for our services from our electric power and
gas customers throughout 2003 with stabilization in the demand for our services
from our telecommunications and cable customers and relatively level demand for
our ancillary services. Financial and economic pressures have led our customers
to return to their core competencies and focus on cost reductions, resulting in
an increased focus on outsourcing services. We believe that we are adequately
positioned to provide these services because of our proven full-service
operating units with broad geographic reach, financial capability and technical
expertise.

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Capital expenditures in 2003 are expected to be approximately $30.0
million. A majority of the expenditures will be for operating equipment. We
expect expenditures for 2003 to be funded substantially through internal cash
flows and, to the extent necessary, from borrowings under our credit facility.

UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION

This Quarterly Report on Form 10-Q includes statements reflecting
assumptions, expectations, projections, intentions or beliefs about future
events that are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. They
use words such as "anticipate," "estimate," "project," "forecast," "may,"
"will," "should," "could," "expect," "believe" and other words of similar
meaning. In particular, these include, but are not limited to, statements
relating to the following:

- Projected operating or financial results;

- Expectations regarding capital expenditures;

- The effects of competition in our markets;

- The duration and extent of the current economic downturn;

- Materially adverse changes in economic conditions in the markets served
by us or by our customers, and;

- Our ability to achieve cost savings.

Any or all of our forward-looking statements may turn out to be wrong. They can
be affected by inaccurate assumptions and by known or unknown risks and
uncertainties, including the following:

- The duration and extent of the current economic downturn;

- The cost of borrowing, availability of credit, debt covenant compliance
and other factors affecting our financing activities;

- Quarterly variations in our operating results due to seasonality and
adverse weather conditions;

- Material adverse changes in economic conditions in the markets served by
us or by our customers;

- The adverse impact of goodwill impairments;

- Replacement of our contracts as they are completed or expire;

- Rapid technological and structural changes that could reduce the demand
for the services we provide;

- Our ability to effectively compete for market share;

- Our ability to generate internal growth;

- Our growth outpacing our infrastructure;

- Retention of key personnel and qualified employees;

- The impact of our unionized workforce on our operations and acquisition
strategy;

- Potential exposure to environmental liabilities;

- Our ability to effectively integrate the operations of our companies;

- Beliefs and assumptions about the collectibility of receivables;

- Our dependence on fixed price contracts;

- Cancellation provisions within our contracts; and

- Beliefs or assumptions about the outlook for markets we serve.

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Many of these factors will be important in determining our actual future
results. Consequently, no forward-looking statement can be guaranteed. Our
actual future results may vary materially from those expressed or implied in any
forward-looking statements.

All of our forward-looking statements, whether written or oral, are
expressly qualified by these cautionary statements and any other cautionary
statements that may accompany such forward-looking statements. In addition, we
disclaim any obligation to update any forward-looking statements to reflect
events or circumstances after the date of this report.

ITEM 4. CONTROLS AND PROCEDURES

Our management evaluated, with the participation of our Chairman and Chief
Executive Officer and Chief Financial Officer the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of
June 30, 2003. Based on their evaluation, our Chairman and Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of June 30, 2003.

There has been no change in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the quarter ended June 30, 2003, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.

PART II -- OTHER INFORMATION

QUANTA SERVICES, INC. AND SUBSIDIARIES

ITEM 1. LEGAL PROCEEDINGS

We are from time to time a party to various lawsuits, claims and other
legal proceedings that arise in the ordinary course of business. These actions
typically seek, among other things, compensation for alleged personal injury,
breach of contract, property damage, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to all such lawsuits,
claims and proceedings, we accrue reserves when it is probable a liability has
been incurred and the amount of loss can be reasonably estimated. We do not
believe that any of these proceedings, separately or in the aggregate, would be
expected to have a material adverse effect on our results of operations or
financial position.

ITEM 2. CHANGES IN SECURITIES

(c) Recent Sales of Unregistered Securities

On April 28, 2003, First Reserve purchased 1,179,091 shares of common stock
for a total purchase price of $3,497,778 pursuant to the exercise of their
preemptive right to purchase a proportionate number of shares of common stock in
respect of our issuance or sale of shares of common stock to third parties. We
relied on Section 4(2) of the Securities Act of 1933 as the basis for exemption
from registration. For the issuance, First Reserve was an "accredited investor"
as defined in Rule 501 promulgated pursuant to the Securities Act.

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

The Company held its annual meeting of stockholders in Houston, Texas on
May 22, 2003. Nine members were elected to the board of directors, each to serve
until the next annual meeting of the Company and until their respective
successors have been elected and qualified.

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The following eight individuals were elected to the board of directors by
the holders of the Common Stock of the Company, with no abstentions or broker
non-votes:

The holders of Limited Vote Common Stock of the Company elected Vincent D.
Foster to the board of directors. Mr. Foster was elected by a vote of 613,701
shares of the Limited Vote Common Stock, with 322,592 shares voted against and
no abstentions or broker non-votes.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Quanta Services, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

QUANTA SERVICES, INC.

By: /s/ DERRICK A. JENSEN
------------------------------------
Derrick A. Jensen
Vice President, Controller and
Chief Accounting Officer

Dated: August 14, 2003

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EXHIBIT INDEX