Transurban half year results positive, but what are the details?

Australian toll road investor Transurban has released its results for the six months ended 31 December 2012, which report an increase in the proportional EBITDA of 3.8%, compared to the prior corresponding period, but a reduction in the statutory net profit of 16%.  The difference between these is due to the exclusion of five assets in which Transurban has a partial shareholding in the statutory net profit.  Costs are up 10.5% overall, largely attributed to the launching of the I-495 express lanes.

It is a good result with "A distribution totalling 15.5 cents per stapled security will be paid on 14 February 2013 for the six months ended 31 December 2012. This will be made up of a 12.0 cent distribution from Transurban Holding Trust and a 3.5 cent fully franked dividend from Transurban Holdings Limited".  There is also a A$5 billion pipeline of investments for the group (being the Hills M2, I-95 Express Lanes and M5 widening projects

However, it's worth having a look at Transurban's portfolio of assets to see what they are looking like, and what it teaches future investors about the profile of such investments, compare to the full year results for 2012 which I reported on here.   Transurban's presentation is the source of much of the following conclusions.

Melbourne Citylink

Proving that a major urban motorway can be a profitable investment that delivers enormous benefits to a metropolis, Citylink continues to be the "jewel in the crown" of Transurban delivering nearly half of all of its toll revenue.  Traffic growth has been 2% in the past year and toll revenue growth 4% (EBITDA 3.9%) including an adjustment for the bedding down of a new billing system, which added short term costs.

The key prospects for this project are in a related proposal, the East-West Link, which would connect Melbourne's Eastern Freeway with the Western Ring Road interchanging with Citylink.  Transurban is targeting this as an obvious potential enhancement to its portfolio.  There are also plans to upgrade Citylink.  Bear in mind Melbourne Citylink is the corridor between the city and Melbourne's major airport (there is no rail link), and is the only decent east-west corridor at present.  It is strategically vital, but thrives as a privately owned toll road.  Concession ends in 2034.

Revenue of A$267.1m, costs of A$52m, depreciation/amortisation/financing costs of $A100.8m, leaving a profit before tax of A$114.3m

Sydney Hills M2

This motorway has suffered due to extensive roadworks to add new interchange capacity, which has deterred trips because of lower speed limits.  Traffic volumes are down 2%, with toll revenue down 1.7% (EBITDA 1.9%).  The works are expected to be completed mid 2013, with the hope that traffic volumes will recover.  The M2 is a core part of the Sydney orbital toll road network, connecting the northern suburbs to the west, and so has affected the results of two other Transurban assets.  It is more of a suburban motorway that needs orbital urban traffic to thrive, so will be dependent on how there is growth in suburb-suburb commuter and leisure traffic (which is not conducive to public transport usage, which is high in Sydney for trips to the downtown area).  It is expected to deliver significant growth in 2014, as temporary speed restrictions are removed.  Concession ends in 2046.

Revenue of A$73.4m, costs of A$15.9m, depreciation/amortisation/financing of A$52.9m, profit before tax of A$4.6m.

Sydney Lane Cove Tunnel

This part of the main route north from Sydney has seen static traffic with a small increase in toll revenue (0.3% - EBITDA 4%).  Bear in mind the history of this project in that Transurban bought it from the receivers for around 60% of the cost of constructing it, after traffic and revenue numbers did not meet forecast expectations.  A key project is to consolidate and reduce costs in maintaining Transurban's Sydney highway assets, which may partly reflect the better EBITDA figures.  Lane Cove Tunnel does have an untolled alternative, so is sensitive to pricing, congestion levels on the surface streets and limited competition from rail.  Concession ends in 2037.

Revenue of A$31.7m, costs of A$13.4m, depreciation/amortisation/financing of A$22.1m, meaning a loss before tax of A$3.8m

Sydney M1 Eastern Distributor

This is the highway that connects Sydney Airport to the city and the harbour crossings.  It has seen a small decrease in traffic (0.4%), but a 8.2% increase in toll revenue (EBITDA 8%) due to 9% toll increases ($A 0.50), indicating low elasticity of demand on this key corridor (which also has intensive rail competition, and parallel inferior surface streets).   Transurban has a 75.11% shareholding in this road.  Given the time sensitivity and the constraints in corridor expansion along this route, it can be expected that this investment can deliver more over the long term.  Concession ends in 2048.

Revenue of A$51.3m, costs of A$13.7m, depreciation/amortisation/financing of A$48.3m, meaning a loss before tax of A$10.7m. 

Sydney Westlink M7

The M7 runs north-south along the western end of the Sydney orbital ring road, and so is a core part of Sydney's bypass, but also connects the northwest and northern suburbs with the south, avoiding the need to use the harbour crossings.   It has seen a 2.4% increase in traffic, and 3.2% increase in toll revenue (EBITDA 3%).  A stable route, growth being dependent on growth in housing and employment at Sydney's periphery promoted by the location of growth nodes at either end of the motorway.  50% owned by Transurban.  Concession ends in 2037.

Revenue of A$106.6m, costs of A$23.8m, depreciation/amortisation/financing of A$177.2m, meaning a loss of A$94.4m before tax.

Sydney M5 SouthWest

The M5 is Sydney's main motorway south-west towards Canberra and Melbourne.  It has seen a small (0.4%) decrease in traffic, but 10.1% increase in toll revenue (EBITDA 11.4%) due to toll price increases.   This road is 50% owned by Transurban, and has its own widening project underway, which means an additional lane each way (from 2 to 3 lanes in each direction).  It also has the eccentricity of a taxpayer funded rebate scheme for regular users, which was a 1995 electoral bribe by the then Labor state government.  It means that vehicles that are owned by a New South Wales resident, registered in the state for private, pensioner or charitable use, and are equipped with an electronic tag, are eligible for toll refunds.  "Business vehicles" are not included.  As such, there is obvious long run potential if the state finances get to the point where this is to removed.  Concession ends in 2026.

Also in Sydney, Transurban is pursuing a potential project to connect its M3 to the F2 freeway (which leads to Newcastle).

Revenue of A$103.1m, costs of A$14.2m, depreciation/amortisation/financing of A$51m, meaning a profit of A$37.9m before tax.

USA I-495 express lanes

These lanes opened in November, as reported here.  However, Transurban is reporting that traffic is below expectations, but systems are working well.  Obviously two months are too early for any assessment of trends.  It will require both marketing and patience to see if motorists become more willing to pay to bypass congestion on this route, which is the key south-west quadrant of Washington DC's orbital freeway network.  Concession ends in 2087!

So far revenue of A$1m, costs of A$3.2m, depreciation/amortisation/financing of A$9.1m, so a loss of A$11.3m before tax.

USA Pocahontas 895

If Citylink is the Jewel, Pocahontas is the fools gold.  It is 100% owned by Transurban and has been 65% below traffic forecasts.  The results have seen a 5.1% increase in traffic and similar (5.3%) increase in toll revenue (6% EBITDA), but it remains a seriously underperforming asset (which Transurban wrote down last year by A$138 million).  Problems with this asset have included the cancellation of a major property development that would have been served by the road, which was expected to generate up to 35,000 additional trips a day (the timing of the project coincided with the financial crisis and the US property market crash).  It has been suggested that the loss of Interstate status didn't help, but this point is insignificant.  The likelihood is that Transurban will hope that property development will be reignited so that the road will come into its own in due course.  Concession ends in 2105.

Revenue of A$7.4m, costs of A$3.1m, depreciation/amortisation/financing of A$16.7m, so a loss of A$12.4m before tax.

USA I-95 Express lanes to come

As Transurban's US investments are all in Virginia, it is logical that it has also put money into this HOT lane project.  It is under construction and will be completed in late 2014, and involves a 49km of new reversible 2-3 lane set of lanes south of Washington DC within the existing corridor.

Toll rate variations

The full report (PDF) includes some interesting data on the caps (if any) on toll rates for Transurban assets, as follows:

M5 South West Motorway - Escalated quarterly by quarterly CPI. The toll cannot be lowered as a result of deflation, however, until inflation counteracts the deflation the toll cannot be increased. 

Hills M2 - Escalated quarterly by the greater of quarterly CPI or 1%. 

M1 Eastern Distributor - Escalated quarterly by the greater of a weighted sum of quarterly Average Weekly Earnings and quarterly CPI or 1%. 

Westlink M7 - Escalated or deescalated quarterly by quarterly CPI. 

Lane Cove Tunnel - Escalated quarterly by quarterly CPI. The toll cannot be lowered as a result of deflation, however, until inflation counteracts the deflation the toll cannot be increased. 

CityLink - Escalated quarterly by the greater of quarterly CPI or 1.1065% (being 4.5% p.a. as a quarterly compound rate) for the first 15 years, then quarterly by CPI. This is subject to a cap of annual CPI plus 2.5%, which cannot be exceeded. 

Pocahontas 895 -  Fixed rates until 2017 and then escalated by the greater of CPI, real GDP or 2.8% p.a.

495 Express Lanes - Dynamic, no cap. 

Finally, an interesting interview with Transurban CEO Scott Charlton, reported in Business Spectator has him talking about the extension of concessions, and the payment of cashflow in dividends before reducing debts.   He talks of combining into one back office for all Australian operations.   He mentions the interest in applying dynamic (demand) driven pricing into Australia (which isn't possible under current concession conditions).  Transurban seems supportive of a shift towards more distance based tolling and shifting from fuel tax towards tolls more generally.   He confirms that Transurban isn't enthusiastic on the AirportLink or Clem7 tollways in Brisbane, but more interested in the Queensland Motorways assets.

Conclusion

Looking beyond Transurban, which has a range of assets from the remarkable to the unfortunate, one can see statistics which demonstrate some of the real opportunity costs of building major new motorways.  These being costs not conventionally seen in government procured projects.  That is seen in the financing costs, as these (and the capital asset value of the road) are largely hidden or written off, as they are seen in budgetary deficits as roads may be financed either by specific or non-specific public debt, or through "pay as you go" annual budgeting.

Large highways are expensive, they involve a lot of capital.  They depreciate, and it is through the accounts of companies like Transurban that we can see, transparently, what they cost.  The revenue they generate is clear (and it would be interesting to consider fuel taxes on top of that), and the operating costs (including maintenance) is also clear, but the big portion of costs is servicing that capital over the depreciated life of these assets.  A road isn't "paid for" until those costs are paid for, and then the long run capital cost of the road is the capital renewal cycle for it, which is a very long time.

Intelligent debate about the costs of highways, relative to other modes, cannot be had until there is more data on the relative costs of highways, compared to other private investments, and other parts of the economy.   Of the seven highway assets owned or part owned by Transurban in full operation, three make a profit and four have been making a loss (before tax), the losses are due to financing costs not been recovered from revenue from users.  One of those had a major refinancing in the past year, others have localised issues, but Pocahontas is a road that shouldn't have been built when it was, and I suspect had the project been entirely led by investors - not a government promoting the road on its own, it would have been quite different.

Some projects would thrive, Melbourne Citylink saves a fortune in time and fuel for those who use it, and has unlocked significant benefits for Melbourne in relieving congestion to and from the airport and across town.  Others would not be built.  That is how it should be.  Tolling, of course, provides a good proxy for whether a road should be built, notwithstanding the two distortions not reflected in this - the presence of fuel tax (which doesn't pay for the road) and the existence of parallel untolled routes (which get more demand than they should).