What’s the issue?
Each year the interstate pipelines are required to provide information about the vendors -- from mainline and compressor contractors to legal and environmental service providers -- to which they paid more than $250,000.
Why does it matter?
The data, when aggregated, can show not only the health of the pipeline industry, but can also offer insights into the vendors that are most successful at providing critical services to the interstate pipelines.
What’s our view?
The heyday of spending in 2017 and 2018 has come to an end, but the good news is that the fall in annual spending did not continue into 2020, but appears instead to have stabilized at about $5 billion annually. We think this is a level that may hold for the foreseeable future and is one that vendors may be able to rely on going forward.
Each year the interstate pipelines are required to provide information about the vendors to which they paid more than $250,000. When aggregated, the data can show not only the health of the pipeline industry, but can also provide insights into the vendors that are most successful at providing critical services to the interstate pipelines. As we discuss today, the heyday of spending in 2017 and 2018 has come to an end. But the good news is that the sharp falloff in 2019 did not continue into 2020 and the spending seems to have stabilized at about $5 billion annually, which is comparable to the spending in 2016.
The Big Picture
As part of its annual report to FERC, each interstate pipeline must report by name any vendor that was paid more than $250,000 and which provided services related to rates, management, construction, engineering, research, finance, valuation, legal, accounting, purchasing, advertising, labor relations or public relations. When this data is aggregated across the industry, it provides some key insights into not only the health of the interstate pipeline industry, but also who the major providers of these services are.
Today we look back at the last five years of data for 2016 to 2020 to see what insights we can gain about the overall spending, as well as the leading providers, in four key categories: Mainline Construction, Engineering, Environmental and Legal. At the highest level, we see that spending on these outside services peaked in 2017 and fell off precipitously in 2019. The good news is that the fall in annual spending did not continue into 2020, but appears instead to have stabilized at about $5 billion annually, which, if true, should be a level that vendors may be able to rely on going forward.
Mainline Construction Contractors
Based on total spend over the five-year period from 2016 through 2020, sixteen of the seventeen highest-paid vendors are all mainline construction contractors, with the only exception being Solar Turbines, a key equipment manufacturer. Breaking down the top ten of those mainline contractors, we can see who the major suppliers are, and also how each has done over the last five years.
As seen above, some of the major contractors, such as Precision Pipeline, Michaels and Price Gregory, appear to have followed the macro trend by receiving a huge increase in work in 2017 and 2018, only to see that work diminish substantially over the last two years. Other contractors, like Otis Eastern and U.S. Pipeline, did not benefit as much from the tremendous increases in 2017 and 2018, but have kept a much more steady supply of work.
Engineering
Another major area for outside services spending is the amount spent on engineering services. While the spending on such services is far below the amount spent on construction services, the top eight contractors all received over $75 million in payments over the last five years.
This group followed a pattern similar to that of the mainline contractors, where some of them seemed to feast in the good years, but then famished since then, while others, like EN Engineering and Mott MacDonald, appear to be providing a continuous level of service throughout the time period, which may bode well for them in the coming years.
Environmental Services
One of two key services necessary to prepare a project for development is the services provided by outside environmental contractors, and that spending may be signaling a warning sign for future work for the other service providers. Looking at the payments made to those environmental firms that received at least $20 million over the last five years shows the following.
As seen above, the spending on environmental services was at an elevated level in 2016, ahead of the rest of the categories that peaked in 2017 and 2018. The spending fell in 2019, as the other spending did, but continued its fall into 2020. So this may be an adverse signal about the spending that we will see for 2021, particularly in project-related spending categories.
Legal Services
One final area that seems to be resilient across time is the provision of legal services, which can increase during times of project development, but are also required for rate cases, which have recently picked up both as a result of the Form 501G process that FERC initiated following the 2017 Tax Cut and Jobs Act, and also as pipelines spend money on routine maintenance and seek to recover those costs through rates.
As seen above, Hogan Lovells saw a substantial increase in payments in 2019 and 2020, even as overall spending by the pipelines dropped. That appears to be almost entirely driven by the addition of a new client in 2019 who paid them about $6 million in each of those years. The firm of Harris, Harris, Bauerle, Ziegler’s billings arise from its work for a single client and it advertises itself as a firm specializing in representing property owners in condemnation proceedings. It is unusual to see a firm like that rise to the top of the list for law firms and it will be interesting to see whether its billings will continue to fall.
Overall, our view is that the precipitous drop in spending that occurred in 2019 could have been a harbinger of lean times for outside vendors. But based on the 2020 spending, it appears that the drop was more likely just a return to the normal level of spending that existed prior to 2017. A key difference may be that the spending on outside vendors will be different going forward, as the need for mainline contractor work may decrease, but the need for other types of work, such as pipeline maintenance and rate case work, could increase.
If you would like to discuss the trends in any of these categories or others, please contact us.