U.S. Infrastructure Investing is Different. While direct investment in publicly listed civil infrastructure equities is common in European and Asian countries (we count over 50), the majority of U.S. civil infrastructure is owned by municipal, state, or federal governments. As such, direct investment is generally limited to the credit markets, private equity funds or the equities of companies that build bridges, dams, highways, ports, etc.
Companies such as Martin Marietta, Granite Construction, Kiewit, Jacobs, and Fluor compete with one another for big infrastructure projects, and some are heavily involved with upstream oil and gas development that may be less appealing to infrastructure investors.
The U.S. utility model borrows from both public and private ownership. Like public infrastructure, investor-owned utilities are natural monopolies and to avoid duplication, regulation limits competition, grants the right of eminent domain and limits returns on investment. Investor-owned utilities earn a “just and reasonable” return on capital and recover all operating costs, interest on debt and a return on equity from are passed through to customers in their utility bills. This system has been in place for 120 years, but regulations are now evolving as regulators are increasingly seeking ways to incorporate outcome and performance-based incentives to drive greater capital and operating efficiency.
- As an established, long-term energy infrastructure investor, EIP’s views on evolution of the regulatory model and capital allocation are frequently sought by regulators and utility industry leaders.
The civil infrastructure companies overseas that operate roads, bridges, airports, container terminals, etc. have a similar regulatory construct whereby they have stable allowed rates of return on invested capital which along with all other costs are passed through in tolls and fees to customers. There are a number of regulated power and gas utilities in Europe and Asia that have similar regulatory construct, but most of those companies also operate merchant electric power plants which is a cyclical commodity business. Despite many years of consolidation, the U.S. utility sector remains a comparatively large addressable population universe diversified by function, geography, and regulatory jurisdictions and today, three decades after the deregulation of power generation, most U.S. utilities are pure play regulated businesses.
Capital Growth Means Earnings Growth. EIP has seen U.S. power and gas utilities grow their earnings between 5-6%[1]annually, driven by capital expenditures expanding the investment base that earns an allowed rate of return, as of the March 31, 2021. Even though power demand grows less than 1% per year, utility capital expenditures are driven by improving reliability and lowering costs by connecting new lower cost sources of electricity like wind and solar. Technology is making utility grids more robust, intelligent, and open to new technology such as renewables and energy storage.
- In addition to reducing its own carbon emissions, electricity is also key to lowering GHG emissions in other sectors of the economy (e.g., transportation) and is central to other emerging energy technologies such as hydrogen.
Wider Political Appeal. Progressives favor clean energy, which depends on a robust grid to deliver renewable electricity at scale—and speaks to the attendant investment opportunity as well as the creation of good-paying union jobs. Conservatives like the idea that hundreds of billions of dollars can be deployed in infrastructure without costing the government anything.
[1] Based on First Quarter 2021 Company Earnings Reports.
The above is Energy Income Partner LLC’s (EIP) opinion and such opinions may change without notice or duty to update. The information is based on data obtained from third party publicly available sources that EIP believes to be reliable but EIP has not independently verified and cannot warrant the accuracy of such information. Past performance is not indicative of future results, which may vary significantly due to changing conditions. Any investment may lose money, including investment principal. Accounts managed for partial periods may have experienced materially less favorable results than those portrayed over the highlighted time horizon.