West Gate Tunnel puts handbrake on Transurban’s post-pandemic recovery

Significant cost overruns at Victoria’s West Gate Tunnel are threatening not only Transurban’s credit rating but also its reputation.

Construction on the Melbourne West Gate tunnel project in Yarraville, where costs and delays have hurt Transurban’s bottom line. Picture: Aaron Francis

A $3.3bn blowout on Victoria’s West Gate Tunnel threatens to hit Transurban’s credit rating as it emerges from the pandemic, as well as its reputation for completing projects on time.

Moody’s Investor Service has warned the “significant cost overruns could hinder” the toll road operator’s credit profile, with its financial leverage — while strengthening in the past year — remains below rating tolerance.

It comes as the group confirmed lockdowns across Sydney, Melbourne and Brisbane are wiping up to $33m a week off its revenue and it is considering suing West Gate Tunnel builders CPB and John Holland over the handling of toxic soil, which has delayed the project by years.

The West Gate Tunnel Project (WGTP) “highlights the rising construction-related ESG (environmental, social and governance) risks facing the group,” Moody’s analyst John Manning said.

“Originally planned for completion in 2022, construction delays with regard to the safe disposal of contaminated soil, will effectively delay recommencement of tunnel boring machines until early calendar 2022.

“Our central scenario assumes the WGTP is unlikely to open to traffic before end calendar 2024/early 2025. While Transurban has experience in completing projects within time and cost budgets, significant cost overruns could hinder its credit profile in the midst of the pandemic recovery.”

But Mr Manning said he believed Transurban could “partly mitigate” the risk, given its track record of project delivery, the staggered nature of its broader project pipeline and “proven capacity” to manage its balance sheet.

“Financial leverage as at June 30, 2021 recovered to 6.3 per cent (from 4.7 per cent in the first half), however remains below the 7 per cent rating tolerance.

“Despite post balance date traffic disruption, we expect Transurban metrics will gradually strengthen from the 2021 financial year as the vaccination rollout allows movement restrictions to be lifted.”

Mr Manning said the group’s finances also benefited from the sale of its Greater Washington toll roads, which lifted the company’s coffers by $3.73bn.

“Our central scenario assumes financial leverage will strengthen to within the rating tolerance level over the next two years, with our expectation that the group will implement countermeasures should such fail to eventuate.”

UBS analyst Simon Mitchell said the West Gate tunnel “project continues to be bogged down with a commercial dispute and regulatory uncertainties resulting in an expected $3.3bn cost blowout on an original project cost of $6.7bn.”

Mr Mitchell expected lockdowns across Australia’s three main eastern cities to wipe 5 per cent of the group’s earnings before interest, tax, depreciation and amortisation this financial year. In the 12 months to June 30, Transurban’s EBITDA fell 3.3 per cent to $1.81bn.

“The change in outlook for Australian east coast lockdowns has prompted a downgrade to our forecasts. We now assume the current c.-50 per cent traffic position in Sydney does not recover fully until October,” Mr Mitchell wrote in a note to investors.

“We have also moderated our Brisbane and Melbourne assumptions on the basis of likely rolling snap lockdowns for the next few months. Combined these changes drive a 5 per cent reduction to EBITDA.”

Transurban chief executive Scott Charlton said he was hopeful the group could strike a “commercial resolution” with CPB and John Holland via mediation. But if those talks failed, the company would have no option but to sue.

“We want to try and find a commercial resolution to the mediation process. If for some reason – we hope it’s not the case – we can’t find a commercial resolution, there is obviously the legal pathways. But that’s not our preferred pathway,” Mr Charlton said.

He also was confident traffic volumes would bounce back once restrictions lifted, citing toll road use returning to pre-pandemic levels in between lockdowns in the past year.

“It looks like lockdowns will persist for whatever period of time. But I think everyone’s plan is hopefully by the end of the calendar year we will be at a sufficient vaccination level to at least modify the amount of lockdowns.”

Transurban shares closed down 2.8 per cent, at $13.64.