Transcript Extracting Private Equity Through Public

Presentation for:
Regarding:
Federal, State & Private Role in Financing P3's
April 26, 2007
Table of Contents
Tab
Evolution of Federal Role
I
Recent Example of State Role: SH 121
II
Private Role: An Alternative Source of Capital
III
1
I. Evolution of Federal Role
Federal aid for transportation projects can take many forms. Federal
lending vehicles have endured over time.
$120 Mn standby
Federal line of
credit for San
Joaquin Hills
Transportation
Corridor Agencies
First Federal
Section 129 Loan
(precursor to
TIFIA) for
President George
Bush Turnpike
$140 Mn TIFIA
loan for SR 125 is
first-ever provided
for a private toll
road development
1993
1995
2002
3
Recent Government Subsidies/Financing Sources
TIFIA Overview
 The Transportation Infrastructure Financing and Innovation Act (TIFIA) provides loans, guarantees and
standby lines of credit for transportation infrastructure projects. It is a taxable US Treasury rate.
 In order to become eligible for credit assistance, a project must meet certain threshold criteria, including:

Large surface transportation projects (project costs must exceed $100 million or 50% of State federal
highway funds for most recent fiscal year).

TIFIA contribution limited to 33 percent

Investment grade rating requirement (for senior debt)

Dedicated revenues for repayment
Private Activity Bonds (PABs)
 Qualified PABs are tax-exempt bonds issued by a state or local government, the proceeds of which are used
to build certain qualified facilities that will be owned, leased or otherwise used by an entity other than the
government issuing the bonds.
 For a PAB to be tax-exempt, 95% or more of the net bond proceeds must be used for one of the several
qualified purposes, as described in the Internal Revenue Code. Section 142 of the Code specifically
describes what qualifies as an Exempt Facility Bond, which is issued to finance various types of facilities
owned or used by private entities.
 As opposed to state-by-state volume cap allocations that limit the issuance of certain other PABs, SAFETEALU establishes a national limit of $15 billion to be allocated by 2009 and issued by 2015. As a result of this
new provision, tax exempt financing will be made available to surface transportation projects with significantly
more private participation than has been permitted in the past under the Code.
4
FTA has designed its Public Private Partnership Pilot Program to
encourage use of alternative delivery and finance approaches.
 Project’s that
submitted for the
March 31, 2007
deadline include:
 Houston Metro

BART –
Oakland
Airport
Connector
Denver RTD

Georgia RTA

 3 projects will be selected to participate in the Pilot Program
 The key benefit of participating will be expedited approval for New Starts funding
 Candidates of the new Program must exhibit high “demonstration value” which includes the
following five criteria:

Number of project elements the private partner is responsible for

Quality of risk allocation with respect to the cost of project

Extent to which equity capital and development proceeds contribute to project and terms
related to contribution

Whether project is part of a plan that incorporate system-wide congestion pricing

Speed of delivery and quality of performance as well as reliability of projections of costs
and benefits associated with the project
 Applications to the Pilot Program will be reviewed quarterly on a rolling basis for as long as
there is an opening
 Deadlines for submission:

To qualify for first quarterly review, applications must have been received by March 31,
2007

To qualify for second quarterly review, applications must be received on July 1, 2007
5
II. Recent Example of State Role: SH 121
The $3.4 billion SH 121 Project is the largest competitively bid
concession for a greenfield toll road in the United States to date.
 Goldman Sachs has been serving as a concession advisor to the Texas Department of Transportation
(TxDOT) on its Comprehensive Development Agreement (CDA) program since October 2005

The CDA, which provides a competitive selection process for developing regional projects, is the
program TxDOT uses to enable private investments in the Texas transportation system
 On February 28, 2007, TxDOT approved the recommendation of the Cintra consortium as the preferred
best value proposer

Two other bidding teams led by Macquarie and Skanska submitted bids for the project
 The Cintra team will pay an upfront fee of $2.1 billion, guarantee 49 annual payments of $25 million per
year (PV of $716 million), and spend roughly $567 million to extend the main lanes into Collin County for
the right to design, build, finance, operate and maintain the 26 mile road for 50 years post final
construction

While part of the SH 121 has already been built by TxDOT, this is one of the first Greenfield P3s in
the US

TxDOT has imposed a revenue sharing arrangement; above certain gross revenue targets, TxDOT
will share an increasing percentage of those gross revenues in addition to the upfront payment and
guaranteed annual payments

The Regional Transportation Council of the Dallas-Worth Area, which will largely decide how the
upfront funds will be spent, is expected to use proceeds to accelerate funding for needed
transportation projects throughout the region
7
Project Overview
 TxDOT “pre-applied and pre-qualified” for an estimated $700 million TIFIA loan and up to $1.8 billion of
Private Activity Bonds (PABs) allocation for this project. The developer has the option to utilize TIFIA and
PABs as part of their final funding strategy
 Tolls will be approximately $0.139/ mile in 2008 and $0.145/mile in 2010 (higher for trucks). Toll increases
allowed every 2 years, capped by increase in CPI or Employment Cost Index. TxDOT will allow time of
day and congestion pricing starting 2012
 Project is expected to be completed in 2012, 20 years earlier than originally anticipated using traditional
funding alternatives

This approach will limit use of public funds since the developer will bear the full cost. TxDOT funds
which otherwise would have been used for this project can be redirected to meet other transportation
priorities

Developer has committed to higher levels of performance standards than TxDOT currently provides,
which will benefit users
 Award is conditional pending final environmental approval (expected April 2007) and successful financial
close
8
Overview of SH 121
Location of SH 121
Map of Local Area
Highway Overview
 SH 121 is expected to be a ~26-mile tolled diagonal
state highway, connecting I-35W near downtown
Fort Worth to US-75 near Bonham, Texas

~10 miles of new construction to be completed
in 2011, 7 miles already operational as of July
2006, and ~9 miles to be built by the State

Pass north of the greater Dallas area, running
through Denton and Collin counties, a densely
built-up area with one of the fastest growth
rates in the State and through the most affluent
counties of the Dallas area

6 main lanes with grade separated
interchanges at all major cross streets
 Expected to provided improved access to DFW
Airport (the 3rd busiest airport in the US) and other
critical regional hubs
 The Dallas-Fort Worth Metropolitan Area, which is
responsible for one-third of Texas’ GDP, is a heavilydeveloped area with rapid population growth
(population increase from 4 million in 1990 to
5.8 million in 2004, CAGR of 2.7%)
9
Overview of SH 121
Transaction Timeline
 January 2005: TxDOT received unsolicited proposal from Skanska
 March 2005: TxDOT issued request for indicative offers
 June 2005: TxDOT received 5 indicative offers
 July 2005: 4 consortia short-listed by TxDOT
 August 2006: TxDOT issued request for final offers
 January 2007: TxDOT received 3 final offers
 February 2007: Cintra selected as Apparent Best Value Proposal
 April 30, 2007 (est.): Obtain environmental approvals and financial close
10
III. Private Role: An Alternative Source of Capital
North America is the growth market for global infrastructure
investors.
Established
International
Infrastructure
Investors are
Setting Up U.S.
Offices
U.S. Based
Infrastructure
Funds are
Raising Equity
and Seeking
Investments
 Macquarie

Over 150 people in U.S.
 Cintra

Adding to base in Austin/Chicago
 Babcock & Brown

Building U.S. Team in San Francisco
 Hastings Management

Moving personnel to New York
 Transurban

Investment team based in U.S.
 Brisa

Considering adding U.S. office
 Goldman Sachs

$6 bn Fund
 Carlyle Group

Raising $1 bn Fund
 Blackstone Group

Rumored to be raising Fund
 Apollo Advisors

Wants to see NYSE listed vehicle to invest
 Morgan Stanley

$1+ bn Fund
 JP Morgan

$1+ bn Fund
 GE/Credit Suisse

$1+ bn Fund
 Deutsche Bank

$1+ bn Fund
 Merrill Lynch

$1+ bn Fund
12
Public-private partnerships provide an opportunity to fully capture the
“growth wedge” in future revenue increases.
 Municipal bond investors rely on historical revenues to determine the leverage levels which
constrains total value for the owner
 Equity investors look for future returns based on growth
 Debt + Equity = Greater Proceeds for Owner of Asset
Maximum Municipal Bond Leverage
Concession Sale
Net Toll
Revenues
Net Toll
Revenues
Debt
1.25-2.00x
Coverage
Past
Today
Equity
Investor
Debt
40 yrs
99 yrs
Past
Today
40 yrs
99 yrs
13
Substantial pools of capital are focused on investing in infrastructure
and this growth wedge.
$75 Bn
20% Equity
$300 Bn
80% Debt
Total Buying Power:
$375 Billion
Examples of Infrastructure Investors/Operators





Macquarie
CKI
Ontario Teachers
Borealis Infrastructure
Goldman Sachs





Babcock & Brown
Hastings Fund
Star Capital
Carlyle Group
Galaxy Fund
14
Goldman Sachs Infrastructure Partners has recently increased its
Infrastructure Fund to $6.5 billion
GSIP Seeks to Invest in Global Infrastructure Assets with Stable Long Term Yields
Fund Overview
 New, infrastructure-focused, investment fund sponsored
and managed by Goldman Sachs

Housed within the Merchant Banking Division

Leverage from the relationships and capabilities of
the Goldman Sachs franchise
 Equity commitments in excess of $6.5 billion

~$20.0 billion in buying power with additional funds
coming through co-investment (includes leverage and
equity)

Goldman Sachs to provide a significant portion of the
equity
Potential Target Asset Classes
Type
Transportation

Essential social services

Stable, predictable, low risk cash flows(a)

Insulated from the business cycle

Revenue often linked to local inflation

Able to support high leverage
(a) There can be no assurance that the fund will achieve these objectives.
Toll Roads
Airports
Ports
Selected Rail
Underground Transport
Regulated Utilities




12-15 Year Fund Life
 Targets uniquely positioned global infrastructure assets
with the following characteristics:





 Electricity
 Gas
 Water
 Fund structure similar to traditional private equity vehicles

Asset Types
Hospitals
Schools
Prisons
Stadiums
Social Infrastructure
Communications
 Broadcast Transmission
Networks
 Mobile Telephony
 Satellites and Terrestrial or
Submarine Cable Networks
15
The recent $3.85 billion lease of the Indiana Toll Road illustrates the
PPP market is growing in the US.
Description of the ITR
The Road Network

Critical transportation link between major East Coast cities, the City of
Chicago, and the western United States

46 year operating history

Approximately 157 miles in length

The Toll Road is designated as Interstate 90 (I-90) from the Illinois
State Line (where it connects to the Chicago Skyway) to the Ohio State
Line (where it connects to the Ohio Turnpike)

FY05 AADT of 46,000 on Barrier System, and 25,000 on Ticket System

Unchanged toll rates since 1985 – Among lowest $/mile in US

State mandated increase to become effective on 3/1/2006
Ownership and Financing Structure
Financial Overview(a)
(in millions)
2004A 2005A 2006E(b) 2007E(b)
Financing Structure
Ownership Structure
Commercial Revenue
$49.6
$53.3
NA
NA
Bank Debt
Passenger Revenue
35.3
34.4
NA
NA
Equity
Total Toll Revenue
$84.9
$87.7
3.5
3.3
2.6
39.5
59.7
60.6
63.9
98.0
65.0
63.3
63.5
71.8
% Growth
EBITDA (c)
% Margin
$90.3 $126.0
CAGR
Revenue
5 Yr
Hist.
3 Yr
Hist.
5 Yr
Proj.
10 Yr
Proj.
1.7%
3.4%
8.2%
10.3%
EBITDA
4.2%
9.3%
10.0% 13.0%
Macquarie
50%
Cintra
50%
Total
$3,278.5
770.1
$4,048.6
81%
19
100%
Acquisition bank debt
 Tenor is 9 years
 Step up in margins
 Partial cash sweep
Estimated IRR = 12.5%(d)
(a) Source: Wilbur Smith/State of Indiana
(b) Pro Forma 2006 and 2007 estimates based on Goldman Sachs and Wilbur Smith internal projections
(c) Includes historical concession revenues, which were included as part of the Concession Agreement
Hedging
 Fully hedged debt profile for 20
yrs

(d) Source:Macquarie Website
Swap rates step up gradually
from 2006 to 2026, starting at
3% p.a.
16
Indiana Toll Road: The private operator agreed to key concession
terms, including predefined future tolling increases and operating
standards.
 Term of Concession: 75 years
 Estimated Additional Capital Expenditures/Road Enhancements: $4.4 billion (2006 dollars)
 Toll Increases:

A state-mandated toll increase schedule will be implemented on April 1, 2006.
– First toll increase since 1985
– Passenger car tolls to increase to 5.1¢ / mile, and remain unchanged until 2010
– Commercial vehicle tolls step up as shown below in April 2006, April 2007, April 2008, and April
2009

Concessionaire’s ability to set tolls begins in 2010 with a step up in 2010 to reflect the prior 4 years CPI or
nominal GDP per capita growth

Maximum annual toll increase from 2011-2080 (term of concession) will be the greater of 2%, CPI and
nominal GDP per capita growth
5.1¢/mile
Passenger
Cars
Commercial
Vehicles
(5-axle)
11.4¢/mile
April 1,
2006
14.4¢/mile
April 1,
2007
17.4¢/mile
April 1,
2008
20.3¢/mile
April 1,
2009
Catch up of prior
4 years growth
Greater of 2.0% or CPI
or nominal GDP/capita
Catch up of prior
4 years growth
Greater of 2.0% or CPI
or nominal GDP/capita
June 30,
2010
June 30,
2011
 Operating Standards:

250 pages of operating standards that must be maintained

Restrictions on congestion management with mandated expansion upon certain Level of Service (LOS)
triggers
17
The concession lease of the Chicago Skyway was the first of its kind
in the United States.
Description of Chicago Skyway
The Road Network

7.8 miles divided elevated toll road and toll bridge with 3 lanes in
each direction

Connects to Indiana East-West Toll Road and Dan Ryan
Expressway

Current tolls: $2 per car, $1.20 per truck axle – no change since
1993

Mostly cash-only tolling

Lack of Competing Direct Route

Small Impact of Toll Increases on Traffic Demand

Strong EBITDA Margins and Revenue Growth Rates

Limited Future Capital Expenditures

Modernization Potential
Ownership and Financing Structure
Financial Overview
2003 (a)
2004
39.8
41.2
49.6
50.1
Operating Expenses ($) (b)
11.4
12.2
12.6
13.1
EBITDA ($)
28.4
29.0
37.0
37.1
EBITDA Margin
71.3%
70.4%
74.5%
73.9%
Total Vehicles (000)
17,422
17,395
16,260
16,422
5 Yr
Hist.
3 Yr
Hist.
5 Yr
Proj.
10 Yr
Proj.
3.0%
1.5%
11.6%
14.1%
8.6%
10.1%
10.3%
12.4%
(US$ in millions)
Revenues ($)
CAGR
Revenues
EBITDA
(b)
2005 (a) 2006 (a)
(a) Lane closures due to CIP impacted traffic and revenues (completion of CIP in December 2004).
(b) Source: Audited financial statements.
(c) Source: Macquarie Website
Ownership Structure
Macquarie
45%
Initial Financing Structure
Debt
$1,000
53%
Equity
Cintra
55%
Total
882
$1,882
47
100%
$1.4 bn Debt Refinancing
Estimated IRR = 12.3%(c)

Achieved non-recourse financing

Improved match funding of assets
and liabilities versus bank
financing

Reduced financing cost through
several features including an
innovative accreting swap provided
by Goldman Sachs Capital
Markets L.P.
18
The Skyway $1.4 Billion refinancing gave “proof-of-concept” to US
capital markets of debt financing future growth.
 Innovative interest rate derivatives created a synthetic floating-rate zero coupon debt instrument allowing:




Issue floating-rate securities, enhancing the marketability of its senior debt and enabling the sponsors to achieve
a lower rate than may have otherwise been possible
Significantly defer fixed-rate payments to the swap counterparties in the early years to the later years after
scheduled toll increases take effect
Financial Security Assurance (FSA) wrapped not only the senior secured debt, but provided a forward
commitment to guarantee certain refinancing debt
An aggressive view on growth was necessary to achieve such leverage levels
Compounded Annual Growth Rate
Projected Cash Flow
2006-2010
2010-2015
2015-2020
2020-2025
2006-2025
16.0%
12.5%
9.4%
5.3%
10.7%
Year End Debt Service and Cash Flow Comparison ($000s)
$ 300
$ 250
Projected Cash Flow
Debt Service (DS)
DS Coverage Ratio
$ 200
2. 5x
2.4x
2.3x
$ 150
2.3x
2.2x
$ 100
2.2x
2.2x
$ 50
1.9x
2.6x
2.3x
$0
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
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