Macquarie infrastructure group Analyst package 2008

Transcription

1 Macquarie infrastructure group Analyst package 2008

2 Disclaimer This information package (the Package), which includes the accompanying spreadsheet, has been prepared by Macquarie Infrastructure Group (MIG) which comprises of two Australian trusts: Macquarie Infrastructure Trust (I) ARSN and Macquarie Infrastructure Trust (II) ARSN ; and Macquarie Infrastructure Group International Limited (MIGIL), a Bermudan mutual fund company ARBN Macquarie Infrastructure Investment Management Limited ACN (MIIML) is the responsible entity of MIT(I) and MIT(II). MIIML is a wholly owned subsidiary of Macquarie Group Limited ACN (MQG). Macquarie Capital Funds (Europe) Limited (MCFEL) registered number is the adviser to MIGIL. MCFEL is a wholly owned subsidiary of MQG. The Package has been prepared in good faith to assist analysts in the development of their own models. The Package does not purport to forecast the asset value, income or distributions of MIG, nor the value, income or distributions of any other entity. No representation or warranty, express or implied, is made by MIG or any part of MQG (Macquarie) as to the fairness, accuracy, completeness or correctness of the information, opinions and conclusions contained in this Package. Any assumptions or forecasts contained in the Package are intended as a guide to analysts only. They do not represent forecasts of Macquarie nor any other party and are not intended to be a representation that the assumptions will occur. The recipient should do their own research and form their own judgment in relation to any assumption, forecast or estimate contained in the Package and not rely on any information in the Package as being either absolute or the likely outcome. The Package does not purport to list the assumptions or risks which may influence the valuation of assets of MIG. Any discussion of tax treatment is provided without warranty and for information only. The recipient should seek professional advice in respect of any taxation assumptions required to analyse MIG. Macquarie does not guarantee information provided is up to date, and does not accept any obligation to update the Package or to inform the recipient that the package is no longer up to date should new information become available. The Package remains the property of MIG and may not be reproduced in part or whole without the express written permission of MIG. None of the entities noted in this presentation is an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of Macquarie Bank Limited ABN (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities. No part of the Package is an offer, invitation or recommendation for subscription or purchase of stapled securities. It does not take into account the investment objectives, financial situation and particular needs of the investor. Before making an investment in MIG, the investor or prospective investor should consider whether such an investment is appropriate to their particular investment needs, objectives and financial circumstances and consult an investment adviser if necessary. Information in this Package, including any forecast financial information, should not be considered as a recommendation in relation to holding purchasing or selling, securities or other instruments in MIG. Due care and attention has been used in the preparation of forecast information. However, actual results may vary from forecasts and any variation may be materially positive or negative. Forecasts, by their very nature, are subject to uncertainty and contingencies many of which are outside the control of MIG. Past performance is not a reliable indication of future performance. These materials do not constitute an offer of securities for sale in the United States, and the securities referred to in these materials have not been and will not be registered under the United States Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an exemption from registration.

3 Contents Overview Macquarie Infrastructure Group Snapshot... 3 Asset Portfolio... 5 MIG Investment Strategy... 9 Valuation Policy Valuation of Toll Roads Group Structure MIG Reporting Distributions On-market Buy-back Securities on Issue Management Fees North America 407 ETR Chicago Skyway Indiana Toll Road Dulles Greenway South Bay Expressway Europe M6 Toll Autoroutes Paris-Rhin-Rhône th April/Vasco da Gama Bridges Warnow Tunnel Australia Westlink M Model Overview Structure of the Analyst Model Using the Analyst Model

4 Welcome to the 2008 MIG Analyst Package. This Package is designed to assist analysts and institutional/professional investors to understand MIG and its investments. The Package includes a set of background notes on MIG and on each toll road within the MIG portfolio as well as an Analyst Model that outlines a possible format for valuing MIG. The Analyst Model does not purport to forecast the asset value, income or distributions of MIG or any other entity. Any assumptions contained within the Package are intended to be a guide only and do not represent the forecasts of MIG or any entity in the Macquarie Group (collectively Macquarie) or any other entity. Macquarie does not represent that the forecasts will be achieved, the assumptions will occur or that the assumptions are reasonable, reliable or accurate. The recipient should do their own research and form their own view on any assumptions, forecasts or estimates contained within the Package. No part of the Package is to be construed as an invitation or recommendation to buy or sell any securities. No responsibility is accepted by Macquarie in respect of the accuracy of any statement or calculation within the Package. 2 Macquarie Infrastructure Group 2008 Analyst Package

5 Overview Macquarie Infrastructure Group Snapshot MIG was formed in July 1996 as the Infrastructure Trust of Australia and listed on the Australian Stock Exchange (ASX) on 16 December MIG is one of the largest developers and owners of toll roads in the world. Table 1.1: MIG snapshot Date Listed 16 December 1996 Market Capitalisation A$7.2 billion 1 Compound Annual Growth Since Listing 14.5% 2 Size Relative to ASX Top 40 1 Toll Roads in Portfolio 11 Number of Unitholders 46,000 1 Securities Held Outside Australia 46% 1 Balance Date 30 June 1. As at 1 May Based on all capital raised, distributions paid and valuation (market capitalisation) from December 1996 to May NORTH AMERICA MIG believes toll roads are an attractive asset class as they exhibit the following characteristics: Long-term growth potential The combination of traffi c growth and toll increases can produce solid revenue growth Traffi c growth often exceeds GDP MIG s toll growth is often at a minimum of infl ation, mainly CPI+ Long-term assets MIG s weighted average length of concessions remaining is 61 years 1 Legally enforceable concession agreements MIG invests in OECD and OECD-like countries with well developed legal systems High EBITDA margins which increase over time Operating costs are relatively small as a proportion of revenue Relatively low ongoing capital expenditure requirements 1. As at 31 December Predictable cash flows With relatively fi xed operating costs and known mechanisms for toll increases, cash fl ows can be predicted with some certainty Sustainable competitive advantages Development of competing infrastructure is a time consuming and costly process, hence new competitors face signifi cant barriers to entry Increasing marginal benefit of service Users growing real incomes tend to increase their value of time savings and hence, the attractiveness of using toll roads Option value Traffi c uplift from implementation/ growth of electronic tolling Potential for concession extensions Ability to increase road capacity EUROPE AUSTRALIA MODEL 2008 Analyst Package Macquarie Infrastructure Group 3

6 MIG is managed by the Macquarie Capital Funds division of Macquarie Group Limited, which, together with its associated entities worldwide, is a diversifi ed global provider of fi nancial and investment advisory services headquartered in Australia with over 12,400 employees in 25 countries as at 31 December Through its relationship with Macquarie, MIG benefi ts from experienced management and continuous deal opportunities: MIG has fi rst right of refusal to future Macquarie sourced toll road deals in OECD and OECD-like countries Macquarie is a global leader in advising on the acquisition, disposal and management of infrastructure assets the Infrastructure division of Macquarie Capital Advisors has over 500 infrastructure professionals who provide deal origination and execution services on a global basis the Macquarie Capital Funds division of Macquarie has over 590 infrastructure asset management professionals globally. 4 Macquarie Infrastructure Group 2008 Analyst Package

7 Overview Asset Portfolio MIG holds a direct interest in the majority of its toll road assets. In addition to its portfolio of toll road assets, MIG has a direct interest in Transtoll Australia Pty Limited. MIG s toll road portfolio is outlined in Table 1.2. Table 1.2: MIG s toll road portfolio Investment vehicle Underlying assets Asset location MIG s interest % of MIG portfolio International Inc 407 ETR Toronto, Canada 30.0% 37% Midland Expressway Limited Eiffarie SAS M6 Toll Birmingham, UK 100.0% 30% Autoroutes Paris-Rhin-Rhône (APRR) France 20.4% 2 11% Westlink Motorway Group Westlink M7 Sydney, Australia 47.5% 8% Toll Road Investors Dulles Greenway Virginia, US 50.0% 4% Partnership II LP Statewide Mobility Partners LLC Skyway Concession Company Holdings LLC South Bay Expressway LP Lusoponte Concessionária para a Travessia do Tejo SA Warnowquerung GmbH & Co, KG Indiana Toll Road Indiana, US 25.0% 3% Chicago Skyway Chicago, US 22.5% 3% South Bay Expressway 25th April Bridge Vasco da Gama Bridge Warnow Tunnel San Diego, US 50.0% 2% Lisbon, Portugal 30.6% 2% Rostock, Germany 70.0% Total 100% 1. Based on 31 December 2007 MIG valuations. 2. Effective interest in APRR. MIG holds a 25% interest in Eiffarie SAS. 0% NORTH AMERICA EUROPE AUSTRALIA MODEL 2008 Analyst Package Macquarie Infrastructure Group 5

8 Overview Asset Portfolio (cont.) Figure 1.1: Location of asset portfolio UK M6 Toll FRANCE APRR GERMANY Warnow Tunnel CANADA 407 ETR UNITED STATES Dulles Greenway Chicago Skyway South Bay Expressway Indiana Toll Road PORTUGAL 25th April Bridge Vasco da Gama Bridge AUSTRALIA Westlink M7 Figure 1.2: MIG s asset portfolio 1 Indiana Toll Road 3% Dulles Greenway 4% Westlink M7 8% Chicago Skyway 3% Other 4% 407 ETR 37% APRR 11% M6 Toll 30% 1. Based on 31 December 2007 MIG valuations. 6 Macquarie Infrastructure Group 2008 Analyst Package

9 Portfolio Characteristics MIG s portfolio has the following features: majority of assets in early stages of their life cycle globally diversifi ed, with assets in North America, UK, Europe and Australia signifi cant remaining concession terms for many assets attractive mix of toll escalation paths and mechanisms. Table 1.3: MIG s toll road life cycle Construction Ramp Up Growth/Maturity Risks Construction time Ramp-up rate Impacts on traffi c Construction costs Initial traffi c Ramp-up rate Natural traffi c/revenue level MIG Assets Natural traffi c/revenue level 407 ETR APRR M6 Toll 25th April Bridge Westlink M7 Dulles Greenway Indiana Toll Road Chicago Skyway South Bay Expressway Vasco da Gama Bridge Warnow Tunnel Toll Road Life Cycle All toll road assets move progressively through a number of stages of development, collectively known as the toll road life cycle. Toll roads in the early stages of their life cycle have signifi cant capacity for forecast cash fl ows to de-risk. Forecast cash fl ows de-risk as they become less dependent on future growth being achieved. Lower risk cash fl ows are more highly valued by investors, resulting in lower return requirements and increases in asset valuations. As shown in Table 1.3, the majority of MIG s assets are currently in ramp-up and expected to benefi t from asset re-rating in future. NORTH AMERICA EUROPE AUSTRALIA MODEL 2008 Analyst Package Macquarie Infrastructure Group 7

10 Figure 1.3: MIG s portfolio characteristics 1 North America 49% Geographic split Australia 8% Concession term remaining years 23% UK/Europe 43% >40 years 77% Young and developing portfolio Growth 11% Tolling mechanisms % of CPI 11% CPI 10% CPI+ 6% Market-based 73% Ramp-up 89% 1. Based on 31 December 2007 MIG valuations. 2. MIG's weighted average concession term is approximately 61 years. 8 Macquarie Infrastructure Group 2008 Analyst Package

11 Overview MIG Investment Strategy MIG s strategy is to invest in and develop quality assets that are accretive to the portfolio over the long term. Returns to security holders are expected to be in the form of both capital growth and distributions. Table 1.4: Equity risk premium Equity risk Stage in life cycle premium Construction 6 8% Ramp-up 3 6% Growth/maturity 2 3% Future opportunities for investment should: generate a forecast return that: is accretive to MIG s portfolio internal rate of return (IRR) determined by security price; and implies an equity risk premium at or above the level required to compensate for its asset and fi nancial risks (refer to Table 1.4) be consistent with the distribution policy of sustainability with increasing coverage of operating cash fl ows available for distribution offer potential for increasing value through active management of operations and capital structure be located in OECD or OECD-like countries offer sustainable competitive advantages in a traffi c corridor. In making an assessment of the required risk premium for an investment, MIG considers: stage in toll road life cycle robustness of traffi c and revenue forecast (e.g. quality of data available for forecasting and the nature and extent of future uncertainties) risk transfer in the concession agreement contractual structure and transfer of risk to other parties, such as construction contractors credit standing of counterparties operational complexity (e.g. tolling systems) project leverage fi nancing terms and conditions refi nancing opportunities equity market conditions country-specifi c risks future network developments NORTH AMERICA EUROPE AUSTRALIA assessment of equity partner(s) if applicable including terms of shareholders agreement other specifi c risks and ability to mitigate such risks. MODEL 2008 Analyst Package Macquarie Infrastructure Group 9

12 Overview MIG Investment Strategy (cont.) Realised Toll Road Investments MIG has invested in, and actively managed, toll road assets for over 11 years. During that period MIG has: reviewed more than 160 opportunities across over 20 countries invested in 31 toll roads in 9 countries realised interests in 20 toll roads (13 via Cintra), through both private and capital market processes MIG has achieved IRRs in excess of 20% on all divestments/demergers to date. This solid performance has been a function of: good initial acquisitions active management of investments strategic divestments/demergers. Details of previous divestments/ demergers are outlined in Table 1.5. Table 1.5: MIG asset divestments/demergers Divestment Date Holding period Value (A$m) IRR (%) Transurban Dec 03 7 years Cintra Oct 04 3 years 2, Yorkshire Link Dec 04 5 years Hills Motorway Mar years % of US assets Dec years 1, Demerger Sydney Roads Group Jul years 1, Total 5, Macquarie Infrastructure Group 2008 Analyst Package

13 Overview Valuation Policy MIG values its toll road investments using the Discounted Cash Flow (DCF) approach. This approach estimates the future cash fl ows expected to be generated by the asset and discounts them back to a present value. MIG revalues its investments every six months, with these valuations then used to calculate MIG s Net Asset Backing (NAB). The change in NAB shows the increase (or decrease) in the directors valuation of each MIG stapled security. A large number of variables are incorporated in the valuation models, including: revenue (mainly derived from traffi c and toll price forecasts) operating and capital expenditure for the asset macroeconomic factors such as infl ation, interest rates and foreign exchange rates the capital structure used to fi nance the asset the tax position of the asset. Forecasts for a number of variables are made by MIG in conjunction with various third party experts. Forecast equity cash fl ows are discounted using a rate derived by adding a risk premium to the prevailing risk-free interest rate for the country in which the asset is located. MIG uses the 10-year government bond rate, or its equivalent, as a proxy for the riskfree rate in the country in which the road is located. The risk premium for each asset is individually determined by MIG s Board and refl ects the uncertainty associated with each road s cash fl ows. The risk premiums used for the valuation of MIG s toll roads as at 31 December 2007 are listed in Table 1.6. NORTH AMERICA EUROPE Table 1.6: MIG asset risk premiums as at 31 December 2007 Asset Stage In toll road life cycle Risk premium 407 ETR Ramp-up 3.5% M6 Toll Ramp-up 4.5% APRR Growth 6.0% Westlink M7 Ramp-up 5.0% Dulles Greenway Ramp-up 7.0% Indiana Toll Road Ramp-up 6.0% Chicago Skyway Ramp up 5.5% South Bay Expressway Ramp-up 7.0% Vasco da Gama / 25th April Bridge Ramp-up/Growth 2.8% Warnow Tunnel Ramp-up 5.0% AUSTRALIA MODEL 2008 Analyst Package Macquarie Infrastructure Group 11

14 Overview Valuation Policy (cont.) Non-Concessionaire Assets While MIG s mandate is to invest in toll road assets in OECD and OECD-like countries, it will also make investments in assets that are complementary to MIG s core business. As at 31 December 2007, MIG has one such investment in Transtoll Australia Pty Limited (Transtoll). Transtoll provides hardware and software solutions to the tolling industry. Transtoll s products include web-based violations enforcement processing, web-based account management systems and electronic maintenance and asset management systems. Table 1.7: MIG s Net Asset Backing The techniques used to value MIG s non-concession investments depend on the nature of the investments. The valuation of MIG s investment in Transtoll is based on the price at which a rights issue recently took place. In the absence of a transaction in Transtoll shares, Transtoll is valued based on an EBITDA multiple. The EBITDA multiple has been determined through benchmarking with companies in similar industry sectors listed on the ASX. Transtoll NAB reconciliation 31 December 2007 A$m Portfolio valuation (directors valuation) 10, Cash at balance date 1, Declared distribution at balance date (241.5) - Base fees payable at balance date (18.4) +/- Sundry debtors/creditors 10.7 = Value of MIG Equity 11,086.2 / No. of securities on issue (as at 31 December 2007) 2,415.3 = Net Asset Backing A$4.59 per security Table 1.8: Events significantly affecting MIG s NAB Six months to Primary drivers for significant movements in NAB 31 December 2000 Financial close reached for the acquisition of M6 Toll. There was a signifi cant revaluation of the asset post fi nancial close 31 December 2004 Distribution of Cintra IPO proceeds circa A$1.2 billion ($0.60/security) 24 July 2006 Demerger of mature Australian roads circa A$1.1 billion ($0.38/security) 12 Macquarie Infrastructure Group 2008 Analyst Package

15 represents less than 0.1% of MIG s asset portfolio by value as at 31 December Net Asset Backing Per Stapled Security MIG s NAB is calculated every six months based on updated investment valuations and noninvestment balances. The NAB at 31 December 2007 of $4.59 was calculated as outlined in Table 1.7. Historical NAB for MIG is shown in Figure 1.4. Figure 1.4: Historical Net Asset Backing Reported NAB (A$) Listing Adjustment for $0.60 Distribution of Cintra IPO Proceeds in December 2004 Adjustment for Demerger of ED, M4 and M5 Motorways via In-specie Distribution in July 2006 Dec-96 Adjusted NAB Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun Dec-00 Jun-01 Dec NORTH AMERICA Large changes in NAB per security occur when there are substantial movements in the valuation of MIG s net assets without a similar corresponding change in securities on issue (or vice versa). In three instances, events relating to a single asset have resulted in a large movement in MIG s NAB. These are outlined in Table 1.8. Figure 1.5: Historical security price performance vs MIG NAB EUROPE AUSTRALIA MODEL Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 A$ Dec 96 Jun 97 Dec 97 Jun 98 Dec 98 Jun 99 Dec 99 Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 MIG Net Asset Backing MIG Security Price 2008 Analyst Package Macquarie Infrastructure Group 13

16 Overview Valuation of Toll Roads In general, the value of toll road investments is best determined by the DCF approach. This approach is preferred due to the relatively predictable nature of asset cash fl ows and the fi nite length of concessions. Toll road assets have the following cash fl ow characteristics: large initial capital cost revenue driven primarily by growth in traffi c and toll price low ongoing operating costs as a proportion of revenue high fi nancing costs as a proportion of revenue relatively low ongoing capital expenditure as a proportion of revenue. As with other industries, the future cash fl ows available to equityholders for toll road assets can be determined using a cash fl ow cascade as outlined in Table 1.9. Table 1.9: Cash flow cascade Revenue - Operating costs = Net operating cash fl ow (i.e. EBITDA) - Debt service obligations - Tax payments - Capital expenditure + Debt drawings = Cash fl ow available to equityholders The equity value of an investment is derived by discounting future cash fl ows to equity by an appropriate equity discount rate. The discount rate should refl ect the inherent risk in the investment and is generally calculated by adding a risk premium to the risk-free rate of the country in which the asset is located. The equity value of a toll road asset changes as it moves through the toll-road life cycle. When a toll road is in construction, there is greater uncertainty on future traffi c levels and thus a higher risk premium is used to value the investment. As the toll road proceeds through the life cycle of ramp-up, growth and then maturity, the uncertainty associated with future traffi c levels decreases and a lower risk premium is applied. This reduction in risk premium (known as the re-rating process), coupled with the benefi t of bringing forward future cash fl ows, results in a progressive increase in value as the toll road moves through its life cycle. As an illustration, the value created through the re-rating process for the M6 Toll is presented in Figure Macquarie Infrastructure Group 2008 Analyst Package

17 Accounting Concepts: Accounting Profit vs Free Cash Flow A key valuation driver of toll road assets is their ability to generate free cash fl ows. In contrast to traditional industrial companies, the concept of accounting profi t does not provide a meaningful proxy for free cash fl ow of toll road assets. The nature of toll road assets gives rise to the generation of free cash fl ows before accounting profi t as illustrated in Table The Profi t/(loss) measure in the Income Statement captures a number of non-cash items: Depreciation: The initial capital cost in most cases is debt funded and interest generally capitalises during the construction period. Once the road is open for traffi c, the net capitalised cost (both construction cost and capitalised interest) is depreciated across a specifi ed period of time. In the early years of operation, the large initial capital cost results in signifi cant depreciation charges to the Income Statement which do not have a corresponding cash fl ow impact. Capitalising debt interest: The Income Statement does not distinguish whether interest payments have been capitalised or paid in cash. Thus for assets with capitalising debt facilities, the portion of interest capitalised does not have a corresponding cash fl ow impact. Table 1.10: Example of accounting profit vs free cash flows Figure 1.6: Value created through re-rating the M6 Toll A$millions Cash flow cascade 3,250 3,000 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1, % 7.00% 7.00% 6.50% 6.00% 6.00% 5.50% 5.50% 5.50% 5.00% 5.00% 5.00% 2008 Analyst Package Macquarie Infrastructure Group % Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Construction 407 International 2007 (C$m) M6 Toll Equity Value M6 Toll Risk Premium Income statement Revenue 519 Revenue 519 Expenses (111) Expenses (111) EBITDA 408 EBITDA 408 Other Expenses (2) Interest and Other Expenses (279) Net Interest Paid (201) Depreciation and Amortisation (69) Debt Principal Raised/(Repaid) 107 Tax Expense 0 Net Capital expenditure (90) Profit 60 Net change in Investments/ Reserves (72) Tax Paid 0 Movements in Working Capital (18) Net Cash flow Available 132 Opening Cash Balance 92 Net Cash fl ow Available 132 Cash Available for 224 Distribution Cash Distributed to Equity (120) Closing Cash Balance 104 A$972 million returned via refinancing in August 2006 Ramp-up Growth in value > 20% pa over 6 years NORTH AMERICA EUROPE AUSTRALIA MODEL

18 Overview Valuation of Toll Roads (cont.) Repayment of debt principal: These cash fl ows are not recognised in the Income Statement. Capital expenditure: Under accounting standards, these expenses are generally capitalised to the cost base and depreciated over a specifi ed period of time. For toll roads assets, capital expenditures are lumpy in nature and not evenly incurred during the concession period. As such funding is generally reserved in advance for such expenses. In analysing toll road assets, it is common practice to concentrate on Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) as a headline metric as it provides a meaningful proxy for cash fl ow generation. Debt Financing Unlike traditional industrial companies, toll road assets have the ability to support higher levels of debt fi nancing due to: predictable and growing nature of future cash fl ow streams minimal ongoing operating and capital expenses as a proportion of revenue. In general, toll road assets benefi t from being able to leverage traffi c growth into higher EBITDA growth. Growth in underlying traffi c coupled with growth in toll prices translate to higher revenue growth which, by keeping growth in costs to a minimum, result in even higher growth in EBITDA or operating cash fl ows. Growth in EBITDA for 407 ETR and the ability to leverage growth in traffi c to operating cash fl ows are presented in Figures 1.7 and 1.8 respectively. As toll road assets mature and generate increased free cash fl ow, they are able to support increasing levels of debt. In such instances appropriate use of additional debt is an effi cient means of fi nancing as: the cost of debt is generally lower than equity this enables surplus proceeds from refi nancings to be reinvested in capital improvements or returned to security holders. As toll road assets mature and derisk, the equity value of the asset increases (as illustrated through the M6 Toll in Figure 1.6). Therefore, the use of additional debt does not necessarily result in increased levels of gearing. The appropriate use of additional debt enhances equity value as it brings forward the timing of future equity distributions. Lenders to toll road projects generally use a Project Life Cover Ratio (PLCR) to assess the project s ability to support debt. The PLCR refl ects the number of times the current level of debt can be repaid within the term of the concession (the project life). 16 Macquarie Infrastructure Group 2008 Analyst Package

19 Since toll roads have a fi nite concession term, the use of additional debt must be analysed having regard to: maturity structure of debt tranches to diversify refi nancing risk ability to service principal and interest payments within the remaining concession term. Refi nancing is an integral part of actively managing toll road assets and can add substantial value to equity holders. For example, in C$million Figure 1.7: 407 ETR - increasing operating cash flow Operating Expenses EBITDA Total Revenue Figure 1.8: 407 ETR leveraging traffic growth into higher EBITDA growth 5% 14% August 2006 MIG refi nanced its investment in M6 Toll increasing gross debt levels from 620 million to 1.0 billion. Key terms of the transaction: refi nanced acquisition debt facilities with a 1.0 billion fi nancing package committed 30 million Capital Expenditure Facility nine-year facility with 30-year interest rate hedging rated BBB by Standard & Poor s. 16% Outcome for MIG: reduced credit margins and swap rates signifi cantly extended interest rate hedging 100% covered for 30-years capitalising swaps resulting in better matching of cash fl ows over the life of the concession increase in projected fi ve-year average distribution of 4 million fi ve-year average Debt Service Cash Cover ratio increased from 1.7x to 2.8x project life cover ratio reduced from 5.9x to 3.2x returned A$972 million via equity distribution to MIG. Sensitivity to Interest Rate Movements Sensitivity to interest rate movements is an important consideration when valuing toll roads investments. In the short term, hedging is generally used to reduce exposure to rising interest rates. MIG s investments are relatively insensitive to short-term changes in interest rates as a signifi cant proportion of the debt is hedged. Table 1.11 outlines current levels of hedging for MIG s key assets (by value), including policy initiatives in place to manage exposure to movements in interest rates. NORTH AMERICA EUROPE AUSTRALIA MODEL 2007 Traffic Growth (ADT) Revenue Growth EBITDA Growth 2008 Analyst Package Macquarie Infrastructure Group 17

20 Overview Valuation of Toll Roads (cont.) In the longer term, toll road investments have a natural hedge to rising interest rates as there is some correlation between interest rates and infl ation, i.e. they often move together. Rising interest rates increase the cost of capital (discount rate), decreasing the value of the investment. However, higher infl ation increases the valuation as toll road assets generally have infl ation-linked toll pricing mechanisms. Table 1.12 illustrates the natural hedge to rising nominal interest rates for MIG s two largest investments. Table 1.11: MIG assets hedging position Minimum required 1 Hedging % as at 31 December ETR 90% of all debt 2 100% M6 Toll 75% of all debt 100% APRR 75% of all debt 75% Westlink M7 85% of senior debt 100% Dulles Greenway 80% of all debt 2 100% Chicago Skyway 75% of senior debt 100% Indiana Toll Road 100% of senior debt for 20 years 98% 1. Minimum requirement stipulated by fi nancing documents. 2. No stated policy, refl ects view of Board and management. Table 1.12: Natural hedge to rising nominal interest rates 407 ETR A$m M6 Toll A$m Valuation at 31 December ,770 3,026 Interest rates +1% 1 (101) (12) Risk-free rate +1% 2 (769) (512) Infl ation +1% 3 1, Valuation 3,985 3,418 Valuation uplift Due to increase in debt servicing costs. 2. Due to increase in discount rate/cost of equity. 3. Due to increase in toll revenue as toll prices linked to infl ation. 18 Macquarie Infrastructure Group 2008 Analyst Package

21 Overview Group Structure MIG is a triple stapled security, consisting of a unit in Macquarie Infrastructure Trust (I) (MIT(I)), a unit in Macquarie Infrastructure Trust (II) (MIT(II)), and a share in Macquarie Infrastructure Group International Limited (MIGIL) as shown in Figure 1.9. Stapled securities are two or more instruments that are quoted and traded as if they are a single instrument. The responsible entity of MIT(I) and MIT(II) is Macquarie Infrastructure Investment Management Limited (MIIML) while MIGIL is advised by Macquarie Capital Funds (Europe) Limited (MCFEL). MIIML and MCFEL, together the Manager, are wholly owned subsidiaries of Macquarie Group Limited. Securities consisting of one or more investment vehicles managed by a third party are registered in Australia under the Managed Investments Act. MIG s structure has been developed to facilitate the distribution of income and other surplus cash fl ows to security holders in the most effi cient manner possible. Figure 1.9: MIG group structure Distribution of income and other free cash flow Debt Facilities MIG s interests in toll roads are held via holding companies, in separate project vehicle legal entities. The debt borrowed by these project vehicles is on a non-recourse basis. MIG only makes use of debt facilities for short-term bridge fi nancing. Taxation Distribution of dividends and other free cash flow MIT(I) is considered to be a fl ow through trust for the purposes of Division 6 of the Australian Income Tax Assessment Act MIIML, as responsible entity of MIT(I), will not be liable for income tax on the income of the Trust, provided that the income of MIT(I) is fully distributed to unitholders each year. Income distributed by MIT(I) to unitholders retains its character and therefore MIT(I) distributions may comprise different components (e.g. interest, dividend, capital gains, etc.). Distribution of dividends and other free cash flow NORTH AMERICA EUROPE AUSTRALIA MIT(I) (Australia) Stapled MIG Stapled Security MIT(II) (Australia) Stapled MIGIL (Bermuda) Assets Assets Assets MODEL 2008 Analyst Package Macquarie Infrastructure Group 19

22 Overview Group Structure (cont.) MIT(II) is a trading trust for the purposes of Division 6C of the Australian Income Tax Assessment Act MIT(II) may take controlling interests in the assets in which it invests, carry on a trading business itself or invest in a partnership or joint venture which carries on a trading business. A consequence of being a Division 6C trust is that MIT(II) is taxed as a company and is subject to tax at the corporate tax rate. This means that distributions from MIT(II) are akin to company dividends and may be franked. As of 1 July 2003, MIT(II) has been the head entity of a tax consolidated group. This means that MIT(II) will always be treated as a company even if it no longer meets the Division 6C tests. MIGIL (a Bermudian mutual fund company) is the ultimate holding company for MIG s European and Canadian assets. Bermuda does not impose a tax on the income or capital gains of Bermudian companies. Distributions from MIGIL will generally comprise dividends. PFIC Treatment Under certain circumstances, US tax legislation seeks to tax US investors when they invest in foreign entities which predominantly make passive investments (defi ned as Passive Foreign Investment Companies or PFICs). In general, a PFIC is any non- US corporation where 75% or more of its gross income for the year is passive income (interest, dividends, etc.) or where at least 50% of its average assets held during the year produce passive income. For stapled entities that trade as a single security (such as MIG), the legislation seeks to determine whether any of the stapled entities (i.e. MIT(I), MIT(II) and MIGIL) are PFICs. If an entity is deemed a PFIC, the US investor can be assessed on PFIC income without necessarily receiving distributions from the PFIC (i.e. taxable income without receiving cash). In determining whether entities are PFICs, a look through rule applies. Where entities have an interest of 25% or more, by value, of the stock of a subsidiary, the holding 20 Macquarie Infrastructure Group 2008 Analyst Package

23 entity is deemed to have earned and is deemed to own the relevant proportion of income and assets of the subsidiary. Stock of a less than 25% owned subsidiary is automatically treated as passive, and any income derived therefrom is passive income. As it relates to MIG, MIG has recently updated its analysis and believes that for the year ended 30 June 2007 that MIT(I) and MIGIL are not PFICs but that MIT(II) is a PFIC. The change in status for MIT(II) has arisen due to its sales of the Sydney toll roads (M4, M5 and Eastern Distributor) and 50% of its interests in US toll roads (Dulles Greenway, Chicago Skyway, Indiana Toll Road and South Bay Expressway). MIG will continue to monitor the situation. This analysis is subject to fi nal legal sign-off. MIG takes no responsibility for investors or others who act on the information above. MIG recommends that investors or others affected should seek their own professional advice. Investors who wish to confi rm the PFIC status of these entities at 30 June 2007 and beyond should contact MIG s investor relations department (see contact details). NORTH AMERICA EUROPE AUSTRALIA MODEL 2008 Analyst Package Macquarie Infrastructure Group 21

24 Overview Group Structure (cont.) Figure 1.10: MIG s current structure MIT (I) Stapled 100% Western Sydney Orbital Funding Trust 100% LMI WSO Holding No.3 Pty Limited Western Sydney Orbital Holding Trust 100% 100% 40.0% Western Sydney Orbital Funding (Option) Trust 7.5% MIG - Western Sydney Orbital Holding Company Pty Ltd* 100% 47.5% 47.5% 47.5% 8.5% 39.0% FinCo (WSO Finance Pty Ltd) WestLink Motorway Partnership Nominee (WestLink Motorway Ltd) WSO Co (WSO Co Pty Ltd) Stapled MIG Investments Australia Pty Ltd* 100% 100% MIG Indiana Holdings LLC WestLink M7 Skyway 100% MIG Holdings (US) LLC 1% 49% Indiana Toll Road Partnership Indiana Toll Road 50% 49% Dulles Greenway Transtoll Chicago Skyway Partnership Statewide Mobility Partners LLC South Bay Expressway 45% 100% APRR 407 ETR Skyway Concession Company Holdings LLC ITR Concession Company Holdings LLC M6 Toll 100% 100% Warnow Tunnel Vasco de Gama & 25th April Bridges Skyway Concession Company LLC ITR Concession Company LLC 22 Macquarie Infrastructure Group 2008 Analyst Package

25 MIT (II) Stapled MIGIL 100% Macquarie Green Bermudian Holdings Ltd 100% Macquarie 50% Infrastructure US Pty Ltd* South Bay Expressway LP 100% 90% MIBL Finance Luxembourg SarL 10% MEI Macquarie Motorways Group Limited 100% NORTH AMERICA 100% MIT (II) Holdings 59.51% Pty Ltd* Transtoll Pty Ltd 100% Midland Expressway Ltd 100% Macquarie Infrastructure Australia Pty Ltd* 50.2% MAF Finance Sarl 100% Macquarie Infrastructure (UK) Ltd 30.61% Lusoponte Concessionaria para a Travessia do Tejo SA EUROPE 50% 50% % MIG Holdings 2 (US) LLC 50% Dulles Greenway Partnership 100% MIG Investments 3 (US) LLC 100% Shenandoah Greenway Corp (GP) 0.1% Toll Road Investors Partnership II LP Macquarie Autoroutes de France SAS 50% -1 Financière Eiffarie SAS 100% Eiffarie SAS 81.48% Autoroutes Paris- Rhin-Rhône Macquarie Infrastructure Toll Route SA 100% 100% 22.65% Macquarie Infrastructure Canada Inc 30% 407 International Inc Macquarie Infrastructure Luxembourg SA 77.35% 70% European Transport Investments (UK) Ltd 70% Warnowquerung GmbH & Co KG Warnowquerung Verwaltungsgesellschaft GmbH 100% AUSTRALIA MODEL * Members of Australian Tax Consolidated Group (Head Entity MIT(II)) 2008 Analyst Package Macquarie Infrastructure Group 23

26 Overview MIG Reporting MIG prepares two reports which cover the operational and fi nancial performance of MIG and its underlying assets. In addition to the statutory fi nancial accounts, MIG provides a quarterly Management Information Report to assist analysts and investors in understanding MIG s performance. Table 1.13: MIG s financial reporting MIG Financial Statements The fi nancial report for the year ended 30 June 2007 and the interim report for the half year ended 31 December 2007 are prepared under Australian Accounting Standards. Where MIG has a controlling interest in a toll road, the assets and liabilities of the concessionaire entity are consolidated into the accounts of MIG. These assets and liabilities include the road itself, the tolling concession (being the right to levy tolls) and non-recourse project level debt. MIG currently only consolidates Midland Expressway Limited (M6 Toll). Report Frequency Description Financial Statements Semi-annual Statutory accounts as required for an ASX-listed reporting entity Management Information Report Quarterly Presents MIG s key proportionally consolidated performance metrics and balance sheet items Also presents MIG s cash fl ows and investments at fair value without consolidating MIG s controlled assets 24 Macquarie Infrastructure Group 2008 Analyst Package

27 In accordance with Australian Accounting Standards (AASB139), all non-controlled MIG toll road investments are recorded in MIG s balance sheet at fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an arm s length transaction. A halfyearly assessment of the fair value of each non-controlled entity is made by the MIG Board, and revaluation movements are recognised in MIG s Income Statement. Acquisition costs of all non-controlled MIG toll road investments are written off at the time of purchase. Management Information Report The Management Information Report outlines: MIG s proportionate earnings, being the aggregation of MIG s proportionate share of the fi nancial results of each road asset based on MIG s benefi cial ownership interest details of traffi c volumes across MIG s portfolio of investments a balance sheet and statement of cash fl ows that refl ects transactions between MIG and each investment, disregarding the accounting concept of consolidation for investments in which MIG has a controlling interest. In the balance sheet, which is used to derive MIG s Net Asset Backing, MIG s investments in its controlled and noncontrolled assets are refl ected at the MIG directors estimates of fair value. NORTH AMERICA EUROPE MODEL AUSTRALIA 2008 Analyst Package Macquarie Infrastructure Group 25

28 Overview Distributions MIG has confi rmed distribution guidance of 20.0 cents per stapled security for the 12 months to 30 June 2008 and provided preliminary guidance of 20 cents per stapled security for the 12 months to 30 June This distribution guidance is subject to there being no material changes in the underlying cash fl ow forecast assumptions of the MIG business, including changes in proposed refi nancings and the projected performance of the portfolio. Components of MIG Distributions The classifi cation of MIG s distributions depends on how these funds have been derived. The components of MIG s distributions can vary every fi nancial year and are disclosed in its annual Tax Statement Guide. Figure 1.11: MIG distributions 1,300 1,200 1,100 1, Jun 97 Dec 97 Jun 98 Dec 98 Jun 99 Dec 99 Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 A$ million The key components may include: Franked Distributions: Where Australian income tax has been paid within the MIG structure imputation (franking) credits may be attached. These franking credits are available to domestic MIG investors. Fully franked distributions are not subject to Australian dividend withholding tax when paid to MIG s offshore investors. Capital Gains: Capital gains made by MIT(I) on the disposal of assets form part of MIT(I) s assessable income which will be distributed to security holders. As MIT(I) is a fl ow through trust, the capital gain generated on the sale maintains its character when the proceeds are distributed to investors. These capital gains will form part of security holders Normal Distribution Cintra distribution SRG in-specie distribution 26 Macquarie Infrastructure Group 2008 Analyst Package

29 assessable income, and the Capital Gains Tax (CGT) discount should be available for qualifying investors (broadly, individuals and superannuation entities). Tax Deferred: Tax deferred distributions do not form part of security holders assessable income for tax purposes. These distributions reduce the cost base of security holders investments for the purposes of Australian Capital Gains Tax calculations. In the event that these distributions reduce the cost base to zero, any excess will constitute capital gains. The CGT discount should be available for qualifying investors who have held their MIG securities for 12 months or more. Foreign Distributions: Distributions made by MIGIL are classifi ed as foreign distributions. These are not subject to Australian withholding tax when paid to MIG s offshore investors. MIG informs security holders of the actual components of its distributions in the annual Tax Statement Guide distributed in or around August each year. MIG recommends that all investors obtain their own tax advice in relation to the treatment of MIG distributions. Distribution Reinvestment Plan: MIG has traditionally offered investors the opportunity to reinvest distributions in additional MIG securities through a Distribution Reinvestment Plan (DRP). Only investors with a registered address in Australia or New Zealand are eligible to participate in the DRP. The security price for the MIG DRP is calculated as the average of the daily MIG Volume Weighted Average Prices (VWAPs) over the 10 trading day period ending no later than fi ve trading days before the distribution payment date, which is then adjusted for any applicable discount offered. Under its constituent documents, MIG is able to offer a price discount of up to 10% for stapled securities issued under the DRP. MIG currently offers no discount on stapled securities issued under the DRP. NORTH AMERICA EUROPE AUSTRALIA MODEL 2008 Analyst Package Macquarie Infrastructure Group 27

30 Overview On-market Buy-back On 24 August 2006, MIG announced that the Australian Securities and Investments Commission (ASIC) had granted relief for MIG to undertake an on-market buy-back of up to A$500 million. This was the fi rst time this relief had been granted for an Australian listed trust. The buy-back was initiated because MIG assessed that it was the most effi cient way of distributing surplus cash and generating value for security holders. On 18 December 2006, following the successful completion of the sale of US assets to Macquarie Infrastructure Partners (MIP) and having received the required approvals from ASIC and MIG s security holders, MIG announced that the buy-back would be expanded by a further A$500 million to a total of up to A$1 billion. On 15 January 2008, MIG announced the successful completion of the onmarket buy-back having bought back 292,218,706 stapled securities for a total consideration of $999,999, The price paid by MIG for stapled securities under the buy-back ranged between $2.90 (23 November 2007) and $3.88 (27 February 2007), with an average price of $ Macquarie Infrastructure Group 2008 Analyst Package

31 Overview Securities on Issue A summary of the dates and issue prices of MIG s securities is set out below. Table 1.14: Summary of securities on issue Date Issue of securities No. of securities Price (A$) Cumulative Dec-96 Initial Public Offering 300,000,000 $ ,000,000 Dec-96 Issue to Manager 18,000, ,000,000 May-97 Private Placement 31,800,000 $ ,800,000 Aug-97 Dividend Reinvestment Plan (DRP) 7,823,883 $ ,623,883 Dec-97 1:3 Rights Issue 119,211,526 $ ,835,409 Feb-98 DRP 7,163,915 $ ,999,324 Aug-98 DRP 11,695,388 $ ,694,712 Feb-99 DRP 7,547,463 $ ,242,175 Mar-99 Private Placement 55,900,000 $ ,142,175 Aug-99 DRP 11,601,860 $ ,744,035 Oct-99 1:2 Rights Issue 285,346,519 $ ,090,554 Oct-99 Private Placement 12,804,420 $ ,894,974 Feb-00 DRP 11,445,059 $ ,340,033 Aug-00 DRP 10,050,933 $ ,390,966 Feb-01 DRP 8,891,810 $ ,282,776 Apr-01 Private Placement 58,000,000 $ ,282,776 May-01 Private Placement 6,640,001 $ ,922,777 Aug-01 DRP 5,408,875 $ ,331,652 Sep-01 Institutional Entitlement Offer 409,692,677 $ ,379,024,329 Oct-01 Institutional/Retail Entitlement Offer 188,572,589 $ ,567,596,918 Feb-02 DRP 3,960,861 $ ,571,557,779 Apr-02 Institutional Placement 61,540,000 $ ,633,097,779 Apr-02 Institutional Entitlement Offer 180,484,959 $ ,813,582,738 May-02 Retail Entitlement Offer 69,515,042 $ ,883,097,780 Aug-02 DRP 9,771,131 $2.84 1,892,868,911 Dec-02 Manager Performance Fee 2,047,402 $2.97 1,894,916,313 Feb-03 DRP 6,371,778 $3.30 1,901,288,091 Aug-03 DRP 4,954,868 $3.50 1,906,242,959 Aug-03 Manager Performance Fee 20,131,790 $3.57 1,926,374,749 Feb-04 DRP 4,153,503 $3.28 1,930,528,252 Aug-04 DRP 4,549,794 $3.39 1,935,078,046 Aug-04 Manager Performance Fee 1,862,630 $3.27 1,936,940,676 Feb-05 DRP 227,949,622 $3.47 2,164,890,298 Aug-05 DRP 17,594,493 $4.09 2,182,484,791 Sep-05 Institutional Placement 174,418,605 $3.87 2,356,903,396 Sep-05 Manager Performance Fee 21,861,756 $4.19 2,378,765,152 Oct-05 Security Purchase Plan 26,731,829 $3.87 2,405,496,981 Feb-06 DRP 40,035,853 $3.40 2,445,532,834 Feb-06 DRP 29,966,556 $3.48 2,475,499,390 Aug-06 DRP 55,504,517 $2.66 2,531,003,907 Nov 06 Conversion of ReCNs 2 165,048,894 $3.06 2,696,052,801 Oct 06 Jan 08 On-market buy-back 3 (292,218,706) $ ,403,834, Includes UK stamp duty paid by the MIG investor, in relation to shares in MEI. 2. MIG issued Reset Convertible Notes (ReCNs) to defer its equity contribution to the Westlink M7 project. The ReCNs were converted to MIG securities by ReCN holders in November 2006 at a price of $ per security. 3. On-market buy-back of up to A$1 billion commenced on 3 October 2006 and was completed on 14 January Weighted average price paid under the on-market buy-back. NORTH AMERICA EUROPE AUSTRALIA MODEL 2008 Analyst Package Macquarie Infrastructure Group 29