Infrastructure investing in the Sunshine State, April 2019

When we think of Florida, holidays in the sun, Disney World and space shuttle launches may come to mind. Less so utilities, transportation and communication.

Here, Andrew Greenup, deputy head of Global Listed Infrastructure at First State Investments, talks to us about a recent trip he made to the Sunshine State and the investment opportunities it can provide.

What's attractive about Florida when it comes to infrastructure investments?

“The Sunshine State has more to offer than just the weather. With population growth above the national average, Florida is now the third most populous state in the US, with just over 21 million people. It's also the 4th largest economy in the US. To put this into perspective, if it was a separate country, Florida would be the 16th largest economy in the world - not far behind Australia, and larger than either the Netherlands or Switzerland.

“Florida is also home to a number of world leading infrastructure companies and offers investors exposure to strong demographics, pro-business politics and sensible regulation. The state's utilities are leading the charge towards renewable energy, while gas pipelines are delivering a low-cost transition fuel, both working to keep customer bills low and minimise political and regulatory risk.”

What did you do on your visit?

“Most of my time was taken up talking to management teams, visiting corporate head offices and conducting several asset tours including to the largest natural gas fired power plant in the US.

“I was particularly interested in the utilities sector. While per capita consumption of electricity in Florida is close to the national average, this reflects the lack of significant industrial load - residential electricity consumption is well above the national average owing to the heavy use of air conditioning.

“We view the pro-business environment in Florida for utilities as positive. The state's utility regulator has traditionally been constructive in looking for win-win solutions for customers and shareholders. The state's electricity prices have remained static for over a decade (Florida's average 1,000-kWh residential bill was $99 in 2018 vs $109 in 2006, and is well below the national average), while allowing strong investment, timely recovery of costs and a good allowed return on equity.

“The state has also been closing coal, oil and nuclear power plants and replacing them with solar and gas-fired power plants. Its electric and gas utility market is dominated by four listed infrastructure companies, including NextEra Energy, our third largest holding in the First State Global listed Infrastructure fund*, 35 small municipal-owned utilities and 18 rural cooperatives.

What about other sub-sectors?

“To the detriment of Florida's taxpayers, the vast majority of the state's transportation infrastructure (roads, railways, airports, ports) is owned and operated by local or state government. But there are a few exceptions.

“Florida has 22 commercial airports and is the second largest aviation market in the US with over 170 million passengers per annum. Just over 20% of these passengers are international. In 2018, global listed infrastructure firm Vinci, another holding in the First State Global listed Infrastructure fund, acquired the 3 million passenger Orlando-Sanford International Airport, Orlando's second airport and the eighth largest in Florida.

“Over the next few years we expect Vinci to attract new airlines, expand number of destinations, upgrade the retail offering, invest in better facilities and improve the cost base of this small airport in order to better compete against Orlando's large 47 million passenger main airport.”

What is your outlook for infrastructure globally?

“We expect public policy support for investment in infrastructure to remain strong globally, especially where it relates to replacing aged assets, reducing urban congestion, building out renewables for the decarbonisation of electricity, and the globalisation of natural gas markets.

“As government debt levels continue to grow and fiscal surpluses appear politically harder to achieve (despite 8 years of economic expansion) we see no reason why private sector funding of new infrastructure investment will not grow again in 2019.

A few listed infrastructure specific things we are keeping a close eye on in 2019 are:

  • Replacement of high cost coal and nuclear power plants with lower cost renewable energy driving large scale new investment opportunities for utilities globally;
  • Solar becoming the lowest cost producer of electricity in many (sunny) parts of the world;
  • Figuring out whether the slowdown in retail spending at European airports is cyclical or structural;
  • The implementation of Precision Scheduled Railroading by US freight railways Union Pacific and Norfolk Southern which improves customer service, reduces costs, improves asset returns and can drive large scale economic value-add;
  • The awarding of more Public-Private Partnerships projects in the US including toll roads in Maryland, and an attempt to privatise St Louis airport;
  • The ability of energy infrastructure firms to deliver US$40 billion of investment into Liquified Natural Gas export terminals on time and on budget.

“We believe that Global listed infrastructure is well positioned to navigate a likely slower growth world in 2019 due to its essential service nature having the ability to price at or above inflation without destroying demand.

“Global listed infrastructure provides investors with exposure to essential service assets with strong price power, high barriers to entry, structural growth and predictable cash flows. These characteristics may become more attractive to investors in 2019 as global economic growth slows and risks become more evident.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Andrew's views are his own and do not constitute financial advice.

Published on 23/04/2019