Macquarie buying VA Dulles Greenway for $615m

Catapult Mom Rocketman The Greenway's major deficiency is a poorly designed mainline toll plaza which regularly creates backups - pic TOLLROADSnews early 2004 Geography lesson needed downunner The western section of the Greenway - just 2x2 lanes but with median space to go to 2x4 Map showing Dulles Greenway (DGwy) and Dulles Toll Road in the larger metro area. The transition between the tollroads is at VA28.

Macquarie say they have an agreement to buy 86.7% of the stock of the Dulles Greenway in Virginia for $533m. This is the stock of Shenandoah Group - the family company of the Greenway pioneers Maggie Bryant and her son and CEO Michael Crane - and of AIE LLC, lowkey private investors who bought out Autostrade's former 30% share in 2003. Macquaurie also say they are close to nailing down an agreement to purchase the remaining 13.3% of the stock held by Kellogg Brown & Root, a Haliburton sub, and the major builders of the tollroad, which opened just short of 10 years ago in the fall of 1995.

If Macquarie pay KBR the same per share as Shenandoah and AIE the purchase price of the Greenway will be $615m.

Macquarie say they will take "operational responsibility" for the pike and will make a public stock issue of $675m to pay off interim loans and fund the new venture.

Autostrade have an operations and maintenance contract at the Dulles Greenway for the life of the concession, but Macquarie's statement apparently means they will work to Macquarie's instructions.

A Macquarie spokesman said today their ownership of the general partner will give them "day to day responsibility for the management and operation of the concession."

Macquarie rationale

Explaining the purchase Macquarie Infrastructure Group (MIG) CEO Steve Allen said in a corporate statement:

"Dulles Greenway has a number of highly attractive attributes that caught the attention of MIG and we have been actively pursuing the opportunity to invest in the road for some time. Dulles Greenway is a relatively young, well maintained intra urban toll road with a 10-year operating history and 51 years remaining in the concession agreement. Tolls are established, on application, by the Virginia State Corporation Commission (SCC).

"One of the most exciting aspects about the road is that it serves an affluent region experiencing strong population and employment growth. Loudoun County has one of the fastest growing populations in the United States with significant housing and economic development expected to continue.

"Although the road experienced difficulties in the early years the region's strong growth is now reflected in the Dulles Greenway's compound average growth of 17% for traffic and 26% for revenue between 1996 and 2004.

"This is a high quality, growth asset that will be value accretive to the MIG portfolio. We are forecasting an average yield of 8% per annum over the next 10 years. Following completion of our investment in Dulles Greenway it will comprise 8% of MIG's portfolio and will be our third investment in the growing United States toll road market."

Investment fundamentals

Under the heading "Investment fundamentals" Macquarie say the Greenway promises an internal rate of return on the $615m purchase price of 12.6%/yr. They call it a "growth asset" which should yield an average 5%/yr in the first 5 years and 8% over the first 10 years.

MIG are proposing an equity capital raising of approximately $675 million via an institutional placement of stapled securities. There will also be a security purchase plan.

MIG anticipate financial close by mid-Sept.

NJ misplaced - US geography lesson needed downunner

The Sydney Morning Herald headlined its report of the Macquarie announcement today: "MIG buys New Jersey toll road" though the text of the report correctly located the Dulles Greenway in the state of Virginia. NJ got into the story because it quoted CEO Steve Allen as saying they were "monitoring" state plans for the turnpike. The NJ Turnpike, Allen said, would be "very big." If it were too big for Macquarie alone they would put together a consortium.

Traffic history

The Dulles Greenway is an extension northwesterly of Virginia DOT's Dulles Toll Road and constitutes a premier commuter route to the rest of the Washington DC metro area for residents of Loudoun County VA centered on Leesburg and points west in nearby West Virginia. Designated VA267 it goes 22km (14mi) from US15 in Leesburg to the western end of the Dulles Toll Road at a complicated interchange with VA28 (Sully Road) and the complex of entrance Roads to Washington Dulles International Airport, one of three airports in the Washington-Baltimore metro area (pop 7.2m).

It competes for traffic with VA7 Leesburg Pike - a famous 19th century tollroad now a 2 x 3 lane arterial, free of tolls, but riddled with an endless procession of traffic signals. The Greenway is constructed in rolling country, and winds left and right, reflecting the privately negotiated land purchases and avoidance of 'holdouts' that defined its right of way in the years 1991-93. It has only one major bridge - over Goose Creek. The eastern end of the Greenway, including the mainline toll plaza, is constructed on land leased from the Metropolitan Washington Airports Authority. It is on the edge of the real estate of Dulles Airport.

Traffic on the Greenway last year averaged 70.7k/day. They expect to have 82k/day this year, another 16% growth.

Being privately held there are no publicly available accounts for the Greenway but we were told toll revenues are currently about $50m.

Peak toll rates at the mainline plaza are $2.40 and off-peak $2.00. 50c of the toll collected at the Greenway mainline plaza is passed on to VDOT as a west-end Dulles Toll Road toll, the equivalent of a ramp toll at other exits on the west end of the VDOT facility.

Growth

Loudoun County had 169.6k people in 2000 vs 86.1k in 1990, growth of 97% in the decade. There have been major battles over development policy in county government but growth continues strong. The area is very attractive for development and well situated relative to booming northern Virginia and the airport area. Nearby Jefferson and Berkeley counties of West Virginia are also developing and feed the Greenway.

The Greenway opened Sept 29 1995.

Average daily traffic averaged over full years has been:

1996 20.2k

1997 27.8k +38%

1998 32.4k +16%

1999 39.7k +23%

2000 46.3k +17%

2001 51.9k +12%

2002 55.7k +7%

2003 60.9k +9%

2004 70.6k +16%

Peak toll rates at the mainline plaza are $2.40 and off-peak $2,00. 50c of the toll collected at the Greenway mainline plaza is passed on to VDOT as a west-end Dulles Toll Road toll, the equivalent of a ramp toll at other exits on the west end of the VDOT facility.

HISTORY: TRIP II the holding company now in sale was sponsored and has been majority owned by the family of Maggie Bryant and her son Michael Crane via their Shenandoah Greenway Corp. They are local (Middleburg VA) property owners and business people. Kellogg Brown & Root the Houston sub of Haliburton own a portion of shares. Autostrade the big Italian toll operator were initial partners but about two years ago sold their interest to AIE LL, private investors.

The main developer of the project was Ralph Stanley, a mercurial 43 year old, 6'6" tall, who kept a large dog in his office in a 2-story building in the main street of Leesburg and used to conduct two conversations simultaneously. This larger than life guy was briefly in government where he was head of the Urban Mass Transit (now Federal Transit) Administration under Pres Reagan.

Stanley talked up local support for the tollroad, found the Crane family as lead investors and worked most of the land acquisition, permitting, design, the financing, and set the project on the road to construction. Land acquisition involved negotiation with about 300 private owners of land along the route. Stanley fell out of favor with the Cranes by the time the road opened. He got a job with Bechtel in Portland, but sadly died of melanoma in 2001 at age 49.

Troubled early years

TRIP II defaulted on its original longterm financing from Prudential and New York Life insurance companies from the very first due date for debt service because traffic was miserably low at the opening $2.00 toll. Traffic slightly more than doubled at a $1.00 toll but revenue wouldn't service the debt. The tollroad's first three years were dicey with Prudential in effect running the show. (CEO Crane joked that he entered his office each day happy to see he still had a chair and desk left to sit at, and told us he had to get "the OK from Hartford CT" to order new typewriter ribbon.)

There was much bad feeling at the time over traffic and revenue projections from Vollmer - though just recently they have been looking rather prescient.

From the fourth year traffic grew strongly. In May 1999 Bear Stearns did a successful refinancing and the original bondholders were paid off about 90c in the dollar. The first third laning began soon afterward.

The final obstacle to funding expanded capacity was a requirement that the tollster get permission for a toll increase from a state price controlling body in Richmond VA called the State Corporation Commission. This organization took 13 months to render judgment that the tolls could go up. Seven months went by before the price controllers organized hearings on the toll increase. In their decision they granted the Greenway request - despite much noisy opposition at the public hearings - and set maximum tolls for cars previously $2.00 at $2.40 immediately, $2.70 at end-2005, and $3.00 July 1 2007. Actual tolls have at times been below the maximum allowable.

Loudoun County served by the Dulles Greenway is one of the faster growing fringe areas of the 7.2m pop Washington-Baltimore metro area. The Dulles Greenway competes with the untolled 6-lane signalized arterial VA7 Leesburg Pike (named from its early 19th century origins as a toll road) as the main connection to the rest of the metro area. As a project it was initially called the Dulles Toll Road Extension since it is an extension west beyond VA28 and Dulles Airport of the successful VDOT toll road who goes from VA28 east to the Capital Beltway (I-495). Travelers from Loudoun County to the Beltway have mainline plazas at the Greenway and on the Toll Road at Tysons Corner to pass through.

Concession term extended 20 years

TRIP II obtained a "Certificate of Authority" to toll for 40 years as part of the original concession agreement with the state before the road was built. Last year the State Corporation Commission extended this to 60 years, accepting the investors argument that the longer term was needed to fund the capital improvement program. (Neither the Washington Post nor the Washington Times has ever reported the 20 year concession extension.)

51 years now remain on the concession.

Owners of the Dulles Greenway, a toll increase in hand, closed on a bond financing in March 2005 that is funding $72m of expansion projects currently under way:

* widening the whole length of the pike to 2x3 lanes

* adding two new interchanges, improvements to another

* construction of a direct connector ramp to Dulles International Airport

* expansion of the mainline toll plaza from 14 to 18 lanes (originally 10 lanes)

Traffic in 2004 averaged 70.6k daily - too much for a 4-lane highway for which about 50k to 60k is normally considered a comfortable ceiling. The road was designed with a wide median and has the space to go to at least 2x4 lanes though rail enthusiasts want to run a heavy 'Metro' rail line down the middle too.

Feasibility study for 8 lanes

The present owners have a feasibility study under way looking at where they go beyond the 2x3 lanes being built with the present financing.

The Greenway has already gone to 3 lanes per direction for the first 8km (5mi) traveling westward (to Claiborne Parkway) so the present work involves 14km (9mi) of third-laning to US15 in Leesburg.

Two new interchanges will replace arterials which presently bridge the Greenway without connections in the western half of the toll road.

* Battlefield Parkway will become Exit 2 after removing the existing Tolbert Lane Bridge and replacing it with a new four lane structure that connects directly to Battlefield Parkway as well as extending Battlefield Parkway to VA621, Evergreen Mills Road

* Cross Trails Blvd will become Exit 3 through widening the existing Shreve Mill Rd Bridge to 4 lanes and building the connecting ramps and roadway within the Greenway right of way

Construction of a direct connection ramp to Dulles International Airport near the eastern end of the Greenway will eliminate a circuitous trip by eastbound traffic in which they cross over the top of the Greenway to join VA28 for a short distance and go under the Greenway again before joining the lanes of the VDOT Dulles Toll Road entering the airport. If that sounds confusing, it is! Only a sketch map can explain the spaghetti of DTR/Greenway/VA28/AirportAccess/ParkingLotRamps movements. (I once ended up in a longterm Parking Lot Blue trying to find the Greenway, my route home, having just left Parking Lot Yellow, or something like that. All the way round again. PSam)

At the western end of the pike in Leesburg an entry ramp from US15N will be doubled.

An existing diamond interchange at Ox Road VA606 will get loops to make it a full cloverleaf. (Virginia is the world's last refuge of cloverleaf interchanges!)

The mainline toll plaza presently the scene of serious backups in peak hours will be widened to 18 lanes. The abutting Dulles Toll Road has moved to higher speed electronic tolling on its mainline plaza but the Dulles Greenway is not yet making that move. For the immediate future it will still be 15mph roll-through in single transponder-only lanes.

Collaboration with Accenture on video tolling

Dulles Greenway have been working with a new tolling group at Accenture to demonstrate advances in video tolling on the Greenway. Details have not yet been released, but improvements to the Greenway plaza are badly needed.

Dulles Toll Road

Macquarie must be looking closely at making a bid for the Dulles Toll Road, the 350k tolls/day state-owned facility to which the Greenway attaches. It is the subject of a proposal to the state of about $1b worth of rail-financing support by Dulles Corridor Mobility Consortium, a group comprising a small local broker with the backing of Autostrade and Laing. The tying of a toll concession to support for a loss-making rail line has drawn criticism, and state officials have said they would like competing bids. The deadline for these is Oct 28.

The two presently separate operations would integrate nicely.

COMMENT: The Greenway is a good buy at $615m. It is a tollroad with similar revenue to the Chicago Skyway and better potential for growth - at a third the price.

What future Catapult Mom and Rocketman

For us the biggest unanswered question is whether the new owners will banish Catapult Mom and Rocket Man, cutesy promotional figures deployed by the Greenway in marketing ever since it opened. The first rocket was a fizzer.

NOTE: Parts of this report draw on material in a TOLLROADSnews report dated 2005-03-03.

See Macquarie statement at

http://www.macquarie.com.au/au/mig/news/20050830.htm

TOLLROADSnews 2005-08-30