Challenger Limited · ASX:CGF
Challenger — Challenger Infrastructure Fund — Merger or Acquisition (October 2007)
34 slides from Challenger's merger presentation, Oct 9, 2007
Slide 1: Challenger Infrastructure Fund: Investment in Southern Water
Challenger Infrastructure Fund Investment in Southern Water 9 October 2007
Slide 2: Important notice
Important notice Information contained in this publication is current as at 9 October 2007 unless otherwise specified and is provided by Challenger Listed Investments Limited (ABN 94 055 293 644) (AFSL 236887) (“Challenger”), as responsible entity of CIF Investment Trust 1 and CIF Investment Trust 2
Slide 3: Agenda
Agenda 1. Transaction Summary 2. Southern Water 3. Impact on CIF 4. Acquisition Funding 5. Q&A 3
Slide 4: CIF has acquired a 27% interest in Southern Water
CIF has acquired a 27% interest in Southern Water • CIF is part of a consortium that has entered into an agreement for the purchase of Southern Water for an enterprise value of £4.2 billion (A$9.7 billion)1 – EBITDA multiple of 9.2x and RCV multiple of 1.27x for year ending March 2008 – CIF has cont
Slide 5: Southern Water is one of the fastest growing WaSCs in the UK
Southern Water is one of the fastest growing WaSCs in the UK • Southern Water is the fastest growing UK water and wastewater company – Located in the SE of England, the region with the highest population growth in the UK – Highest Regulated Capital Value (RCV) growth in the sector in current regulat
Slide 6: The acquisition meets all of CIF's strategic objectives
The acquisition meets all of CIF’s strategic objectives • CIF is a diversified global portfolio of high quality infrastructure and utility assets – Southern Water introduces a new asset class into CIF’s portfolio – water and sewerage – Southern Water adds to CIF’s scale and diversity • CIF’s investm
Slide 7: CIF is part of a strong consortium of infrastructure investors
CIF is part of a strong consortium of infrastructure investors • CIF has invested alongside long term strategic partners for a 27% investment – Further potential exists to syndicate £156m of equity within the next 12 months – CIF will maintain significant exposure to the asset (23%) • Equity investm
Slide 8: Agenda
Agenda 1. Transaction Summary 2. Southern Water 3. Impact on CIF 4. Acquisition Funding 5. Q&A 8
Slide 9: Southern Water's RCV is forecast to be £3.2bn at March 2008, making it the 7th largest WaSC
Southern Water’s RCV is forecast to be £3.2bn at March 2008, making it the 7th largest WaSC Water and wastewater services area Wastewater service only (other companies are responsible for water supply) Water supply only (other companies responsible for wastewater service) Operational Statistics Area
Slide 10: A high quality infrastructure asset with a growth profile
A high quality infrastructure asset with a growth profile • Strong growth profile – Fastest growing regulated capital value (“RCV”) of all the UK WaSC’s: 31%1 over 2005-2010 – Second highest real allowed average price increase of 5.6% over 2005-2010 • Expectation of significant capital expenditure f
Slide 11: Southern Water is the fastest growing WaSC in the current regulatory period
Southern Water is the fastest growing WaSCs in the current regulatory period Real growth in RCV as a percentage of RCV (2005-2010) 35% 31% 30% 25% 22% 20% 16% 15% 14% Average = 15% 15% 12% 10% 10% 10% 10% 7% 5% 0% Southern Thames South Yorkshire Welsh Wessex United Severn Northum. Anglian Water Wate
Slide 12: Management have been effective in implementing the current capex program
Management have been effective in implementing the current capex program Proportion of capital expenditure program completed to March 2007 110% 105% 101% 100% 100% 96% 95% 95% 90% Average = 85% 85% 84% 85% 80% 77% 75% 73% 73% 70% 65% 65% 60% Southern Anglian Northum. South Yorkshire Severn Welsh Uni
Slide 13: Robust financials underpinned by regulated cash flows
Robust financials underpinned by regulated cash flows Real average annual price increases (2005-2010) 6.9% 5.6% • Southern Water has one of the 5.4% 5.2% 4.5% 4.5% 4.1% 3.9% highest allowable real average 3.0% 2.4% price increases over the regulatory period 2005-2010 South Southern Welsh Wessex Seve
Slide 14: Management has extensive experience in regulated utilities
Management has extensive experience in regulated utilities • Strong and disciplined management team with extensive utility and water industry experience • All members of the senior management team well regarded in the industry • Incentives are tied to delivery of the business plan • Management has i
Slide 15: Southern Water represents a significant strategic investment for CIF
Southern Water represents a significant strategic investment for CIF CIF investment criteria SW Commentary • Clear and transparent regulatory framework established by Ofwat which has been Regulated industry or near successfully implemented for the last 17 years monopoly market position • Ofwat has a
Slide 16: Agenda
Agenda 1. Transaction Summary 2. Southern Water 3. Acquisition Funding 4. Impact on CIF 5. Q&A 16
Slide 17: Southern Water is to be funded with a senior debt acquisition facility and RPS
Southern Water is to be funding with a senior debt acquisition facility and RPS Sources £m A$m Uses £m A$m CIF Acquisition Facility 215 494 CIF Equity Investment 300 690 Redeemable Preference 98 225 Transaction/financing costs 13 29 Shares (RPS)1 Total 313 719 Total 313 719 • CIF has utilised its se
Slide 18: RPS provides an inexpensive source of funding
RPS provides an inexpensive source of funding Feature Term Type of securities Redeemable Preference Securities (“RPS”) Ranking Unsecured, subordinated notes issued by a sub-trust of CIF Issue size £97.9 million (A$225 million) Term 2.5 years Maturity April 2010 Cash coupon 5.3% p.a., payable semi-an
Slide 19: Optimising capital structure
Optimising capital structure • CIF intends to continue to actively manage its gearing levels and has a strategy to optimise its capital structure to maximise value of security holder returns • CIF maintains significant flexibility with respect to the long term management of its capital structure. Op
Slide 20: Agenda
Agenda 1. Transaction Summary 2. Southern Water 3. Acquisition Funding 4. Impact on CIF 5. Q&A 20
Slide 21: Southern Water provides CIF with further diversification through the water sector
Southern Water provides CIF with further diversification through the water sector By asset By sector By geography Gas Northern Gas Distribution Europe Chemical 12% Wales & West 7% 14% Storage 7% Pre-acquisition 25% North America Inexus 13% 39% Arqiva 22% Gas Trans Broad-casting 39% 22% UK 75% LBC 25
Slide 22: Impact on CIF distributions
Impact on CIF distributions • FY08 DPS guidance of 34.0 cps reaffirmed • Medium term distribution growth of 5% p.a. reaffirmed • The first full year of distributions from Southern Water will occur in FY09 5% p.a. medium term distribution guidance 34.0 32.1 28.4 14.2* FY06 actual FY06 grossed up FY07
Slide 23: Southern Water enhances CIF's portfolio
Southern Water enhances CIF’s portfolio • Assets performing in line with expectations underpinning distribution growth – Inexus: maintains leading market position in new gas and electricity connections and moving into water and sewerage connections – LBC: capital expenditure program in line with pre
Slide 24: Agenda
Agenda 1. Transaction Summary 2. Southern Water 3. Acquisition Funding 4. Impact on CIF 5. Q&A 24
Slide 25: Questions
Questions
Slide 26: CIF contacts
CIF contacts: Steve Bickerton Chief Executive Challenger Infrastructure Fund Tel: 02 9994 7327 Email: sbickerton@challenger.com.au Susie McPherson Investor Relations Challenger Infrastructure Fund Tel: 02 9994 7958 Email: smcpherson@challenger.com.au 26
Slide 27: Appendix: Background Information
Appendix: Background Information
Slide 28: 22 companies provide water and sewerage services in England & Wales
22 companies provide water and sewerage services in England & Wales Issue Description Industry structure • Industry comprises 10 water and sewerage companies (WaSCs) and 12 water only companies (WOCs) in England and Wales • Scotland and Northern Ireland have different structure Company • Companies a
Slide 29: UK water and sewerage companies are vertically integrated
UK water and sewerage companies are vertically integrated Produce Water abstraction, treatment, and storage 68% of water from ground water sources (predominantly chalk) with 27% from rivers and 5% from reservoirs Distribute Treatment: clarification, filtration, and disinfection process Collected was
Slide 30: The objective of UK water regulation is to protect the interests of all stakeholders
The objective of UK water regulation is to protect the interests of all stakeholders "No hidden agenda, no predetermined outcomes. Price limits will be what they need to be to enable efficient companies to finance their functions" (Ofwat, 2003) The Guiding Principles • Ofwat has a duty to ensure wat
Slide 31: Allowed revenues are fixed each five years by agreement with Ofwat
Allowed revenues are fixed each five years by agreement with Ofwat • Yearly price increases for each five year AMP are agreed between the company and Ofwat • A ‘building blocks’ approach is used to determine allowed revenues • An RPI + K formulation is used to describe the year-on-year movement in p
Slide 32: Current capex program focuses on wastewater and environmental compliance
Current capex program focuses on wastewater and environmental compliance Southern Water capital expenditure 2005-20101 (£m) Maintain water mains and sewers, Flooding and 170.0 , 11% service improvements, 87.0 , 6% Water resources and growth, 112.0 , Environmental 7% improvements, 643.0 , 41% Maintai
Slide 33: Southern Water has the lowest leakage levels
Southern Water has the lowest leakage levels Total leakage comparison of WaSCs (litres/property/day) 300 244 250 200 Average = 144 167 163 152 138 136 132 150 113 108 90 100 50 0 Thames Welsh Severn United Yorkshire North. Wessex South Anglian Southern Water Water Trent Utilities Water Water Water W
Slide 34: Southern's strong growth rate is expected to continue into the next regulatory period
Southern’s strong growth rate is expected to continue into the next regulatory period Capital investment requirements in the UK water sector • Industry-wide capex requirements expected to £ billion, 02/03 prices Ofwat’s ‘benign continue into the next regulatory period economy, environment lower prio
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