Transurban Group (TCL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Transurban Half Year Results Conference Call. [Operator Instructions] I'd like to now hand the conference over to Mr. Scott Charlton, CEO. Please go ahead.

Good morning, everyone, and thanks for joining us at Transurban's result briefing for the first half financial year 2022. I hope that everyone is safe and well. And today, I'm joined by our CFO, Michelle Jablko. And together, we'll take you through the presentation we've lodged with the ASX this morning. Also on the call is our Investor Relations team who will follow up with any questions if we can't reach them today. Today's presentation should take about 40 minutes, followed by time for questions. Now I'll kick off today's presentation with some of the highlights for the period, and I'll move to Slide 5 on the presentation that was lodged with the ASX this morning. In the second quarter, we saw traffic recover in most markets in line with the easing of government restrictions. I'll cover this in more detail later in the presentation. In Sydney, we increased Transurban's ownership in WestConnex to 50%, and that transaction now has extended our weighted average concession life to approximately 30 years, which we're very happy with. In Melbourne, we reached agreement to resolve disputes on the West Gate Tunnel, and we're now looking forward to tunneling getting underway in the next month. And the TBMs have recently been turned on as part of the testing and commissioning process. We achieved an outstanding result in our safety performance with the improvement in all of our metrics, highlighting our continued focus on achieving excellence across our operations. We completed tunneling on the M4-M5 project in Sydney. And we continue to progress our projects in the U.S., including predevelopment work for Phase 1 of the Maryland Express Lanes Project. And finally, as I talk more on the next slide, Transurban is positioned well in an environment characterized by rising interest rates and inflation. So I'll turn to that slide on 6. And it's been another interesting start to the year with supply chain and COVID-19 disruptions playing a role in an elevated inflationary outlook. And certainly, economists are also widely predicting interest rates will start to increase at some point this year. Again, to us, it's no surprise, and it's something that we've been planning for, for the last 3 to 5 years. I guess what the surprise is it's probably taken so long for interest rates to start rising given that they were at an all-time low in the cycle. As you've heard Michelle and I both say before, we take a conservative view on interest rates and inflation to inform our strategic planning and our investments. However, in an environment where both inflation and interest rates are rising, we are well positioned, as we show on the slide. In the near term, Transurban's interest rate exposure is very low as a result of our hedging policy with 99% of our existing debt book hedged at the 31st of December 2021. And the majority of our expiring debt over the period from now to FY '25 is above our weighted average cost of debt. In addition, as shown in the pie chart, almost 70% of our revenue is linked to CPI price escalations as part of our concessions. We've tried to illustrate the combined impact of these factors in an environment where both interest rates and inflation are rising. There is a positive impact to our revenue, more than offsets the expected impact of interest rate increases, as you can see on the chart on the right, in the near and the medium term. Now if I move to Slide 7 and talk a little bit about what's happening with traffic. And so most of the impact in the first quarter, due to the government-mandated restrictions on movement to curb the Delta outbreak, particularly this time in Sydney and continuing in Melbourne. Historically, we have seen traffic bounce back quickly in line with the easing of restrictions. And this, again, was evident in the second quarter performance and, particularly in Sydney, where the restrictions began easing from October. In Melbourne, traffic increased year-on-year mainly due to fewer days of strict lockdown in the previous period. In Brisbane, which had relatively few restrictions, we continued to see steady traffic volumes, supported by additional capacity on the Logan Motorway. And finally, in North America, the positive trends continued through the period. Schools have reopened in Virginia, Maryland and Montreal, and we're seeing a continued uptick in leisure travel. Now we provided, on Slide 8, some of the weekly traffic data because we appreciate it's a bit confusing with all the volatility of the lockdowns. But this shows the performance across the past year across the portfolio on a, basically, on a weekly basis. And the emergence of the highly transmissible Omicron variant in December was obviously a setback globally. And we saw restrictions, such as mandatory mask indoors as well as density limits, reintroduced in several of our markets. In each of our markets, you can clearly see though the recovery trend when limitations on the movement are eased, and through January and into February, a week-by-week increase in traffic volumes now that we seem to be passing the peak of this wave. We've tried to illustrate that on Slide 9 and giving the current status of COVID-19 restrictions in our markets. Pleasingly, in Queensland, the government is now encouraging people back into the CBD. And in Sydney, the indoor mask mandate is expected to be removed in the next few weeks, and it looks like Victoria may be doing similar. So that's -- very happy about that and obviously very happy that there's been a fall in hospitalization rates in each of our markets that you can see on the chart on the left that's leading to a recovery. Today, we've also released, and we've highlighted on Slide 10, some of the data on our latest mobility trends, consumer research, which helps us understand key trends in current and future mobility. And we undertook the latest round of this research in late January, early February, so just coming out of the Omicron variant, and independently surveyed more than 5,000 people in Australia and North America. We continue to see the trend in preference towards private vehicle travel over public transport with daily private vehicle travel expected to be, on average, 16% more than pre-pandemic, which that number has doubled since July 2021 in our survey. And public transport use is expected to be 22% less than pre-pandemic, which has remained flat across our survey over the past 2 years, again, mainly due to health and safety concerns, with 44% of people feeling unsafe on public transport in Australia. Flexible working arrangements are likely to continue for most people. However, 87% of people expect to do most of their work at the workplace. And on average, most people expect to work under 2 days a week at home, which is down from closer to 3 days from the survey in 2020. The trend to e-commerce continues with 53% of our respondents saying they expected to shop more online, which is an increase of 8 points compared to when, again, we asked that question in July of '20. And the resilience of commercial traffic points to this ongoing demand for e-commerce. And finally, respondiments -- sorry, respondents' demand for domestic and industry travel continues to build with 67% of people intending to travel in '22, up 7 points from our survey in '20. We just highlighted again on 11, I know this is a slide that you see all the time, we think it's important because our investment proposition continues to remain unchanged. We now have 21 assets in 5 markets, all supported by, we think, long-term positive growth drivers. Having a diverse portfolio has proven very resilient to the impacts of pandemic. And our long-life assets have also allowed us to look through the impacts of COVID. Again, with WestConnex, as I said earlier, that extends our weighted average concession life to around 3 years. We continue to progress the 7 projects we have in development or delivery, both in Australia and in North America. And of course, our relationships with governments and strategic partners are fundamental to progressing our opportunity pipeline and the government's infrastructure plans in our markets. We're very confident that the fundamentals of our assets will support traffic growth. This will allow us to deliver on our investment proposition of building value over the long term while balancing distribution payments to security holders and efficiently funding our development pipeline. Just on Slide 12, again, we think it's important to look at the sustainable business model we think we have built and continue to prosecute. And the growth in our business is a clear demonstration of our investment discipline as well as the value that we can create in our assets through active management and operational excellence that enhances our customers' experience. And in just over 20 years, Transurban has grown from single-purpose entity with the average daily traffic numbers around 200,000 a day to the business that we are today. We now have, as I said earlier, 21 assets, with 14 of those added in the past decade. And our customers are taking more than 2 million trips a day across our 5 markets. And by executing on our long-term strategy to deliver value to all our stakeholders, we believe we've proven our capability as a partner of choice. And we look forward to continuing to get the best out of our current assets as well as continuing to position the business for the next stage of growth. And as part of that, we've outlined on Slide 13, as we normally do, what remains a significant pipeline of opportunities in each of our 5 core markets, and these range from enhancements to our own assets to potential acquisitions and large-scale greenfield projects. These are development opportunities targeted for the next decade, and we'll assess all of them in our usual disciplined way, and there might be even more that come available in the market. I would like now to go through some of our environmental, social and governance highlights on the next slide for the period. You will see in our corporate report that we released with our annual results quite a range of things the company does. It's very hard to condense in such a small analyst presentation. But ESG considerations are embedded right across our business. And our business purpose to strengthen communities through transport reflects our understanding of the significance of these areas. Over the last few years, we've made substantial progress at Transurban to formalize the processes by which we engage with and measure the value we create across all our full set of stakeholders. We undertook our first stakeholder listening program in 2016. And this year, we've evolved it into a continuous campaign to better understand their issues on an ongoing basis and to ensure that when we do future initiatives, we achieve the greatest social impact. During the period, we've implemented the first of our power purchase agreements. And renewables now supply just under 60% of our electricity requirements in New South Wales. And our first PPA in Queensland came online in January, and renewables are expected to supply around 80% of our electricity needs in that market. And I'll talk a little bit about some developments in Victoria later on. In September, we launched a promotion to encourage COVID vaccination take-up among our millions of Linkt customers across Australia. We've recently launched our booster competition this week. And the campaign has served a dual purpose as well as promoting the vaccination is promoting electric vehicles with an EV as the main prize. We also built on our extensive support for those most impacted by COVID as well as progressing a number of community initiatives, including road safety education with our partners at Kidsafe and Neuroscience Research Australia. On Slide 15, you'll see that over the past decade, our customer base has more than quadrupled to 9 million people under the Linkt brand in Australia, Express Lanes and GoToll brands in the U.S.A. and the A25 in Canada. Over the past 3 years, the number of accounts has increased by more than 15%. And customers rely on our roads for travel time savings, safer journeys and more reliable travel. And our focus is making their interactions with us as seamless as possible on both on and off the road. Along with our roadside data, each year, we analyze around 250,000 pieces of customer feedback, and this informs our continuous improvement approach to the customer experience. And our pay-as-you-go apps continue to gain momentum. 4 million trips in Australia have been taken using our LinktGO, and GoToll in the U.S. is now available on 86 roads, tunnels and bridges across a few states. Now one of the other things as part of what we look at, and I know it's a recent hot topic, we do look as a long-term partner and investor at the future of transportation in our markets. And the need to rethink our current road funding model is something I know everyone knows I've been talking about for some time. As most of you are aware, the model is under increasing pressure as fuel excise receipts continue to decline due to more fuel-efficient and zero-emission vehicles. Now alongside this, the real cost of private transportation to consumers is predicted to fall dramatically as electrical vehicles become mainstream over the next decade, further exasperating the road funding issue. So we do believe and highlight on the next slide, 17, that the transition to a road usage charge model to replace the current funding model is something being contemplated, obviously, by governments around the world as a more sustainable revenue source and a fairer way for drivers to pay for their usage. And research undertaken as part of our mobility trends insights found that 50% of respondents preferred a road user charge over the current system. And although 68% thought that a road usage charge would be fair with motorists who use the roads, most paying a greater proportion for the roads. And we know fairness has also been a topic raised in the New South Wales government's inquiring the tolling regimes. With the different tolling regimes in Sydney, Sydney has led to some inequities with some drivers spending more per kilometer of travel than others. And we welcome and have always welcomed the opportunity to engage with policymakers. We take a pragmatic look at tolling regimes to create potentially a fair proposition for customers. Now I'll move to some of the highlights of the specific markets, starting out with Sydney, where total revenue declined by 14% year-on-year with traffic down around 25% due to the lockdown, which extended through to October as compared to the prior year. Large vehicle traffic was less impacted by COVID restrictions, decreasing by only around 4.7%. The Sydney result benefited from the contribution of NorthConnex as well as the additional ownership of WestConnex from the 29th of October. And as well as contributing to the traffic performance, I'm really pleased that NorthConnex has brought significant benefits to the community along the Pennant Hills Road with the halving of near-miss traffic incidents in the road since NorthConnex opened. And progress is continuing on WestConnex with the tunneling now complete on the M4-M5 Link tunnels, which will connect the New M4 at Haberfield to the M8 and Rozelle Interchange. And there is some additional information about WestConnex project delivery on Slide 41 in the appendices. And this week, the Group Executive of WestConnex, Andrew Head; and the Group Executive of New South Wales Market, Michele Huey, appeared at a public hearing as part of the New South Wales Parliament's inquiry into road tolling regimes, following on from their first appearance, which occurred in December last year. And as I said earlier, we welcome the opportunity to be a part of these important conversations and to demonstrate the value we bring to our customers and the community. And we look forward to ongoing conversations both with the Inquiries Committee and the New South Wales Government. If we move to Slide 20, just a couple of highlights that I'll mention. There's a detailed proposal for the M7-M12 interchange project, which will connect the new Western Sydney Airport with the new M7 motorway. We've submitted that in late '21 as part of the New South Wales Government's unsolicited proposal process. And it's currently under assessment by the New South Wales Government, and we hope to have an update and progress on that soon. Now if I move to Slide 21 in Melbourne where toll revenue increased by 21% compared to the first half of the previous year with traffic up by 20%. These increases are largely due to the long periods of government-mandated restrictions in the first half of the previous financial year. Car traffic increased by nearly 30%. Large vehicle traffic increased by nearly 6%. As with New South Wales, reducing the emissions intensity of our business has also been an important focus for us in Melbourne. And pleasingly, we recently signed a renewable energy power purchase agreement to source 100% of CityLink's electric consumption from renewable sources from 2024. And we continue to engage strongly with our communities around the CityLink supporting run for the kids, which we're planning will return hopefully as an in-person event this year. Now if we look at the pipeline and portfolio on the next slide, really, our focus, again, is on getting the West Gate Tunnel Project delivered in Victoria. In December, we announced an agreement with the state and the builders, resolving some very long-standing and difficult disputes. Tunneling is now due to commence shortly with project completion scheduled for 2025. We've outlined the key terms of this agreement in Slide 43 in the appendix, and I'm happy to answer any questions that you may have on this. Quickly on Brisbane, we saw toll revenue increased by nearly 7%, with car traffic increasing by 3.2% and large vehicle traffic increasing by 6.5%. And Brisbane has benefited from the least impacts of COVID-19 of any of our markets with shorter lockdown periods. And the transitioning of 4 individual control centers into the new integrated center is progressing well. And the operations center will eventually operate all 81 kilometers of our network right across Brisbane. I'll skip over Slide 24 and look at the North American update where traffic increased by nearly 30% versus the prior period with improvements across the Express Lanes assets as well as the A25. Toll revenue increased by 17% or 84% on a like-for-like basis if you exclude the impact of the 50% sale of the Transurban Chesapeake assets. Two enhancement projects were approved by the Virginia Government during the period, which we expect will result in some smoother traffic flows on the relevant sections of the 95 and 395 Express Lanes around some of the entrance and exits. If I move to Slide 26 and an update on some of the projects in the area. In Maryland, predevelopment work is progressing, as I said earlier, on Phase 1 of the Express Lanes project, including a tender process for the D&C subcontractor work package. We are on track to receive final approval from the Board of Public Works at the end of this calendar year. And I'm looking forward to getting over there in the next couple of weeks and meeting both with, obviously, our employees with our partners. In Virginia, we reached commercial close on the 495 Extension project during the period. As a reminder, this project extends the Express Lanes by 3 kilometers towards the Maryland border. And we expect to reach financial close on the project in the coming weeks. We've almost completed 1 million work hours on the FredEx project, however, the schedule remains under review. Given there have been some construction challenges, we do expect some further cost on this project, which should be quantified in April following an arbitration hearing with the D&C subcontractor. However, and I think it's important to note, we do not expect these additional costs will be material to Transurban. So with that and our market highlights, I will now pass over to Michelle, who will take us through the financial results for the period.

Thanks, Scott, and good morning, everyone. When I look at our financial result for the half, I think it shows that the business is in a robust position despite the impact of COVID restrictions in our biggest markets. As we step through the detail, it's important to note that while Sydney and Melbourne both had significant periods of government-mandated restrictions, Melbourne also had these in the first half of last year and actually had less days of lockdowns this half. With that in mind, average daily traffic was down 4.8%. Given the resilience of our business model, this translated to flat proportional revenue of $1.2 billion as lower volumes were offset by price escalations and continued resilience in commercial traffic. We've continued to invest in the business and our balance sheet is in good shape. Also, as Scott outlined, our hedging profile has been actively managed over many years. This protection, combined with CPI-linked toll escalations, position us well if we see rising interest rates and inflation. Let me now take you through some of the detail. So starting with free cash on Slide 30, total free cash for the half was $459 million. This covered the first half distribution of $0.15 per security, and there were no capital releases in the half. Free cash was slightly down by $8 million. A few key drivers to call out here. Firstly, COVID impacted the outcome in our 100%-owned operations. However, distributions from non-100%-owned assets were higher, noting that the I-95 is now paying distributions. The deconsolidation of Transurban Chesapeake led to a reduction in net finance costs, and working capital movements were mostly timing-related. While free cash was broadly in line with the prior half, it was below pre-COVID levels. But free cash should benefit from the lifting of COVID restrictions and improved traffic, although there can be some short-term timing differences with assets paying distributions in arrears. The next slide on 31 provides an overview of our statutory result, which was a loss of $106 million. The improvement from the $448 million loss in the first half of '21 was mostly driven by remeasurement of certain balance sheet items that flow through the net finance cost line and are noncash in nature. These relate to the measurement of derivative financial instruments, shareholder loan notes and the West Gate Tunnel construction obligation liability. So moving now to our proportional results on Slide 32, which gives you a better sense of underlying business trends. Proportional EBITDA was $805 million, which was $35 million lower for the half. Like-for-like toll revenue was up $21 million with impacts from increased restrictions in Sydney, offset by price increases, resilient commercial traffic and comparatively less days of COVID restrictions in other markets. Costs were higher. And as I'll cover on the next slide, almost half of this was because of changes in accounting requirements. We saw some benefit from our new assets in Sydney, roughly balancing lower revenue from the Transurban Chesapeake transaction. New assets would likely have contributed more if not for the restrictions in place in Sydney over the period. All of this meant that EBITDA was 4.1% lower for the half or roughly 2% lower before the impact of accounting-related items, a reasonable outcome given 4.8% lower average daily traffic. So if I take us now to costs on Slide 33, we split these between operational costs and accounting-related items. Our operational costs increased by 5.6%. This reflects investments we've been making in capabilities to support the recent and future growth of the business. This includes areas like data analytics, cyber and other technology. Employee numbers were up around 2%. Increased costs partly reflected changes in the mix of staff and also included a full half of costs for positions filled in the previous period. We also had higher insurance premiums. Then in terms of accounting-related increases, we changed the way we account for Software-as-a-Service spend with more of our spend being expensed rather than capitalized. We flagged this at the full year. There was also a small change to maintenance provision discount rate across our Australian assets. So if you turn to margins on Slide 34, margins at the group level were just under 66%, lower than normal due to COVID restrictions in our largest markets. We would expect to see group margins return towards a more normal range as restrictions lift and traffic again returns to pre-COVID levels, and we've illustrated that for you on this slide. You can also see here that last year, margins improved quickly as traffic recovered and that the CityLink margin held up reasonably well at 80% despite lockdowns in the half. In North America, proportional margins improved as average daily traffic and the average price of both Express Lanes reached their highest levels since December 2019. The 50% sale of Transurban Chesapeake also improved margins with the higher-margin A25 now a larger proportion of that market. However, even on a like-for-like basis, the North American margin was the highest since the first half of FY '20. Moving now to our balance sheet metrics on Slide 35, there are 3 key themes to call out. Firstly, our liquidity, debt covenants and credit ratings have remained robust through COVID-related traffic volatility. This is the result of deliberate and concerted effort over many years. Our credit ratings were reaffirmed last year following announcement of the West Gate Tunnel dispute settlement. Secondly, we have a strong corporate liquidity position of $3.8 billion or just under $3.4 billion after the first half distribution is paid later this month. This, combined with future capital releases, sets us up well as we go forward. And finally, we've been planning for higher interest rates for some time. Our debt book is 99% hedged, providing good protection in a rising interest rate environment. And as Scott went through, we would also likely have revenue benefits from CPI-linked toll escalations. Most recently, we've had excellent continued access to debt markets with our refinancing last week of 95 Express Lanes public activity bonds heavily oversubscribed and completed at rates below our average cost of U.S. dollar debt. So our balance sheet has us very well positioned. Moving now to Slide 36, I'll just take you through some financial considerations looking forward. We expect traffic recovery with the lifting of COVID restrictions, acknowledging, of course, that there is still some uncertainty. We understand the challenge for our investors in quantifying the impact of the pandemic on our business. And we've previously provided numbers related to the revenue impact of a week of lockdown across the market. Recognizing that the situation is a bit different now without strict lockdowns, we've simplified the approach and instead provided reference points for monthly traffic movements based on data from the first half of '22. Then in terms of costs, drivers are likely to be similar to the first half. And our capital release profile over the next 3 years has not changed. With in excess of $2.3 billion between now and 2025, the timing will be subject to market conditions. So as I stand back from our financial performance for first half of '22, our business is in good shape to benefit from recovering traffic as restrictions ease. We've built a strong balance sheet with forecast capital releases providing further funding support. Our hedging profile and CPI-linked toll escalations position us well in a rising rate environment. And we continue to take a disciplined approach to capital management, carefully weighing all options. Any capital we invest is required to meet our hurdle conditions, which are based on a long-term through-the-cycle view of our cost of capital. Thank you, and I'll now hand back to Scott.

Thanks very much, Michelle. Well done. I'd like to finish today's presentation with a few comments on our outlook. As we noted in the presentation, 2021 -- actually 2020 and 2021 both were very busy years, not only dealing with COVID, but with some significant milestones reached for the business. So last year included the sale of Transurban Chesapeake, acquiring the remaining 49% stake in WestConnex and, although difficult, agreeing a resolution on the West Gate Tunnel. And while traffic has remained sensitive to government restrictions, we continue to see quick recovery after every period of impact. This now leaves us in a position to focus on our core operations and the growth pipeline ahead of us. And while we foresee some changes in the economic environment, and something we've been planning for, again, as Michelle and I both have said for a very long time, our inflation-linked toll escalations and debt hedging profile provide protection against a rising interest rate environment over the near and medium term. As always, we will focus on balancing distributions for our security holders, which we know is extremely important with long-term value creation while maintaining our capital discipline. And of course, in wrapping up, I'd like to thank the team at Transurban who have worked so hard in very difficult circumstances over this period to contribute to these results and again, our security holders, who continue to support us and for attending today's call. So with that, we will open it up to questions, please. Thanks, Ben.

[Operator Instructions] Your first question comes from Anthony Moulder from Jefferies.

If I can start with you, Scott, the -- you mentioned the outlook for a quick recovery of traffic. Is that a different picture that you're seeing in this mobility data that you collect from Melbourne, the willingness to return to the office, the air travel expectations, et cetera?

No, no. No, not really. I mean there are some differences between each market, some subtle differences. But I mean it all comes back to Victoria. We still have work from home if you can and mask mandates, so we saw the recovery, and the ceiling got very close to pre-COVID numbers toward the end of last calendar year. So yes, we see the same circumstances. I think the deeper and the longer the restrictions go, obviously, it takes a little bit longer for the recovery to occur. And Victoria has been through deeper restrictions for periods of time, but now we see the same trends in each of our markets.

All right, very good. The comments on road user funding, obviously, you've been talking about that for a little while. But given this report that we see today on the Western Harbour Tunnel, will that challenge some of those roads being built if they need to be subsidized by others?

No, I don't think so, Anthony. I mean this has been going on for, I guess, since the time of the Romans. And somebody has to pay for infrastructure. It's not free. So you can either tax people or you can have a user charge. And what we're just, I think, saying and governments are looking at, the industry and policymakers are saying is that over the next couple of decades that the current system is probably not as efficient as it needs to be with the introduction of technology and the changes in transportation. And Transurban wants to be a part of that discussion and the dialogue. But the infrastructure needs to get built, that's a definite. And if you look at when the infrastructure does get built and if you look at the benefits that the city of Sydney is deriving from WestConnex or Brisbane from the Logan Enhancement or Victoria will get out of the West Gate Tunnel, these cities can't be world-class cities without world-class infrastructure. And then it's up to governments to decide how they want to pay for it. We're happy to provide input into that dialogue, but it's ultimately up to the governments to decide how they want to pay for it.

Yes, of course. And for Michelle, capital releases, you said the expectations on those capital releases haven't changed. Does the increase in yield environment changed the outlook that you could have depending on what -- where rates go to for capital releases?

No, because I think we took a pretty conservative view in -- we always take a long-term view when we think about it from the start. And as Scott said, rising interest rates are not really a surprise in terms of them coming. So no, I'm comfortable with the number.

And I think, Anthony, going back to the investment, and this is where we got the natural hedge on both sides, so I think if you remember back when we bought QML, I can remember, we had forecast interest rates to rise when we bought QML, but we'd also forecast CPI to rise. And we got to the same margin outcome we thought through the integration process. Partly, CPI disappointed us because it was lower than we forecast, but interest rates were lower than we forecast. And so we got to the same sort of outcome. And now we're just seeing the reverse play out or what we plan for is there's hedging or it's not an imperfect hedge, but there is -- mitigates on the other side that, yes, interest rates realized, but certainly in the short to medium term, inflation benefits us.

Your next question comes from Rob Koh from MS.

So apologies, I joined your call late for another company's results. So if I am asking a stupid question, I do apologize. I guess my first question is just about the opportunity in Victoria with the North East Link. And I guess the construction package there is an alliance pricing or is it 3 separate contracts, as I understand it. Can you just talk to your appetite to take on alliance pricing for growth projects?

Well, I guess there's a couple of questions in that, Rob. So -- but first of all, we're disappointed, we're not your first put a call on the analyst call. So -- but thanks for joining. Look, in relation to delivery, we're not involved in the North East Link. We put it down there as a project we know, long term, the government is looking at setting up a tolling entity that they would own and toll, and we don't know what that entity would do over time. And if the government were to choose to monetize something then -- and they wanted the private sector to look at it, then obviously, it's something we may consider. But that is a long way potentially down the track and not something that we're looking at immediately at the moment. In relation to alliance contracting or any form of delivery, we will look at it in the context of a risk/reward equation. So yes, we would be prepared to potentially look at alliance contracting. But again, it has to be in the risk/reward context. And if we're taking on more risk, then issues around contingency or how we share that risk would have to be discussed with all our partners. So for us, every project that we look at is bespoke, and we do our best to manage that risk/reward profile. But we are not going to become a D&C contractor. That is certainly something that we would never do.

Okay. And I guess the reason I chose the other company was more because you guys give me less to worry about if I can...

Well said, Rob. Thank you. Thank you. Well, good recovery.

Yes, yes. Dig up, dig up. Okay. So my second question, this might be a little silly, but I guess the -- one of the things we always look at is the maintenance provision versus the maintenance cash spend. And just noticing that the maintenance provision seems to have gone down versus PCP. Just wondering if you can maybe highlight any kind of lumpy items that are in that, please?

Yes. I'll give it to Michelle because there's new assets and stuff coming on, but Michelle?

Yes. It's mostly because of the deconsolidation of Transurban Chesapeake, that's a big driver, and a little bit of WestConnex is coming in.

Your next question comes from Owen Birrell from RBC.

Just a quick one for me. In terms of the margin step-down that we've seen in Sydney, I understand -- so you provided a little bit of color around how you expect that to rebound as traffic comes back. But I'm just wondering to get a greater sense of how much of an impact the, I guess, the increased stake in WestConnex has had on those margins. And should we see those margins return to where they were pre-COVID with the increased WestConnex contribution there?

Well, so yes, the WestConnex margin in the short term, because they're ramping up those new tunnels and the tunnels have a higher cost, is partly to deal with that. They will go back closer to pre-COVID levels. We have the accounting adjustment, that's a permanent adjustment now. But yes, we are operating more tunnels in the short term. I don't know, Michelle, do you want to make a comment?

Side of that is that Transurban -- we own less of Transurban Chesapeake, which is lower margin. So net-net, the sort of impact of WestConnex and Transurban Chesapeake largely sort of net each other out.

But I think Owen is talking specifically about Sydney. So I think...

For Sydney, yes.

But Owen, it's just for Sydney. So with Sydney, it should get back closer to those numbers. Even WestConnex, as we said, the tunnels operate on lower margins because obviously, you have higher operating costs with the electricity cost. But the size and the scale of WestConnex and particularly when you bring the M5 West into WestConnex in 2027, you'll get back to what is pretty close to historical margins other than the permanent adjustment for the accounting change.

It's also just worth noting, Owen, that the numbers we provided or that graph we provided on the slide that shows the normalized margins, we've looked at 2019 traffic for that. So that's -- clearly, there's upside as traffic improves as well.

Yes, excellent. Just on North America, a big, big step-up in the margins there. Just wondering how much of that big step-up was the margins that you're sort of getting out of Canada versus the remaining businesses that were left in that North American U.S. region?

I'll let Michelle answer the specific thing. But yes, part of it, a big step -- well, it did big recovery. I mean it was hard hit -- the hardest hit on the margin perspective from COVID, as you saw in the first half of '21. And if you look at the first full year for '21, you see the recovery had already began. But I don't know if you've got specifics, Michelle.

Yes. It was mostly the growth in traffic, so the recovery, and a small proportion was the...

I-25.

The I-25.

Yes, the deconsolidation of the 50% sale of Chesapeake.

Got it. And just one final question for me, just regards to the capital releases. You sort of made quite a bit of comment around the $600 million of incremental capital releases that you're getting out of the increased stake in WestConnex. Can we assume that all of that $600 million will be used to mitigate this dilution that you sort of talk of between FY '22 and FY '25?

No. Again, I'll let Michelle comment. You shouldn't assume all of it is being used. What we'll look at is the underlying -- we'll look at the underlying free cash flow. And then we'll look at the impact that the equity raise had on that and use some of that to adjust for to bring back the investors as if the dilution hadn't occurred. I don't think it's forecast that we would use all of it. I don't know, Michelle, do you want to comment?

Correct. I mean what we said, and clearly, it's a decision for the Board at the time, is that we intend to use some of it or it's likely we'd use some of it to offset dilution in the first couple of years.

And obviously, we're very pleased when we've given the forecast of $0.15 despite the volatility that occurred. Since we made the announcement at the equity raise, that we were able to cover that 100% basically with free cash flow without even touching that yet.

Your next question comes from Justin Barratt from CLSA.

I just wanted to follow up on Owen's question in relation to capital releases. With those capital releases or those additional releases from WestConnex, just given your commentary on FY '22 distribution, will those additional capital releases be used to, I guess, bolster distribution from FY '23 onwards? So even if you sort of had really strong performance in the back half of FY '22 and got some capital releases, it wouldn't be used to bolster FY '22 distributions?

Sorry. Can I -- maybe just to make sure I understand your question. We said that putting aside the -- offsetting some of the dilutionary impact on the WestConnex capital raising, distributions will be funded from underlying free cash, except for the capital releases.

Yes. So I think, Justin, what we're saying, so if we did outperform -- so the business outperformed, but it would still have a dilutionary impact from the equity raise because the outperformance would just be based on the underlying operations. So we did outperform our budget. We still use some of that because there would still be dilutionary impact of the outperformance. So we just take that. Basically, whatever the performance is, if it's 20% below budget or 100% above budget, we take whatever the performance is and then calculate what the likely dilutionary impact would have been and adjust for that. That's our thinking.

Yes, okay. But capital releases could be used to support distributions from FY '23 onwards and not in FY '22?

Oh, sorry, I understand your question. Well, it depends actually in terms of market conditions this year and the timing of the capital releases. So the -- yes?

But the -- yes, but potentially, I think the Board had given guidance to '22 and '23.

Yes.

Okay. Fantastic. And then just a question on the Sydney Harbour Tunnel, concession due to finish in August this year. Have you heard any more about any kind of process or monetization of that asset at all recently?

I mean, no. I think there's been a fair bit of discussion in the media, but no, we're not aware of what government -- I mean, obviously, the concession gets returned to the government. And then yes, then the government will have -- eventually have 3 crossings. And the government have to make a decision what it wants to do. But I think at the tolling inquiry, there was treasury officials who were talking about they're doing a whole review of that concession and the whole tolling arrangements in New South Wales. And they'll come back and present to the government and perhaps they'll make something public. But no, we're not aware of anything at this time.

Your next question comes from Andre Fromyhr from UBS.

Maybe this is going back on the topic of the WestConnex capital releases. Just wondering if you could help reconcile how the WestConnex distributions have been funded. So my understanding from the press is you received $77 million of distributions from WestConnex. But then if I look at the asset, it did about $100 million of EBITDA and then paid out about another $100 million of cash net interest costs. So I'm just wondering where the distributions have come from or how we should think about that with respect to capital releases.

So the distributions from WestConnex are paid in arrears. So it won't fully reconcile through to EBITDA. There will be timing differences. And also it includes the M8 from last year. So the M8 coming on last year has come through this time, so they've been sort of effectively a catch-up, if you like.

Right. Okay. And then just on the EBITDA margin, you've hopefully provided the sort of the pro forma estimate of what the half would have looked like, excluding COVID traffic impacts. Can you just talk through a little bit of the maths about that COVID traffic impact? Is that just a fixed cost leverage effect if you were doing sort of pre-COVID traffic levels? Or are there adjustments as well for changes in your cost base?

Yes. So if you look at the chart, you can see we've effectively added back the accounting change because that's a change in policy, a bit more permanent. And then what we've done is effectively said if traffic was at pre-COVID 2019 or first half '20 levels, all else being equal, everything else being the same, what would the margin have been?

Yes. But the cost -- the fixed cost of that, Andre, yes, it's taken into account, but it's a small one.

It's small, correct. Yes.

But yes, it's taken into account.

Okay. And then on just -- on that accounting adjustment, so we should interpret that as sort of a permanent shift, not just a single period change in provisions?

Yes, it's a permanent shift in accounting policy. And I think that's a fair assumption. I mean, clearly, it will depend on decisions we make in terms of actual spend and what we're investing in. But yes, that's how I would look at it.

It was a change in -- it wasn't -- it's a change in the guidelines and regulations last year.

It's change in guidelines, yes.

So we had to adjust for the change in accounting guidance or regulations. For some of us who are not accountants, it doesn't make a lot of sense. So if you do it yourself, you can capitalize. And if you get someone else to do the same thing, you have to expense it. And actually, it's a specific thing to our accounting standards. It doesn't affect GAAP. It's different. So unfortunately, it sort of disadvantages companies for using the cloud.

Investment in cloud, yes.

Yes, that's the accounting standard.

Your next question comes from Anthony Longo from JPMorgan.

Just a couple of quick questions from me. On the OpEx piece, I do appreciate the disclosure and the way that you've tried to carve out the accounting adjustments and other. But are you able to potentially -- so ex accounting adjustment, are you able to give more granularity on how much the insurance premiums did rise versus, I guess, that other growth OpEx that you did highlight?

Yes. The insurance was about 20% of that $25 million.

Yes. But there's a big growth in the insurance cost.

It is big growth, so it's about $10 million over a year. And then the rest came through, as I said, just ongoing investment in the business.

Okay, great. And my house renewal is coming up shortly...

Yes, don't look forward to that. But I mean there was also that, and then you've seen the directors' public liability insurance and other things like that, that have just gone through the roof right across the market.

Yes, no problem. And the second one, on the West Gate Tunnel, so I appreciate all the disclosure in the presentation that you did last year. But I guess looking at that project going forward from here, I mean, what's the risk of additional cost overruns from that going forward? Or is that largely protected from here?

Well, we still maintain the underlying structure of a fixed time, fixed price contract. We have done as best we can to allocate the risk through that project, including the risk of COVID. It doesn't lie with Transurban if there's continued COVID restrictions. And we have a cap on any spoil issues with the spoil side. So we've done, we believe, the best to protect ourselves. We've got incentive arrangements and a pool of KPIs to incentivize a contractor. I was out there yesterday, and the site looks fantastic. Everyone is actually very excited just to get on with the project. As I said, they're actually -- the TBMs are actually turning because they're commissioning them. And there's just a ton of activity happening. So it just feels like a completely different project and very excited to get it going. And we believe we've done the best we can to protect us against the major issues.

That's great. No, I appreciate that. And look, just another one from me. Just in terms of, I guess, with offices likely to come back into the CBDs from March, I mean -- and obviously, the potentially increased flexibility of the workforce, I mean how is that sort of changing the way you're thinking about your projects over the longer term, maybe that initial investment case? And so just wanted to understand with the flow of traffic into CBDs with the flexible environment, how does that ultimately impact the broader outlook for traffic across the portfolio?

Yes. Thanks, Anthony. Look, it's a good question. I don't know, I've talked about it in a lot of different forums at a high level. So without going to specifics, we've always said there's a few long-term trends that we've always talked about. So we've talked about the trend of remote working that was going to play out over the long term with technology, mobility as a service, electrification or zero-emission vehicles, which means the real price of private transportation will continue to drop. Again, e-commerce and all these things, we would look at our long-term forecast and how they might play in and out of things. And what COVID has done, to some extent, is accelerate those trends, so flexible working arrangements, but also e-commerce and a few other things. So that's why you see the heavy vehicles are so strong because the e-commerce has been brought forward. Yes, flexible working arrangements will have some impact. But all in all, if you look at the long-term trend lines, we're not seeing really that much difference in what we would look at or forecast in the long-term trend lines. You've just accelerated some of the trends that counter each other to some extent. So we expect traffic to come back. And again, because of the public trend, even if the offices don't fill up, as we said, the reluctance to fully utilize public transport is going to move more people into private vehicles. And again, to a large extent, our roads are directing people around the cities, not so much to the cities. Yes, we have a couple of strong commuter roads or roads that are connected to the airports, like the ED or Western Link in Melbourne or the Airport Link in Brisbane, which are more affected probably by CBD and airport traffic. But as you see, like the M7, super strong, even the M2, Logan, anything that has to do with freight, commercial and moving people around the city as opposed to the city, we still see strong results even despite COVID. So yes, we take all that into account. And yes, there's movement and timing issues. But we still think the long-term trend lines and all of those cultural or structural shifts that will occur over the next 20 years will favor more kilometers being driven.

[Operator Instructions] Your next question comes from Ben Brayshaw from Barrenjoey.

Apologies, I missed most of the slides on another call. So I was wondering if you could talk about what higher interest rates and potentially higher inflation might imply to the valuation of motorway assets in the private market because I think you've mentioned on several occasions that Transurban uses a through-cycle approach to its underwriting assumptions. And presumably, your partners and broader practice in the market as well is consistent with that. So I suppose my question is, at what point do you think long-term interest rates could create some disruption to the valuation of the underlying asset class?

No, Ben, it's a good question. And look, we heard of assets, not the ones we competed against, but we heard of assets over the last 2 years where people were bidding 0 inflation -- sorry, 0 interest rates into their model for a 30-, 40-year concession, which, heroic assumptions, but good on those people and some assets in Europe, nothing that we are involved with. But -- so I guess the answer is that we've taken those long-term impacts into our investment model. So we're very comfortable with our investment. I think what it does change, Ben, is that one thing that we do, do when we all do investments and our partners as well is, obviously, we can lock in the short-term rates. We lock that in and take it into account. Obviously, in investments, if you lock in the debt for 5 years or 7 years when you make the investment, then you know with certainty and then you assume it rises over time. I guess what this does is potentially it ups the front end as you make a new investment as rates are rising. So it will affect some of the short-term valuations. But I think what you've seen with Sydney Airport, GasNet, with everything else, potentially disappearing out of the ASX, is that these long-term infrastructure investors who look through the cycle aren't really that concerned or as concerned about moving in the interest rates through the cycle. And that's what we continue to do. So yes, there will be some short-term probably change in the valuations, but I don't expect a significant change in the valuations.

Just to add to what Scott said, I mean, clearly, it's asset dependent. And as rates go up and inflation goes up for some assets, they're offsetting revenue impacts as well if you're talking about the short term.

Yes. Michelle, I mean I take your point entirely. I'm looking at your review profile and 50% or thereabouts of EBITDA is subject to an annual inflation adjustment. So point well made.

Yes. And I think just one thing that -- and I don't know if Michelle wants to make a comment, again, about liquidity, capital, and we're always very careful, and that's why we lock this away and we balance and manage the book very carefully. Obviously, we manage our security holders' capital very carefully. We recently did an issue in the U.S. for those public activity bonds, 13x oversubscribed. It was just a massive call for good quality debt at interest rates below our U.S. average in this current environment. So we're very careful. We're not saying that's how it's going to remain, but there's still a lot of liquidity in the market.

Your next question comes from Cameron McDonald from E&P.

A couple of questions, if I can. Firstly, for you, Michelle, just delving into that question a bit earlier about the costs in insurance. I mean 20% of the costs coming from insurance still leaves a 5.5% increase in the underlying cost base. Can you just explain to me what's driven that?

Yes. I sort of I tried to touch on it in my speaking notes. But essentially, we've continued to invest in our business. And I called out a few areas, technology, data, cyber, as examples. And what that does is it changes the mix of employees, mix of FTE as well. So it really is that, it's just continued investment in the business. If you go back sort of 6 months, 12 months, there wasn't a lot coming through the cost base. So some of it is sort of catch-up. And I also touched on in my speech the annualization of people that were coming on over the prior half of -- a full half's worth of people had come on in the prior half.

I think it can. It's just hard to...

So that increased investment of...

Sorry, Cam.

Sorry. That increased investment, though, shouldn't that come with a productivity benefit, so some of this should reverse out in future periods?

It does over time. Some of it is investing for growth we've had and some of it is setting ourselves up for future growth. And again, if you sort of look at the margin slide, we've said if traffic was more normal, our margins would come back to more normal margins. And then if traffic increases beyond that, that should help over time.

Yes. But some of it can -- cyber, which everyone is dealing with, the cybersecurity uplift, it's not -- what comes back to you over time as you're protecting your data and protecting your customers. So some of it is just the cost of doing business now in a modern and different environment. As Michelle said, it's -- we haven't had a huge change in headcount, but we have -- that headcount has left and the headcount has brought in a different level for different purposes. So some of that is just what you need to operate a modern business in today's world.

Yes, understood. Just on some of the assets themselves, are there any -- is there any timing issues we should be aware about where assets have either declared dividends or distributions that have not yet been received and you're expecting that to come through in the second half?

Yes. I think it's probably more the other way, actually, in that we've got -- so WestConnex and Northwestern Roads pay in arrears. So there's probably a little bit more COVID impact to come through on those.

Yes. But no, not at this point, not at this point. And at this point, I think -- I'm looking at Michelle and Tom, I think we expect all our entities that we're expecting to receive distributions from and when you particularly see the reversal in the traffic numbers that have come through from January with Omicron and then it's reversing pretty quickly in February.

It just takes a little longer on the distributions than it does on the 100% owned assets.

Yes. Understood. And Scott, can I ask you just a quick question about the terms of reference for the tolling regime? When I read that, in New South Wales, when I read that review, you've made some interesting comments around the transparency of bids, but then also potentially getting IPART sort of involved to independently set tolling and toll increases. My question is, could this lead to -- around that transparency, could this lead to like almost like a big case type scenario where you get like a more regulated return like we see in other infrastructure assets like gas pipelines as an example or even Aurizon's network with there's just set amount of capacity or expected usage and then if you over or under-recover, there's an adjustment to the pricing? And the second part of that question is, if they change the pricing methodology, what compensation are you entitled to in your current concessions?

Sure. I'm going to -- let's do the first question. Sorry, there's a lot of questions there, but let me cover that quickly. First, so the sort of the parameters of the toll inquiry looking, I mean, looking at what sort of happened in the past, but then what they might do in the future. So they're not talking about retrospecting or retrofitting or doing anything retrospectively with the current concessions. That's not really part of the tolling inquiry. And so we have contracts with it. And again, we have contracts with the New South Wales Government that set out our commercial rights and obligations, and we have a lot of obligations. And so any changes would need to have some commercial discussions. And again, as we said, if there's something that makes more sense, and we're happy to entertain all ideas and look at how we make it more efficient and better for our customers while we're protecting our security holders, then that's something that we have offered up many times and I have discussed and happy to do in public forums. In relation to regulations, I think what they're talking about, Cam, is more -- is IPART gets involved in setting the tolling, not in a regulatory regime like a utility or a network that IPART in future toll roads gets involved with the community on what the tolling regime would be. So what's the initial toll, what the escalation may or may not be? So it's more, I think, considering -- one of the ideas is considering when the independent regulator gets involved in setting the toll, which is really a question for government. And historically, both labor and liberal governments have set the tolls and escalations and have put those forward. And then that's been provided to the private sector to administer. So again, it's up to what government policy wants to do. But I don't think, I've been saying, IPART becomes a regulated asset. Although, just for pure clarity, we are heavily regulated because our toll is set and the escalation is set. So thanks, Cam. I think -- well, 2 things. Hopefully, we've exhausted almost everyone's questions, and we've run out of time. But if you have any further questions, please follow up with the Investor Relations team. I will put a plug in. We are trying to have our Investor Day in May, hopefully, in person. Hopefully, details will be coming out before too long. But thank you, everyone, for your time today. I know it's incredibly busy with the amount of results coming out, and I appreciate your attendance. And hopefully, I'll be able to see many of you soon. So thanks very much.