Introduction to infrastructure

The Infrastructure Asset Class

Infrastructure businesses provide basic services that are used everyday, such as parking, roads and water.

Macquarie Infrastructure Company focuses on the ownership and operation of infrastructure businesses with the following types of long-life physical assets:

“User Pays'' Assets

These assets are generally transportation-related infrastructure that depend on a per-use system for their main revenue source. Demand for use of these assets is relatively unaffected by macroeconomic conditions because people use these types of assets on an everyday basis. While some ""user pays'' assets, such as airports and toll roads, are generally owned by government entities in the United States, other types, such as airport and rail-related infrastructure, are typically owned by the private sector in the United States.

Where the private sector owner has been granted a lease or concession by a government entity to operate the business, the business will be subject to any restrictions or provisions contained in the lease or concession.

Contracted Assets

These assets provide services through long-term contracts with other businesses or governments. These contracts typically can be renewed on comparable terms when they expire because there are no or limited providers of comparable services. Contracted assets, such as communications towers, district energy systems and contracted power generation plants, are generally owned by the private sector in the United States.

Where the private sector owner has been granted a lease or concession by a government entity to operate the business, the business will be subject to any restrictions or provisions contained in the lease or concession.

Regulated Assets

Businesses that own these assets are the preferred providers of essential services in their service areas and, as a result, are typically regulated by government-entities with reference to the level of revenue earned or charges imposed. Government regulated revenues typically enable the service provider to cover operating costs, depreciation and taxes and achieve an adequate return on debt and equity capital invested. Water utilities and electric and gas distribution and transmission networks are examples of regulated assets. In the United States, regulated assets are generally owned by publicly-listed utilities, although some are owned by government entities.

By their nature, these businesses tend to have sustainable and growing long-term cash flows due to consistent customer demand and the businesses' strong competitive positions. Consistent customer demand is driven by the basic, everyday nature of the services provided.

The strong competitive position is the result of factors, including:

• high initial development and construction costs, such as the cost to build roads;
• difficulty in obtaining suitable land, such as the difficulty in obtaining suitable land near or at airports for parking facilities or FBOs;
• required government approvals, which may be difficult or time-consuming to obtain, such as approvals for a network of communications towers, or approvals to lay water pipes under city streets; and
• long-term exclusive concessions and customer contracts, such as contracts to provide broadcasting services to broadcast television companies.

These have the effect of protecting the revenue generated by the infrastructure assets owned by these businesses. They arise because services provided by infrastructure businesses, such as parking, roads, and water can generally only be delivered by relatively large and costly physical assets in close proximity to customers.

These services cannot be delivered over the internet, and cannot be outsourced to other countries, and are therefore generally not susceptible to the competitive pressures that other industries, including manufacturing industries, typically face. We will not seek to acquire infrastructure businesses that face significant competition, such as merchant electricity generation facilities.

The prices charged for the use of infrastructure assets that are our focus can also generally be expected to keep pace with inflation due to the pricing power generally enjoyed by "user pays'' assets, the contractual terms of contracted assets, and for regulated assets the regulatory process that determines revenues and typically provides for an inflation adjustment.

Infrastructure assets, especially newly constructed assets, tend to be long-lived, require predictable and manageable maintenance capital expenditure and are generally not subject to major technological change or rapid physical deterioration. This generally means that significant cash flow is often available from infrastructure businesses to service debt, make distributions to shareholders and retain and expand the business.

The sustainable and growing long-term cash flows of infrastructure assets mean that infrastructure assets can typically support more debt than other businesses, which can increase returns to shareholders. This indicates the importance of financial structuring and capital optimization in enhancing shareholder returns to owners of infrastructure assets.