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Presenter: Dennis Eagar, Portfolio Manager, Magellan Asset Management Topic: Advantages and pitfalls of infrastructure investment Date: 16 August 2011 Location: Sydney Investor Hour

[2]

Advantages and Pitfalls of Infrastructure Investment

Dennis Eagar Portfolio Manager August 2011

[3]

The Last Decade

• Tech Wreck
• 9/ 11
• SARS
• I raq war
• Credit market melt down
• Recession
• Record oil prices
• Euro Region Sovereign

Debt Crisis

• Emerging market

inflation

• Natural disasters
• US debt rating cut

[4]

The Last Decade

• Tech Wreck
• 9/ 11
• SARS
• I raq war
• GFC
• Recession
• Record oil prices
• Euro Region Sovereign Debt Crisis
• Emerging market inflation
• Natural disasters
• US debt rating cut

Global Equities* Return 2.3% p.a.

* MSCI A$ Hedged

[5]

The Last Decade

Global Equities Return* 2.3% p.a. Global Listed I nfrastructure Return* 9.9% p.a.1

• 1. Magellan I nfrastructure Beta Fund I ndex

* MSCI A$ Hedged * A$ Hedged

[6]

The Next Decade

Global Equities Return ??????

[7]

The Next Decade

Global Equities Return ?????? Global Listed I nfrastructure Return1 CPI + 5%

• 1. Magellan expectation

[8]

Agenda

• Australian I nfrastructure ≠

Rest of the World I nfrastructure

• I nfrastructure Sector I nvestment Fundamentals

[9]

Recent Australian Experience

• Australian infrastructure stocks have been more heavily geared.
• The externally managed investment vehicle model, i.e. management by an

external party such as Babcock & Brown or Macquarie Bank, is almost unheard of outside of Australia.

• Listed greenfield toll road assets are only found in Australia.

The Australian experience was quite different from the rest of the world.

[10]

Debt Levels in Australia vs Rest of the World

Gearing levels of Australian utilities are generally higher than their global comparables.

Source: Company accounts, Magellan research

Gearing of Utilities - Net Debt / EBI TDA

• 1.0

2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Envestra DUET APA SP Ausnet Spark I TC Holdings PG&E National Grid Westar Snam Rete Gas Wisconsin Energy Terna Con Ed. NSTAR Alliant Energy Atmos Energy WGL Holdings

[11]

Infrastructure Sector Investment Fundamentals

[12]

What is Infrastructure?

• Magellan believes true infrastructure assets have two key characteristics:

– Essential for the efficient

functioning of a community.

and – Do not face significant:

Sovereign risk; Competition; or Commodity price risk. Demand and revenue are relatively stable Minimal pressure on cash flows

[13]

Power Industry Example

A disciplined approach to defining what constitutes “infrastructure” is essential to achieving predictable returns. Generation Transmission Distribution Retailing Unregulated 100% Regulated 100% Regulated Unregulated

[14]

Case Study: Loy Yang A Power Station

• Largest power station in Victoria – 24% of installed capacity
• Lowest operating cost generator in the National Electricity Market
• Privatised in 1996. Horizon Energy owned 25%
• Sold for $0.07 in the $1 in 2003

Unregulated power stations do not provide reliable returns.

[15]

Size of the Listed Infrastructure Market

Infrastructure falls into two main categories:

1.Utilities: energy transmission &

distribution, water treatment and distribution; and

2.I nfrastructure: airports, toll

roads, rail, ports and communications infrastructure.

The global listed infrastructure universe is dominated by utilities (energy transmission & distribution and water). The total size is in excess of $600bn.

Listed I nfrastructure & Utilities Universe

Infrastructure 24% Utilities 76%

Source: Magellan Research.

[16]

Utilities – Nature of Returns

• Because water and power utilities are natural monopolies, the prices they charge are

regulated.

• Regulation is administered by a government body and is transparent and simple in

concept.

• Regulation allows utilities to earn moderate returns with low potential for loss. It puts

a “cap” and “collar” on those returns.

• Regulation means companies trade within a tight range of intrinsic value.

The regulation of utility earnings leads to stable financial results and, ultimately, stable investment returns.

[17]

How does Utility Regulation Work

Regulators allow utilities to generate a fair return on the capital used in their businesses.

Regulated Asset Base

x

Cost of Capital

=

Prices Charged Operating & Debt Costs Required Earnings

• =

Often with a modest margin

[18]

Why is Financial Performance so Stable?

Regulators allow utilities to generate a fair return on the capital used in their businesses.

Source: Magellan Research

US Electricity and Gas Utilities - Regulated ROEs 0.0% 3.0% 6.0% 9.0% 12.0% 15.0% Average Regulated ROE = 10.5%

[19]

Why is Financial Performance so Stable?

Allowed Returns on Equity have been materially higher than 10 year bond yields for the last 30 years.

Source: Morgan Stanley Research

Allowed ROE in US Rate Cases (Mar-80 to Sep-10)

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Mar-80 Mar-83 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10

Average Allowed ROE 10 Yr Bond Rate

[20]

Utilities - Financial Performance

The returns from regulated utilities have been stable through the recession.

Source: Company accounts, Magellan Research Utility group includes Alliant Energy , Atmos Energy , Consolidated Edison, I TC, NSTAR, PG&E, Southwest Gas, Westar Energy, WGL and Wisconsin Energy

ROE from 2004 to 2010 for the US based Regulated Utilities in MI F's Portfolio at 31 December 2010

0% 2% 4% 6% 8% 10% 12% 14% 2004 2005 2006 2007 2008 2009 2010

[21]

Utilities are Stable

Consolidated Edison has enjoyed 34 successive years of dividend increases.

Consolidated Edison owns the Manhattan gas and electricity distribution system Source: Bloomberg

Consolidated Edison - Dividend History

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 Dec-77 Dec-81 Dec-85 Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09

[22]

Utilities are Stable

NSTAR recently paid its 476th consecutive quarterly dividend.

NSTAR provides transmission and distribution services in Massachusetts Source: Bloomberg

NSTAR - Dividends per Share from 2000 to 2010

$0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 $1.60 $1.80 Dec-99 Jun-01 Dec-02 Jun-04 Dec-05 Jun-07 Dec-08 Jun-10

[23]

Utilities are Stable

Washington Gas has paid a dividend for 160 consecutive years and has increased that dividend for the last 35 consecutive years.

Source: Bloomberg; WGL

WGL Dividend History

$0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 $1.60 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

[24]

Toll Roads – Nature of Returns

Mature toll roads provide very predictable returns.

• Toll increases are regulated in the concession agreement

Prices are regulated not earnings.

• Toll roads exhibit very high free cash flow margins – often over 80%.
• As traffic on the alternative routes becomes more congested, the toll road becomes an

effective monopoly.

• Traffic forecasting for a greenfield toll road is highly problematic.

It is an art not a science.

[25]

Toll Road Prices are Generally Linked to CPI

The most attractive toll roads have the ability to increase tolls by at least the rate

• f inflation.

Asset Location Basis of Toll I ncreases

M5, Sydney Australia CPI Eastern Distributor Australia Greater of 4.1% or basket of 67% AWE & 33% CPI CityLink Australia Greater of 4.5% or CPI to 2015 then CPI APRR France 85% of CPI Atlantia Italy 70% of CPI Brisa Portugal 90% of CPI 407ETR Canada At Owners Discretion Western Harbour Tunnel Hong Kong CPI

Source: Magellan, underlying asset operators

[26]

Cars Dominate Large City Transport

The complexity of modern trips and the historic focus of public transport on the CBD makes car travel unavoidable for most people.

Source: Transport NSW

Weekday Trips in Sydney

Distance Travelled in 2008

12% 5% 2% 2% 79%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Car Train Bus Walk Only Other

[27]

Toll Roads Exhibit Low Price Elasticity

Tolls on Sydney’s Eastern Distributor have been increased 5 times since it opened with no measurable impact on traffic numbers.

Source: Transurban

Eastern Distributor Average Daily Traffic

20,000 25,000 30,000 35,000 40,000 45,000 50,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $3.00 $5.00 $4.50 $4.00 $3.50 $5.50 Tolls Up I n Real Terms: 30% + Traffic Up: 80% +

[28]

The Corridor Effect

The corridor effect can generate exceptional growth on some toll roads.

Corridor: 2.7% ; free -0.1% ; plaza + 7.7% *At the main toll plaza

• Source: RTA; Interlink Roads

M5 Traffic Corridor

• 25,000

50,000 75,000 100,000 125,000 150,000 175,000

1987 1989 1991 1993 1996 1999 2002 2005

• Ave. Daily Traffic

Hume Highway Canterbury Rd M5*

[29]

M5 Toll Road – Daily Traffic Pattern

The M5 exhibits the typical pattern of traffic growth through to Friday.

M5 Tollroad Daily Traffic

60,000 70,000 80,000 90,000 100,000 110,000 120,000 130,000 140,000 Monday, 11 December 2006 Tuesday, 12 December 2006 Wednesday, 13 December 2006 Thursday, 14 December 2006 Friday, 15 December 2006 Saturday, 16 December 2006 Sunday, 17 December 2006

Cars Trucks

12% Source: I nterlink Roads Pty Limited

[30]

ConnectEast – Daily Traffic Pattern

ConnectEast in Melbourne exhibits the same week day traffic pattern.

ConnectEast Daily Traffic Profile

• 50,000

100,000 150,000 200,000 250,000 Monday Tuesday Wednesday Thursday Friday Saturday Sunday Cars Trucks

13% Source: ConnectEast Group

[31]

The 407ETR Toronto Canada

407ETR Toronto Daily Traffic Pattern

50000 100000 150000 200000 250000 300000 350000 400000 450000

Monday, 1 December 2008 Tuesday, 2 December 2008 Wednesday, 3 December 2008 Thursday, 4 December 2008 Friday, 5 December 2008 Saturday, 6 December 2008 Sunday, 7 December 2008

The 407ETR in Toronto Canada also exhibits the same weekday pattern.

15% Source: 407 I nternational I nc

[32]

M6Toll Road – Daily Traffic Pattern

The M6toll, a bypass road of Birmingham in the UK, exhibits the same weekday pattern.

M6Toll Birmingham Daily Traffic Pattern

• 10,000

20,000 30,000 40,000 50,000 60,000

Monday, 5 November 2007 Tuesday, 6 November 2007 Wednesday, 7 November 2007 Thursday, 8 November 2007 Friday, 9 November 2007 Saturday, 10 November 2007 Sunday, 11 November 2007

11% Source: Macquarie I nfrastructure Group

[33]

Toll Road Revenue Growth

The Australian toll roads have enjoyed continued revenue growth over the past 6 years.

Source: Transurban Group

Australian Toll Roads - Revenue I ndex from 2004 to 2010

0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 2004 2005 2006 2007 2008 2009 2010

Hills Motorway (M2) CityLink Eastern Distributor M5 Sydney

[34]

Toll Road Revenue Growth

I nternational roads have enjoyed continued revenue growth over the past 6 years.

Source: Annual accounts for 407etr, Atlantia, APRR, Brisa and SANEF

Toll Roads - Revenue I ndex from 2004 to 2010

0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 2004 2005 2006 2007 2008 2009 2010 407ETR ATLANTI A BRI SA APRR SANEF

[35]

Toll Road Example – 407ETR

Over the last 10 years the 407ETR in Toronto Canada has increased tolls by an average of 10% pa while traffic has grown at an average of 5% pa.

Source: 407ETR I nternational

407ETR Financial Performance

C$0m C$100m C$200m C$300m C$400m C$500m C$600m C$700m 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Expenses Revenue 15% CAGR in EBITDA

[36]

Toll Road Example - Atlantia

Atlantia has historically enjoyed stable traffic growth and high EBI TDA margins even during the worst of the recent recession.

* Atlantia operates 70% of the I talian motorway system

Source: Atlantia

Atlantia Financial Performance

€0m €500m €1,000m €1,500m €2,000m €2,500m €3,000m €3,500m €4,000m 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Revenue Expenses 8% CAGR in EBITDA

[37]

Airport Fundamentals

• Airside operations are effectively regulated
• Spend per passenger on retail and car parking drives growth

– But underpinned by minimum rent guarantees

• Passenger growth driven by:

– Increased wealth – Falling real air fares – Low cost airlines – Deregulation of routes

An airport is like a regulated utility attached to a Westfield shopping centre with an expensive car park.

[38]

Airport Passenger Growth

Over the long-term, passenger traffic has demonstrated resilience to economic conditions & has grown at a significant multiple to GDP.

Source: I ATA, MAP Group

[39]

Airports - Average Passenger Growth

(includes Auckland, Brussels, Copenhagen, Frankfurt, Heathrow, Paris, Sydney and Zurich)

• 15%
• 10%
• 5%

0% 5% 10% 15% Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

But Airport Traffic is Impacted by Shocks

The global financial crisis had a material impact on air travel.

Source: Auckland I nternational Airport, MAP Group, Fraport, BAA, Aeroports de Paris, Flughafen Zuerich

Eyjafjallajokull I mpact

(I celand Volcano)

[40]

Own the Airport Not the Airline

Despite passengers numbers declining, the financial performance of airports has been robust under difficult economic conditions.

Airport - Revenue and EBI TDA I ndex (2003 to 2010)

(includes Auckland, Brussels, Copenhagen, Frankfurt, Heathrow, Paris, Sydney and Zurich)

1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80 2003 2004 2005 2006 2007 2008 2009 2010 Revenue I ndex EBI TDA I ndex

Source: Auckland I nternational Airport, MAP Group, Fraport, BAA, Aeroports de Paris, Flughafen Zuerich

[41]

Capital Markets Remained Open Thru the GFC

Company Location Amount Term Yrs Rate Timing

407ETR Canada C$0.55bn 3 4.50% January 2008 Consolidated Edison USA $1.2bn 10 & 30 5.85% May 2008 Atlantia Italy €1.0bn 15.5 2.90% Nov 2008 Fraport Germany €0.8bn 10 5.25% Sept 2009 Atlantia Italy €1.0bn 13 2.75% Dec 2009 Red Electrica Spain €0.5bn 6 3.50% October 2010 Terna Italy €1.25bn 10 4.75% March 2011 Terna Italy €0.35bn 20 2.35% July 2011

Source: Underlying companies

High quality infrastructure assets raised significant debt through the depths of the credit market crisis – and continue to do so at cheap prices.

[42]

Infrastructure / Equities / Property

I nfrastructure returns uses Magellan I nfrastructure Beta Fund I ndex, Global Equities is MSCI Developed Gross Total Return I ndex; Global Property is UBS Global Property I nvestors I ndex

Asset Class Total Return (% pa) Standard Deviation 3 Yrs 10 Yrs 3 Yrs 10 Yrs I nfrastructure 8.7% 9.9% 12.6% 10.7% Global Equities 0.6% 2.3% 19.7% 15.4% Global Property 3.4% 9.2% 29.7% 19.5% I nfrastructure offers very different and much more defensive characteristics than either equities or listed property.

Periods ending 30 June 2011

[43]

Conclusion

• Properly defined, infrastructure assets should provide:

– Robust earnings through the economic cycle; and – Strong linkage of earnings to inflation.

• Over the longer term, the asset class should return around CPI +

5% .

[44]

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