Powering up European network investment 4D Infrastructure April 2024 When talking about the energy transition, naturally, the focus has been on renewable energy. Many an article has been written on the exponential growth in wind, solar and batteries driven by increasing power demand, fossil fuel replacement, and societal concerns driving government and corporate targets towards net zero. The focus on renewables has thus always overshadowed the complementary need for investment in electricity transmission and distribution networks. This is despite grid operators long being vocal about the importance of accelerating investment to adapt to these essential changes in power generation and energy consumption. Networks lagging generation in the race for net zero It's estimated that over 80 million kms of grid infrastructure will need to be added or refurbished worldwide by 2040 if countries are to fulfil their national climate commitments on time and in full - equivalent to double the length of existing grids[1]. Currently, only 20% of the $770b USD invested into clean energy goes into network investment[2]. Investors have focused more on renewables given the outsized attention and higher perceived growth prospects. Renewable companies have marketed their sizeable growth pipelines, whilst utilities as owners of transmission and distribution grids, were more constrained by regulators and policy. They needed to be more prudent in their growth assumptions given their defensive position in the market, and with concerns around affordability. Until recently, the low-rate environment supported this thesis, with the market willing to pay more for longer duration renewable growth. However, in the past couple of years, there has been a shift in investor thinking. Improving policy has supported network investment Regulators, governments, and policy makers have started to appreciate the importance of, and urgency with which, network investment needs to happen for the energy transition. This has translated into improved regulation, more attractive investing regimes, and overall better policy. These changes have seen a materially improved outlook for most (if not all) European utilities with electricity networks exposure. This trend has accelerated in recent months and can continue to accelerate further with ongoing electrification and generative AI-related power demand, which is only just gaining traction in Europe. Some of the recent developments include: November 23 - UK utilities, National Grid & SSE (both in the 4D fund) increased their five-year capex plans from £40 to 42bn and £18 to £20.5bn respectively due to greater visibility provided by the UK's Accelerated Strategic Transmission Investment framework. March 24 - German distribution network operator E.On significantly upgraded its financial targets driven by an increased five-year investment programme - from €33bn to €42bn (up ~30%)[3]. March 24 - Iberdrola delivered their new business plan, surprising the market with further upgrades on an already significant 10 year/€150bn investment program driven by more transmission network investment. March 24 - Italian transmission network operator, Terna, increased its five-year investment plan by 65% compared to its previous plan. March 24 - France's electricity transport network operator, RTE, is expecting €100bn of electricity transmission investment from 2025 to 2040, compared to a previous plan of €33bn of investments over 2021 to 2035. Networks have become more attractive than renewables in a higher rate environment Despite renewable deployment continuing to accelerate, investors are starting to put more value on the visible, sustainable growth grids offer alongside the more immediate returns on capital. While we invest in both pureplay renewables and network companies, our preference in recent years has been to gain exposure to renewable developers through integrated regulated utilities. These are utilities that operate across the value chain in power generation, networks and in energy supply. We like the higher quality and often diversified (both in terms of renewable technologies and geographies) development portfolios of these companies, along with economies of scale which often provide supply chain advantages allowing for higher returns. Additionally, our research indicates that the market has undervalued and underappreciated both the scale and longevity of growth in their complementary network businesses - which, as mentioned, is only beginning to get more attention and support from governments, regulators, and operators. Capital flexibility in balance sheets, along with the ability to sell / hedge the power generated from renewables directly to retail customers, also provides us with an added level of comfort. Even with the recent outperformance of networks versus renewables, the table below highlights the ongoing disparity between valuations and market multiples across these two sectors. [4] Integrated regulated utilities are allocating more capital into networks As the renewables sector has suffered from inflation, cost of capital and power price challenges, we've seen integrated utilities (include some aforementioned) shifting more investment into networks. One of the clearest examples is from Iberdrola - one of our core utility holdings. Iberdrola is an integrated utility operating across power generation, networks and supply in Europe, the Americas and Asia. It's one of the largest renewable developers and network operators globally, and therefore inherently linked to the energy transition. Recognising the challenges in renewables versus the improving outlook for grids - Iberdrola in its 2022 Capital Markets Day started to pivot more towards networks. This foresight and capital allocation flexibility has proved timely. The company doubled down on its network focus in its March 24, taking advantage of policy tailwinds for networks in the UK and US, and reducing its exposure to some of the renewable energy headwinds currently at play (high rates, value creation concerns, supply chain issues, US offshore wind troubles). In doing so, the company highlighted the need to double global annual network investment by 2030 versus 2022, and triple investment by 2030 to work towards global net zero emissions targets[5]. Additionally their analysis revealed the massive long-dated needs for networks, with every 1 euro of renewables spend requiring 1 euro of network spend, and an even higher 1.25 euros in advanced economies[6].  This timely pivot is but one of the reasons we rate the quality of Iberdrola so highly. Utility underperformance provides for greater long-term opportunities While this growth outlook is unparalleled, the European utility sector has still underperformed the broader market, albeit considerably less than the pureplay renewable companies. Even with these massive growth drivers, the fact remains that utilities are considered a bond proxy and in a high-rate environment with a high opportunity cost of capital, it's difficult for these stocks to outperform. Strong economic data supporting cyclical growth and tech / AI-related trends have amplified this underperformance. While the market currently favours cyclicals over defensive growth, we have used this as an opportunity to increase our positioning in high quality network-focused utilities, such as Iberdrola, National Grid, ENEL and SSE. We believe these are all strong investment propositions given their long-dated defensive growth profiles with a secure regulated returns, which despite increased attention, still aren't being fully appreciated by the market. The content contained in this article represents the opinions of the authors. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the authors to express their personal views on investing and for the entertainment of the reader. [1] https://www.iea.org/commentaries/the-clean-energy-economy-demands-massive-integration-investments-now> [2] https://www.iea.org/commentaries/the-clean-energy-economy-demands-massive-integration-investments-now>, EMDE refers to advanced, emerging, and developing economies [3] Total five-year investment plan 2024-28 compared to 2023-27 [4] 4D Infrastructure, FactSet [5] Iberdrola Capital Markets Day 2024, IEA [6] Iberdrola Capital Markets Day 2024, IEA  Funds operated by this manager: 4D Emerging Markets Infrastructure Fund, 4D Global Infrastructure Fund (AUD Hedged), 4D Global Infrastructure Fund (Unhedged)

US wildfire risk rears its head again 4D Infrastructure April 2024 In his annual letter to investors, released on 24 February 2024, Warren Buffett drew the public's attention to the increasing wildfire risk that electric utility investors in parts of the US are exposed to. He confirmed this risk had negative ramifications on essential investment required to support utilities and communities alike. This messaging was further reinforced by the experience of Xcel Energy, who in early March confirmed that its assets in Texas were likely responsible for the ignition of the Smokehouse Creek wildfire. Strong words from Buffet on an increasingly concerning utility risk Buffett drew broader investor attention to an issue which is already well understood by US utility investors, attributing the poor performance of Berkshire Hathaway Energy (BHE) to increased wildfire risk - to "the regulatory climate in a few [US] states has raised the spectre of zero profitability or even bankruptcy (an actual outcome at California's largest utility and a current threat in Hawaii)". This was in reference to BHE's utility company, PacifiCorp (referenced in the previous article listed above), which BHE believes is facing at least $8 billion in legal liability claims associated with fires it allegedly ignited in October 2020[1]. The scale of such potential liabilities obviously raises the question of the financial viability of PacifiCorp. To this Buffett stated, "At Berkshire, we have made a best estimate for the amount of losses that have occurred. These costs arose from forest fires, whose frequency and intensity have increased - and will likely continue to increase - if convective storms become more frequent". Importantly, with regard to BHE's appetite in bailing out the company from financial distress Buffett stated, "Berkshire can sustain financial surprises but we will not knowingly throw good money after bad"[2]. This should be a major concern for legislators and regulators in exposed states, as an electric utility in financial distress (potentially bankruptcy proceedings) will struggle to attract investment capital and service its customers. This is particularly important in the current environment, with massive capital investment required to support the energy transition and power demands of AI and data centres. Indeed, Buffet recognises the investment proposition on which utilities were historically based could be in question, "Now, the fixed-but-satisfactory return pact has been broken in a few states, and investors are becoming apprehensive that such ruptures may spread". Xcel Energy the latest utility at risk Shortly after the release of Buffett's investor letter, Xcel Energy confirmed that its assets are likely to have ignited the Smokehouse Creek wildfire in Texas. A lawsuit against the company has claimed that one of the company's utility poles near Stinnett, Texas, had been blown over by strong winds sparking the initial blaze. The fire based in the largely rural Texas panhandle and parts of Oklahoma burnt around 1.2 million acres, destroyed 400-500 structures, and is associated with two casualties. Despite it being too early to understand the potential legal liabilities facing the company, Xcel Energy's share price fell 17% (representing a c.US$6 billion devaluation in market capitalisation) in the week after media reports implicated the company in the fire. This again reinforced the risk facing electric utility investors from the unintended ignition of wildfires. The states, and therefore companies, physically exposed One major problem in identifying wildfire risk is that the geographies exposed to wildfires are increasing over time as a result of global warming - which we touch on in our article,  Extreme weather risks and their impact on investors. Despite the increasing occurrence, the states that are currently most exposed to wildfires are depicted by UBS below, utilising data provided by FEMA on the National Risk Index. The map shows that the highest risk areas are in the western, central and southern parts of the US. Source: California Board of Forestry and Fire Protection (CAL Fire) The map helps identify states that are most exposed to wildfires, and the utilities which have significant operations in those states (listed in the table below). This provides a first pass as to utilities in 4D's investment universe which have/could have risk from wildfires. This a high-level geographic assessment only and captures many of the US utility operators. A deeper dive would see some with little real wildfire exposure at present as they operate in more urbanised areas with little vegetation to support the damaging fires - for example CenterPoint Energy Houston Electric (in the Texas section of the table above) have confirmed that their operations in downtown Houston is highly unlikely to be impacted. Other considerations to wildfire liability exposure Other major considerations as to electric utilities' exposure to wildfire liabilities include:  1) how prepared electric utility companies are to mitigate physical wildfire risks; 2) what litigious environments exist in various states; and 3) are companies able to manage wildfire liabilities of various scale if incurred? These are the areas that 4D undertakes significant due diligence in when considering a company for investment. When researching a potential investment in a US electric utility that is in (or could develop into) a high wildfire risk geography, we spend significant time understanding the company's wildfire mitigation preparedness. This incorporates getting a thorough understanding of wildfire mitigation plans in its totality, which incorporates vegetation management processes, situational awareness (video monitoring of the network, lineman visual inspections, and drone surveillance), investment in hardening the network from fire ignition, and established public safety power shutdown (PSPS) procedures as a last resort. Significant investment in the insulation of overhead wires, replacement of weak/old power poles and undergrounding of wires in particularly high-risk regions all 'harden' the grid from wildfires. The particular litigious framework established in individual states identified in the table above vary considerably. Some key factors, which will influence the level of legal liability risk, include: Absolute cap on liabilities - some states have established legal liability caps on the absolute amount that an individual/company can be litigated for. Judge vs jury presided courts - jury courts are more likely to be influenced by their emotions (with wildfire damage being very emotional for communities) rather than by the strict interpretation of the law. Whether punitive damages can be applied in addition to actual (property) damages -punitive damages are often multiples larger than actual damages, which are usually massive for wildfires in their own right. The application of punitive damages is usually dependent upon the establishment of gross negligence on behalf of the company, which should have a high threshold of evidence, but this has been depleted in some examples. A jury court in Oregon ruled that BHE's PacifiCorp was grossly negligent in its operation of the network during the October 2020 fires in the state, based largely on the company not shutting power off in the lead up to the fires. This would have had far reaching operational ramifications that made the decision far from straight forward. The court's decision is being appealed. The level of wildfire preparedness (or robustness of wildfire mitigation plans) that a company can demonstrate will reduce the risk of being found (grossly) negligent by a court. Specific state-based legal concepts - some specific legal standards can be applied in individual states such as inverse condemnation in California (see The real risk of wildfires to US infrastructure investors for more information on this).  The question of a company's ability to manage wildfire liabilities will be dependent upon its balance sheet capacity and liquidity, which are obviously influenced by its size. Smaller electric utilities, including smaller municipal owned utilities, will be less able to manage large legal liabilities and are more likely to be forced into financial distress and/or bankruptcy. Could this be a driver of M&A consolidation in some states? A financially distressed company is unlikely to have the capacity and/or willingness to continue to invest much-needed capital in the networks (replacement, growth and hardening) which could hinder economic and social development in the exposed region. We expect there will be growing questions around insurance for these events - what can be insured, what premiums will do as this risk intensifies, and when does insurance pay out? It could get harder for utilities to protect themselves from this risk. 4D's approach Wildfire risk is becoming a bigger concern for market investors and is probably something that is still being understood. At 4D, we don't recommend avoiding these companies from investment altogether.  We do, however, recommend thorough due diligence of the risk to a company before taking a position. As always, we balance quality, risk and return in making investment decisions. In some cases, that risk will be too great - as Buffett outlines, there is the potential for the adoption of risk that outweighs the potential regulatory return of a utility, which can end up in the loss of all equity value (as experienced by PG&E Corp). However, in others we see the moderated risk more than compensated by valuations, with network hardening against fires also a strong driver of earnings growth. The content contained in this article represents the opinions of the authors. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the authors to express their personal views on investing and for the entertainment of the reader. [1] Warren Buffett's western utility facing untold billions in wildfire damages after the latest bombshell jury verdict came down - The Associated Press; 7/3/2024 [2] Charlie Munger - The Architect of Berkshire Hathway; Warren Buffett; 24/2/2024 Funds operated by this manager: 4D Emerging Markets Infrastructure Fund, 4D Global Infrastructure Fund (AUD Hedged), 4D Global Infrastructure Fund (Unhedged)

Chris Gosselin, CEO of FundMonitors.com, speaks with Sarah Shaw, Global Portfolio Manager and CEO/CIO at 4D Infrastructure. The 4D Global Infrastructure Fund (Unhedged) has a track record of 8 years and 1 month and has outperformed the S&P Global Infrastructure TR (AUD) benchmark since inception in March 2016, providing investors with an annualised return of 9.22% compared with the benchmark's return of 8.49% over the same period. Funds operated by this manager: 4D Global Infrastructure Fund (Unhedged),  4D Emerging Markets Infrastructure Fund, 4D Global Infrastructure Fund (AUD Hedged)