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Transurban’s Latest Development Limits Risk

Written by on June 4, 2013

Transurban’s proposed F3-M2 tunnel project has progressed to the third and final stage of the New South Wales government assessment process. The project is likely to proceed as long as the firm and its partners can secure an acceptable design and construction (D&C) cost of around AUD 2.65 billion.

With land and other setup costs, the total cost comes to around AUD 3 billion, plus capitalised interest, during construction. If it goes ahead, the road will complete late this decade. Near-term distribution guidance is not affected. Full details of the proposal won’t be available until financial close in mid to late 2014, but guidance is promising with only 25% of funding coming from tolls on the new tunnel, substantially limiting greenfield traffic forecasting risk.

The balance of funding comprises AUD 800 million from the government and concession extensions and truck toll increases on the M7. This substantially lessens project risk, as most of the expected cash flows to cover construction costs come from an existing asset where traffic forecasting risk is minimal. In a side deal, Transurban also hopes to negotiate concession extensions on the Lane Cove Tunnel (LCT) and M2 (both wholly owned) and a truck toll increase on the LCT for a payment of around AUD 200 million to the government.

The novel approach of having motorists on other motorways subsidises the new road works well for Transurban but may be unpopular with motorists. The decision not to increase car tolls should make it more palatable. Transurban plans to fund its capital commitment from parent-level debt to be contributed over the four-year construction period. After completion, non-recourse debt will be raised at the asset level and additional debt will be raised at the M7 to partly repay initial investments.

While the firm doesn’t plan to raise equity specifically for this project, equity dilution continues due to the distribution reinvestment plan, and further equity raisings are likely given the strategy of paying out all free cash flows, as distributions to investors and adding new roads via acquisitions and developments. Ultimately, finite road concession lives limit Transurban’s ability to continually increase debt.


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