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Tunnel group asks state for $1.25B bond

Updated: February 11, 2011 - 2:49 pm

Posted: February 11, 2011

By Philip Newswanger

philip.newswanger@insidebiz.com

The state is a critical partner in the financing of another two-lane tunnel between Norfolk and Portsmouth for the Midtown Tunnel.

Elizabeth River Crossings LLC has asked the Virginia Small Business Financing Authority to approve a tax-exempt bond for $1.25 billion. The request will be the subject of a public hearing at noon Feb. 16 at the Jefferson Building, 1220 Bank St., in Richmond.

Andrew Ancone, division director for Elizabeth River Crossings, submitted the request Feb. 2 under a public-private partnership with the state. ERC, based in Alexandria, is a partnership between ERCHold Co. LLC, a subsidiary of Macquerie Financial Holdings Ltd., and Skanska Infrastructure Development Inc., a subsidiary of Skanska AB.

The group also proposes to extend the Martin Luther King Freeway from London Boulevard to Interstate 264, make improvements at the Midtown and Downtown tunnels, and modify an interchange at Brambleton Avenue and Hampton Boulevard in Norfolk.

The total cost: $2.11 billion.

Virginia Department of Transportation presented ERC’s preliminary financial structure to the Commonwealth Transportation Board last May.

“ERC developed a base case financial structure for the project as part of development work required by the interim agreement between ERC and VDOT,” said Ryan Pedraza,program manager in the VDOT Public-Private Partnership Act office.

“The premise of the base case was for ERC to deliver the project for no public funds,” Pedraza said.

Financing includes the tax-exempt bond, a possible federal loan and an equity investment from the partners. Tolls will pay for the debt on the bonds, the loan and for a return on the equity investment by shareholders. The proposal calls for an off-peak toll of $2.17 to a peak toll of $2.79 and a 50-year lease.

VDOT has not agreed to accept any assumptions in the base case, Pedraza said.

“Rather, the base case served to demonstrate the financial feasibility of the project. VDOT and ERC currently are undertaking a number of development activities to further refine project costs and the financing plan.

“Those activities include exploring ways the parties can reduce the peak period toll rate to at or near $1.50,” Pedraza said. “VDOT expects to have more information about the toll rate to be available later this spring.

The projects will create 500 new jobs within 18 months during construction and 200 jobs in operations, maintenance and tolling for the life of the lease, ERC said.
ERC said the annual average salary of employees during the operation of facilities will be $64,000.

The new tunnel and the additional improvements at the tunnels and the Martin Luther King Freeway will alleviate 2 to 3 miles of traffic backups at the Midtown and Downtown tunnels and reduce travel times for 75,000 workers at Norfolk Naval Shipyard and Naval Station Norfolk, ERC said.

ERC expects traffic to increase 30 percent at major river crossings by 2020. ERC will purchase goods and services worth $560 million during construction of the Midtown’s second tube, ERC said.

ERC’s attorney is Orrick, Herrington & Sutcliffe LLP in New York. Hunton & Williams LLP of Richmond is bond counsel and Bank of America Merrill Lynch, Charlotte, is ERC’s bank of record. ERC hasn’t selected an accountant, lenders or guarantors and underwriters for the project.

The financing is expected to close this summer and construction of the second Midtown Tunnel is expected to begin during the fourth quarter of this year.