October 2025 Vol. 80 No. 10
Features
Utility & communications construction update
Daniel Shumate, Managing Director, FMI Capital Advisors Inc.
Across the underground utility infrastructure segment, companies are performing quite well in the power, gas distribution and water and wastewater construction segments. Strong investment by investor-owned utilities, the federal government, states and municipalities have led to quality project opportunities that brought significant growth to the contractors serving those markets.
However, the additional theme driving the entire industry is the growth of data centers and power demand. This began softly, with the proliferation of ChatGPT but is now a roar driven by the hyper-scaling companies. Utilities are raising capital to meet surging demand. The U.S. Energy Information Administration (EIA) forecasts that power demand forecasts will rise at a nearly 5 percent compound annual growth rate through 2028, driven by data centers, electric vehicle adoption and new manufacturing load.
Additionally, the water and wastewater segments have seen strong expansion over the past few months.
Spending in 2025 is being led by line and plant work, up 15 percent and 12 percent, respectively, year over year. Migration trends, aging infrastructure and the increasing frequency of billion-dollar weather events are driving significant investment in storm cleanup, infrastructure-hardening and stormwater management systems. The National Oceanic and Atmospheric Administration (NOAA) reported 18 separate billion-dollar events in the first nine months of 2025.
Additionally, nutrient removal and plant modernization programs are driving large metro investments. Environmental Protection Agency (EPA) regulations are expected to increase capital requirements nationwide. The challenge in the water segment lies in the future of federal funding. Proposed federal budget cuts are creating uncertainty about state revolving funds. The fiscal year 2026 budget request included an 89 percent reduction to CWSRF funding, which, if enacted, would force states to explore alternative financing approaches, such as issuing municipal bonds and considering public-private partnerships.
The Utility & Communications Construction Index presented below presents the stock performance of the sector’s publicly traded stocks for the past three months (Figure 1), year-to-date (Figure 2), and for the past three years (Figure 3). The UCC Index has exceeded the return of the S&P 500 with price growth in the quarter of 16.3 percent compared to 7.8 percent respectively. Projected increases in the availability of funds for maintenance and repair combined with an uptick in expected power requirements has created an interesting and growing opportunity for the UCCI companies.
The performance of the UCCI companies over the past three years remains nothing short of remarkable. The UCCI companies’ price has grown 211.6 percent over the three-year period compared to 77.5 percent for the S&P 500. The strong investment by both investor-owned utilities and federal legislation led to strong growth and profitability for these companies. As data centers to power AI are constructed, continued growth at comparable levels to address the nation’s infrastructure will require increased investment by utilities and communication companies.
Companies in the UCCI have experienced valuation increase as they are seen as the pivotal component of the construction and powering of data centers and infrastructure for AI. The double-digit growth by several companies in the industry illustrates the impact of the funding on the industry as well as the opportunity inherent to the power and data center growth. As the industry continues to address needs for repairing existing infrastructure while building resilient power infrastructure for the future, the underground construction segment should remain resilient.
Several transactions occurred during the quarter as acquisition activity has picked up in the back half of 2025. Investments in civil infrastructure, power and water suggest that broad investment into the nation’s infrastructure remain a key point of interest for businesses looking for predictable growth.
As companies (both public and private) see interest rates decline, valuations and availability of funds for acquisitions should increase and will likely impact the number of transactions impacting the sector. We expect for the remainder of 2025 into 2026 to experience increased M&A activity as growth in the industry has been strong and investors look toward stable acquisition opportunities.
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