Toll Road Operator Finds Light at End of Tunnel. California Private Transportation Says 91 Express Lanes Now Profitable
By RAJIV VYAS
With new financing at lower interest rates and higher toll charges, California Private Transportation Co. says that its 91 Express Lanes toll road has become profitable several years ahead of its initial plan.
Anaheim-based California Transportation, a company that was formed to create and operate the four-lane, 10-mile toll road in the median of the Riverside (91) Freeway, refinanced its debt at lower rates in July and also increased its toll charges in November. Both moves are helping the money-losing project to turn the corner.
At the end of July, California Transport-ation raised $135 million through a senior secured bond offering at 7.63%. The bonds received a AAA rating from Standard & Poor’s and Fitch Inc. after they were secured by a guarantee by XL Capital Assurance.
Most of the money that the company raised went to retire old and expensive debt. The company had $95 million of debt on which it was paying roughly 9.5%. Also, most of that debt had to be repaid in the next seven to eight years. The $135 million senior secured bonds are due in 2028. California Transportation also repaid $11 million in subordinated debt to Orange County Transportation Authority.
“It is less expensive money and a long-term financing strategy for the company,” said Charles Ruck, partner and head of the mergers and acquisitions group at Latham & Watkins. Ruck represented California Transportation in the refinancing deal.
“It’s no secret that they have thought about what long-term alternatives are there for their toll road,” he said. “The refinancing brings more stability to the project.”
Lower interest rates are driving what little economic growth there is in the U.S. right now. The 10 interest rate cuts by the Federal Reserve have triggered a slew of debt and mortgage refinancing. Not only are homeowners taking advantage of lower interest rates, but companies that have significant borrowings and are highly leveraged also are restructuring their debt.
“The (interest) rates were good,” said Greg Hulsizer, California Trans-portation’s general manager, noting that the refinancing is saving the company “about 200 basis points” in interest costs.
Besides refinancing, Cal-ifornia Transportation also raised tolls on the 91 Express Lanes by 25 cents to 50 cents in November, a move that it said would increase its revenue and also slow a growth in traffic volume that sometimes clogs the lanes. Hulsizer said that this was the sixth time the company had increased its toll charges since opening the 91 Express Lanes in 1995.
The Riverside Freeway is a major commuter link between Orange and Riverside counties, stretching from the county line westward to the Costa Mesa (55) Freeway interchange.
Toll roads normally are set up when a state or a county does not have enough money to build and manage a freeway. California Transportation operates under a 35-year franchise from the state, during which it will own and operate the toll road. In December 2030, the company will turn the road back to the state.
“Since 1998 we have been at cash break-even,” Hulsizer said.
But before the refinancing and the most recent toll increase, the company was losing money after interest and depreciation. In the five-year period from 1996 to 2000, California Transportation accumulated losses of more than $42 million, almost $29 million of that in depreciation charges.
After the refinancing, “we became instantaneously profitable,” Hulsizer said, several years ahead of original projections.
The company’s toll road carries an average of 27,000 vehicles each day, while the Riverside Freeway proper carries about 250,000 vehicles. But during rush hours, Hulsizer said, the 91 Express Lanes carry 45% of the traffic. Before the recent toll adjustments, the roads were operating at 95% to 105% of capacity during rush hours.
“We are very comfortable with the long-term viability of the project,” Hulzizer said.
In the first quarter of 2001, California Transportation posted revenue of $5.37 million, an increase of 14% from the same period last year. Its loss widened to $3.62 million in the quarter, because of a one-time charge of $2.5 million incurred on an interest rate swap derivative.
Bumpy Road
The successful restructuring of debt comes as welcome good news for California Transportation, which has been embroiled in controversy over the 91 Express Lanes virtually since they opened.
Criticism from Riverside County, where most of the toll road’s commuters live, began when the initial tolls were announced as among the highest in the nation, and only has intensified since. In 2000, Riverside County went to court to void California Transportation’s contract to operate the toll lanes, saying the deal was an unconstitutional gift of public assets. The state Supreme Court last year refused to throw out the suit.
Corona also has sued the state, claiming a no-compete clause in California Transportation’s contract has prevented widening of the Riverside Freeway and pushed traffic onto that city’s streets.
Meanwhile, American Transportation, faced with mounting losses and political headaches, decided in 1998 that it wanted out. It offered the 91 Express Lanes first to the OC Transportation Authority, which declined, and then inked a deal with a non-profit organization called NewTrac, headed by former San Clemente mayor Gary Hausdorfer.
But Riverside County officials questioned both the legality of that deal and NewTrac’s ability to manage the toll lanes. The sale was aborted last year as legislative hearings and an Attorney General’s Office investigation got under way. ,Roger Bloom
