For Utilities Sector, Better Days Lie Ahead - Sector Check
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SECTION: Sector Check

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For Utilities Sector, Better Days Lie Ahead

By G.C. Skipper

Article Date: 09-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.

Some estimate market improvement by mid-2010.

It’s like blind men trying to describe an elephant.

Ask a utility expert what he thinks of the market and he will tell you that it is pretty well insulated from major economic swings – with one exception, that is. The federal government’s stimulus package will initially delay big projects until each state’s public service commission can figure out a format for properly applying for stimulus money. That could take a little time, but once the commissions know how to qualify projects for grants, it will set off, “a tsunami wave of construction,” according to Griffith R. Morris, managing director of utility business development, FMI, Raleigh, N.C. FMI, founded in 1953, is the largest provider of management consulting and investment banking to the worldwide construction industry.

That’s one market snapshot.

Ask an equipment distributor how the utilities market is doing and, more than likely, he will say, “very, very soft.” Ask a utility contractor the same question and he’ll say, “flat.”

That’s a second snapshot.

But ask all of them when the utilities market, burdened by a stumbling economy, is going to regain its footing, and they all agree – mid-2010.

Morris said, “My thinking is that an uptick and the opening of the flood gates (stimulus money) will occur midyear 2010 and thereafter.”

A lot of things are going on in utilities, Morris said. “The regular construction market in utilities is composed of several categories. Repairing water, gas and electrical systems, providing service and hooking up customers, and then there are huge projects like power plants and major transmission lines. Also, there is the construction work, such as running lines, maintaining and providing service and upgrades to homes.”

Morris said the market has been “steady and good right through the downturn.”

As far as equipment distributors are concerned, according to Dennis Vander Molen, president, Vermeer Midsouth, which has its main office in Jackson, Miss., the health of the utilities market “depends on which underground utility you’re talking about. The communication sector has some activity. Other sectors are very, very soft. In our area – Mississippi, West Tennessee, Arkansas and North Louisiana – there is still a fair amount of upgrades in terms of fiber optics to homes, although I wouldn’t call it significant.”

Another active area, he said, is in cell phones.” Although cell phones [operate] basically through the air, to do that requires cell towers. Those towers have to be hooked up to a landline, so there is activity in that sector as well.”

Gas and electrical distribution make up the soft markets, Vander Molen said. “There aren’t as many subdivisions being built, so a lot of gas systems – public or municipality owned – aren’t expecting [much].”

Water systems, Vander Molen noted, are fairly slow today. “It is driven by new home construction and new subdivisions. The amount of equipment activity is substantially less than what it was a year ago. Prior to that,” he said, “we saw continued growth from around 2002, but it capped in mid-2008 and started down.”

The economy has a lot to do with the decline, he said, but another harmful factor is, “a mindset that all of a sudden this year, things will turn around because of the new regime in Washington. However, in terms of a new regime, the question is, where are infrastructure dollars going and where is private investment going? Until that starts to solidify, you’re going to see people not investing money for a while,” Vander Molen remarked.

Two things are needed to stop the downward trend, he says. Government dollars, “which are coming very, very slowly and, (2.), private investment, which we are not seeing at all.”

Vander Molen thinks the market will improve in mid-year 2010. The third snapshot of the utilities market comes from the viewpoint of utility contractors, as reflected through the National Utility Contractors Association.

The group’s 2009 president is Lyle Schellenberg, president of Amarillo Underground, Inc., Salem, Ore. His company specializes in road boring and any utility that comes under roads or rivers, wet lands, runways or railroads.

As a specialty contractor, market conditions depend a great deal on where you are located, he said. There is some work in the public sector, Schellenberg said. He made this observation: “When bids go out today, the public sector is getting a bargain. Prices are down, volume is down, but there is still activity. Contractors who are suffering the hardest are the ones that primarily do private work. Subdivision work is just about nil,” he noted. “There are very few private projects right now, and the housing market has come to a standstill.”

As for recovery, Schellenberg said it’s going to take awhile. “You hear a lot of talk about bottoming out and things turning around late this year. “But I don’t think there is enough confidence in the private side work until the housing market improves. The private market isn’t going to come back until a significant number of folks build houses. It’s not going to happen this year and probably will take another year before it does happen.”

Geography plays a key role in just how fast the situation will improve, Schellenberg commented. Florida, for instance, where there is a backlog of large subdivisions, may take five to 10 years to recover. Florida, along with Georgia, is the hardest hit, he said.

By comparison, Texas is doing fairly well. That’s because Texas has a diversified economy, said Schellenberg. The state has a lot of manufacturing, the oil money is there, which helps despite the oil market being down; and there is also a major sports industry.” All this makes the economy there more stable than it is in other areas that do not have a diversified base,” Schellenberg said.

Schellenberg, who testified in July on the proposed Clean Water Restoration Act before a House Committee on Small Business, pointed out that there are still opportunities in public works, despite all the negative market trends.

“The market will come back, hopefully, in 2010, he said. “We are hopeful that the 2010 budget will have more funding for the clean and wastewater projects, which are looking pretty promising so far. But,” he cautioned, “nothing is ever a done deal until it finally gets through the senate and the president signs it.”

Although stimulus money is beginning to trickle into the industry, Schellenberg pointed out that many sewer and water projects can’t be done without permits. “That’s causing this segment of the industry to recover more slowly. It’s not like, for example, paving. Paving is shovel ready. Most utility work is slower because of permit requirements and because shelf life of plans is short. You can’t put things together too far in advance. But there is stimulus work out there. We’re starting to see that now.”

Although the economy may be swinging as high and wide as a child on a playground, in the words of Griff Morris, FMI, opportunities, “abound for constituents to shape emerging regulations and improve their respective businesses. This is especially true for utilities.”

Unlike other market sectors, utilities still have to replace systems and provide service to customers, Morris said. “Ongoing new customers for maintenance and service may have tapered off, but overall [utilities] construction is above last year.”

One piece of advice Morris had for contractors is to go to whatever the utility is and make a presentation that emphasizes your desire to partner with the utility in a strategic alliance so both parties can go to the public service commission to present their ideas. “If you work hard and do it right and don’t get into a situation where you have egg on your face, it becomes a no-brainer,” Morris said. “Many times states don’t even go out for bids on a lot of this stuff.”

The success of contractors, of course, could mean improving business for equipment distributors.

Dennis Vander Molen at Vermeer Midsouth said, “For distributors, the answer could be in area service rather than sales. That service has to be in terms of what we can deliver today when it comes to parts, rental – maybe even in short-term rentals, and in servicing equipment when it breaks down. All of us are going to have to get used to less equipment sales for a while.”

And Lyle Schellenberg added, “Long term, I think we’re going to see more companies relying on leased or rented equipment from equipment dealers, and part of that is based on clean air requirements. Contractors have to re-evaluate their fleets. CARB (California Air Resources Board) regulations go into effect this year in California. People who can meet those standards have tremendous opportunity. The ones who can’t,” he said, “are going to be suffering here pretty quick.”

At the end of the day, according to Morris, “These are exciting times for contractors, distributors and others in the construction business. Changes are going on and some of the stimulus money is going to be channeled to the right places. Guys who are smart enough to see it coming,” he said, “and guys who become proactive will wind up as beneficiaries. The guys who just sit around and wait will be okay, but those who get in front of this are going to have a good ride. There’s no question about that.”

Like blind men describing an elephant, what you feel is what you see.  
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