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Edited Transcript of TCL.AX earnings conference call or presentation 10-Feb-21 10:30pm GMT

·64 min read

Half Year 2021 Transurban Group Earnings Presentation Melbourne Victoria Feb 11, 2021 (Thomson StreetEvents) -- Edited Transcript of Transurban Group earnings conference call or presentation Wednesday, February 10, 2021 at 10:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Scott Charlton Transurban Group - CEO & Executive Director * Tom McKay Transurban Group - Interim CFO and GM of Treasury & Capital Markets ================================================================================ Conference Call Participants ================================================================================ * Anthony Longo CLSA Limited, Research Division - Research Analyst * Anthony Moulder Jefferies LLC, Research Division - Equity Analyst * Cameron McDonald Evans & Partners Pty. Ltd., Research Division - MD & Head of Research * Ian Myles Macquarie Research - Analyst * James Nevin RBC Capital Markets, Research Division - Analyst * Nathan Lead Morgans Financial Limited, Research Division - Senior Analyst * Paul Butler Crédit Suisse AG, Research Division - Director * Robert Koh Morgan Stanley, Research Division - VP * Simon A. Mitchell UBS Investment Bank, Research Division - MD and Head of Research for Australia & New Zealand ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Transurban Half Year Results Conference Call. (Operator Instructions) I would now like to hand the conference over to Scott Charlton, CEO. Please go ahead, Scott. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [2] -------------------------------------------------------------------------------- Great. Thank you, and welcome, everyone. As the moderator said, thank you for joining us at our half year results briefing. Again, I hope that wherever you're listening that you're safe and well in this current environment. I'm actually in Melbourne today and joined by our Interim CFO, Tom McKay. And together, we'll take you through the presentations that we've lodged with the ASX this morning. We -- also on the call is our Investor Relations team. And please, if we don't get to your questions or if you have further questions, follow up with that team. Presentation, as always, should take about 40 minutes, and then we'll leave as much time as we can for questions. So hopefully, everyone's seen the results presentation, and we'll walk through that. So I'll begin today by starting with some of the strategic highlights for the half. And if you turn now to Page 4. Again, as we set out almost 5 years ago on a very large delivery phase, it's been a very important period. I think it was my second month at Transurban when we announced the unsolicited proposal, we started the framework for NorthConnex. So really, really pleased after a very long development period and to see it opening and doing so well. And that opened in October. And with the M8 in July, and we also commenced at the same time when we opened the M8 tolling on the M5 East. Just before Christmas in December, we announced the formation of Transurban Chesapeake, which is a partnership between Transurban, Australian Super, the Canadian Pension Plan Investment Board and UniSuper. And now our North American business is positioned for its next stage of growth. And we're working on a significant pipeline of opportunities. And we're hoping to get some positive news in the very near term on one of them. And I'll talk about that in a bit more detail shortly. And finally, and I guess, obviously, the core of everything we do, we've seen a positive traffic trend through this period, finishing the calendar year with average daily traffic of 2.1 million trips in December versus where we were at 1.8 million in July as restrictions, particularly in New South Wales and Queensland and some of the easing of restrictions in Victoria, were changed. And we'll talk a bit more detail. So going to the results highlight on Page 5. Obviously, COVID-19 has continued to play a big impact on our performance for this half year. And then Tom will also talk about it from a debt perspective because it's -- obviously, this is the first full year of most of the impacts that flowed through to the group. We had for the half around an 18% decrease in traffic volumes across the portfolio, and that translated into about a 16.5% decrease in proportional toll revenue. There was a large focus on managing our cost through this period, and the underlying operating costs decreased by 7.2%, including -- sorry, excluding FX and the spend on strategic projects. And Tom will give you an update on that. We obviously had a big period of spend on other projects that we're currently either finishing or pursuing. The Board's reaffirmed the intention to pay a full year distribution in line with free cash, excluding capital releases. And our interim distribution of $0.15 per security was actually 114% covered by free cash flow, which equates to around $0.17 per share. Turning to Slide 6. 2020, again, was a period of uncertainty for us all. But looking back, I'm very proud of all the decisions that we've made at Transurban to balance the need of all of our stakeholders. So we ensured that the business emerged through this challenging period in a very strong position. And we received a lot of support from both debt and equity markets, which were crucial to us to withstand the significant impact to the earnings. And during this period, we raised almost $10 billion of debt throughout 2020 to support the delivery of projects and various funding initiatives and refinancings. And with all this, we were able to support our people, our customers and the communities where we operate. We grew, actually, our workforce through 2020, which was essential given the span of opportunities that now sit in front of us. We expanded our customer and community initiatives. We granted over $10 million of toll credits to frontline workers and people who have been impacted by COVID-19. And in Sydney, Melbourne and the Greater Washington area, we kept construction going at all times, and we progressed 6 major projects in addition to the 2, which were completed and opened in the half. Turning then to Slide 7. Our environmental, social and governance considerations as part of this are integrated into all our decision processes. And pleasingly, we're engaging on these issues more and more with the investment community as well. And during this period, we made some very important achievements. We increased our commitments to climate change action with a Net Zero by 2050 target. And this extends our previous and existing 2030 targets and is underpinned by a strategy, including the move to renewable power, reducing energy and fuel consumption. And we have a clear path to reach our target. We have also made important expansions to our customer hardship program. 2021, our total credit support is designed to help people experiencing hardships for a range of reasons, it's no longer tied just to COVID-19 impacts. We are collaborating and partnering with the financial counseling, legal assistance and community welfare sectors on these initiatives. And we know we don't have all the answers and we continue to evolve our programs, but we're committed to continuing action to support our customers experiencing hardship. And we've included a more detailed summary of our integrated approach to ESG in the appendix of this presentation. I'll turn to Slide 8. And I know it's something that is -- gets a lot of attention. And we've provided an update here. And I'll talk -- I can talk about it a little more in the Victoria section as well. Significant works are continuing on 2 of the 3 major sections of the West Gate Tunnel Project. And for those of you who drive the route, you'll see new pedestrian bridges, lane widenings, significant noise walls, particularly on the western section and on the eastern section, the launching gantry for Footscray Road and the piles for the river crossing. We've completed almost 22 million construction hours and $2.6 billion of CapEx has been deployed to the project to date. We continue to work towards tunneling commencement as quickly and safely as possible. However, the builder's tender process to select a disposal site is still ongoing. And participating disposal sites are at various stages of achieving the required planning and environmental approvals. And at this stage, we have completed a detailed project schedule review, taking account now the new availability for the disposal sites to potentially start receiving spoil. And unfortunately, a 2023 project completion is no longer considered achievable. We appreciate this is challenging for the communities alongside the project and the motorists who desperately want to see this road complete, and again, we are doing everything possible to work through these challenges with the state and our JV partners. Again, despite the challenges, it continues to be transformed in the 4 new lanes taking shape and the pedestrian bridges, as I talked about, are now fully open to the community. There are also more than 150 locally manufactured bridge beams and around 1,000 new noise walls panels that have been installed, as I said. Closer to the city, again, more than 50% of those foundations on the -- across the river that connect CityLink in the Port of Melbourne and the CBD has also been completed. I just want to touch on Slide 9, and I know this -- we announced the Transurban Chesapeake transaction just before Christmas, and it was a very busy time. But I think it's worth highlighting, again, the strategic rationale and the importance of this transaction for positioning Transurban for growth. And that's highlighted again on Slide 9. So we've agreed to sell 50% of the Greater Washington area assets to 3 very strategically aligned and well-known partners for gross sale proceeds of approximately USD 2.1 billion. In addition, we're entitled to an earn-out of another USD 70 million if the assets outperform. Performing the partnerships with investors who can follow their money has been a very successful and key strategy for us, and we're looking forward to continuing that strategy with these partners now in North America. And the process of recycling this capital will allow us to accelerate growth by going after a larger pipeline of opportunities that are materializing in both North America and in Australia, while they support our credit metrics and facilitate long-term distribution growth. And we're targeting to reach financial close of the sale by the end of the financial year, subject to approvals and will reflect the new ownership stake in our FY '21 accounts, and I'm sure everyone is looking to that, including the accounting team across from me, presenting that. Looking at Slide 10. And just to -- always, as we do a recap of our long-term strategy, and that is to provide transport solutions that offer real and lasting benefits to the cities and communities where we work. I think one of the things that we did with the Board, particularly coming into October and one of the things that's been tested this last year, is our strategy. And we believe even during the pandemic, that our strategy has proved resilient and has positioned us well. And I'll move to Slide 11. There's been a few changes toward the end of last year and some announced just prior to the end of the year. And this will be the team that is going to deliver our -- on our strategy. And just, again, to highlight a couple of changes. So during the half year, we welcomed Simon Moorfield to the newly created role combining Group Executive, Customer and Technology to combine our capability from both teams and to ensure that we're at the forefront of this rapidly evolving space. And I have to say that both the customer and the technology team are doing a fantastic job. And we've already seen benefits bringing the ingenuity and the capability of those 2 groups together. We also welcome Hugh Wehby to the new role, Group Executive, Partners, Delivery and Risk. And Hugh is overseeing our delivery agenda, while ensuring that Transurban is a preferred partner in our industry. And Hugh's role reflects the importance of these strategic partnerships, including the newly announced Transurban Chesapeake. We're also delighted that in March, Michelle Jablko will join the business as Chief Financial Officer, including responsibility for corporate affairs, facilities management and other things. Michelle is bringing deep experience in capital efficiency, capital allocation and M&A. And the experience is a great fit for Transurban, given our business scale and ambition. And we thank Tom McKay, our Group Treasurer, for aptly stepping in for the role in the interim period. And finally, we welcome Pierce Coffee to her new role as President in North America. She'll be taking the reins from Jen Aument. Pierce has more than 11 years of experience with Transurban, and it's played an integral role in the expansion of the business in the U.S. and Canada as well as she spent significant time based here in Australia. We're delighted that we can promote her from within for this opportunity in this role as we deliver on that growth strategy in North America. And these changes ensure that Transurban is positioned well with this executive committee to drive forward our strategy and our next phase of growth. Again, as I touched on, and I'll move to Slide 12, we thought -- we believe our strategy has proven resilient during this past period. And we want to remind everyone of our investment proposition. As I mentioned, the impacts of COVID-19 have provided an important test to the business. And here's what we have learned during this period and then a summary of that. One is that our roads are obviously essential, clearly illustrated by the resilience of the large vehicles throughout even the periods of significant government restrictions. The essential nature of the assets underpin our cash flows and our ability to pay distributions to security holders even through the deepest parts of the pandemic. Traffic has recovered quickly in markets where restrictions have been lifted. The best examples are obviously in Brisbane and Sydney, where you see a clear recovery profile between August and December as restrictions were lifted and community transition -- transmission of the virus was contained. In fact, on Friday, the 11th of December, we recorded an all-time-high daily traffic number in both Brisbane and Sydney, even when we exclude the new assets. We've seen changes in mobility. The trends are dynamic and often offsetting. We're continuing to monitor our customers' views on transport and mobility in the light of COVID-19. And today, we've released an updated research report on this topic. The findings from the report at the highlight, which we put some of them here, include that the health and safety is obviously continuing to dominate travel behavior. But this has resulted in currently 5% of the respondents expect to use their cars more and 21% expect to use public transport less, even in a post-COVID world. And I think we see this sort of data elsewhere. Car sales are up 14% in December 2020 on the prior period. Now while the majority of the survey respondents expect to return to the workplace, 70% are calling for greater flexibility as an incentive to get them back to work. We think there is some important policy ramifications here, including for peak hour spreading and diversity in the workplace. And I encourage you to read our report for more detail. Just some interesting and anecdotal parts of the survey that 60% of the respondents are expecting to travel domestically or internationally in 2021. And of those with current travel plans, a vaccine would make 1/3 of those respondents more likely to travel. Sentiment around travel though is continuing to impact our airport exposed roads more directly with those numbers pointing to stabilization and growth and traffic volumes on those assets throughout 2021. Longer-term organic and portfolio-wide traffic growth will be driven by the core fundamentals of our assets with stronger growth coming from those assets, which were more impacted during COVID, so a bigger recovery as well as from the new assets that are in the ramp-up phase. As those individual assets in the portfolio mature, we have the opportunity to inject proportionately more debt and liberating capital. Over the last few years, everyone knows, we've made around about $700 million of capital releases from the portfolio, which have been largely distributed to security holders. However, looking forward, the capital releases will continue to provide a material and flexible source of funding for Transurban, particularly for our growth pipeline. And we expect that over $2 billion of capital releases will potentially be available from the portfolio out to financial year '25, including those coming from WestConnex. And again, I think we talked about, during this development phase, a lot of our pipeline was being funded by equity, and now we have the ability to put debt against those performing assets. The organic growth, again, will be supplemented by new growth opportunities. So if I talk about those opportunities, now moving to Slide 13, many of these, again, you'll be familiar with. Nothing comes up, obviously, in our world very quickly, in the world of infrastructure. But you see, we have a balance of large-scale greenfield and asset enhancement opportunities in the pipeline. Some of the highlights are we're currently in Stage 2 of the unsolicited proposal for the M7/M12 project, and we're working with the New South Wales Government to define the potential size, scope and funding sources. And as the M7 concessionaire until 2048, Transurban and our co-investors are uniquely placed to deliver the M12 interchange, which will connect the M7 with the new M12 Motorway. I'd like to move now to Slide 14 and talk a little about WestConnex, which has been in the news recently. And the New South Wales Government has just kicked off a sale process for its -- a portion of its stake in the WestConnex portfolio. And Transurban alongside with our co-investors in Sydney Transport Partners are looking to participate. We have the right of first offer over the 49% stake, which is being transacted, potentially into 24.5% tranches. As the current operator and substantial owner of the business, we believe we are best placed to understand the value inherent in the WestConnex portfolio. And again, we'll be preparing for this process since we bought the asset, and we're going to show up and be competitive. And obviously, we need to show value for money to the New South Wales Government. On Page 15, a bit more detail, notwithstanding the results of the transaction, STP, Sydney Transport Partners will retain operational control of WestConnex through the end of the concession in 2060. And since acquiring the 51% of WestConnex in 2018, we've worked hard to achieve excellence across all the disciplines, leveraging the skills and experience right across the Transurban organization. Obviously, with this, we try to make all this look easy, but let me confirm that it is a complex portfolio of assets. It comprises over 450 kilometers of motorway, including 10 tunnel -- separate tunnel tubes, which a number of new assets will connect over the next 10 years. And to date, over 2.4 million customers have traveled on WestConnex during the half. And Linkt, the preferred tag retailer run by Transurban, is the preferred tag retailer for WestConnex. And obviously, all the assets operate on our back-office tolling and operation system. In the last 12 months, I've given us an opportunity to stress test these assets and those learnings have been incorporated into our long-term investment case moving forward. So now I'll provide -- that was a high level of some of the key issues we're dealing with. I'll just touch on very quickly some high-level points across the markets. And we'll start with our largest market in Sydney, where total revenue grew by almost 8%, including revenue from the additional M5 West interest, the M8 and M5 East and NorthConnex. Excluding all these new assets, total revenue decreased by about 5% for the half. Including these new assets, traffic was up close to 9% during the period or down 7.1% on a like-for-like basis. Also during the period, we constructed significant research in Sydney, which showed a significant improvement in sentiment towards WestConnex, with more than half the people in the Greater Sydney area feeling positive now about the projects and the benefits that it's bringing to Sydney. Our community engagement team has worked hard with these communities since we've been involved in the project, and we're proud of this progress and steady improvement in the feelings toward the project. On Slide 18, and you would see on the front cover of the presentation, is a section of NorthConnex, which opened on the 31st of October. We're extremely pleased with the performance of the asset to date since it came online with average daily traffic of 37,000 trips, including taking more than 6,000 large vehicles a day off of Pennant Hills Road. Our expectations for this asset were obviously set in a pre-COVID environment. So this performance speaks to the value that the customers are seeing in this asset and the long pent-up demand and requirement for this type of infrastructure. In addition, our other assets, particularly the M2, are benefiting from NorthConnex with traffic volumes enhanced since the asset has come online. This is important in the performance of the asset. We've received an overwhelmingly positive response from the community since NorthConnex opened and residents immediately benefiting from a quiet and much safer Pennant Hills Road. We've got the normal pipeline, our portfolio on Page 19. You can see there's still a large opportunity set over time. And then moving to Melbourne. I've touched on the West Gate, again, happy to take questions. I'll talk a little bit about the traffic. So for the half, toll revenue fell by 39% and traffic volumes by 47% on CityLink. Again, we're very pleased to see the traffic improve once the restrictions started lifting in October. And as I said earlier, traffic on CityLink was down 19% versus the prior corresponding period. And we've had a few days better than that in February so far. The Western Link was impacted more significantly by the government restrictions, including by lower levels of airport-related traffic. Overall, large vehicles showed much more resilience, just declining by 12.8%. Remembering that in Victoria, we classify the light commercial vehicles as large vehicles as well. If you actually look at the heavy vehicles, they only decreased by 6.1%, which is consistent with the heavy vehicles right across all our portfolios during the pandemic. Update on Brisbane on Slide 22. We saw toll revenue decline by 3.4%. And average daily traffic declined close to 6%. With the lightest of the government restrictions of any of the markets, Brisbane was our best-performing market underlying and perhaps gives us the best insight into what a normalized traffic profile will look like. As I mentioned earlier, December saw a record-breaking traffic in this market with Logan and Legacy Way, all recording their highest ever traffic during this month. Skipping now to North America, which has, obviously, and continues to be more heavily impacted by COVID. Traffic declined by 29.5%, and toll revenue declined by almost 55%, again driven by the lower-than-average tolls for both the 495 and 95 Express Lanes. The residents in our core markets are there in Virginia, Maryland as well up in Montreal, continue to experience significant impacts compared to the situation in Australia. And we feel for the colleagues there in the time they've had to deal with these issues. And we appreciate their effort under a lot of duress. We've seen this reflected in their traffic volumes, which deteriorated in December and January. And positive news now for these markets, the vaccine rollout has now commenced in all 3 locations. And we hope to see some resulting stabilization and recovery in traffic through the rest of this year. In Virginia, we continue to progress our development projects, including the FredEx and the 495 North Extension project as well as discussions with the Virginia Government as we move towards reaching a development agreement for what we call the Capital Beltway Accord. Just an interesting note. In January, we announced the expansion of our mobile tolling app, GoToll, not only from Virginia, but to North Carolina, Florida and Georgia. And GoToll, which is same as LinktGO here, allows drivers to create a profile and get quickly on the road without needing to wait to receive a physical transponder or prepaid arrangements with your retailer. Then on Slide 25, you have a little bit of the market there. As I mentioned, we're very focused on the pipeline of opportunities in North America and feel we're well positioned, particularly given the recent introduction of our strategic partners in that market, and again, we hope to hear something soon on one of the assets. But with that now, I'll let Tom take us through the financial results for the period. Tom? -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [3] -------------------------------------------------------------------------------- Thanks, Scott. And let's begin with the statutory results on Slide 27. Today, we are reporting a statutory EBITDA of $792 million and a statutory net loss of $448 million for the period. EBITDA was down largely as a result of the significant decrease in total revenue due to restrictions in travel movements related to COVID-19. While costs increased overall, we saw strong underlying cost performance. Higher costs were a direct result of the higher spend on strategic projects, given the company's significant opportunity pipeline, which I'll cover shortly. The statutory loss was driven by the significant impact of COVID-19 on EBITDA as well as the impact of higher net finance costs. The increase in these net finance costs was primarily due to outcomes from remeasuring balance sheet financial instruments at period end, covering foreign exchange movements, derivative financial instruments and our shareholder loan notes with the STP joint venture and the NorthWestern Roads Group. We have included more detail on the drivers of these increases in the appendix at Slide 15. I would point out, however, that these costs are largely noncash. As a result of contractual close being achieved on the sale of 50% of the Transurban Chesapeake assets, their results are represented as a -- discontinued operations within the group income statement. We expect that Transurban Chesapeake will be deconsolidated from the group and recognized as an equity accounting investment within the full year FY '21 results, assuming we have reached financial close by that time. We again have included a summary of the transaction impacts on our accounts in the appendix at Slide 62. Moving on to the proportional results on Slide 28, which we believe provide a clearer view of our financial performance for the period. Proportional EBITDA, excluding significant items, decreased by $254 million or just over 23% year-on-year to $840 million. Proportional toll revenue was down 16.6%, a decrease of $231 million, again, primarily driven by the lower traffic result of COVID-19, partially offset by the impact of new assets. Our new assets included a full 6-months contribution from the 395 Express Lanes and the additional ownership in the M5 West as well as the M8 and M5 East, which opened in July '20, and NorthConnex, which opened in October '20. The COVID impact to revenue was severe in Melbourne, as Scott mentioned, which government -- where government-mandated restrictions on movements severely impacted traffic for much of the period. Toll revenue on Sydney was down by almost 40% year-on-year. Importantly, much of that impact came in the first quarter, with traffic increasing in line with the progressive lifting of restrictions. North America was also significantly impacted with revenue from our Express Lanes impacted by both reduced traffic volumes and lower prices due to the nature of the dynamic tolling regime. With less restriction on movement in Brisbane, the impact of the virus was less severe. In Sydney, new assets, including the M8, M5 East, NorthConnex and the additional ownership of the M5 West, increased revenue overall. Additional costs from new assets totaled $28 million for the half. Moving now on to Slide 29, which I'll discuss the cost in a bit more detail. Headline cost growth was influenced by the incorporation of new assets into the cost base, as mentioned. Outside of the impact of the new assets, operations and maintenance costs decreased by 7.2% for the half. While this was partly due to a reduction in volume-related costs, such as roaming and transaction fees, operating costs also reduced as a result of a disciplined approach during the period. As Scott has discussed, we are looking at a material pipeline of development opportunities. And as a result, our investment in strategic growth projects has increased by $25 million year-on-year, which was flagged at the full year results. This spend includes costs associated with the significant pipeline of opportunities, including spend on the Maryland Express Lanes project, the recent Transurban Chesapeake transaction, our bid for the Elizabeth River Crossings as well as preparing for the upcoming WestConnex transaction. In addition, we continue to record costs relating to the integration of WestConnex and the M5 West. Moving now to Slide 30, on where we talk about the EBITDA margins. And again, margins across the group were generally impacted as a result of decreased traffic levels resulting from COVID. The Sydney margin was also negatively impacted by the ramp-up phase of the M8, M5 and NorthConnex as well as liquidated damages received in the prior period for the delayed opening of the M4 Tunnels and the M8. In Melbourne, the margin was particularly impacted by mandated travel restrictions in response to COVID-19. The Brisbane margin was supported by the recent insourcing of tunnel operations. And as previously mentioned, the impact of reduced traffic flow on dynamic pricing amplified the impact on the Express Lanes in the Greater Washington area. The North American result was also impacted by the accrual of the annual transit payment due to the Virginia Department of Transport, which started in FY '20 at service commencement of the 395 Express Lanes. Moving now to Slide 31 to talk about some free cash. Free cash, excluding capital leases for the period, decreased by 34.7%, again, driven by the impact of COVID on EBITDA. Distributions from non-100% owned assets was $12 million higher than the first half in '20, primarily due to the release of distributions held back in FY '20, including from the Eastern Distributor, the partial deferrals from Transurban Queensland and the M4. The release of these funds at this time is a testament to our confidence in the strength of these assets on which we have seen positive trends through the half year period. We had a $31 million reduction in tax paid year-on-year, which was a result of the M5 West joining the Transurban Corporate tax group in October 2019. Net finance cost decreased overall due to the capitalization of TIFIA interest on the 495 Express Lanes, providing liquidity support and also demonstrating the benefits of Transurban's diversified funding strategy. This more than offset higher interest costs due to the completion of the 395 Express Lanes and lower interest generally received across the group. As flagged at the full year, we anticipate that finance costs for the group will increase over the medium term as we continue to fund our development opportunities, including commencement of interest payments on the April '20 EMTN and the September '20 U.S. 144A issuances. We also saw a favorable movement of $9 million in our working capital, primarily driven by timing of operational payments, including the 395 Express Lanes transit payment. This is expected to reverse in the second half. Overall, free cash for the half was $467 million, providing distribution coverage of 114%. The guidance from the Board remains unchanged in that it expects the FY distribution will be in line with free cash, excluding capital releases. Looking to the second half, our free cash will continue to be heavily influenced by COVID-19. Distributions from our non-100%-owned assets are a decision taken by subsidiary boards, although, we would note that distributions from the NorthWestern Roads Group and WestConnex are paid in arrears, and that we are not expecting distributions to be paid from WestConnex relating to the M8, M5 East in the second half. Post-financial close of the Transurban Chesapeake transaction free cash contributions from the Washington area assets will be recognized through distributions from non-100%-owned entities. These assets are currently in lockup and are not expected to pay distributions until FY '22. Turning to Slide 32, which outlines the highlights of our financing activity during the half, all of which has supported the group to not only withstand the impacts of COVID-19, but to ensure that we are maintaining our workforce and continuing to deliver our project pipeline. Once again, during this period, we successfully extended the average maturity duration of our debt book and also reduced its overall weighted average cost from 4.4% at June to 4% at December '20. Due to the impacts of COVID-19 on free cash, FFO to debt at 31 December was 5.5%, below our long-term target of 8%. Financial close of the partial sale of the Chesapeake assets is expected by the end of FY '21, which will provide immediate support for Transurban's credit metrics and take the FFO to debt metric to be above our target levels. Our capital management strategy remains unchanged, and we can -- and we will continue to balance our 3 fundamental objectives to maintain high investment-grade credit metrics, efficiently fund our development pipeline and provide distributions for security holders. So thanks for your time. I look forward to meeting with many of you over the next couple of weeks and also to working closely with Michelle when she joins us very soon. I'll now hand you back to Scott. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [4] -------------------------------------------------------------------------------- Thanks, Tom. And thanks for a great job over the last few months. And as I said, Tom will be around to [lead in March] and he will be around a lot longer than that as well. And to the whole finance team for putting the results together, again, in difficult working circumstances from home. So just turning to Slide 34. Again, as I said, the result is heavily impacted by COVID. But despite these challenges presented by the pandemic, we remain focused on delivery, cost discipline and positioning the business to emerge strongly from this period. Again, I think we've all seen government's focus on now managing -- continuing to managing, obviously, the health crisis, but looking at economic recovery and infrastructure, it's likely to play and continues to play a big role in that. Traffic is improving at various rates across our assets, but in the markets where the restrictions have been lifted, we're seeing a strong recovery profile. And in fact, if we look at some of the survey results, we could even see those above pre-COVID levels as people seem to be moving more to private transportation. Of course, we remain very much alive to any potential or further government restrictions in our markets, and we realize that they can come fast to deal with health initiatives. We're focused on the pipeline of opportunities that we see continue to materialize in our core markets. And I think, as I said, when we talk about -- and doing the spring transaction of -- it's been as large as we've ever seen it in Transurban. But -- and this is -- obviously, has always been core since I've been at Transurban, and I know the Board and the executive team is very focused on balancing the distributions for our security holders. And creating long-term value creation, which is what this is all about. It's not acquiring and developing assets, but creating long-term value and be able to continue to grow those distributions. So we will maintain our capital discipline in all situations. So in wrapping up, I'd like to thank again the whole Transurban team, who have worked extremely hard during this very, very difficult period to contribute to these results; to our security holders, who continue to support us; and for those who showed the interest in attending today's call. And so now happy to open up to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Anthony Moulder from Jefferies. -------------------------------------------------------------------------------- Anthony Moulder, Jefferies LLC, Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- If I can start with traffic, obviously, in the supplementary slide, you've given the monthly traffic performance by asset, but at the group level as well as it looks like across the East Coast of Australia traffic came off in January. Is that more because your [ceramables] were taking extended holidays through January and that's not representative of perhaps what you said since the start of that? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [3] -------------------------------------------------------------------------------- No, Anthony, I think that there was a couple of short -- sharp restrictions around a couple of the COVID outbreaks, Northern Beaches and a few other things. So that had to do with a couple of quick responses that government had and then they have since come off, and that's why we've seen recovery coming through in February. -------------------------------------------------------------------------------- Anthony Moulder, Jefferies LLC, Research Division - Equity Analyst [4] -------------------------------------------------------------------------------- Okay. The $2 billion of capital releases over the next 4 years, it's obviously significantly up on that $700 million since 2017. Does that -- how do we think about the skew of that? Is that more skewed towards the latter years? Is it going to be more evenly spread? Can you give the indication as to what the expectations are for the next few years on those capital releases, please? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [5] -------------------------------------------------------------------------------- Look, I'll give my overall comment, and I'll let Tom provide some more detail. I mean, again, you would anticipate a lot of those capital releases, and I mentioned WestConnex comes from not a wholly owned asset. So some of it has to do with the timing and working with other partners on releasing that and the ramp-up and getting the right amount at the right time. So yes, it's not a lot of it's going to come this year, but it'd be more skewed toward the back end. But Tom, you want to make any comments? -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [6] -------------------------------------------------------------------------------- Other than to say, we do -- the timing of those things are, to the extent we can manage closely, so we try and do -- spread them out over time. So -- but as Scott said, there's certainly nothing that we're expecting in the very near term, but we'd expect to see that sort of come through over the next couple of years. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [7] -------------------------------------------------------------------------------- Yes. We're not spreading that over time because at this point, as the Board has given guidance, it's paying out the distribution, it's based on free cash not these capital releases. But I think Tom is talking about spreading out over time in a capital sense, so when you come to refinance it, we've managed the refinancing risk. -------------------------------------------------------------------------------- Anthony Moulder, Jefferies LLC, Research Division - Equity Analyst [8] -------------------------------------------------------------------------------- Does that also suggest that some of those -- some of that capital releases will be used for distribution as opposed to going into some of the growth pipeline that you've got? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [9] -------------------------------------------------------------------------------- Look, that's always an option for the Board. As we sit here today. The Board's only guidance is free cash flow not capital releases, that is always an option that they have. But if I sit and look at the potential pipeline for Transurban and the opportunities we have not only in the potential public transactions that we mentioned in our report, but we always have some ideas or things that we're looking at on our existing roads or with our government partners, I think I'd be disappointed if we didn't find a way to use that opportunity to create value for our security holders in growth projects. -------------------------------------------------------------------------------- Anthony Moulder, Jefferies LLC, Research Division - Equity Analyst [10] -------------------------------------------------------------------------------- Sure. And related to that, obviously, Maryland's managed lanes Stage 1 probably due any day, I think it was early February or it's expected early Feb. How critical is that piece to your overall growth project through that part of North America? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [11] -------------------------------------------------------------------------------- Yes. Look, we -- obviously, we're trying our best to win, but nothing is so critical that -- it has to be value accretive and it has to make sense for us. So we'd love to win, and we think it's a great project and great opportunity. But we put our best -- I guess our best proposal for that makes sense for us and our security holders and hopefully, we'll be successful. That's up to -- obviously, that's up to the government. But we see a lot of other opportunities, some of them are public and some of them aren't, Anthony. But nothing is that strategic or critical in a sense that it's got to make financial long-term sense for us. Because, I mean, all those projects in the U.S., there's 60, 70 years, so we got to get it right up front. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Your next question comes from Ian Myles from Macquarie Equities. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [13] -------------------------------------------------------------------------------- Just on the macro side. If we think about the U.S. transaction with the other partners, do you consider roads like M2, Lane Cove Tunnel and Cross City Tunnel potential for other partnerships? Or is it really, you've created the partnerships in the existing portfolios? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [14] -------------------------------------------------------------------------------- Yes. I guess we would -- you look at every option, Ian. And again, no asset is sacred. I mean if someone came along and offered us a price well above what we thought the asset was worth or the potential for the asset, we would all -- consider all options. And I think that when you look at the reason for Transurban Chesapeake was to position the company to take advantage of the opportunities going forward. So would we use the M2 as a vehicle to bid for other assets? No. So it wouldn't -- it doesn't seem, at this point, to make any sense to bring partners into those assets, and they're all fairly mature, generating significant cash flow. I can't see it at this point in time, it's not on the agenda, but you never say never if it makes sense. But then when you have something like WestConnex, where it's growing and it's huge or QML at the same time, then there's different rationale and regions -- and reasons. But no, I don't think so. And like we picked up the other half of the M5 West over the last 2 years, there's portions of the assets -- of the existing assets that we don't own. So it may not be divestment, it may actually be acquiring the remaining depending on the situation. So if we think it's a good return for our security holders, then we'll -- we could pick up percentages of the existing assets. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [15] -------------------------------------------------------------------------------- Okay. And then on West Gate -- oh, sorry, let's go macro factors. We're seeing RBA talking about [residential] population growth, actually negative population growth. We've seen [regions] being pretty weak of late. How are you just looking at the broader macros? Because you're obviously reporting Brisbane doing better. But is it running below what your normalized models would be sort of suggesting? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [16] -------------------------------------------------------------------------------- Yes. Well, we're back to -- like Brisbane and Sydney are close to pre-COVID levels. So yes, we've lost a year. So if you were thinking you sort of -- if the trend was continued, yes, they're back to pre-COVID levels, but that's in 2019 as opposed to what 2020 or '21 might look like. But I think when you deal -- and we can talk about this at Investor Day, Ian. When you deal with our network and traffic modelers and forecasters and the economics and all the specials we have in there, they just talk about this as noise around a 50- or 60-year profile. And a few years, you're above, a few years you're below, but this is just what you expect to oscillate around the long-term trend line. So with all the trends, whether it's population or connected tunnel to vehicles and mobility of service or whatever, still the long-term trend line we're comfortable with. And we see that as still the best indicator of where we're going. Although there will be oscillation around that, and we need to make sure the balance sheet is prepared for shocks and other things that occur like the pandemic. And you know these kind of things tend to occur, at least on a decade basis, for whatever reason. So -- but we still think things will get back to the long-term trend line for different reasons. I mean there will be more flexible working and more working at home, but that leads to more logistics and more people wanting personalized transport, but still the long-term trend line we're comfortable with. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [17] -------------------------------------------------------------------------------- Okay. And then finally, just because I don't want to ask too many, west Gate Tunnel, you've obviously deferred it post to 2023. And I assume you're talking calendar year not fiscal year, if you can clarify that? And secondly, in every month of delay before the boring machines start, we just add a month to the time line for when this tunnel can actually open? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [18] -------------------------------------------------------------------------------- It's not that simple. As always, in construction, nothing is simple because you got to think about -- tunnel boring machine isn't just the boring header at the front. The tunnel boring machine in this case, they're not roadheaders, obviously, this is a machine. It's effectively a train. And the train has lots of interrelated parts. Now all those interrelated parts that could cause issues are being produced, stockpiled and ready to go. So in [Manila], we've got 40% to 50% of all the segment aligning is already done. The train set up the -- to remove the roadheaders from the other end, the boxes have all been -- are being built and almost complete. So it doesn't necessarily mean for every month, it's a month-to-month delay because the train might be able to be completed quicker and faster. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [19] -------------------------------------------------------------------------------- And can you clarify you're talking fiscal year or calendar year when you talk '23? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [20] -------------------------------------------------------------------------------- Yes. It's calendar year. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Your next question comes from Anthony Longo from CLSA. -------------------------------------------------------------------------------- Anthony Longo, CLSA Limited, Research Division - Research Analyst [22] -------------------------------------------------------------------------------- Just following on from Ian's question on the West Gate Tunnel. Are you perhaps able to give a bit of an update as to what the lead time is for some of those disposal sites and getting those environmental approvals for that spoil? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [23] -------------------------------------------------------------------------------- I mean, look, Anthony, some of them can be imminent, but it's in the hands of independent third-party regulators. So we have no -- we don't know is the answer. But the material that they need to make their assessment, they can always request more material. I believe they have all the material they need to make their assessments, but the timing is in their hands. So some of it could be -- I mean there's 3 different sites, some of it could be imminent. But yes, we just can't confirm. But we're comfortable, the 3 parties putting forward submissions have put forward very robust submissions and that at some point, it will get approval, we're just not sure when. -------------------------------------------------------------------------------- Anthony Longo, CLSA Limited, Research Division - Research Analyst [24] -------------------------------------------------------------------------------- Yes. Understood. Second one for me. Look, I appreciate the survey that you put out, looking at trends. But so my understanding is -- you've mentioned before that people typically use your road network to across the city and then get around rather than -- or a less proportion directly accessing the CBD. In the context of maybe more flexible working arrangements and maybe personalized transport, as you mentioned, I mean, how do you ultimately expect that behavior to change? Do you actually see a benefit to accessing both cross city travel and into CBD travel going forward as things change? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [25] -------------------------------------------------------------------------------- Yes. Well, again, we've got -- as we talked about in the mobility report, and as everyone knows, you look at school holidays and 5% or 6% of traffic makes a big difference to average speed time. So 2 things that benefit Transurban. If we can have faster travel times and make transport more efficient and convenient, that means people might choose that mode of transport. But if we can use more of the peak spreading of the shoulder periods and more of that capacity on the road that's not being utilized, it's a great outcome not only for Transurban, it's a great outcome for the networks. And at some point, with a lot of these roads, and particularly when you have tunnels, you can't really expand the tunnel as people here in Melbourne know with Burnley and the domain tunnel when it's congested. So it's just a logical, I guess, outcome and what we're trying to suggest that maybe as we've had to work through the pandemic and a lot more flexibility has been put into the workforce with the technology and others is can we grab some of that in flexible work practices when we come back, which seems to be -- again, the survey suggest that people do want to go back, particularly for relationships and collaboration to try and capture some of that, which benefits everyone, including Transurban's security holders. -------------------------------------------------------------------------------- Anthony Longo, CLSA Limited, Research Division - Research Analyst [26] -------------------------------------------------------------------------------- Right. And sorry, last one for me. In terms of the cost, I mean that the underlying cost reduction of 7.5% or so. Are you able to give a bit more color as to what costs were ultimately taken out? I appreciate some was activity. But perhaps some of the other key buckets that were into that? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [27] -------------------------------------------------------------------------------- You're happy to make a comment, Tom? -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [28] -------------------------------------------------------------------------------- Yes. Look, it wasn't so much -- so some of it was definitely just the variable costs that came down as a result of the traffic flows. But it was more a -- it wasn't actually a cost out because as cost mentioned, we -- sorry, Scott mentioned, we actually kept the workforce intact and in fact, have increased the workforce. So it's not a cost-out exercise, it's really just more inefficiency. Obviously, travel has been down. We -- there's less traffic. Some of our maintenance work has been down a bit. So it's more across the board, but it's certainly not a cost-out issue for us. We've very deliberately kept the workforce intact as we go forward. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [29] -------------------------------------------------------------------------------- Yes. I mean we're pleased with the outcome. So I think what we're trying to -- and of course, the cost in our business because it's -- the way the tolling works in a high-margin business because of the high-capital business. It's impossible to get the cost down at the same level as the revenue. But to Tom's point and the Board and management made a decision very early on that we thought what is happening was likely to happen and that we wanted to keep investing in our people and capabilities so that we would be positioned on this side. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Your next question comes from Simon Mitchell from UBS. -------------------------------------------------------------------------------- Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia & New Zealand [31] -------------------------------------------------------------------------------- Just circling back on earlier question on traffic. So if you look at Slide 38, Melbourne in January was down 24% versus 19% in December. It just seems like it's much worse than what was expected despite the lockdowns around the country at that time. So are you definitely sure that traffic trend has recovered in February? Or are there any issues we need to talk about in January? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [32] -------------------------------------------------------------------------------- Yesterday -- day before yesterday, where is -- Henry, we were at 16%? Henry is in the room, Mr. Victoria. So I think we're at 16%. Look, it's just very sensitive, Simon, to -- you request a mask to be worn back in the office and not a lot of people enjoy wearing mask in the office and it makes it harder and less likely for people to come in. And the government had announced that the workforce is -- at least in the public sector, were being -- I think, 75%, was supposed to be last or this week. And obviously, that's been postponed. So yes, it's just very sensitive to restrictions. -------------------------------------------------------------------------------- Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia & New Zealand [33] -------------------------------------------------------------------------------- Okay. And then just on West Gate Tunnel, I just noticed you've spent $2.6 billion already out of a budget of $4 billion for your spend. Obviously, not an expert in construction cost modeling. But is $1.4 billion enough for the tunneling, given you haven't started that yet? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [34] -------------------------------------------------------------------------------- Well, we have a fixed time, fixed price contract, Simon. So unless a legal process says otherwise, then that's what we bought with that amount of money. Now that doesn't mean that eventually, we won't participate and help find a solution with the joint venture and the government. But -- and we're trying to find various different solutions with their legal process, and we have a fixed time, fixed price in contract with the contractor. -------------------------------------------------------------------------------- Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia & New Zealand [35] -------------------------------------------------------------------------------- Yes. I guess as you mentioned, it comes down to the eventual legal outcome is. But clearly, there's a potential for a cost overrun there, a significant cost overrun for somebody to bear. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [36] -------------------------------------------------------------------------------- Yes, there is. And obviously, we don't believe we're liable for that cost overrun. But that being said, we're still willing to try and help find a solution. -------------------------------------------------------------------------------- Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia & New Zealand [37] -------------------------------------------------------------------------------- Yes. Okay. Just on interest, perhaps a question for Tom. So finance costs, cash costs up about $70 million, so I think about $470 million, it looks like that's largely through -- WestConnex through project completion. Is that a clean number that we should extrapolate into the second half? Are there any timing issues in that number? -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [38] -------------------------------------------------------------------------------- No, Sam, there was a one-off. We -- there was a refinancing that we completed for WestConnex in December, which was just over $4 billion refinancing. There was a -- as part of that, we actually reset the interest rate swap book on that percentage. So there actually was a there's quite a significant closeout cost that was associated with that refinancing. But then, of course, we've then put in place much lower interest rates associated with that refinancing say. So the majority of that WestConnex was really a one-off so we brought that to account. But going forward, we would expect the WestConnex interest cost to go down with line with the new interest rate hedging. -------------------------------------------------------------------------------- Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia & New Zealand [39] -------------------------------------------------------------------------------- Okay. Great. And just lastly, on capital issues. So the proceeds from the Washington asset sales, is it -- do we see that gets repatriated back to Aussie dollars? Or is that going to be held in U.S. dollars? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [40] -------------------------------------------------------------------------------- Well, we've got some projects in the U.S., obviously, with NEXT and a few other things. So the combination of both, Simon. Yes. So we've got some -- hopefully, we'll have some finalized commitments shortly, so we'll leave that in U.S. dollars. And then -- but a large portion of that will be brought back to Aussie. -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [41] -------------------------------------------------------------------------------- I would say the majority will be brought back. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Your next question comes from Rob Koh from MS. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [43] -------------------------------------------------------------------------------- Just if I can ask another question on the West Gate Tunnel. And you mentioned that the legal dispute, so clearly a sensitive topic. But can you just remind us about the time line on any key milestones in that process? Just I guess, a factual question. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [44] -------------------------------------------------------------------------------- I wish you could put milestones on legal process, but it has a kind of a -- it's a mind of its own. I mean it's -- there's several processes going on, Rob, and there's nothing that we can put a specific date on it. Unfortunately, they're just a long, winding process. So yes, there's no specific timing I can give you. The most important issue for us is getting a spoil side activated, commencing the tunneling to minimize to the project the impacts of the delays. No, so we can't really give you an update on the timing of the legal process. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [45] -------------------------------------------------------------------------------- Yes, okay. No worries. And then if we try to think about the potential cost overruns there, would it be fair to say that the longer it's delayed, the more the cost overrun goes up because of like construction resequencing and cost of carry, is that a fair comment? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [46] -------------------------------------------------------------------------------- That's a fair comment. But again, remember the memory of the project is sort of split into 3 components. So 3 of the components are progressing. Again, it's not a proportional cost issue. So you don't say, well, if the project was X, then you just add X every month. So it's -- again, as everything in construction, it's not easy. But yes, every month it's delayed, there's additional cost, [that's collection, obviously]. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [47] -------------------------------------------------------------------------------- Yes. All right. The next question, I guess you've repeated that the Sydney Transport Partners are interested in the sale process for WestConnex. Do you guys get your bid cut under that process like other bidders? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [48] -------------------------------------------------------------------------------- My understanding is that we get the same treatment as the other bidders for the first 24.5%. Yes. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [49] -------------------------------------------------------------------------------- Okay. All right. That seems fair, I guess, for that tranche. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [50] -------------------------------------------------------------------------------- We had to be treated fairly. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [51] -------------------------------------------------------------------------------- Yes, yes, that helps. Last question for me. The headroom for further potential capital releases, $2 billion. Could you give us a theory as to which assets you might be thinking about for those? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [52] -------------------------------------------------------------------------------- I mean WestConnex, the assets in the U.S. Tom, you want to -- I mean, there have been no surprises. Those assets that are ramping up, will create headroom. But Tom... -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [53] -------------------------------------------------------------------------------- I think that's right. Certainly those 2. And certainly, the larger ones, given the sale of -- and Queensland is looking at potentially -- looking at turnover the coming years. So they're probably the biggest 3 in that group. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- Your next question comes from Nathan Lead from Morgans Financial. -------------------------------------------------------------------------------- Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [55] -------------------------------------------------------------------------------- Just a couple of quick ones for me. Just sorry to keep on sort of going at the West Gate Tunnel Project. But to me, the biggest value kicker for that project was the concession extension to CityLink and then the 4% toll escalator. Is there any risk to that, that could get taken away as a result of what's going on? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [56] -------------------------------------------------------------------------------- We have a contract with the government for the 4% and for the CityLink concession agreement. So that's -- we have a contract with the government. So I guess if the government doesn't fulfill their obligations in the contract, we're pretty confident that we have the escalation and the concession extension. -------------------------------------------------------------------------------- Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [57] -------------------------------------------------------------------------------- Okay. And then the -- in the contingent liability note in the accounts, it talks about you having advanced $265 million-odd to the builder. Is -- what's the risk if the project completely stalls about being able to recover that capital? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [58] -------------------------------------------------------------------------------- So again, under the contract, there's certain -- there's a schedule of which the cash flow's drawn down again its completed words in recognizing that the contractors have had some level of difficulty, we've advanced some of that contract works to help them out so it's under the contract. It's moneys that we -- the contractor was going to be entitled to, they're just getting it a little bit early. We obviously have significantly -- we have significant bonds, another collateral under the contract that we could call against that moneys if there was an issue. -------------------------------------------------------------------------------- Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [59] -------------------------------------------------------------------------------- Okay. And just a little detail one for me. Just the amount of interest that was capitalized, that sort of sits outside of that, the numbers going through the operating cash flow. I think in the account, it said there was $26 million that was capitalized for the period for the controlled assets. But on proportional consolidated basis, so how much interest was incurred that -- sort of that net interest pay that you disclosed? -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [60] -------------------------------------------------------------------------------- Well, no, it all sits within that number we disclosed. That's just how we trade. So it's all disclosed whether we capitalize it or not. So it's in the disclosed number. -------------------------------------------------------------------------------- Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [61] -------------------------------------------------------------------------------- So I thought there was amount of sort of some go through operating cash flow, some gets capitalized in the PP&E? -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [62] -------------------------------------------------------------------------------- So the proportional number that's capitalized is $29 million. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- Your next question comes from Cameron McDonald from E&P. -------------------------------------------------------------------------------- Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - MD & Head of Research [64] -------------------------------------------------------------------------------- Just one question from me. Following up on some of that the interest discussions. So just on Page 52 and 55 of the presentation, you've got the proportional interest expense of $707 million versus the $445 million of interest paid, is a pretty big benefit and discount unwind and valuation line item of 227 with $196 million coming from corporate. What is -- what's the explanation for that? Just given the quantum versus the -- what we've usually seen is that differential is much smaller. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [65] -------------------------------------------------------------------------------- Yes. Look -- thanks, Cameron. I mean we have put quite a bit of detail around that in our statutory accounts. But we've had a couple of big movements in that area. Some of it has been driven by this bigger preshow strong appreciation in the Australian dollar. So we've had to mark-to-market effectively some cross stable intercompany loans that have gone into the U.S., which there's been an FX component, which we've taken to interest cost. We have a component of our cross-currency interest rate swaps that are ineffective, certainly a small amount. But we've -- but given that, that's from an accounting perspective. -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [66] -------------------------------------------------------------------------------- Because economically, they're... -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [67] -------------------------------------------------------------------------------- Economic hedged. But that -- so that is also going through net finance costs as well. Actually, as I talked to, there's some of our loan notes that we put into some of our joint ventures, we've had to mark-to-market those on the balance sheet. And that's, again, that movement actually comes through net finance costs. So again, all noncash, but you're right, certainly increase the net finance cost rate. -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [68] -------------------------------------------------------------------------------- It's quite a -- if you get a chance, Cam, to look at the accounts, it's quite a good explanation, a lot of detail because it is confusing that they are economically hedged. But from an accounting basis, we've had to take a different position. So there's a lot of notes in the actual accounts. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- Your next question comes from Paul Butler from Crédit Suisse. -------------------------------------------------------------------------------- Paul Butler, Crédit Suisse AG, Research Division - Director [70] -------------------------------------------------------------------------------- I just wanted to ask about whether you're seeing a change in traffic patterns with the recovery in terms of higher peaks, lower troughs, sort of both during the day and across the week? You made reference to, you're seeing different patents, I think, in Brisbane, where you've got the recovery coming through. Is that the case? I mean could you just sort of explain that? And does that create a risk to growth going forward from here? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [71] -------------------------------------------------------------------------------- Thanks, Paul. Look, if you get a chance to look at our mobility report on the -- I think it's the fifth page there, shows the peak travel patterns month by month. And you can see November in Brisbane looks almost identical to November last year. So yes, it's coming back largely to the peak patent. It's a bit different, though. So for the M7, a lot more, if you will, trade traffic and logistic traffic, which is a little bit different. But largely, what we're starting to see is coming back to more traditional patterns, which, again, our suggestion is that's probably not what we'd like to do. We'd like to see some peak spreading with flexible work times. But yes, we don't see in those markets that recover. And again, if you get a chance to look at the mobility report suggests they're coming back pretty much in line with prior to COVID. -------------------------------------------------------------------------------- Paul Butler, Crédit Suisse AG, Research Division - Director [72] -------------------------------------------------------------------------------- Okay. And if I can just ask one more. Could you just explain how the right of first offer works with these 2 tranches of WestConnex [throughout the sale]? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [73] -------------------------------------------------------------------------------- Sure. So I think it's in the presentation. But in effect, the government is running a sale process for the 24.5% -- one of the 24.5% share. So they've as we understand it, and this is just from public information. They've gone to the market to seek interest in buying that. They will on a sell process for that. At the same time, they have to offer us that tranche under the investors' agreement. So they will come to us at some point, assuming they get expressions of interest and enough interest to run a sales process. Give us notice that they would like to sell that, we have the right to make an offer. I think the way it's being run is that our offer will go in at the same time as the competitive process on the sales side. So the government will have people submitting offers in their process. At the same time, we will submit an offer for the 24.5%. So in effect, there'll be competition for that 24.5%, and I assume they'll pick the highest bidder. And at the same time, we're being offered then in addition to submit another offer for the final 24.5% under the ROFO, if we would like. And obviously, they have to decide whether it meets their value for money hurdle or the reserve price, whether they accept that second offer as well. So -- I mean in theory, how we could lose the -- theory you could win both. We could lose the first tranche and win -- but then get the second tranche because we're the only one participating in the second tranche, but if it meets their value for money of the reserve hurdle. Or in theory, we could lose the first tranche and then our second tranche doesn't meet the reserve price, and we end up with nothing. So there's sort of 3 different outcomes here. -------------------------------------------------------------------------------- Paul Butler, Crédit Suisse AG, Research Division - Director [74] -------------------------------------------------------------------------------- Right. Sorry, just to be clear, like does this rise of first offer give you any advantage? I just [should not] clear on that. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [75] -------------------------------------------------------------------------------- Well, first of all, we're the only ones allowed to bid for the 49. So yes, we think it gives us advantage. It's just a different process for us that we're going through. Look, does it give us an advantage or not? I -- it doesn't really matter whether it gives us an advantage or not. We have to show value for money to the state. We have to put a competitive price up. And that's what we'll do. And we think better than anyone as the operator of the asset, we believe we will know the true value of this asset better than anyone. -------------------------------------------------------------------------------- Operator [76] -------------------------------------------------------------------------------- Your next question comes from James Nevin from RBC. -------------------------------------------------------------------------------- James Nevin, RBC Capital Markets, Research Division - Analyst [77] -------------------------------------------------------------------------------- I just have a question on the funding of future growth projects and particularly development projects. And I suppose, with the change in treatment of corporate releases. Can I -- on maybe a changed approach to funding and growth projects where previously, maybe you'd raise all the equity upfront and maybe the debt over time. And maybe you don't need to do that anymore. So potentially if you are successful than the likes of Maryland, and you won't need to raise the equity upfront anymore, and you're just going to match us with kind of the timing of covered releases over the few years of development? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [78] -------------------------------------------------------------------------------- Yes. Well, certainly, projects, when you look at projects like Maryland or the M7, M12 once this proposal because both them are development projects, the capital goes in over a longer period of time. That's certainly an option with the capital releases. So again, I think it will be a combination of both, something like WestConnex, where there's potentially a substantial acquisition. We do potentially like we have always done is obviously flag it well in advance to the market of what we might potentially look at. And if we need capital, hopefully, the security holders will continue to support us. But yes, certainly, those longer-term development projects, and when we get out to the Logan widening in the gateway widening in Brisbane and other things like that. And then certainly, the ability to use those capital releases to fund the growth projects as opposed to going back to the markets is something that the Board, I think, and management are looking at pursuing. -------------------------------------------------------------------------------- James Nevin, RBC Capital Markets, Research Division - Analyst [79] -------------------------------------------------------------------------------- And I suppose just on a similar vein, just the on those types of projects and I think on West Gate Tunnel, the debt wasn't locked in up front and required to fund the project. And I suppose what we saw last year with traffic volumes going down and maybe the debt markets kind of closing or kind of prices going up in debt markets for future projects, would you need to look at kind of locking the debt in early in the project once you know you're going ahead with this? -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [80] -------------------------------------------------------------------------------- Go ahead, Tom. -------------------------------------------------------------------------------- Tom McKay, Transurban Group - Interim CFO and GM of Treasury & Capital Markets [81] -------------------------------------------------------------------------------- Yes. We approach it -- we actually carry quite significant bank facilities on balance sheet to actually to give us that flexibly uncertainty as to how we fund those things. So when we commit to fund some over time, we will take a very prudent approach and put in place facilities, particularly on balance sheet from [bank typings] and then look to access capital markets over time. So that would be our general approach to commitments over time. Having said that, we -- you were right, only last year, the markets were volatile, but we did access the markets twice last year, both in Europe and the U.S. and whilst there was some elevated pricing involved, we still got great support from our investors, and we're able to raise the funding that were required. So we remain confident that the markets will continue to support us. However, when things are volatile prices do move around. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [82] -------------------------------------------------------------------------------- Well, I think we -- we make our investment case. We take all this in consideration about where we think the rates are and where they're going and what we can do to lock in or how we look at that volatility. So I think that's -- on a development case, it's certainly something that we look at. And in some of the development cases, I know in the U.S., the government -- our partners actually share that risk, the government partners share that risk because they ask us to potentially take some of that risk over a period of time. So then they share of the interest rate movement risk with us before we can lock in the debt. So different ways for us to look at it and mitigate it. -------------------------------------------------------------------------------- Operator [83] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back to Scott for closing remarks. -------------------------------------------------------------------------------- Scott Charlton, Transurban Group - CEO & Executive Director [84] -------------------------------------------------------------------------------- Great. Well, thanks, everyone, again. Thanks for your attention. I know it's an incredibly busy day. I appreciate everyone's interest. Again, Investor Relations team or Tom and myself are available to take further questions. And hopefully, it's not too long before we can get around and see everyone in person. And thanks again for the Investor Relations team for putting this all together. Speak to everyone soon. Thank you.