Transcript

Jordan Wainer: Good afternoon, everyone. On behalf of the Federal Highway Administration's Center for Innovative Finance Support I'd like to welcome everyone to today's financial viability assessment exercise review webinar. This is the last webinar in the P3 value 2.0 webinar series. My name is Jordan Wainer. I'm with the U.S. DOT's Volpe Center in Cambridge, Massachusetts and today I will be moderating the Webinar as well as facilitating our question-and-answer period. I would like to point out a few key features of our Webinar room. On the top left side of your screen you will find the audio call in information. If you are disconnected from our webinar at our any time please use that call in information to reconnect to our audio. Below the audio information is a list of attendees. Below the list of attendees is a box titled materials for download where you may access a PDF copy of today's presentation as well as the draft P3 product financing guidebook. We will also make the answers to the exercise available here at the end of the webinar. In the lower left corner is a chat box where you can submit questions to our presenters throughout the webinar. Our webinar is scheduled to run until 2:00 P.M. eastern today and we are recording today's webinar so that anyone unable to join us may review the material at a later time. With that, I will hand it over to Patrick DeCorla-Souza. Patrick.

Patrick DeCorla-Souza: Thanks, Jordan. And welcome to this last of the series of webinars on P3 value. Today, we will cover the review of the exercise that we issued last Monday on financial viability assessment. With me to help prevent this webinar will Wim Verdouw and Wim will join us later. This is a list of the webinars we've held so far. And if you missed any of them they're all available on our website under webinars and the P3 toolkit. Just go ahead and click on any of these webinars and you can listen to the recordings. So the outline for the webinar today is I will cover the project background. It's the same project that we've been looking at previous exercises. I will cover a little more in detail the financial aspects of that project. In Part A, we will show how to use the P3 value tool to evaluate financial liability of conventional delivery, that is public financing of your project. In Part B we will show you how to check the financial viability of your project if you are contemplating P3 delivery. And finally we will to summarize the webinar. Here's the introduction project background, the P3 value tool has embedded in it a project that reflects a study done by a state DOT to do value for money analysis, as well as to evaluate net societal benefits of P3 delivery. And we've already looked at the value for money analysis. We've looked at the benefit cost analysis in that P3 value tool. And today, we are going to look at how to check financial liability both for public financing as well as P3 delivery. The project, as before, is a managed lanes project. So there is an existing facility that is three lanes in each direction and the project involves adding two managed lanes per direction so a total of four additional lanes. The cost of the project is both including preconstruction and construction amounts to 425 million. Routine maintenance that's annually $4 million a year major maintenance which includes rehabilitation types of activities. It includes $10 million and is required every eight years. The start date for preconstruction is 2015. The start date for construction 2017 for a period of 4 years. And operations will be for 40 years starting in 2021. Now, in one of the prior exercises we showed you how to calculate the risk values for this project and these are the results of the risks that we calculated. So you see the PSC or conventional delivery risks in the first column, the P3 delivery risk in the second column. And the key important thing to understand is for the PSC or conventional delivery we do include as inputs all of these risks, that is pure risks, the base variability, lifecycle performance risk and revenue on the adjustment. And these are all risks you can review by looking at the prior exercise on risk assessment or prior webinars. On the P3 side, we only calculate through the tool, the pure risks and base variability, the lifecycle performance risk and revenue, uncertainty adjustments even though the values are shown here they're actually derived from the weighted average cost of capital. And that weighted average cost of capital involves the risk premium that is included in the interest rate on debt and the equity rate of return required by equity investors. And that's all included in the financing costs. And so we do not calculate them separately for the P3 project. Also for the revenue uncertainty adjustment, the revenue risk is included in the higher interest rates and the higher equity rate of return that might be demanded by equity investors. And since that is included as a financing cost under the P3 has the weighted average cost of capital we do not separately calculate the revenue uncertainty adjustment for a P3. Now, important for financial viability analysis, is to understand traffic projections and revenue projections because that, of course, is the most important input, how much income is going to come into the project. Then, of course, we've also estimated in the past the cost of construction and operations. So we look at the revenues, we look at the costs and then based on these two factors we are able to calculate whether the revenues are sufficient to pay for the costs. So an important input is all of these traffic volumes on the managed lanes or toll lanes. And you see that these are inputs that we provided to the model increasing by approximately 5,000 vehicles per day through 2050 at a rate of increase of 1 percent per year thereafter. And this is important because this is used along with the toll rates. And the toll rates are also inputs that we provide in P3 value. Since this is a managed lanes project we have different rates for different times of the day as well as for the weekend. And we know that managed lanes projects really you don't have fixed tolls, at least, in most of the managed lanes in operation in the U.S. The toll rate actually varies based on demand. And all we are trying to do here to get our estimates is to provide the tool with an average toll rate in the peak hours for passenger cars, an average toll rate in the off peak hours and then an average toll rate on the weekends. Now, if trucks are allowed in the managed lanes, their tolls might be higher. And what we see here is they're about 50 percent higher at least for the peak periods. But then the weekday off peak and weekends they are twice as high. Important also in estimating the financing cost is the financing conditions and there are several factors that affect the cost of capital and the first important factor is the cost of debt. And the cost of debt depends on the majority of the debt or for how long the loan will last. The second important factor is the interest rate. Of course, a higher interest rate means you pay more in interest. The minimum required debt service coverage ratio which, as we discussed last week, affects how much of debt you can borrow because it limits the amount of debt service that you can allocate to a project from your cash flows. And what this is saying is that the debt service coverage ratio being 1.3 means that the total revenue needs to be at least 30 percent higher than the debt service. Now, one thing important is the P3 value has only one tranche of debt. And we know that in most P3 projects, as well as even possibly conventional financing you may have more than one tranche. For example, you may have bonds covering senior debt. And then you may have subordinate debt in the form of a TIFIA loan. And the 1.3 coverage ratio effects the sum of the TIFIA and the bond debt service. So that's what we are using here is a combined-- so that means that the interest rates and the debt maturity is some sort of average if you have two tranches of debt that you are proposing to use on your project. Now, the public agency has allocated from its budget $100 million. It has the much available for this project. And so it is allocating that in order to reduce the amount of debt that it needs to borrow basically. So we are going to check and see if that amount of subsidy is actually adequate to fund the project or if additional subsidy is needed in the case of PSC financing or conventional delivery. For the P3 financing situation there are many factors affecting the cost of capital and therefore the cost of the project. The interest rate on debt, of course, is important but also important is now the rate of return required by equity. And in this case, this project requires a twelve percent return. The financiers are requiring a debt to equity ratio or leverage of 75 percent which means that the financing needs to include at least 75 percent of debt and 25 percent, the remaining would be equity. And that's a requirements of the financiers to ensure that equity investors have sufficient skin in the game, so to speak, in order to form a buffer. If revenues aren't adequate basically the equity investors are the ones who won't be paid first. And the debt holders will be more secure. So debt maturity under a P3 is 30 years. These are assumptions for the particular situation of the P3 that we are looking at in this project. Debt interest rate is a little higher. As we indicated the interest rate may include more than just the basic risk or systematic risk that you might get that is included in your normal general obligation bonds, for example. So this is higher because it is reflecting additional risk off the project itself. That's why it's higher than the four percent under the PSC. Of course, an equity bridge loan is a loan that is taken out by the equity investors in order to fund the project up front when they know that they can pay off the loan through milestone payments that are already scheduled upon completion of the project or at certain milestones during the project. And we know that the public agency has allocated $100 million to the project and they're going to pay it in the form of a completion payment at the end of the project. And so the equity investors need to take out a loan of this $100 million or sufficient to pay not just the $100 million principle but also interest that would be required to be paid during the construction period. And so that's what that equity bridge loan is and it is subject to the six percent rate of interest similar to the debt interest rate. The debt service coverage ratio is the same as for the PSC. And as we said, the subsidy is also the same as under the PSC. So now, let's talk about how all of this information can be used to evaluate whether the financing of the project under conventional delivery is viable. The first thing is to understand what are the factors that affect financial viability? And the project scope is obviously important because that affects the cost. We know that's half of the equation if you are trying to check on financial viability. And revenue is the other half, that is toll rates. So that's the revenues that toll rates multiplied by the traffic gives you the revenue. And so these are two variables that could at least have some-- the public agency might have some ability to affect either by reducing the scope or increasing the toll rates to make the project viable. What we are going to look at, though, is something more related to the financing and the cost of financing which can also affect the costs. So it's not just the scope but also the cost of financing that can affect the cost. And so we're going to look at the debt terms that can affect cost, so, for example, annuity type debt versus sculpted debt. And as we indicated at the last webinar, sculpted debt is more efficient. It likes to match the profile of the revenue stream. And so you can match-- if you can match the revenue stream you can borrow more and be more efficient thereby requiring less equity or less subsidy in the case of conventional delivery. Debt service coverage ratio, we indicated the magnitude of that can affect how much you can borrow, because it effects how much of cash you can use for debt service. And the more the cash you could use for debt service, the more you can borrow. Debt maturity likewise, if the debt service goes on for more years you have that many additional years of debt service that can provide the repayment of the debt. And so this is an important too. And then grace period effects annuity and we are looking only at sculpted debt so we are not going to look at grace period since we are not using annuity debt in this particular project. And finally, the interest rate, obviously, if you have higher interest rate more of your annual debt service will need to go towards interest and therefore you will be able to pay back less principle. And so, of course, less principle means you can borrow less right up front. So what we're going to look at is the input in P3 values or we will look at the toll revenue and traffic forecasts. We will look at the various factors that affect debt, annuity versus sculpted, maturity interest rates, fees. I forgot to mention fees. When you're borrowing or when you are issuing bonds there's certain fees that need to be paid up front and so that needs to be added to your upfront debt. And we mentioned minimum required DFCR. Reserves, we haven't spent a lot of time on but reserves are what at least in the case of debt service is what the debt providers require that the project company keep as cash on hand in order to make sure they get paid on the due date of the next payment. Similarly, there are reserves for operations and maintenance costs, and for major maintenance that need to be set aside. And those are part of the inputs to your model. And finally, since in this particular project the public agency has said that it will allocate a certain amount of public subsidy to the project that is an input of the project. What we are going to look at in the conventional delivery evaluation is we will, of course, look at the results from the initial case which has the financing conditions I showed you earlier, interest rates, revenues, debt to maturity and things of that type. Now, what we will see is what would happen if the debt service coverage ratio was reduced from 1.3 to 1.2? So hopefully, we can borrow more if the coverage required is reduced. So hopefully, if you have more to borrow upfront we can reduce the amount of subsidy required. In test two we will look at a longer debt to maturity. The inputs as we mentioned earlier had 35 years for the debt maturity. And what we are going to do is increase it to 40 years and see if that brings us more debt for the project and thereby reduces the subsidy required. Finally, what we're going to see is what would happen if the market interest rates dropped? And so right now, the model includes a four percent interest rate. We are going to check and see what the effect of a drop in interest rate to three percent might do. All right. I'm not sure if Wim has joined yet. I'll go ahead and show the tools.

Jordan Wainer: Wim hasn't joined yet, so what you just do is press share my screen and then you should get some prompts.

Patrick DeCorla-Souza: Okay. So just let me know when you can see my screen.

Jordan Wainer: Okay. So it's still working.

Patrick DeCorla-Souza: All right. It seems there's a little echo. I'm not sure why that's happening.

Jordan Wainer: Do you have your computer speakers on?

Patrick DeCorla-Souza: Let me go back and look. I am quite sure I didn't. So I don't know-- hold on. Let me check. Mute my speakers. All right. Can you hear me now?

Jordan Wainer: Yeah, that's better.

Patrick DeCorla-Souza: Great.

Jordan Wainer: And I don't see your screen yet. Why don't you give it one more try? Do you see the button, again, that says Share my Screen?

Patrick DeCorla-Souza: Nothing is being shared it says here. Okay. Here. Start sharing screen share.

Jordan Wainer: Okay. It looks like it's-- there we go, it's working now. I think you need to mute your speakers, again. No, no, the other one. So you have two open.

Patrick DeCorla-Souza: Which one should I close?

Jordan Wainer: I wouldn't close either of them, honestly. Just make sure you mute your speaker in the one you're in right now. And then if you go back to Excel it should work.

Patrick DeCorla-Souza: Can you see my screen now?

Jordan Wainer: Yeah, it's working now.

Patrick DeCorla-Souza: All right, great. Sorry for the mix up. We lost Wim. We're down, not sure where he is, but anyway. Here is-- what I'm going to do is take you through each of these inputs. As you can see input timing and cost. The screen here simply shows all of the cost inputs. The most important thing from the financing perspective comes down here escalation inputs. And what you can see is when you give the cost in your inputs you're giving the in base year dollars. And so the model since it's creating this cash flow stream has a two percent rate of inflation that it's applying to all of the costs that you provide. So construction costs, operation costs, toll rates, all get a two percent rate of escalation applied. Now, these could be different but for our particular model we've assumed that all of these would be exactly the same. So now, let's go back and look at the other inputs, the toll and traffic inputs that you see here, these are the managed lanes traffic projections that I showed earlier. The toll rates are shown in the next set of inputs and various conversions from daily to annual traffic, from daily to peak and off peak and all of that are shown below to come up with your final traffic volumes by period, by type of vehicle and multiply it by the appropriate toll rate for that particular period. So now let's look at the other set of inputs, the construction ramp up, milestone payments. So what do you see on this is the distribution of the costs here. You see for preconstruction year one and two, that would be 2015 and 2016, then 2017 onwards. You've got the distribution of cost. This is important because for the later years you apply that two percent escalation factor which tends to increase the cost. Traffic ramp up, we discussed this earlier and that is simply showing how traffic increases from the first year of operations up until the fifth year of operations when the full amount of potential traffic is achieved. Now, the subsidy we said would be in the form of a milestone payment. And here you see the last year of construction, that's where we have the milestone payment. Finally, for the P3 similarly we have actually faster construction because the project, if you recall, in the prior webinars, the P3 is going to complete the project in a shorter of period of time in three years instead of four. And so the costs are divided over three years. Traffic ramp up is exactly the same as for the PSC. The subsidy since they completed sooner they get that 100 percent of the milestone payment in year three instead of year four. So everything-- so these are what we input and let's go and look at the last set of inputs which is the input finance INPFIN and what we have here is the interest rate. So what you can see is first the discount rate for value for money analysis. And, of course, we are not using it doing value for money at this-- at least not for this exercise. If there were taxes we would want to include them for the P3 evaluation but we've assumed zero taxes. Competitive-- there's no competitive neutrality adjustment that we are looking at. And, of course, that would only apply for VFM analysis. So here is the 100,000 that we input as the subsidy and that's where we tell the model how much the subsidy is that the public agency is willing to provide. And then the various other debt parameters. So in this case the maturity-- of course, this is in the final test. We increased it to forty years and that's what you see there. the interest rate, we dropped it to three percent from four percent and that's what you see there. The DSCR, the debt service coverage ratio is dropped to 1.2 and that's what you see on that input. Reserves are-- you get an interest rate of two percent. That's what you're providing. So cash that is lying idle gets two percent rate of return. P3 gets the same subsidy as for PSC. The equity rate of return is assumed to be twelve percent. For the 2 equity ratio in the base case we had 75 percent, but this reflects the final test where we increase the debt ratio to 80 percent and so that's why you're seeing 80 percent there. And the final test we increase the maturity of the debt from 30 to 35 years. So that's what you're seeing there. The interest rate in the base case was six percent. In the P3 final test we reduced it to five percent and that's what you see there. The equity bridge loan rate is the same as the regular loan rate. And in the final-- here's the fee, the one percent issuance fee for the debt. And the DSCR and the final test was reduced from 1.3 to 1.25 and that's what you see there. So reserves have the same interest rate as for PSC. And this is the uncertainty adjustment factor for revenue that was used to calculate the reduction in revenue to account for uncertainty under the PSC. So we can go back now and look at our outputs. So that's the inputs and here are the outputs. And, of course, all of the information that we'll be looking at for conventional delivery is up above here. So conventional delivery, you have the debt service coverage ratio, how much debt can be borrowed. The subsidy amount which is actually higher than what we input in because if you recall the input was in present value dollars. But the actual payment is made four years later and so the payment is higher in dollars in the fourth year, the nominal dollars. Now, this is the final run and so that's why you're seeing that you have an additional subsidy of 32,000 that is required. And we'll go through all of the results for each test and we'll get back to the PowerPoint slides now and look at these results in more detail. So let's see, what do I do? Okay. So my arrows are not showing up. Okay. There they are. Okay. So we are going to look at the outputs in the-- we are going to change the DSCR to 1.2 from 1.3. We are going to increase the maturity of that from 35 years to 40 years. And then finally, reduce the interest rate from four percent to three percent. So we're looking at conventional delivery. And here's the 1.3 debt service coverage ratio. As you can see, the model was very efficient and was able to exactly match the minimum required debt service coverage ratio. And if we match that ratio we can get 334 million in debt. You add the subsidy of 110 million. And then the additional required subsidy is 171 million in the base case. Now, you might ask the project only costs 425 million, then why is the total here $616 million? And that's a fair question. Why is the cost almost $200 million more than what we said the project should cost? Now, so the key is that the $425 million was really in present value dollars. So it's not inflated as you go through the four years, two years of preconstruction, four years of construction, inflation builds up and the cost of the project in nominal dollars increases. Now, we are dealing only with nominal dollars here and so the numbers increase. But then there is another important reason unrelated to simply just the cost and that has to do with the fact that you are taking a loan. If you're going to borrow this much in year zero, so to speak, before beginning the project, you will need to pay interest on this loan for the four years when you will not be getting any toll revenue at all because the project is not yet completed. So you're going to have to still pay interest during those years. So what you do is you actually borrow that interest that you will have to pay over the period of construction upfront. So this number here 334 million includes the 4 percent interest that you're going to be paying every year. So four percent that's another about sixteen percent right there in cost that is included in this amount right here just so that you can pay interest. So the inflation, the interest and all of these factors increase the amount of nominal dollars you need up front to $616 million, which means that we are still short-- even with that milestone payment we are short by $171 million. And that's the amount of subsidy we would need to provide additional subsidy, that is. So the total subsidy would be 110 plus 171. So if we reduce the DSCR to 1.20 now that means that we can-- more of the cash flow from the revenue can be allocated to debt service. And, of course, if we can pay more debt service, it means that we can borrow more up front. And here you see that from 334 million, our debt amount went up to 362 million. Now, interestingly, the cost of the project, actually, increases from 617 to 619. And, again, that has simply to do with the fact that since we are borrowing more money, that 362 million means we have to pay more interest during those first 4 years and so that has to be included in the nominal dollars up front. And so we have an additional couple of million dollars to borrow up front to pay that extra interest. So in the second test we are increasing maturity from 35 years to 40 years. We keep the debt service coverage ratio the same. But we have more years of debt service that we can use to pay back debt. And so if you have more ability to pay back debt we can borrow more up front and so the debt amount now goes up from 670-or-whatever-million we had. Sorry, it was 370 million or thereabouts to $418 million simply because we have five more years of debt services that we can use to pay back our debt. Of course, if we are borrowing more that means that the subsidy that will be needed to pay for all of the costs reduces. And so our subsidy has dropped. Of course, as in the past with more debt, our requirement for interest during construction increases. So from something like 619 million, now our total nominal dollars increases to $624 million. So in the last test we lowered the interest rate. We kept the debt service coverage ratio the same and low and behold we can now borrow a lot more money. So from something like what was that 418 we actually now have almost something like $85 million more that we can borrow. And so our subsidy drops from something like 95 million to just 7 million. This is the additional required subsidy. So we are getting close to being completely at least financially viable and relative to the amount that we have allocated in our budget. But we are still short something like $7 million. You notice that the total cost actually dropped in this case from 624 to 620. And if you think about it the loan is now subject to a lower interest rate of three percent instead of four percent. So if you have less interest to pay the nominal dollars that you will require upfront, to finance the whole project is less and so the total dropped. Now, this slide summarizes the entire results that we've seen for all of the three tests. Just, again, to show how your debt is increasing each time we relax the debt conditions or financing conditions, we are able to increase the amount of debt we can borrow. And the final test, of course, brings us the highest amount of debt. This simply column show you what we did with the debt service coverage ratios that helped us get to the higher debt. The minimum calculated is the same as the average. And what this suggests is that we have been very efficient in sculpting the debt so we are utilizing all of the revenue available to us to the maximum amount. If the average was higher than the minimum, it would mean that we are not using all of the revenue that is available to us, to service the debt. What you see is the subsidy is the exact reverse of the debt. So we start off with 282 million and that includes the 110 million in subsidy allocated up front. So this includes the allocated subsidy as well as the calculated additional subsidy. And what you see is as the debt size goes up the subsidy drops, higher debt, even lower subsidy, highest debt and the lowest subsidy. So basically demonstrating the relationship between an efficient debt provision and how that can affect the viability of your project even under conventional delivery. All right. So let's stop here and see if there are any questions.

Jordan Wainer: There are no questions at this time. If anyone has any questions, they can insert them into the chat pod or just speak right over the phone.

Patrick DeCorla-Souza: All right. Hearing no questions, let's move on with the P3 financial viability. So now we have completed the conventional delivery. We're going to look at what are the factors affecting P3 viability. Of course, it's the same-- a lot of the factors are the same as under conventional delivery. You had the project scope, the revenues, so that's the cost in the revenues as before. And the financing terms except in this case now, we have a couple of more important factors and that is what is the return required by equity investors. So it's very similar to the interest rate required by debt holders that we had under conventional delivery. And that will continue under P3 but there is a requirement under a P3 that debt providers require that equity investors have sufficient skin in the game, so to speak, so they require certain percentage of the financing to be provided by the equity investors. And that portion which is the equity is subject to higher risk since the other equity investors are the first people to suffer from any shortage of revenues. And so since they're taking more risk the rate of return required by them is higher. And so this is really the two new factors that come into play when we look at a P3. So I already showed you when I was showing you the conventional delivery, I already showed you the revenue, the toll rates, and forecast for conventional delivery, and the P3 delivery inputs are exactly the same. Even for the ramp up we don't have any difference. Now, the only difference under the P3 in one of the tests we will see, we will test the effect of a higher toll rate during the peak period because maybe the P3 partner can design an algorithm for the managed lanes that can squeeze the maximum economic toll out of the drivers who are using the lanes in the peak period in order to avoid congestion. And so we will test a 25 percent higher toll rate under the P3. Equity-- so we have certain base conditions which I talked about earlier. We will test the impact of a different gearing ratio. And I already showed you the inputs for equity so we will just look at some of the results. Debt, again, very similar. We already saw the inputs for P3, so we won't go over that, again, except for reserves we went over some of those interest rates on cash balances. As well as we looked at the subsidy amount. So there's no need to go over that, again. But let me explain the tests that we are going to look at. So the first test was doing all of the things that we did for the conventional delivery to make, I guess, the best scenario to look at the most favorable scenario for debt. And so we're going to use the same reduction in DSCR that we used for the PSC. We will increase the debt maturity by five years just like we did under PSC, except it will be from 30 to 35 years because our base is 30 years under the P3. And we lower the interest rates by one percent as we did under the conventional delivery except since the starting point is six percent, we will reduce it to five percent. So we'll test all of these favorable debt conditions. This could be affected by markets, for example, demanding lower interest rates. And so we'll test that in the first test. In the second test we will look at the effect of increasing the debt to equity ratio to 80 percent from 75 percent. And in the third test we will look at that increase in the toll rate in the peak period from an average of $4 to an average for 4.25 simply because the P3 has more incentive to squeeze the maximum tolls out of the drivers. So let's go ahead and I see, Wim, has joined us. So Wim, can you show them the P3 information? I already showed the conventional delivery data.

Jordan Wainer: So I see Wim in the Web room but I don't see him-- I didn't hear a beep on the phone so I'm not sure if he's on the phone yet. Oh, he's typing. He's having a connection issue.

Patrick DeCorla-Souza: Okay. Why don't we-- I'll go ahead and, I guess, I'll say share my screen.

Jordan Wainer: Yeah, it's coming up now. So if you open the Excel file you should be able to see it.

Patrick DeCorla-Souza: Okay. All right. So basically, I think I already showed most of the inputs. But let me simply go to the financial inputs and show, again, the important information for P3 that we are going to look at in our results. So the $100 million subsidy that has been allocated in the budget is still there under the P3 scenario. There's the twelve percent interest rate. The base, of course, would have been 75 percent since this is an output of my final run, it's showing 80 percent. As the gearing, similarly it's showing 35 years as the maturity because this is my final run of the model. The debt interest rate, again, is five percent, reduced from six percent. The equity bridge loan is also reduced from six percent to five percent. Issuance fee is the same. And you see that the DSCR has been dropped from 1.3 to 1.25. Cash balances and the reserve accounts get two percent interest rate. And, I guess, that's it for the inputs. So we can now look at the outputs. And I showed you the conventional delivery so here now are the outputs. And we look at these in more detail for each test result. But I just wanted to show you that it is at the financing outputs screen or sheet that you will find all of the answers. Here, again, are the calculated DSCR just like under the conventional delivery. Except, even though we said in the last test you are willing to reduce the DSCR to 1.25 we are still showing 1.66. And we'll talk about why that is so in a little bit but I just want to show you where the data is. And then the sources of funding and financing just like under conventional delivery we have a debt amount. Debt is calculated by the model. The subsidy, you notice that the subsidy, the allocated subsidy is lower. In the original conventional delivery case we had the subsidy as 110, now we have it 108. And their key to understanding it is when does this subsidy show up. And if you recall, the conventional delivery takes a year longer and so simply because of how we input the data and the model of the input data information as being-- the subsidy as being received in the fourth year inflation was applied to it and so we got 110. Now, in the case to the P3 the developer completes construction by the end of the third year. And so the subsidy is subjected to less inflation and so that's why you see 108 as the total subsidy amount. The subsidy to the developer, again, now this is the extra amount over and above the subsidy that was already allocated in the budget of the public agency. That's what this shows you and this is the result of the final case, so this is the lowest additional subsidy to the developer in all of our tests. And then you have the equity contribution and the key to understanding the gearing ratio is to simply look at this number, look at the debt amount and you will find that the ratio is 80/20. And that's in the final test we said the ratio of debt to equity would be 80/20 and so that's what you're seeing reflected here. Equity IRR, we input that into our models so the model is trying to accomplish that 12 percent return while running its iterations. The WACC, we talked about the WACC, the weighted average cost of capital and the valuable money exercise. I won't go over that again, but it's simply the average of the interest rate on debt and the equity rate of return. This number eighteen million is the same as the number up there. Okay. So we are ready to go back to the PowerPoint slides. So let's now look at the results from each of the tests. So we've got test one where we simply tried to make the debt conditions as favorable as possible basically looking at a very optimistic scenario for when we actually would go to the market with this project. So just trying to see what is the lowest amount of subsidy we could be required to provide if everything was in our favor when we go to market. Test two we are hoping we can at least the P3 concessionaire can negotiate with the debtors and debt providers to allow them a higher debt to equity ratio. So we said and sort of 75 percent, they would get an 80 percent debt to equity ratio. And in the third test we are being a little optimistic in saying that the P3 concessionaire with its innovation and ingenuity and willingness to get as much revenue as possible out of the managed lanes will try to maximize the toll revenue during the peak periods. So let's see what all of these favorable assumptions can get to us and thereby how low can we get the subsidy that might be required to be provided to the concessionaire. So these are the results from the base case. As I explained, even though we only required a 1.3 ratio the model is giving us 1.63. So you might ask, is the model not behaving efficiently? Do we need to fix the model? No. The model is doing fine. As you can see, the average and the minimum are exactly the same so it's being very efficient in calculating the debt service and how much debt can be provided. What is limiting us is the debt to equity ratio. Now, to understand that you have to see that the equity investors want a twelve percent ratio. And so they need to get-- they can only finance an amount that would provide them with this twelve percent equity rate of return. So if you run the model and you find that you can-- the remaining cash flows after debt is paid off and operations and maintenance costs and all of these other costs are paid off, if the remaining cash is only sufficient to provide a 12 percent rate of return on $79 million that's all of the equity investors would be willing to invest. So that means that if it's an 80/20 ratio the debt has now to be exactly four times that's 80/20 so 4 times this $79 million. So that's what's limiting our debt, not the debt service coverage ratio but the debt to equity ratio. So, of course, then that is-- we can only get this much in financing that is the debt and the equity that means that the balance has to come from subsidy and that's what the amount is. Interestingly, you notice here that the cost of a project in nominal dollars has dropped. And if you think about it, again, you know, it was like $620 million or thereabouts and we've dropped it to about 520 million. So that's the effect of the early completion and the reduced interest that you're paying out to debt holders over those three years. So your costs are subjected to less inflation, only three years' worth of inflation. And you are paying out only three years' worth of interest on the debt. And as you can see, that has a huge effect on the total nominal cost which really suggests what a big impact early completion can have on your costs of the project. In the first test, we tried to get the most favorable financing conditions for debt. We reduced the debt service coverage ratio. We reduced interest rates and we increased the maturity. You can see, we didn't get any benefit by reducing the debt service coverage ratio and it's actually a little higher than before. Now, the factor that affects it, again, is our maximum that we can borrow based on the debt to equity ratio. You can see, we can borrow more debt, more years of revenue coming in-- I'm sorry, debt service that we can provide, lower interest rate, all of these factors do increase the amount of debt we can borrow. Also, equity rate of return there's more cash left over because of the lower interest rates, more cash left over for equity. And so we have more equity coming in. More equity allows more debt. And as a result our subsidy which is a balance of the cost has reduced from something like 95 million to 51 million. So favorable financing conditions can, as you can see, have a big effect on the amount of additional subsidy that the public agency has to provide. The cost, as you can see, also dropped a little bit simply, again, because of the lower interest rate that you have to pay in the early years of construction. Now, we test the other factor which is the gearing of the debt to equity ratio. So can we get more debt by increasing the ratio of debt to equity from 75 percent to 80 percent? And yes, we can. You can see from something like 280, we went up to 305. Of course, the equity didn't increase because remember, it's a ratio. So now we are increasing the ratio from 75 percent to 80 percent, so they're getting more debt but that means we acquire less equity. Even though the total of these goes up equity is still not as much as it was before. It's benefiting from the better gearing ratio. Now, our subsidy required has gone down from 51 million to 29 million which reflects the fact that this more efficient financing structure or at least more liberal, if you like, from the liberal conditions from the debtors is allowing the subsidy to be reduced by more than $20 million. So the third test we are simply raising revenues. So the financing conditions are exactly the same, debt to equity ratio, the interest rates, DSCR et cetera. We were able to reduce the DSCR a little bit and get a little more debt, again, because we have more revenue. If you have more revenue, the debt service that you can provide will increase. So that accounts for the reduced head service coverage ratio here. And the amount of debt we get is also increased because we have more debt service that we can allow. And, of course, what that does is reduce the subsidy that is required not by a lot, from 29 million to 18 million so an additional $11 million in reduced subsidy. So in summary, what we see here is, again, just like in the conventional delivery in each step we have less and less subsidy that needs to be provided. And the reason these are the combination of the 108 million plus the extra subsidy calculated by the model. And so that's why these numbers are a little higher than the calculated subsidy by itself. But you can look at the differences here and you can see that the effect of the test one where we assume the optimistic debt provider scenario. And that had the effect of reducing the subsidy by about $45 million from 205 under the base case to 160 under the test one case. And test two increasing the gearing allowed more debt. And so it actually reduced the equity a little bit as you can see here because of the lower percentage requirement of equity but it decreased the debt and overall we were better off with regard to the subsidy and the subsidy reduced by another 20 million or so. And finally, in the case of test three with more revenue, we were able to not only finance more debt but we were able to draw in more equity than before. And that had a small effect on the subsidy requirements since we could finance more of the upfront costs that means that the subsidy required is also less. Okay. So let's see if there are any questions, Jordan.

Jordan Wainer: There are no questions in the chat pod at this time. If anyone has any questions you can insert them into the chat pod or just speak-- just ask them over the phone.

Patrick DeCorla-Souza: Yeah, and if you're on the phone, the lines are all open, please feel free to just pick up your phone, unmute yourself and talk. Okay. Hearing no questions, we will at this point make the answers to the exercise available. There's a lot more detailed information in those answers that explain a little bit more on the workings, the inner workings of the model. So do read the answers and we will make them available in a little bit. Jordan, are you...

Jordan Wainer: I'm working on it right now. My computer, it's a little bit slow but they'll be up in just a minute.

Patrick DeCorla-Souza: Okay. So while Jordan is doing that, let me move on and sort of recap what we've done. Of course, we explained the project background, the various factors that go into conventional delivery with regard to financing as well as the P3 delivery. And then we went into in part A how do you sort of try to get to financial viability by testing various factors that affect financial viability? Primarily in the case of conventional delivery it was the financing conditions. So you might ask, how can you affect these debt providers? What do you do to get them to lower their financing requirements? And in the guidebook which we have made available there is a section on credit enhancements. And credit enhancements are a way to give the debt providers a little more comfort that they will actually be paid. So increasing the amount of reserves that you hold back, these are some of the ways of dividing debt into senior debt, and subordinate debt. So senior debt holders will be first in line and so they will have more comfort. Or even external guarantees. You know, the TIFIA program, for example, does provide guarantee that also provides loans but guarantees, you know, some external guarantee provider can reduce the cost of financing that debt providers require. And there are various other bond insurance, for example, is another type of enhancement. So feel free to download the guidebook and read that section because that might help get to financing conditions that might actually make your project financially viable. Now, with regard to P3 delivery the same factors as conventional delivery apply with regard to debt. But we have the additional factor of equity and equity returns that have to be satisfied. So it's a little more complicated with regard to trying to arrive at the optimal subsidy or the lowest subsidy that you can provide because you've got to meet three different sets of requirements. So you have the debt service coverage ratio, you have the debt to equity ratio, and you have the required rate of return required by equity investors. And all of these three balls in the air have to be balanced out to get the optimal solution and so you need a financial model that can do iterations. And that's what P3 value does is tries to optimize to get the lowest subsidy by trying to satisfy all of these three requirements. And so, of course, you know, sometimes you can-- as we saw in this example, we were able to satisfy the equity rate of return of twelve percent. And we were able to satisfy the debt to equity ratio. But we were not able to get down to the minimal debt service coverage ratio that we were allowed. You know, it was still acceptable to debt providers. In fact, they're quite happy if the debt service coverage ratio is higher than what the minimal amount that they require because obviously there's more coverage. But you can't have all three or it would be very rare to have all of those three measures at the absolute minimal or optimal or whatever or satisfied at the same time. And that's what this exercise is meant to demonstrate the complexity of the financing that is involved in P3. And it is really quite an art to get to the optimal financing solution. So the tool, if you haven't already downloaded it is available from our website, along with the user guide. We've got several primers and guidebooks. There's a primer on financing, P3 financing structures and assessment. And we will have a guidebook on P3 project financing. On our Web it's still undergoing final review, but I promise those of you that come to this webinar last week that I would make available an advanced copy. And in your materials for download on the left hand side there is something called draft P3 Project Financing Guide, five megabytes. Feel free to download that. Do not distribute it yet. It's for your own personal use since it's a draft. But we will have a final available on our website very soon, as soon as we can get through the final editing and formatting. So in the meantime feel free to download a draft. And all of the rest of the resources are available on our website as show here. And, I guess, we have a few more minutes if there's any questions you'd like to ask either in the chat box or by phone, feel free to pick up the phone and ask your question. Okay. Hearing none, of course, if some further questions arise in your mind when you're doing the exercise by yourself feel free to contact me and I'll be happy to help out to the extent I can. And, of course, if you have other questions not even relating to P3 value but about P3s, in general, feel free to give me a call. In addition to these webinars, we also provide hands on training on site. So if you are with a state DOT or federal highway division office or any other government agency, NPO, local government, et cetera, we provide free training on site in public/private partnerships. And we can tailor the course to your requirements. So, you know, if you go to our website you can see the types of training we make available. And if you need additional training that's not listed on the website you can contact me and we can work something out. We have a team of consultants that help us present these courses and we can get you the right fit in terms of the right expert that can help you out. So with that I want to thank Jordan Wainer for moderating this webinar. And I also want to thank Wim Verdouw because he's the one who actually wrote all of the answers to the questions that you will see very detailed answers explaining everything in much more detail than I have been able to explain during this webinar. So do also download the exercise answers which, I believe, should be available now. Is that correct?

Jordan Wainer: Yeah, they're in there now.

Patrick DeCorla-Souza: And so thank you all for your attention and I look forward to your further questions and dialog. So with that, have a good afternoon.