September, 2023
On a stock-specific basis, U.S. electric utility Constellation Energy (+0.26%) was the top contributor to quarterly performance.
Constellation Energy (Constellation) is primarily a nuclear generation company and is the largest producer of carbon-free electricity in the U.S., serving states including New York, Illinois, Maryland, Pennsylvania and New Jersey. The company’s combined generation capacity is more than 32 GW and 90% of annual output is carbon free.
Summer volatility in energy prices in Texas bodes well for Constellation’s nuclear assets, which provide baseload generation.
Turning to the Asia Pacific, Japanese rail operator West Japan Railway (+0.15%) also contributed to quarterly performance.
West Japan Railway (JR West) is one of Japan’s largest passenger railway operators. JR West operates the Shinkansen high-speed rail lines near Kansar, as well as commuter trains within the Osaka metropolitan network. JR West’s share price rose with the continued recovery of domestic traffic.
U.S. electric utility NextEra Energy (-0.84 %) and U.S. renewables utility NextEra Energy Partners (-1.21%) were the largest detractors from quarterly performance.
NextEra Energy (NextEra) is an integrated utility business with a regulated utility operating in Florida and is the largest wind business in the U.S. NextEra’s regulated business, including Florida Power & Light, serves nine million people in the State of Florida.
NextEra Energy Partners (NEP) is a growth-oriented contracted renewables company formed by its sponsor and general partner NextEra to own, operate and acquire contracted renewable energy generation assets located in North America.
During the quarter, NEP changed their growth guidance from 12%–15% to 5%–8% p.a. through to 2026. Additionally, they announced a reduction to their 2023 cash flow expectations. In turn, this impacted NextEra’s share price as the reduction is a function of long-term interest rates, which investors now fear may be a problem for U.S. utilities more broadly.
All returns are in local currency
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/Commentary-Pooled-Funds-Income-September-2023.pdfJune, 2023
On a regional basis, Latin America was the top contributor to quarterly performance (+0.83%), with Brazilian electric utilities Eletrobras (+0.50%) and CPFL Energia (+0.24%) being the lead performers.
Centrais Elétricas Brasileiras SA (Eletrobras) is one of Brazil’s largest integrated utilities operating in the generation and transmission segments. Eletrobras saw a rebound in share price as the chances of re-nationalisation now appear increasingly unlikely. This will allow Eletrobras to continue as a private company and give them the chance to deliver on their lucrative turnaround plans.
CPFL Energia is one of Brazil’s largest distribution and generation companies, with a 13% market share in distribution and a 3% market share in generation. CPFL’s distribution assets include eight separate federally regulated concessions and generation assets consisting of a mix of hydro and renewable assets that are underpinned by longterm take-or-pay contracts. CPFL saw favourable tariff reviews granted by the regulator this quarter and was a beneficiary of a general market rebound in Brazil. Turning to Asia Pacific, Japanese rail operator West Japan Railway (+0.33%) also contributed to quarterly performance.
West Japan Railway (JR West) is one of Japan’s largest passenger railway operators. JR West operates the Shinkansen high-speed rail lines near Kansar, as well as commuter trains within the Osaka metropolitan network. JR West’s share price rallied with Japan reopening their borders post COVID-19.
Portuguese renewables utility Energias de Portugal (-0.42%) and U.K. water company Pennon (-0.43%) were the largest detractors from quarterly performance.
Energias de Portugal (EDP) is an integrated utility based in Iberia, operating electricity distribution, generation and energy supply businesses. It has a growing exposure to global renewables, through its 83% owned subsidiary EDPR, which is primarily onshore wind farms. EDP also operates electricity distribution and generation businesses in Brazil through its 50% owned EDP Brasil. EDP’s share price was dragged down by weakened global renewables sentiment, which affected EDPR’s performance and in turn EDP, which has about two-thirds of its value coming from EDPR. In addition, drought across Portugal in April and May caused concerns over power output for EDP’s hydropower plants there. We view these factors as transient and remain confident in the longer-term fundamentals of the company, being a meaningful player in the clean energy sector which is undergoing structural growth through decarbonisation. Valuation remains attractive at current levels.
Pennon (PNN) is a U.K. water and waste services company comprising two wholly owned water utilities: South West Water (SWW) and Bournemouth Water. PNN pulled back primarily on the back of rising bond yields in the U.K., which impacted the performance of regulated utilities. This was accompanied by rising concerns of political and regulatory scrutiny on the U.K. water sector regarding sewage overflows and pollution, which was aggravated by the financial collapse of its unlisted sector peer ,Thames Water. PNN, in particular, faced more uncertainties around the ongoing investigations by Ofwat and the Environmental Agency on pollution issues with unclear timelines, as well as a new investigation by Ofwat on data accuracy.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/Commentary-Pooled-Funds-Income-June-2023-1.pdfApril, 2023
On a regional basis, Western Europe was the top contributor to quarterly performance (+2.75%), of which Portuguese renewables utility Energias de Portugal (+0.39%), Spanish gas utility Enagas (+0.39%) and U.K. electric utility National Grid (+0.38%) were the lead performers.
Energias de Portugal (EDP) is an integrated utility based in Iberia, operating electricity distribution, generation and energy supply businesses. It has a growing exposure to global renewables through its 83%-owned subsidiary EDPR, which is primarily onshore wind farms. EDP also operates electricity distribution and generation businesses in Brazil through its 50%-owned EDP Brasil. EDP’s share price gain was driven by the improved outlook for 2023 earnings, as Iberian hydro recovered from earlier quarters, coupled with constructive growth targets laid out in its strategic plan update.
Enagas engages mainly in the transport, storage and regasification of natural gas in Spain. They are a natural monopoly in gas transport and have the largest share of regasification in Spain. They also have stakes in international assets, including 30% in U.S. midstream pipeline Tallgrass as a key contributor to associate earnings. Enagas rallied during the quarter as its FY22 results contained positive comments from the company on hydrogen, Tallgrass and control of operating expenses.
National Grid is one of the world’s largest publicly owned utilities, focused on transmission and distribution activities in electricity and gas. National Grid’s share price increased over the quarter given moderating bond rates and economic concerns, combined with improved tailwinds for the sector, including expectations of improved permitting for future projects.
Turning to North America, U.S. renewables utility Brookfield Renewables Partners (+0.41%) also contributed to quarterly performance.
Brookfield Renewables Partners is a pure-play renewables operator and developer headquartered in Canada, focused on international hydro, solar, wind and storage technology. As more private and public institutions announce ambitious carbon reduction initiatives, Brookfield’s globally diversified, multi-technology renewables business makes it an attractive partner. Brookfield’s development pipeline stands at 18,000 MW, providing confidence that the company can meet its targeted double-digit cash flow growth through to 2025. Brookfield’s share price rose together with most long-duration assets in North America as bond yields retreated from early March highs.
Brazilian electric utility Eletrobras (-0.26%) was the largest detractor from quarterly performance.
Centrais Elétricas Brasileiras (Eletrobras) is one of Brazil’s largest integrated utilities, operating in the generation and transmission segments. A combination of weak spot power prices in Brazil and negative commentary from President Lula caused weakness in Eletrobras during the first quarter of 2023.
All returns are in local currency.
Positioning and Outlook On a regional level, the strategy’s largest exposure is in the U.S. and Canada (40%) and consists of exposure to regulated and contracted utilities (27%) and economically sensitive user pays infrastructure (13%).
For the Global Infrastructure Income Strategy, the primary quantitative tool in portfolio construction is excess return, on which our stock-ranking system is based. The Global Infrastructure Income Strategy also uses yield quality as a secondary measure. As such, driven by valuation, the Investment Committee initiated positions in U.S. rail operator Union Pacific, Chinese gas utility China Resources Gas and U.S. communications company American Tower. Union Pacific is one of the largest freight railway networks in North America with a strong track record of execution with recent stock price weakness offering an opportunity to initiate a position at an attractive valuation. China Resources Gas is a natural gas distributor throughout China that is expected to benefit from a recovery in gas volumes following China’s reopening.
The strategy also exited Spanish airport operator AENA and Brazilian electric utility Engie Brasil this quarter. For Engie Brasil, we see potential risks surrounding a potential asset sale transaction between its parent company Engie.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/Income-Strategy-March-Commentary-ClearBridge-Investments.pdfJanuary, 2023
On a regional basis, Western Europe was the top contributor to monthly performance (+1.15%), of which Spanish toll road operator Ferrovial (+0.22%) and U.K. water company United Utilities (+0.21%) were the lead performers.
Ferrovial operates toll road concessions and airports globally, with its largest assets being the toll road operator 407 ETR (Express Toll Route) in Ontario, Canada, and its stake in London’s Heathrow Airport. Ferrovial’s share price rallied during the month as the market began to anticipate a soft landing. The stock was further supported by reduced bond rates, particularly in North America where Ferrovial’s key assets are located. Additionally, general traffic data remained resilient and a number of brokers upgraded the recommendations as they updated their valuations for I-66 in Northern Virginia, which opened in late 2022.
United Utilities (UU) is the largest listed water company in the U.K., managing the regulated water and wastewater network in the northwest of England. United Utilities’s share price outperformance was mainly driven by a pullback in U.K. bond yields, while Ofwat’s PR24 Final Methodology, announced in December, came largely within market expectations.
Turning to North America, Canadian gas utility TC Energy (+0.26%) and U.S. communications company Crown Castle (+0.25%) also performed well during the month.
TC Energy is a North American energy infrastructure company managing over 93,300 km of natural gas pipelines, 4,900 km of liquids pipelines, and 4.3 GW of power assets. More than 90% of its cash flows are backed by stable long-term contracts and cost-of-service tolling with creditworthy counterparties. The market continues to anticipate TC Energy’s announcement to the market on the magnitude of cost increases for its Coastal Gaslink project, as well as the asset sales it will complete to alleviate leverage concerns.
Crown Castle is the leading independent owner and operator of wireless communications infrastructure in the U.S. with a portfolio of approximately 40,000 towers. Crown Castle did well as inflation concerns eased and more growth-orientated stocks came back in to favour with investors.
Japanese rail operator West Japan Railway (-0.15%) was the largest detractor from monthly performance.
West Japan Railway Company (JR West) is one of the Japan Railways Group companies and operates in Western Honshu. It has its headquarters in Kita-ku, Osaka. JR West’s share price fell with rising COVID-19 cases impacting passenger traffic.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/ClearBridge-RARE-Infrastructure-Income-B.jpgDecember, 2022
On a regional basis, Western Europe was the top contributor to quarterly performance (+3.35%), of which Spanish electric utility Iberdrola (+0.62%) and U.K. electric utility SSE (+0.50%) were the lead performers.
Iberdrola is a multinational integrated electric utility company headquartered in Spain. Iberdrola is engaged in energy networks, renewables and wholesale and retail operations. The company has expanded internationally with operations in the U.K. (via Scottish Power), the U.S. (via Avangrid), Brazil (via Neoenergia) and Mexico. The market received its strategic plan update positively, as it emphasises protecting the balance sheet and more skew toward regulated networks than before. In addition, the appointment of a new CEO, separated from the chairman role, signified improvement in corporate governance.
SSE is a diversified energy utility headquartered in Scotland, U.K. It is vertically integrated, operating over the entire supply chain in the U.K., with generation (including hydro, wind, CCGT), electricity networks, and retail businesses (primarily B2B). It is the U.K.’s largest renewable energy generator. Shares were up as there was more clarity over an energy profit levy for electricity generators announced in the U.K.; SSE also announced a minority sale in its transmission network at multiples more attractive than the market expected.
Turning to North America, U.S. electric utilities Public Services Enterprise Group (+0.49%) and Entergy (+0.44%) also performed well during the quarter.
Public Services Enterprise Group (PEG) operates the largest utility business (~90% of earnings) in New Jersey, along with a generation business (~10% of earnings) comprising nuclear and gas turbine facilities.
Entergy is a pure regulated electric utility, providing services in Arkansas, Louisiana, Texas and Mississippi.
Shares of Public Services Enterprise Group and Entergy were higher as broader utilities outperformed on lower rates.
Canadian electric utility Emera (-0.42%) was the largest detractor from quarterly performance.
Emera is a listed Canadian utility that generates 95% of its earnings from its regulated operations in Florida and Nova Scotia. Shares declined after the Premier of Nova Scotia introduced legislation that places a cap on electricity rates, effectively circumventing a well-established independent regulatory framework.
All returns are in local currency.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/www-clearbridgeinvestments-com-au-perspectives-income-strategy-december-commentary-.pdfSeptember, 2022
On a regional basis, Latin America was the top contributor to quarterly performance (+0.08%), of which Brazilian electric utility CPFL Energia (+0.18%) and Mexican airport operator Grupo Aeroportuario del Pacifico (+0.05%) were the lead performers.
CPFL Energia is one of Brazil’s largest distribution and generation companies, with a 13% market share in distribution and a 3% market share in generation. CPFL’s distribution assets include eight separate federally regulated concessions and generation assets consisting of a mix of hydro and renewable assets that are underpinned by long-term take-or-pay contracts. During the quarter, the Brazilian central bank decided to halt interest rate rises after numerous quarters of aggressive monetary policy. This sent a positive signal to the market that the rate cycle could be turning, leading to outperformance by Brazilian rate-sensitive stocks like CPFL.
Grupo Aeroportuario del Pacífico SAB de CV (GAP) is Mexico’s largest airport operator with a portfolio of 13 airports focused in Mexico’s Pacific region with an additional airport in Jamaica. Once again, GAP delivered encouraging traffic growth and solid quarterly results leading to strong relative performance during the quarter.
Italian gas utility Snam (-0.61%) was the largest detractor from quarterly performance.
Snam is the owner and operator of gas transport, distribution, storage and regasification infrastructure in Italy and its neighbouring European countries. Shares were lower due to rising bond yields in Europe, coupled with energy crisis and recession fears, as the Russia-Ukraine conflict escalated and the global growth outlook worsened.
All returns are in local currency.
File: https://commentary.quantreports.net/wp-content/uploads/2022/02/Screen-Shot-2022-11-06-at-09.21.03.pngJune, 2022
On a regional basis, Asia Pacific was the top contributor to quarterly performance (+1.29%), where Australian toll road operators Atlas Arteria (+0.84%) and Transurban (+0.22%) and Australian gas utility APA Group (+0.23%) performed strongly.
Atlas Arteria is a toll road owner and operator with its key assets being a 31% stake in the APRR, AREA and ADELAC concessions in France and 100% ownership of Dulles Greenway in Virginia, in the U.S. In addition, it owns the Warnow Tunnel in Germany. The French concessions represent ~75% of the company’s value. Atlas Arteria performed strongly as a result of a large Australian pension fund (IFM) taking a 15% stake in the company at $8.10/share with the expectation this would ultimately lead to a takeover offer.
Transurban owns a suite of intra-urban toll road assets that dominate the Australian toll road network in the three state capital cities on the eastern seaboard. Additionally, it has several toll roads in North America, predominantly in the Washington D.C. area. Transurban’s share price increased owing to easing concerns on bond rates and a slightly better than expected second half dividend driven by the ongoing traffic recovery.
APA Group is Australia’s largest gas pipeline operator. APA owns and manages gas transmission pipelines in all states of mainland Australia, as well as gas storage and processing, contracted power generation and renewable energy production. APA’s share price increased owing to a combination of factors, including continued concerns over inflation given APA’s strong inflation protection, easing concerns over bond rates and incrementally positive views on the future role of gas in the energy transition.
File:March, 2022
On a regional basis, the U.S. and Canada region was the top contributor to quarterly performance (+4.54%), of which Canadian energy infrastructure company Pembina Pipeline (+0.85%), U.S. energy infrastructure company Williams Companies (+0.56%) and U.S. renewables utility Brookfield Renewables Partners (+0.52%) were the lead performers.
Pembina Pipeline provides transportation and midstream services for the energy industry in North America. The company announced the hire of Scott Burrows as permanent CEO, and Jaret Sprott as COO and reaffirmed its corporate strategy, boosting investor sentiment.
Williams owns and operates natural gas pipelines and associated midstream assets in the U.S. Shares were higher due to the strong natural gas pricing environment, causing midstream companies to continue to perform well.
Brookfield Renewables Partners is a pure-play renewables operator and developer headquartered in Canada, focused on international hydro, solar, wind and storage technology. As more private and public institutions announce ambitious carbon reduction initiatives, Brookfield Renewable’s globally diversified, multi-technology renewables business makes Brookfield an attractive partner. Brookfield’s development pipeline stands at 18,000 MWs, providing confidence the company can meet its targeted double-digit cashflow growth through to 2025. The market narrative around the energy transition and energy security, along with the price of fossil fuels increasing which has driven greater focus on switching to renewables, helped Brookfield shares in the quarter.
Turning to Western Europe, U.K. electric utility National Grid (+0.50%) also performed well during the quarter.
National Grid is one of the world’s largest publicly owned utilities, focused on transmission and distribution activities in electricity and gas. National Grid’s share price increased during the quarter as a result of several factors, including its defensive profile with inflation pass-through and limited exposure to underlying generation and the associated input cost inflation (e.g., gas). Additionally, it received final regulatory approvals for the sale of its Rhode Island business to PPL, de-risking that transaction.
U.S. communications company Crown Castle International (-0.42%) was the largest detractor from quarterly performance.
Crown Castle is the leading independent owner and operator of wireless communications infrastructure in the U.S. with a portfolio of approximately 40,000 towers. Crown Castle underperformed as investors, driven by rising interest rates, rotated away from defensive sectors into more value-orientated sectors.
All returns are in local currency.
File:December, 2021
On a regional basis, the U.S. and Canada region was the top contributor to quarterly performance (+4.07%), of which U.S. electric utility Exelon (+1.02%) and U.S. renewables utility Clearway Energy (+0.92%) were the lead performers.
Exelon is a U.S. energy provider with one of the cleanest and lowest-cost power generation fleets. Its utilities serve millions of electric and gas customers across Delaware, Illinois, Maryland, New Jersey, Pennsylvania and the District of Columbia. The share price of Exelon rose as the company received approvals for its anticipated spinoff, in addition to broader supportive datapoints around nuclear support.
Clearway Energy primarily owns and operates contracted renewable generation assets in the U.S. It also owns and operates conventional generation and thermal infrastructure assets. Clearway Energy’s share price continued to benefit from the completed sale of its thermal assets, which was above expectations, generating USD$1.3 billion in incremental proceeds. Additionally, there was optimism surrounding a stimulus bill pass-through which contains renewables subsidies. Turning to Western Europe, U.K. electric utility National Grid (+0.97%) and Spanish electric utility Iberdrola (+0.47%) also performed well.
National Grid is one of the world’s largest publicly owned utilities, focused on transmission and distribution activities in electricity and gas. National Grid performed strongly during the quarter as the business continued to de-risk following prior regulatory decisions and significant M&A. The company also benefited from falling real rates and a solid set of half-year results and strong Investor Day presentations.
Iberdrola is a multinational integrated electric utility company headquartered in Spain. Iberdrola is engaged in energy networks, renewables and wholesale and retail operations. The company has expanded internationally with operations in the U.K. (via Scottish Power), the U.S. (via Avangrid), Brazil (via Neoenergia) and Mexico. The share price rallied as political risks receded after the gas clawback measures proposed by the Spanish government in September scaled back significantly.
Spanish airport operator AENA (-0.24%) was the largest detractor from quarterly performance.
AENA is the monopoly owner of the Spanish airport system, operating the 46 airports under a dual-till regulatory regime. AENA also manages London Luton Airport, with a 51% stake. AENA’s share price fell following the emergence of the Omicron variant and the uncertain outlook for travel.
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