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1 Infrastructure in Italy – A Case of Misperception of Risk? 27 March 2014 GESAC HfV Enel Rete Gas Mediterranea delle Acque SEA Mediterranea delle Acque Enel Rete Gas Metroweb
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Carlo Michelini - F2i Presentation, Yielco, March 2014

Aug 23, 2014

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Carlo Michelini

Presentation of the activities of F2i - Fondi Italiani per le Infrastrutture held by Carlo Michelini. The document lists the reasons for the choice of the area of intervention and the most important operations achieved.
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Page 1: Carlo Michelini - F2i Presentation, Yielco, March 2014

1

Infrastructure in Italy – A Case of Misperception of Risk?

27 March 2014

GESAC

HfV

Enel Rete Gas

Mediterranea delle Acque

SEA

Mediterranea delle Acque

Enel Rete Gas

Metroweb

Page 2: Carlo Michelini - F2i Presentation, Yielco, March 2014

2

Introduction to F2i

F2i was created in 2007 by the main Italian public and private financial institutions to facilitate local privatisation and infrastructure spin-offs from the largest Italian groups

F2i has launched its Second Fund, with total Fund target size € 1,2 bn

‒ With tiotal AuM equal to € 2,5 billion, F2i is the largest Italian infrastructure asset manager and one of the most important in Europe

‒ Its portfolio includes some of the major Italian infrastructure (such as the Milan airports, the broadband Milan network, the second largest Italian gas distribution company)

‒ Its Sponsors include: State-owned bank Cassa Depositi e Prestiti; the two largest Italian Banks (Banca Intesa San Paolo and Unicredit); some of the largest Banking Foundations; two Italian Pension Funds; and one major European asset manager (Ardian)

‒ 35 strong management team with decades of experience in infrastructure, led by Vito Gamberale (40 years of experience in the sector)

Page 3: Carlo Michelini - F2i Presentation, Yielco, March 2014

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8th largest country in the World in GDP terms*

3d largest economy in the Euro zone in GDP terms*

32% of GDP is exported

60 million inhabitants

4.4 million SMEs, one of the largest European industrial areas

100 industrial districts, producing about 1/3d of Italian manufacturing

90 universities, some of the oldest in the World

47 UNESCO sites of outstanding cultural and historical significance

Why Italy?Italy ranks 3d in the Euro zone in GDP terms

* Source : Prometeia, data as of 2012

Page 4: Carlo Michelini - F2i Presentation, Yielco, March 2014

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F2i – Why infrastructure in Italy ?Italy has a solid infrastructure endowment…

300’000 km water distribution networks

252’266 km gas distribution networks

150’000 km sewage networks

146 million airport passengers

41 GW renewable energy generation capacity

24’000 km of rail network (1’370 km high speed)

180’000 km national roads and 6’700 km highways

3 hub ports and 21 first-level commercial ports

* Source : Prometeia, data as of 2012

Page 5: Carlo Michelini - F2i Presentation, Yielco, March 2014

5

Italy presents various cases in which it excels for its engineering and architectural skills, that allow it to carry out cutting edge works

…with examples of engineering excellence…

High Speed RailIt consists of two lines connecting most of Italy’s major cities (first line connects Turin to Naples, second Turin to Venice). These lines operate at top speeds of over 300 km/h.Several projects are underway to expand the system. Plan include both more domestic connections and new international connections

Mose ProjectThe Mose (Modulo Sperimentale Elettromeccanico) flood protection project is currently being built to protect Venice and its historic city center from high waterMoving flood barriers are being erected at the three inlets of Lido, Malmocco and Chioggia that connect the Venetian Lagoon with the Adriatic SeaThe project is absolutely unique in the world

Page 6: Carlo Michelini - F2i Presentation, Yielco, March 2014

6- 6 -

Terna – premium/(discount) evolution on RAB

I REGULATORY PERIOD(1)

2004-2007Regulatory wacc: 6.7%

II REGULATORY PERIOD(2)

2008-2011Regulatory wacc : 6.9%

III REGULATORY PERIOD(3) 2012-2015

Regulatory wacc : 7.4%

Financial crisisIntroduction of Robin Hood Tax for companies operating in regulated sectors

4,209 4,369

5,307 5,4024,987

6,243 6,305

5,648

6,693

9.8% 1.9%

10.7%

(7.3%)(3.0%)

8.5% 6.7%

(0.7%)3.7%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Market capitalization - average of the year (€m) Premium/ (discount) on RAB (%)

Note: Premium / (discount) on RAB calculated considering the RAB of the period compared with the implied EV in the average market capitalization of the year, adjusted for the value of non-regulated assets (including non-controlling interests in non regulated Brazilian companies, photovoltaic other non-core minor assets) and their impact on NFP

…with rational regulatory frameworks

Page 7: Carlo Michelini - F2i Presentation, Yielco, March 2014

7- 7 -

Snam – premium/(discount) evolution on RAB

II REGULATORY PERIOD(1)

DISTRIBUTION 2004-2008: Regulatory wacc : 7.5%TRANSPORT 2005-2009: Regulatory wacc : 6.7%

III REGULATORY PERIOD(2)

DISTRIBUTION 2009-2012: Regulatory wacc 7.6%METERING 2009-2012: Regulatory wacc 8.0%

TRANSPORT 2010-2013: Regulatory wacc 6.4%

Financial crisis and acquisition of Italgas and Stogit

Introduction of Robin Hood Tax for companies operating in regulated sectors

Separation of Snam from ENI

8,606

7,101

8,6558,227

11,105

12,91713,683

11,863 12,308

19.4%

4.3%

20.0%

14.1%

(6.2%)

2.2% 5.9%

(1.7%)2.2%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Market capitalization - average of the year (€m) Premium/ (discount) on RAB (%)

Note: Premium / (discount) on RAB calculated considering the RAB of the period compared with the implied EV in the average market capitalization of the year, adjusted for the value of non-regulated assets (including non-consolidated interests in gas distribution, district heating activities, interest in the UK interconnector and other non-core minor assets) and their impact on NFP

…with rational regulatory frameworks…

Page 8: Carlo Michelini - F2i Presentation, Yielco, March 2014

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…and attractive pricing: quality Italian assets are underpriced compared to other European countries

Airports : majority transactions EV/EBITDA multiples

Wheighted average global

transactions:14.4x

Wheighted average Italian transactions:

9.9x

Airports : minority transactions EV/EBITDA multiples

Gas : majority transactions EV/EBITDA multiples

Wheighted average global transactions:

12.7x Wheighted average Italian transactions:

8.9x

Water : all transactions EV/EBITDA multiples

Wheighted average global transactions:

11.0x

Wheighted average Italian

transactions:8.2x

Wheighted average global

transactions:9.9x

Wheighted average Italian transactions:

8.9x

Page 9: Carlo Michelini - F2i Presentation, Yielco, March 2014

9

Asset Premium vs. Gov. Bond 10Y

MDA Water 9,3%

SEA II Airport 10,0%

TRM Waste-to-Energy 8,0%

SIA Technology Infrast. 9,9%

ERG II Gas Distr. 8,8%

Average 9,2%

Sector

Risk premium between government bonds and infra investments

─ F2i’s IRR expectations show an average premium (~9%) to Italian Government Bonds 10Y higher than UK and Germany (~ 7- 8%).

Asset Country Sector

NWG UK Water

Thames UK Water

Stansted UK Airport

SESW UK Water

Phoenix UK Gas Distr.

Average UK

OGE GER Gas Transp.

6.8%

7.1%

7.9%

7.3%

8.6%

Premium vs. Gov. Bond 10Y

8.0%

9.2%

0%

3%

6%

9%

12%

15%

ITA Gov. Bond 10Y

SIA

ERG II

SEA II

TRM

Infra investments return vs. Government Bonds in Italy... … and in Europe

Roumored IRRs

0%

3%

6%

9%

12%

15%

UK Gov. Bond 10Y GER Gov. Bond 10Y

Oct. 2011 Oct. 2012 Oct. 2013

StanstedAirport

UK

Phoenix Gas Distr.

UKOGEGas Transp.

GER

NWGWater

UKThamesWater

UKSESWWater

UK

Oct. 2011 Oct. 2012 Oct. 2013

F2i Fund I and Fund II Investments (in portfolio) and expected IRR (1).

F2i Fund II Investments (ERG II concluded and SIA expected to be formally closed by April 2014) and expected IRR (2).

(1) Expected IRRs represent the expected return as at 31 December 2012.

(2) Expected IRRs represent the expected return at signing.

MDA

Page 10: Carlo Michelini - F2i Presentation, Yielco, March 2014

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A comparison in the water sector

─ The spread between the expected IRR for F2i in the water sector in Italy and the one expected in the UK market, is justified both from the gap in the risk free rate (i.e. country risk premium) and the specific asset risk.

4,5%2,2%

9,3%

7,8%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

Expected IRR - F2i Water Expected IRR - UK Water

13,8%

10,0%

Spread between Italian and UK Government Bonds of approx. 230 bps

Spread relating to the different risk between Italian and UK water business of approx. 150 bps

Page 11: Carlo Michelini - F2i Presentation, Yielco, March 2014

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Market dislocations, financial constraints, regulatory changes, liberalizations and privatizations are fueling an important flow of quality opportunities in Italy, particularly in these sectors :

Italian infrastructure includes sectors of particular attractiveness

• Well established RAB-base regulation allowing strong margins and cash generation• Significant opportunities for consolidation among 250+ gas distributors

• Asset fragmentation• Ample potential in revenue and cost synergies through coordinated management of several facilities

• Focused roll-out of ultrabroadband infrastructure in selected urban centers• Substantial opportunities in mobile telephony and broadcasting towers, due to divestments by incumbents

• Strong trend to develop more waste processing facilities, green and brownfield opportunities• Highly fragmented market, with the first nine operators capturing only 9% total market share

Gas

Toll roads

Telecoms

Waste

Airports

• Opportunity to create a large operator in a core infrastructure sector by participating in selected privatizations

• Italian water network is obsolete, with average distribution losses of 37% and insufficient coverage• Sector is highly fragmented, with thousands of local operators and only few national playersWater

• Disposal opportunities from over-leveraged utilities in a favorably regulated sector• Acquisition opportunities in renewable energy generation due to sector fragmentation and sub-optimal operator scalePower

Page 12: Carlo Michelini - F2i Presentation, Yielco, March 2014

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Enel Rete Gas

GESAC

Enel Rete Gas

SEA

Page 13: Carlo Michelini - F2i Presentation, Yielco, March 2014

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Mediterranea delle Acque

HfV

Metroweb

Mediterranea delle Acque

Page 14: Carlo Michelini - F2i Presentation, Yielco, March 2014

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Acquisition of 100% stake in Enel Rete GasCo-investor: AXA Private Equity (28%)Date: May 2009 EV €1’447 millionDate: December 2013 EV €2’450 millionType: brownfieldSecond largest gas distributor in Italy

Enel Rete Gas

Market share (%) 11

Clients (million) 2.23

RAB (€ million) 1’565

Turnover (€ million) 396

EBITDA (€ million) 230

Pipe network (km) 32’946

Municipalities 1’213

Acquisition of 100% stake in E.On ReteCo-investor: AXA Private Equity (25%)Date: April 2011EV €255 millionType: brownfieldSeventh largest gas distributor in Italy

Enel Rete Gas + E.ON Rete ∆

Market share (%) 13 +18%

Clients (million) 2.79 +25%

RAB (€ million) 1’864 +19%

Turnover (€ million) 528 +33%

EBITDA (€ million) 274 +19%

Pipe network (km) 41’539 +26%

Municipalities 1’479 +22%

Acquisition of 100% stake in G6 Rete GasCo-investor: AXA Private Equity (25%)Date: September 2011 EV €742 millionType: brownfieldSixth largest gas distributor in Italy

Enel Rete Gas + E.ON Rete + G6 Rete Gas ∆

Market share (%) 17 +55%

Clients (million) 3.81 +71%

RAB (€ million) 2’588 +65%

Turnover (€ million) 689 +74%

EBITDA (€ million) 360 +56%

Pipe network (km) 57’237 +74%

Municipalities 1’962 +62%

F2i – Case studies – Fund I and & II investmentEnel Rete Gas – consolidation into Italy’s second largest gas distributor

Page 15: Carlo Michelini - F2i Presentation, Yielco, March 2014

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Investment rationale

• Second largest gas distributor in Italy, with 11% market share in 2009• Predictable revenue streams from regulated activities• Strong cash generation• Ideal platform to lead consolidation strategy in Italian gas distribution sector, in

order to reach similar industry structure as in other European countries

Investment overview

• Description: Enel Rete Gas is the second largest gas distributor in Italy

• Deal source: Tender process

• ERG investment dates: September 2009 (€279m for 63.8%) and December 2013 (€50.6m for 8.1%); F2i total ownership is 72%

• Co-investor: Axa Private Equity (28% ownership)

• Add-on investment dates: E.ON Rete 04/2011 (€71m for 100%); G6 Rete Gas 09/2011 (€68m for 100%)

Value creation

Actions•Led two major acquisitions to build a group with 17% market share

• E.ON Rete : seventh largest• G6 Rete gas : sixth largest

•Integrate and rationalize group• Integrate management, structure roles & responsibilities• Internalize specific services previously out-sourced to Enel• Rationalize field operations• Harmonize processes and use of best practices• Integrate and upgrade IT systems

•Market leader in terms of • Revenue per client• Technical quality (AEEG incentives)• Network inspection• Average time for rapid intervention• Non-standard services

•Lead innovation, service quality and safety

Results above expectations•Synergies over 2x higher as initially forecast and significant cost reduction•Consolidated group results are above budget in turnover, EBITDA and EBIT in 2012•€314.5m distributed in total to shareholders by ERG in 2010-2013•Net financial position substantially improved

Key Statistics 2009 2010 2011 2012 2013e

Revenue (€m) 318 361 629 689 685

EBITDA (€m) 161 189 323 360 370

Margin (%) 51% 52% 51% 52% 54%

Dividend strategy and exit

• Optimize dividend flows• Exit through IPO or sale to strategic buyer

10 Largest LBOs in Europe 2009 (Bloomberg)

F2i – Case studies – Fund I and & II investmentEnel Rete Gas – consolidation into Italy’s second largest gas distributor

Page 16: Carlo Michelini - F2i Presentation, Yielco, March 2014

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F2i – Case studiesF2i Airports Network – 37% of total Italian passengers traffic

Acquisition of 70% stake in GesacDate: 12.2010 + 02.2011 EV €225 –164 million (weighted average € 221 million)Airport: NaplesType: Brownfield7th largest airport by passengers

GESAC

Market share (%) 3.9

Passenger (million) 5.8

Turnover (€ million) 71

EBITDA (€ million) 22.9

EBITDA Margin 32%

Acquisition of 44.3% of SEA in two stepsDate: 12.2011 + 12.2012 EV €1.68 - 1.41 billionAirports: Milan Malpensa & Linate, (Bergamo indirectly)

Type: Brownfield2nd largest hub by passengers

SEA*

Market share (%) 19

Passengers (million) 28

Turnover (€ million) 621

EBITDA (€ million) 141.5

EBITDA Margin (%) 23%

Acquisition of 50.79% stake in SagatDate: December 2012 EV €117 millionAirports: Turin, (Bologna indirectly) Type: Brownfield12th airport by passengers

SAGAT*

Market share (%) 2.4

Clients (million) 3.5

Turnover (€ million) 63

EBITDA (€ million) 14

EBITDA Margin (%) 22%

MXPBER

LIN

NAPNAP

Majority stake

Qualified minority stake

Minority stake

* Data excludes indirect interests in SACBO and SAB

Majority stake

Qualified minority stake

Minority stake

Majority stake

Qualified minority stake

Minority stake

MXPBERLIN

BOL

TOR

NAP

Page 17: Carlo Michelini - F2i Presentation, Yielco, March 2014

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F2i – Case studies – Fund I and & II investmentSEA Airports – Milano Malpensa and Milano Linate

Investment rationale• Italy is one of the largest European airport markets, featuring strong growth

(2000-2012 CAGR +4%)

• Combining different airport infrastructures to create a network sharing a common value creation strategy

• SEA manages the 2nd largest passengers hub in Italy and 9th in Europe and the leading cargo traffic airport (60% of total annual cargo volume in Italy)

• The combined assets of F2i’s airport network create a network of 54 million passengers in 2012 representing 37% of the total Italian passenger traffic

• Attractive acquisition multiple (8.2x for SEA II) vs. International average(13.9x)

Investment overview

• Description: SEA is the second largest airport hub in Italy• Ownership: 8.6% of SEA held by Fund II (44.3% of SEA by Fund I &

II)• Indirect ownership: 31% of SACBO (held by SEA)• Deal Source: Proprietary• F2i airport investments :

Fund I: 12.2010 €81 million GESAC EV €221 million Fund I: 12.2011 €385 million

SEA (I) EV €1.68 billion Fund I:12.2012 €60 million SEA (II) EV €1.41

billion Fund II: 12.2012 €87 millionSEA (II) EV €1.41 billion

Fund I: 12.2012 €63.5 million SAGAT EV €117 million

Value creation

Actions•Take advantage of the highly fragmented Italian airport sector by opportunistically acquiring strategic airports

•Create a network of efficient and profitable airports that can be managed pursuant to a common value creation strategy and leveraging economies of scale

•F2i already invested in 3 leading airports• GESAC – Naples airport • SEA – Milan Malpensa & Linate airports + Bergamo indirectly• SAGAT – Turin + Florence and Bologna indirectly

•F2i created an Airport Advisory Board to:• Share best industry practices and a common strategy• Improve revenue management through coordination of major

customers and retailers• Generate commercial and operational synergies• Enhance negotiating position with main counterparties, in

particular with low-cost carriers• Optimize costs, through synergies in procurement• Benchmark quality and costs across airports• Improve external relations management, in particular vis-à-

vis Italian regulatory authorities

•Participate in already announced airport privatizations including: Palermo, Verona, Cagliari, Genoa, Bologna, Apulia airport system and the remaining public stake in the Milan airports

Key Statistics (*) 2011 2012 2013e

Revenue (€m) 596 621 642

EBITDA (€m) 134 141 163

Margin (%)*Does not include minority interests in Bergamo, Florence & Bologna airports

22.5% 22.8% 25.0%

Dividend strategy and exit

• Optimize dividend flows• Exit through IPO or sale to strategic buyer

Page 18: Carlo Michelini - F2i Presentation, Yielco, March 2014

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Infracis

Mediterranea delle Acque

Page 19: Carlo Michelini - F2i Presentation, Yielco, March 2014

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TRM

SEA

Page 20: Carlo Michelini - F2i Presentation, Yielco, March 2014

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The key to manage a complex market: pros of Country - focus

• In-depth knowledge of the country and its legal and regulatory system

• Proximity with all major constituencies

• Government

• Local authorities

• Regulators

• Unions

• Direct access to deals

• Better sourcing

• Deeper due diligence

• Closer negotiation

• Ability to pursue buy and build strategy

• Privileged access to local financing

• Asset management benefitting from geographical proximity

• Best local management talent