The Bond Buyers 8 th Annual Transportation Finance/P3 Conference

Transcription

1 The Bond Buyers 8 th Annual Transportation Finance/P3 Conference Highly-Leveraged Public Deals October 18, 2007 Brian Mayhew Chief Financial Officer MTC/Bay Area Toll Authority

2 Is PPP The Answer Or Can Public Agencies Produce A Better Overall Result? Public Agencies have the direct relationship to its constituent public that cannot be replaced by any form of private lease/purchase sale Government agencies have the requisite experience in design, construction, operation and maintenance There are any number of examples of public agencies contracting to a private company for private operation of water, wastewater and power operations while the government owns the facilities and sets rates If the interest is to maximize the equity value of the asset, government agencies have more options and can produce better results than private companies If there is no political will to maximize the asset through rates and tolls its doubtful the it will be there to maximize the asset through a sale

3 Privatization is One of Many Financing Tools The private sector uses mainly equity and debt (80%+) Government agency has loans, grants, sales tax and tax exempt t debt Federal State Local Private Highway Trust Fund GARVEE/GANs Direct/Indirect Section 129 Loans State Infrastructure Bank (Federally Capitalized) Loans, Guarantees, Interest Rate Buydowns TIFIA Direct Loan, Line of Credit, Loan Guarantee Funds Management Flexible Match, Match (Toll Credits), Advance Construction State Highway Fund (Leveraged and Pay- Go) Motor Fuels / Sales Tax Sales Tax on Motor Vehicles Use Tax on Motor Vehicles Licensing Fees Other Obtain Design/Build Contract Toll Revenues Grants/Capital Contributions Provide Shadow Tolls Back-up Appropriations for Toll Roads, Highways O&M, CapEx, DSRF Guarantee Local Sales tax Special Tax Districts Grants Fees Tolls Tax Exempt Debt Toll Concession Debt Private Activity Bonds Equity Leverage Shadow Tolls or Availability Payments Provide Design/Build Contract Subordinate loan/up-front equity as consideration for contract Provide Management Agreement

4 Transportation PPP Can Take a Variety of Forms PPPs have a variety of risk/reward profiles for public and private entities While the brownfield Chicago Style concession sales have garnered significant publicity, other types of PPPs (such as greenfield design/build) also have had substantial success For any given structure, the risk and rewards must be fairly distributed between the public and private entities Greatest Private Risk/Reward Greatest Public Risk/Reward Structure Description Example Design/Bid/Build Public entity controls entire - Typical for State Departments of Transportation procurement process and takes all risks (subject to risks offset to subcontractors) Private Contract Private entity responsible - Louisiana Transportation Infrastructure M odel Fee Services for capital planning in addition for Economic Development to O&M /management Design/Build Public entity enters into - Transportation Corridor Agencies (California) contract for both architectural/ - E-470 Tollway (Colorado) engineering services and - State Highway 130 (Texas) construction - I-15 Corridor Reconstruction Project (Utah) -Northwest Parkway Public Highway (Colorado) - New Mexico SR 44 Highway Build Operate Combines design build with O&M - Route 3 North Highway (Massachusetts) Transfer responsibilities; public sector retains - Las Vegas Monorail (Nevada) revenue risk and surplus revenues - Hudson-Bergen Light Rail (New Jersey) Design Build Finance Combines design build, O&M. Private - Chicago Skyway Toll Road (Illinois) -- Concession Sale Operate sector responsible for financing - SR 125 Toll Road San Miguel Mountain Parkway (California) and revenue risk (equity position); - Dulles Greenway Tollroad (Virginia) Public retains title ownership and - Variety of Shadow Toll Programs (United Kingdom) provides long-term lease/concession - Toronto Toll Road Highway 407 Build Own Operate Similar to above, only no public ownership - Foley Beach Express Toll Bridge (Alabama) -Ambassador Bridge (Michigan)

5 Factors Driving Privatization Transportation privatization has a significant history in Europe and has spread to the U.S. $1.6 trillion transportation infrastructure needs in the next 5 years* has necessitated the evaluation of every possible funding source Existing asset value may be unlocked and used for other transportation improvements Equity investors may pay premium over bondholders Private sector may also contribute operating efficiencies and acceleration of projects Successive federal highway legislation (SEP-14, ISTEA, NHSDA, TEA-21, SEP-15, SAFETEA-LU) has increasingly encouraged private sector involvement in design-build, financing and operations Currently strong equity investor demand Significant supply of equity capital chasing limited U.S. transportation assets Historically low overall interest rate environment and low returns on comparable equity investments Concessions typically provide long-term inflation-protected returns Toll roads typically have favorable pricing power However, despite the potential benefits, privatization must be evaluated on a project-by-project basis *Source: American Society of Civil Engineers

6 Public vs. Private Toll Structures Public Goals Improve transportation Minimize costs/tolls Respond to political environment Private Maximize present value cash flow Provide customers a quality product Tolling/Revenue Restrictions Toll increase typically limited to operate and maintain facility and repay debt Political pressure Toll rate covenant Priced as a public service Set tolls at lesser of (1) market level and (2) concession agreement limitation Distances government from tolls Typically no toll rate covenant Financing Tax-Exempt Debt TIFIA Government grants SHA Taxable Corporate Debt Possible Tax-Exempt Debt (Private Activity Bonds) under SAFETEA-LU TIFIA Equity (15 30% of financing) Purpose of Debt Finance initial development and subsequent improvements Open Indentures can also fund off-system improvements Finance initial development, subsequent improvements and off-system improvements Maximize leverage to minimize cost of capital/maximize bid price Traffic/Revenue Modeling Focus on cost recovery/downside Focus on business approach and upside potential for equity Surplus Revenues Fund capital improvements for facility and other eligible projects Fund capital improvements for facility Recurring equity dividend payments

7 Risk and Motivational Comparison Public Public Sector Sector Private Private Sector Sector Goals: Maintain project for public use Maximize shareholder / equity returns Minimize user fees Maintain project so that it produces optimal vvvvreturns Build public agenda Build shareholder value Risk profile: Operations: Generally risk averse since no upside in taking vvvvrisk Willing to take risk for appropriate returns Smooth operation to minimize bad press Minimize O&M costs to increase rate of vvvvreturn Reasonable costs Keen focus on meeting maintenance vvvvrequirements Capital expenditure: Re-investment: Improvements as needed after demonstrated vvvvcongestion Excess cashflow for improvement to projects vvvvin system or as designated Improvements as required to optimize vvvvtraffic/revenue flow Excess cashflow to shareholders beyond vvvvmaintaining minimum reserve requirements vvvvand debt service coverage ratios Capital structure: Grants / Retained Earnings Equity No rate of return directly associated IRR target: % Debt Debt Typically tax exempt Aggressive use. Probably taxable (PAB's vvvvmay be available) Generally moderate levels Low investment grade to below investment vvv grade often optimal High leverage considered Re-gearing to increase equity returns Toll rate setting: Rate covenant / increase sufficient to cover vvvvo&m, debt and necessary improvements Tolling regime is typical, therefore no rate vvvvcovenant

8 Concession Agreement Must Meet Public and Private Goals The Public Entity (the Owner ) typically maintains title to the asset and enters into a longterm Concession and Lease Agreement with the Concessionaire (the Operator ) The Concession Agreement must fully anticipate any issue that could possibly arise during the term of the lease Public Goals for Agreement Transfer risk to Private Entity Ongoing protection of public interest from the concession granted to the winning bidder Ensure long-term viability of toll road asset (operating and maintenance standards) Certain employment restrictions (nondiscrimination/affirmative action, fair wages, conflicts of interest) Ensure that Private Entity makes any applicable improvements or expansions in a manner consistent with economic development and demographic needs Private Goals for Agreement Maintain flexibility regarding method of performing repairs and replacements Maximize flexibility regarding employment Maintain public responsibility for law enforcement and some environmental issues Maximize ability to benefit cost from efficiencies including modern tolling strategies and technologies Minimize risk of future competing toll roads and freeways Ability to assign Concession Agreement and/or grant leasehold mortgage

9 Benefits and Considerations The opportunity for private investment creates certain benefits and considerations. Goals can include: Transfer operating/management risk Retire outstanding debt Upfront payment can fund infrastructure investment or other public needs Benefits Receive large upfront or annual payment Pass through benefits of private management and depreciation Transfer of development and operating risk, including pressure of toll setting Strong balance sheet (private) to maintain and improve asset Considerations Loss of future surplus revenues Protection (overcharging) toll payer Funding for expansion / other projects Determining proper value for asset Excess returns for private vendor Operating and maintenance standards Blame for poor performance Poor maintenance Financial performance / sale

10 Current U.S. Toll Road Privatizations A Brief History Chicago, IL Indiana Dulles, VA Richmond, VA San Diego, CA May 23, 2003 October 2004 August 2005 February 2006 May 2006 Road SR 125, South Bay Expressway Chicago Skyway Dulles GreenWay Indiana Toll Road Pocahontas Parkway Location San Diego, CA Chicago, IL Dulles, VA Indiana Richmond, VA Length 9.3 miles 7.8 miles 14 miles 157 miles 9 miles Buyer Macquarie (Australia) Macquarie (Australia), Macquarie (Australia) Macquarie (Australia), Transurban (Australia) Cintra (Spain) Cintra (Spain) Concession length 35 years from years 51 years 75 years 99 years Relevant government body(s) San Diego County, Caltrans, SANDAG, USDOT City of Chicago VDOT Indiana State VDOT

11 Current Privatized U.S. Toll Roads Investment and Operating Profile Overview of U.S. toll road acquisitions Overview of U.S. toll road acquisitions Concessionnaire /Operator Project Description Concession Duration Concession Price Price/ EBITDA (x) Leverage Price/ Year/Mile Comment SR 125 South Bay, San Diego, CA Macquarie 9.3 mile road linking State 95 to State years from construction $668 mm NM 75% $2.1mm Construction estimated to be completed late 2006 Chicago Skyway, IL Macquarie & Cintra 7.8 mile urban toll road linking Chicago to I-80 in Indiana 99 years $1.83bn 49.5x 65% (85% post refinancing) $2.4mm Brownfield Road Price net of Cap Ex Dulles Greenway, VA Macquarie 14 mile urban toll road 51 years $533mm 19.8x <50% $0.7mm Brownfield Road, widening project Indiana Toll Road, IN Macquarie & Cintra 157 mile east-west inter-city toll road 75 years $3.85bn 63.5x 81% $0.3mm Brownfield Road, major trucking and commercial traffic Pocahontas Parkway, VA Transurban 9 mile toll facility located in Richmond, VA 99 years $611mm N/A 69% $0.7mm Distressed asset, traffic well below T&R forecast

12 Projects under agreement or in-progress Project Overviews State Description Est. Size Stage in Progress Est. Completion Private Partner I-81 VA Four lane widening project with separation of truck and car lanes $7.9bn Selected by VA in March 2004; project yet to be undertaken TBD STAR Solutions (Adam, APAC, KBR, English, Wilbur Smith) Coalfields Expressway VA New four-lane highway connecting the WV Coalfields Expressway to Wise County $2.3bn KBR finished design/engineering for initial section of highway; announced partnership with coal producers on Jan. 13, 2006 TBD KBR (with Pioneer and Alpha) Capital Beltway HOT Lanes VA HOT lanes in both directions along 14 miles and add a connection to the road and I-95 $985m Signed PPP agreement in April 2005; construction scheduled to begin within a year TBD Fluor-Transurban I-95/I-395 VA Improvement along 56 miles adding a third lane to existing HOV lanes $913m Advisory panel recommendation of Fluor- Transurban made in November 2005; no action taken Spring 2007 Fluor-Transurban Route 28 VA Special district tax financed widening from six to eight lanes; interchange upgrading $200m Four of six interchanges upgraded; fifth in progress TBD Clark Construction I-75/575 GA High volume of widening projects along I-75 $1.2bn Received $48m contract in late 2005; larger project expected TBD GTP (Bechtel, Gilbert, Matthews) South Bay Expressway CA 14.9 km four lane toll road, SR125 $635m Under construction Winter 2006 Macquarie Port of Corpus Christi TX 1,000 acre port development, including road/rail/waterway extension and marine terminal capital improvements $274m In late 2005, PCCA entered into a six-month exclusive agreement to develop a concession agreement TBD Dragados S.P.L. I-205 Corridor Sunrise Project Newberg-Dundee OR - Lane widening and interchange improvements - Construction of five-mile limited access four-lane facility - Proposed 11 mile bypass corridor $1bn+ Identified as preferred partner in November 2005; currently undertaking pre-development financing study TBD OTIG (Macquarie, Hatch Mott MacDonald, Preston Gates Ellis)

13 BATA PPP Model Based on MIG targets and other purchase examples BATA has developed a lease/purchase model BATA s Assets Seven bridge mature system Over $500mm in annual tolls Completed over $4b of $8b bridge and seismic upgrades New Carquinez Bridge New Benicia Bridge Widened San Mateo Upgraded Richmond Upgraded SFOBB Westspan Replacing SFOBB Eastspan Cash balances at $3billion Cash reserves at $795mm (27%) Ratings AA/Aaa3/AA- Debt portfolio at $4b All-in rate of 4.34% Annual transit transfers over $60mm Any PPP transaction has to exceed current value S O N O M A A L A M E D A

14 PPP Example: Chicago Skyway Overview 7.8 mile, 6 lane toll Bridge opened in 1958 One toll plaza; manual operation $38.7 million net revenues in 2003 Global Prospects Contacted 10 Bidders Submitted RFQ 5 Bidders Pre-Qualified Abertis Bilfinger Berger/Cheung Kong Vinci/Confiroute Cintra Macquarie Transurban Winner $1.83 Billion Cintra-Macquarie International toll road operator with 35 years of demonstrated experience Raised over $10 billion in both debt and equity for the financing of toll roads Advised by, Capital Markets Debt Underwritten by and Swaps Structured and Underwritten by Citigroup

15 PPP Example: Indiana Toll Road - $3.85 Billion Bid Overview Macquarie Infrastructure Group ( MIG ) - Cintra consortium has been announced as the preferred bidder to acquire the 75-year lease of the Indiana Toll Road Statewide Mobility Partners is an equal partnership between MIG and Cintra Citigroup is serving as Capital Markets advisor to MIG-Cintra on the project Financing Size and Costs* ($ millions) Acquisition Debt $ 3,278.5 CapEx Facility Liquidity Facility Total $ 4,078.5 Purchase Sources and Uses** ($ millions) Sources Uses Debt $ 3, % Purchase Price $ 3, % Equity % Reserves & Other % Total $ 4, % Total $ 4, % *Source: MIG website **Source: Cintra website

16 ITR Bid: Macquarie Infrastructure Group Website Information

17 Sample BATA Bridge PPP Valuation Sources ($mm) Equity $ 1, % 11% IRR target Senior Debt 3, % 7% assumed all-in-cost Subordinate Debt 1, % 8.5% assumed all-in-cost Total Sources $ 6, % Uses ($mm) Acquisition Price $ 5, % Cost of Issuance % Senior Lien Debt Service Reserve % Next 12 months actual Operating Expense Reserve % 50% of next 12 months actual Subordinate Lien DSRF % Next 12 months actual Total Uses $ 6, % Initial CAPEX Debt Facility $ 3,580

18 BATA Bridge Net Valuation Results Acquisition Price $5.52 billion Based on the MIG targets and other sales BATA has estimated the PPP value Less: Debt Defeasance Cost ($4.20 billion) Add: Likely Cash on Hand Net Valuation Dollars $2.00 billion $3.32 billion Purchase value $5.5 billion Net payment value $3.3 billion The estimated value is not sufficient to complete balance of the planned capital program Estimate is adequate to maintain existing level of transit transfers

19 Expected Increase in the 2 Axle Toll Expected Increase in the 2 Axle Toll Expected Increase in the Axle Toll $16 $4 $5 $6 $7 $8 $9 $

20 BATA s s comparable debt capacity BATA, continuing as a government owned concern and with inflation indexed tolls (3% assumption), has the following additional debt capacity: This assumes: $6.7 billion 1.25x minimum debt service coverage - at this coverage level, we can maintain the MTC Transfers 6.36% discount rate - same as the subordinate debt funding cost we have assumed in the model for quite some time 50 years of debt service discounted back to July 1, The discounted total of 100 years of debt service equals $8.1 billion

21 Public vs. Private Summary Private funding meets the goals of shifting operating and toll setting risk Private funding fails to meet the goals of completing all current projects, maintaining transit funding and providing a new revenue source Pledged Revenues O & M Equity Value Inflation indexed tolls BATA controlled No change $6.7 billion BATA Ownership Private Concession Inflation indexed tolls pursuant to agreement Assume same level of maintenance / rehab $3.3 billion Complete projects Yes No Transit Funding Surplus Revenues Transfer Risk Operating Rate Setting Protect Tollpayer Minimize Tolls Yes possibly expanded Yes NO No (depends on willingness to set rates) Yes No Yes No (without further toll increase) Yes Yes No No

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23 BATA Bridges PPP versus the P PPP Net Value = $3.317 billion If BATA wanted to continue funding MTC transfers (both RM-1 and RM-2) we calculate that a deposit of $1.6 billion, earning 5.0% interest, would be sufficient to fund these over the next 50 years BATA s incremental debt capacity = $6.7 billion Heavily contingent on the public sector willingness to commit to an inflation indexed tolling regime, likely with minimum annual increases (i.e. annual floor) Assumes tax exempt debt, therefore the use of proceeds would need to be eligible (i.e. public sector capital) Primary factors driving the value differential include: Weighted Average Cost of Capital in the PPP scenario is approximately 8.0% versus 6.36% in the tax-exempt scenario Corporate Income Taxes are forecast to exceed $100 billion in future dollars ($533 million PV at 8.0%)

24 Key Assumptions Toll revenues Traffic assume a 1% annual growth rate on all bridges except the Bay Bridge until 2055, thereafter zero traffic growth Tolls assume a 3% annual increase through out the study period Operating expenses Assume a 3% annual growth rate through out the study period Assume no efficiencies from private sector management Eliminated the funding of MTC transfers Taxes Assume a property tax abatement ($800 mm PV of estimated Property Tax) Assume the typical depreciation of the roadway and civic improvements Debt Mix of senior lien and subordinate lien debt each sized to maintain minimum debt service coverage ratios Capital Funded entirety of the current SRP, RM-1, and RM-2 budgets including the SRP contingency (partially offset with State of California contributions) and 3% contribution to rehabilitation program