American Gas - May 2014 - (Page 29)

beaTIng The s&P 500 the success oF the Gas industry in meetinG its challenGes is evidenced in the perFormance oF GasFx-an alpha even BeFore it was Born. incentive mechanisms aside, utilities must work diligently to gain regulatory and legislative backing for acceleration projects. Case in point: Chicago-based Integrys Energy Group. Flowing Forward With diversified holdings including six regulated natural gas and electric utilities in four Midwestern states, Integrys has incrementally replaced old pipe since the mid-'80s. In 2013, through its Peoples Gas subsidiary, the mid-cap (roughly $4.5 billion) company commenced an accelerated modernization program of approximately 1,700 miles of aging pipeline across Illinois. The 10-year project-estimated to cost between $2.2 billion and $2.6 billion-got off to a bumpy start, admits Steven Eschbach, vice president of investor relations for Integrys. "After the original ratepayer surcharge for funding the program was struck down in court, we were able to get legislation enacted that allowed us to immediately start recouping our funds through a modest billing adjustment," he explains. The moral of the story? "What helped Integrys move forward was our proactive approach to rolling up our sleeves and reaching out to all stakeholders, from state legislators and the Mayor of Chicago's office to the consumers and unions," says Eschbach. "I would say that a collaborative mind-set and relationship-building are key components of the investment story." Securing the Pipeline LNG exports are also part of the investment premise of natural gas, says Aylesworth. Here again, building infrastructure is key, and here again, time is of the essence. Currently the price differential between U.S. gas and gas in Europe and especially Asia is high enough to support large profit margins even after the cost to process, liquefy, and ship the commodity, Aylesworth says. But other regions are considering new efforts in exploration and production, and "about 60 LNG export facilities are being built around the world, including in Africa, Australia, and the Middle East," he adds, raising the specter of squeezed profit margins. That said, the success of the gas industry in meeting its challenges thus far is evidenced in the performance of GASFX, which was an alpha even before it was born. "When the fund's creators back-tested its methodology to around 1972, they found it gave an average return of between 11 and 12 percent, beating the S&P 500 over the same time period," Aylesworth says. "Today, 25 years later, those metrics are almost identical. GASFX is synonymous with stability." As an index fund, GASFX's lower management fees, expense ratios, and turnover mean lower costs and expense for investors, who also benefit from the enhanced diversity of its member companies. "While distribution remains the default product as from day one, this is not your father's fund," continues Aylesworth. "What helps make GASFX an ideal asset diversifier for investors looking to lower their risk in the overall market is the diversification of the portfolio itself." Case in point: investment giant Berkshire Hathaway. "In the fund, through its controlling interest in Iowa City-based LDC MidAmerican Energy Holdings Co., Berkshire illustrates how non-traditional players are broadening investor exposure to the natural gas industry," Aylesworth says. Led by legendary investor Warren Buffett, Berkshire itself is making everbigger bets on natural gas. In December 2013, it acquired a company that makes advanced polymers for coating the inside of pipelines. It also owns Burlington Northern Railroad, which is considering converting its diesel engines to natural gas. "The railroad spent $4 billion on diesel fuel last year. Converting to natural gas would reduce this cost by 50 to 60 percent," Aylesworth says. "What this points to is the natural gas story evolving into the energy-and economic-story of America." In reaching 25 years-mature, if not ancient in index fund years-GASFX has come far in fulfilling its original goal of attracting investors to the world of natural gas. From an investment perspective, there is much utilities can do to continue attracting and retaining that interest, Aylesworth says. "Strong corporate governance and transparency are key, and especially for companies whose activities touch on environmental issues, a public relations mind-set of being in front of the story, not behind it. A good reputation is essential, for which safety and best practices are top priorities. Keeping and strengthening public trust is foundational to the future success of energy utility sector." u The GASFX performance data quoted represents past performance and the current performance may be lower or higher than the performance data quoted. The investment return and principal will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. The performance data does not reflect the deduction of taxes that a shareholder would pay on fund distributions or redemption fees. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. This and other information about the fund can be found in the GASFX fund prospectus. may 2014 AmericAn GAs 29

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American Gas - May 2014