The FTSE Infrastructure Index Series

The FTSE Infrastructure Index Series Defining infrastructure s infrastructure definition Features In terms of listed equities, defines core infrastructure as companies which own, operate, manage or maintain physical structures or networks used to process or move goods, services, information, people, energy and/or life essentials. FTSE s Infrastructure Index Series include only publicly listed infrastructure, in order to guarantee transparency and investability. expands this definition to include companies which provide the conveyance of goods, services, people and/or life essentials, as well as the critical materials and support for construction and maintenance of networks and structures. They also provide voice and data communications services. This expanded definition is used to define companies whose businesses are infrastructure-related. s definition of infrastructure Transportation Telecommunications Energy Core infrastructure sectors Related Materials & Engineering Related Conveyance Services Related Communications Services Infrastructure-related sectors The FTSE Infrastructure Index Series is comprised of 6 broad industry sectors 3 Core Infrastructure Sectors and 3 Infrastructure-related Sectors. Each sector was selected to represent a group of listed companies whose business lines adhere to s definition of core infrastructure or infrastructure-related. ftserussell.com has created a definition of infrastructure around which it has developed a set of indexes for benchmarking the performance of publicly listed infrastructure companies. This definition was developed in consultation with numerous asset owners, asset managers and investment consultants. FTSE s Infrastructure Indexes have been constructed in a modular fashion and are highly customizable, allowing adaptation to investors individual needs and the evolution of infrastructure investment over time. defines three core infrastructure sectors and expands this definition to include three infrastructurerelated sectors for a total of six broad industry sectors making up the FTSE Infrastructure Index Series. Standard, uncapped FTSE Infrastructure Indexes include Global, Developed and Emerging Indexes for both core and infrastructure opportunities. also applies a capping methodology to the infrastructure opportunities index to avoid overweighting in any particular sector. In this version, the companies in the infrastructurerelated sectors are capped at 10%. 1

Core Infrastructure Sectors FTSE s Core Infrastructure Sectors comprise listed companies that own, operate, manage or maintain a particular network, structure or facility. These are nuts and bolts constituents whose revenue from operations is similar to a stable, annuitized cash flow over a relatively long period. Such companies are typically involved in the construction, maintenance and/or operation and usage of conduits, thoroughfares and networks. Revenue from these businesses often has an element of inflation-linking built in. Long-term projects may include features to accommodate future price increases of material and labor. Long-term concessions to operate or maintain a road, bridge, tunnel or light railway may accommodate toll and fare increases over time, as necessary. Port operation and management companies will have some portion of their revenue linked to usage fees of port facilities. These companies provide exposure to the infrastructure asset class, with lower volatility in their returns and cash flows. Transportation Core Infrastructure Companies that own, operate, manage or maintain roads, bridges, tunnels, (freight) railway lines, waterways, ports, airports, terminals and depots. This Sector includes local commuter rail lines as well as urban mass transit lines, regional light rail and monorail systems, where the majority of usage is for regular commutation to and from work. The FTSE Transportation Core Infrastructure Subsectors are Railroads; Roads, Bridges & Tunnels; Airports; Other Ports & Terminals; Commuter Rail & Light Rail; Other Commuter Transportation. Freight railway companies which own or manage the track and/or rightof- way are represented by the Railroads Subsector. Companies that are responsible for bridge and tunnel construction and toll plaza operations, roadway maintenance, capital infrastructure improvements, toll collection, etc. and which provide these services via long-term concessions, are included in the Roads, Bridges & Tunnels Subsector, the Airports Subsector and the Other Ports & Terminals Subsector. Within the Commuter Rail & Light Rail Subsector and the Other Commuter Transportation Subsector are companies with concessions to operate urban mass transit or local commuter rail and bus lines, light rail or monorail systems or, at least part of whose business includes the exclusive right to collect fares and/or undertake activities and commercial development of such commuter lines. Energy Core Infrastructure Companies that own, operate, manage or maintain oil, gas or water-supply pipelines or electricity transmission networks. Companies providing gas and water to regions, cities and neighborhoods via pipelines and conduits are included. Those with a presence in more than one energy industry are part of the Multiutilities Subsector. Core energy companies include utilities and energy generators as long as they can be shown to operate or own an economically significant portion of the distribution grid. Pure electricity generators (e.g. owners or operators of single, or groups of, power plants) are not included, unless it can be shown that they also operate or own an economically significant portion of the local grid to which they contribute their power. A key aspect of FTSE s definition of energy/utilities is the focus on regulated utilities. Utilities are included if it can be identified that they are regulated by local, state or regional governments or agencies. Typically, the regulating body allows the utility to earn a minimum rate of return. To that end, the utility is able to pass along some portion of its conventional fuel costs (i.e. fossil fuels, nuclear or hydro) to consumers in the form of higher rates, thereby mitigating the commodity price risk and the volatility of operating cash flows. This is easier to do with utilities in the U.S. than it is with utilities in other countries. Outside the U.S., regulation may or may not specify a minimum rate of return and it is more difficult to determine if regulation allows commodity price risk to be passed along. The result will be that some large, integrated utilities are not included in the infrastructure index. This definition of energy/utilities mitigates the impact from this sector on the overall index characteristics. These are the criteria for conventional electricity companies. For the present, companies generating power via wind, solar, hydrogen, ethanol or other alternative energy sources, or which do not have any rights of control over portions of the transmission grid, are excluded. The FTSE Energy Core Infrastructure Subsectors are Gas Distribution; Pipelines; Water; Multiutilities; Conventional Electricity. Telecommunications Core Infrastructure Companies that own, operate, manage or maintain fixed line telephony and data networks or, that own, manage, operate or lease transmission lines or towers to others. Also included are companies that own, operate, manage or maintain wireless transmission towers (or, who lease them to others) and companies that own, operate, manage or maintain transmission satellites (or, who lease them to others). Companies providing voice and data communications are included only if they have control over economically significant portions of the distribution/transmission network. The FTSE Telecommunications Core Infrastructure Subsectors are Fixed Line Networks; Mobile Networks. 2

Infrastructure-related Sectors FTSE s Infrastructure-related Sectors comprise listed companies that are considered to be part of a country s infrastructure because they utilize infrastructure facilities but do not own, operate, manage or maintain them. These companies are involved in transportation along the established infrastructure network, are businesses that support the construction of infrastructure facilities or are those that provide voice and data services to end-users. These companies provide broad, diversified exposure to the infrastructure asset class, with potentially higher returns, which are of particular interest to retail investors. Infrastructure-related Conveyance Services Companies that operate passenger rail services, passenger or freight airlines, bus services, ferries, passenger or bulk container shipping, trucking or delivery services. defines conveyance services as companies that move goods and people from one place to another. A conduit or thoroughfare is necessary but not sufficient for a country s social and economic development. An unused road generates no income on its own. Once the conveyance service (trucking, airlines, container shipping, etc.) is included, commerce can take place. These businesses represent everyday infrastructure that the average person would equate with economic development. It should be noted that the passenger conveyances included in this sector are not the same as the commuter transportation included in the Transportation Core Infrastructure Sector. The difference is subtle, as the same physical rolling stock that transports working people (i.e. commuters) to and from their jobs also carry tourists around a city and residents to leisure activities on weekends. However, a system s typical pattern of usage will be considered when making the determination between commuter and general passenger activity. The FTSE Infrastructure-Related Conveyance Services Subsectors are Delivery Services; Marine Transportation; Trucking; Airlines; Passenger Conveyances. Infrastructure-related Materials & Engineering Companies that provide support services and materials to builders of infrastructure facilities (e.g. ports, roads, bridges, tunnels, etc.). These services and materials include surveying and engineering, cement, concrete asphalt, iron, steel and aluminum. Materials and engineering are necessary inputs into the construction of infrastructure facilities and those facilities cannot be created without them. Projects can have a long construction timeframe and an even longer maintenance timeframe. Companies providing materials and services to these projects can reasonably be expected to receive long term revenue. While it is not always possible to determine that a company providing the materials listed above is actually providing them for an infrastructure project, FTSE makes the presumption that such companies are engaged in these projects unless evidence is found to the contrary. It is less detrimental to include all such companies, on the assumption that at least some of them must be providing materials for infrastructure projects, than it is to exclude all of them until direct evidence can be found from the financial statements that the materials are, in fact, being used on infrastructure projects. The FTSE Infrastructure-Related Materials & Engineering Subsectors are Cement, Concrete & Asphalt; Surveying, Engineering & Logistics; Iron & Steel; Aluminum. Infrastructure-related Communications Services Companies that provide general voice and data services to consumers. The rationale used for the other infrastructurerelated sectors applies to Telecommunications as well. Some companies own or operate the physical network. Others lease capacity on the network to provide services to consumers. The large national, regional and global telecoms companies, who may not necessarily control the network but who utilize it, would be included in this Sector. Not all information that is transmitted contributes to the orderly working and advancement of civil society. However, there is clearly a societal and economic impact from the wide availability of mobile communication and internet services to the masses. For an individual company, one cannot disaggregate the value of casual phone calls from those of more societal import. The sheer availability of all forms of electronic communication must be taken as a whole. We recognize that impact by including this sector and subsector within the index series. The FTSE Infrastructure-Related Communications Services Subsector is FTSE Infrastructure-Related Communications Services. 3

Index series design FTSE calculates infrastructure indexes across global, developed and emerging markets. The FTSE Global Core Infrastructure Index Series is comprised of companies from the core sectors which generate a minimum of 65% of their revenue from infrastructure. The FTSE Global Infrastructure Opportunities Indexes offer a broader exposure to infrastructure by combining companies from core and 20% of their revenue from infrastructure. Finally, the FTSE Global Infrastructure Indexes add a 10% cap to constituents from the infrastructure-related sectors. This helps to mitigate the risk of being overweight in a particular sector. Any of FTSE s Infrastructure Indexes can be customized in terms of region, revenue threshold or capping factor to meet specific requirements. FTSE Global Infrastructure Index FTSE Developed Infrastructure Index FTSE Emerging Infrastructure Index 10% adjustment factor to infrastructurerelated sectors Summary & conclusion Government investment in infrastructure likely to continue to support growing populations and remain globally competitive. Listed infrastructure provides a reasonable proxy exposure for unlisted infrastructure and benefits from transparent, market-based pricing. Definitions of infrastructure vary widely. FTSE offers a modular, customizable approach to accommodate broad and narrow definitions. FTSE Global Infrastructure Opportunities Index FTSE Developed Infrastructure Opportunities Index FTSE Emerging Infrastructure Opportunities Index FTSE Global Core Infrastructure Index FTSE Developed Core Infrastructure Index FTSE Emerging Core Infrastructure Index Infrastructure-related Conveyance Services Infrastructure-related Communications Services Infrastructure-related Materials & Engineering Telecommunications Core Infrastructure Energy Core Infrastructure Transportation Core Infrastructure i Source: The Wall Street Journal Digital Network, Market Watch, September 26th, 2011 (http:// www.marketwatch.com/story/infrastructure-spending-will-create-jobs-geithner-2011-09-26) ii Source: Morgan Stanley Brazil Infrastructure, Paving the Way, May 5th, 2010 and APE/ BNDES (http://www.morganstanley.com/views/perspectives/pavingtheway.pdf) 4

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