Investing in European Gas Markets: a Banker s Perspective Julian Mylchreest Global Co-Head of Energy & Power, Investment Banking, Bank of America Merrill Lynch 23 th May 213
Financing Markets Dynamics Signs of the Great Rotation? 2
Tailwinds? Recent Regulatory Upheavals Cost of Capital Increase? But Allowed Returns Are Declining 3
The Public Equity Market View Networks Have Outperformed Utilities Total Shareholders Returns Last 12 Months Last 3 Years Last 5 Years Networks 24.% 32.6% 17.8% Integrated Utilities 9.8% (28.7%) (58.2%) FTSE 1 22.3% 27.% 7.6% Dax 29.2% 37.7% 17.7% Dividend Yield 9.2% 6.8% 7.5% 6.5% 6.5% 6.1% 4.% 3.7% 4.% 3.6% 3.5% 3.8% Last 12 Months Last 3 Years Last 5 Years Networks Integrated Utilities FTSE 1 Dax Source: FactSet and Bloomberg as at 14 May 213. Note: Networks index includes Enagas, Fluxys, National Grid, REN and Snam, Elia, REE and Terna. Integrated Utilities Index includes Centrica, EDF, EDP, Enel, E.ON, GDF SUEZ, Iberdrola, Gas Natural, RWE and SSE 4
Key Themes of Regulated Networks for Public Equity Investors Low Risk Profile Regulatory Framework Attractive? Expansion Opportunities Attractiveness of Dividend Yield Key Themes Political Risks Capital Structure Market Risks Capex 5
Financing Markets Dynamics 213 Trends European Gas Networks Spread to Swaps (bps) 28 255 23 25 18 155 13 15 8 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Southern Gas Networks 4.875% due 223 (Baa1/BBB) National Grid Gas 4.188% due 222 (A3/A-) Wales & West 4.625% due 223 (NR/A-) TIGF 4.339% due 221 (A3/NR) Phoenix Natural Gas 5.25% due 217 (Baa2/BBB+) Northern Gas Networks 8.875% due 219 (Baa1/BBB+) Enagas 4.25% due 217 (BBB) SNAM 5.25% due 222 (Baa1/A-) Sources: Bloomberg 6
Financing Markets Dynamics Supply of Bank Lending Is Tightening Spreads Historical Transaction Volume (1) ($ bn) (# Deals) 1,2 1, 1, 8 8 6 6 4 4 2 2 24 25 26 27 28 29 21 211 212 Q1 213 (2) GCP M&A Transaction Sources: Dealogic, Reuters, Loanconnector and Bloomberg. (1) Western European investment grade transactions (2) General Corporate Purposes 7
Financing Markets Dynamics Supply of Bank Lending Is Tightening Spreads (Cont d) Average Drawn Margin Trend in 213 (bps) 75 1H 213 2H 213 + 6 45 3 Expected to Stay Stable / Decrease Stable 15 9 Q1 9 Q2 9 Q3 9 Q4 1 Q1 1 Q2 1 Q3 1 Q4 11 Q1 11 Q2 11 Q3 11 Q4 12 Q1 12 Q2 12 Q3 12 Q4 A BBB BB Average Sources: Dealogic, Reuters, Loanconnector and Bloomberg. 8
Financing Markets Dynamics 213 Trends Historical Transaction Volume Total Volume ($m) 213YTD Issuance Trends EUR 4, 38,85 Utilities (16%) 3, 2, Other (84%) 1, 7,11 4,5 13,25 GBP Utilities (38%) 212 213YTD Other (62%) GBP EUR Sources: Bloomberg 9
The Private Capital View Selected Recent European Networks Transactions UK France Belgium Norway UK elec. networks Finland Germany Vattenfall Finland Power Dist. Luxembourg TENP Czech Republic Spain Gas Dist. Assets in Madrid Italy South Stream Pipeline Endesa Gas Power Disco. Assets TAG Pipeline Portugal Most recent network acquisitions have been by financial investors 1
Recent Trends Amongst Infrastructure Investors Flight to Safety Investments by Infrastructure Funds in Europe ($bn) % Core Markets (vs. Periphery) 87% 93% 65% 67% 68% 99% 24.8 17.4 14.3 7.1 1.8 3.8 27 28 29 21 211 212 Utilities Transportation Renewables Source: BofAML Credit Investor Survey 11
Recent Trends Amongst Infrastructure Investors (Cont d) Increasing Volume and Size of Transactions Asset Disposal Programmes Have Increased Transaction Volumes Selected Announced Disposal Programs Company Target ( bn) Completed ( bn) E.ON 2. 17. ENEL 1.8 1.4 Iberdrola 5. 1.1 RWE 7. 2.1 Large Transactions Are Returning to the Market ($bn) 1 Infrastructure Transactions > $2 bn 1 5 9.4 1.4 12. 5 3.4 1.8 2.5 27 28 29 21 211 212 Transactions % of Total Source: BofAML Credit Investor Survey 12
Recent Trends Amongst Infrastructure Investors (Cont d) Availability of Equity Average Fund Size is Recovering Infrastructure Fund Firepower ($bn) 67 65 7 9 83 ($bn) 1 9 8 7 6 5 4 3 2 1 44.5 4. 32.1 22.4 19.8 9.3 27 28 29 21 211 212 ($m) 1,2 8 4 Funds Raised (LHS) Average Raised Per Fund (RHS) Source: BofAML Credit Investor Survey 13
Recent Trends Amongst Infrastructure Investors (Cont d) Demand for Debt but More Conservative Approach to Leverage In/Out flows into Credit Funds Over Last 3 Months: Signs of the Great Rotation?.8.7 Inflows > Outflows.6.5.4.3.2.1. (.1) (.2) Mar-6 Jun-6 Sep-6 Dec-6 Mar-7 Jun-7 Sep-7 Dec-7 Feb-8 Jun-8 Sep-8 Dec-8 Mar-9 Jul-9 Sep-9 Dec-9 Feb-1 Jun-1 Oct-1 Dec-1 Feb-11 Jun-11 Sep-11 Dec-11 Feb-12 Jun-12 Sep-12 Jan-13 Mar-13 Source: BofAML Credit Investor Survey 14