Cintra-Macquarie bid of $3.85b for Indiana TR accepted
A Cintra-Macquarie partnership has offered $3.85b, the highest of four bids for the Indiana Toll Road on a 75 year concession. Governor Mitch Daniels who had initiated the privatization process announced the bids at a news conference this morning, calling the $3.85b an "astonishing sum." The state's reserve price was $2.0b. Gov Daniels said the Cintra-Mac bid is "clearly superior" to the other three bids and "after due deliberation, I am proud, and thrilled, to recommend it to the General Assembly and to my fellow citizens."
He said the concession fee would allow the state to "stop dreaming, and start digging" on other important projects.
We got Charles Schalliol, director of the State Budget Agency, on the phone.
He sounded very excited about the Cintra-Mac bid. He says the state is aiming for a financial close on the Cintra-Mac deal by June 30. He said it needs endorsement of the legislature which is due to adjorn March 14. He did say: "I'm not a politician. I'm from business, but..."
"We think it will get bipartisan and strong support. With this number ($3.85b) I don't see too many voting against it. It fully funds our ten year program. It is good for every area of the state. There's something for every constituency. It is hard to see legislators telling us to tear up a check for nearly four billion dollars."Other bids
Schalliol said of the other three bids: "They were good solid bids."
All the final bids were for an identical concession contract - available on the website of the Indiana Finance Authority. See http://www.in.gov/ifa/tollroad.html/
The state won't release the names or the numbers of the losing bids until after the planned June 30 financial close with Cintra-Mac.
That follows precedent set by the City of Chicago on the Skyway privatization - their argument being that in case of a failure to achieve a financial close the city (state) as concession grantor wants to be in a position to bargain with one of the other bidders without them knowing the offers they are competing with - the sealed bids argument for getting top money.
We've heard independently that the second bid was in the $2.8b to $3.0b range and that the third and fourth bids were over $2.0b, but we'll know the reliability of that mid-summer. Fluor was in one of those. A fifth bidder Washington Group International and Abertis were in the race until the last few days, we also heard. They were considering a bid in the range $2b to $2.2b, but decided at the end not to submit.Cintra statements
Cintra chief exec in the North America Jose Maria Lopez de Fuentes told us in a telephone interview he thinks the bid is good for Indiana and good for the shareholders of the two companies. He said their policy was to bid "what we think it is worth" not what was needed to win the concession, because "you never know that." If you really want to win you bid your maximum, he said.
"It was a very aggressive proposal. If we pay a lot more than the others, we have no hard feelings. That is alright. We think it is worth $3.85 billion, so we bid that. We hope it will serve the state well. It will give them money, I think, to make Indiana one of the states leaders in terms of modern infrastructure. It will help the economy and the people of the state. Meanwhile we are committed to completely modernize the Toll Road, both by the concession contract and in the interests of our business."
Lopez said they hope to be in a position to do a financial close and take control ahead of June 30: "We may be able to do it earlier than that. First they need legislation supporting the concession. Then we sign the contract after that. Then we do a financial close and execute the contract. It is quite quick."
The Cintra chief says they plan $700m of improvements over nine years of which more than a half will be done in four years.
"We will be joining the IAG (Inter Agency Group for E-ZPass) very soon to plan electronic tolling. We want to move quickly on that."
Much of the early work will be at the busier western end. 14km (9mi) is already 2x3 lanes. The group will widen another 11km (7mi) to 3 lanes each direction, improve toll plazas and interchange ramps. Over the nine year period there will be improvements over the whole length of the tollroad. Level of service guarantees will dictate many improvements.
"We will really rejuvenate this road," he says.
Lopez told us that although the Skyway and the ITR will support one another, they will have separate staffs and separate accounts because they are separate companies with separate concession obligations.
In a prepared powerpoint presentation Cintra says that the consortium proposes to provide $770m equity (Cintra $385m, Macquarie $375m) and to raise senior bank debt of $3279m for a total of $4,049m. They estimate equity internal rate of return of about 12.5%. The yield from the first years will be 3.5%, "creating value from day one." The presentation says: "Financing already completed: debt in local currency wsithout recourse to partners."
Cintra will nominate a CEO "subject to board approval."
The presentation says the concession provides a "very attractive tolling plan" and a "long concession." Other attractive features are that the facility has been operational for 49 years and has good growth potential because it is a "link between the main logistics hubs in the US."
Stephen Allen, CEO of Macquarie Infrastructure Group (MIG) said: "We are delighted to have been selected as preferred bidder for the Indiana Toll Road. The Indiana Toll Road, often referred to as the 'main street of America' is an essential part of the US National Interstate Highway System and serves as an integral connection between the east and west coasts of America. Consistent with the integral role of the road in the national economy, we are committed to enhancing levels of service for all Indiana Toll Road users. This will be done through significant capital improvements over the coming years and the introduction of electronic toll collection.
"The Indiana Toll Road will be an attractive addition to the MIG portfolio of roads businesses. Significantly, it has a long operating history with solid prospects for revenue growth over the 75 year concession. Traffic has grown over 3.9% per annum since opening. In addition, an attractive toll schedule has been set in place until 2010 after which tolls will increase at the greater of 2 per cent, CPI and nominal GDP per capita growth. This acquisition will increase the average concession term, internal rate of return and equity risk premium of the MIG portfolio."
The Indiana Toll Road will comprise 5% of MIG's portfolio after the close.
Allen said the estimated internal rate of return will be between 12.5% to 13.5% a year, providing a risk premium of between 8% to 9% per annum over US 10 year bond yield. Average expected yield will be 2.6% per annum over the first 5 years with an anticipated 15 year payback period to equity.Indiana is "out in front"
Budget Agency chief Schalliol bragged a bit about their process in our interview.
"We are very proud of what we have accomplished here. Indiana is out in front on this. We did (the selection) in 117 days versus two and a half years in Chicago. We have the concession contract ready. It's a good contract for the state and for road users. The concessionaire guarantees Level of Service D and better in the urban part (of the ITR) compared to Level of Service E now and worse in prospect under state ownership. They promise Level of Service C in the rural areas. All this is after their initial investment in improvements over two years... We got four solid bids... These people know the business. They are the biggest private toll operators in North America."
Most of all he was excited by the bid number.
"We were blown away by it. It enables us to fully fund ten years of major construction, that is presently unfunded."
The impression is that state officials got a solid billion dollars more than they expected.
The same companies that did the Skyway were employed by the state of Indiana on this privatization: Goldman Sachs doing the financial numbers, and Mayer Brown Rowe, Chicago lawyers, the bidding process and legal issues.
The text of prepared remarks by Gov Mitch Daniels this morning:
"One year ago, Indiana faced twin deficits: a fiscal deficit stemming from years of government outspending its means, and an infrastructure deficit, a $3 billion shortfall between the cost of needed transportation projects and the dollars due to come in. We had more than $2 of needs and plans for every $1 of funds on a business as usual basis.
"Today, state government is operating on a balanced budget, and is on its way to paying back its debts to schools and local governments. This morning, in one bold stroke, we announce the closing of Indiana's second deficit.
"As a candidate and as governor, I said that we should explore the possibility of attracting private capital, other people's money that no Hoosier (colloquial for Indianan) need be taxed for, to build the great projects we cannot afford, bringing with them countless thousands of new jobs and a more prosperous future for our children. We sought to leap to the front of an onrushing, worldwide trend to use such partnerships.
"Last Friday, after the fastest bid process in the history of such transactions, we received four final bids to lease and operate the Indiana Toll Road on a long-term basis. Every bid offered an enormous amount of money far beyond anything the state could generate on its own. One bid was clearly superior to the others, and after due deliberation, I am proud, and thrilled, to recommend it to the General Assembly and to my fellow citizens.
"I ask this morning that the legislature pass our proposed 'Major Moves' initiative (a ten year program of transport projects) and enable Indiana to accept the offer, from the joint venture known as Statewide Mobility Partners (the operating name for the Cintra-Mac partnership for the ITR), of a lump sum payment of $3.85 billion. "After closing, we will deposit this astonishing sum, equaling more than a decade of new construction funding at the current level, into a new trust fund, to be invested as fast as legally and humanly possible in the biggest building program in state history. The Hoosier Heartland Corridor, a non-stop US 31, new Ohio River bridges, I-69, the Fort to Port highway, the Gary-Chicago Airport, and hundreds more projects will all change overnight from wishes to certainties. The money will be in the bank. At last, we can stop dreaming and start digging.
"The advantages don't stop there. We will have a vastly better Indiana Toll Road than we have today. It will be better maintained, better patrolled, with better technology than the state could ever provide. Statewide Mobility's capital plan for the next few years calls for more than twice as much investment to upgrade the Toll Road as the state has managed in the recent past.
"It's been years since state government has been able to provide a dime of road money to local government. Because the winning bid was so large, even beyond what is estimated to fully fund our 10-year plan and other Major Moves commitments, I have asked the bill's sponsor to add to it an amendment to commit $150 million in direct funding to our 92 counties, to help them address their own project needs and backlogs, over the next three years.
"On the day it closes, this transaction will become the largest such event in American history. That record will not last long. Other, larger states are already considering similar steps, and will be emboldened by Indiana's example, but our moving ahead of others almost certainly contributed to the high level of the bids we received.
"One record likely to last a long while is the time in which we got this done. We took just 117 days to conduct a complex financial process that typically takes 9 months or even longer. In today's world, speed makes a huge difference and those businesses, or states, that move fast gain a major edge.
"I speak often to our New Crew in government of the need for our state to think big, aim high, and move fast. In this instance, it's safe to say that Indiana has done all three.
"Today marks an extraordinary moment in state history. A breakthrough like this may come but once in a public service lifetime. We invite and welcome the support of every legislator for this unprecedented and probably unrepeatable opportunity to build Indian's future. Surely partisanship and negativism will now be suspended to seize this fantastic opportunity. Let everyone share in the credit, and in the joy of seeing new life come to Hoosier communities and thousands of new jobs come to the workers of our state." [end quoting Daniels statement]
Toll increases announced by state in September
Toll revenues in 2005 were $88m, and other revenues (service areas mainly) were another $8m. The state's costs were $35m producing an EBITDA or earnings before interest, tax depreciation and amortization of $61m.
The state announced major toll increases in September designed to approximately double toll revenues to $170m/yr. These higher rates - the first since 1985 and due to go into effect this spring - form the toll base point for the concession. Toll increases for cars will rise from the present 3c/mile to 5c/mile (they say from $0.0296 to $0.0504c/mi) or 72% (2c to 3c/km). For trucks toll increases will be even larger averaging 122%. Average tractor-trailer tolls will more than double from 9.3c/mile to 20.4c/mile. The common 157 mile (253km) trip across the state between the OH and IL lines will go from $4.65 for a car to $8.00 and for the truck from $14.55 to $32.00.
Indiana Toll Road rate increases will only bring them above levels in Ohio, but they will still be below rates in Pennsylvania and Illinois.
Concession limits on tolls
The concession agreement keeps passenger vehicle tolls at 5.1c/mile for four years to mid-2010, then it allows a "catch-up" increase for inflation over those four years. From mid-2011 on annual toll increases are allowed for passenger vehicles of 2%, the increase in CPI, or nominal US GDP per capita, whichever of those three is the greatest.
Commercial vehicle tolls at the lowest class go 11.4c/mi to April 1 2007, 14.4c/mi to Apr 1 2008, 17.4c/mi to Apr 1 2009, 20.3c/mi to June 30 2010, then a 4 year catch-up to June 30 2011, and after that an annual increase of 2%, the increase in CPI, or nominal US GDP per capita, whichever whichever of those three is the greatest.
66% of the Indiana Toll Road tolls are paid by out-of-state vehicles, 18% by Indiana cars, and 16% by Indiana trucks.
The ITR is one of the first generation of tollroads in the motor vehicle era, having opened in 1956, around the same time as the Ohio Turnpike, Illinois' main tollways, the New York State Thruway, the New Jersey Turnpike and the Massachusetts Turnpike. Only the Pennsylvania Turnpike (1940) and Maine Turnpike (1947) are substantially older.
The ITR is in some ways two tollroads: including a 37km (23mi) barrier system portion and a 216km (134mi) ticket system portion.
The 37km (23mi) western seventh carries heavy commuter traffic of southwest Michigan and northwest Indiana residents going to jobs in the Chicago area and travelling on the Skyway over the Illinois state line. This portion also carries Chicagoans going to nearby Indiana and Michigan to recreational spots including casinos weekends. It exploits its closeness to the lakefront as the most direct route to Chicago though it faces competition from the untolled expressways which parallel it further from the lakefront including the Borman, Kingery, Bishop Ford, and Dan Ryan Expressways. The western portion has a point toll or barrier toll system. Traffic in 2005 averaged 46k veh/day here. This 15% of the length provided 18% of toll revenues.
The long 216km (134mi) eastern six-sevenths of the ITR caters little to commuter traffic. It links the South Bend-Mishawaka-Elkhart cities in the central north of the state to Chicago but there are few commuters at that distance of 120km (75mi). The main traffic of this long eastern portion of the ITR is interstate - longdistance occasional travelers and heavy trucks. Indeed trucks constitute about 40% of the traffic volume and produce 65% of the revenue on this six-seventh.
Tolling of this stretch is by ticket - issued on entry and tendered on exit to compute the toll by miles traveled. Traffic volumes at 25k/day hardly warrant road widening.
This portion of the ITR faces less competition from free roads in the sense that there is no parallel expressway standard route - only surface rural arterials. South Bend residents headed to Chicago can take state route 2 (IN2) to I-94 in Michigan City IN and take the freeway but there is a time penalty. Traffic crossing the state on the big trucking routes Chicago to the east coast - Boston, New York, Philadelphia and Baltimore - really have no alternative to the ITR. US12 in Michigan and US20 in Indiana are both 2x1 lane arterials going through small towns, 35% and 15% slower, according to traffic and revenue estimates.
COMMENT: Cintra-Mac clearly bid their max to win this one. We told people last week our guess was $2.5b to $3b. But then we thought the Skyway was worth $1.2b and they put $1.83b where their mouth is. The ITR is clearly at least twice the toll business of the Skyway, perhaps three times its potential. We thought they'd pay about 2x to 2.5x$1.2b. WRONG. They paid 3.2x $1.2b or 2.1x$1.83b.
Anyway short of some unforseen fiasco which torpedoed a close, this one clearly establishes them as the leader in concessions in North America.
Also they clearly see a synergy with their Skyway concession. The west end of the ITR plugs into the east end of the Skyway, so there are major advantages in operating them together as a single business unit. They can do joint marketing and joint customer service, and spread operations crews over the two facilities. Improvements on one benefit the other because they attract more traffic. Cintra-Mac already have commited to two years of construction on the Skyway which will reduce capacity during that time. They don't want more traffic on the Skyway until 2008 because they can'd handle it.
During those same two years they will now be trying to do about $200m of improvements to the western barrier system end of the ITR - toll plaza improvements, electronic tolling and third laning. The push to market the improved level of service and reduced trip times will start 2008. MEMO to MacDonalds: Plan to move your franchise out of the center of the Skyway toll plaza there by 2008. That real estate will be needed for open road tolling. TOLLROADSnews 2006-01-23
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