Letter from Chairman and the CEO
Introduction
We are pleased to present the Macquarie Infrastructure Group (MIG) annual report for FY2007. MIG is one of the largest developers and operators of toll roads and toll road networks in the world. MIG is a top 35 business on the Australian Securities Exchange (ASX) and currently has investments in 11 toll roads and toll road networks across seven countries.
MIG is focused on generating security holder value through the development of its high-quality international toll road portfolio. For more than a decade MIG has successfully acquired and integrated large, complex toll road businesses and enhanced their value both as investments for security holders and as essential services to the communities in which they operate.
Operational development, improvement and service enhancement are key to the value-generating activities undertaken by MIG. As discussed in this annual report, recent and current significant activities undertaken on MIG’s assets range from construction of new roads (South Bay Expressway), to road widenings that increase capacity and reduce journey times (407 ETR), to implementation of electronic tolling to ease payment and improve service delivery (Indiana Toll Road).
MIG has also on occasion undertaken strategic divestments and demergers. Directors and management believe that this is an appropriate way to maintain a development focus and capitalise on the value created by MIG’s active management model. This also – because the creation of a mature, stable business is a necessary precursor to a successful divestment – delivers benefits to the community of which the divested business is a part.
Consequently, customers have experienced quicker, more efficient travel and security holders have realised value from a combination of MIG’s capital appreciation, distributions and the demerger of the Sydney Roads Group and sale of 50% of the US toll road portfolio.
An important two years
The last two years have been particularly important for MIG. The first year – FY2006 – was a period of acquisition with significant new investments in the Dulles Greenway and Indiana Toll Road in the US, and in the French toll road network Autoroutes Paris-Rhin-Rhône (APRR), and the completion and opening of the 40km Westlink M7 in Australia in December 2005. These new investments now comprise 27% of MIG’s portfolio and are generally performing in line with their business plans.
Following these significant events, the key focus for FY2007 was on adjusting MIG’s capital management strategy to take into account its new portfolio composition and market conditions, the catalyst being the portfolio and capital management review announced in August 2006.
As a result, over the last 12 months MIG has focused on:
- Optimising the performance of the assets within its portfolio
- Adopting and applying updated capital management, distribution and future funding policies formulated in the portfolio and capital management review
- Updating its investment criteria, as detailed on page 7
- Achieving further alignment of management
and security holder interests through fee and remuneration initiatives
- Restructuring its portfolio, through the sale to Macquarie Infrastructure Partners (MIP) of 50% of MIG’s interests in its four US toll roads, to better position the business
- Leveraging opportunities arising outside the Australian marketplace.
Other important outcomes have been the execution of MIG’s on-market buy-back – a first for any listed trust in Australia – and the demerger in July 2006 of MIG’s interests in its three mature Sydney toll roads, with the ASX listing of Sydney Roads Group (SRG), the vehicle established to hold those interests.
In addition, 16 December 2006 was a significant day for MIG, marking its 10th anniversary since listing in December 1996 – at the time as the Infrastructure Trust of Australia – with an initial public offering of A$300 million and holding investments in just four Australian assets.
The broader FY2005–FY2007 period has consequently been particularly important for MIG security holders. From 1 January 2005 to 30 June 2007, total returns to security holders exceeded A$2.7 billion, comprising capital appreciation arising from the increase in MIG’s market capitalisation, income from distributions and the proceeds of the SRG demerger.
Business performance review
We are pleased to report solid traffic and revenue growth across the portfolio. An overview of MIG’s financial results is contained in the CFO’s report on page 6.
Highlights for the period include:
- The successful refinancing in August 2006 of the M6 Toll’s debt facilities in the UK. The financing structure is now tailored to better match the M6 Toll’s capital structure to its operating cash flows over the life of the concession. The A$972 million released to MIG from the refinancing had a beneficial impact on the cash position of the business
- Completion of the demerger of MIG’s interests in the mature Australian roads, the Eastern Distributor, M4 and M5. The demerger incorporated an in specie distribution to MIG security holders of one SRG security for every three MIG securities held, and culminated in the listing of SRG on the ASX on 31 July 2006. The demerger gave investors access to a stand-alone portfolio of quality, mature assets generating a stable distribution stream
- Completion by Westlink M7 of its first year of operation as an integral, fully electronic section of the Sydney orbital network, providing an important link to and between major employment, residential and industrial areas of western Sydney. There has been solid demand from users and there is significant industrial and residential growth in the catchment. In September 2006 MIG exercised its pre-emptive rights to acquire an additional 2.5% of Westlink M7, taking its total interest to 47.5%
- Completion of a number of important capital works programs. These include lanes added in both directions of a 25km section of the 407 ETR in October 2006; lanes added in both directions of a section at the western end of the Dulles Greenway in November and December 2006; and completion of stage one of the works on the Chicago Skyway in December 2006
- Commencement in June 2007 of electronic tolling on the western section of the Indiana Toll Road.
The market
MIG continues to see significant opportunities for toll road investments in North America and Europe.
The Australian marketplace is also expected to generate several potential opportunities for MIG. The pace of development of the North American market has been mixed, with debate in some states concerning the merits and risks of private involvement in public infrastructure. MIG will continue to engage with stakeholders in an effort to ensure they are fully aware of the policy and practical benefits that can arise from private sector involvement in road infrastructure, and the protections commonly implemented that can preserve the public interest.
The fact that this debate is now occurring highlights its relevance. Policymakers in many jurisdictions are grappling with the fiscal, social and policy issues arising from the effects of congestion on productivity and overall economic wellbeing, and the growing cost of maintaining, improving and expanding road networks at a time when there are increasing demands on available funding.
Distributions
In June 2007 MIG announced a distribution of 10 cents per stapled security for the half year ending 30 June 2007, in line with guidance given at the annual general meeting held in November 2006. This brought the total distribution for FY2007 to 20 cents per stapled security. MIG also offered investors the opportunity to participate in the distribution and dividend reinvestment plan (DRP) for each of these distributions.
Outlook
Key initiatives for the year ahead include:
- Investing in our existing assets, including capital improvements on 407 ETR, Indiana Toll Road, Chicago Skyway, APRR and Dulles Greenway
- Opening of the South Bay Expressway in the fourth quarter of 2007
- Continued implementation of cost control strategies resulting in improvement in EBITDA margins and increased take-up of electronic tolling
- Investigation of suitable investment opportunities in North America, Europe and Australia.
The boards and management of MIG are confident that the business will perform solidly over the next 12 months with continued EBITDA growth forecast for FY2008. MIG has provided distribution guidance of 20 cents per security for FY2008.
On behalf of the boards, we thank our security holders for their ongoing support of MIG.
Mark Johnson
Chairman
Macquarie Infrastructure Investment
Management Limited
Stephen Allen
Chief Executive Officer
Macquarie Infrastructure Group
