Transurban Group (OTCPK:TRAUF) Q4 2022 Earnings Conference Call August 17, 2022 7:45 PM ET
Company Participants
Scott Charlton – Chief Executive Officer
Michelle Jablko – Chief Financial Officer
Conference Call Participants
Justin Barratt – CLSA
Andre Romeo – UBS
Owen Birrell – RBC
Paul Butler – Credit Suisse
Suraj Nebhani – Citi
Cameron McDonald – E&P
Operator
Thank you for standing by and welcome to the Transurban Group Full Year ‘22 Results Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Scott Charlton, CEO. Please go ahead.
Scott Charlton
Great. Thank you and thanks everyone for joining us for Transurban’s 2022 full year results briefing. Today, I am joined by our CFO, Michelle Jablko. And we would like to take you through the presentation. We have lodged with the ASX this morning and also our Head of Investor Relations, Hannah Higgins is on the call with us. And of course, her and the team will be available should you have any follow-up questions over the next period of time. Hopefully, presentation is fairly short. This morning should take only about 20, 25 minutes and then we’ll have some time for questions.
But before I start the formal part of the presentation, I’d like to acknowledge the traditional owners of the land in which we are gathered today. And those of you that are in Sydney and do drive through WestConnex and through that St Peter’s Interchange, you may have noticed the artwork at the entry to the final stage of the WestConnex tunnel. It’s been created by the visual artists which are the traditional owners of the land in that area. And that our work is just one example of how we use our assets to demonstrate respect to the indigenous people and their ongoing connection to the land and our local communities.
Okay. Now turning over to Slide 4, which is the highlights slide. So while traffic was broadly flat year-on-year, we were pleased to see traffic volumes grow as the year progressed. The fourth quarter, saw traffic levels reaching a new all-time high and exceed pre-pandemic levels. This was a result of both new asset capacity and people returning to moving around our cities and including more travel to the airports. And in the current macro environment of rising inflation and interest rates, the business is well-positioned with approximately 70% of our assets having total escalations linked to CBI are greater, which provides a built-in buffer, obviously, in this environment.
Now in FY ‘22, proportional toll revenue grew by almost 6% and free cash by approximately 20%. And around 98% of our debt book is fully hedged, which gives us low exposure to near-term interest rate increases given the size of our book. And actually during FY ‘22, we continue to strengthen the balance sheet and we refinanced over $3.4 billion of debt at attractive rates. And actually, we lowered our average cost of debt, including the latest refinancing that was just done on WestConnex.
We have an exciting pipeline of development opportunities and a strong balance sheet to fund those near-term opportunities as well. Our FY ‘22 distribution of $0.41 per stapled security was 122% covered by free cash, including capital releases. This included a final distribution of $0.26 for the 6 months ended 30 of June, which we announced back in June. We do anticipate or forecast or expect our distribution for FY ‘23 will be $0.53 per security, which is approximately 30% higher than FY ‘22, reflecting both an uplift in traffic performance and the benefit of CPI-linked price escalations. And just for clarification, the underlying free cash flow, we expect, obviously, in FY ‘23 is higher than that of 2019 and we do anticipate subject to market conditions of approximately having $0.10 of capital releases, $0.10 per share of capital releases on top of that as well to fund those opportunities that we will discuss going forward.
Turning quickly to Slide 5, that’s just a recap of our strategy statement. You’ve seen that since I think the Investor Day or the Half Day highlights the three elements that are key to our long-term success, which is obviously listening and understanding what matters to all of our stakeholders, using that to create innovative road transport solutions and then ultimately becoming the partner of choice for both governments and our strategic partners.
On Slide 6, we just wanted to remind everyone of Transurban’s investment proposition, given we have been dealing with crises and other things for a while. We thought it was good to go back to some of the basics. Ad by delivering on the strategy, our businesses expanded into five markets we have grown from 8 assets to a portfolio of 21, which are used by more than 2.4 million trips a day on our assets. Over the past decade, we have maintained an average concession life of more than 28 years through disciplined investment, new assets and enhancements. And currently, we have approximately 7 development projects in progress.
As I talked about on the opening slide, our inflation-linked toll escalations and debt hedging position provide us and position us well in the near-term for rising interest rates. Going forward, our experience in asset development, delivery and operations will be supported by the continued investment we have made in data and technology, allowing us to continue to deliver innovative road transport solutions alongside our partners. And we are confident that these core fundamentals of our assets will support traffic growth over both medium and long-term allowing us to deliver on our investment proposition, which is building that long-term value while balancing growing distribution payments to security holders and efficiently funding future opportunities.
Now, I know again, on Slide 7, one of the major topics is the inflation and interest rates. And if we move to Slide 7, again on how we are positioned in this macro environment and positioned well as we said. We talked about some of this at the Investor Day. And again, our inflation-linked toll escalations coupled with our hedging profile, actually provide a net benefit in the near-term inflationary environment. We saw some benefit in this last financial year, but the majority of the benefit of the increases in the higher CPI numbers that are now incorporated into our base toll prices will flow through in future years, including FY ‘23.
And as the chart shows, the benefit of a 1% increase in CPI is likely to be greater than the cost impact of 1% higher interest rates in the near-term given that again approximately 70% of our revenue is CPI-linked and that we’ve managed our debt book to give us a lower exposure to current market rates. And I think, just a comment on the outlook, obviously, there is some forecasts out there of inflation reaching the high-7s, I think being made by the government forecasts for the end of the year, but we have seen the long-term bond rates come off a bit. So hopefully what we will see is a sharp adjustment. And then we will go back to long-term trends, but obviously, that embedded inflation will flow through long term into Transurban’s revenue streams.
Turning now to traffic. And as I mentioned earlier, we are seeing traffic growth in all our markets. And this chart clearly shows and after extended periods of restrictions, particularly in Sydney and Melbourne early in this financial year, traffic levels have rebounded with 2.4 million trips a day in quarter four, again, exceeding the same period in FY ‘19. And we are seeing that particularly continue on through into August. This is particularly evident on those assets connecting to the airports and some CBD-related activity. But as we said before and if you look at some of our different reports and mobility report and why people travel, which I’ll talk about a little bit, again, CBD is important, but that is not the majority of our travel is not CBD-related.
Large vehicle traffic continues to be steady across the year in part due to the continued and growing e-commerce demand. Sydney’s traffic performance did benefit from some of the new assets, including NorthConnex and the M8 and M5 East, along with some of the broader economic recovery. Now, Melbourne’s traffic levels are starting to improve and they improved in the second half of the Western Link supporting increased airport activity around that precinct. In Brisbane, traffic growth has been steady with positive trends and commuter and discretionary travel.
In North America, we have also seen some improvement with traffic on the 95 Express Lanes in particular in Northern Virginia. And if you look at some of the pricing data and other data that we have released, we see both traffic and price strength in the Express Lanes and the A25 in Canada exceeding FY ‘19 levels. We expect traffic to return to long-term growth trends over time. And while near-term traffic performance will remain sensitive to government restrictions to health issues that again have the potential to restrict people moving around, but hopefully we are past that period. Again, we had seen some of this come out to play in recent weeks. We did see some impacts from the Omicron variant and flu in July during the peak of winter. But overall, traffic is holding up well, particularly given the additional impact of severe weather in Sydney in July. And again, as I said signs in August are positive and we are hitting all-time high numbers for further recovery.
So bit of insights into what we are seeing on the traffic if I move to Slide 9 and some of our insights from our Mobility Trends Research. Firstly, airport travel and as anyone has been to an airport recently can attest, people are certainly traveling again. International flights in Australia again have doubled since the start of ‘22 and a forecast again to double by December of this year. We have seen that in some of our airport-related corridors such as Western Link on CityLink. Again, as you can see they are benefiting on the chart on the bottom of the left of this slide, which shows an increase in traffic corresponding with the higher airport passenger volumes.
In our most recent Mobility Trends Research, we found that travel to the airport was the most common reason, actually for using toll roads in Australia. Again, it’s on a, I guess, on an ad-hoc basis when people need to go to the airport, but an interesting finding, again from the research. We are also starting to see people form a degree of consistency in some of their working and travel habits. And as many of you would know, we have been conducting research since the start of the pandemic to understand changes in the way people are living, working and moving around our cities. And our latest research conducted between June and July surveyed more than 5,000 people across both our Australian and North American markets.
This research showed most people are traveling to the workplace on an average at least 3 days a week, which is consistent with our previous findings and the average applies equally to city workers and others. But I think that’s important, a lot of people will talk about CBD office occupancy, but the majority of workers work outside of the CBD and around our roads and industrial precincts and other employment hubs around the city. And in Australia, respondents say they expected to work an average of 1.7 days a week from home. That number varies from – from a low of Brisbane of 1.5 and a high of 2.1 in Canada. And that number has remained sort of fairly consistent from our previous findings.
Our most recent findings indicate though there has been a significant increase in the availability of flexible work hours since the start of the pandemic, with more than 70% of Australian respondents reporting having access to flexible start and finish times, which compares to about 37% last year. This increased flexibility appears to be having an impact on the way people decide to travel to their workplace. Because we have found and we look on Slide 10 now, around one in four respondents say they have changed their primary mode of transport to get to work or study since the pandemic started. And for most people, that’s meant switching to private vehicles over public transport.
This chart shows a significant shift of up to 34 percentage points to private mode depending on the city and the preference for private vehicles have been playing out since the start of the pandemic. Initially, the result of public health measures, but it now appears that some people have changed their routines as a result of increased flexible working practices. Again, for example, someone who took the train or bus to work 5 days a week pre-pandemic may now choose to drive 3 days a week at a time that better suits their lifestyle. And you can find the full version of our latest Mobility Trends report on the digital insights hub on our website.
If we look at Slide 11, an another positive trend that followed us all the way through COVID and coming out the other side is the e-commerce and online shopping. In Australia, 4 in every 5 households shopped online last year and 93% plan to maintain or increase that habit this calendar year. Our assets provide crucial connectivity for vehicles traveling between these distribution centers, airports and ports. And in FY ‘22, around 128 million large vehicle trips were taken on our roads and this slide shows in Sydney for an example, the close proximity of our roads to parcel processing centers in the postcodes with the highest levels of online shopping.
The compelling if I move to Slide 12 and to talk about some of our customer experience in the compelling value proposition of our roads is also evident in the growth of our customer base, which is more than quadrupled in the past decade to almost 9 million customers. Travel time savings are key value driver and in FY ‘22, even during the pandemic customers saved approximately 325,000 hours each work day compared to alternative routes. And our recent Mobility Trends Research found that nearly 50 respondents rated travel time reliability as the top factor when they make their transport choice. And we provide services such as our 24/7 incident response, which clear the majority of incidents within 15 minutes and helped keep our roads running smoothly. And this year, we also launched travel alerts on our linked app to share live information with our customers about disruptions on our roads.
Interesting in Northern Virginia, safety was ranked as the most important factor in choosing a transport option in the recent research. And we continue to identify and implement initiatives to enhance our road safety. And on our roads this year, we achieved a Road Injury Crash Index of 3.78, which is a close to the lowest we have ever achieved and significantly below our target. This index tracks the number of serious injury crashes per 100 million vehicle kilometers traveled on our roads.
We give some more data on Slide 13 to some of our customer base and our most recent Mobility Trends Research looked into why actually people use the toll roads and you can see from the chart on the left. The reasons are very diverse. Only 14% of respondents use toll roads primarily for commuting and the most frequent reason for choosing a road or airport or holiday related was 76% saying that toll roads provide a direct way to reach their destination. So, most of our customers use toll roads infrequently and that’s reflected in our spending patterns, with more than 80% of our Australian customers spending less than $10 on average a week on tolls and tolls represent approximately 1% of the average Australian monthly household expenditure.
Our research also showed that most people do not or only occasionally consider the price of petrol when they are actually going on short trips or commuting. This is something we have observed over the years and reflects the resilience of our assets despite significant fluctuations in fuel prices. We have provided an example of CityLink to show traffic recovery continuing despite rising fuel cost on that slide. However, we also recognize that rising costs including petrol do impact our customers. So, we have encouraged our Linkt customers to take advantage of our fuel discounts offered through our partnership with Shell Coles Express. Now all up, our fuel discount program so far has saved customers more than $3 million. This year, we have also added to our Linkt Assist program for people facing financial hardship by joining the One Stop One Story Hub pilot program in Australia. This hub allows customers to access hardship support for multiple essential services via a single point of contact.
Just want to cover some of our ESG highlights, but we have our full corporate report and outlines all our sustainability and ESG outcomes and encourage you to look at that as well. But if you look at Slide 14, alongside our long-term target of net zero emissions, we are targeting a 50% reduction in Scope 1 and 2 emissions by 2030. This obviously represents mostly our fuel and electricity use. And despite the growth in our business, we remain on track to meet our target and we have achieved a significant 46% reduction this year through the use of renewable electricity. Two-thirds of our electricity needs are now being sourced from renewables and we have renewable power agreements in place for all of our Australian markets. And we are exploring our different options for the Greater Washington area. And whilst our customers’ greenhouse gas emissions are not formally within our control, we acknowledge their impact on the environment. We have a number of activities underway to promote driving efficiently and to encourage the uptake of electric vehicles.
Moving on to Slide 15 and just an update on our pipeline, this has been fairly consistent. You can see we have a range of opportunities from enhancements to our own assets to acquisitions, potential acquisitions, and large-scale Greenfield projects. And the development opportunities span the next decade and we will assess each in our easy disciplined way. And obviously if other opportunities present themselves within our strategy, we will consider those. However, in the near-term, the projects are largely weighted toward enhancements or expansion projects on our existing assets.
Now, there is a lot of detail on the market. So I will just make a couple of highlights in relation to Sydney on Slide 17. Again, we have included in each of our markets traffic performance, travel time savings and key business activities throughout the year and a few callouts particularly in the development area. In Sydney, the M7-M12 integration delivery project, as we have discussed has progressed to the third stage of the New South Wales government’s unsolicited proposal project and that’s continuing to move forward. We have also made good construction progress on the M4-M5 Link in Sydney, which is a key connector for WestConnex and expect that to open early next year.
And if I move to Slide 19, in Melbourne during the year, we commenced tunneling on the West Gate tunnel. The tunnels are now approximately 42% complete and tracking well. I was out there on Tuesday. It’s an amazing site. Everything is just progressing at pace now and a lot of activity and it’s just going to transform the road network in Melbourne, just a fantastic project. Further updates on both of these projects – sorry WestConnex and West Gate have been provided in some of the supplementary information.
In relation to Brisbane, population growth in Southeast Queensland is the highest of any region in Australia, again, providing a favorable backdrop for continued expansion and opportunities in Brisbane. And we continue to progress those discussions with the government partners that may alleviate existing congestion and also congestion associated with this population growth and preparing the city and the region for the Brisbane 2032 Olympics.
In North America, construction is progress and started on Project NEXT and progressing on FedEx and we are pleased that our proposed enhancements to the 95 Express Lanes at Seminary Road and Opitz Boulevard have now reached financial close. And on the Maryland Express projects, there have been some delays to the final step of the environmental review process meaning that we are currently working with the Maryland Department of Transportation on an updated timeline to reach financial close on that project and we continue to progress discussions with our client.
But at this point, I will now pass over to Michelle, who will talk through our financial results for the period. Over to you, Michelle.
Michelle Jablko
Thanks, Scott and good morning, everyone. As Scott has said, we think we are well setup to deliver distribution growth for security holders into the future. We are seeing traffic recovery and we have embedded CPI-linked escalations across 68% of revenue as well as a strong balance sheet.
Despite the impact of COVID restrictions in our biggest markets in the first half of last year, we saw a strong rebound in traffic in the second half supported by our new assets, increased movement around the cities, and a return to business and leisure travel, which resulted in traffic finishing only slightly behind the prior year. EBITDA grew year-on-year benefiting from embedded price escalations and new assets. The strength of our current position gives us the confidence to continue to invest in our business, ensuring that we are in a good position to take advantage of our future growth opportunities, adding longer term value and growing distributions for our security holders.
Let me now take you through some of the detail. So I will start with free cash and distribution outcomes on Slide 28. Our full year distribution of $0.41 per security was 122% covered by free cash and approximately 12% higher than in FY ‘21. Total free cash was $1.5 billion. This included $355 million in capital releases from WestConnex and NorthConnex during the year. Excluding capital releases, our free cash was around $1.2 billion, up 17.6% year-on-year. So, we grew distributions for security holders and retained most of our capital releases to reinvest in our growth pipeline. The next slide provides an overview of our statutory result. The main difference between this year’s statutory result and last year’s was the one-off profit we recorded in FY ‘21 on the Transurban Chesapeake transaction. This was partly offset by non-cash movements in derivative valuations.
Moving now to our proportional results on Slide 30 which gives you a better sense of our underlying business trends. Proportional EBITDA was $1.9 billion, 3.5% higher than the prior year. Within this, like-for-like toll revenue was up $103 million despite average daily traffic being slightly lower for the year. This demonstrates CPI-linked or fixed price escalations in our Australian markets and improved pricing on our North American Express Lanes. We expect to see further CPI escalations come through in the near-term with March and June inflation announcements taking effect during the course of FY ‘23. Costs for the year were higher as we continue to invest in our business. We are confident that this was the right approach despite COVID impacts on traffic. I will cover this in further detail on the next slide.
We also benefited from new assets. Last year, we sold 50% of our Transurban Chesapeake assets using some of the funds from this transaction to acquire larger share of WestConnex. We can see the benefit of these transactions coming through in our results, with new assets contributing $75 million to EBITDA. So, EBITDA was up 3.5%, with future EBITDA likely to benefit from improved traffic full year annualization of our greater interest in WestConnex and CPI benefits.
If I take us now to costs on Slide 31, as I said costs increased this year as we continue to invest in our business. Overall costs increased by 10.9% consistent with comments we made at the first half. We split the cost increases on the slide to separate out accounting-related items and transaction costs, which contributed about 40% of the overall increase. The main driver here was the change in accounting requirements that reclassified spend that has traditionally been capitalized, such as cloud-based technology projects. Partly offsetting this was a net benefit from power purchase arrangements that we put in place for the majority of our Australian energy requirements.
Excluding accounting and transaction cost impacts, we increased operational cost by 6.3%. This includes the re-phasing of some future maintenance activities to earlier periods and higher insurance premiums. Importantly, we also continue to make focused investment in the business to support recent and future growth. This investment includes supporting the growth in assets we have had in recent years and areas like data analytics, cybersecurity, customer experience, and more scalable and flexible tolling platforms. We believe this was the right approach even through the pandemic as it puts us in a better position to support future growth.
If you move now to Slide 32, I have included some considerations as you think about costs into FY ‘23 and we do expect costs to increase again this year, but that should be more than offset by revenue from traffic growth, new assets and embedded price increases. Looking at the cost increases, there are three key reasons for this. Firstly, our operational costs will go up as we continue to invest in capabilities to support the future growth of the business. For example, this includes further investment in customer experience, tolling platforms and cybersecurity. More of this will go to OpEx instead of CapEx given the type of spend.
Secondly, with traffic improving, we expect an increase in volume-related costs. And we will have a full year of costs associated with the additional ownership of WestConnex and the opening of Stage 3A. Volume-related costs and new assets are expected to add around 5% growth to the cost base in FY ‘23, again, more than offset by the corresponding revenue benefits. And thirdly, we have a number of potential development projects where we take costs to OpEx in the early stages. The costs here will ultimately depend on decisions that are made throughout the year, so new assets and projects do add costs. Making this investment now allows us to continue to grow the business and realize value over the longer term.
Slides 33 shows our EBITDA margin outcome for the year. Margins at the group level were just under 69%, with these being impacted by government-mandated COVID restrictions in our two biggest markets. We can see the improvement in margins to over 71% in the second half as traffic in those markets improved. CityLink margins grew to 84% in the second half and Sydney margins to 80%. The Brisbane margin was slightly lower in the second half due to high maintenance provisions as a result of a decision to bring forward some planned maintenance activity. In North America, proportional margins improved as traffic and the average price on the Express Lanes improved, particularly on the 95 Express Lanes. The 50% sale of Transurban Chesapeake also benefited margins as the higher margin A25 became a larger proportion of our North American earnings.
Moving now to funding on Slide 34, our balance sheet is in good shape. Firstly, as you can see, we are well setup for a high interest rate environment. We have been actively managing our portfolio with a through-the-cycle view, bringing forward refinancing activity and locking in pricing when rates were lower. We were able to reduce our average cost of debt slightly over the year. And almost all of our debt is hedged providing protection from rate rises in the near-term. Of course, we will eventually see the impact of rising rates, but this will happen slowly. And as Scott has said in the meantime, we will see revenue benefits from our inflation-linked toll escalations.
The second callout on this slide is that we are well positioned to support future growth. We successfully completed the acquisition of an increased interest in WestConnex during the year. To fund this, we use around half of the proceeds we received last year on the sale of 50% of Transurban Chesapeake as well as new equity raised with strong support from our security holders. Using only around half of the Transurban Chesapeake proceeds has us well positioned to support future growth. We have a strong corporate liquidity position of $3.9 billion or just under $3.1 billion after the final distribution is paid later this month. This combined with future capital releases, sets us up well as we go forward.
And you can see this in more detail if you move to Slide 35. Here you can see that we are well placed to fund our committed project pipeline with additional liquidity headroom. We have previously flagged that we expected to receive around $2.3 billion in capital releases between FY ‘22 and FY ‘25. This expectation has not changed. So far we have received $355 million of the $2.3 billion, with around $1.9 billion expected to come over the next 2 years. This gives us around $5 billion in corporate liquidity to fund our committed capital with around $2 billion of additional liquidity headroom. We have also provided some information on this slide on our upcoming refinancing with most of the debt to be refinanced already above our average cost of debt. So, our balance sheet position and our through-the-cycle approach should help support distribution growth and has given us the confidence to continuing to invest in our business for the longer term.
We know that near-term distribution growth is very important for our security holders. And on Slide 36, we set out our guidance that we expect our FY ‘23 distribution to be $0.53 per security, which is approximately 30% higher than FY ‘22. This is of course dependent on traffic continuing to recover throughout the year, with significant – without significant unanticipated disruptions and subject to broader macroeconomic factors and the timing of distributions from subsidiaries. Similar to FY ‘22, we expect that the 2023 distribution will include a small component of capital releases to minimize the dilution from the WestConnex capital raising and this has been factored into the guidance.
So as I stand back from our financial performance for the year, our business is in good shape to support distribution growth and create long-term value for security holders. We expect distributions to be $0.53 per security in the coming year. Our prudent through-the-cycle balance sheet management and embedded CPI-linked price escalations position us well in a rising inflation and interest rate environment. And we built a balance sheet that gives us the flexibility to support our capital commitments with additional liquidity headroom for further growth opportunities.
Thank you. And I will now hand back to Scott.
Scott Charlton
Great. Thanks, Michelle. Looking now to the future on Slide 39, you would also see that our Chair Lindsay Maxsted has said he will not stand for reelection at the upcoming AGM. Lindsay has now served on the Transurban Board for more than 14 years. And over that time, that business has grown almost seven-fold, adding 14 new assets in the last decade and paying more than out – more than $11 billion in distributions to security holders. I know that Lindsay will be greatly missed by the executives and myself. I’d also like to welcome our new Chair Craig Drummond to the Transurban Chairmanship. He joined the Board in July last year. He has got very extensive experience in financial and regulated service industries. And you will see some more detail on Craig’s background. But I am sure most people know Craig. I am really looking forward to working with Craig as well as the Board and continue to execute on our existing Transurban strategy of delivering road transport solutions, again, to create long-term value for our stakeholders and growing our distributions.
So, just summarizing on the outlook page on 40, we have covered most of these points, but looking forward our business is well setup to benefit from growth in traffic and inflation-linked toll escalations as we are protected from rising near-term interest rates and we have a robust balance sheet will allow us to continue to invest in sustainable growth for our business. And again, we are seeing that growth in traffic over the last few months reaching all-time highs for the Transurban Group. And we expect traffic to continue to recover particularly coming into the summer and warmer months as we move out of this last phase with this current phase of Omicron.
And as always, we will continue to balance this investment that we have with our growth in distribution for our security holders. And as we have talked about the total distribution, FY ‘23 will be $0.53 or forecast to be $0.53 per share, which is again 30% higher than our FY ‘22 distribution. And then going back to what I said just to make it clear, the underlying free cash flow is above that in 2019. And we still have subject to market conditions, on top of that approximately $0.10 per share in capital releases that we use to put back into the business to create future growth and long-term value for our shareholders.
So finally, I’d like to thank particularly the team at Transurban through another, a year that’s had its challenges. But we are sitting in a very good position at this point in time to take advantage of all the hard work over the last couple of years. And of course, I’d like to thank our security holders who supported us so much and for everyone who has attended the call today. And now, we will open up to questions, please.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Justin Barratt from CLSA. Please go ahead.
Justin Barratt
Hi, there. Thanks very much for your time. My first question just comes in relation to cost I appreciate the commentary that cost should further increase into ‘23. And I was just wondering, is it still reasonable to expect some margin expansion across your different geographies in the group level on I guess sort of two half ‘22 levels?
Scott Charlton
I’ll let – thanks, Justin and thanks for the question. So I will let Michelle answer that question, but we do anticipate expansion over time, but…
Michelle Jablko
Yes. So Justin, yes, we do. As we noted on the cost slide, there are some costs, particularly around early stage development spend that we will make decisions on during the year, but yes, we are expecting some margin expansion on the second half margin.
Scott Charlton
Yes. But it’s an interesting thing as well as we continue to invest in particularly in customer technology and other things that add cash flow and add benefit to the bottom line. They might not be at an 80% margin level, but they continue to add cash. So we will do things that continue to create value and distributions, but we do expect over the longer term, yes margin expansion.
Justin Barratt
Fantastic. Thank you. And then just appreciate the disclosure on Slide 44, your distributions from non-100% owned entities. Just wanted to try and make sure that I understand, so $97 millionish and that that’s some backdated distributions from I guess, the COVID impact period, is it fair to say that they will shrink quite considerably into FY ‘23 or are you saying that delayed one quarter NorthWest Roads Group and the WestConnex M4-M5 – M8 M5 regions distributions can be expected into FY ‘23?
Michelle Jablko
Justin, it’s probably more the format. So, the driver of the timing increases as you say was distributions that have not been paid out in the prior year, particularly Transurban Chesapeake, there were also – there had also been some holdback of reserves and other things at WestConnex. And so you don’t expect those to repeat in the coming year. There will be some small differences on some other assets, us, assets for example, the ED – we didn’t pay out distributions in 2022 just given the COVID restrictions there, but we are expecting some return to distributions for the ED. But yes, I think your first premise was right that timing difference should come down quite a bit.
Justin Barratt
Great. Thanks very much.
Operator
Thank you. Your next question comes from Andre Romeo from UBS. Please go ahead.
Andre Romeo
Hello. Good morning. Just maybe starting with the traffic and customer behavior and appreciate all the data that you have shared from the recent research that you have performed. But I’d love to get your sense of to what extent we are still in a sort of recovery state on the path to a new normal of customer behavior or to what extent should we start to interpret some things as structural changes? So, for example, Melbourne closing down 7.5% in the fourth quarter versus pre-COVID, does that feel like the new baseline or is it full recovery to play out?
Scott Charlton
Thanks, Andre. Good question. We still think again going back to long-term trend line, so we still think there is some recovery to play out. And again, those cities that had longer lockdown periods, you see it’s taking longer to recover. And for those of you who spend any time in the Melbourne, CBD, you will still see that there is recovery to be had there. Obviously, the airports aren’t back to full operation or capacity. So we still think there is recovery. Again, as we have talked many times there is long-term trends here about working at home, e-commerce and other things like that. And some of those are playing out. Again, we think all those long-term trend lines mean more kilometers being driven. But there is still some recovery to be had. I mean, you can see it, we are just, if you go back just a few months to January, February dealing with the latest round of Omicron and other things, particularly in Sydney, but – and we still have the government in Victoria talking about if in certain instances still if you can work from home now that will reverse obviously over time. So yes, there is still some recovery to play out. The thing that’s balancing out that is obviously the trend away from public transport that will move back more toward public transport over time, but the same will occur that more people we believe will come back to the offices and you can see on a regular basis now, certain large corporations talking about, I am not sure the right word is mandating but suggesting or looking to have their employees come back into the office. So again, partly its recovery, but being supported well in the short-term through some of these other trends and move away from public transport.
Andre Romeo
Okay. My next question is probably about the capital releases. So I guess you’ve reiterated the overall size over the medium-term, with $1.9 billion remaining and that’s scale of capital release has been sort of held in your guidance for some time. To what extent is that sensitive to the interest rate environment, with the rates were lower when you initially talked about that scale of capital release? Is there any sensitivity there?
Scott Charlton
I will let Michelle answer, but when you have to deal with the treasury people, they are always very conservative, so – but I will let Michelle answer the question.
Michelle Jablko
The reason we haven’t changed our guidance on that even as we have seen and we expect rates to go up is to Scott’s point, we take a fairly conservative view when we said it. So we had some buffer and we – so we are still very comfortable.
Scott Charlton
But again – but even if you look at the long-term bond rates and where they have come off the margins, liquidity, it still can still be a fairly attractive market. So at this point, we don’t have concerns.
Michelle Jablko
And we keep achieving them and actually better than we…
Scott Charlton
Yes, we keep achieving them better than we forecast. So I mean, the big underlying issue, Andre is what will the traffic be doing at the time. So obviously, we are in a good position now with the recovery of cash flow. But if for some reason, something happens in relation to government restrictions, but that doesn’t look like the case going forward.
Andre Romeo
Okay. And then one probably more detailed question on that and the role of the WestConnex capital releases in FY ‘23. To what extent have you sort of got an idea of the scale of those already, in which case if the underlying cash flow performance is better, you could be listing that – you could distribute higher than the $0.53 or the opportunity with the WestConnex releases provide a bit of a buffer, but if you perform better, you use – capital releases to be performed well, can you give a bit more like, if you understand the dynamic I am talking about?
Scott Charlton
Yes, yes I completely understand the question. So first of all, just make it clear the Board has given distribution guidance of $0.53. So, that’s the Board’s guidance, but clearly we see how the operations go during the year. And obviously, we hope we do better and history in Transurban. Other than market conditions outside of control, we have usually done at least a little bit better. So we hope to do better. The issue with the capital releases as I said, we have subject to market conditions roughly around $0.10 per share of market releases, Michelle can talk about where they are likely to potentially come from, but that decision at the end of the day will come from the board looking at the underlying performance of the company, what we have got to do and delivering the pipeline. But their guidance at this point is $0.53, but certainly there is plenty of flexibility with the capital releases and other things for the board to consider. But that will be something they do next year. So I don’t know, Michelle, if you want to talk about where it’s coming from with WestConnex or other?
Michelle Jablko
Yes. I mean, I think in the near-term, it is more WestConnex. And then over time, there will be some more out of NorthConnex and also a little bit in Queensland and then Transurban Chesapeake over time. So, it’s probably worth just going back to the distribution policy. And as we stayed in the presentation, the way we think about the distribution right now is its underlying free cash and then conscious of the WestConnex capital raising and the dilution, so we say, we will use a little bit of that to support the dilution. The reason it was set that way is you sort of look at the pipeline of opportunity we have and it makes sense to reinvest those capital releases into the business. If the capital releases end up being a bit more than that, it just becomes a question for the Board at the time.
Andre Romeo
Okay. Thank you very much.
Operator
Thank you. Your next question comes from Owen Birrell from RBC. Please go ahead.
Owen Birrell
Hi, guys. I want to just drill a little bit further on that distribution guidance. I mean $0.53 looks like in simple terms, 2x what you delivered as the final, or in the second half ‘22. In terms of the distributions that you are getting from non-100% owned entities, it sounds like there is a bit of quite a considerable degree of discretion by those entities to pay. Are there any particular assets, where you expect the distribution to be significantly lower or softer than what you saw in the second half?
Scott Charlton
Again, I will let Michelle answer. But there is not the discretion to pay. I mean I appreciate that in your minds, it might have been a long time ago that COVID and all this happened. But that – it was just a year ago that, particularly for Sydney, and Omicron, that Sydney traffic was looking terrible, and the City was shutdown. And then to Michelle’s point, the timing of the distributions followed behind that, so having to deal with those consequences. So, there is no issue with getting the distributions out, just we have a fairly – always we have a fairly conservative capital, and balance sheet management philosophy. But one thing is we have very strategically aligned partners as well who have their own reasons to distribute the cash as well. So, I think very much aligned and no reason other than if it’s a development opportunity to retain the cash. But we were in some pretty, again, looking at potentially extraordinary circumstances. But if you want to…?
Michelle Jablko
Yes. So, I think this question is more about the timing of it. So, whether it’s in ‘23, or gets pushed out if something changed the view, that’s why we make the point in the presentation. In terms of what we are expecting from the different assets, you sort of have normal, performance driven increases as traffic improves in some of them. But I have mentioned in response to an earlier question that though we won’t expect the repeat of some of the timing benefits, particularly in Transurban Chesapeake, and there will be a small offset of that probably in the Eastern Distributor.
Owen Birrell
Yes. Going to ask on the Eastern Distributor, the comment there about transitioning to paying tax and amortization payment, how much can we expect that Eastern Distributor distribution to be impacted by both of those?
Michelle Jablko
Yes. Sorry, we have started paying tax and amortizing and we didn’t pay a distribution in – we didn’t pay distribution out of the ED in ‘22. You sort of expect in terms of total Transurban Group, it’s probably about $0.01 of our distribution, roughly.
Owen Birrell
And can I just ask second question on the cost considerations? You gave – you made a comment earlier on the early stage costs being expensed? Probably, you have given us – give us an estimate of the kind of what sort of magnitude of early stage costs you are expecting to expend, you are budgeting to expense in FY ‘23? And I guess how much can that deviate sort of high-low?
Michelle Jablko
So, it’s – talk about where it is. So, there is the M7, M12 project. There is work as Scott mentioned in terms of Brisbane, and there is work going on in the U.S. around Maryland, and some other projects, potential projects there. The reason we haven’t given a number is it will depend on decisions made through the year. But it could be in the order of $30 million, $50 million, depending.
Scott Charlton
Yes. And the other thing that’s changed a bit as you would see with the development projects and some of the things over the last few years. The issue on getting to financial close, getting the right construction project, getting the right due diligence done, getting the right sort of structured on to make sure in this environment with this construction market and other things that we get the right outcome. So, we don’t have any issues going forward. It just takes more upfront costs. Now, the value of these projects, long-term creation, it’s significant value to the company, but we are just having to spend a bit more in this current environment to make sure we get everything right.
Owen Birrell
That’s right. Thank you.
Scott Charlton
Thanks Owen.
Operator
Thank you. Your next question comes from Paul Butler from Credit Suisse. Please go ahead.
Paul Butler
Good morning. Thanks very much for the presentation. Sorry to rehash things, but I just wanted to clarify, I wasn’t 100% clear, because I think, Scott, early in the presentation, you are talking about holding on some of the capital for future projects. And I just wasn’t clear whether you were talking about just hanging on to the capital from capital releases, excluding from WestConnex, or whether you were also including that some of the underlying cash flow from 100% owned assets?
Scott Charlton
It could be – it could potentially be some of – it could potentially be sum of the both. But we would be able to make – we would be able to show you where that’s coming from. If for instance, we decided with the M7 that it’s more efficient, to use the existing cash to do the construction, but we would show you where that was and what capital would have come out. So, we are just looking at how we most efficiently use the capital, Paul. But we would still be paying out the free cash flow and plus the amount of I guess dilution for the WestConnex, no matter what the case, as Michelle said. And then on top of that, I mean for this year, we have got another $0.20, sorry, another $0.10 per share of capital releases to put back into the company. So, that’s what I was talking about. Sorry, if that confused a little bit.
Paul Butler
Okay. And the $0.10, where is that coming from?
Scott Charlton
It’s mostly as I think Michelle said, mostly WestConnex. And that’s well progressed and should happen. I am looking at the treasurer, soon or rather than later. He is laughing. So, that’s good.
Paul Butler
Right. So, that $0.10, is that the proportion of the capital release that will go to fund the $0.53 dividend?
Scott Charlton
No, that’s on top of that.
Michelle Jablko
The way I think, remember, when we did the WestConnex transaction, we got additional capital releases just because we own more of WestConnex. And we said we would use a little bit of that for the first couple of years to offset the dilution. We have effectively already got that with the capital releases we have done. So, I would think that the capital release that’s coming up in ‘23, is essentially to go back into the growth pipeline.
Paul Butler
I guess I mean what I am trying to do is take the $0.53 of guidance, and then try and figure out what that means in terms of what you are implying about free cash generation?
Scott Charlton
I appreciate that. And I guess, you can’t be all that specific. But let’s just say it’s almost of – it’s almost all free cash, be the expectation.
Michelle Jablko
And if you look at the small amount that we used in ‘22 for the dilution, that’s a fairly good indicator, give or take a bit.
Scott Charlton
But again – and again, I understand why people might – what people would be disappointed, but we are coming out of COVID, there is a lot of – has been a lot of volatility over the last 2 years. And obviously, giving guidance for your guidance, in the last 2 years we have not been able to give guidance, we think is pretty strong. It’s a 30% increase plus the capital releases. I could understand why people are disappointed, but you can also understand why the company might be looking at it on the – potentially on the conservative side, given that we are coming out of the sort of COVID period.
Paul Butler
Okay. Thanks very much.
Operator
Thank you. Your next question comes from Suraj Nebhani from Citi. Please go ahead.
Suraj Nebhani
Hi. Good morning everyone. Thanks for the presentation. Just a couple of quick ones. Maybe one for Michelle, can you clarify the average cost of debt for FY ‘22 borrowings was 3.5%. But where does the cost of new debt sit today if you were to refinance anything?
Michelle Jablko
So, just to understand your question we told you specifically in the U.S.
Suraj Nebhani
Where would the cost of debt would be?
Michelle Jablko
Look, as Scott said we tend to try and take a conservative view than beat it. The recent – we did refinancing at WestConnex just in the last couple of weeks. And again, the all-in cost of that ended up below average cost. So, it’s probably a bit more doing it today. But then, we have got a team that works really hard at trying to it.
Scott Charlton
Yes. I think again, the last, the financing was below four. I think Suraj, thank you for your question. I think also to answer the question depends on where we see value for money where we need to shape the portfolio. So, it depends on term and liquidity, there are just so many different factors. I mean we can do, sometimes we have to replace our working capital, some of it might be working capital. And that’s got a very low number on and some we may look to go the U.S. long-term for some of the portions of the WestConnex. So – but I don’t think average is going to be much different, might be above our average cost of debt, but it’s not going to be it’s not going to move the portfolio.
Michelle Jablko
Yes. I would expect the average comes up a little bit better.
Suraj Nebhani
I would like to say, that makes sense. Thanks for that. I guess the other one is on the asset enhancement projects that you announced in the U.S. So, with the Seminary Road and Opitz, Boulevard, is there any sense of CapEx around these two?
Scott Charlton
That’s fairly…
Michelle Jablko
They are pretty small.
Scott Charlton
$100 million together, so they are pretty small.
Suraj Nebhani
I guess the other thing that Scott, you mentioned was that over the future, it’s probably more enhancement projects that will take up majority of the pipeline, apart from a couple of large projects. I guess where do you see, the next wave of opportunities is it – were they mostly in Australia or offshore?
Scott Charlton
Yes. Look, so in the short-term, they are in the enhancement projects, like hopefully, in Queensland. Enhancement projects there, as we said, so if you look at that, Slide 15, Gateway, Logan, hopefully, we have got M7 and M12, which almost should be running in Maryland. Other projects we have already committed, other ones will come in the next 5 years. We will always, if it fits strategy, we are always watching a few things that are on this list that may become available that fit into our strategy and makes sense, and we can create long-term value with. We have always been optimistic on the U.S., but it can be difficult. But we keep watching brief on several markets. But it’s been difficult to find the exact opportunities that we need. We are making good progress in Montreal, and hopefully, future enhancement there. So, I would like to say more in the U.S., but then there is what the governments decide to do with things like Western Harbor Tunnel and other things in the future that we keep watching. So, it’s hard to say, but we just see plenty of opportunities, both just being created from our existing pipeline, but in the markets that we operate. So, usually, it’s not necessarily a shortage of opportunity. It’s, more just to make sure we have the right resource to execute and make sure we execute correctly.
Suraj Nebhani
Thanks. And then maybe just one final one. Looking ahead, obviously, construction costs are rising as well, and interest rates have increased significantly. Is that impacting the required returns that you are looking in your previous reviews for projects going forward?
Scott Charlton
Again, we take a long-term view on the cycle, I mean the construction costs will be where – the construction costs will be when we lock in the deal with the government, wherever the returns we need for our projects, or whatever. So, their construction cost is important, because whether it makes value for money and project is viable and other things, it’s obviously very key. But once we lock in the construction costs, that really shouldn’t be the issue. The interest rate cycle, again, when we do an investment, we are investing over 30 years, 40 years, 50 plus years. So, we always assume the roughly the interest rates and inflation and go back to long-term averages. So, we are still below those long-term averages. But we do take that into account. And yes, so it doesn’t change really our long-term view. But each project is specific and we look at the risk return of each project. But clearly, we need to fund value for our security holders, not only in the long-term value, but make sure that we don’t disrupt the growth in distribution too much by just creating our long-term value. We need to make sure we create distribution growth as well.
Suraj Nebhani
Thank you.
Operator
Thank you. The next question comes from Cameron McDonald from E&P. Please go ahead.
Cameron McDonald
Hi, Scott and Michelle. Can I just back up over the EPS guidance just for clarity please? So, when we go back and look at the WestConnex acquisition of the additional stake, you said there was $600 million worth of additional capital that you are expecting to get out of that through FY ‘25. That’s about $0.195 a share, you have just distributed $0.03 in FY ‘22. And Michelle’s just guided to another $0.02, or thereabouts in FY ‘23. So, are we expecting another $0.08 odd or $0.07 odd of distributions in ‘24 and ‘25 given that, that would then absorb the $600 million?
Scott Charlton
Sorry, I will enter on the high level and then Michelle will talk about the details. The answer, Cameron, as we said, we use some of that to do dilution. We won’t use all of that. And obviously, anything in the future like that is the Board’s discretion on how they apply it. But we said, we will use some of that, we didn’t say we would use all of it, so…
Michelle Jablko
That’s right. So, we said the bulk of it would actually go back as reinvestment into the business, and we would use a small amount as you have seen us do.
Cameron McDonald
So, I don’t think you will see us using much more than what we are looking at is around that $0.02 to $0.03 a year?
Michelle Jablko
But yes, you are right in your math that there is more, but this has to come from WestConnex.
Cameron McDonald
Okay. Thank you. And can I just to Michelle ask, given that you have been raising tolls with inflation? Are you seeing any elasticity of demand? And so again, given that in addition, the first real time we have seen tolls rise, maybe this sort of magnitude in a long time?
Scott Charlton
The answer is no, we haven’t. So, probably the bigger sensitive issue was, is the rising fuel price, which when fuel jumps up much you see for a short period of time, a couple of days, maybe some changes, but then it comes right back fairly quick. And if you look again, at our mobility research and our data, not only does it play out in our traffic modeling and how we look at it through our modeling, but then how it comes back to the surveys that commuting and short trips are not that much affected by the price of petrol, long term trips – long trips are affected by petrol prices. And tolls, interesting, while tolls, particularly in a low inflation environment, rising at higher than inflation with some of the embedded floors and tolls seem to be a bigger issue than the tolls rising at inflation, which seem to be at the lower end. If you look at some of our surveys at the lower end of the issues that our customers are dealing with when you consider the price of petrol. electricity price, groceries, so that’s a long way of saying no, we are not seeing any issue and elasticity of demand with the increase in toll.
Cameron McDonald
And last question, just this is the New South Wales Government toll review came out and I paraphrase that as you said you should renegotiate tolls quarterly. I mean I think you would be happy to renegotiate with the government if there was some sort of commercial outcome. Can you make some comment around that point?
Scott Charlton
Look, we have been saying for a long time that, we are learning to engage with the government and look at a more efficient way to do the tolling for better network outcomes and better customer outcomes. But again we have also said, for very long time, we can be no worse off from a security holders point of view. So, I am happy to look at all different ways of accomplishing that objective, but that’s something for government policy, and happy to work with any of the governments to try and achieve that objective. And regards to the tolling inquiry, again, people get a chance to see the document. We submitted it. It’s actually really good document on the value that we add particularly to the New South Wales network and the tolling inquiry, the recommendations that came out, I think it was 14 of them were almost identical to the same recommendations that came out 3 years earlier, and almost every tolling inquiry. So, it’s we agree with the vast bulk majority of it. So – but tolling policy is up to the government and we are willing to engage whatever they are prepared to.
Cameron McDonald
Thank you.
Operator
Thank you. There are no further questions at this time. I will now hand back to Mr. Charlton for closing remarks.
Scott Charlton
Great. Well, thank you everyone. I know it’s another busy reporting day. I think next year, hopefully, we will try and come out a little bit earlier in the season. But thanks everyone for your interest and if there is follow-up questions please talk to Hannah, the Investor Relations team and hopefully over the next few weeks I will get around to seeing the majority of you, but appreciate your interest and your time. And we will talk to you soon. Thank you.
Operator
That does conclude our conference for today. Thank you for participating. You may now disconnect.
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