Transurban Group (TCL) Earnings Call Transcript & Summary

Great. Thank you, and welcome, everyone, and thank you for joining us for our full year results briefing. And again, I hope that wherever you are listening to this, that you're safe and well. Today, I'm joined by our CFO, Michelle Jablko, and together, we'll take you through the presentation. We have lodged with the ASX this morning, and there's lots of material as well that supports the release as well. And I encourage you when you get you chance to look at our corporate report and some of the other mobility report and information that we've released this morning as well. We have our Investor Relations team on the call, monitoring the call. And if we don't get to your questions, please follow up with the team, and we will get you a response. Today's presentation, hopefully, will take about 40 minutes, and then we'll follow up that with questions. So hopefully, everyone has got the investor presentation in front of them, and we'll move right to Slide 4 and talk about some of the highlights. So the FY '21 mark the first full year of the COVID-19 impacts for Transurban. And despite the challenges posted by the pandemic this past year, we believe we have demonstrated the resilience of our business model, we strengthened our balance sheet, and we continue to invest for long-term growth. And I'll kick off this morning's presentation with some of the highlights for the period. So we'll start with traffic, which we saw trending up through FY '21. Of course, the situation is continuing to evolve with the government-mandated restrictions currently imposed in Sydney and Melbourne. And of course, they've just lifted in parts of Queensland, and I'll return to this topic though in a few moments. In Sydney, we opened NorthConnex and M8 and we started tolling on the M5 East during the first half. And pleasantly, the assets outperformed our expectations even in FY '21 conditions, and they've also driven traffic across the wider networks such as the M2 and the M7. We're also -- we're very pleased to be selected as a preferred developer for Phase 1 of the Maryland Express Lanes project. This is our first project in collaboration with the Maryland Department of Transportation. And if we stay in North America, as everyone knows, in December of 2020, we announced the sale of a 50% stake in our 95 and 495 Express Lane assets and their associated development projects, which sets up -- which sets us up for accelerated growth in the region. We did continue to pay distributions throughout the pandemic as well as substantially invest in our growth pipeline. And now finally, with new members of the executive team having joined during this last year, we have the right capability for us to achieve our next phase of value creation and growth for the company going forward. I'll move to Slide 5 now and talk about some of the results summary. Traffic and proportional revenue were roughly flat year-on-year with the impacts from lower traffic largely offset by the contribution of new assets that opened during the year. Free cash was down 13%, primarily reflecting the impact of COVID on EBITDA in Melbourne and North America as well as increases in costs related to investment in strategic growth projects, which Michelle will take you through later, and largely related to Transurban Chesapeake. The full year distribution was 128% covered by free cash, given the Board has elected though to retain capital releases from WestConnex within the business for future growth. But still, we were more than 100% cash covered, even excluding capital releases. Our statutory profit result reflects a $3.7 billion gain in relation to the 15% sale of the Transurban Chesapeake assets, realizing significant value for securityholders for these long-term quality assets, and we're very excited of our partners in that project. We've continued to make progress on the West Gate Tunnel Project, although it is still a challenging situation. We've included a lot of information in this pack, and I'll talk further on this topic in a minute. Turning to Slide 6. Just a reminder of our long-term strategy, which is to provide transport solutions that offer real and lasting benefits to cities and communities. And Slide 7, you'll see that both our strategy and our investment proposition have been tested and they remain unchanged. We now operate 21 assets in 5 markets with an average concession life of 25 years in Australia and 46 years in North America. We have confidence that the core fundamentals of our assets will support long-term traffic growth, supplemented by a strong opportunity pipeline, which continues to grow. We believe our ability to listen to our stakeholders and develop solutions to meet their needs is core to our competitive advantage as we seek to work with governments to help them fulfill their long-term infrastructure plans in some of the most dynamic cities in the world. We're focused on maintaining financial strength and flexibility, so the business can meet its growth ambitions as well as growing distributions over time. So getting into a bit more detail. If I move to Slide 8, talk a bit about the traffic overview, shows the performance of traffic over the last 8 quarters. And you can clearly see the recovery trends for the period, supported by our diversity across our markets and accelerated by the contribution of the new assets in the portfolio. Slide 9, we've provided a lot more detail not only of what happened last year, but what's happening over the last few weeks or last month. And you can see in the markets with relatively few restrictions like Brisbane and Sydney, there was a positive trend through the second half with both markets again recovering to pre-pandemic levels. That contrasted with Melbourne where we saw repeated and extended lockdowns for the second half. And the ongoing restrictions like mask being enforced indoors directly impacts the working environment and therefore with the patronage on our roads. And finally, in North America, we saw a steady positive trend through the second half, corresponding to the vaccine rollout in Virginia, Maryland and Montreal, where the vaccines now exceed between 55% and 65% in those jurisdictions. This coincides with an improvement in pricing on the Express Lane assets as well. Unfortunately, we have seen now government-mandated restrictions reimposed in Sydney, Melbourne and Brisbane during July and August. And while this is not where we wanted to be at the start of the new financial year, we have the experience and the data to give us confidence that when restrictions are lifted, and they will be eventually, traffic will bounce back, and it tends to come back very strongly and quickly. Moving to some of the highlights in relations to what we've been working with our customers for the last year. Been more focused, obviously, than ever on delivering for what we have is almost 9 million customers now that choose our roads for various reasons, whether it's travel time savings, safety or just more reliable travel. One of the best tools we have in our toolkit is our data, and we have a lot of it. Our customers are taking over 2 million trips per day, and we analyze this alongside feedback received through our voice of customer program and substantial other research that we undertake. And many of the changes that we make in our systems or our processes are direct feedback from our customers and such things like decision point signage campaigns that are currently being undertaken. We're also building an extensive support -- building on our extensive support, which we rolled out during the pandemic to support our customers and it's now being embedded in supporting those customers in financial need or hardship. In our most recent initiative for the millions of our Linkt customers across Australia, will provide the chance to claim prices, including electric vehicles and free tolls as part of our efforts to help get people moving again and support the COVID vaccine rollout program across the various states. If I move now to Slide 11, and you'll have seen this opportunity pipeline previously. It continues to be large and growing. And it's balanced between both greenfield and asset enhancement opportunities and some M&A activities. We're also delighted to see Brisbane named as the host city for the 2032 Olympics and believe it's a potential catalyst to accelerate infrastructure and investment in Southeast Queensland, with the private sector having an important role to play. Likewise, we are very optimistic on the opportunities that may develop in the U.S.A., given their support for a $1 trillion bipartisan deal to overhaul the country's infrastructure. And we note that nearly $300 billion of that is earmarked for transportation projects. So in summary, there's plenty of opportunity for us to pursue in our core markets that are consistent with our strategy, and we believe that the macro trends are in our favor. Turning to one of the biggest opportunities in the near term is on Slide 12, which is the New South Wales government sale of its remaining 45% stake in WestConnex. Transurban, alongside our co-investors in Sydney Transport Partners, are intending to submit offers for both tranches of 24.5%. At this time, we're obviously quite limited in what we can say given the competitive process, but I want to make a few points on the funding. We are coming into this transaction with a strong balance sheet, particularly given the proceeds we have on hand from the sale of 50% of the Chesapeake assets as well as retained capital releases. If successful, we will likely raise equity to support the transaction as we have traditionally done in the past, and we will retain some of our existing funds for additional growth projects. If we are in the position that we're coming to the market for equity, it will likely be similar to what we have done in the past regarding -- recognizing the benefits of rights issues and taking all factors of fairness and efficiency into account. In relation to our approach on WestConnex on Slide 13, we feel best place to understand the value inherent in this WestConnex portfolio given our experience in operating the assets to 2018 and even doing the due diligence for 2 to 3 years prior to that. This is a complex portfolio of assets, compromising over 450 kilometers of motorway, including 10 tunnel structures to which a number of new assets will be connected over the next 10 years. We believe that we're the natural owners of this infrastructure given our direct experience in owning and operating these type of assets, particularly as these assets are both managed and operated by Transurban and STP. And again, notwithstanding the results of the transaction, STP retains operational control of WestConnex through to the end of the concession in 2060. Now turning to one of the other major projects that we're working on and seeking to progress on the West Gate Tunnel. Let me again reiterate the importance of this critical infrastructure project for Victoria. Everyone in Victoria knows that an alternative to the West Gate Bridge is desperately needed to help provide quicker and safer trips for thousands of Melbourne riders. We're sharing the disappointment and frustration of the community from the delays and challenges because we know how transformative this project will be. This project began originally in 2015 with Transurban and the Victorian government undertaking a comprehensive project development and tender process. And the DNC subcontract was awarded to CPB John Holland joint venture in late 2017. Significant progress has been made today on construction with our proportional $2.7 billion spend, but over $3 billion spent total on the project. However, we expect the tunneling to get underway in 2019, and this has not occurred due to changes in the classification of soil containing low levels of PFAS. The classification changes required a purpose-built disposal facility for the tunneling spoil with associated environmental and planning approvals also contributing to the delay. These issues have resulted in a dispute between the parties. However, impacts associated with COVID and delays relating to relocation of utilities have also contributed to the disputes. We had hoped to have this project open for the community next year. As we discussed previously in our other announcements, this is no longer achievable and we're unable to put a reliable time frame on the project on when the project will be complete until the TBMs commence. But if I turn to Slide 15, I think it's very important to understand that we're doing everything we can to help get this project on track. We've taken a number of steps to keep construction moving, including providing cash flow support to the builder, and we're funding the preparation works for the spoil disposal side to enable the tunneling to get underway as soon as possible. In parallel, the parties have agreed to a mediation process following an independent expert determination. However, legal pathways can always be pursued by any of the project parties under the existing contracts. And in relation to the disputed matters in this regard, Transurban has been through a process, and we remain confident in our position regarding our contractual rights and liabilities. So we wanted to be transparent that this is a difficult and complex issue, and the estimated cost to complete differ between the project parties and there remains a number of matters to be resolved. But we believe the successful delivery of this project is in the interest of the community, and we're prepared to make further meaningful contributions to resolve the challenges, which we believe is required from all project parties given the circumstances and responsibilities under the contracts. A bit of update on what is actually happening on the project because we can't lose sight of how much work has actually been done to date. There have been over 24 million hours worked. And anyone who has driven to the project corridor recently will be starting to see the shaping up of 4 new lanes on the West Gate Freeway and instructions to bridge the Maribyrnong River and along Footscray Road. And we know people are sick of being stuck in congestion and residents are tired of trucks on their local roads. And when completed, the West Gate Tunnel will reduce 20 -- will take 20 minutes off their daily commute and will remove over 9,000 trucks a day off of local streets. We'll talk about some of the other good work that Transurban is doing in the ESG space. These considerations are integral to our decision process at Transurban, if you look on Slide 17. And there's so much happening in this space. And I encourage everyone to click on links to some of our statements to everyone to go have a look at what's being done. It's impossible to try and summarize on 1 or 2 slides how much work the group is doing and we're very proud of it all. But some of the highlights, so during the period, we increased our climate change initiatives with a net zero target by 2050, and we're one of the first companies in the ASX 20 to have those targets validated by the science-based targets initiative. Starting from next year, we expect to see our emissions profile reduced quite markedly, in line with the ramp-up of our renewable energy used on our assets. Again, we published our corporate report today, our sustainability supplement and that gives substantial detail on our integrated approach on different ESG issues. We are pleased to continue to engage more with the investment community on these issues, and we welcome your feedback on our report and what we're doing. I'm now going to go through some quick highlights of the individual markets, and I'll jump to Sydney to start with, which is our largest market. Total revenue actually grew by 19.2% over FY '20, with traffic up 22.3%. As I mentioned, city traffic volumes benefited from the contributions from the M8, the M5 East and NorthConnex. However, even without the contribution of these new assets, traffic was up almost 5% on FY '20 and down just around 2% versus unaffected COVID year of FY '19. In May, we also provided data and analysis as part of our response to the New South Wales Parliament's inquiry into road tolling regimes, which is publicly available. And we welcome, again, an opportunity to engage with policymakers and take a pragmatic look at tolling regimes to potentially create a better proposition for our customers. We continue to work very actively with communities in Sydney. And during the financial year, we delivered some fantastic initiatives, including the West Gate -- sorry, the WestConnex canal to creek public art program, which, again, you can see in some of our material. If you look at the Sydney portfolio and pipeline on Slide 20, it highlights some of the solutions we're providing to our customers and our communities. And we're making good progress on the detailed proposal for the M7-M12 project, which will play an important role in connecting the new Western Sydney Airport and the existing M7. We're hopeful that our proposal for this project will enter the third and final phase of the New South Wales government's unsolicited proposal process later this year. Moving now to our Melbourne market update, where toll revenue fell by 17.6% and traffic volumes by roughly 24.5% on CityLink. The city continued to see impacts from repeated lockdowns through the second half, but overall performance did improve in the half. The Western Link continues to be impacted more significantly given the exposure to the CBD and airport-related traffic. But there are some exciting and interesting things coming forward, and we expect to see some movements on Burnley Tunnel with a virtual reality trial conducted this year using some lighting knowledge from Japan to manage driver speed. We hope this will result in smoother traffic flow and less congestion in the tunnel. If I move now to the Melbourne -- sorry, the Brisbane market on Slide 23. In Brisbane, we saw toll revenue increase by 7.7% and average daily traffic increase by 6.2%, and traffic was roughly flat on the FY '19 levels. As I mentioned earlier, Brisbane has benefited from the least impacts of COVID of any of our markets. And although the government has put the city into lockdown several times in 2021, these restrictions have tended to be short and we've seen traffic bounce back quickly. In July, we began the process of transitioning 4 individual control centers into a new integrated center from which we'll eventually operate all 81 kilometers of our network across Brisbane, and it's been a fantastic initiative and will help both with safety and operations. Moving to North America. Traffic declined 13.3% on FY '20, and toll revenue declined by close to 40%, driven by lower average tolls across both 495 and 95 Express Lanes. Pleasingly, as I've said, we've seen toll prices on both assets increase quarter-on-quarter throughout the year, reflecting the increasing traffic levels on these roads and growing congestion on the competing roads. In the U.S.A., more drivers are now using our mobile tolling app GoToll as well. In FY '21, we've expanded this service from Virginia to 4 additional states, including California, North Carolina, Georgia and Florida. So GoToll is now available in 43 roads across 5 states with the potential to reach tens of millions of drivers. And giving an update on our projects in the Greater Washington area on Slide 26. In Virginia, the government has accepted our binding proposal on the 495 Extension project. Again, if everyone is familiar with that, it extends express lanes by 3 kilometers toward the Maryland border. We expect to reach commercial and financial close on this project by mid--- well, by the end of this calendar year. Further south, we're making process on FredEx, which is the extension of the 95 Express Lanes by 16 kilometers. The project is currently tracking behind schedule. However, we're collaborating with our D&C contractor on the construction challenges with work continuing in the meantime, and we're about 40% complete on that project. Again, in Maryland, we're very pleased with the Phase 1 of the Express Lanes project, and it was reaffirmed as part of the long-term plan for the region by the Transportation Planning Board recently. And the next step in the process is the Board of Public Works approval of our public-private partnership agreement, which we expect to receive later in this week. If we look at the pipeline of opportunities or the slide with the projects, we're focused on the pipeline in North American market and feel we're well positioned, particularly given the recent introduction of our strategic partners in Transurban Chesapeake. We continue to engage with the Québec government in relation to potential future opportunities in that region as well. And with that market overview, I'll now pass over to Michelle, who will walk through the financial results for the period, and welcome, Michelle, to your first results.

Thanks, Scott, and good morning, everyone. I'm very pleased to be speaking with all of you today, this being my first result here at Transurban. As Scott said, this result reflects just how resilient our business model is and also demonstrates the capacity we've created to support our longer-term growth. We know that distributions and growth are both important to you. You can see here on my first Slide 29 that we distributed around $1 billion to securityholders in the past year and also managed the balance sheet to ensure we have capacity to enhance longer-term value. Our distributions were equal to 100% of free cash, excluding capital releases. If we add capital releases and also the net proceeds from our 50% sale of Transurban Chesapeake, we generated $3.5 billion, which has strengthened our liquidity position and provided capacity to support growth. You can also see here that even with COVID restrictions throughout the year, our revenue was flat at $2.5 billion. What made the difference was the diversity of our business mix, resilience in commercial traffic and the benefit of new assets. And good cost management meant that EBITDA was $1.8 billion, down 3% year-on-year, a good result given the circumstances. Let me now take you through some of the detail, and then I'll spend some time at the end covering financial considerations for the coming year, recognizing the COVID-related uncertainties continue in the near term. So starting with free cash on Slide 30. As I mentioned, free cash, excluding capital releases, was $1 billion and was all paid out to investors. This was 13% lower year-on-year. There are a few key points to call out here. Firstly, the largest driver was lower EBITDA from 100% owned operations given COVID restrictions in Melbourne and North America. The North American outcome was exacerbated as Transurban Chesapeake became a non-100%-owned asset on 1 April and, therefore, deconsolidated from that date. This was partly offset by higher distributions from nonwholly owned entities. Some of these entities released distributions that have been deferred or held back at the end of FY '20, and NorthConnex made its first distribution in FY '21. The working capital movement that you can see of $49 million mostly reflects an increase in customer receivable balances back toward their pre-COVID levels by 30 June. The movements in tax and net finance costs were largely because of one-offs in the prior year. And net finance costs were also higher because of initial interest payments on corporate debt raised in late FY '20 to fund our development activity. So underlying free cash of $1 billion and then we brought forward $278 million in capital releases into FY '21 with our WestConnex U.S. private placement, this was achieved at an average tenure of 14 years. Given the Board's decision to pay distributions out of free cash, excluding capital releases, our free cash coverage was 128%. The next slide provides a brief overview of our statutory result, which was a profit of $3.3 billion. This was largely driven by the gain on sale for 50% of Transurban Chesapeake, which reflects the long-term value of these assets and was a real highlight of the year. Moving on to our proportional results on Slide 32, which gives you a good underlying view -- sorry, a good view of underlying business trends. Proportional EBITDA was 2.8% lower for the year or 2.4% if you look through the impacts of FX. This was a solid result given the full year impacts of the pandemic, including repeated lockdowns and restrictions on movement in our markets. On a like-for-like basis, total revenue was down $94 million. Our Melbourne and North American assets were most affected, with the impact in the Greater Washington area also impacted by reduced pricing with lower congestion on adjacent general purpose lanes. As Scott mentioned, traffic in Brisbane was generally higher than pre-COVID levels. And Sydney performed well, exceeding 2019 levels in the second half of the year. Commercial vehicles were resilient with all regions except Melbourne experiencing growth and commercial vehicles overall were 17% of average daily traffic. Our new assets helped offset the financial impacts of the pandemic and contributed $63 million to the result after adjusting for divestments. The M8/M5 East and NorthConnex performed better than our pre-COVID investment case expectations, and we had the benefit of additional ownership of the M5 West. Moving now to costs on Slide 33. We managed these well. You can see on the slide that underlying operations and maintenance costs were $10 million lower in aggregate year-on-year. We achieved savings in a number of ways. For example, through resource and customer account management, lower tolling expenses and lower travel costs. All of this more than offset inflation and contracted cost increases. We achieved this while continuing to invest in our customers, including the expanded linked assist program to support vulnerable customers and investment in data and analytics to assist customers in making informed choices about using our roads and to guide future improvements. While costs increased 7.8% overall, this was due to new assets and higher investment into strategic growth projects. These include our opportunity pipeline in Sydney and North America and costs related to the Transurban Chesapeake transaction. So all in all, good cost management, but not at the expense of longer-term investment. Moving now to margins on Slide 34. As you can see here, the proportional EBITDA margin was 70.3% for the year. While the full year outcome was 2% lower than last year, we saw good recovery in margins in the second half, as traffic recovered across a number of markets. You can see this in Sydney, Melbourne and North America. Brisbane was much less impacted by COVID to begin with. There were also some timing differences and one-offs that flowed through to margins, and we've called these out on the slide. These include the full year benefit from completion of the Logan Enhancement Project in August 2019, the ramp-up phases and liquidated damages on the M8/M5 East and NorthConnex and the opening of the 395 Express Lanes. All in all, margin outcomes demonstrate the underlying resilience of our business model and relatively quick improvement when COVID restrictions eased. Moving now to the balance sheet on Slide 35, which is in really good shape. We currently have just under $6 billion of available cash and undrawn corporate debt facilities. This includes the net proceeds from the sale of 50% of Transurban Chesapeake and $278 million in capital releases, which was the first step towards our estimated $2 billion in capital releases by FY '25. We also demonstrated through COVID that we've got significant financial covenant headroom and we've had really good continued access to markets, raising $10.2 billion of debt across the group, 78% of which was to refinance existing or maturing debt. And we maintained strong investment-grade credit ratings. All of this provides financial flexibility as well as support for our pipeline of committed and potential opportunities. Our overall debt tenor has reduced slightly from 8.4 to 7.7 years as we deconsolidated the Transurban Chesapeake debt post sale, which was relatively much longer dated. Excluding this, our weighted average maturity would have increased slightly to 8.5 years. Our weighted average cost of debt has continued to come down with successful refinancing activity taking place throughout the year at favorable rates due to supportive capital markets. Our quality asset base, strong relationship with debt providers and the liquidity currently available in the market all enabled us to build certainty for the future with almost all of our debt hedged and low refinancing risk. I show this in more detail on the next slide. As we spoke about at our Investor Day in May, we take a conservative through-the-cycle view on medium- to long-term interest rates, and these form part of our stress testing approach. This helps inform us on a range of decisions, including future capital releases and capacity to access additional funds for growth. Looking at our near-term interest rate exposure, we're in a good position. Firstly, almost 100% of our book was hedged at 30 June. And then if you look at the maturities coming through over the next few years, most of them are above our average cost of funds. You can also see we have a very manageable quantum of debt to refinance in the coming year. Interest rates are obviously connected to inflation, which has correlation to our revenue. As you can see on the right-hand side of this slide, most of our assets have CPI-linked price escalations as part of their concessions. This will help to partly offset any interest rate increases over time. Moving now to Slide 37. Let me take you through some financial considerations for the coming year. As Scott said, COVID restrictions have continued into the new financial year. The diversity of our markets and essential nature of our roads has continued to support the business. However, there is ongoing uncertainty in the near term. How this comes through in FY '22 will, of course, depend on the length and nature of any restrictions and the speed of recovery. It's really hard to give guidance. So what we've tried to do is set out some reference points on this slide that might help you estimate the impact of restrictions on proportional revenue as they arise. So for example, you can see here that based on FY '21 data, a week of lockdown in Sydney had an impact of between $10 million and $12 million on proportional revenue. The impact was slightly less in Melbourne at $7 million to $9 million per week, but the recovery period was longer. And in Brisbane, the impact was around $5 million to $6 million per week. The most recent lockdown in Sydney since the end of the financial year has had tougher restrictions than we saw in FY '21, including restricted construction activity, which is -- and this has reduced the movement of heavy vehicles. We saw impacts of around $16 million to $18 million per week in Sydney in the second half of July. And then in relation to costs, there are a few points to note here, too. Firstly, there's been a change to the Australian accounting standard for Software as a Service, which requires more of this spend to be expensed rather than capitalized. The impact in the coming year could be up to $30 million. There are some other unavoidable cost increases with insurance premiums going up by nearly 50%. And subject to the length of COVID restrictions, we could see some normalization of cost savings from FY '21. We're also planning some FTE increases to support our business in the next phase of growth. Although naturally, we'll consider the extent of these in the context of COVID restrictions and revenue pressures. So moving to my last slide. As I stand back from our financial performance for FY '21, we've done much to support our ongoing investment proposition. Having started with Transurban just a few months ago, I've been impressed with the resilience of the balance sheet and business model. This put us in good stead to manage through the pandemic while continuing to pay distributions to securityholders and support our people, customers and other stakeholders. And we built on this with the Transurban Chesapeake transaction and significant refinancing activity throughout the year. We have a portfolio of cash-generative assets, including, some of which are still in their ramp-up phase. We'll continue to demonstrate strong financial discipline in the way we manage the business and the balance sheet. Clearly, we continue to face uncertainties given the unpredictability of COVID, and it's right to remain prudent. All of this will help support our committed and future development pipeline and distribution for investors. Thank you, and I'll now hand back to Scott.

Thanks, Michelle. Well done. I should make a comment about Sydney as well. I think it's interesting data, and hopefully, that will help you with your models or analysis and how we go forward. Michelle's comment about Sydney since we've seen -- government then lift the restrictions on construction, we've seen it bounce back to those previous sort of numbers pre the construction restrictions, so that's good to see. And we support doing everything we can to support the construction industry in New South Wales getting back to work as well. In addition to the presentation material on our results and our corporate report, we also published what is in the third of our sort of industry reports. As you know, we spent a lot of time at Investor Day talking about future trends strategy, the data we have, the analysis that we do on market, it's really one of the strengths of Transurban. So we provided a report today, and we were looking and talking to the different markets about, again, the changing in mobility habits, both in the short term and considerations around long term. Again, what this data is showing with COVID and restrictions that are happening, it's a continuing preference for private vehicles over public transportation. This will continue to put additional pressure on the roads, which were already reverting to pre-COVID norms during periods in FY '21. And we expect as restrictions release or the vaccine rollout makes substantial progress, that will be the case going forward. And in parallel at the same time here in Australia as well as we see overseas, we're having a declining road funding model with the uptake of zero emission and high-efficiency vehicles, which we see various discussions at state governments and the press and regarding what that means going forward. We've long been an advocate for the adoption of zero-emission vehicles or electric vehicles as well as a need for a fair long-term road funding system. So in producing this kind of research and working with our partners in the industry and government, we look forward to playing a constructive role in this complex area that we believe will eventually lead to more efficient, fair and integrated transport networks. And again, if you go have a look at that report, which is -- you can link to it from the investor presentation, I think you'll find a lot of very interesting data and material and analysis. So moving to the last slide and a few comments on the outlook. Again, we have to reiterate that our performance this year will remain sensitive to the government responses and economic conditions in each of our markets, including the pay to the vaccine rollout. But I think the good news for our long investors and security holders is that our experience gained since the COVID, we have many reasons to be confident and optimistic that when the restrictions are lifted, traffic will rebound, and then that will be underpinned by the essential nature of our road networks and diverse reasons that the customers continue to use our toll roads. Michelle has highlighted the funding availability and optionality that we have to support our development projects as well as, again, what I've said is the largest pipeline of future growth opportunities that I've seen since we've been at Transurban. But as always, and I think I've been consistent, we've all been consistent in this, we will focus on balancing the distributions for our security holders. We understand how important that is, but also creating long-term value while we maintain our capital discipline. As Michelle said and as the Board has reiterated, in this financial year, we will pay distributions in line with free cash, excluding any capital releases and the capital releases will be retained for future growth and balance sheet strength. Again, we are very focused on creating lasting value, not only for our investors, but for all of our stakeholders. We look forward to reporting on our achievements in each of these areas in the next financial year. But in the final wrap-up, I'd like to mostly thank the team at Transurban who've worked so hard through this very difficult period to contribute to these results. I'd like to thank our security holders who continue to support us and for everyone attending today's call. And with that, now we'll open to questions for Michelle and myself. Thank you.

[Operator Instructions] Your first question comes from Rob Koh from Morgan Stanley.

Just a question on the mobility trends report. I guess this is now, I think, the third iteration of that. Can you comment on how predictive the survey results have proved to your traffic forecasting?

Yes, they've been pretty -- I mean again, when you're forecasting there's 2 different kind of forecasts. When you're used to doing strategic sort of network forecasting, Rob, you're forecasting over 20, 30, 40 years. You're not reforecasting on sort of a daily basis. But what it does show is that we've got consistent results now through all 3 surveys that basically show an uptick in private vehicles versus public transport, particularly with near and medium term. It also continues to show that still -- I think it's still between 85% and low 90s still want to get back to the office. So I think while there'll be some shorter-term impacts, we still think, again, the longer-term trends and other issues will favor our assets in the longer term. So it's fairly consistent even though we've gone for a long -- fairly long period with the COVID.

Okay. Great. My next question relates to management KPIs and long-term incentives. I'm reading the remuneration report section. It suggests that you're moving to 4-year testing, but -- from 3 years. But there's no inclusion of a free cash flow metric in FY '22, similar to last year. I guess given that you're now able to give us pretty granular financial impact estimates for COVID like Slide 37, can you talk to when you might expect to put free cash flow growth back into the KPI metrics?

Yes. I think that would be a preference of the Board, and we were looking at it this year. But with the unpredictability, given the amount of lockdowns and restrictions, it's very difficult, which would mean potentially constantly looking at adjusting that because it would be either unfair to management or it would just require a lot of potential adjustments because it's just the uncertainty of what we're seeing until we get the vaccine rollout. So I think once we get to more stable arrangement in relation to lockdowns, that, that will be something the Board will certainly consider. And I would say, it's up to Board's decision. I would say there would be a preference to add that back, Rob. But until there's a bit more certainty around what's going to happen with lockdowns, it's very hard to use that as an incentive.

Yes. Yes. I understand. And just on those estimates, this is Slide 37, where you've called out rough financial impacts. Do those revenue impacts include the toll forgiveness initiatives, which I think historically haven't been huge numbers, but are still very important to social license?

Yes. Look, I think in the overall scheme, I think that's just -- you can use those as the numbers. It's close enough for them. It's not going to -- and again, those are -- they're rough estimates or circa. Those numbers each lockdown has its own anomalies or is a little bit different. But we just thought that was a good guide to consider.

Yes. I think given the ranges we've provided, I think it's -- it will be within those.

Yes. Okay. That's very helpful. Yes. And just I guess last question, if I can ask one more. Can you give us a sense, Ms. Jablko of the kind of length of time that we need to remain in lockdown for debt covenants to be heading down to lockdowns? Is this something you could give us?

Yes. I mean what I can say is we do a lot of stress testing of the balance sheet, and there's a significant headroom on our covenant. So the covenants are not the concern.

It's kind of an impossible question because it matters what the kind of lockdown, how it affects individual assets. I think to Michelle's comment, it's something -- I wouldn't say we don't worry. We obviously look at it stress tested. But given the liquidity, what we've been through previously, where we are with vaccine rollouts, where we are with the states probably handling it in better than the -- or having a little more level of certainty than we did in the first time, I think we're pretty confident with our position, Rob.

Your next question comes from Owen Birrell from RBC.

Just a couple of questions from me. I'd like to just start with the West Gate Tunnel project dispute update, some really good numbers in there. I appreciate you guys being able to provide those to us. I just wanted to confirm, firstly, the estimate of the D&C subcontractor construction costs. You said that it could increase in the order of $3.3 billion. Can I just confirm, is that $3.3 billion total cost to the subcontractor? Or is that $3.3 billion in addition to the $2.7 billion that they're already contracted for?

No. The original contract, I think, was -- I have to go back to the original -- yes, their total original sum of the project was $6.7 billion, but the D&C contract was less than that because that included a bunch of other issues. I have to go back on to the exact number, but that $3.3 billion is the cost overrun of the original contract.

Right. So in addition to whatever they...

Yes. Correct.

Okay. Now you've mentioned that, that cost will ultimately have to be, I guess, borne by all parties through some sort of commercial settlement. Can you confirm that you're including the Victorian government within that grouping?

Yes. I think there's 2 issues. What we say is we think is most important. Well, first of all, we believe it's still a fantastic project. And the most important thing is to get the project done as quickly and efficiently as possible. And we think the best way to do that is to reach a commercial settlement between all 3 parties that are involved. And in order to do that, we believe all parties have to contribute in a meaningful way. So that's what we're saying. However, if that is not achievable, then we can -- obviously, there's legal pathways under the existing contracts. And the legal pathways will result in whatever the courts say who's liable for the disputes and the outcomes. We prefer to try and reach commercial settlement and move this project as quickly as possible. But to do that, all 3 parties are going to need to contribute. So just clarify this -- so just clarify, on the D&C -- original D&C subcontract was around $5 billion -- approximately $5 billion out of the $6.7 billion.

So that increase in cost of $3.3 billion, can I just confirm whether that includes the $152 million spoil disposal site activation work? Or is that separate?

Look, we're not going to get into like the fine details of all that, but I think we'll just leave it at that. We think that to finish project, it's going to cost $3.3 billion. That's our estimate that's backed up by an independent third party.

And as you said here, the D&C subcontractor is claiming a higher amount than that?

It wouldn't surprise you that -- and I have been on that side of the table, but it wouldn't surprise you that normally D&C contractors claim as much as possible. And then -- but that's our estimate and independent parties back that up.

And just to confirm the delay in the delivery of West Gate Tunnel, is that in any way affects the timing of the extension commencement or the nature of the extension on the CityLink tolling?

It doesn't affect the timing. So -- but under the contract, there's liquidated damages and other recourse to the contractor for being late that would compensate us for delays in completion. But it doesn't extend -- the concession extension isn't tied to completion date of the project.

Okay. Fine. And just a final question for me. Actually, it's probably more for Michelle. I just wondering why the Chesapeake assets are now equity accounted given that you own 50% and you control the asset?

It's because we don't control the asset in the way the Board and other arrangements up in the shareholders' agreement.

We operate the assets, Owen. But with the way the Board and decisions are made at the Board, it's under the accounting standards when deemed not to control the asset.

Because it's a separate entity and separate board and...

Separate decision and our partners have equal say in budgets and other things, which is the same arrangements in WestConnex and some of our other assets.

Your next question comes from Ian Myles from Macquarie.

Just a quick question. In your commentary, you talked about retention of some of the proceeds associated with the sale of Chesapeake assets. I just wanted to get more clarity what's the thought process why you may need to retain that given you've still got probably $1.7 billion of capital leases to come through your existing roads which would fund levels of growth?

Well, Ian, yes, I think -- look, I think -- well, I know, I think -- I mean the Board and management, as Michelle has said, tend to be on the more conservative side, we have 10 when we've done major projects to come to the market to raise equity associated with those projects. That's most likely, again, going to be the case in WestConnex, while there's 1 or 2 tranches that's raised. And so the net leaves us, obviously, as you said, with some excess capital. And we expect -- we've got the M7, M12 coming where we have Project NEXT and other things coming, appreciate that may leave us with some capital where we tend to be, I guess, a bit more conservative in these times in relation to the balance sheet and funding. So we just wanted to make sure that it was pretty transparent that if we were to win portions of WestConnex, we're most likely to come to the market.

Okay. And on the M12, M7, can you maybe give a little bit more color, are you talking about being the actual constructor of the M12 itself or just the intersection to M7 in the bigger process?

Yes. Yes. That's a good question. Yes. It's really just the -- what we're proposing and it hasn't been accepted by the government. So it's still down the government work. What the proposal is we would do the interchange because it's obviously on our asset, on our land affects our road, which we can manage disruption better. So it would be the interchange between the M12 and the M7, the widening of the M7. And -- but obviously the interchange is the substantial interchange, not too dissimilar from what you see at M4, M7.

And does your proposal on that M7 requires significant upgrading like the M4 and change as well?

No, not substantial. It does require, obviously, works on ramps and things like that, but not -- that's not the substantial portion.

Your next question comes from Ben Brayshaw from Barrenjoey.

I just have a few questions in relation to West Gate. Firstly, I was wondering if you could talk just broadly about the time frame that you would be expecting for, I suppose, the affected soil to be, if you like, removed from development areas and taken to the designated sites? And if you could just also comment please around whether the facilities are able to receive the soil, assuming the dispute is able to be resolved or whether they're still under construction?

Yes. So we're -- as we said in our presentation, we are financing the activation of the high-quality site. So we believe that site should be -- and it has all its environmental and planning approvals. We believe that site should be available and ready to take spoil early next year. So there will be a location that then can take the spoil from the site, and it's capable of taking all of the spoil. So that one site can take all the spoil. So yes, we believe that, that will be available very early next year.

And just as a follow-up to that, is construction process in the tunnels, is that able to be managed, I suppose, concurrently to removing effective soil? Or does it -- is it predicated on having a site made good, soil taken away and then commencing construction?

No, no, no. The way we're just talking about -- so to be clear, there's PFAS soil that has been taken away from the site already. So the tunnel portals, both the entry and exit tunnel portals have basically been there. Well, I think certainly, the entry ones are completed. The exit ones are near completion as well. And so there has been PFAS removed, taken to license landfills and dealt with. It's just the quantum of the spoil that comes out of the TBMs and the TBM spoil when they started turning delivered us into a spoil shed on-site, and that can store about a day's worth of 24 hours, maybe 36, maybe 48 hours of the TBMs turning depends on the speed, can store that much spoil and that spoil needs to be taken to a spoil disposal site. So really what we're talking about is once the TBM start, you need to be able to have a site that continuously can take the spoil in order to keep the TBM production moving forward. So that's what we're talking about. It's just the quantum and being able to ensure that progress in supply of construction. I mean on the other side, there has been a tremendous amount of work being done, both on the East and the West. And again, the precast yard, I think we're well over 60% with all the tunnel linings and all the other precast structures. So a massive amount of work being done on the supply chain to provide the TBMs. And now that we have a spoil site, hopefully, we will move to production in the next few months.

Great. So just a final question. You mentioned in the presentation that should the dispute not be able to be resolved commercially, potentially we'll head to courts. I'm just wondering, is a project cancellation one of the possible scenarios if you do go down that path? Is it -- to what extent is it a concern to you that the project may be not able to be completed or resolved in the courts and therefore be canceled?