OMERS Infrastructure Year in Review

Michael Ryder, Senior Managing Director at OMERS Infrastructure recently wrote a comment on LinkedIn going over their year in review:

When the year began, no one could have foreseen that our lives would be disrupted by a global pandemic that would wreak havoc on our communities and force businesses to adapt and respond to a series of extraordinary challenges. Through it all, I’ve been impressed by the resilience and agility displayed by my colleagues at OMERS and by our portfolio management teams as we’ve navigated this crisis together.

Reflecting on the year, I’m particularly proud of the way our portfolio companies rose to the occasion with solutions to support our communities. For example, LifeLabs, the leading provider of community laboratory services in Canada, coordinated with government partners to add critical COVID-19 testing capacity. Bruce Power, one of the largest nuclear power plants in the world, produced isotopes to sterilize medical equipment and provided millions of pieces of personal protective equipment to frontline workers. Recently, Bruce Power launched the “Be a Light” campaign, committing $1 million to work with public health, county and municipal governments, chambers of commerce, hospitals, local MPs and MPPs and community organizations to redouble efforts to battle the pandemic. Those are just a few examples of the way our companies have demonstrated remarkable leadership throughout the crisis, and I couldn’t be prouder to partner alongside them. 

I’m also proud of our Americas infrastructure team who’ve done an incredible job adapting to working from home. The team has continued to support our portfolio companies while also working to identify and diligence new investment opportunities; they haven’t missed a beat. In the recent sale of our stake in the Detroit River Tunnel Partnership (DRTP), we were able to work seamlessly to execute the transaction in this challenging environment thanks to our strong preexisting partnership with Canadian Pacific (CPR). Over the course of our investment, we collaborated with CPR as long-term owners and developers to add value and ensure safe and reliable operations of a major international transportation link; I wish them continued success. 

The pandemic has showed us that strong, modernized infrastructure in the areas of transportation, health, telecommunications and energy, among others, is needed to support the well-being and safety of our communities. At the same time, COVID-19 has accelerated some trends we were already seeing within infrastructure: nowhere more so than in digital infrastructure. The crisis has accelerated the digitization of many businesses, services and traditionally in-person experiences, most notably in the workplace and education. The rise of remote work during the pandemic, and the likelihood for it to prevail post-crisis, will create substantial opportunities for infrastructure investors such as ourselves. As part of the shift online, data infrastructure has been, and will continue to be, an area of growth, and the strength and security of this infrastructure will be imperative to fueling economic growth in the post-COVID economy.

As the year comes to an end, I would like to reiterate my appreciation for our employees, portfolio company management teams and essential workers, many of whom are OMERS members, who have all done an incredible job navigating these unprecedented times. Thank you for everything that you do to support each other, our communities and the sustainability of our members’ pensions.

Philippe Busslinger, Senior Managing Director & Head of Europe at OMERS Infrastructure also provided a year in review on LinkedIn:

As I reflect on the events of this year, I’m incredibly proud of how the OMERS community globally came together to continue to deliver our pension promise to our 500,000 members, including active and retired teachers, school administrators, firefighters, policemen, and civil servants in Ontario. It has been humbling to see our team rise to the extraordinary challenges of 2020 to support each other, our members, our assets, and our communities.

As long-term custodians of critical infrastructure businesses, we have been supporting our twelve management teams across our pan-European portfolio as a priority. First and foremost, we have focused on ensuring that the companies could continue to provide their essential services in a safe manner for their customers and staff. Secondly, we had to ensure their balance sheet resilience given the increased volatility. Thirdly, we had to support them planning for a prolonged uncertainty.

As I look back at what we achieved, I am proud at how our portfolio companies rose to the challenge. How a company navigates a crisis depends on the quality of its board, governance, management team, culture and the resilience of its systems and processes. I saw management teams remain composed and focused, adapt swiftly to remote working and uncertainty, and multiply their engagement with customers and other stakeholders. Asset managers at OMERS employ a sparring partnership approach with our management teams and this trusted relationship leads - in my view - to better decision making in times of stress.

Beyond keeping their own businesses running, I am immensely proud of our portfolio companies’ front-line employees – many of whom were designated essential workers - continued to meet the needs of their communities during this crisis. London City Airport in the UK for example offered its airfield to support the transport of medical supplies and equipment to the Nightingale Hospital.

Our resilience this year is not only the fruit of our active asset management approach, but also of the diversified nature of our portfolio and its low correlation with short term demand cycles. This pandemic reinforces my conviction that there is no substitute for diversification and thoughtful portfolio construction.

With over two decades investing experience, OMERS is a pioneer in infrastructure. Today we are custodians of an equity portfolio in excess of C$20bn spread across more than 30 companies in 12 countries. Such a portfolio has been built as a bedrock for the pension plan and as such with a relatively low correlation to other asset classes. Transport infrastructure - which has been one of the most impacted segments this year - barely accounts for a quarter of our global exposure. In the last four years, we have been further future proofing the European portfolio by adding exposure to sectors such as water, rail and fibre. In 2020, we were fortunate enough to close the acquisition of Inexio & Deutsche Glassfaser in Germany and of Covage in France.

In addition to diversification, our portfolio gives us the flexibility to crystallise gains opportunistically without necessarily altering the risk profile of the portfolio. For example, our London team completed the sale of our smart metering business MapleCo during the pandemic, generating an additional positive contribution to the plan’s return in a challenging year.

Last but not least, our London based Infrastructure team has shown its true colours: remaining composed, focused, agile, collaborative and not letting the pressure take away its peculiar sense of humour despite the personal and professional challenges they and their families have been subject to. I have been impressed at how seamlessly the team moved into WFH mode; working tirelessly to identify risks and support our 12 management teams ensure business or financial resilience. I know that this effort has come at a great cost to people’s lifestyles and for that I am immensely grateful.

Despite 2020 being a challenging year for all of us, OMERS has remained resilient. Although this crisis is not over yet, I’m looking ahead to 2021 with confidence that the robustness of our portfolio, together with our differentiated investment and asset management approach, and the strength of our team will allow us to continue to deliver secure and sustainable returns for our members.

OMERS Infrastructure manages the infrastructure assets at OMERS. It's a powerhouse and has a very enviable portfolio of companies others can only dream of.

As you can see below and when you head over to its website, they own great assets all over the world:

Now, I'm not going to lie, I'm on record stating that OMERS, OTPP, AIMCo and the Kuwait Investment Authority went a little nuts four years ago when they won the takeover battle for London City Airport with an offer of about £2bn. 

Don't get me wrong, pandemic or no pandemic, it's a great asset but they bought it at nosebleed valuations.

Still, if they hold it long enough and realize on their value creation plan, they will make great returns on this investment. 

Why? Because as Victoria Moores of Aviation Week reports, London City Airport traffic is set to double in the 2030s:

Under a new long-term master plan, London City Airport (LCY) is expecting to handle 11 million passengers by the mid-to-late 2030s–more than double the 5.1 million that it handled in 2019.

“Our current planning permission allows us to accommodate up to 6.5 million passengers and 111,000 aircraft movements per year,” the airport said Dec. 4. “These annual limits are expected to be reached in the coming years.” 

The new strategy updates London City’s 2006 master plan, which originally predicted 5 million passengers by 2020, growing to 8 million by 2030. Back then, aircraft movements were expected to hit 171,000 by 2030.

“Having updated our forecasts as part of this master plan, we expect passenger demand to use London City Airport to increase to 11 million passengers annually, accommodated by around 151,000 air transport movements, including 5,000 business aircraft movements,” London City said. “This long-term forecast is likely to be realized by the mid-to-late 2030s and could see our share of expected passengers across the London airports increase from around 2.8% to around 4.3%, dependent on how capacity develops at these other airports over time.” 

Movements are now expected to rise more slowly than the 2006 plan predicted, reflecting trends toward larger average aircraft sizes and higher load factors. London City expects to hit the 6.5 million passenger limit before the movement cap.

London City believes it can support the forecast growth using its existing runway, without any changes to its operating hours or existing eight-hour night flight curfew. 

“We have not included proposals for a new runway, to extend the length of our existing runway or to significantly expand our existing site boundary,” the airport said. Instead, the airport is planning “modest, incremental changes” to the airfield, to pave the way for more new generation aircraft. 

The draft master plan was released in June 2019 and went through a 16-week consultation period. The final strategy was scheduled to be released in March 2020, however it was delayed to December 2020 because of the COVID-19 pandemic.

Under the original draft of the 2020 plan, London City was expecting to hit 11 million passengers and up to 151,000 movements by 2035. In light of COVID-19, the airport is now expecting to hit these figures in the mid-to-late 2030s.

“In the short term, it is clear that our focus has to be on recovering from the devastating impacts of COVID-19, supporting our communities and welcoming back passengers and airlines to London’s most central airport,” LCY CEO Robert Sinclair said. “As recent events have shown, it is not possible to be precise about future trends. However, we believe that the fundamentals underpinning future growth at London City Airport remain.”

During the height of the COVID-19 crisis, LCY temporarily closed. Several parts of the airport’s development program have already been completed, including eight new aircraft stands, a full-length parallel taxiway and new passenger facilities, but remaining plans have been put on hold.

“The new infrastructure will allow us to provide additional capacity when demand returns and provides a firm foundation for the future terminal extensions, now that the most complex infrastructure activities have been completed,” the airport said.

You can view London City Airport's master plan here.

Clearly, COVID-19 has dealt a devastating blow to airports around the world, especially in the UK, US and other countries where the pandemic has raged on.

It's the longer term effects that we still don't know. Will Zoom and other technologies mean a permanent reduction in business travel? If so, how does this impact airport traffic and revenue projections?

Nobody knows. Just like nobody knows how offices will be impacted longer term in a post-pandemic world.

Brookfield's CEO Bruce Flatt thinks the effects will be minimal, tech mogul turned philanthropist Bill Gates thinks there will be a permanent reduction in office demand.

Speaking of Bill Gates, he was on CNN Sunday stating lockdowns should carry on into 2022.

I sent that comment to a friend who didn't mince his words about Gates and other tech moguls making public proclamations on health policy:

Anyone who thinks in a purely Cartesian manner, like most people in tech, especially multi billionaires, are really completely useless in a pandemic. 
When I hear people say "it's about the science", I cringe, especially when it comes from politicians who have never seen the inside of a lab or been in an engineering environment. 
In addition to the science, this is about jobs and lives being destroyed. It's about economics, mental health, and corruption. It's about politics, about the Left using the pandemic to peddle their ideology which has never worked (and never will) and about the uber wealthy protecting and sometimes potentially increasing their wealth. 
So Bill should probably go back to coding in C++ and stop trying to pretend that he knows anything about pandemics because he doesn't. Cutting a big cheque to vaccinate children in Africa, although honourable, does not make you an expert in anything. A lockdown lasting until 2022 will render a large proportion of the population destitute so they may not die from the virus but from hunger ... great options BIll.

My friend added:

The politicians have a much larger obligation to the population than just deferring to public health. Public Health is important and can take priority over things, but only in the short term. They have no choice but to look at the larger picture. We need real leaders now. People who can advance multiple fronts in parallel, who can cut through the politics, and who don’t talk in platitudes.

Now, my friend may have been a tad harsh on Gates but he's right, there's more to running a country than public health and we cannot realistically enforce lockdowns for another year, that's just insane.

Gates should probably reflect a lot more before making statements on public health that might make rational sense to him but make no sense to the working man or woman out there struggling to survive in this pandemic.

Some things Gates has said about how the pandemic will dramatically change the world are spot on, but others are guesses.

Do I think business travel will be reduced in the years ahead? Yes, absolutely, companies worried about the bottom line will scrutinize business travel a lot more carefully and encourage their workers to do as much as possible using Zoom, Teams or WebEx. 

And this will go on even after the world returns to normal, whatever that means in a post-COVID world.

Offices will still be there but working from home will not go away, it will be encouraged and some companies (large tech companies) will adopt it permanently.

What we need now more than ever is a multi-prong approach to dealing with the pandemic and future pandemics.

We need cheaper, faster tests (including COVID sniffing dogs), we need to get people educated and vaccinated, we need to respect health protocols for as long as it takes to flatten this bloody curve, and we need to educate people about the benefits of vitamin D and other things they can do to reduce their risk of getting COVID in the first place.

I heard about an anecdotal story which came from a credible source of a New York City teacher whose entire family got COVID except her. Dumbfounded, doctors checked her blood type (it wasn't O) and asked her how did six members of her household get it and she was spared. Turns out, she has been taking 15,000 IUs of vitamin D once a week for years and has adequate D in her system.

I have long touted the benefits of vitamin D and think every adult should be taking 1.000 IUs a day, and up to three and five times that amount in winter months. 

It won't stop COVID in its tracks and doesn't guarantee anything but it can make the prognosis a lot better if you get it. Only a well-tested vaccine can give you more peace of mind and even that doesn't guarantee anything.

Alright, back to OMERS Infrastructure. My favorite asset in that portfolio? That would be Bruce Power:

Bruce Power is a Canadian-owned partnership of TC Energy, Ontario Municipal Employees Retirement Systems (OMERS), the Power Workers’ Union and The Society of United Professionals. A majority of our employees are also owners of the business. Established in 2001, Bruce Power is Canada’s only private sector nuclear generator, annually producing 30 per cent of Ontario’s power at 30 per cent less than the average cost to generate residential power.

Ontario’s Long-Term Energy Plan is counting on Bruce Power to provide a reliable and carbon-free source of affordable energy through 2064. To do so, Bruce Power has signed a long-term agreement with the province to refurbish six of its eight units, investing $13 billion private dollars into these publicly owned assets. Bruce Power’s Life-Extension Program will create and sustain 22,000 jobs annually while injecting $4 billion into Ontario’s economy each year.

Bruce Power employs more than 4,000 people and, over the past 15 years, has been one of the largest investors in Ontario’s electricity infrastructure, providing billions in private dollars to the Bruce Power site — which continues to be owned by the province. The site is leased under a long term arrangement where all of the assets remain publicly owned while Bruce Power funds all infrastructure upgrades, makes annual rent payments, and pays for the cost of waste management and the eventual decommissioning of the facilities.

The site is located on the eastern shore of Lake Huron near Tiverton, Ontario, within the traditional lands and treaty territory of the people of the Saugeen Ojibway Nation (SON), which includes the Chippewas of Nawash and Saugeen First Nation. Bruce Power is dedicated to honouring Indigenous history and culture, and is committed to moving forward in the spirit of reconciliation and respect with the Saugeen Ojibway Nation (SON), Georgian Bay Métis Nation of Ontario (MNO) and the Historic Saugeen Métis, and to leading by example in this community and industry.

I've long argued that more Canadian pensions need to explore the nuclear power option over the long run, and not just invest in wind and solar farms.

OMERS is very lucky to have this company in its infrastructure portfolio. It's extremely well run and its CEO, Mike Rencheck, recently won CEO of the Year at the 2020 Ontario Business Achievement Awards.

OMERS Infrastructure has other great portfolio companies like LifeLabs which Michael Ryder mentioned above, but none are as big and as important as Bruce Power.

Alright, let me wrap it up there. 

Below, learn about why nuclear is the way forward if we are to tackle climate change and why Bruce Power is a leader in the field.

Second, Bruce Power provides Ontario with 30 per cent of the province's electricity at 30 per cent less than the average cost to generate residential power.

Also, learn about how Bruce Power is playing a major role in making sure hospitals are safe, not only in Canada but around the world.

Fourth, learn about how Bruce Power's Life Extension Program is one of Canada's largest infrastructure projects, and will provide clean, reliable, low-cost electricity to 2064 and beyond.

Lastly, OMERS President and CEO Blake Hutcheson joined Antoinette R. Tummillo for an in-depth conversation, hosted by the Empire Club of Canada, about his first 100 days as CEO, his commitment to safeguarding our members’ financial future and about “leaving the campsite better than you found it.” 

Great discussion, take the time to watch it.