1. Public Finance
April 12, 2000
www.fitchibca.com
Project Finance
New Issue
E-470 Public Highway Authority
Ratings
New Issues
Senior Revenue Bonds
Current Interest Bonds,
Series 2000A .................................... BBB–
Capital Appreciation Bonds,
Series 2000B..................................... BBB–
Outstanding Debt
Series 1997 ........................................... BBB–
Analysts
James Gilliland
1 212 908-0575
jgilliland@fitchibca.com
William Streeter
1 212 908-0508
wstreeter@fitchibca.com
Cherian George
1 212 908-0519
cgeorge@fitchibca.com
Issuer Contact
Edward J. DeLozier
Executive Director
1 303 537-3741
ed@e-470.com
John D. McCuskey
Director of Finance
1 303 537-3745
jmccuskey@e-470.com
New Issue Details
Approximately $106,000,000 Current Interest
Bonds and $215,000,000 Capital Appreciation
Bonds are scheduled to sell the week of April 17
via a syndicate led by Bear Stearns & Co. and
George K. Baum & Co.
Purpose: The series 2000 bonds will be
issued to finance the design and construction
of segment IV of beltway E-470, as well as
fund capitalized interest through 2004 and
provide funds to supplement the senior bonds
debt service reserve fund.
s Outlook
The medium-term rating outlook for E-470 Public Highway Authority’s
senior revenue bonds is stable. With the completion of construction on
segments I–III, more than 70% of the 47-mile beltway project is
operating. Strong growth in the south Denver area, well above the
national average, provides a positive economic environment for traffic
growth. While the 2000 traffic and revenue study may still contain some
optimism with respect to revenue growth in the near term, the project’s
liquidity mitigates this potential vulnerability. As with other stand-alone
toll road projects, escalating debt service will provide financial hurdles for
some time. The authority does not expect additional borrowing needs
beyond the current issue.
s Rating Considerations
The rationale for the investment-grade rating rests with now moderated
traffic and revenue projections, a favorable debt service structure, a
strong management team, and an unusually strong liquidity position
for this type of project. Security for the senior revenue bonds includes
net toll revenues, excess vehicle registration fees, loans from local
governments, and certain highway expansion fees. The series 1997
senior revenue bonds are insured by MBIA Insurance Corp., which
will also have certain rights over the series 2000 bonds. Projected
coverage of debt service by pledged revenues is weak for an
investment-grade credit in the near term; a factor more than
compensated for by the project’s ample liquidity ($70.1 million in
unrestricted cash and investments as of Dec. 31, 1999).
The 2000 traffic and revenue study is more conservative than the original
study and is not predicated on expansion of the beltway, such as through
construction of the Northwest Parkway. Construction risk for segment IV
is mitigated due to the experience of the design-build contractor, which is
led by the same company hired for segments II–III. Segment I’s near-term
disproportionate financial burden for the fixed and operating costs of the
entire project is an ongoing concern, particularly with the additional debt
now being incurred to construct segment IV.
The segment IV project is the final extension of beltway E-470, which
will complete the eastern beltway around the Denver metropolitan
area. This project intersects the area’s highways, interstates 25, 70, and
76, and provides access to Denver International Airport. Additionally,
segment IV will serve the areas north of Denver and will link with the
proposed Northwest Parkway (estimated opening in 2004) to provide
direct airport access to the Boulder, CO area.
s Strengths
• Established operating history in segment I.
• Construction phase for all but segment IV now complete.
• Traffic and revenue projections not predicated on future project
expansion.
2. Public Finance
E-470 Public Highway Authority
2
• Strong partnership with member governments
provides support.
• Experienced management team and experienced
design-build contractor.
• No additional borrowing needs.
s Risks
• Disproportionate short-term burden of segment I
revenues to cross-subsidize segments II–IV.
• Project is highly leveraged with senior debt;
early years’ financial flexibility is limited.
• Financial flexibility after debt service depends
largely on real estate development.
s Security Provisions
Security: The authority’s senior revenue bonds are
secured by a lien on the trust estate, consisting of a net
revenue pledge of net toll revenues, excess vehicle
registration fees, and highway expansion fees, as well
as loans from the Colorado Department of
Transportation (CDOT) and other governments, and
investment earnings. The senior revenue bonds debt
service is payable after the application of vehicle
registration fees (VRFs) to pay debt service on the
authority’s VRF bonds and to restore any deficiency in
the VRF debt service reserve account. The series 2000
bonds are on par with the 1997 senior revenue bonds.
Rate Covenant: Tolls must be set to generate
sufficient net revenues at 1.3 times (x) aggregate debt
service coverage (DSC) on senior revenue bonds.
The authority has the power to increase tolls and
charges without voter approval and without
supervision from any agency or commission of the
state or member municipalities.
Flow of Funds: The trustee maintains the debt service
and debt service reserve funds. Cash is transferred six
times weekly from the authority’s vaults to the
authority’s depository (see chart at right).
Additional Bonds: Additional bonds may be issued
if: net revenues meet at least 1.3x DSC for the 12
consecutive months prior to the senior bond issue;
and net revenues meet 1.2x DSC for the 12 months
prior to the issue if the series to be issued is first-,
second-, or third-tier subordinate bonds.
Redemption Prior to Maturity: The series 2000
bonds are subject to optional redemption prior to
maturity, with an anticipated 10-year call (Sept. 1,
2010). The series 2000A bonds are also subject to
mandatory sinking fund redemption prior to maturity.
Certain Rights of MBIA Insurance Corp.: Although
the series 2000 bonds are currently not insured, the
insurer for the series 1997 bonds and VRF bonds,
MBIA, has been granted certain rights that may affect
the security for and payment of the series 2000 bonds.
Such rights include, among other things, the right to
approve the issuance of additional parity bonds despite
compliance with financial tests and the right to waive
certain requirements of the resolutions. MBIA may
continue to exercise rights of a majority holder during
most of the life of the series 2000 bonds.
Denver Area Underlying Ratings
City and County of Denver
General Obligation Bonds...........................AA
Denver International Airport,
Airport System Revenue Bonds ..................A+
Regional Transportation District
Certificates of Participation.........................A
3. Public Finance
E-470 Public Highway Authority
3
s Not a Traditional Startup Project
Because segment I of E-470 has been open to traffic for
almost 10 years, and segments II–III fully opened in
May 1999, the authority has fewer risks than most
startup projects. The remaining 12.5-mile segment IV is
scheduled to open in 2003. The authority benefits from
the established customer demand in segment I and from
the financial assistance it provides to subsidize
segments’ II–IV construction and ramp-up years.
Construction risk for segment IV is mitigated due to the
experience and success of the design-build contractor,
which is led by the same company hired for segments
II–III. Finally, the revised traffic and revenue study,
based on actual data, provides a more conservative
revenue forecast for the project.
s Financial History of E-470
Segment I has been a success in its early years. It
captured strong market share growth and customer
demand in the south Denver area, even when competing
with free access roads. Traffic studies so far indicate that
E-470 currently prospers on short trips, rather than as a
crosstown thruway. The authority has unusually strong
liquidity, primarily from surplus contingency reserves
from the construction of segments II–III. However, the
full length of E-470 is still far from being a highly
demanded beltway, as 1999 net revenues were
approximately $9.7 million versus $160 million
maximum annual debt service in 2026.
Prior to the current offering, the authority has
$822 million of series 1997 senior highway revenue
bonds outstanding and $50 million of series 1997
VRF bonds outstanding. The VRF bonds are secured
by vehicle registration fees only.
s Financial Forecast
With an additional $321 million in parity senior revenue
bonds, in addition to its outstanding $822 million senior
revenue bonds, the authority is a highly leveraged stand-
alone project, with approximately $6.1 million debt-per-
lane mile. Fitch IBCA believes that the authority can
sustain this debt load based on expected traffic, as well
as its liquidity and debt structure.
The 2000 traffic and revenue study is more conservative
than the 1997 study and is not predicated on expansion
of the beltway, such as through construction of the
Northwest Parkway (a proposed connecting project to
be funded by a separate authority). Most of this
conservatism applies to assumptions for slower
development in the northeastern segments of the
beltway and less traffic diversion from the airport.
However, traffic growth rates in the southern, developed
portion of the corridor may be optimistic. Short trips in
the southern segments, at toll plazas A and B, are
forecast to produce the most margin for E-470. Toll
plazas A and B are projected to produce more than 50%
of the project’s revenue for the life of the bonds and are
forecast to have average annual growth rates of 20% and
24%, including toll increases, over the next seven years.
These high growth rates are more indicative of a facility
still in ramp-up; the first segment has been open since
1991. An ongoing concern is the extent to which plazas
A and B will be expected to carry the increasing debt
service requirements for the entire project.
Although traffic and revenue in segment IV are
projected to be the smallest contributor to the authority
throughout the life of the bonds, the passage that
segment IV provides to Interstate 25 should prove
invaluable to E-470’s economic vitality in the long term.
Toll increases are still scheduled to occur in 2001, 2003,
2006, 2009, 2012, 2015, 2018, and 2020, potentially
strengthening the authority’s liquidity for contingent
situations. Electronic tolling is used, although there are
no discounts for electronic toll users. Net revenues are
forecast to increase at a rate that could leave a margin
over the broadly stepped increases in scheduled debt
service payments. This maximizes the potential for cash
accumulation and opening the door for gradual
improvements in credit quality, which is unusual for a
stand-alone toll road project (see chart above left).
s Liquidity
To assess the project’s vulnerability to sustain ramp-up
risk from slow real estate development, Fitch IBCA
developed a stress test that froze revenue growth at toll
plazas C and D for the next three years and delayed the
opening of plaza E by one year. Under this stress
scenario, there is a small-to-moderate probability that
some of the liquid reserves may be needed to
compensate for deficiencies in debt service coverage
over the next three to four years. Even if drawdowns
occur, reserves should remain healthy. These liquid
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2000 Debt Service
1997 Projected Net Revenues
2000 Projected Net Revenues
Net Revenues and Debt Service
($000)
4. Public Finance
E-470 Public Highway Authority
4
reserves mitigate significant concerns about possible
weakness in debt service coverage during the next few
years. Fitch IBCA assigns a high probability that the
project will be able to generate sufficient cash flow to
retain adequate operating and debt service reserves for
the life of the bonds.
The debt service reserve fund is currently liquid with
$80 million and will receive an additional $32 million
when the series 2000 bonds are issued. The
contingency fund currently contains $92 million of
surplus contingency cash from segments II–III
construction, some of which will be used for right-of–
way (ROW) acquisition for segment IV. The rebate
fund is fully funded for both bonds’ rebate payments in
fiscal 2000 and fiscal 2002 from the 1995 issue and
1997 issue. All excess revenues, after payment of debt
service, renewal, and replacement deposits, as well as
operating reserve deposits, flow into the surplus fund,
which has two accounts, the retained surplus fund and
the general surplus fund. Both surplus fund accounts
may be used for any contingency situation and the
member counties and municipalities are legally barred
from drawing on the authority’s reserves for any
reason other than E-470 financing.
s Design-Build Contract
In February 2000, the authority entered into a design-
build contract with MKK Constructors, selected in the
competitive bidding process for segment IV. MKK is a
Colorado joint venture between Morrison Knudsen
Corp., an Ohio corporation, and Kiewit Western Co., a
Delaware corporation. Morrison Knudsen was the lead
company for the segments II–III project, which was
completed ahead of schedule and under budget.
The design-build contract is a $232 million
(exclusive of ROW acquisition), fixed-price contract
with a guaranteed completion of 3.1 years after the
notice to proceed is given by the authority. The
authority expects to receive two final permits in mid-
to-late April 2000, after which it will issue the notice
to proceed to MKK upon closing of the bond sale.
The design-build contract has multiple protective
measures to ensure that the project is completed on
time and on budget. Among these measures are
progress payments and retainage of certain payments
until 50% of the project is complete and on schedule.
Additionally, the design-build contract has default
preventative measures for the contractor, such as
requiring the “parent guarantors” of MKK to enter into
separate agreements with the authority, to guarantee
the full and timely performance of the contract. MKK
has purchased payment and performance bonds worth
$232 million as surety for the contract, as well as
employers’ liability insurance, commercial general
liability insurance, automobile liability insurance, and
Projected Revenues and Senior Bonds DSC with Segment IV
($, Years Ending Dec. 31)
Gross Toll Gross Revenue
Excess Revenues Other Project Operating Available for Total Debt DSC
VRF Revenue (All Segments)* Revenues** Revenue Expenses Debt Service Service† (x)
2000 2,923,584 23,079,535 1,643,067 27,646,186 18,700,000 8,946,186 — —
2001 2,927,031 35,171,395 3,578,019 41,676,445 19,448,000 22,228,445 — —
2002 2,923,391 43,745,820 9,031,867 55,701,078 20,225,920 35,475,158 24,247,953 1.46
2003 2,922,791 60,847,390 9,042,753 72,812,934 23,363,469 49,449,465 32,447,953 1.52
2004 2,925,806 74,241,420 9,054,045 86,221,271 26,533,380 59,687,891 38,247,953 1.56
2005 2,927,064 85,201,515 9,065,757 97,194,336 27,594,715 69,599,621 48,796,953 1.43
2006 2,926,911 106,645,950 8,729,257 118,302,118 28,698,504 89,603,614 61,061,953 1.47
2007 2,926,271 114,582,095 8,729,257 126,237,623 29,846,444 96,391,179 64,563,053 1.49
2008 2,925,581 122,598,025 8,729,257 134,252,863 31,040,302 103,212,562 68,414,053 1.51
2009 2,924,679 144,862,965 8,729,257 156,516,901 32,281,914 124,234,987 74,705,303 1.66
2010 2,923,976 153,533,920 8,729,257 165,187,153 33,573,190 131,613,963 80,703,743 1.63
2011 2,923,901 163,658,735 8,729,257 175,311,893 34,916,118 140,395,775 83,228,313 1.69
2012 2,922,836 187,527,255 8,729,257 199,179,348 36,312,763 162,866,586 88,298,813 1.84
2013 2,922,216 198,736,555 8,729,257 210,388,028 37,765,273 172,622,755 93,937,650 1.84
2014 2,922,344 209,944,870 8,729,257 221,596,471 39,275,884 182,320,587 97,719,163 1.87
2015 2,923,521 240,016,920 8,144,021 251,084,462 40,846,920 210,237,543 105,718,913 1.99
2016 2,926,051 252,366,850 7,855,462 263,148,363 42,480,796 220,667,567 113,651,663 1.94
2017 2,927,206 264,715,795 7,855,462 275,498,463 44,180,028 231,318,435 113,753,913 2.03
2018 2,925,741 300,988,420 7,855,462 311,769,623 45,947,229 265,822,394 115,977,163 2.29
2019 2,927,271 314,858,205 7,855,462 325,640,938 47,785,119 277,855,820 121,430,425 2.29
2020 2,927,104 350,629,465 7,855,462 361,412,031 49,696,523 311,715,508 128,243,925 2.43
*Includes a 1.5% toll evasion rate assumed by Fitch IBCA. **Includes highway expansion fees, governmental loans, debt service reserve fund
earnings, and other fees. †Subject to change. VRF – Vehicle registration fees. DSC – Debt service coverage.
5. Public Finance
E-470 Public Highway Authority
5
professional liability insurance. Additional financial
flexibility is gained in the short-term from the current
warranties of segments I–III (except for a 2.5-mile
section of segment I), which are covered under the
design-build contract, that will keep operations and
maintenance costs low.
s Right-of-Way Acquisition
and Operations
The design-build contract is exclusive of toll
collection systems and ROW acquisition. ROW
acquisition, which is budgeted at $45 million in costs,
consists of 135 parcels of land, 19 of which have
already been acquired. Leftover contingency cash
from the construction of segments II–III primarily
funds the ROW acquisition. Part of the ROW
acquisition costs include capping and relocation of
nearly depleted oil and gas wells and relocating
several utilities and railroad crossings. Independent
experts claim there is little contingent liability
associated with ROW acquisition for segment IV.
The authority has a roadway and roadside maintenance
contract with RBI for day-to-day roadway
maintenance. The three-year contract with RBI is
subject to authority approval with renewal rights. Both
manual toll collection and electronic toll collection, or
automatic vehicle identification, as well as facility and
toll maintenance, are contracted to Mile High Toll
Services, also on a three-year contract, with renewal
rights subject to authority approval.
s Litigation Risk
A competing contractor, whose bid for design and
construction of segment IV was not accepted, has
alleged, in a lawsuit filed against the authority,
irregularities in the proposal and award process.
However, damages sought are limited to monetary
compensation, and do not include, at this point,
injunction of construction. The authority has
represented that there is no basis for the lawsuit and
intends to defend against it.
Other potential litigants have challenged the U.S.
Army Corps of Engineers’ issuance of a Clean Water
Act permit. The Federal Highway Administration has
concurred with the U.S. Army Corps of Engineers’
finding that a full environmental assessment was not
required. Other environmental approvals required
prior to commencement of construction are pending.
s E-470 Public Highway Authority
The authority is a unique entity with joint ownership of
E-470 assets. The members include Arapahoe, Adams,
