The year ended much like 2022, inflation was still above most central banks’ targets, Interest rates were significantly higher than 18 months previously. However, the rate of increase in interest rates has slowed. With ongoing geopolitical turmoil, we view that interest rates are likely to stay elevated for some time. Given this scenario, we anticipate less extreme volatility from the economic impact in the coming quarters concerning the future revenue outlook in the infrastructure sector.

IC10 Power Generation x-Renewables / IC70 Renewable Power

In the energy market, the crisis of 2022 has subsided, this is evident in the energy prices that have fallen significantly from their peak in 2022, which was due to gas supply disruptions. European energy prices are currently trading at approximately one-tenth of the peak levels in 2022, normalized to pre-energy crisis levels. While gas prices have remained stable amid the current northern hemisphere winter and the Red Sea conflict. The gas prices have decreased by more than 50% in 2023, dropping from $9/MMBtu last year to $2.6/MMBtu this year.

Additionally, we observed a decline in gas-fired power generation in the power mix in Europe, with a shifting focus towards renewable energy. Another factor contributing to the less urgent demand for gas is Europe’s maintenance of strong inventories. As of the end of December, the storage levels, reported by AGSI (Gas Infrastructure Europe, 2023), stood at 86.40%, equivalent to approximately 984 terawatt-hours in Europe.

We take the view that with these falls in the spot price, and potentially the continued increase in the export of gas from the US, gas prices and hence electricity prices will remain subdued compared to 2022 levels. This will also reduce the revenues for any merchant renewable assets.

it should be noted that there is potential volatility, stemming from LNG strikes in Australia, outages in the US, and the emergence of conflict in the Middle East leading to fluctuations in the gas market, we will continue to monitor and adjust revenue expectations accordingly if new information arises.

IC6010 Airport companies

The airport sector has made a robust recovery from the pandemic. We observed that the airport revenue has rebounded to pre-COVID levels, driven by the positive impact of trade and tourism routes. The Asia Pacific region, in particular, has witnessed a substantial rebound in passenger numbers, especially considering that borders only fully reopened earlier in 2023.

As per IATA(2023), air passenger traffic, gauged in revenue passenger kilometers (RPKs), sustained growth in November, registering a 29.7% increase compared to the previous year. Global RPKs are currently only 0.9% below pre-pandemic levels.

In 2023, Heathrow Airport witnessed a similar recovery in traffic, with a total of 79.1 million passengers traveling through the airport—close to the pre-COVID level in 2019, which was 80.9 million passengers, as stated in their latest annual report (Heathrow Airport, 2023).

We have reverted our view that air travel and revenues of airports is now again a function of economic variables with the removal of the last movement restrictions.

IC8040 Water and Sewerage Companies

In the UK, Ofwat conducts a review of water and wastewater companies’ business plans every five years. These plans, which span the subsequent five-year period, encompass the impacts on customer bills.

Substantial shifts in inflation, interest rates, and power prices, resulting in an escalation of water companies’ near-term cost base, would necessitate adjustments in revenue. We’ve forecasted the increasing inflation impact on the revenue, considering regulations that link revenue to inflation and other factors. We also note that these revenue increases are dependent on group performance. With OfWat having the power to allow lower than CPI increases in water prices for poorly performing firms.

We anticipate that there will be muted increases in water tariffs for poorly performing firms such as Thames Water. This will have further implications for the refinancing due in April 2024.

References

• Gas Infrastructure Europe (GIE) (2023). Aggregated Gas Storage Inventory. https://agsi.gie.eu/
• Heathrow Airport (2023). December 2023 Investor Report. https://www.heathrow.com/company/investor-centre/reports/investor-reports
• IEA (2023). Global energy crisis. Global Energy Crisis – Topics – IEA
• IATA (2023). Air Passenger Market Analysis November 2023. https://www.iata.org/en/publications/economics/
• Pennon group (2023). Half Year Results 2023/24. https://www.pennon-group.co.uk/investor-information/financial-reports-and-presentations