SESSION 8 PROJECT FINANCE: INVESTING IN ENERGY TRANSACTIONS IN 2013 BETTER ODDS THAN ROULETTE? April 26, :45 a.m. 11:15 a.m.

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1 2013 ANNUAL SPRING INVESTMENT FORUM American College of Investment Counsel Chicago, IL SESSION 8 PROJECT FINANCE: INVESTING IN ENERGY TRANSACTIONS IN 2013 BETTER ODDS THAN ROULETTE? April 26, :45 a.m. 11:15 a.m. John T. (Jack) Wallace John Hancock Life Insurance Company (U.S.A.) (Moderator) William H. Bulmer The Prudential Insurance Company of America Bryan S. Cho Metlife Roderick N. Devlin Greenberg Traurig, LLP

airport assets internationally. In the U.S.

2 P3s At U.S. Airport: The Landing Lights Are On Roderick N. Devlin Published in Project Finance International (February 2013) Public Private Partnerships (P3s) have long played an important role in the financing, construction, operation and maintenance of airport assets internationally. In the U.S. however, the P3 model has been slow to takeoff, with government authorities continuing in their traditional roles as airport managers, funding capital needs through the issuance of tax exempt municipal bonds. The Federal Aviation Administration s (FAA) Airport Privatization Pilot Program (FAA Pilot Program), 1 established in 1996, failed to launch the airport P3 sector. For many years, the Terminal 4 project at JFK International Airport in New York City, completed in 2001, stood as the sole example of a successful U.S. airport P3. An Uplift In Participation By historical standards, the runway is now jammed with airport P3 projects. The most recently launched is the P3 for the Midway International Airport in Chicago, following on the heels of the Central Terminal Building at LaGuardia Airport in New York City. The P3 procurement for the Luís Muñoz Marín International Airport in Puerto Rico, which took to the air in July 2011, is expected to come in for a landing sometime soon. This article will examine all three of these current projects, with a special focus on Midway International Airport. LaGuardia Airport, Central Terminal Building, New York City In mid February 2013 the Port Authority of New York and New Jersey (PANYNJ) announced that it had received Statements of Qualifications (SOQs) from five bidding teams in response to its October 2012 Request for Qualifications (RFQ) 2 relating to a new Central Terminal Building (CTB) at LaGuardia Airport in New York City. 3 The winning bidder will: participate with the PANYNJ in the replacement and financing of a new CTB and other support facilities; operate and maintain the existing CTB during the construction period; manage the transition of airline and other tenants to the new CTB; and operate and maintain the new CTB for a yet to be specified term. The existing CTB is 47 years old and houses half of the airport s gates. The RFQ contemplates that the winning bidder will provide private sector financing for the project. The costs of the project have been estimated at $2.6 billion. 4 The PANYNJ is not seeking an upfront payment from the winning bidder. Instead, it is looking for an equity investment in the range of $200 million, the annual ground rent payments and a negotiated share of the net revenues. The RFQ calls upon respondents to identify any approaches that they have successfully used in other airport projects to generate or augment non airline revenue sources. The PANYNJ is expected to release its shortlist of qualified bidders and the Request for Proposals (RFP) for the project in the second quarter of Overall, the PANYNJ is tracking the structure that it successfully used in connection with Terminal 4 at JFK International Airport in New York City. The PANYNJ granted a private consortium, JFK IAT, a long term lease of the site in May JFK IAT constructed the new Terminal 4 on the site of the old International Greenberg Traurig, LLP gtlaw.com February

3 Arrivals Building (IAB), while keeping the IAB open to airlines and passengers. The new $1.4 billion Terminal was completed in May Currently, construction is underway on a $1.2 billion expansion of the Terminal, with Delta Air Lines being the key tenant for the expanded facilities. 6 A further expansion was announced by JFK IAT in February Luís Muñoz Marín International Airport in Puerto Rico In July 2011, the Puerto Rico Public Private Partnership Authority (PRP3A) and the Puerto Rico Ports Authority (PRPA) commenced their P3 procurement with respect to the Luís Muñoz Marín International Airport (LMM Airport), located outside of San Juan. 8 Unlike the CTB project at LaGuardia, the Puerto Rico P3 is being undertaken pursuant to the FAA Pilot Program. Although participating in this program can be cumbersome and time consuming, 9 it offers significant benefits, notably exemptions from certain federal regulations that can restrain P3 activity, including: the so called anti diversion rule, which restricts municipal airport owners from using lease or other payments received from private operators for non airport purposes; and the requirement that certain federal grants be repaid by a municipal airport owner if it enters into a P3. PRP3A and PRPA selected Aerostar Airport Holdings (AAH) (a consortium headed by Aeroportuario del Sureste, a Mexican airport operator (ASUR) and Highstar Capital, the US infrastructure investor) as the winning bidder in July Under the proposed 40 year concession agreement, AAH will be responsible for operation, maintenance, capital improvements and commercial development at LMM Airport. AAH agreed to make an upfront payment of $615 million for the concession. The concession agreement also contemplates the following revenue sharing arrangements: for the first five years of the term, PRPA will receive annual payments of $2.5 million; during the next 25 years, PRPA will receive 5% of annual gross revenues; and during the last ten years of the term, PRPA will receive 10% of annual gross revenues. It is estimated that Puerto Rico will receive approximately $2.57 billion during the term of the concession, including $1.4 billion in capital improvements. AAH has proposed issuing $350 million of senior secured private placement bonds to partially fund the up front payment, with RBC Capital Markets and UBS as co placement agents. AHH is also expected to make an equity contribution of $327 million, to be split equally between ASUR and Highstar. In September 2012, the FAA held a public meeting to hear comments on the final preliminary application to participate in the FAA Pilot Program. A final decision from the FAA is expected shortly. The proposed P3 is also subject to regulatory approval by the Transportation Security Administration (TSA) and Department of Homeland Security. Greenberg Traurig, LLP gtlaw.com February

4 Chicago Midway International Airport The City of Chicago s previous attempt to consummate a P3 project for Midway International Airport under the FAA Pilot Program was grounded in After a competitive procurement process, the City awarded a 99 year lease to the winning private consortium in September As a key condition to the award, the consortium was required to make an up front payment of $2.5 billion to the City. 11 Following several time extensions, the City terminated the award in April when the consortium failed to close the required financing. 13 Under the terms of the RFP, the consortium s $126 million completion security was forfeited to the City. The FAA granted various extensions to Midway s participation in the FAA Pilot Program at the request of the City. 14 The City issued its new RFQ for the project in January The City received 16 responses to its RFQ on February 22. An Information Memorandum and draft documents are scheduled for release in the first quarter of The New Approach Lessons Learned The project outlined in the RFQ differs in certain key respects from the unsuccessful P3 proposed in For one thing, the term of the lease is capped at 40 years (as opposed to the 99 year lease under the previous structure). While a shorter term lease may make the project less attractive to the private sector and drive down the up front payment that the City expects to receive, it will likely make the project more politically palatable. The City has also clearly learned some valuable lessons from the unpopular 75 year Chicago Parking Meters Concession awarded in 2009 under former Mayor Richard Daley. That project was criticized in certain quarters for a perceived lack of public scrutiny. Although the winning bidder paid $1.16 billion for the concession, the public saw little tangible benefit as the payment was used to cover the City s operating deficit. The significant increases in meter rates were a case of much public complaint and press attention. In structuring the new Midway airport P3 procurement process, the City has taken some important steps to avoid such pitfalls. Midway Advisory Panel Oversight and Transparency In January 2013, prior to the issuance of the RFQ, Mayor Rahm Emanuel announced formation of a seven member advisory panel to assist in the Midway P3 process. The Midway Advisory Panel is charged with helping represent the public interest in connection with the project. The Panel includes two City Council members, representatives from the business and planning communities, and a union representative. 16 According to Mayor Emanuel, [t]hese civic leaders will be vigilant protectors of taxpayer interests as we explore potential opportunities with Midway Airport. Any potential deal must pass an extremely high threshold and this committee will ensure transparency, integrity and thorough deliberation in this process. 17 The City has stated that the Panel will be briefed at every stage of the process. Further, the Panel will provide written reports to the public. 18 Once the winning proposer has been selected, but prior to execution of the P3 agreement, the Panel will deliver a report to City Council outlining its viewpoints on the process and the proposed P3. Specifically, such report will address: the benefit that the proposed transaction will provide for taxpayers and residents; Greenberg Traurig, LLP gtlaw.com February

5 the fairness, transparency and competitiveness of the process; and whether or not the proposed transaction provides fair value for taxpayers. 19 To further address the criticism of lack of transparency and public consultation leveled at past P3 transactions in the City, the RFP contemplates that once the Panel has delivered its report, the City Council will have a review period of not less than four weeks prior to final action by Council. If the transaction is approved by the Council, it is expected that there will be a further 60 day public comment and a 60 day review period. 20 Travelers Bill of Rights In early January, the City also released its proposed Travelers Bill of Rights with the declared intent of protecting the public s interest and establishing standard for safety, security and customer service with respect to the Midway P3. 21 It addresses Midway parking facilities and prices, the quality of the terminal, convenient and timely baggage services, reasonably priced food and beverage choices, restroom quality, curbside services, and other matters. The RFQ makes specific reference to the role of the Travelers Bill of Rights in the procurement process. 22 Airlines First Class Treatment A key component of the FAA Pilot Program is the requirements that the proposed P3 be approved by (a) at least 65% of the air carriers serving the airport and (b) air carriers whose aircraft represented at least 65% of the total landed weight at the airport. In 2011, Southwest Airlines represented approximately 88% of emplaned passengers and 84% of landed weight. 23 The City has reached a preliminary understanding with the Midway airlines on the terms of a new airline Use Agreement. 24 The winning private bidder must assume such Use Agreement, which will provide a long term framework of airline fee rate setting that inflation linked and caps airline tariffs. 25 Up-Front Payment, Revenue Sharing and Use of Funds A Long Term View The RFQ requires respondents to provide evidence of their capacity to close the financing for the transaction. 26 The City is looking for both an up front payment (on the closing of the financing) and an annual revenue sharing payment. 27 In contrast to the application of the funds received from the 2009 Parking Meters Concession, the City has indicated that the Midway proceeds will not be used to plug the City s operating deficits but will rather be applied to pay down Midway s debt and to satisfy the City s infrastructure needs. Conclusion Given the continuing pressure on municipal finances, it is not surprising that municipalities are increasingly looking to P3s as a means of accessing private sector financing. For municipal airport owners participating in the FAA Pilot Program, the possibility of a substantial upfront payment is understandably attractive. Instead of simply trying to maximize the shortterm financial benefits of an airport P3, the municipal airport owners currently pursuing P3 projects have adopted a more nuanced approach. With shorter lease terms, a greater focus on long term revenue sharing, and specified capital investment requirements, these projects are structured so as to avoid some of the criticism leveled against past asset monetization projects. The City of Chicago in particular has taken some creative steps to head off potential challenges to its Midway P3 by establishing the Midway Advisory Panel, creating greater public consultation and Greenberg Traurig, LLP gtlaw.com February

6 comment opportunities and making its Travelers Bill of Rights part of the P3 procurement process is set to be a banner year for the Airport P3 sector in the U.S. If the Luís Muñoz Marín International Airport project in Puerto Rico reaches financial close, it will provide a significant boost to the proposed Midway Airport project, by demonstrating that the FAA Pilot Program is a viable route to a P3. It appears likely that the PANYNJ is on track to replicate its success with JFK International s Terminal 4 at LaGuardia s Central Terminal Building. On the private sector side, all three projects have attracted substantial interest from international and domestic operators, contractors and infrastructure funds. While it is too soon to say if the current activity is the start of a thriving U.S. airport P3 sector, if these three projects are successfully consummated, it will significantly boost private sector confidence that such projects can be done in the U.S, as well as encouraging other municipal airport owners to consider P3s as a possible option. 1 Section 149 of the Federal Aviation Administration Authorization Act (which added a new Section to Title 49 of the U.S. Code) established the FAA s Privatization Pilot Program. 2 The initial response date of December 21, 2012 was extended by the PANYNJ to January 25, The Central Terminal Building P3 project at LaGuardia Airport in New York City is not part of the FAA Pilot Program. 4 In its December 19, 2011 Request for Information (RFI) in connection with the project, the PANYNJ contemplated the possible inclusion in the project of certain additional roadways, utilities and parking garages. However, in the October 2012 RFQ, the PANYNJ stated that such supporting projects would be undertaken by the PANYNJ separately. 5 Schiphol, the Dutch airport operator, is now the sole owner of JFK IAT after two previous consortium members were bought out. 6 This $1.2 billion expansion of Terminal 4 is scheduled to open in May In February 2013, JFK IAT announced that it would continue the expansion of Terminal 4 with a further $180 million project that will add 11 gates and 75,000 square feet to the Terminal. See: ID= million passengers passed through Luís Muñoz Marín International Airport in See U.S. Airport Public Private Partnerships: Preparing For Flight?, Roderick N. Devlin, Project Finance International, March As a participant in the FAA Pilot Program, the proposed LMM Airport P3 must be approved by 65% of the scheduled air carriers serving the airport, determined both on the basis of landed weight and by number of carriers. Prior to starting the procurement, PRPPA entered into a non binding Memorandum of Understanding with airlines representing over 80% of the landed weight at the airport under which such airlines agreed to cooperate with the P3 procurement process. 11 Daley announces $2.5 billion lease for Midway Airport, Chicago Tribune, September 30, aley announces/comments/page/2/ 12 Midway Airport deal falls apart: Consortium can't borrow cash needed to finance deal, Chicago Tribune, April 21, 2009: /news/ _1_midway airport dealconsortium. 13 The depressed financial markets in 2009 played a large part in the consortium s inability to close on the financing, but the large size of the up front payment was also a factor. See: What made the Chicago Midway privatization fail? Project Finance, May 1, Emanuel in holding pattern over Midway, Hal Dardick, Chicago Tribune, August 3, See: Chicago seeks investors for potential Midway Airport deal, /business/ct biz 0119 midway Greenberg Traurig, LLP gtlaw.com February

7 _1_privatization deals privatization plan cityoperations 16 See: Emanuel Announces Midway Privatization Advisory Panel 10/ /emanuel announces midway privatizationadvisory panel 17 See: _room/press_releases/2013/january_2013/mayor_emanu el_announcesmidwayadvisorypaneltoensuretransparencya n.html 18 Id. 19 Id. 20 See Chicago Midway International Airport, Request For Qualifications, January 2013, page Id. at page Id. 23 Id. at The City intends to enter into legally binding agreement with such airlines before it begins the formal bidding for the P3 lease. See Id. at Id. at Id. at Id. at 3. Roderick Devlin Greenberg Traurig, LLP MetLife Building 200 Park Avenue New York, NY Tel Fax Greenberg Traurig, LLP gtlaw.com February

Chicago Midway International Airport Privatization. ACI 2009 Legal Issues Conference San Francisco, CA May 13-15, 2009

Chicago Midway International Airport Privatization ACI 2009 Legal Issues San Francisco, CA May 13-15, 2009 How does it work? Prerequisites Authority Necessary waivers The process The parties and the deal