Atlas Arteria Limited (ALX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Atlas Arteria 2022 Results Presentation Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Graeme Bevans, CEO. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining Atlas Arteria's 2022 full year results call. I'm joined by our CFO, David Collins; and our Investor Relations team. Today, David and I will take you through the presentation we have lodged with ASX this morning. Our formal presentation should take around 40 minutes, following which we will open the call to questions. Starting with the key highlights on Slide 6. 2022 was a significant and transformative year for Atlas Arteria. Based on the company's strong performance and momentum, I am delighted to be able to reaffirm distribution guidance of $0.20 per security for the second half. This will translate to a record distribution of $0.40 per security for the year. We have also reaffirmed guidance of $0.40 per security for 2023, which is underpinned in part by the strong toll increases that you can see on the slide. In September, we announced the acquisition of a majority interest in Chicago Skyway. This landmark acquisition has transformed Atlas Arteria into a stronger, larger and more diverse business. We continue to expand APRR's footprint in France with tolling commencing on the A79 in November. And last month, we signed an investment plan with the French state, under which we will deliver capital improvements to the APRR and AREA networks. Traffic benefited from a continued increase in mobility, improved operating conditions and the contribution of Chicago Skyway and the A79. Including the contribution of the new roads, traffic volumes were 7.8% above 2021. So in all, a year of strong execution across our organic growth priorities as well as the successful delivery of a significant acquisition. This relentless focus on unlocking value across our businesses is indeed translating into securityholder value. In 2022, we delivered a total security holder return of almost 9% versus the ASX 200, which went slightly back. More importantly, since internalization was voted on in 2018, we've outperformed the index with a very credible total security return of 42%. Moving now to the financial results on Slide 7. All our businesses outperformed 2021 levels led by APRR and ADELAC. We expanded the contributors to our traffic and earnings with the addition of the A79 and the Chicago Skyway. Overall wasted average toll revenue increased by 9% versus '21, while weighted average EBITDA increased by 10.3%. Today, we are reaffirming the second half distribution guidance of $0.20. That brings the '22 total distribution guidance to a record $0.40 per security. Following the Skyway equity raise, we obviously have more securities on issue. And as we announced at the time, we intend to support the second half distribution by utilizing excess cash on the balance sheet. We're also pleased to guide to $0.40 per security for 2023, which will reflect the contributions of APRR, Warnow Tunnel and Chicago Skyway. It will also include proceeds from refinancing activities at Chicago Skyway as we flagged at the time of acquisition. This is a short-term strategy to support distributions, not a change to our usual approach of funding distributions from operating business cash flows. We believe that $0.40 is a sustainable target for distributions going forward. Moving to Slide 9. In September 22, Atlas Arteria announced it would acquire a majority of interest in the Chicago Skyway. In October, we completed a $3.1 billion equity raising to fund this acquisition. And in December, we achieved financial close. Skyway was a rare and compelling opportunity that we were uniquely placed to access in which will add value to our business, both financially and strategically. The Skyways long concession life and highly attractive toll regime are key value drivers on this road. In addition, we've been able to leverage our detailed knowledge of Skyway based on our historic ownership of the business and our long-standing relationship with Ontario teachers. We've included information in the pack today on Skyway's current and historic performance, including supplementary information in the appendix. Slide 10 talks to the focus of our activities since we assumed majority ownership in December '22. The Board and management team have spent time in Chicago, and we have established good working relationships at all levels of the business. We've done a lot of listening and learning and started leveraging our capabilities as a global operator across multiple areas of the Skyway business. Looking to the rest of the year, we have a number of priorities to progress with the Skyway Management team and our partner, Ontario Teachers. One important area in which we are codeveloping plans is our approach to maintenance. A more proactive life cycle maintenance approach will improve asset condition and reduce overall maintenance requirements over time. In the short term, that will mean that the cost of maintenance will increase above the $11 million historic leverage. In 2023, we're guiding to maintenance CapEx of $19 million. In addition, we're working towards key upcoming debt refinancing activities. Moving to Slide 11 and some comments on the recently signed investment plan, the EUR 410 million capital investment plan will support the French government's environmental agenda and deliver long awaited motorway upgrades, particularly to the A6. The largest individual capital component on the plan is the redevelopment of a 17-kilometer stretch of the A6, which connects the APRR network to the [indiscernible]. This plan will also deliver customer service improvements, including the conversion of the majority of the AREA network entry points to free-flow tolling. This could be a precursive to the more widespread application of free-flow tolling across the network. In turn, the government has approved a number of compensation measures, including supplemental toll increases for APRR and AREA. This is the fourth investment plan of its kind, and it extends our track record of successful collaboration with the French government. Moving to Slide 12 and an update on the Dulles Greenway business. Legislation is currently being considered by the Virginia General Assembly, which would authorize VDOT to negotiate a new concession agreement for the Dulles Greenway. The legislation is included in the governor's budget bill, which is presently being debated, and we expect the outcome to be known shortly. If successful, there are a number of activities which need to be progressed in order for us to affect a restructure of the Greenway's business model. Should the legislation not pass at this time, Dulles Greenway will advance a rate case application in 2023 for increased tolls. The decision would be possible in mid to late 2024. Moving to Slide 13, which demonstrates the current inflationary impact benefits at Atlas Arteria. Toll prices at APRR, ADELAC and Warnow Tunnel are all directly linked to inflation. As a result of decades high inflation levels in France and Germany, tolls were increased by almost 5% at APRR and over 6% of Warnow Tunnel in recent months. At Skyway, the tolling regime selects whichever macroeconomic indicator is higher on a 2-year look-back basis. This means we have strong visibility over the 2023 and 2024 increase at the time of the Skyway acquisition. In 2023, tolls increased for light vehicles by 11.9% once we've taken into account the rounding benefit in the mechanism, which takes it to the nearest $0.10. This reflects 2021 GDP levels. In 2024, we have an estimated increase of around 9%, also based on GDP levels. While we have seen early indications of certain inflationary impacts on our cost line, for example, wage increases, we expect to be net beneficiaries of the current inflationary environment. Now let's change gears and talk about operational progress made through 2022. At APRR, we saw another very strong result. Traffic across the APRR Group was 8.2% higher than the same period in 2021. This was mostly driven by higher light vehicle traffic of 9.4% linked to strong holiday traffic over both the winter and summer periods. Heavy vehicle traffic increased by 2.4% relative to 2021. The outlook for French household consumption and real GDP is expected to be flat in 2023 with forecast growth over the following 4 years. As you can see on the chart, light vehicle traffic levels have been closely correlated with household consumption over the past 20 years. Heavy vehicle traffic is expected to continue to grow with international trade, although this was lower through the second half of 2022. Moving to the A79. This road is part of the key East-West transversal link from Royan in the Atlantic Coast to the Rhone Valley in [indiscernible] towards Germany, Switzerland and Italy. This concession is the first in France to be commissioned with free-flow tolling technology from the outset. This expansion has vastly improved the safety conditions on the road, creating 2 lanes in each direction while delivering significant time savings for mergers. The A79 is priced according to environmental criteria. Electric cars will, for example, pay EUR 3.20 per trip as opposed to EUR 4 for a conventional car. As expected, in the first 8 weeks after tolling, we saw a significant use of the road by heavy vehicles, which made up just over 40% of all traffic and 73% of toll revenue. Moving to Warnow Tunnel on Slide 17. Traffic was up by 3.4% on 2021, which was subject to COVID-19 related restrictions. However, there were some other impacts during '22, including the introduction of the German government's discounted public transport ticket initiative. During the fourth quarter, Warnow Tunnel benefited from the road works on the competing route, which increased the travel time savings offered by the tunnel. Moving to Slide 18 for a snapshot of traffic performance on the Chicago Skyway. Although we only incorporated the contribution of the Skyway into our accounts from December, we've included historic data here for comparative purposes. Both light and heavy vehicle traffic were positively impacted for part of 2022 by roadworks along the adjacent competing route on the Frank Borman Expressway. In addition, the steady increase in office-based work in Chicago also positively impacted traffic. Heavy vehicle traffic was supported by strong industrial production growth. Looking forward, industrial production is expected to contract marginally in '23 in conjunction with broader short-term economic headwinds. The outlook is then positive between 2024 and 2027. In 2023, roadworks on the adjoining Indiana Toll Road are expected to negatively impact Skyway traffic. This was flagged at the time of the acquisition. As you can see on Slide 19, we continue to see gradual improvement in traffic at Dulles Greenway. Traffic over '22 was 6.6% higher than '21, but 30.8% below 2019, driven by the slow return to the office in the Greater Washington area. Now the traffic in peak periods, which has been the slowest to recover, is showing a steady positive trend. As a reminder, peak period traffic pays a multiplier on the Dulles Greenway and therefore, drives higher revenue outcomes on this road. Since the commencement of the pandemic in 2020, traffic on the adjoining Dulles Toll Road has quite closely mirrored the performance of the Dulles Greenway. DTR also supports significant commuter traffic and current traffic levels are substantially below 2019. Conversely, we believe that weekday traffic by the alternate route 7 and 28 is more or less back to 2019 levels. These roads typically serve a different mix of customers to the Greenway who travel to and from different sets of origin and destinations. This is a good thing for the Greenway, with the more congestion on the free alternative route, the more significant for time savings offered by the Greenway. Turning to environmental, social and governance matters on Slide 20. During '22, we continue to make good progress across our sustainability priorities. Full details will be provided in our second sustainability report, which will be released in April. Safety remains the top priority. As we've explained before, the accident which occurred at APRR in April, which we have previously spoken about, resulted in one fatality and one serious injury of an employee who has since recovered and returned to work. We're very focused on supporting the employees and their families as well as implementing changes following this tragedy. APRR recorded an LTIFR of 3.67%, a result above this target to keep LTIFR at or below 3. This miss was driven by an increase in accidents in the busy summer and Christmas periods. No lost time injuries were recorded across the rest of the business. In 2023, the focus will be on working with the Chicago Skyway team to help them develop their approach to sustainability. In parallel, we will continue to implement our policies and programs across the rest of the business. This year, we've made good progress to address the recommendations set out in the task force on climate-related financial disclosures. This will be a multiyear exercise. During the year, the business focused on identifying and analyzing climate-related risks and opportunities. We also formalized the structures necessary to embed oversight within the business. We're very focused on achieving our Scope 1 and 2 greenhouse gas emission reduction targets. During '22, we assessed Scope 3 emissions in our wholly owned businesses and at our corporate offices. I will now hand over to David, who will take you through the financial performance for 2022.

Thank you, Graeme, and good morning, everyone. I'm very pleased to report Atlas Arteria's 2022 results today. The Atlas Arteria income statement is provided on Slide 23. Our financial performance has significantly improved compared to 2021. The primary driver is the continued strong performance of APRR, which you can see come through in the share of net profits of equity accounted investments and the improved performance at Dulles Greenway. I would also call out the 17% increase in toll revenue, which was predominantly driven by higher traffic and increased toll rates at Dulles Greenway as well as the weakening of the Australian dollar against the U.S. dollar. The 645% increase in other income, which reflects the increase of interest income on cash deposits. This is due to rising interest rates as well as interest earned on the shareholder loans with CCPI, which is related to Chicago Skyway for the month of December. And finally, corporate costs increased over the period, in line with expectations. Corporate costs do not include the $2.3 million of IFM engagement costs or $2.5 million of transaction costs associated with the Chicago Skyway transaction. We expect corporate costs to be between $34 million and $36 million for 2023. This corporate cost range does not consider transaction or growth project costs. As Graeme has discussed, we also acquired a majority interest in the Chicago Skyway in December. As with APRR, the skylight has been included in the share of net profits of equity accounted investments line. For 2022, the Skyway has only been included for the month of December. We have also included a number of notable items in relation to the Skyway transaction as well as costs associated with IFM engagement. Overall, we are very pleased with the outcome for the year. Now we turn to our cash flow waterfall on Slide 24, which outlines how we derive our distributions. The consolidated APRR profit for the first half was EUR 535 million. And starting on the left-hand side, Atlas Arteria's pro forma share of this was EUR 167 million. Our share of the APRR company net profit after tax, which drives the size of distributions was EUR 135 million. The difference between the $167 million and the EUR 135 million, our consolidation and IFRS adjustments. If you then account for the release of some surplus cash withheld at t Eiffarie in the last period, the mass taxes and administration costs, you are left with the EUR 134 million, which Atlas Arteria received in September. If you convert this, you get AUD 199 million in distributions. We also received AUD 7.9 million from Warnow Tunnel in the period. In addition, we received interest income from capital raise proceeds and $4.8 million from closing out the legacy nibble interest rate caps. We also paid our corporate costs, capital project costs and investment cash flows. This gets us to the $211 million net profit cash flow. We had close to $132 million cash on the balance sheet at 30 June, plus the $211 million of corporate cash flows during the period. We can then see the impact of the Chicago transaction on our cash flow. We received around $3 billion of cash from the equity raising, which is net of equity raising costs. We then drew down around $3 billion to pay for the Chicago Skyway acquisition and transaction costs. We also paid out our first half distribution in October. This meant we closed on 31 December with a cash balance equivalent to around AUD 172 million, as you can see on the slide. Let's turn to Slide 25 to look at APRR, the most significant contributor to our performance. APRR consolidated net profit for the period was around 13% above last year and around 21% above 2019, which, of course, was prepandemic. I will step through some of the drivers of this performance. Firstly, revenue increased with the uplift in traffic and toll increases. The recovery in light vehicle traffic resulted in a more normalized toll mix. However, the weighted average toll price increased versus 2021 due to the toll increases. Secondly, we saw the revenue and cost contribution rise from the fully business, which is growing. As a reminder, the fully business operates service stations along the network. Thirdly, other operating expenses increased as a result of higher operational taxes associated with the higher traffic and earnings. And lastly, interest costs increased as a result of higher debt balances with a slightly higher average cost of debt. Debt was increased during the year to support the acquisition of the interest in the A79. This represents project costs during construction. We have also included in the table, the bridge from APRR consolidated NPAT to the APRR company NPAT. As we just saw on the cash flow waterfall, the company NPAT drives the distribution paid from APRR. The APRR net consolidated adjustments consist of intercompany loan arrangements, which expire at the end of 2023, IFRS accounting differences and lastly, the 6-month lagging effect of profit from AREA. The increase in the consolidation adjustments during the period reflects the IFRS accounting differences for the period. Under the APRR stand-alone accounts, which are calculated under French GAAP accounting standards, the provision has increased compared to 2021, reflecting cost inflation. For more information on the composition of the various cost items and tax line items for APRR, please refer to our investor reference pack, which was also released to the ASX this morning. If you move to Slide 26, we can see the CapEx program for APRR. Following the approval of the investment plan, CapEx guidance has been updated to reflect the additional projects agreed under the new plan. CapEx for 2023 until 2027 is expected to be between EUR 350 million to EUR 400 million per annum. Post this, CapEx is expected to revert back to the average of around EUR 250 million per annum. APRR has significant balance sheet capacity to fund both current and future CapEx projects, which I will discuss further on the next slide, Slide 27. APRR is rated A by Fitch Ratings and A- by S&P. Total debt outstanding currently sits at EUR 9.7 billion at 31 December, including EUR 1.1 billion at t Eiffarie. Liquidity also remains strong at EUR 3.5 billion, including EUR 1.5 billion of cash and a EUR 2 billion undrawn revolving credit facility. APRR has significant balance sheet capacity with net debt-to-EBITDA sitting at 3.4x versus the default covenant of 7x. APRR has EUR 1.4 billion of debt to mature in 2023, of which EUR 0.5 billion relates to fixed coupon bonds. There are EUR 0.8 billion of short-term commercial paper maturing noting that APRR has EUR 1.5 billion of cash, hence, providing a natural hedge. It's also worth highlighting that APRR will pay EUR 40 million of scheduled amortization at Eiffarie, which will impact distributions paid to Atlas Arteria. And finally, 88% of debt at APRR is fixed, which provides protection in a rising interest rate environment. Turning now to Warnow Tunnel on Slide 28. Traffic continued its post-COVID recovery. We finished the year up on 2021, but below 2019 levels, a year where roadworks on competing routes elevated traffic. Warnow also benefited from rising inflation during the period. Toll increased by an average of 6.4% on 1 November 2022. With 75% of debt currently fixed, Warnow Tunnel is well positioned to benefit in the current high inflation environment. Warnow Tunnel paid a distribution of EUR 3.4 million in February 2023 to Atlas Arteria, which will contribute to the second half distribution to security holders. Turning to the Chicago Skyway on Slide 29. I note we are showing on the slide the performance of the Skyway on a 100% basis for the full 2022 and 2021 year. As previously flagged, the Skyway only contributed to Atlas Arteria's performance for the month of December. However, we have included the full periods to allow for comparison. The higher percentage increase in operating revenue for the period compared to the increase in traffic was driven by higher heavy vehicle traffic, which pays highest hole than light vehicles. Capital expenditure was in line with the prior period. As discussed earlier, CapEx guidance for 2023 is expected to be around $19 million, which includes investments in modernization and automation. You can also see no taxes were paid by Chicago Skyway during 2022 and 2021. This is because Skyway was in a tax loss position. We have included further information in the appendix on the relevant U.S. taxes for the Skyway. Overall, Chicago Skyway's performance for 22 was ahead of 2021. Turning to Slide 30 to look at the Chicago Skyway financial position. Chicago Skyway has a robust credit profile and is currently rated BBB+ by S&P. As at 31 December, the Skyway had USD 1.4 billion in total debt, of which 87% is fixed. The Skyway debt service coverage ratio sits at 1.82x, well above Atlas Arteria's target range of 1.4x to 1.6x. There remains significant headroom above the investment grade credit metrics. As we previously discussed, capital releases from Chicago Skyway, as part of the upcoming refinancing process will be used to smooth distributions in the short term. Moving to Dulles Greenway on Slide 31. Traffic was 6.6% higher than last year, with operating revenue 12.6% higher. This was driven by the 5% increase in off-peak tolls from January as well as a greater proportion of peak traffic. Customers traveling at these times pay a higher toll than off-peak users. Importantly, liquidity within the business remains strong with USD 208 million of cash available in the business across restricted and unrestricted reserves at 31 December. At the end of last year, we had $63 million in cash locked up within the business, which could have been distributed but for failure to meet the lockup tests. Of this, around $11.7 million was used in February 2023 for bond payments. Moving to capital management on Slide 32. We are focused on 3 key principles: Firstly, sustainable distributions funded from operating business cash flows; secondly, appropriate gearing across our portfolio; and thirdly, funding to support growth objectives. In terms of distributions, APRR continues to be the main contributor with strong traffic performance driving distributions. Warnow Tunnel is also contributing to distributions with Chicago Skyway to begin contributing in 2023. All of APRR, Skyway and Warnow Tunnel support investment-grade capital structures with APRR upgraded to an A rating by Fitch during the year. We remain focused on strategies to deliver sustainable cash flows from Dulles Greenway, including reinstating an investment-grade capital structure as part of the overall project we are working on there. At 31 December, we had the equivalent of around AUD 172 million on the corporate balance sheet. We are reverting back to holding 1 year cash flow for our corporate cash flows, and we use that cash to support our second half distribution. We have capacity to reinstate covenant-like holding company debt. And as we have said before, if we were to raise new debt at the head count level, it would be on appropriate terms and for the right opportunity, such as the Dulles Greenway restructure. I'll now hand back to Graeme, who will go through our outlook.

Thank you, David. Moving to our clear focus for the next year. This is in transitioning Chicago Skyway to an Atlas Arteria business and continuing to execute on our organic growth opportunities as they become available. In France, we will continue our dialogue with the French government on achieving their road development and environmental objectives in exchange for toll increases and/or concession extensions. In Virginia, it will depend on the results of the legislative process. We will either move to negotiate a new concession agreement with VDOT or we will be filing a rate case application as soon as possible. Before we close, I'd like to take a minute to reflect on Atlas Arteria's journey. In the short time since the agreement to internalize management in May 2018, we've demonstrated our capability to create value for security holders. We've restructured and increased our stake in APRR to 31%, recapitalized by Warnow Tunnel to deliver cash to security holders, expanded our capabilities across the business, notably in the areas of traffic forecasting and data. And in 2022, with the appropriate corporate infrastructure and balance sheet in place, we expanded the platform with the acquisition of Chicago Skyway. In doing so, we've transformed Atlas Arteria into a stronger, larger, more diverse business that can support long-term sustainable distributions for our security holders. I would invite you to read our annual report also published today for a more detailed summary of our strategic progress. Finally, I'd like to leave you with a reminder of what investors are buying when they invest in our company. Inflation-linked earnings, which are reflecting more than decade high inflation rates, a sustainable long-term distribution flow, strong organic growth potential and the balance sheet to facilitate that growth. And finally, a highly experienced team with a proven track record of executing complex transactions to deliver value. As we've discussed, this combination of skills and strategy has resulted in returns for investors since internalization of 42%. In conclusion, I'd like to thank the team at Atlas Arteria for their very hard work over this transformative period for the business and our security holders for your support in achieving this. With that, I'd like to hand back to the operator, which we will open for questions.

[Operator Instructions] Your first question comes from Owen Birrell from RBC.

I guess my first question is just on APRR and these ongoing investment plans that you continue to successfully achieve. I would have thought that a lot of these smaller investment packages could have been rolled up into a larger parcel of works in return for a longer-dated concession extension. Are you sort of shooting to many of your bolts upfront? Or is this all part of a longer-dated strategy to achieve a longer-dated concession extension?

Look, Owen, it's very much a political and negotiating process. The French government's key agenda item at this point in time is pension reform. And they did not want to go through the legislative while they're trying to achieve pension reform with a concession extension. You will have noticed that we only did not have an investment package I think that's highly indicative of the very strong relationship we've created with the ministry and with the government. So we're basically succeeding beyond our peers, and I think that's a really good outcome. Until the pension reform is resolved, I wouldn't expect there to be a concession extension. As I said previously, we have a significant pipeline of opportunities, which we have worked out with the ministry, with the local government and so forth, and they're fully aware of what we are capable of doing and delivering. The other thing that the minister is focused on is what happens at the end of the concession period. And that also is a key focus of the minister at this point of time with the Sanef concession expiring in 2030, that really needs to be dealt within this current administration.

[indiscernible] I guess, investment opportunities within APRR. Can we expect these sorts of investment programs, I guess, rolling on a...

Pardon me Owen. This is the operator. For follow-up questions could you please rejoin the queue?

It was just a follow-on question from that same.

It's a follow-on. It's fine operator.

No problem.

Repeat it Owen.

Just -- you talked about a pipeline of opportunities. Can we expect these sorts of investment programs to continue roughly on a rolling 12-month basis?

I don't know what the timing is. It really comes down, as I said, the major focus of the government in '23 at this point in time, as you probably noticed in French newspapers, is pension reform. That's the major objectives that Macron has and everything will come second to that until that's resolved.

Your next question comes from Rob Koh from MS.

Congratulations on the results. Can I just ask a question about the multiparty transaction platform that you have. And I like the way you've expressed that. I guess there's maybe speculation about a potential sale of Eastlink. I'm just wondering if you could comment on whether that would be attractive to your portfolio and what you would see is bringing to such a deal if that was a priority for you?

Thanks for the question, Rob. My understanding is that, that process is happening as we speak. We have -- as everyone is aware, undertaken a huge transformative transaction in 2022 with the acquisition of Chicago Skyway. And our focus over the coming year has to be on bedding that down during the operational changes we wish to achieve. So we will not be participating in the Eastlink process.

Your next question comes from Ian Myles from Macquarie.

Very simple questions to save me doing the math. You talked about a target DSCR of $1.4 billion to $1.6 billion times for Skyway. Just wondering how much debt capacity that actually gives you in the Skyway borrowing profile?

Sure, Ian. It's David. What I would do is I would point to our equity raising materials where we provided a view which was USD 230 million as a comfortable level, a conservative view of additional gearing capacity that's available. I wouldn't put an update or a specific number other than referring you to that, Ian. We do have in the IRP, the cash flows for Skyway, which will give you a pretty good view of what would be achievable within that target range of $1.4 billion to $1.6 billion.

[Operator Instructions] Your next question comes from [indiscernible] from Jarden Group Australia.

Just a quick one on the current traffic trends for APRR in January and February. If you could give us any color how it's tracking and also the mix of traffic between light vehicle and heavy traffic?

Yes. Look, obviously, we will do our next traffic release at the end of the quarter. I think all we can say is traffic's relatively flat to prior year. So I think beyond that, I'm not prepared to answer that, we'll provide full details in our traffic release in April.

You have a follow-up question from Ian Myles from Macquarie.

Okay. Dulles Greenway. Do you just want to give us an update where this legislation in the process because it's all been passed to passed by indefinitely and what the other process is? And then I guess -- if it doesn't get through the legislation, this SEC process is new relative to the past? And maybe what the -- you're sort of focusing on there and the issues which may arise because I think there's something about a 3% sort of have quantified what the impact to a material impact?

Yes. So it's a pretty complex question. I will try to answer as best I can. The relation to the legislation, the governor has incorporated into his budget bill, a mirror of the legislation, which passed the house of Assembly and also passed the transport committee in the Senate, was passed over by the finance committee of the Senate. The expectation is that, that process will work through. The session is meant to finish on the 28th of February. And so we'll see whether the budget gets passed during that period. The budget does not go to committee. The budget is dealt with on the floor, and we believe there is sufficient support on the floor that we will be able to get it through. There will be negotiations between the parties at the both Senate and House level with senior members of both centers in the house and we'll see where it goes. So it's not over until the budget legislation is finalized or until the governor removed the amendment to the budget to exclude the Greenway legislation, which given his strong support for the legislation, I think it's unlikely. So we have done notice, the regulator as in the SEC what we will be doing today that we would intend to file a rate case and we'll also be doing a press release to that effect. So very clear to all members of the Senate and the House that absent the legislation, there will be a significant rate rise application launch. So I think that's the update on where we're at. As to the process, the SEC legislation was amended, the HCA Act in a prior session of Pullman. And as you explained, there is a 3% effect as part of that legislation. And increases can only be granted for a year and not for multiple years. We will be working through that process, and that will give an outcome. If that outcome were to result in a value detriment to the company, the company has available to it recourse through the Virginia Supreme Court under what's called taking legislation that is acquisition of property without due compensation. So that's an extreme point, but we do have various courses of action available to us, depending on the outcome.

You have a follow-up question from Rob Koh from MS.

Thanks for having me again. Just wanted to get some thoughts from you on your debt capacity. You mentioned you have an option for covenant-light holding company debt. Have you got any thoughts or how should we think about debt sizing for that? Or is there a target credit rating? Just any thoughts you could share?

Look, obviously, we have at APRR, a very high rating. And that does give us some capacity to maintain an overall BBB rating, which is sort of where we target. And our key purpose for that, which we've been identifying for the last 3 reports is the context of restructuring Dulles Greenway. And as we anticipate that occurring, there is good capacity within the -- our gearing levels to be able to accommodate that at a whole level on a covenant-like basis.

Thank you. [Operator Instructions] You have a follow-up question from [indiscernible] from Javan Group Australia.

Just a small question on APRR again. For the fully business outlook in 2023, given sort of the traffic is kind of normalized or slowing down a little bit. Is there a risk that the operating costs in 2023 may rise at a faster pace than revenue growth?

Obviously, the -- and thanks for the question, Anderson. Fully is a service offering that we've provided to lower the cost of fuel on our network is the predominant focus of that business. And obviously, from a ratio calculation perspective, it will have negative effects on gross margins. But it's pretty easy to back it out and look at how that affects us. Strategically, what it's giving us is a lot less activity of people leaving the network to refuel and rejoining the network. And where there's alternative routes, we can take a low fuel cost approach. And we're spacing the fully franchises at differences such that people always have a fully option that we can end up with a better outcome for our customers. So we think it's a great initiative. We are getting very solid and positive feedback from our customers. And equally with heavy people operators, they are appreciative where they're refilling on route to be able to refuel that competitive prices at our outlets, which encourages to use our network versus the voting network if there was an alternative option. So that's really the focus of it. And it's been successful in pushing down the relative cost in other service areas along our networks and relative to the rest of the country. So we sort of see it as being a key leading customer service opportunity and really get the house to do the calculations with and without Fully so you can really see how the business is going on a core infrastructure basis.

Your next question comes from Reinhardt van der Walt from Bank of America.

I've got just a quick one on Dulles Greenway traffic. You've obviously been looking pretty closely at occupancy in that part of the world, which has been lagging a little bit. Can you maybe just give us a couple of comments on where that's at and your outlook for recovery on that road?

Yes. Look, the traffic has been disappointing in its bond. What we are seeing is a more permanent work-from-home regime. There's sort of some move still by employers to get employees back to work in offices more regularly. But the office utilization rate in the Greater Washington area lags the rest of major metropolitan areas across the U.S. And so in that context, we see it as being a situation that's going to take quite some time to fully recover. So we've very much flattened our curve of growth over the next few years to -- in our forecasting as to how long it's going to take to get back to pre-pandemic traffic models.

Thank you. There are no further questions at this time. I will now hand back to Mr. Bevans for closing remarks.

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That does conclude our conference for today. Thank you for participating. You may now disconnect.