Full Year 2020 Atlas Arteria Group Earnings Call NSW Feb 25, 2021 (Thomson StreetEvents) — Edited Transcript of Atlas Arteria Group earnings conference call or presentation Thursday, February 25, 2021 at 12:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Graeme Francis Bevans Atlas Arteria Limited – MD, CEO & Director * Nadine Lennie Atlas Arteria Limited – CFO ================================================================================ Conference Call Participants ================================================================================ * Ian Myles Macquarie Research – Analyst * Robert Koh Morgan Stanley, Research Division – VP * Simon A. Mitchell UBS Investment Bank, Research Division – MD and Head of Research for Australia & New Zealand ================================================================================ Presentation ——————————————————————————– Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [1] ——————————————————————————– Good morning, everyone. I’d like to thank you all for joining Atlas Arteria’s 2020 full year results call. I’m joined today by Nadine Lennie, our CFO. I’d like to acknowledge and pay respect to the (inaudible) people for their traditional custodians of the land and waterways where I am today. I extend this acknowledgment of the traditional custodians across all the lands on which we are located. I also pay my respect to Atlas’ past, present and emerging leaders who may be with us here today. Moving to Slide 3 and today’s agenda, I’ll start with the highlights and then hand over to Nadine to run through key financial matters. I will then provide an update on operations and close with an overview of our key priorities and the outlook for ’21. We will then open to questions. Turning to Slide 5. I’d like to start by thanking our fantastic team members throughout our businesses. They have done and continue to do an exceptional job during these very challenging times. Our teams have maintained an unwavering focus on the safety and well-being of our employees, our customers and our communities. We are proud to announce that in 2020, Atlas Arteria was ranked 4 out of 156 peers by Sustained Analytics in our ESG performance. Traffic across our businesses was impacted by COVID-19-related movement restrictions. However, the traffic recovery was very encouraging, particularly in Europe, post the easing of restrictions during the year after the first wave. I will touch on traffic in more detail shortly. It was a year like no other. We focused our energies on building financial and operational resilience and providing capacity for growth. We ended the year with $194 million of cash on our balance sheet, and I’m pleased to provide guidance of $0.13 per share for the final 2020 distribution. This brings total distributions for the 2020 year to $0.24. In September, we completed the buyback of U.S. retail security holders, which enabled us to have U.S. institutional investors participate in future capital raising. This makes Atlas Arteria, a far more attractive investment opportunity for these investors. Importantly, we progressed our strategy throughout the year. We talked at the half about the acquisition of the additional interest in APRR, which closed in March and bought our total ownership to just above 31%. This transaction was transformational to our business to deliver significantly enhanced governance rights and direct participation at APRR. We were very pleased to announce today the capital restructure of Warnow Tunnel through the injection of capital, drawdown of long-term debt at an attractive interest rate. We place the business in a position to pay sustainable distributions into the future and potentially a significant rewriting of value of the business. Turning to Slide 6. You can see that our achievements in 2020 were very much on strategy. We were able to reduce legacy complexity, increase operational efficiencies, pursue disciplined capital management and diversify and manage our risk. Moving to Slide 7. You can see the very different impacts that COVID-19 have had across our businesses. APRR is part of a major transportation corridor for Western European travel and tourism. It benefited from relatively strong heavy vehicle traffic and good rebounds in light vehicle traffic as restrictions eased. Over the summer, traffic returned to 2019 levels. Warnow Tunnel saw a fairly modest impact because of lower case numbers and a business as usual approach within the local community. Dulles Greenway, on the other hand, continues to be affected by movement restrictions as it’s a road primarily servicing commuter-based traffic, where a significant portion of the population are working from home. Moving to Slide 8. We have outlined the major trends we are seeing as a result of the COVID-19 pandemic. While the second wave continues, we are well positioned to manage ongoing business disruption. The growth of e-commerce and logistics is already playing out across the APRR network. The shifting preferences from public to private travel, which we saw over the summer, will be positive to us. We have strong sustainability credentials, which are important for stakeholders. Importantly, as the French government starts to think about stimulus for growth, APRR is well positioned to participate. On Slide 9, we’ve outlined the various lockdown restrictions that were in place across our areas of operation. I don’t propose to go through this slide in detail, but the color coding shows when restrictions were more and less severe. Currently, France continues to have a curfew in place across the country between 6 p.m. and 6 a.m. Shops and services remain open during the day with restaurants, bars and gyms closed. Schools are currently open, and universities continue with remote learning. It is fair to say, however, that the situation remains fluid with local and regional lockdowns possible. Nice, for example, which has had high infection rates, has just announced stricter lockdown arrangements for a couple of weekends. Germany recently extended its lockdown until mid-March. Rules include a one visitor per household with a 10-kilometer travel restriction in hotspots. Schools were closed but have started to reopen depending on infection rates. In Rostock, schools are reopening this week. In Virginia, we saw more restrictions from mid-December. These included a stay-at-home order between midnight and 5 a.m. and further limits on social gathering. The Governor of Virginia has announced some easing of restrictions to commence on 1st of March. The Virginia Department of Education is encouraging schools to reopen for in-person classes. There’s a very strong correlation with our traffic and school attendance. So that, if it occurs, should give an uplift in traffic. In Slide 10, we break down the impact on traffic, revenue and EBITDA of movement restrictions across our network during the year. This gives you a good insight into how restrictions affect our traffic on our various roads. Moving to Slide 11, traffic in our European businesses has demonstrated resilience, returning to pre-COVID levels in the third quarter before falling with the second round of restrictions in Q4. As I noted, heavy vehicle traffic on the APRR network was relatively strong, and this resulted in a 2% shift in traffic mix between light and heavy vehicles. Due to the truck toll multiplier, this translated to a 5% shift in revenue mix. At APRR, traffic since the beginning of the year has been around 25% less than last year, when traffic was not affected by COVID-19 movement restrictions. Of note, the closure of ski lifts as well as the ongoing 6 p.m. curfew are impacting ski season traffic during the winter holiday period. Warnow Tunnel is also tracking around 25% below last year, the strict lockdown conditions in Germany into the New Year. At the Dulles Greenway, traffic remains around 50% below last year, also impacted by the recent major snow events in the region. Turning to Slide 12, we’ve outlined our sustainability achievements for 2020. You can see a range of initiatives on the slide, but I will call out just a few. The safety of our employees and customers is our #1 priority. In addition to actions to respond to COVID-19, we’re implementing initiatives to reinforce the safety culture. We conducted a customer behavior study at Warnow Tunnel, this will improve customer safety at the toll plaza as well as customer satisfaction with better processes for toll payments. Supporting our communities, particularly during this time, is important. APRR donated masks to health care workers in France when they’re in very tight supply and also displayed messages of support along its motorways. Both APRR and Dulles Greenway provided toll-free travel to health care workers. And APRR also developed a new digital service to keep customers better informed of payment, travel and value options. We are actively pursued in gender balance across the organization, including the Board. You may have seen today our announcement that Ariane Barker is joining the Australian board. Our combined Australian and Bermudian Boards will then have a non-executive split of 50-50 between male and female membership, and we have a 50-50 split across Atlas Arteria’s corporate employees. We’re also very pleased to report that in September on the A48 in Grenoble, France, APRR opened the first dedicated lanes for carpooling and lower emission vehicles. APRR was also recognized for its working environmental stewardship, being awarded second place in the overall motorway sector by GRESB and was the most improved infrastructure company. Turning to Slide 13, we will continue to build on our strengths and develop across all 4 sustainability pillars that are fundamental to our business. We continue to embed a safety-first culture across our business and look for new ways to invest in and develop and support our people. At Dulles Greenway, we’ve worked to improve our customer and community relationships, and we’ll further invest in our stakeholder engagement program under our CEO, Rene?e N. Hamilton. In the environmental space, we expanded our coverage of GHG emission reporting across Atlas Arteria, and we plan to consider options as to how we better manage and minimize emissions going forward. With that, I would like to now hand over to Nadine, who will present our financial performance for the half. ——————————————————————————– Nadine Lennie, Atlas Arteria Limited – CFO [2] ——————————————————————————– Thank you, Graeme, and we’ll start with Slide 16. As Graeme mentioned, the second half distribution guidance of $0.13 per security that we announced today reflects the performance of APRR over the second half of 2020. In terms of future guidance beyond this upcoming distribution, and I know that there’s a desire to understand future guidance, what we can say is that distributions from APRR and now Warnow Tunnel as well will form the basis of Atlas Arteria distributions in the near term. And perhaps a little bit more on how we think about cash and cash distribution. To create sustainable distributions to you, our security holders, we’re looking to generate sustainable operating cash flows from each of our businesses. As we’ve talked about previously, this is central to our current strategy. And you can see us deliver on with the APRR transaction last year and then the restructure that we announced today at Warnow Tunnel. We then want to make sure that at a corporate level, we maintain adequate liquidity to protect against risk, while also supporting the immediate needs of the business. As Graeme said, we ended the year with nearly $200 million of cash, of which $70 million of circa is earmarked for restructure of the balance sheet. So this been around, let’s say, $130 million of the equivalent of cash, which is available to cover corporate costs and some extra to allow for assessment of future investment opportunities. As I’ve said before, we do not intend to just keep cash on the balance sheet that can’t be used to create value for security holders. Sustainable distribution growth over time is one of our key objectives. In terms of gearing, we do not currently have any holding company debt. So we have the flexibility to support growth, particularly at the APRR level, now that we have removed the restricted covenants, which were part of that previous facility, which would potentially have prevented leverage at the APRR level. Holding company debt, may still be a feature as we go forward, but ensuring that we have the right structure around that is important to allow the growth in the underlying businesses. And maintaining capacity for balanced funding over time from different markets, including debt and equity funding is also important. So we just have that flexibility to support growth as we need. Turning to Slide 16, we ended the year with substantial liquidity headroom at both the corporate and business level. And look, we’ve talked about the corporate cash balances. So I won’t go through that again. At both S&P and Fitch, reaffirmed their A- credit ratings during the year and maintains their outlook as stable. Fitch upgraded its short-term rating from F2 to F1 despite COVID, which really reflects the stability and strength of that balance sheet. Further to that, APRR holds around 3x liquidity cover against debt maturing over the next 12 months. Dulles Greenway had around $216 million of cash available at the end of the year against $39 million of debt service for the next 12 months and USD 77 million was available for distribution for those lock up here. Look, we haven’t included Warnow Tunnel cash positions on this slide because excess cash has historically been flipped to lenders. We are very pleased, obviously, today to announce the capital restructure at Warnow Tunnel, which will provide us with better control over our cash management here. Turning to our cash flow waterfall on Slide 17. As many of you would be aware, dividend distributions from French companies are restricted to the company net profit and it’s the APRR company net profit after tax specifically that has driven the size of our distributions historically. Importantly, this is company net profit, and it’s not the consolidated net profit. So when I spoke with you in August, I took you through the cash flow for the first half, which reflected the final dividend we received for 2019, and of course, we use this process to repay the corporate debt facility. Within resetting for the second half, you would have seen that the APRR consolidated net profit for the half year ended June 2020. So starting on the left-hand side, Atlas Arteria’s pro forma share of this was EUR 84.7 million. Consolidation adjustments at APRR were EUR 11.8 million. And once these are removed, APRR company net profit is then EUR 72.9 million, you can see there. If you then remove the financing costs associated with the debt facility of Eiffarie and then the mass taxes administration profits that you left with the EUR 64.2 million, which Atlas Arteria received from MAF2 in September. If you then convert this to other dollars, you get the AUD 104 million in distributions that we received. Then from a head office perspective, during the second half of the year, we paid final Macquarie fee of $3.8 million, corporate cost, interest income and some investment cash flows, which gets us to the $86.4 million net operating cash flow. We had AUD 141 million equivalent cash on the balance sheet at June 30. So we have the net operating cash inflow to this balance and the $7.5 million raised from the SPP transaction in July. And you can see there it’s a $71 million, which is net of all the remaining fees from the capital raise. We then take out the distribution that we’ve paid out in October, we closed the year with a cash balance of AUD 149 million equivalent. Turning on to Slide 18. We’ve presented here our income statement for the year and our management results, which we like to think normalized earnings. And these reflect the statutory earnings removing what we call as notable items, which are not necessarily related to underlying operational performance. And you would have seen it do is a few times now. So again, the idea is that these items out of profit essentially shows you what we believe is more effective of just underlying business performance. The underlying operational net profit after tax was down around 60% from 2019, and the business was adversely affected, obviously, by COVID-19, as Graeme has talked about, which was the primary driver behind the change in performance. Total revenue, which is the consolidated performance of the Dulles Greenway and Warnow Tunnel, decreased by 37%. Movement in the other income line reflects primarily smaller construction cost adjustments than the prior period and lower interest revenue. In terms of costs, seasonal operations costs were 16% lower than 2019 as toll collection costs reduced with lower traffic. We saw the benefit of the cost reduction programs at Dulles Greenway. And again, there were lower construction costs. And I hate to turn it all into account answer. Just to note that under IFRIC 12, which we have noted in various documents, where you recognize construction costs as revenue that also recognizes cost, which is what we’ve just talked about. Our corporate costs are in line with previous guidance of that $20 million to $25 million per annum. And we have noted that corporate costs are expected to increase in 2021 due to increased insurance costs, and we may also put some investment in additional capabilities, particularly, for example, to strengthen some capabilities within the organization around things such as traffic. The share of profits from associates reflects the performance of APRR, and that’s adjusted to the ownership structural arrangements, including the barring debt, which affects the line items. The performance here reflects our 25% ownership until the 2nd of March and then our 31% ownership for the remainder of the year. It’s a different, of course, for the calculation of the distribution. So just pointing out that they’re based on the particular ownership at that point in time. Moving into notable items. The Macquarie management fee relates to the final payment of the Macquarie fee up to the 2nd of March when the APRR transaction completed. And as we discussed at our half year results, given the decline in traffic at the in the first half of the year and just uncertainty around the recovery of the U.S. economy as a result of the COVID-19 pandemic, the Board decided to impair the Dulles Greenway at June 30 by a total of USD 100 million, and that translates to $143.9 million you see there. But importantly, there was no further impairment that was required at the end of the year. In addition to notable items for this year, sorry, another additional notable item this year is the FX impact of significant transaction, which is an accounting item only. It’s not cash, and it provided a positive impact of that $13.8 million that you see there. This was included in our half year results as it related to the various internal arrangements that were required to support the closing of the APRR transaction. So then just tax effecting for all of those notable items, you can clearly show the link there and see the link between the operational performance and the statutory results. Moving on to Slide 19, an APRR’s performance for the year. And as you can see, operating revenue impacted by COVID-19 restriction. In terms of operating costs, there was a 13% decrease in the variable taxes equivalent to around EUR 50 million and then produced as revenue decreased and as there were less kilometers driven on the road. Increases in general operating costs associated with the Eiffarie fee were offset by lower winter maintenance costs, travel expenses and temporary labor costs. Despite challenging debt market, APRR completed a series of debt transactions at favorable rates, which reduced their average debt cost. So you can see now that average cost of debt for APRR has come down from 1.5% to 1.2% and for Eiffarie has come down from 0.9% to 0.7%. So while we’re talking about APRR, we’ll turn on to Slide 20 and the current capital structure of APRR. I’ve already touched on the strength of its credit rating. During the year, APRR and Eiffarie refinanced approximately EUR 5.5 billion across the EMTN, bank debt and commercial paper market. The through euro bond tranches, we set very strong support, including one that was priced at the heart of the pandemic in April. It was well oversubscribed and competitively priced. I think it is worthwhile pointing out that the APRR revolving credit facility and the Eiffarie bank debt facility were both set up as ESG linked facility, which really reflects the importance of these matters to the business. We then turn on to Slide 21, just rounding up the performance of our European business. Traffic at Warnow Tunnel continued to perform well despite the lockdown for the revenues for 2020, there were only down 8% compared to 2019. Just because of the Warnow Tunnel numbers, the EBITDA reduced by 12%, but the cost increase was small and primarily as a result of the additional maintenance that we did during the year, including a full tunnel planning. As we talked about, we have now agreed the capital restructure at Warnow Tunnel, and you can see there the maturity profile of the new facility. This capital restructure provides flexibility over cash balances, as I mentioned before, and distribution for Atlas Arteria rather than the excess cash being split to lenders, which is what is currently the case under the existing facility. And as you can see, there there’s no amortization until the 30th of June 2028. So just finally, on financial performance, we’ll turn to Slide 22 and the Dulles Greenway. As was advised previously, the Greenway did not pass each 1- or 3-year lock up test at the end of December, meaning cash will be locked up in that business until at least the end of 2024. As also mentioned earlier, we did see cost reductions with reduced traffic. There was a reduction in property tax rates, and we saw the benefit of some of the cost-saving measures that have been implemented during the year. Importantly, with all of this, liquidity within the business still remains very strong. I’ll now hand back to Graeme, who will go through an operational update, our growth priorities and outlook for this year. ——————————————————————————– Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [3] ——————————————————————————– Thank you, Nadine. Turning to Slide 24, like all businesses, Atlas Arteria’s financial results have delivered through providing value to our customers. Our roads offer a superior travel experience compared with congested or speed limited alternative routes. As you will see on the slides that follow, we are very focused on continually improving our businesses to enhance the experience and the benefits for our customers. Moving to Slide 25. While it was a challenging year for all transportation infrastructure businesses, APRR and ADELAC moved quickly to maintain operations, so customers were able to continue to use the network. Business continuity plans were quickly adapted and implemented and adjusted over the period. Our people worked in fixed rosters to limit the potential cross spread of the virus amongst our workforce. And operational improvements included completing the installation of WiFi in all service areas and rolling out additional very high-performance electric vehicle charging stations. We’ve grown the number of active badges or/and transponders used on our network, and we’re building additional car parks across the network to facilitate carpooling. With the acquisition of KiWhi Pass Solution in May and the launch of Mango Mobilities in October last year, APRR further enhanced its mobility services. If you move to Slide 26, you can see that our APRR has continued to deliver on its various capital commitments under the concession extension agreements we hold with the state — French state. As we mentioned at the half, there were some delays on projects due to COVID-19 restrictions. However, during the second wave, works continued with all of the recommended safety arrangements in place. Despite these delays, there is no significant change to our overall delivery timelines or estimates for complete committed capital spend. You can see on the slide some of the more significant projects currently underway across the network. We spent a total of EUR 474 million on CapEx projects as compared to EUR 522 million in 2019. The RCEA project is moving forward with construction commenced in mid ’20, with completion expected in ’22. Moving on to Slide 27, at Warnow Tunnel, we conducted a customer survey in collaboration with Rostock University. It indicated that 83% of our customers are satisfied with the Warnow Tunnel, which is very encouraging. We also performed a full tunnel clean during the year, which will reduce our lighting needs and therefore, our energy use. We appointed a new Head of Operations, who joined us earlier this month, further strengthening our technical capabilities within the business. Turning to the Greenway on Slide 28. Renée Hamilton, our CEO, has now been with the business for 8 months. She has become an important leader in our turnaround story and become very active in the local community. The Greenway has maintained seamless operations. We continue to make improvements on the road by installing additional cameras at the plaza to improve safety. We’ve also had new asset management software to enhance our operations and maintenance. We’re building our relationships with the local community and various stakeholders. At the moment, we are focused on the outcome of the most recent legislative session. We expect to receive the final order of the SCC Rate Case during Q1 ’21. In terms of construction work during the year, the DTR Connector project was completed on schedule and on budget and fully opened for use in mid-July. The West End project first phase is completed — was completed ahead of schedule and ahead on budget, opening to traffic in August of last year. We’ve awarded the contract for Phase 2 of the West End works and expect completion either later this year or early next. Competitive bid process we conducted led to a cost of $4.4 million versus our budgeted costs of $6 million. We’ll share the final cost 50-50 with Loudoun County. In the context of seeking to meet the needs of our customers, we made significant progress in working with VDOT in considering mechanisms by which we could potentially be able to introduce distance-based tolling and lower tolls across the network. Alongside the introduction of distance-based tolling, an outcome which our customers have been seeking for some time, this is a concept we’ve been working with the local community in 2018 and again in 2019. We continue to work with our stakeholders moving forward to endeavor to achieve a mutually beneficial outcome. As we’ve gone through the legislative process this year, the VDOT bill, which we — administrative bill, which would enable us to proceed on this project was effectively held over in the Transport Committee and no decision was made. But the option is there to move it forward in the future, and we’ll be focused on achieving that. Each year, we’ve worked on this. We’ve moved further forward in achieving our objective, and we are committed to continuing on this process as we move forward. Turning to Slide 30. We’ve outlined the key priorities in our outlook for ’21. At the corporate level, we are focusing on sustainability, including the health and safety of our people. We’re also examining opportunities to create sustainable cash flows and lengthen our average concession terms across our businesses. We continue our dialogue with the French state to improve the network and achieve the state’s throughout objective of development. At Warnow, the traffic continues to be supported by local roadworks in the near term. We will work towards better ESG outcomes and reaching financial close on the capital structure we announced today. Finally, at Dulles Greenway under our new CEO, we are working on developing relationships with key stakeholders and completing our capital works program. Turning now to Slide 31. Atlas Arteria offers exposure to inflation-linked earnings. The majority of our debt is at fixed rates and long term. So we have limited exposure to increasing interest rates. We have a strong dividend yield relative to our peers and are very pleased to provide guidance today of $0.13 per share for the final 2020 distribution. We continue to explore ways to further diversify and grow our distributions. We have a conservatively geared balance sheet, and we are able to pursue growth opportunities, particularly adjacent to our existing businesses, and we are resourcing ourselves to achieve this. We’re well positioned to play a part in the economic recovery of the regions in which we operate, and we’re recognized for being ESG leaders in the infrastructure space. Lastly, but most importantly, we’re a team of highly experienced people with a proven track record of transaction execution. This is further demonstrated with the Warnow Tunnel capital restructure that we’ve announced today. It’s for all these reasons and more that Atlas Arteria is an attractive investment proposition. The team is looking forward to continuing to grow and evolve the business from the strong foundations we’ve built and adding value for our security holders into the future. With that, I’d like to hand to the operator for questions. ================================================================================ Questions and Answers ——————————————————————————– Operator [1] ——————————————————————————– (Operator Instructions) Your first question comes from Simon Mitchell from UBS. ——————————————————————————– Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia & New Zealand [2] ——————————————————————————– Graeme, just a first question regarding the A79. My understanding was that was being entirely capital funded by Eiffage and APRR’s involvement was limited to operations and therefore, probably immaterial to APRR, could you just clarify that? ——————————————————————————– Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [3] ——————————————————————————– I think you’re referring to the RCEA project, Simon, is that correct? ——————————————————————————– Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia & New Zealand [4] ——————————————————————————– Yes. ——————————————————————————– Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [5] ——————————————————————————– So the project is structured in a way where Eiffage own 99% of the bidding entity and APRR earns 1%. There are contractual arrangements that result in that business being totally transferred at an appropriate point in time to APRR as a wholly-owned entity of APRR, and that is an automatic process based on certain elements, which are in our control. ——————————————————————————– Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia & New Zealand [6] ——————————————————————————– And is that process likely to take place following construction? ——————————————————————————– Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [7] ——————————————————————————– We would expect it to happen during construction, but that’s really up to Eiffage satisfying various elements of their requirements. ——————————————————————————– Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia & New Zealand [8] ——————————————————————————– Okay. And is the pricing methodology around that transaction already agreed? ——————————————————————————– Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [9] ——————————————————————————– Yes. ——————————————————————————– Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia & New Zealand [10] ——————————————————————————– Right. Okay. So that provides some opportunity to extend the overall concession length for APRR. But I guess it’s been a stated objective for you for a while and — yes, it seems like it’s been a little challenging to actually get any substantive agreement on new projects to do that, maybe if you could just give an update on what the response has been from the state? ——————————————————————————– Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [11] ——————————————————————————– No, look, I think COVID presented an opportunity, which we expected midyear to result in significant opportunity. I think we’re still in discussions with the French state on a number of projects. And we expect that there will be positive outcomes to come from that. I think in large-scale context, which result in material concession extension for APRR, that’s likely to be deferred given the focus of the government on other things at this point in time in their legislative program, but there’s still a discussion ongoing. ——————————————————————————– Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia & New Zealand [12] ——————————————————————————– Okay. And maybe just a question for Nadine on the Warnow Tunnel just in terms of how we think about that cash flowing through to the corporate level. Is it just a straight pass-through pretty much of the cash generation each year? And I guess, what are the issues around timing delay? And when do we expect it to start? ——————————————————————————– Nadine Lennie, Atlas Arteria Limited – CFO [13] ——————————————————————————– So we’re expecting financial close on the transaction to happen in March, which means that then we’ll be doing the first testing, as we’ve outlined in the document under the debt service coverage ratios, which are really the required to ensure that the cash can be passed through for June and then December this year. As apprised in the release that we put out, if we were to apply the facility in 2020 on a pro forma basis then there would have been EUR 6 million or approximately AUD 10 million available for Atlas Arteria. ——————————————————————————– Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia & New Zealand [14] ——————————————————————————– Okay. And we should think about that as being still — how should we thinking about that? Sorry, I was just going to clarify that question. So do we think about it as being similar timing issue to APRR and that flows through in the following 6 month period? ——————————————————————————– Nadine Lennie, Atlas Arteria Limited – CFO [15] ——————————————————————————– Yes, effectively because it will be done on a profit declared basis. So it will be slightly deferred in terms of the next period. ——————————————————————————– Operator [16] ——————————————————————————– Our next question comes from Ian Myles from Macquarie. ——————————————————————————– Ian Myles, Macquarie Research – Analyst [17] ——————————————————————————– Just a couple of quick ones. In your investing cash flow, you had a $1.5 million of other investments. I was just wondering, is that anything material or what it was actually? ——————————————————————————– Nadine Lennie, Atlas Arteria Limited – CFO [18] ——————————————————————————– Sure. So, as a result of — or as you expected to looking at the corporate cost base to the extent that it’s appropriate that we’re spending money on investing as opposed to operating cash flows, and that will flow through that investing line. In addition to that, there’s also a number of things that, for example, the working-from-home arrangements is additional computer, all of those types of things, also with additional staff coming on that have flowed through that particular line item. ——————————————————————————– Ian Myles, Macquarie Research – Analyst [19] ——————————————————————————– And you sort of flagged higher corporate cost, can you maybe give some sort of framework on how much higher? Because I think you a thought wanted to save a little bit of money once you converted out of an outsourced management to internalize? ——————————————————————————– Nadine Lennie, Atlas Arteria Limited – CFO [20] ——————————————————————————– Yes. It’s a good question, Ian. As we flagged in the presentation, the 2 primary drivers for the increase in costs this year are expected to be increasing insurance costs and then some additional capability that we want to put into the organization. In terms of the insurance market, as you would probably all have seen, it is becoming an expensive market for buyers. We won’t actually get a good gauge on what our insurance costs are going to be for the year until we’re much closer to placement for those insurances. So certainly, we’ll be much better placed to have a discussion around that and update you on the outcomes in our June results. In terms of the additional capability, again, even as Graeme outlined, making sure that we’re positioning the business for the strategy and the delivery on the strategy. And as a particular point out, one example of that is making sure that we’ve got really good technical skills around traffic forecasting and taking advantage of new technology that’s becoming available and has become available over the last couple of years. In terms of the internalization process, I think as we’ve even highlighted in this presentation, we paid $67 million in base fees on that from a Macquarie perspective. So certainly, there’s no intention to grow that base for this year up to $67 million line. We’re talking about incremental costs on that $20 million to $25 million top arrangements that we’ve historically had, depending, of course, on what happens with insurance costs. ——————————————————————————– Ian Myles, Macquarie Research – Analyst [21] ——————————————————————————– Okay. And just one final question, again, a little bit technical. The leakage between MAF2 and ATLIX, I get there’s some fees, which you have to — you’re paying effectively to MAF2 and there’s tax, but that amount seems to be increasing on a — from first half to second half. I was just wondering what sort of leakage should we be expecting on a go forward? ——————————————————————————– Nadine Lennie, Atlas Arteria Limited – CFO [22] ——————————————————————————– Yes, another good question, Ian. And there’s a couple of things that have led to that in the last 2 periods that we’ve reported there. First of all, the management arrangements have now been internalized. So for the 2 results, half 2 2019 and the half 1 2020, there was some reserving of costs to accommodate rather than fees being paid at the — for us at the middle level. They’re now being paid out of operating cash flows at that lower level. In addition, we’re also adopting a much more conservative cash management policy at those levels. So we’re adopting the 2-year forward cash coverage rather than what was previously in place. So that’s also increasing from that perspective. There will come a time, I think, where those prudency arrangements aren’t necessarily required, and we might see a pullback in terms of the cash reserving. ——————————————————————————– Operator [23] ——————————————————————————– (Operator Instructions) Your next question comes from Rob Koh from Morgan Stanley. ——————————————————————————– Robert Koh, Morgan Stanley, Research Division – VP [24] ——————————————————————————– So I guess, listening into the Eiffage call overnight, there was discussion about the French state perhaps being more interested in smaller projects with more of a green focus. I wonder if you could share with us your thoughts on that? And if there’s any ideas on renewable power and wildlife crossings and those kind of things that you could share with us? ——————————————————————————– Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [25] ——————————————————————————– Yes, Rob. So as I sort of was inferring earlier that the large-scale type projects, we were hoping to result in concession extensions are likely to be pushed out. And the focus at this point in time under sort of negotiated arrangements, which can be done within the existing concession arrangements without legislation that has a very strong focus on green projects. As we described, increasing the number of charging stations, we were expecting to have 50% of our service station type areas with charging stations by ’22. The government has recently come out and made an announcement that they want to see that increased to 100% by the end of ’22. So there are a lot of projects like that, which are sort of under discussion, as we speak. ——————————————————————————– Robert Koh, Morgan Stanley, Research Division – VP [26] ——————————————————————————– Okay. Great. If I move to the Dulles Greenway and just Slide 22 with the debt service profile, that’s the same profile that’s been for some time. But the step-up in debt service in 2022, — 2022 is only one year away, can you just give us some thoughts on how you’re managing the liquidity there and backup plans, if recapitalization might be required? ——————————————————————————– Nadine Lennie, Atlas Arteria Limited – CFO [27] ——————————————————————————– So as I said, Dulles Greenway has or had $216 million in cash sitting on the balance sheet, $77 million of which would have been available for distribution bought for the lockup test. So significant cash, which, in worst-case scenarios, could be used for funding debt service. And in fact, a lot of that cash balance is reserve funds required to just that circumstance by the lenders. The other thing is, and obviously, as you said, just to redo a lot of scenario analysis around traffic. But the performance of the business is very much dependent on traffic recovery post-COVID, et cetera, et cetera, in the U.S. So we’ll have to see how the business plays out and where it gets to. But any — the things that Graeme has talked about with the changes in the Virginia arrangements in responding to better COVID rates, then we remain hopeful that we will see improvement from last year. ——————————————————————————– Robert Koh, Morgan Stanley, Research Division – VP [28] ——————————————————————————– Yes. I think we can all get behind that. All right. And then just one more question with the new legislation that’s passed in Virginia, which, I guess, comes into effect after the Rate Case that’s currently to be decided. But that includes a condition about, I guess, traffic elasticity, so like a 3% traffic impact would be the limiting factor on toll increases. Could you perhaps put that into context a little bit for us in terms of how you guys see elasticity on that road? ——————————————————————————– Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [29] ——————————————————————————– Yes. So in our filings for the SCC, we have very detailed analysis on the elasticity. In very simple terms, it’s around 0.2. And so we are not dramatically affected by toll increases affecting demand. So in that context, the 3% isn’t an onerous target. ——————————————————————————– Operator [30] ——————————————————————————– There are no further questions at this time. I’ll now hand back for closing remarks. ——————————————————————————– Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [31] ——————————————————————————– Thank you, Operator. Very much appreciate you all joining us today for the call. And obviously, we’ll be meeting with many of you over the coming 10 days directly with investors. And Jeanette and her team are available to answer any further questions that you may have. Very much appreciate your time and your support for the company during these very difficult times. Thank you. ——————————————————————————– Operator [32] ——————————————————————————– Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.
