The FTSE Global Infrastructure 50/50 index – one of the more popular infrastructure indices – includes more than 200 companies. But Maple-Brown says many businesses in the index, such as stevedoring and railway services, are potentially cyclical in nature and receive earnings from activities that do not have core infrastructure characteristics. They may therefore result in a more volatile return profile, which is less attractive to the infrastructure investor.
“We use a bottom-up approach to choose a more concentrated portfolio of stocks in which we have a high conviction,” says Maple-Brown. “Our investment process relies on digging deep and using as much publically available information as possible, much of which is not necessarily produced for financial investors such as ourselves.”
Splitting out earnings
Maple-Brown says that, in the case of regulated utilities, the financial accounts are helpful in providing a snapshot. “They tend to provide the greatest information in areas such as debt facilities, interest rates on debt, interest rate hedging and the balance sheet,” he says. “But, as they don’t have the granularity we need to make forward-looking assumptions, we use the much more detailed reporting on operational information available through the company’s regulatory filings.
“For example, for larger companies with multiple assets, if we just rely on the financial accounts it can be difficult to split out the earnings and the balance sheets of individual assets. This splitting can be important, because these assets can have very different durations and revenue drivers.”
He says this is true in North America, where many of the regulated assets in the fund are based, and in most other countries too.
“We also use regulatory filings when analyzing regulated water, gas and electricity businesses across Europe, Australasia and Latin America,” he adds. “For companies that report under IFRS, financial reporting does not follow regulatory reporting, so accessing the regulatory filings becomes even more critical in evaluating the drivers of asset value.
“For example, when researching UK regulated water utilities, we need to analyze closely the total expenditure allowances from the regulator, which are provided in regulatory documents. The regulator applies a ratio to the total expenditure to derive the costs to be recovered from revenue and the value added to the asset base. These regulatory splits are crucial to modeling the UK water utilities and are different to the statutory reporting of operational expenditure and capital expenditure.”
Pike adds an example of pipeline companies in North America. “When analyzing these companies, we build dividend discount models of at least 10 years, focusing on variables such as contracted positions and annual tariff adjustments,” he says.
This information can be found in documents including the 10-Q (quarterly) and 10-K (annual) US Securities and Exchange Commission reports, which are detailed, but relatively standardized across companies. But, as Pike explains, major interstate natural gas pipelines also have to submit filings to the Federal Energy Regulatory Commission (FERC), such as Form 2, which is a compilation of financial and operational information with up to 200 pages of detail.
These filings are typically used by shippers or producers, but are also valuable sources of information for financial analysts. “For example,” Pike says, “in a 10-Q or 10-K, you only have to report major customers over a certain size. But the FERC filings typically disclose all of the contracted customers on the pipeline.”
The team monitors a wide range of regulatory filings on potential investments. But the largest source of information comes in regulatory rate cases.
The rate case examines the value of investments into the asset so that the regulator can determine a fair return. It also calculates a total revenue requirement, which is used to determine customer charges. Maple-Brown explains that these rate cases give much more information than SEC filings, including a detailed, asset-based breakdown, current revenue requirement and a forecast of revenue growth through the regulated period. They also provide capital expenditure forecasts, customer and sales forecasts by customer type, customer bill comparisons and more detailed tax breakdowns.
“In most regulated assets, we have a clear decision-making process that runs through the revenue requirement, asset base and expenditures,” he concludes.