23 May 2013

Financing Gas Infrastructures: challenges and opportunities

Jean-Pascal AssemanHead of Project Finance Italy

1. Strong gas infrastructure needs….

2

Exploration and Development

66.7%

LNG9.0%

Transmission and Distribution

24.3%

€ 2.1tn

€ 0.8tn

Worldwide booming gas demand as main driver of massive investments

Worldwide, huge increase in gas demand (+50% from 3.4tcm in 2010 to 5 tcm in 2035), driven by:

A general rise in global primary energy demandworldwide by 35% (from 12,730 Mtoe in 2012 to 17,197Mtoe in 2035), with an always more relevant role inenergy market played by the emerging economy (inparticular China / India / Middle East);

Fossil fuel remaining the principal source of energyworldwide given i) a lower contribution of nuclearenergy in developed countries after Fukushima and ii)the boom of shale gas production as a result ofcompetitive price and abundant supply;

A change in the energy mix in favor of natural gasand renewables (particularly in Europe and Japan)given minor impact on environment;

Energy Mix Evolution

27% 25%

32%27%

22%24%

6%7%

13% 18%

0%

20%

40%

60%

80%

100%

2010 2035

Coal Oil Gas Nuclear Renewable

LNG Infrastructures Under ConstructionPlanned Gas Pipeline Infrastructure Capex Details

Up to 2035, IEA forecast global investment in natural gas market for $ 8,7tn or $ 360bn per year, with the majority of investments in non-OECD countries (fastest growth in demand)

Country N° of Projects Capacity (bcm/year)

Algeria 2 12.5

Angola 1 7.1

Australia 7 77.1

Indonesia 1 2.7

Papua New Guinea 1 9.0

Total 12 108.4

€ 5.8tn

Source: International Energy Agency, 2012

Source: International Energy Agency, 2012

Resource Area Importer Project Names - Details

Central Asia - Myanmar China Central Asia Gas Pipeline

Russia China Easter Siberia

Turkmenistan IndiaTAPI - requirement:

Afghanistan stabilisation

North Africa EuropeExisting Pipelines

Expansion - GALSI

Russia EuropeNord Stream - South

Stream

Caspian Region EuropeTANAP and [TAP or

Nabucco West ] - ITGI

3

European Gas Trend

Russia35.1%

Algeria13.5%Libya

2.7%Qatar8.1%

Nigeria3.3%

Norway27.0%

Other10.3%

European Gas Infrastructure to improve connections & supply diversity

European Natural Gas Key Figures Drivers for gas infrastructure in Europe are of a different nature:

Increase in import requirements, as a combination of i) higher demand (although growing at a slowpace) and ii) production progressive fall;

Bottle neck in European gas network in several region such as Baltic Republics – Finland and centralEurope Region, with poor infrastructures;

Necessity to connect the high potential LNG regassificators of Spain and UK to the European network; Connect the Southern and Northern countries bi-directionally; Distribute the gas coming from Libya, Algeria and Mediterranean LNG regassificators towards

Northern countries.

Gas Import by Country of OriginInvestments in European Infrastructures

569 585669

304250 215

0

100

200

300

400

500

600

700

2010 2020 2035Demand Supply

bcm

Source: International Energy Agency, 2012

Source: European Union, 2012

Priority Corridor Project of Common InterestInvestments

Need (€ bn)

North - South

Interconnection

in Western

Europe

- Connect Iberian Peninsula in order to exploit large LNG capacity of Spain and import gas

capacity to the rest of Europe

- Improve interconnections of Mediterranean area and connect Africa supply with Northern route

- Invest in LNG terminals

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North - South

Interconnection

in Eastern Europe

- Develop regional gas infrastructure

- Supply diversification through new pipelines (Northern and Southern Stream) and LNG (Croatia)

- Improve interconnections between regions and reverse flow

upgradings (Bulgaria-Romania-Hungary-Greece)

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Southern Gas

Corridor

- Construction of new gas pipelines connected to Caspian and Middle East (Nabucco West, TAP,

ITGI)

- Strength of LNG regassificators activities

22

Baltic Corridor

- Reduce isolation of Eastern Baltic Sea through new supply routes (LNG terminal construction) or

new interconnections (Poland-Lithuania, Finland-Estonia, Poland-Denmark)

- Create an interconnection between Norway and Denmark

3

4

2. … facing funding challenges…

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Long lasting constraints on the Bank Market

Scarcity of liquidity and banks’ continuing relative high cost of funds,especially in certain geographic areas, have affected number andvolume of transactions over the past years.

Certain geographic areas have been more hit than others, dependingalmost on sovereign risk’s evolution and related translation ontodomestic banks’ rating.

Deal flow in the Eurozone fell sharply as austerity and Basel IIIhit;

The centre of gravity of global project finance market shiftedeast with loan volumes in Asia Pacific accounting for 50% ofglobal PF in 2012.

Increased financing costs resulting from the above may be a concretehurdle for fully regulated assets where the tariff formula actually capsthe profitability / sustainability of the transaction.

Capital constraints associated with regulatory changes have beendriving banks’ asset appetite and balance-sheet management.

2011-2012 have been characterised by banks’ deleveraging exercise,now considered as globally completed.

In the medium term, Basel III implementation will continue to be anincreasingly important factor in Bank behaviour and cost of capital,and banks will be forced to respond when funding costs are affectedby macro-financial market volatility.

EMEA Loan Volume

0

500

1,000

1,500

2,000

2,500

0

400

800

1,200

1,600

2,000

2006 2007 2008 2009 2010 2011 2012 Q1 2013

Q1 Volume Q2 Volume Q3 VolumeQ4 Volume Number of Loans

Source: Dealogic Loan Analytics, 2013

50

100

150

200

250

300

350

400

450

500

550

600

BNP Paribas Deutsche Bank UnicreditBBVA ING CommerzbankRBS

Source. Bloomberg

5-yrs USD CDS for European Banks

in USD bn Number of Loans

bps

6

€11bn financing package subsequently reduced to €9bn following two pre-close bond issuances of €1bn each (June/July 2012)

€4bn bridge-to-bond facility underwritten by MLAs

€5bn Credit Facilities – part of the syndication process

One of the largest non acquisition deals closed in 2012 in EMEA in hugely challenging market conditions, in particular Southern Europe & Italy

Bond Award 2013 Euroweek - "Best debut corporate bond issuer"

New banking scenarios

Regionalisation / national focus (banks retreating from global asset business to concentrate on specific regions, sectors or home markets).

Increased lending selectivity with a priority for key clients.

Focus redefined:

Quality infrastructure credits with investment grade features fuelling strong bank appetite for relatively few assets;

Associated in 2012 to strong oversubscriptions and falling margins;

Ancillary business opportunities.

Shorter maturities, 3/5/7 year, not matching asset economic life.

From start:

Clear early distribution strategy;

Clear capital market take out story.

New lending guidelines have emerged

July 2012

€ 1bn4 years

July 2012

€ 1bn6.5 years

September 2012

€ 2.5bn5.5-10 years

November 2012

€ 1.5bn3-L7 years

Successful take-out of SNAM financing

Jumbo loan amount with bond take-out as key driver for underwriting

April 2013

€ 1.5bnL4-S8 years

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Diversification of liquidity sources

Development banks / ECAs, especially (but not only) in developing countries.

Institutional investors, expanding into long term infrastructure asset class, either directly in loan / private placement or indirectly behind assetmanagers.

Bond financing (+60% to USD 25bn in 2012): this is particularly true in certain geographic areas (e.g. United States), while Europe onlyaccounted for 10% of the bond issuance. Various structures available: Project bonds, Corporate bonds (mainly feasible for investment gradeassets).

Specific funding sources for selected infrastructures at European level driven by the investment gap (estimated at € 15bn in the period2013-2020) between the total planned European infrastructure investments in gas sector (€ 70bn) and the sources available on the market.

Multilaterals like EIB in various forms;

Promotion of projects belonging to TEN-E (Trans European Energy Network): potential of € 22.2bn in 2013, of which € 12.2bn for directfinancing and up to € 10bn for project bond;

Institution of Connecting European Facility (CEF) for the period 2014-2020 for the promotion of innovative financial instruments in order toattract new class of investors;

European Energy for Recovery Program (EERP) consisting in a one-off disbursement (€ 4bn) for energy infrastructure construction. In thegas sector, the program allocated totally € 1.4bn, divided in € 1.3bn for 17 cross-border interconnections and € 0.1bn for 14 reverse flowprojects.

Increasing involvement of other liquidity sources

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3. …but able to attract interest from financing institutions

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Why Gas Infrastructures do represent an opportunity for funders ?

STRONG FUNDAMENTALS

Increasing gas demand / import requirements

Improvement in security of supply

Diversification of supply sources

Improved flexibility / peaking capacity

More interconnections / reverse flows

Political willingness to favor gas price decrease for an improved competiveness of the country

Political stability

Stability of energetic policy at national level

APPEALINGENVIRONMENT

Gas infrastructure financing can offer limited exposure to volume and price risks through:

Ship or Pay agreements

Regulated revenues stream

Stable regulatory body with clear guidelines for the various regulatory periods

Proper implementation of all gas infrastructure pieces for cross-border projects thanks to European coordination

STRONG EQUITY SPONSORSHIP

Experienced sponsors, whether industrial or financial

Ability to understand the market and build up a successful strategy in the context of the applicable regulation or environment

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Case Study in the gas distribution sector in Italy: Enel Rete Gas

Enel Rete Gas is the second largest independent player in the Italian gasdistribution sector. In the context of a fragmented but consolidatingenvironment incentivised by the regulation in place, the companyacquired the Italian gas distribution assets from E.ON and GDF Suez.

The financing package includes funds to allow (i) the financing of theacquisition by Enel Rete Gas of the E.On gas assets, sold in March 2011by E.On Italia to the Sponsors, (ii) the financing of the acquisition of G6Rete Gas SpA, put on sale by GDF Suez Energia Italia SpA and (iii) therefinancing of the original financing to Enel Rete Gas.

The financing benefits from high predictability of cash flows generated,thanks to: the de-linking of revenues from volumes of gas distributed; a precise tariff formula which is based on regulatory asset base

(“RAB”) as calculated by the Italian Authroity (“AEEG”).

Financing : Total amount: € 1.8bn Tenor: 7 years Repayment: bullet Cash sweep: from year 5 Financial covenants: Leverage, LTV, ICR

Sponsors: F2i / Axa Private Equity

BNP Paribas acted as Mandated Lead Arranger and Hedging Bank

ENEL RETE GAS Refinancing (Italy)

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Most recent operation closed in Europe

Italy - 2011

Gas Distribution

€ 2.1bn

Italy - 2012

Gas Transmission

€ 9.0bn

Germany - 2011

Gas Transmission

€ 415M

Germany - 2012

Gas Transmission

€ 2.7bn

Switzerland –2011

Gas Transmission

CHF 1.0bn

Germany - 2011

Gas Transmission

€ 3.5bn

Phase II

Germany - 2010

Gas Transmission

€ 5.8bn

Phase I

Spain - 2010

Gas Distribution & Transmission

$ 1.1bn

Spain - 2010

Gas Storage

€ 1.5bn

Russia- 2011

Oil, Gas Condensate Field

€ 1.1bn

Norway - 2011

Gas Transmission

NKR 12.3bn

Czech Republic –Ongoing

Gas Transmission

€ 1.4bnSpain - 2010

Gas Distribution

Spain - 2011

Gas Distribution

€ 360M€ 485M

GEM

France –Ongoing

Gas Distribution

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