Dissecting listed infrastructure in the new world

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Dissecting Listed Infrastructure in the New World Gerald Stack Head of Investments & Infrastructure Magellan Asset Management

Important Information 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. A copy of the relevant Offer Document relating to a Magellan product or service may be obtained by calling Magellan on +61 2 9235 4888 or by visiting www.magellangroup.com.au. This Presentation does not constitute a part of any Offer Document issued by Magellan. The information contained in this Presentation may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of Magellan.

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Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Presentation may contain “forward-looking statements”. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither Magellan or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. No person, including Magellan has any responsibility to update any of the information provided in this Presentation.

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Agenda 1. Why definition is important to investment in Infrastructure 2. Utilities – Economic Model, Impact of Covid-19, 3. Transport Infrastructure 4. Communications Infrastructure 5. Magellan Infrastructure Fund – Objectives, Outcomes & Investment Portfolio RP158

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Commonly used definition of infrastructure

Essential Assets: Essential for the efficient function of a community

Demand is predictable

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The universe of infrastructure assets 350 stocks with a market capitalisation of more than US$3 trillion

Utilities

Transport

Social

Water Utilities

Airports

Hospitals

Gas Utilities

Toll Roads

Schools

Energy Transmission and Distribution

Pipelines

Prisons

Communication Power Generation Power Retailers

Ports Rail

Satellites Master Limited Partnerships

Car parks RP079

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Magellan’s definition of infrastructure Strict definition: critical to reliable earnings through the economic cycle

Essential for the efficient function of a community

Demand is predictable

AND

Earnings are NOT sensitive to competition, commodity price movements or sovereign risk

Cashflows are reliable

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Magellan’s infrastructure universe 130 stocks with a market capitalisation of more than US$1.5 trillion

Utilities

Transport

Social

Water Utilities

Airports

Hospitals

Gas Utilities

Toll Roads

Schools

Energy Transmission and Distribution

Pipelines Communication Ports Rail

Power Generation Power Retailers

Satellites

Prisons

Master Limited Partnerships

Car parks RP079

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Utilities – Economic model, impact of covid-19

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Magellan’s infrastructure universe Utilities

Transport

Social

Water Utilities

Airports

Hospitals

Gas Utilities

Toll Roads

Schools

Energy Transmission and Distribution

Pipelines Communication Rail

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Utilities – Nature of returns

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

Regulation allows utilities to earn fair returns with low potential for loss.

Earnings regulation leads to stable financial results

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How regulation works for regulated utilities Capital Employed – “Rate Base”

x

(A)

Cost of Capital

=

Net Profit After Tax + Income Tax

=

Net Profit Before Tax

+

(B)

Interest Expense

+ Depreciation

+ Operating Expenditure & Cost of Energy

=

Revenue ÷

(C)

Energy Volume

=

Energy Price RP104

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Regulation leads to stable financial performance The earnings of US regulated utilities were stable through the recession Return On Equity for the Magellan US Regulated Energy Utilities Index 15% 14% 13% 12%

11% 10% 9% 8% 7% 6% 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: Company accounts, Magellan Asset Management Limited analysis. Utility group includes Alliant Energy, Atmos Energy, Consolidated Edison, Northeast Utilities, ITC/Fortis, Southwest Gas, Southern Company, Westar Energy, PG&E, WEC & Xcel Energy.

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Impact of covid-19 upon regulated earnings Capital Employed – “Rate Base”

x

(A)

Cost of Capital

=

Net Profit After Tax + Income Tax

=

Net Profit Before Tax

+

(B)

Interest Expense

+ Depreciation Operating Expenditure & Cost of Energy

Utility can reduce costs or spread negative impacts over the medium-term

Revenue

Reduction in Revenue / Bad Debts

+

= ÷

(C)

Energy Volume

=

Reduction in volumes

Energy Price RP158

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Regulated utilities – Impact of covid-19 on earnings Company

Type of Utility

Impact of covid-19 on 2020 results

US gas distribution

Confirmed earnings guidance

2 Eversource Energy

US electricity and gas

Confirmed earnings guidance

3 Sempra

US electricity and gas

Increased earnings guidance

4 Xcel Energy

US electricity and gas

Confirmed earnings guidance

Italian gas transmission

Confirmed earnings guidance

US water

1% reduction in earnings guidance

US electricity and gas

Confirmed earnings guidance

Italian electricity transmission

Confirmed earnings guidance

Australian electricity

Hasn’t reported yet

UK and US electricity and gas

FY20 EBIT reduced by approx. 4% will be recovered in future years

1 Atmos Energy

5 SNAM 6 American Water 7 WEC Energy 8 Terna 9 Spark Infrastructure 10 National Grid

?

Source: Magellan research

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Outlook for regulated utilities 1. Earnings largely unaffected 2. Low interest rates for the foreseeable future is supportive of utility valuations

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Regulated Utilities – 2020 investment performance Investment returns for the 7 months to 31 July 20201 Utilities

-3.6%

Made up of Water Utility

3.3%

Integrated Power

-7.7%

Transport & Distribution

1.6%

Gas

-6.6%

Investment returns represent the market capitalization weighted average investment return for regulated utilities that meet Magellan’s definition and are domiciled in OECD markets Source: Magellan research 1

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Infrastructure

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Magellan’s infrastructure universe Utilities

Transport

Social

Water Utilities

Airports

Hospitals

Gas Utilities

Toll Roads

Schools

Energy Transmission and Distribution

Pipelines Communication Rail

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Infrastructure – Nature of returns

Because revenues and earnings grow in line with patronage growth, infrastructure assets are able to earn high returns Revenue

=

Volume

x

Price

Toll Road Revenue

=

Number of cars

x

Average Toll

Airport Revenue

=

Number of passengers

x

Average Charge/Spend

Telco Tower Revenue

=

Number of Tenants

x

Average Rental

Prices rather than earnings are subject to regulation or long-term contracts

1.Earnings are not constrained or protected by regulation

2.Patronage growth has a direct impact on financial returns

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Airports - Economic model, impact of covid-19

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Airport economic model 1.

Passengers

X

Aeronautical Price

=

Aeronautical Revenue +

2.

Passengers

X

Passenger Spend Rate (PSR) i.e. Retail PSR + Car Park PSR

=

Non-Aero Revenue

+ 3.

Funds Invested in Property

X

Rental Yield

=

Rental Revenue TOTAL AIRPORT REVENUE

Less: Operating Costs AIRPORT OPERATING PROFIT Source: World Bank

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Impact of the pandemic on passenger demand • Global passenger demand1 declined by: ➢ 52.9% in March compared to March 2019 ➢ 94.3% in April compared to April 2019 ➢ 91.3% in May compared to May 2019 ➢ 86.5% in June compared to June 2019

• The low point was 21 April 2020 • For the month of April: ➢ domestic passenger demand declined by 86.9%; and ➢ international passenger demand declined by 98.4% Passenger demand measured in revenue passenger kilometres Source: IATA 1

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Current status of recovery of passenger demand • China domestic passenger demand1 ➢ Declined by 84% in February vs February 2019 ➢ The decline in demand had reduced to 24% in the week of 3 August

• USA – Domestic aviation traffic was down by 95.6% in April and down by 80.1% in June ➢ On 27 July United Airlines said they expect domestic capacity for September to be 40% of 2019 capacity ie a reduction of 60%

• Europe - Airline traffic was down by 98.1% in April and down by 93.7% in June • Asia Pacific – Airline traffic declined by 88.5% in April and by 76.4% in June Passenger demand measured in revenue passenger kilometres Source: IATA 1

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Views of airports and airlines about recovery • IATA: Expects world aviation traffic to return to 2019 levels by 2023-2024 • Airports ➢ Aeroports de Paris – Expects a recovery to 2019 passenger levels between 2024-2027 ➢ AENA - Expects a recovery to 2019 passenger levels between 2024-2027 ➢ Fraport - Expects a recovery to 2019 passenger levels between 2028-2031 ➢ Zurich Airport - Expects a recovery to 2019 passenger levels by 2023

Source: IATA, Aeroports de Paris, AENA, Fraport, Zurich Airport

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Resilient global passenger growth Global Aviation Passengers (1970 - 2017)

4,500

Annual Passengers (millions)

4,000 3,500 3,000

Global Financial Crisis

2,500 SARS

2,000

Asian Crisis

1,500

Gulf Crisis

1,000 500

9/11

Oil Crisis '79 Oil

-

Source: World Bank

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Investment performance & outlook for airports 1. Recovery in passenger numbers expected but significant uncertainty surrounding pace of the recovery 2. Listed airports have delivered investment returns of -39% for the 7 months ended 31 July 2020

Investment returns represent the market capitalization weighted average investment return for Airports that meet Magellan’s definition and are domiciled in OECD markets Source: Magellan research

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Toll roads

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Impact of the pandemic on toll road traffic • Atlantia Week ending

Italy

Spain

France

Brazil

19 April 2020

-84.3%

-81.8%

-83.4%

-43.3%

12 July 2020

-17.5%

-15.7%

-5.9%

-16.9%

2 August 2020

-11.4%

-21.7%

-3.6%

-15.5%

• Transurban Month

M2

Citylink

Clem7

Transurban Group

April

-49%

-56%

-53%

-48%

May

-36%

-45%

-45%

-36%

June

-16%

-31%

-26%

-20%

July

-14%

-48%

-17%

-25%

Source: Atlantia, Transurban

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Investment performance & outlook for toll roads 1. Recovery in traffic volumes expected over the medium term 2. Listed toll road have delivered investment returns of -12% for the 7 months ended 31 July 2020

Investment returns represent the market capitalization weighted average investment return for toll roads that meet Magellan’s definition and are domiciled in OECD markets Source: Magellan research

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Telecommunications Infrastructure

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Outlook for Telecommunications Infrastructure Telecommunications Towers benefit from:

• Continued explosion in demand for wireless data; • The need for telecommunications infrastructure to keep up with demand for wireless data

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Demand for wireless data continues to increase *

Source: Cisco VNI Global IP Traffic Forecast, 2017-2022. * Vertical axis refers is Exabytes per month.

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The demand for Telecommunications Infrastructure

Source: American Towers, AV&Co. Research & Analysis

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Communications Infrastructure – Impact on outlook Company Crown Castle

Impact of covid-19 on 2020 results Confirmed AFFO guidance

American Tower

Increased AFFO guidance due to exchange rate fluctuations

SBA Communications

Increased AFFO guidance due to exchange rate fluctuations

Cellnex Inwit

Increased EBITDA guidance due to acquisitions

?

No guidance provided

Source: Magellan research.

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Investment performance & outlook for Communications Infrastructure 1. Demand for communications infrastructure is strong and largely unaffected

by Covid-19

2. Listed communications infrastructure sector has delivered investment returns of +30% for the 7 months ended 31 July 2020

Investment returns represent the market capitalization weighted average investment return for Communication Infrastructure companies that meet Magellan’s definition and are domiciled in OECD markets Source: Magellan research

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Magellan Infrastructure Fund

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Investment objectives

Achieve attractive risk-adjusted returns over the medium to long term (CPI + 5% through the business cycle)

Protect capital in adverse markets (Strict definition)

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Delivering to our objectives

Magellan Infrastructure Fund to 30 June 2020

1. Consistently delivering returns over the cycle – as at 30 June 2020 One Year (%)

Three Years (% p.a.)

Five Years (% p.a.)

Seven Years (% p.a.)

Ten Years (% p.a.)

Since Inception (% p.a.)#

Magellan Infrastructure Fund

-8.9

4.3

7.7

10.3

12.9

7.6

Global Infrastructure Benchmark

-16.2

-1.4

2.6

6.2

7.9

4.2

7.3

5.7

5.1

4.1

5.0

3.4

Excess

2007* (%)

2008 (%)

2009 (%)

2010 (%)

2011 (%)

2012 (%)

2013 (%)

2014 (%)

2015 (%)

2016 (%)

2017 (%)

2018 (%)

2018 (%)

2020 (CYTD) (%)

Magellan Infrastructure Fund

2.2

-34.1

24.2

11.8

11.2

15.1

17.8

22.4

10.6

6.7

17.4

-0.4

25.5

-13.5

Global Infrastructure Benchmark

6.5

-27.5

10.0

5.7

4.7

9.1

18.5

22.9

-5.4

14.1

14.4

-6.7

25.3

-20.4

Excess

-4.3

-6.6

14.2

6.1

6.5

6.0

-0.7

-0.5

16.0

-7.4

3.0

6.3

0.2

6.9

The inception date is 01 July 2007 inclusive. * Part year performance. Calculations are based on exit price with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and entry fees (if applicable). Returns are denoted in AUD. The Global Infrastructure benchmark is comprised of the following: from inception to 31 December 2014 the benchmark is UBS Developed Infrastructure & Utilities Index NTR Index (Hedged in AUD) and from 1 January 2015 onwards, the benchmark is the S&P Global Infrastructure NTR Index (Hedged in AUD). Risk Measures are after fees. #

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Delivering to our objectives 2. Protecting capital in adverse markets – 5 Years to 30 June 2020 5 years ending 30 June 2020, AUD Hedged

Downside Capture

Magellan Infrastructure Fund

Global Infrastructure Benchmark*

S&P/ASX 200 Accumulation Index

0.3

0.7

0.7

0.6

0.6

0.8

0.5

0.8

0.9

Relative to MSCI World NTR Index

Upside Capture Relative to MSCI World NTR Index

Beta To MSCI World NTR Index

* The Global Infrastructure benchmark is comprised of the following: from inception to 31 December 2014 the benchmark is UBS Developed Infrastructure & Utilities Index NTR Index (Hedged in AUD) and from 1 January 2015 onwards, the benchmark is the S&P Global Infrastructure NTR Index (Hedged in AUD). Performance for the Magellan Infrastructure Fund are based on exit price with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and entry fees (if applicable)

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Magellan Infrastructure Fund

Sector Exposures as at 31 January 2020 and 30 June 2020 31 January Sector Exposure* Cash, 10% Airports, 17%

Water Utilities, 5%

32% Utilities Communications, 9%

Integrated Power, 9%

Transmission and Distribution, 6%

58% Infrastructure

Gas Utilities, 12%

Energy Infrastructure, 11%

*

Toll Roads, 16%

Rail, 6%

Geographical exposures are by domicile of listing. Exposures may not sum to 100% due to rounding.

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