Underground Construction - January 2018 - 10

By Daniel Shumate Director, FMI Capital Advisors Inc.

Utility & Communications
Construction Outlook

The utility transmission
and distribution, and
communication distribution industries remain in
a multiyear investment
cycle driven by the need
to repair, replace and
upgrade the transmission and distribution
infrastructure across the
United States. Couple this
investment with growing
demand for broadband
network speed and an aging investor-owned utility
workforce, and there are
robust long-term tailwinds that will continue to drive growth for
third-party construction
companies.
FMI projects with capital expenditures will remain over $100 billion
for U.S. investor-owned utilities, which is down from the 2016 peak and
similar to the investments in 2017. However, the capex reduction is
primarily related to generation investments. FMI anticipates continued
capex growth on power and gas transmission and distribution infrastructure. Some of the largest spending programs in 2018 are to either replace
aged infrastructure or to harden the power network by taking overhead
infrastructure and burying those lines underground.
In addition, the proliferation of distributed energy resources (DERs) is
requiring utilities to undergo smart grid initiatives, including installation
of smart meters and communication technology that provide insight into
the two-way flow of power. These programs are in their infancy and will
continue over the next 25-30 years as the Department of Energy, state
utility commissions and utility providers adapt to a rapidly changing generation environment.
As the underground construction industry has continued to grow,
limitations and risk factors are present that could impact sector performance. The most significant is the demand for labor to complete the work
opportunities that exist. Multiple initiatives are ongoing across the industry to recruit and develop the workforce, and individual companies have
expanded their own internal training plans. However, training and development of people takes time and could impact industry growth.
Federal policy is expected to remain favorable with the Trump administration, but many questions remain. The EPA is reviewing the Clean
Power Plan, multiple interstate pipeline projects are in flux and power
reliability requirements could impact renewable construction. Lastly, as
the federal reserve increases rates, the cost of borrowing goes up, as does
the cost to finance necessary projects. The low cost of natural gas and
improved power efficiency have kept utility bills at reasonable levels, but
increased project costs could face pushback from consumers and slow
down investment.

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Power distribution
Electric distribution networks are in need of substantial investment. The
assets and technology that represent the backbone of America's electric
infrastructure were put in place in the 1950s and are near the end of their
life cycle. An estimated 45 percent of electric distribution assets either
currently, or will soon, need replacement due to reliability concerns.
After the recent expenditures on the electrical transmission network,
the largest funding gap is in the electric distribution network. Current
spending is inadequate to meet the growing needs for reliability and capacity. The funding gap will widen if additional investments are required
to meet growth in local distribution networks or faster implementation of
smart grid technology.
To address these concerns, a number of large rate-case decisions will be
made by utility commissions to increase the amount allotted to maintenance of distribution networks across the U.S. in 2018.

Natural gas transmission and distribution
The outlook for natural
gas transmission and distribution contractors is
very strong. Demand for
natural gas has increased in
electric power generation,
industrial use, exports and
residential heating. Natural
gas-fired power plants are
the primary source of new
utility-scale generating
capacity. To accommodate
this growth, companies
have had to repurpose or
reverse existing pipelines
and laterals to gas-fired generators, build new pipelines and increase storage infrastructure.
The natural gas infrastructure is still in the midst of rapid expansion
of its gas processing capacity, as well. Natural gas is now the primary fuel
or power generation in the U.S. and over 25 million GW of generating
capacity will come online in 2018. U.S. natural gas processing capacity
is expected to increase across the country through 2030, as utilities and
manufacturers take advantage of the low-cost natural resource.
The gas industry spent billions expanding the pipeline network to
transport gas to processing facilities, but significant work remains. The
price differential between two points creates an incentive for shippers to
support midstream pipeline development to capture the pricing advantage in the network. This occurs in instances where new production must
travel via interstate pipeline to reach demand centers, utilization is high
and capacity is maximized. This is the case in the Marcellus Shale Formation, located across states in Northern Appalachia, where new transmission pipeline construction is active and expected to continue.
For the gas distribution contractor, North American local distribution
companies are at the front end of a 20- to 30-year replacement program
to address aging infrastructure. PHMSA oversees almost 2.2 million natuUnderground Construction January 2018

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Underground Construction - January 2018

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