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ASX Investor Hour DISCLAIMER: The following material was presented at ASX Investor Hour. The views, opinions or recommendations of the presenter are solely those of the presenter and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate (“ASX”). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX and its employees, officers and contractors shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided or omitted or from any one acting or refraining to act in reliance on this information. 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

The Last Decade [3] • Tech Wreck • Record oil prices • 9/ 11 • Euro Region Sovereign Debt Crisis • SARS • Emerging market • I raq war inflation • Credit market melt down • Natural disasters • Recession • US debt rating cut

The Last Decade [4] • Tech Wreck • 9/ 11 • SARS • I raq war Global Equities * • GFC Return • Recession 2.3% p.a. • Record oil prices * MSCI A$ Hedged • Euro Region Sovereign Debt Crisis • Emerging market inflation • Natural disasters • US debt rating cut

The Last Decade [5] Global Listed Global Equities I nfrastructure Return * 2.3% p.a. Return * * MSCI A$ Hedged 9.9% p.a. 1 * A$ Hedged 1. Magellan I nfrastructure Beta Fund I ndex

[6] The Next Decade Global Equities Return ??????

[7] I nfrastructure Global Listed CPI + 5% Return 1 The Next Decade Global Equities Return ?????? 1. Magellan expectation

Agenda [8] • Australian I nfrastructure ≠ Rest of the World I nfrastructure • I nfrastructure Sector I nvestment Fundamentals

Recent Australian Experience [9] The Australian experience was quite different from the rest of the world. • 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.

Debt Levels in Australia vs Rest of the World [10] Gearing levels of Australian utilities are generally higher than their global comparables. Gearing of Utilities - Net Debt / EBI TDA 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 - APA I TC Holdings Snam Rete Gas Con Ed. DUET PG&E National Grid Wisconsin Energy NSTAR Alliant Energy Atmos Energy WGL Holdings Envestra SP Ausnet Spark Westar Terna Source: Company accounts, Magellan research

[11] Infrastructure Sector Investment Fundamentals

What is Infrastructure? [12] • Magellan believes true infrastructure assets have two key characteristics: – Essential for the efficient Demand and revenue are functioning of a community. relatively stable and – Do not face significant: � Sovereign risk; Minimal pressure on cash � Competition; or flows � Commodity price risk.

Power Industry Example [13] A disciplined approach to defining what constitutes “infrastructure” is essential to achieving predictable returns. Generation Transmission Distribution Retailing Unregulated 100% Regulated 100% Regulated Unregulated

Case Study: Loy Yang A Power Station [14] Unregulated power stations do not provide reliable returns. • 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

Size of the Listed Infrastructure Market [15] 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 falls into two main Infrastructure categories: 24% 1.Utilities : energy transmission & distribution, water treatment and distribution; and 2.I nfrastructure : airports, toll roads, rail, ports and communications infrastructure. Utilities 76% Source: Magellan Research.

Utilities – Nature of Returns [16] The regulation of utility earnings leads to stable financial results and, ultimately, stable investment 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.

How does Utility Regulation Work [17] Regulators allow utilities to generate a fair return on the capital used in their businesses. Regulated Cost of Required x = Asset Capital Earnings Base - Often with a modest margin Operating & Debt Costs = Prices Charged

Why is Financial Performance so Stable? [18] Regulators allow utilities to generate a fair return on the capital used in their businesses. US Electricity and Gas Utilities - Regulated ROEs 15.0% Average Regulated ROE = 10.5% 12.0% 9.0% 6.0% 3.0% 0.0% Source: Magellan Research

Why is Financial Performance so Stable? [19] Allowed Returns on Equity have been materially higher than 10 year bond yields for the last 30 years. Allowed ROE in US Rate Cases (Mar-80 to Sep-10) 18% Average Allowed ROE 10 Yr Bond Rate 16% 14% 12% 10% 8% 6% 4% 2% 0% Mar-80 Mar-83 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Source: Morgan Stanley Research

Utilities - Financial Performance [20] The returns from regulated utilities have been stable through the recession. ROE from 2004 to 2010 for the US based Regulated Utilities in MI F's Portfolio at 31 December 2010 14% 12% 10% 8% 6% 4% 2% 0% 2004 2005 2006 2007 2008 2009 2010 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

Utilities are Stable [21] Consolidated Edison has enjoyed 34 successive years of dividend increases. Consolidated Edison - Dividend History $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Dec-77 Dec-81 Dec-85 Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09 Source: Bloomberg Consolidated Edison owns the Manhattan gas and electricity distribution system

Utilities are Stable [22] NSTAR recently paid its 476 th consecutive quarterly dividend. NSTAR - Dividends per Share from 2000 to 2010 $1.80 $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Dec-99 Jun-01 Dec-02 Jun-04 Dec-05 Jun-07 Dec-08 Jun-10 Source: Bloomberg NSTAR provides transmission and distribution services in Massachusetts

Utilities are Stable [23] Washington Gas has paid a dividend for 160 consecutive years and has increased that dividend for the last 35 consecutive years. WGL Dividend History $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 Source: Bloomberg; WGL

Toll Roads – Nature of Returns [24] 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.

Toll Road Prices are Generally Linked to CPI [25] The most attractive toll roads have the ability to increase tolls by at least the rate of 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

Cars Dominate Large City Transport [26] The complexity of modern trips and the historic focus of public transport on the CBD makes car travel unavoidable for most people. Weekday Trips in Sydney 79% Distance Travelled in 2008 80% 70% 60% 50% 40% 30% 20% 12% 10% 5% 2% 2% 0% Car Train Bus Walk Only Other Source: Transport NSW