Challenger Limited · ASX:CGF
Challenger — Challenger Infrastructure Fund — Investor Presentation (April 2008)
37 slides from Challenger's investor presentation, Apr 16, 2008
Slide 1: Challenger Infrastructure Fund Southern Water Market Update
Challenger Infrastructure Fund Southern Water Market Update Steve Bickerton - Chief Executive, CIF Les Dawson - CEO, Southern Water 16 April 2008
Slide 2: Table of contents
Table of contents 1. Investment Highlights 2. Business Overview 3. Operating and Financial Performance 4. Capital Structure Appendix A. Regulatory Overview 2
Slide 3: 1. Investment Highlights
1. Investment Highlights Steve Bickerton - Chief Executive, CIF
Slide 4: Southern Water meets key criteria
Southern Water meets key criteria CIF Investment Criteria SW Commentary Regulated industry or near • Southern Water operates under a mature and stable regulatory regime 3 monopoly market position – Water companies operate regional licensed monopolies on a 25 years rolling basis – The current regime
Slide 5: Key benefits to CIF
Key benefits to CIF Sector Diversity 1 Revenue Stability Cashflow Coverage Competitive 13% Debt 4% Gas distribution Telco 22% Pre-acquisition 14% Debt funded Contracted – Inexus 39% order book 28% Independent Tank transport Regulated Cash flow storage 24% 40% 48% 68% Debt 3% Competitive Telco 14% 9%
Slide 6: Acquired at an attractive price
Acquired at an attractive price Enterprise Value Transaction details (£m) Southern Water enterprise value 4,195 Less: Folkestone and Dover1 (15) Less: Non-appointed business2 (28) Less: Normalised working capital3 (27) Regulated enterprise value 4,125 Regulated Southern Water Enterprise Value Enterp
Slide 7: 23.4% provides significant exposure
23.4% provides significant exposure • At acquisition, £155.6m of subordinated debt was put in place with the intention of refinancing with equity post financial close • In December 2007, Cheung Kong Infrastructure, Li Ka Shing Foundation and Retail Employees Superannuation Pty Limited joined the Gre
Slide 8: Experienced management team
Experienced management team • Executive team has an average of 20 years experience - Majority in place at the last price determination in 2004 • Strong track record: - Capex delivery on schedule - Successful outsourcing initiatives e.g. capital expenditure - Leakage reduced below Ofwat targets - Opt
Slide 9: 2. Business Overview
2. Business Overview Les Dawson - Chief Executive Officer, Southern Water
Slide 10: Service area characterised by coastal waters
Service area characterised by coastal waters Water and wastewater services area Wastewater service only (other companies are responsible for water supply) Water supply only (other companies responsible for wastewater service) Water Wastewater • 2.3 million people served • 4.3 million people served •
Slide 11: Southern Water is one of 10 UK water & sewerage companies
Southern Water is one of 10 UK water & sewerage companies Opening and Closing Regulated Capital Value (£m, 2003 prices) 2005 value (opening) 6,293 7,362 Growth in RCV 2005 – 2010 (closing) 5,292 5,721 4,426 5,175 3,714 4,794 4,143 3,059 2,908 2,556 3,242 2,136 1,824 2,685 2,215 2,331 1,847 1,629 Tha
Slide 12: Regulation is a known quantity
Regulation is a known quantity Overview Comment Regulatory period • 5-yearly resets allow for re-alignment of both business and financial costs with market prices Price setting • Prices for each regulatory period determined using a ‘building block’ approach • Annual tariff adjustment using an RPI-K
Slide 13: 2006-2010 Final Determination: key points
South West 6.9% Thames 3,092 Southern 5.6% United 2,505 Utilities Welsh 5.4% Severn Trent 2,201 Wessex 5.2 Southern 1,563 Severn Trent 4.5% Anglian 1,466 Source:Ofwat Final Determination United 4.5% Utilities Yorkshire 1,453 Thames 4.1% Welsh 1,145 Yorkshire 3.9% Northumbrian 839 Real Allowed Capex
Slide 14: Limited factors affect regulated revenue
Limited factors affect regulated revenue Factor Comment Volume • Volume risk only exists with metered domestic and non-domestic customers • ~ 1.04m properties with water – 30% metered domestic properties and 7% non-domestic properties • ~ 1.79m properties with wastewater – 97,000 non-domestic proper
Slide 15: On track to deliver capex program for current regulatory period
On track to deliver capex program for current regulatory period Capital expenditure (net)1 – 2006-2010 • On track to deliver capex program, excluding Wa t e r Brighton and Hove 17 % • Successful outsourcing arrangements in place for >50% of capex program – 42% of capex subject to Single Entity Contr
Slide 16: Southern Water benefits from operating efficiencies
Southern Water benefits from operating efficiencies Operating expenditure – 2006-2010 • Retained efficiencies (opex and capex) are included as part of the building blocks Water • Companies are rewarded for efficiency and 35% quality of service to customers • Savings attributable to efficiency can be
Slide 17: Regulatory agenda: key issues
Regulatory agenda: key issues Issue Comment Cost of capital • Balance need for significant capital expenditure against community objectives Capital expenditure • Significant capex program likely to continue given EU environmental initiatives and population growth in the south east of England • Ofwat
Slide 18: Non-regulated activities
Non-regulated activities • Non-regulated activities included non-appointed activities that form part of the regulated business and other activities that do not form part of Southern Water’s regulated asset base • Non-regulated activities typically account for around 1% of total consolidated EBITDA B
Slide 19: 3. Operating and Financial Performance
3. Operating and Financial Performance Les Dawson, Chief Executive Officer, Southern Water
Slide 20: Southern Water is well placed on key operational metrics
Southern Water is well placed on key operational metrics Total leakage comparison of WaSCs (litres/property/day) • Overall performance assessment (OPA) 300 score is reflected in the K factor 244 250 – One off adjustment to revenues at 200 Average = 144 each price review 167 163 152 138 136 132 150 –
Slide 21: Solid financial performance
Solid financial performance • FY2006 marked the first year of the current regulatory period, and reflects allowances received in the current price determination • Consistent EBITDA margin improvement as a result of sales growth and operating cost efficiencies • Management has identified property sur
Slide 22: On track to meet 2008FY targets
On track to meet 2008FY targets • The profits earned in the period since acquisition are broadly in proportion to the profits earned for the year to date 15 Oct 2007 - 1 April 2007 – Year to date performance (unaudited) (£m) 31 Dec 20071 29 Feb 20082 Regulated revenue 128 562 Non-regulated revenue 2
Slide 23: 4. Capital Structure
4. Capital Structure Les Dawson, Chief Executive Officer, Southern Water
Slide 24: Capital structure in line with peers
Capital structure in line with peers £m At acquisition Change At 31 Dec 2007 Equity 1,126 156 1,282 Securitised Debt 2,700 2,709 Acquisition Debt Senior Debt 350 - 350 Junior Debt 226 - 226 Total Acquisition Debt 576 - 576 Subordinated Debt (toggle) 156 -156 - Total Debt 3,432 - 3,285 Enterprise Val
Slide 25: Flexible financing structure
Flexible financing structure Equity (£1,282m) Greensands Consortium Maximum net debt / RCV Acquisition Term Debt (£446m) 95% Capex Facilities (£130m) Consortium Holding Companies Southern Water Capital Limited (SWC) Southern Water Holding Companies Non-regulated activities Securitised Group Southern
Slide 26: Low cost funding locked in
Low cost funding locked in • Index-linked debt and swaps provides for low cost funding – Average cash cost of debt across all tranches is ~ 4.5% Type Available (£m) Drawn (£m) Ranking Maturity (years) Hedged Securitised Debt Index-linked bond 1,600 1,600 Senior 15-50 Yes Nominal bond 1,100 1,100 Sen
Slide 27: Debt maturity profile
Debt maturity profile • ~90% of debt matures beyond 2015 – Long-dated debt with average maturity of ~27 years • First refinancing event for Southern Water is the bridge facility (£134m) payable in April 2009 • First tranche of wrapped debt not due for refinancing until 2018 – ~60% of total debt is w
Slide 28: Rates are substantially fixed through hedges
Rates are substantially fixed through hedges • Hedging strategy minimises financial risk and improves headroom on financial covenants – Securitised debt is hedged to at least 85% to 2010 and 70% to 2015 – Acquisition debt hedged using 30-year index-linked swaps • Variable nominal rate swapped for a
Slide 29: Questions
challenger @ eS
Slide 30: Contacts
Contacts Jenny Warat-Hughes Investor Relations Tel: 61 2 9994 7663 Email: [email protected] Eugenie Perks Media Relations Tel: 61 2 9994 7327 Email: [email protected] 30
Slide 31: Disclaimer
Disclaimer Information contained in this publication is current as at 16 April 2008 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 (“Chal
Slide 32: Appendix A: Regulatory Overview
Appendix A: Regulatory Overview
Slide 33: Overview of UK water sector
Overview of UK water sector Issue Description Industry structure & • Industry comprises 10 water and sewerage companies (WaSCs) and 12 water only companies (WOCs) participants in England and Wales • Scotland and Northern Ireland have different structures Company structure • Companies are vertically
Slide 34: Revenue building blocks
Revenue building blocks Average for all WaSCs (2005-2010) Inflation Incentives / Penalties Operating expenditure Total Total allowed allowed Revenue Depreciation Revenue (nominal) (real) Tax Return on RCV Building 27% 4% 30% 38% +/-1% 100% Blocks Allowed Allowance Depreciation Opex Reward for Impact
Slide 35: Building blocks and revenue
Building blocks and revenue Year ending 31 March (2003 avg prices) 2006 2007 2008 2009 2010 Calculation Opening RCV 2,185 2,294 A - Depreciation (144) (154) + Regulated Capex 240 376 + Regulated Infrastructure Renewals Expenditure (IRE) 40 43 - Infrastructure Renewals Charge (IRC) (36) (36) + Capex
Slide 36: Transparent consultation process
Transparent consultation process Phase 1 Phase 2 Phase 3 Phase 4 (year 3) (year 4) (year 4 / year 5) (end of year 5) Description Framework and Issues Assessment of draft Decisions and Implementation of price business plans and market determinations limits and evaluation of research periodic
Slide 37: Slide 37
Challenger Infrastructure Fund — Investor Presentation (April 2008) on 6ix