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Mark Bridgers
Continuum Capital
Denver, CO
November 15, 2016
Pipeline Leadership Conference 2017 Pipeline & Distribution System Economic Overview
Sponsors
2 Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Objectives
– Introduce the audience to the likely economic and construction
landscape they will face over the 3 years.
Agenda
– Industry Perspectives
– Capital Construction Spending
– Market Summary
3
Objective & Agenda
Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Industry Perceptions (1 of 2)
4
Source: Proprietary Continuum analysis of pipeline contractor perceptions over 2012-2016.
Liquid/Gas pipeline perspectives on construction market activity becoming less positive since peak oil price in 2014
Gas Distribution perspectives also peaked in 2014 and have remained both higher and more positive about their construction markets
Liquid/Gas Pipeline Contractors
74.9
76.7
74.5
76.4
66.0
63.9
58.8
Q2, 2013
Q3, 2013
Q1, 2014
Q3, 2014
Q1, 2015
Q3, 2015
Q1, 2016
Pipeline Construction Index
> 50 Indicates Growth (Better)
< 50 Indicates Slowing (Worse)
Interpretation: A reduction from 76.4 to 66.0 down to 58.8 for Liquid/Gas Pipeline Contractors indicates that while perceptions of the market are still
positive, they are much less positive than they were prior to 2015.
Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
72.2
72.6
74.4
76.7
72.9
74.2
63.4
Q2, 2013
Q3, 2013
Q1, 2014
Q3, 2014
Q1, 2015
Q3, 2015
Q1, 2016
Gas Distribution Contractors
Industry Perceptions (2 of 2)
5
Exhibit xWhat changes do you foresee in the number of fulltime direct employees in your organization for xxx? (excluding natural attrition,
retirements, etc.)
0%
10%
20%
30%
40%
50%
60%
70%
>-10% -10%-5% -5%-0% 0% +0%-5% +5%-10% >10%
% o
f A
ll R
esp
on
de
nts
Q3, 2012 Q2, 2013 Q3, 2013 Q1, 2014
Q3, 2014 Q1, 2015 Q3, 2015 Q1, 2016
Comparison of hiring growth from 3Q 2012 to 1Q 2016
3.09%
4.56%
2.45%2.81%
5.07%
4.32%3.93% 3.96%
0%
1%
2%
3%
4%
5%
6%
Q3, 2012 Q2, 2013 Q3, 2013 Q1, 2014 Q3, 2014 Q1, 2015 Q3, 2015 Q1, 2016
% A
vg
All
Res
po
nd
en
ts
Comparison of hiring growth from 3Q 2012 to 1Q 2016
Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
UCWA Objective
Underground Construction
Workforce Alliance (UCWA)
Long-Term Objective: – Solve workforce and field leadership availability over a 10-year
time horizon covering 2015-2025.
Short-Term Objective: – Build a coalition made up of Industry Associations, Unions,
Material / Equipment Suppliers, Engineers, Contractors, and Utility / Pipeline firms that develop the strategy and tactics necessary to achieve the long-term objective.
6 Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Original Leadership Team
UCWA Leadership Team
– Doug Banning – CEO - Miller Pipeline
– Robert G. Darden - Executive Vice President -
Distribution Contractors Association (DCA)
– Peter Fojtik - General Manager - Gas Distribution -
Michels Corporation
– Rob Mooney - Vice President – Engineering &
Construction - NiSource Inc. - NiSource Gas Distribution
– Kyle Slaughter - Director Operations Support - Atmos
Energy Corporation
– Dave Wisniewski - Senior Director, Underground
Installations - Vermeer Corporation
– Eben Wyman – President - Wyman Associates
7 Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Leadership Team Invitations
Utility
– Piedmont – Jeremy Koster & Antwan Jones
– AGL/Nicor – Pat Whiteside
– WEG/Peoples – Dave Lazzaro
– National Grid – John Kavanaugh
– Spire/Alagasco – Ken Blackmon
Contractor
– NPL – Steve Dockendorf
– Precision Pipeline Solutions – Eric Gerstel
– Quanta – Loren Brace, Kevin Parker, Vivek Arora
– Primoris – Jaeson Osborn, Jay Osborn
Contractor (Continued)
– Austin Meehan – ULS
– Stuart Buhrendorf – Hallen
Equipment
– Digital Control – Brian Mattson
– Hammerhead – Paul rogers
– DitchWitch – Blaine Easter, Gary Larson
Union
– None to date
Associations
– None to date
8 Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Ohio Pilot
9
Pilot Local Implementation Team: – Central Ohio
– Confirmed shortage of workforce and continued growth in spending over 10 year horizon
– Touches 4 large LDCs
– Touches the edge of the Ohio shale fields
– Touches 5 large contractors and as many as 10 medium to small contractors
Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
$0
$20
$40
$60
$80
$100
$120
$140
$160
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Nat
ura
l Gas
($/
Mcf
)
Cru
de
Oil
($/B
bl)
Crude Oil (WTI) Natural Gas (Henry Hub) Natural Gas (Europe) Natural Gas (Asia)
First & Second price decoupling: Gas Up,
Crude Down
Third price decoupling: Crude Up, Gas Down
Conclusion – Slow global and US economic growth is constraining oil prices and constraining liquid pipeline construction
– Low natural gas prices are slowly increase demand for heating fuel, fuel switching, coal to gas conversion, etc. and will result in more pipeline spending over the long-term
10
Commodity Price Drivers
Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Initial & Subsequent DIMP Market Focus
LDCs struggling to manage DIMP – Currently there are nearly forty LDCs with greater than 50,000 services and
nearly eighty with greater than 20,000 services. Many of these LDCs are large enough to support a serious analysis of leak locations and trends as part of their DIMP program and in support of their pipe replacement program authorized through periodic rate case proceedings.
LDCs struggling to manage Transmission IMP 2.0 – Currently there are over twenty LDCs with greater than 1,000 miles and nearly
eighty-five with greater than 100 miles of gas transmission piping. PHMSA is currently developing an update to the gas transmission IMP regulation (called IMP 2.0) that is expected to triple the pipe mileage requiring assessment. Economic considerations are expected to weigh in favor of making lines piggable that were previously assessed by direct assessment.
11 Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Political
12
From a primary tornado to a general election hurricane!
2016 Forecast: Trump driven Republican convention turmoil splits
electorate, hands White House to Hillary Clinton. Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Construction Spending Forecast
Conclusions
– North American spending grew 5x between 2004-2014 and will continue to
exhibit health growth for 15+ years
– Variability in spending is primarily driven by pipeline spending activity
13
10,390 12,502
18,847
27,254
38,402 40,767
36,576 36,507
43,746 47,740
52,625
45,902 44,992
48,413
56,445
65,521
29.3%
20.3%
50.8%
44.6%40.9%
6.2%
-10.3%
-0.2%
19.8%
9.1% 10.2%
-12.8%
-2.0%
7.6%
16.6% 16.1%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Canada T&D Gas/Liquid
U.S. T&D Gas/Liquid
% Change
Source: Building permits, construction put in place, and trade sources. Continuum prepared forecasts for 2015-2019.
Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Canada Construction Spending Forecast
Findings & Observations – Canadian spending is much more volatile due to its higher percentage of pipeline spending.
– 2014/2015 drop tied to commodity price
– Approximately $1.5 to $2.0 billion in underlying distribution spending in Canada that is relatively consistent year to year
14
1,2
15
1,4
17 2
,582
2,6
42
6,0
13
5,6
46
3,3
17
3,7
66
6,0
09 6,9
81
8,4
88
7,4
86
4,7
41
4,6
39
5,0
41
6,7
42
10%17%
82%
2%
128%
-6%
-41%
14%
60%
16%22%
-12%
-37%
-2%
9%
34%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
-
2,000
4,000
6,000
8,000
10,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Canada T&D Gas/Liquid
Spending Change
Source: Statistics Canada. Continuum prepared forecasts for 2015-2019
Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
14,0
00
11,0
00
12,0
00
13,5
00
15,5
00
9,0
00
9,0
00
9,1
00
11,0
00 1
4,0
00
-22.2% -21.4%
9.1%
12.5%
14.8%
-41.9%
0.0%1.1%
20.9%
27.3%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Gas/Liquid Transmission
% Change
Source: Building permits, construction put in place, and trade sources. Continuum prepared forecasts for 2015-2019.
US Transmission & Gathering
Construction Spend
US Transmission & Gathering dropped dramatically during 2015/2016 – Typical pipeline contractors saw revenue reductions of 40-60% from 2013/2014
peaks.
– Early recovery occurring in 2018, late recovery possibly pushed out to 2019/2020 depending on market conditions, environmental concerns, and regulatory activity
15 Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Transmission Spread Estimates
2015 Spread Estimates
2016 = 119 Spreads
2017 = 100 Spreads
2018 = 85 Spreads
2016 Spread Estimates
2016 = 85 Spreads (-29%)
2017 = 123 Spreads (+23%)
2018 = 83 Spreads (-2%)
2019 = 46 Spreads
16
Source: INGAA Foundation Fall Meting, November 4, 2016.
Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
US Distribution
Segregation of Distribution
– New – Highly depressed since 2006/2007 peak in new home construction; is now coming back and
expected to accelerate post 2017
– Replacement – Rapid run up since 2008 with continued acceleration in cast iron, bare steel, old
plastic replacement and significant system integrity/strengthening in the works
17
19,259 21,741
25,738 27,259 28,637 29,416
31,251
34,675
40,404
44,779
12.5%12.9%
18.4%
5.9%
5.1%
2.7%
6.2%
11.0%
16.5%
10.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
New
Replacement
% Change
Source: Building permits, construction put in place, and trade sources. Continuum prepared forecasts for 2015-2019.
Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Distribution Market Summary
Strong Market Fundamentals Attracting Competition – Continued acceleration in distribution replacement activity
– Slow and unbalanced increase in new housing starts driving service and main construction activity
– Aging infrastructure and safety concerns of gas distribution system are a driver of activity
– Shale oil and gas availability and low commodity prices are a driver if increased natural gas demand and PUC’s are able to grant riders and rate increases that are invisible to rate payers
– Power generation regulation disadvantaging coal and is a driver of high pressure distribution and short segment transmission lateral activity
– Qualified labor and experienced supervision availability will serve as a constraint to spending growth over the next 5-10 years • Build competitive advantage in control of scarce labor and supervisory resources
– Competition will increase from well run, non-traditional pipeline contractors who are seeking to grow into the pipeline market and major existing national competitors who are trying to aggressively grow.
18 Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
19
Transmission Market Summary
Strong Long-Term Market Fundamentals Facing Short-Term Headwinds – Very strong long-term outlook for accelerated expenditures for gas/liquid
transmission work driven by regulatory and economic conditions
– Transmission and gathering sectors will continue to face near-term headwinds on new construction until commodity prices rise or demand for natural gas exceeds supply or system capacity
– Gas pipeline sectors will continue slow growth as demand for gas and capacity resolutions continue to accelerate
– Pump and compressor station sectors will remain slightly counter cyclical and show some growth while pipeline expenditures are down.
– Integrity and maintenance sectors will continue to slowly grow as pipeline systems expand, system continue to age, and regulatory demands more construction and construction like activity increase.
Mark Bridgers
11/15/2016
Pipeline & Distribution System Economic Overview
www.ContinuumCapital.net
Thank You
MARK BRIDGERS
shipping: mailing:
405 Forsyth Street PO Box 31026
Raleigh, NC 27609 Raleigh, NC 27622
www.ContinuumCapital.net
919.345.0403
Twitter: @MarkBridgers
Skype: mark.bridgers.continuum
LinkedIn: www.linkedin.com/pub/mark-bridgers/12/9b4/81
Mark founded and leads a Utility Vertical Market team team at Continuum Capital. He
works with gas/electric utilities, power generators, pipeline companies, and energy
companies. As a recognized expert in capital construction and operational challenges,
Mark was recently honored with membership in the Society of Gas Operators (SOGO).
Mark helps firms prepare for and successfully navigate “strategic transitions.” His passion
is helping organizations achieve breakthrough innovations through collaborative or
integrated relationships. He is the architect of an approach for integrated service provider
management referred to as the “Extended Enterprise” among construction industry
participants.
Mark Bridgers
Mark is an avid educator, trainer, and writer with more than 20 years of industry expertise including financial
performance analysis; development and implementation of tools to reduce construction cost, life-cycle cost, and
operational friction; restructuring of processes and procedures - often times using LEAN Construction
techniques; and leader development.. He is a recognized expert in capital construction and operational
challenges . Mark is also author of over 150 articles and research papers published internationally in industry
journals, including ENR, PE – The Magazine for Professional Engineers, Pipeline & Gas Journal, Utility
Contractor (NUCA), Underground Contractor, Electric Energy (RMEL) and Electric Perspectives (EEI).
Mark holds a master’s degree in business administration from the University of Virginia’s Darden school of
Business and a bachelor’s degree in financial management from Clemson University. In addition, he earned the
designation of Chartered Property and Casualty Underwriter (CPCU) and Associate in Reinsurance (ARe).