TThe slowly unfolding era of U.S. power grid expansion is not yet translating into higher profit margins for major public power contractors, which continue to consolidate through acquisitions. Delays in project and utility spending add to the uncertainty.
The year’s biggest deal in electrical construction contracting, Quanta Services’ $1.5 billion mostly cash acquisition of Cupertino, Calif.-based Electric in July will expand the reach and services of the Houston-based company and will gradually increase earnings per share. he said The deal brings Quanta Cupertino’s skilled workforce and a platform for low-voltage projects.
The purchase helps Quanta position itself as a provider of all-purpose electric power transmission and distribution solutions, CEO Earl C. ‘Duke’ Austin told investment analysts on an earnings conference call on August 1 The business model is a portfolio of services, Austin reminded analysts, that allows you to offset slower growth in one segment with faster growth in another. Its business segments include renewable energy and underground utility infrastructure works.
However, investment analysts live by the numbers.
Quanta Services (PWR-NYSE) revenue for the six months ended June 30 was $10.63 billion compared to $9.48 billion in the same period in 2023, while net income attributable to common stock was $306.5 million, compared to $260.9 million last year.
In the second quarter, Quanta Services reported net income of $188.2 million on revenue of $5.6 billion, compared to $166 million and $5.05 million a year earlier. Gross profit for the quarter was $811 million, compared to $724 million a year earlier, and adjusted earnings before interest, taxes, depreciation and amortization in the first quarter were 523.2 million dollarsor 9.4% of income.
These numbers are respectable in construction contracting, where margins are at the low end of the spectrum compared to other industries.
Quanta has been able to consistently improve results despite some setbacks.
For example, Native American tribes and others are continuing efforts in federal court to block parts of Quanta Services’ largest project: the construction of the $11 billion SunZia power transmission line through Arizona. The route was federally approved in 2015 though last year work was halted in the state by a federal lawsuit. Quanta Services and its Blattner unit is a key contractor. Tribes are appeal to a district court ruling in April that would allow the blocked work to move forward.
Asked about the impact of that pause, Austin said Quanta is booking streaming work and the company’s 2024 earnings guidance for investors remains unchanged.
Delayed utility spending
But the anticipated flood of new transmission projects, driven in part by new data centers and the use of electric vehicles, has yet to materialize.
While U.S. shareholder-owned electric utilities are expected to spend a total of $168.2 billion on capital investments by 2025, questions remain about the pace of their transmission and distribution spending due to rising construction costs and how the upcoming US election could alter federal energy and electric vehicle policy.
Another large contractor that is a player in electric power transmission and distribution, Mastec Inc. (MYZ-NYSE), based in Coral Gables, Fla., has seen potentially profitable projects stalled or put on hold.
In January, Exelon Corp. said it may cut investment plans for 2024 for subsidiary Commonwealth Edison Co. after Illinois regulators rejected ComEd’s multi-year grid plan and approved only about a third of its requested $1.5 billion in rate increases over four years.
Regulators said the company’s forecast did not comply with state law that called for Illinois to move to a completely carbon-free electricity sector by 2045, make energy affordable for customers and benefit communities for environmental justice and low income ComEd’s investment plans included $2.55 billion in spending by 2024, according to T&D World’s account of an Exelon securities filing.
Nationally, most transmission line work and funding will go toward grid resiliency, according to a recent report, not new lines.
Jorge Mas, Mastec CEO, said on a May earnings call that the contractor’s revenue for the first quarter of 2024 was held back by some delayed plans.
“As a reminder,” Mas told investment analysts, in an earlier call “we talked extensively about the signs of weakness we were seeing in power distribution spending. While pressure remains, we are pleased that our diversification strategy and strength in other markets have allowed us to outperform expectations.”
Last year the company’s profit margins were not all that was expected.
“Long-term energy delivery, we know it’s a double-digit business,” Mas explained on a conference call in August. “Our goal is to be in the high single digits this year.”
In telecommunications, one of the company’s business segments, Mas said, “historically we’ve been in that 12% or better margin for a period of time. We think over the cycle we’ll get back there. We’ll be almost double that. -digits of the year within our plans in 2024.”
But he acknowledged: “Look, we came off a very tough year in 2023. We knew that. We’re confident in our ability to show a big improvement in 2024, but we’re not celebrating 2024 here, are we? We know that. It’s a kind of a building year for us.”
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