MIG is focused on generating security holder value through the continued disciplined development of its toll road portfolio
Introduction
We are pleased to present the Macquarie Infrastructure Group (MIG) annual report for the financial year ended 30 June 2008.
MIG is focused on generating security holder value through the continued disciplined development of its toll road portfolio. For nearly 12 years MIG has successfully identified, acquired and integrated large, complex toll road businesses. Through subsequent application of active financial and operational management, MIG has enhanced the value of each of its businesses, both as investments for security holders and as essential services to the communities in which they operate.
This has been particularly evident during the credit market volatility seen throughout the reporting period. MIG has continued to drive strong operational and financial performance from its toll road businesses through a focus on cost control and the implementation of service delivery improvements such as electronic tolling, discussed later in this report. Consequently, MIG continues to be underpinned by the solid performance of its portfolio.
Recognition of this performance is evident in the favourable refinancing terms that MIG has secured from the markets for debt facilities for Autoroutes-Paris-Rhin-Rhône (APRR) and 407 ETR, despite unfavourable market conditions at the time. The preparedness of the market to support high-quality assets, together with MIG’s years of experience in managing debt and capital structures for toll roads assets, mean that MIG has a strong balance sheet and cash position, prudent gearing and a resilient, suitably spread debt profile. MIG recognises the importance of making this position clear to security holders and continues to voluntarily disclose to the market additional information to its statutory accounts regarding its earnings, balance sheet strength and debt position through its quarterly management information report (MIR).
MIG has continued to drive strong operational and financial performance from its toll road businesses through a focus on cost control and the implementation of service delivery improvements
A year of active management
The focus for FY2008 has been on optimising existing operations and the review of opportunities in North America, Europe and Australia in accordance with MIG’s published investment criteria. Over the last 12 months MIG has focused on:
- Optimising cost control and toll collection automation across its portfolio
- Maintaining active programs to manage capital and debt positions at its assets and to regularly and clearly disclose that position to the market and security holders
- Ongoing disciplined application of its investment criteria to acquisition opportunities
- Managing significant capital works projects including reconfiguration of the toll plaza on Chicago Skyway, installation of electronic tolling along the entire length of Indiana Toll Road (ITR) and lane widening on 407 ETR
- Managing the implementation of new toll schedules across the portfolio
- Refining the information disclosed in MIG’s voluntary MIR to further assist the market and security holders’ assessment and understanding of MIG’s performance.
During the period MIG appointed John Hughes as CEO to replace Stephen Allen.
John has been with Macquarie since 1997. John has over 17 years of experience in the infrastructure and resources sectors including senior roles working with various Macquarie teams across a range of projects, such as the successful bid for Westlink M7.
The CEO transition was announced at the MIG AGM in November 2007. As we did then, MIG would like to thank Stephen Allen – who became MIG’s CEO in April 2003 – for his contribution to MIG, which includes the opening of the first tolled motorway in the UK, the first lease of an existing toll road in the US and the first on-market security buy-back by a listed Australian trust.
Business performance review
We are pleased to report solid traffic and revenue growth across the portfolio during FY2008. An overview of MIG’s financial results is provided in the CFO’s report.
Highlights for the period include:
- Successful refinancings, in volatile credit markets, including:
- August 2007: €500 million seven-year facility signed by APRR on better terms than existing debt facilities
- October 2007: C$625 million in senior notes refinanced at 407 ETR
- November 2007: Improved terms and conditions in renegotiation of MIG’s A$500 million stand-by facility
- December 2007: Westlink M7 obtained lender approval for early release of ramp-up reserve and other cash reserves accumulated following its strong performance since opening
- January 2008: C$550 million refinanced at 407 ETR at a cost of 4.5% (senior) and 5.0% (subordinated), with no further debt maturing at the asset until July 2009
- Opening to traffic in November 2007 of the 14km South Bay Expressway (SBX)
- Completion of MIG’s A$1 billion on-market buy-back program in January 2008
- Implementation of electronic tolling on the full length of ITR in April 2008
- Completion of the two-year project to add 100km of new lanes to 407 ETR in September 2007
- Approval by Virginia’s State Corporation Commission of the tolling application for Dulles Greenway. New legislative amendments established a new toll escalation formula through to 2020, providing certainty of toll prices for both Dulles Greenway and its customers
- New tolling schedules for APRR, 407 ETR, M6 Toll, Chicago Skyway, ITR and Dulles Greenway.
MIG continues to see opportunities for toll road investments in North America and Europe, with encouraging signs that attractive opportunities will also arise in Australia
The market
MIG continues to see opportunities for toll road investments in North America and Europe, with encouraging signs that attractive opportunities will also arise in Australia.
There is continued debate in the US concerning private investment in infrastructure, however the May 2008 bidding process for Pennsylvania Turnpike – the leasing of which remains subject to legislative approval – has had two positive effects. Firstly, the size of the winning US$12.8 billion bid has driven increased interest from state governments across the US in the ability of private investment to meet substantial demand for new road infrastructure, particularly when limited alternative funding solutions exist.
Additionally, in MIG’s view, the winning bid also indicates significant support for the valuations of the assets MIG holds, particularly when a bid of that size was made in difficult market conditions. In comparison to Pennsylvania Turnpike, 407 ETR has superior asset qualities, a longer concession period and market-based tolling; Chicago Skyway has a longer concession period; APRR is a significantly larger asset; and M6 Toll has market-based tolling and significantly lower requirements for catch-up maintenance expenditure.
Distributions
In June 2008 MIG announced a distribution of 10 cents per stapled security for the half-year ending 30 June 2008, in line with guidance given at the AGM held in November 2007. This brought the total distribution for FY2008 to 20 cents per stapled security. MIG also offered investors the opportunity to participate in the distribution and dividend reinvestment plan for its distributions.
Outlook
Key initiatives for the year ahead include:
- Ongoing optimisation of existing assets, including capital improvements on 407 ETR, ITR and APRR
- Continued implementation of cost-control strategies to improve EBITDA margins and increase take-up of automated toll collection
- Ongoing management of MIG's asset portfolio debt and hedging profile
- Continued disciplined application of investment criteria to suitable investment opportunities
- Ongoing disclosure to the market of MIG’s balance sheet, cash and debt positions.
Additionally, on 21 August 2008 MIG announced its intention to sell its interest in Westlink M7.
The boards and management of MIG are confident that MIG will perform solidly over the next 12 months with continued EBITDA growth forecast for FY2009. MIG has provided distribution guidance of 20 cents per stapled security for FY2009.
On behalf of the boards, we thank our security holders for their ongoing support of MIG.
Mark Johnson
Chairman
Macquarie Infrastructure Investment Management Limited
John Hughes
Chief Executive Officer
Macquarie Infrastructure Group