1 BBI has a globally diversified investment & asset portfolio - PDF document

ACCC Regulatory Conference 2006 The international experience with regulation Regulation and incentives for investment: an investor perspective Presentation by Steven Boulton Chief Executive Babcock & Brown Infrastructure Friday 28 July 2006 Marriott Hotel Surfers Paradise Queensland The investment market is competitive Infrastructure may be a monopoly, but the investment market is not To attract investment the regulated risk/return must be competitive with rates set in an international capital market BBI has a global mandate for investment – the regulatory regime in a jurisdiction can significantly influence the decision on where to invest - alternative jurisdictions are competing for capital 2 AGENDA 1. Introduction to BBI 2. Regulatory Environments – Summary by Asset 3. The Need for Investment 4. What Investment Environment do Investors Seek 5. Case Study: DBCT – Queensland Competition Authority 6. Case Study: Powerco – NZ Commerce Commission 7. Conclusion 3 1

BBI – has a globally diversified investment & asset portfolio • Geographically diverse with both local and offshore investments: – Australia (all states) – New Zealand (North Island) – Europe (UK, Channel Islands, Portugal, Belgium, Spain and Germany) – United States (New York and Mid North West*) • Multiple regulatory environments – Asset portfolio covers a multitude of different regulatory approaches – Staggered term and reset periods in different countries • Global deal origination for acquisition – Network of Babcock & Brown professionals in 21 offices worldwide – Complementary opportunities sourced via operating subsidiary relationships • Asset classes: – Energy distribution and transmission – Transport – Power generation * NWEC acquisition is subject to NWEC shareholder and regulatory approvals 4 The global diversification of BBI BBW PD Ports IEG NWEC* CSC BBW DBCT BBW Redbank WNR Ecogen Powerco * NWEC acquisition is subject to shareholder and regulatory approvals 5 AGENDA 1. Introduction to BBI 2. Regulatory Environments – Summary by Asset 3. The Need for Investment 4. What Investment Environment do Investors Seek 5. Case study: DBCT – Queensland Competition Authority 6. Case Study: Powerco – NZ Commerce Commission 7. Conclusion 6 2

Regulatory Environments – Summary By Asset ECONOMIC ASSET MARKET POSITION REGULATOR(S) REGULATORY REGIME - SUMMARY REGULATION • Monopoly • Yes for electricity and • Montana PSC • Revenue set based on a version of the building position in • SthDakota PUC Montana, South Dakota gas blocks approach with focus on original cost for a • Various State • Nebraska PSC and Nebraska. historic test period and cost of equity (rather than • 75% regulated operating regulators WACC), assumed gearing with actual cost of debt income and 25% used. NWEC • Rates calculated based on consumption estimates unregulated and total revenue number • No specific reset period • Company can initiate rate review. • 2 nd largest electricity and • Yes for electricity and • New Zealand • Electricity - threshold (CPI-X) scheme for price gas distribution entity in NZ gas in New Zealand Commerce and quality. Reset is 2009 potential for building • Only reticulated natural gas • Franchise for key C&I Commission blocks approach to be introduced. Powerco • Gas – under provisional pricing control - Building supplier in Tasmania customers in Tas. No economic regulation blocks approach focused on WACC. ODV used to at present. assess asset values. Likely to be regular resets. • UK ‘last mile’ gas • Nil in Channel • Ofgem in UK • Legacy Networks (those contracted before Jan distribution – 2nd largest Islands, Isle of Man 2004) regulated under a ‘reasonable profits’ test. supplier. and Portugal Will migrate to RPC over time. • Isle of Man & Channel • Ofgem in UK with • Relative Price Control (RPC) Networks (those Islands – integrated gas capacity charges contracted after 31 Dec 2003). Aggregate of IGT supplier, competing with (fixed revenue per and upstream distributor charges must not exceed IEG other fuel sources connection) charge that would have applied had the connection • Portugal – major LPG been made directly to upstream distributor. distributor • RPC does not directly constrain profits or return on investment. • No reviews of RPC model are planned before 2014. • Key asset for electricity • Yes • FERC • Regulator (FERC) approval for transmission transmission between capacity rate and long term contract out to 2032. CSC Long Island and New England 7 Regulatory Environments – Summary By Asset ECONOMIC ASSET MARKET POSITION REGULATOR(S) REGULATORY REGIME - SUMMARY REGULATION • Major landlord port • Nil. • N/A • N/A • Owns 2nd largest port in UK • Has Statutory Harbour by volume (55m tonnes of Authority status cargo ) (Teesport) allowing it to set • 10th largest port in PD Ports conservancy tariffs. UK/Europe • Sets lease rates for • Deepest sea port on owned property. Eastern seaboard of UK • Rail • Yes • WA Economic • Access Code covers freight rail network access provider in • Negotiate/Arbitrate model with charges set Western Australia Regulatory Authority (ERA) within a regulatory floor and ceiling for a specified route section • Regulatory ceiling acts to cap revenues based on capital costs (with asset values based on a theoretical Modern Equivalent Asset (MEA) value and a WACC applied), operating costs WestNet and access related overhead costs. Ceiling set Rail for three years updated annually for WACC and CPI –X. • Floor is to stop cross-subsidisation and is a minimum charge based on incremental cost. • Basically building blocks approach with MEA rather than DORC and negotiations within floor and ceiling • One of the world’s largest • Yes • QCA • Revenue cap – building blocks approach. • Operating costs passed through to customers coal export terminals. • Clear ex-ante process for regulatory approval of DBCT expansion costs. • Regulatory term through to December 2009. 8 AGENDA 1. Introduction to BBI 2. Regulatory Environments – Summary by Asset 3. The Need for Investment 4. What Investment Environment do Investors Seek 5. Case study: DBCT – Queensland Competition Authority 6. Case Study: Powerco – NZ Commerce Commission 7. Conclusion 9 3

Is there a need for investment in Infrastructure? Infrastructure investment as a proportion of GDP has steadily declined since 1985 10 Sourced from CRA Report “The Future of Infrastructure” for UBS, 2006 Is there a need for investment? – Electricity • Growth in electricity demand: – Economic prosperity increases demand - : - 42% increase in peak demand in South East Queensland in last five years - - 7% increase in Auckland this year - Air-conditioning in US is 5% of total load but 20% of peak demand – Digital economy – - has increased demand from 25 Watts per sq metre in 1980s to 90 Watts today - demands higher quality of supply • Capacity utilization is at critical levels – outages speak for themselves • Downtime now costs more - greater proportion of economy dependent on electricity • Ageing assets - substantial network asset investments made in 1960/70’s – and its been diminishing since 11 The asset replacement cycle – indicative First wave of investment 25-40 years ago – assets now require replacing……...replacement assets need to respond to new quality and security demands of customers Initial investment Replacement investment We are here 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 1940 12 4