Hurricane Sandy left more than 8 million homes and businesses in the dark, some for weeks, after swallowing up parts of coastal communities and surging into New York City in October. Gasoline production and distribution problems ensued, sewage systems spewed raw sewage into waterways and the Atlantic, and public transit came to a screeching halt.
Last summer’s “derecho”—the series of violent thunderstorms that ripped through the Midwest and Mid-Atlantic—and 2011’s Hurricane Irene also paralyzed communities. New Orleans is still recovering nearly eight years after Hurricane Katrina.
Chalk it up to climate change or not, Mother Nature’s increasingly frequent and furious rages are putting deeper cracks in the nation’s outdated and inadequate infrastructure.
The American Society of Civil Engineers assigned it an overall grade of “D” in its 2009 “Report Card for America’s Infrastructure.” None of the 15 categories rated (aviation, bridges, dams, drinking water, energy, hazardous waste, inland waterways, levees, public parks and recreation, rail, roads, schools, solid waste, transit and wastewater) received higher than a “C.” Its next report card is due out in March 2013. “I don’t think it’ll be a whole lot better,” speculated ASCE president Greg DiLoreto in a phone interview prior to seeing it.
Why not? Overall, the U.S. hasn’t done much additional investing in infrastructure, and funding has been reduced for some areas, including water and wastewater, says DiLoreto, CEO of Tualatin Valley Water District, a Portland, Ore., utility. Total public funding for infrastructure is running about $1 trillion, far below the $2.2 trillion the 2009 report card said was needed over the next five years to solve structural problems.
“At a federal level, we’re going backwards,” says DiLoreto, who has testified to Congress about the need for appropriate funding and a coherent, long-term vision. ASCE’s four “Failure to Act” economic studies published last year outline the dangers of not investing in various infrastructure sectors.
The U.S. is also slipping on the global stage. The quality of its overall infrastructure is ranked 25th worldwide, down from ninth in 2008, according to an annual survey conducted by the World Economic Forum. The ASCE notes that the U.S. spends just 2.4% of its GDP on infrastructure compared with 9% for China and 5% for Europe.
Washington has discussed establishing a national infrastructure bank, which would be federally funded and controlled but also leverage funds from private-sector investors. Chicago launched an infrastructure bank last year. Analysts and policymakers aren’t sure if such programs can succeed, but it is clear that government alone can’t afford to fix our crumbling infrastructure.
Already, institutional investors are starting to step up. In 2011, the California Public Employees’ Retirement System (CalPERS) earmarked up to $800 million for investments in California infrastructure over a three-year period. Last year, the California State Teachers’ Retirement System (CalSTRS) made a commitment to invest up to $500 million in a diversified portfolio of core infrastructure assets in North America and Europe.
Navigating the vast infrastructure space can be complicated. Susanta Mazumdar, the portfolio manager of the T. Rowe Price Global Infrastructure Fund (TRGFX), says infrastructure investment is rising in most parts of the world, except Japan, but notes that the reasons differ from region to region.
“The major investment driver for the U.S. will be the changing energy mix,” Mazumdar says. The rising proportion of natural gas, particularly for power generation, will require pipelines and gas gathering stations, and the rising production of shale oil will need investments in oil pipelines and oil processing infrastructure, he notes. He also anticipates big investments in railways and ports used to transport this changing energy mix. For example, more coal will be exported as natural gas takes its place. Additional renewable energy investments will continue too, he says.
Mazumdar, based in Singapore, has a broad fund allocation of 50% in utilities (including such assets as gas pipelines and transmission grids) and 50% in infrastructure companies. “Infrastructure stocks have greater sensitivity to economic activities while utilities have greater correlation with interest rates,” he says. As of November 30, the fund had 36.3% exposure to U.S. companies.
One of its largest overweight bets relative to fund benchmarks is AES Corp. (NYSE: AES), which Mazumdar describes as the cheapest independent electricity producer in the U.S. The company’s new management and CEO are restructuring and placing greater focus on cash flow and dividends, he says.
Mazumdar also explains why he likes some of the fund’s other large, overweight bets. Spectra Energy Corp. (NYSE: SE) has a strong portfolio of gas pipelines. Sempra Energy (NYSE: SRE) has a dominant position in gas and power in California, which he says is a good jurisdiction for a regulated utility; it has a strong presence in Chile, which has had stable regulations for decades; and it’s a large beneficiary of rising liquid natural gas (LNG) exports from the U.S. Calpine, a large independent power producer, has the most efficient gas-based power capacities and is the only company that benefits from lower gas prices in the U.S., he says.
Sempra Energy has some exposure to wind and solar assets. Other fund holdings with renewable energy assets include NRG Energy (NYSE: NRG) and China Longyuan Power Group Corp. Ltd., which trades over the counter in the U.S. under the symbol CLPXF. Mazumdar purchases stocks from their local exchanges.
Calvert Investments, a leader in sustainable and responsible investments (SRI), is also closely tracking infrastructure. “Climate change issues are making the challenges and opportunities for investments even greater and timelier,” says Rebecca Henson, a senior sustainability analyst with the Bethesda, Md.-based firm.
“We believe it’s smarter to build resilience and strengthen infrastructure now rather than take action after,” says Henson, a contributor to two comprehensive reports published last year, “The PREP Guide to Managing Climate Impacts” and “Physical Risks from Climate Change Guide.”
A company she says is leading such efforts is AECOM Technology Corp. (NYSE: ACM), a global provider of technical and management support services for many infrastructure sectors. Other companies she thinks are well-positioned for long-term opportunities include SPX Corp. (NYSE: SPW) and Itron (Nasdaq: ITRI). SPX, a global supplier of manufacturing and industrial equipment, is updating aging water and waste treatment systems. Itron’s meters, software and other technologies help utilities measure and conserve water, electricity and gas. All three are held by the Calvert Global Water Fund (CFWAX).
Henson also likes the strong leadership efforts of Entergy Corp. (NYSE: ETR), a Louisiana-based integrated energy company in the Calvert VP S&P 500 Index Portfolio. It lost a big part of its customer base after hurricanes Katrina and Rita but has since researched and analyzed climate change impact and invested in coastal restoration projects throughout the Gulf Coast. “The company views extreme weather as a bottom line issue; that’s money well spent,” she says.
Meanwhile, extreme weather has exposed major inadequacies in equipment, communication and responsiveness at a number of New York and New Jersey utilities, including Consolidated Edison Co. (NYSE: ED); PSEG (NYSE: PEG); Jersey Central Power & Light, a subsidiary of First Energy (NYSE: FE); and Long Island Power Authority (LIPA), a non-profit municipal electric provider that has power supply agreements with U.K.-based National Grid (NYSE: NGG).
Roger Conrad, chief investment strategist of Investing Daily and editor of Utility Forecaster, ranked as the top-performing investment newsletter of 2012 by The Hulbert Financial Digest, encourages careful consideration of utilities in general. “Power outages are emotional events that investors really have to watch out for,” he says. He warns that what lies ahead can be more dangerous than a storm’s initial fallout—such as what might result from the subpoenas issued to ConEd and LIPA.
“Reliability is pretty huge,” says Conrad, who explains that a utility won’t have good system reliability without investments, and without reliability no one will grant it rate increases to make investments. When politicians start going after a company that’s falling down in terms of reliability, that scares off investors and makes investments and reliability suffer more, he says. Utilities must also cultivate relationships with regulators because these relationships determine their financial health, cost of capital and the type of investments made. “It’s a virtuous or vicious cycle,” he says.
Knowing where a company has operations is also very important, notes Conrad. “In some parts of the country, rate cases are always a crapshoot,” he says, citing the Northeast and Illinois as examples. He’s optimistic about Nevada because it’s growing fast, has solid relationships with its utilities and is trying to add renewables. The Southeast also has a generally cooperative regulatory climate, he says.
One company he likes is Nevada-based NV Energy (NYSE: NVE), which has mapped out a plan to become more energy independent and has a long-term contract with Israel-based Ornat Technologies for a geothermal plant. NV Energy is nuclear free.
On the water side, Conrad likes New Jersey-based American Water Works Co. (NYSE: AWK) and Pennsylvania-based Aqua America (NYSE: WTR). These investor-owned companies are installing new pipes and have grown by absorbing smaller systems that couldn’t make investments necessary for cleaner, more potable water, he says.
Picking Up The Pieces
Investors have also been looking closely at insurance companies, which will play a big role in helping improve and rebuild the nation’s ailing infrastructure. Sharlene Leurig, senior manager of insurance and water programs at Boston-based Ceres, expects insurance companies to pay more attention to climate change as a result of Hurricane Sandy. Ceres leads a national coalition of investors, environmental organizations and other public interest groups working with companies to address sustainability challenges such as global climate change and water scarcity.
One leader Ceres has identified is global reinsurance provider Swiss Re. The company has been very engaged in climate change, particularly in the public policy realm, since the 1990s. In the U.S., its shares are traded over the counter in the form of American depositary receipts (ADRs) under the symbol SSREY.
Primary insurers Ceres views as leaders include Zurich Insurance Group AG and the Bermuda-based ACE Group. Both have developed products related to climate change, something Leurig expects more companies to introduce as policy developments continue. Zurich trades on the SIX Swiss Exchange under the symbol ZURN. The ACE Group’s parent, ACE Ltd., trades on the NYSE as ACE.
Leurig encourages investors to make an effort to understand how insurance companies are incorporating climate finance into their loss modeling. She thinks it’s important to have conversations about these models during quarterly financial calls.
In sum, there are many reasons why the U.S. needs to improve its infrastructure—from staying safe to staying competitive in the global economy—and many ways to invest in it. Even if you don’t believe in global warming, here’s something to keep in mind:
“Extreme weather has affected companies in every industry,” says Henson. “Mayor Bloomberg and Governor Cuomo’s [post-Sandy] comments underscore that we can’t wait around debating climate science.”