Underground Construction - April 2019 - 12

Daniel Shumate | Director, FMI Capital Advisors Inc.

Utility & Communications
Construction Update
Strong revenue and profitability marked the
first quarter of 2019 for the utility and communications industry, particularly among
the publicly traded members of the Utility &
Communications Construction Index (UCCI).
Quanta Services surpassed over $11
billion in revenue and UCCI companies are
at all-time highs of revenue and profit. Nearterm growth opportunities remain strong
and expected investor-owned utility and telecommunication company capital expenditures are expected to increase year-over-year.
The primary drivers of this spending trend
are similar: aging infrastructure that requires
repair or replacement, reliance on the contractor to provide labor to supplement utility
workforce and demand-driven spending on
fiber infrastructure.

Conversely, the first quarter of 2019 has
been rather tumultuous for select customers
of underground construction companies-
PG&E and Windstream. Since the fire in
November of 2018 that devastated California
and took the lives of more than 80 people,
inverse condemnation laws put PG&E at risk
of bankruptcy. Inverse condemnation occurs
when property is taken by the government
without payment. In order to receive payment, a property owner must sue to receive
compensation.
For regulated utilities given the power
of eminent domain, if their equipment
causes damage to property, then it is treated
as "taking property" without payment.
Negligence does not come into the equation
if the damage occurs while the utility acts

11%
6%
1%
-4%
-9%
-14%
-19%
-24%
-29%

Ma
r.-1
9

Feb
.-1
9

.-1
9
Jan

De
c.18

8
No
v.1

.-1
8
Oct

8
t.-1
Sep

.-1
8
Au
g

y-1
8
Jul

8
Jun
e-1

ril18
Ap

-18
Ma
r.

Ma
y-1
8

S&P 500
UCC index

-34%
-39%

Figure 1. LTM UCCI. Source: FMI Research, S&P Capital IQ; as of March 13, 2019
71%
61%

S&P 500
UCC index

51%
41%
31%
21%
11%
1%

r.-1
6
Ma
y-1
6
Jul
y-1
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Sep
t.-1
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No
v.16
Jan
.-1
7
Ma
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y-1
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y-1
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No
v.17
Jan
.-1
8
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Ma
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t.-1
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v.18
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.-1
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9

-9%

Figure 2. 3 Year UCCI. Source: FMI Research, S&P Capital IQ; as of March 13, 2019

APRIL 2019 | UConOnline.com

in performance of regulated activities
(i.e. power delivery).
PG&E took a $10.5 billion pre-tax charge
in February related to third-party claims
from the 2018 fire and the total liability
could exceed $30 billion. PG&E has secured
short-term financing as it works through
Chapter 11 bankruptcy, but significant
work must occur on its system despite the
financial hardships.
Of the $1.7-$2.3 billion in capital to
be spent on wildfire mitigation, the vast
majority will be tied to overhead transmission inspection, repair and replacement,
distribution hardening or replacement, as
well as vegetation management. Over 25,000
miles of power distribution and over 5,500
miles of power transmission lines are in
high fire threat district areas.
Many legislators and the public are
calling for more power lines to be placed
underground to decrease the potential
threat. However, the cost is substantially
higher in California to do so. According
to James Sprinz of decentralized energy
research at BloombergNEF, installing
a 230kV line overhead is $320,000 per
mile versus about $2.6 million per mile
underground. However, liability is reduced,
and reliability is substantially improved
through targeted undergrounding programs
like what Duke Energy has implemented in
its outage-prone areas.
Windstream's woes and its impact on the
rural communication market are unrelated
to any infrastructure issue but, rather, to
upholding the covenants of a 2015 bond
issue. The hedge fund, Aurelius Capital
Management, received a ruling in its favor in
February 2019 that resulted in a judgement
of $310 million dollars after the court ruled
that Windstream had defaulted. Other
claimants can also seek payment resulting in
liabilities of over $5.7 billion dollars.
Windstream has filed for Chapter 11
bankruptcy and received debtor-in-possession financing to continue operation
until the legal and financial challenges are
resolved and the business is appropriately

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Underground Construction - April 2019

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