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

[2]

Advantages and Pitfalls of Infrastructure Investment

Dennis EagarPortfolio ManagerAugust 2011

[3]The Last Decade

• Tech Wreck

• 9/11

• SARS

• Iraq 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

• Iraq war

• GFC

• Recession

• Record oil prices

• Euro Region Sovereign Debt Crisis

• Emerging market inflation

• Natural disasters

• US debt rating cut

Global Equities*

Return2.3% p.a.

* MSCI A$ Hedged

[5]The Last Decade

Global Equities Return*

2.3% p.a.

Global Listed

Infrastructure

Return*

9.9% p.a.1

1. Magellan Infrastructure Beta Fund Index

* MSCI A$ Hedged

* A$ Hedged

[6]The Next Decade

Global EquitiesReturn??????

[7]The Next Decade

Global EquitiesReturn??????

Global Listed

Infrastructure

Return1

CPI + 5%

1. Magellan expectation

[8]Agenda

• Australian Infrastructure ≠

Rest of the World Infrastructure

• Infrastructure Sector Investment 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 WorldGearing levels of Australian utilities are generally higher than their global comparables.

Source: Company accounts, Magellan research

Gearing of Utilities - Net Debt / EBITDA

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Enve

stra

DUET APASP A

usnet

Spar

kIT

C Hold

ings

PG&ENat

ional

GridW

esta

r

Snam R

ete G

as

Wisc

onsin

Ener

gyTe

rna

Con Ed.

NSTAR

Alliant E

nergy

Atmos E

nerg

y

WGL

Holdin

gs

[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 ExampleA 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.Infrastructure: 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 Infrastructure & Utilities Universe

Infrastructure24%

Utilities76%

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 WorkRegulators 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, ITC, NSTAR, PG&E, Southwest Gas, Westar Energy, WGL and Wisconsin Energy

ROE from 2004 to 2010 for the US based Regulated Utilities in MIF'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 systemSource: 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 StableWashington 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 ReturnsMature 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 CPIThe most attractive toll roads have the ability to increase tolls by at least the rate of inflation.

Asset Location Basis of Toll Increases

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 TransportThe 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 SydneyDistance 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 ElasticityTolls 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 In 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

. Dai

ly T

raffi

c

Hume Highway Canterbury Rd M5*

[29]M5 Toll Road – Daily Traffic PatternThe 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, 11December 2006

Tuesday, 12December 2006

Wednesday, 13December 2006

Thursday, 14December 2006

Friday, 15December 2006

Saturday, 16December 2006

Sunday, 17December 2006

Cars Trucks

12%Source: Interlink 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

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

Monday, 1December 2008

Tuesday, 2December 2008

Wednesday, 3December 2008

Thursday, 4December 2008

Friday, 5December 2008

Saturday, 6December 2008

Sunday, 7December 2008

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

15%Source: 407 International Inc

[32]M6Toll Road – Daily Traffic PatternThe 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, 5November 2007

Tuesday, 6November 2007

Wednesday, 7November 2007

Thursday, 8November 2007

Friday, 9November 2007

Saturday, 10November 2007

Sunday, 11November 2007

11%Source: Macquarie Infrastructure Group

[33]Toll Road Revenue GrowthThe Australian toll roads have enjoyed continued revenue growth over the past 6 years.

Source: Transurban Group

Australian Toll Roads - Revenue Index 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 GrowthInternational roads have enjoyed continued revenue growth over the past 6 years.

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

Toll Roads - Revenue Index 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 ATLANTIA BRISA APRR SANEF

[35]Toll Road Example – 407ETROver 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 International

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 - AtlantiaAtlantia has historically enjoyed stable traffic growth and high EBITDA margins even during the worst of the recent recession.

* Atlantia operates 70% of the Italian 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 GrowthOver the long-term, passenger traffic has demonstrated resilience to economic conditions & has grown at a significant multiple to GDP.

Source: IATA, 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 ShocksThe global financial crisis had a material impact on air travel.

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

Eyjafjallajokull Impact

(Iceland Volcano)

[40]Own the Airport Not the AirlineDespite passengers numbers declining, the financial performance of airports has been robust under difficult economic conditions.

Airport - Revenue and EBITDA Index (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 Index EBITDA Index

Source: Auckland International 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

Infrastructure returns uses Magellan Infrastructure Beta Fund Index, Global Equities is MSCI Developed Gross Total Return Index; Global Property is UBS Global Property Investors Index

Asset Class Total Return (% pa) Standard Deviation

3 Yrs 10 Yrs 3 Yrs 10 Yrs

Infrastructure 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%

Infrastructure 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]

This presentation (‘Presentation’) has been produced by Magellan Asset Management Limited (‘Magellan’) ABN 31 120 593 946, AFS Licence No 304 301 and has been prepared for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, Information Memorandum or other offer document (collectively ‘Offer Document’) relating to a Magellan financial product or service.

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