Ontario Teachers’ Pension Plan invests heavily in infrastructure, will double alternatives from 18%

Date: Wednesday, September 1, 2004

TORONTO (CP)-Craig Wong- Canadian Press- A consortium half-owned by two Ontario pension plans is buying into a gas distribution network in Scotland and southern England in a deal worth $7.5 billion. The Ontario Teachers' Pension Plan and Borealis Infrastructure - an investment arm of the Ontario Municipal Employees Retirement System - said the consortium has agreed to buy Scottish and the southern English gas distribution networks from National Grid Transco PLC. Teachers' and Borealis each hold 25 per cent of the consortium and Scottish and Southern Energy PLC, which will provide certain corporate and management services for the consortium, holds the remaining 50 per cent. Robert Bertram, executive vice-president of investments at Teachers', said although an infrastructure may not give the same return as an equity portfolio over the long-term, the investment will provide much more stable returns. "Because they're basically rate-regulated utilities, they tend to react fairly well to unanticipated inflation, so there is some inflation protection and stable long-term returns," Bertram said in an interview from Edmonton. The deal is part of an overall $10 billion in asset sales announced Tuesday by National Grid. The Scottish network includes about 24,000 kilometres of gas mains, delivering gas to 1.7 million industrial, commercial and domestic customers. The network in southern England includes about 49,000 kilometres of gas mains, delivering gas to some 3.9 million customers. National Grid said it sold its network in northern England to a consortium led by Hong Kong's Cheung Kong Infrastructure Holdings Ltd. and United Utilities PLC for 1.4 billion pounds. Its systems in Wales and western England will go to a group led by the Macquarie European Infrastructure Fund, which is managed by Australia's Macquarie Bank Group, for 1.2 billion pounds. National Grid will keep four other distribution networks, covering the west Midlands, London, eastern England and northwestern England, reaching a total of 11 million customers. Teachers' target is to hold 30 per cent of its investments in assets such as infrastructure, timberland, commodities, real-rate bonds and real estate. "We don't have a specific target for any one of those as long as the combination of them all adds up to 30 per cent," Bertram said. "What we try and do is we will emphasize the ones we think have the best opportunities for us at any moment in time." Teachers' infrastructure investments include toll roads in Australia, airports in Britain and Australia, gas and oil pipelines in Alberta and the United States, the electrical transmission system in Alberta and power generation in the U.S. OMERS said in February it would reduce its investments in the stock and bond markets to 60 per cent of the total, from 80 per cent, while almost doubling alternative investments to 35 per cent from 18 per cent over the next four or five years. Rob Watters, senior vice-president at Borealis Infrastructure, said the deal Tuesday was part of OMERS' plan to increase its investments in infrastructure from four to 15 per cent. "I think other pension plans recognize the strategy and I think to the extent that they have the reach they'll be trying to get into these assets," Watters said. The two plans said some of the best infrastructure investments for pension plans are price-regulated monopolies. Borealis Infrastructure and Teachers' also have a strategic alliance in an investment in the Express pipeline, which transports oil from Western Canada to markets in the United States. The total value of the new investment will be approximately $7.5 billion. Teachers' and Borealis will each invest approximately $665 million while Scottish and Southern Energy will invest $1.2 billion. The balance will come from third-party debt. The acquisitions remain subject to regulatory approvals and are expected to be completed in the spring of 2005.