The $9bn bet

Cezary Podkul takes a look at CenterPoint’s historic bid for the Port of Virginia, which could unlock a whole new market for infra investors

Some deals only seem possible in certain places. And real estate developer CenterPoint Properties’ unsolicited bid for the entire operations of a port for 60 years only seems possible in Virginia. It’s a first-of–its-kind proposal in America.

A confluence of factors made Port of Virginia the prime candidate for an offer like this. Among these were a state law allowing unsolicited bids for public infrastructure assets; the port’s ability to handle traffic from a soon-to-be expanded Panama Canal; and its potential to benefit from Chicago as an inland market. In March, Chicago-based CenterPoint gave these benefits an economic value approaching $9 billion. And in doing so it launched an unprecedented bidding war for America’s 7th busiest container port.

The outcome is still far from certain. But just as the Chicago Skyway paved the way for toll road deals in the US, investors will be watching Virginia closely to see whether it will steer America towards more port deals.

Felicitous solicitation

Not every US state allows investors to shop freely for infrastructure assets. The government says only 14 out of 50 states allow public authorities to accept both unsolicited and solicited proposals.Virginia’s Public-Private Transportation Act (PPTA) of 1995 was one of the first to do so, says Rick Norment, executive director of the US Council on PPPs. “Virginia has had one of the most positive, strongest transportation policies on the books for a long time. The PPTA… is a model that holds up nationally.”
Other coastal states with significant port assets – notably California, Washington and neighbouring Maryland – also allow unsolicited proposals. But some of these ports suffer from chronic under-investment and poor location, while others are already prepared to handle the larger ships being developed. “We’ve been looking for some time … we have been meeting with different ports and doing a lot of research on which ones were good places to invest in or near,” says Daniel Hemmer, CenterPoint’s general counsel.

Deep interest

The Port of Virginia quickly caught their interest. Its obstruction-free, 50-foot deep channels make it the deepest port on America’s East Coast, allowing it to load and unload post-panamax vessels. These are the mega-ships developed in the decades since the opening of the Panama Canal. “It is certainly the best-equipped port to handle post-panamax ships,” says Philip Damas, research director at Drewry Shipping Consultants in the UK. 

This could prove a crucial advantage. The Panama Canal is in the middle of a $5.25 billion expansion project that, by 2015, could allow the biggest ships from China to reach America’s East Coast without having to go around the tip of South America. The impact could be huge. In a September white paper, Damas estimated the expansion could help shift 25 percent of the US West Coast ports’ cargo base to ports on the East Coast and Gulf of Mexico.“When that happens, then we hope the big ships come to Virginia, due to its natural advantages.” says Matthew Mullarkey, CenterPoint’s vice president of special projects.

The Virginia Port Authority’s (VPA) most recent 2040 Master Plan estimates that the port could see its container traffic grow 6.1 percent over the next decade, versus the 5.2 percent consultancy Global Insight expects for East Coast ports overall. But Hemmer is careful not to get carried away. “We don’t think the Panama Canal will create an explosion of growth,” he says. He adds that it’s not all about trade growth. The port also has a good labour environment, a capable state-owned operator – Virginia International Terminals (VIT) – and a political climate that is “friendly and appreciates the port”.

These were all reasons why CenterPoint decided to make its initial bet on Virginia: a $350 million distribution centre in Suffolk. This will move container traffic from rail cars to lorries headed inland. Local politicians approved the project in January and CenterPoint hopes to break ground in May.

Chicago connection

Equally important to CenterPoint is what lies at the other end of the roads and railroads leading away from the port: Chicago.

The Midwestern city houses nearly 10 million people, making it the single largest inland market in the US. It is also the only place in North America where all six class one rail carriers – the largest railroads in the US by revenue – intersect.

This makes it a key destination for traffic and a crucial hub for rail-to-truck and truck-to-rail freight transfer. The city trails only Hong Kong and Singapore worldwide in terms of transferred freight containers – most of which originate at East- and West-coast ports. “It’s hard to overstate Chicago’s importantance,” says Hemmer.

Conveniently, CenterPoint is based in Chicago, where it has developed two inter-modal centres for class one carriers and is developing two more. It also develops surrounding infrastructure, which gives it a tight grip on the city’s huge industrial real estate market. CenterPoint is betting its Chicago connection will provide Port of Virginia with a key end destination for its traffic. That should allow it to drive more traffic through the port than other private operators.

It’s also a connection that could grow significantly stronger in the next few years. Two of the class one rail carriers – Virginia-based Norfolk Southern and Florida-based CSX – plan to invest nearly $1 billion dollars between them to allow trains with double-stacked container loads to travel more quickly between Port of Virginia and Chicago.

It will still be a few years before Virginia feels the impact of these improvements. But when it does, Chicago will become all the more important – as will having a strong local partner capable of driving demand.

Quantifying the impact of these and other benefits over the next 60 years was no easy task. But CenterPoint says the Commonwealth of Virginia would derive at least $8.9 billion in economic benefit if the VPA accepts its offer.

Nearly $4 billion would come from money the commonwealth will save by not subsidising the port’s operations over the life of the concession. CenterPoint says it will not accept the port’s annual subsidy from the commonwealth, worth $36 million last year. “It’s a win-win,” says Mullarkey. “We don’t necessarily want the risk of where that trust fund is going to be each year … the commonwealth could fund operating shortfalls on an annual basis with that income stream or it could borrow against it.”
It’s also a trade-off for other commitments. “Foregoing that income stream requires us to fund capital improvements,” Mullarkey says, “because that’s largely what that income stream was used for in the past.” Hence CenterPoint would assume about $1 billion in capital expenditures across VPA’s facilities.

A further $500 million would go to the commonwealth in the form of an upfront cash payment for the VPA’s facilities’ operating earnings. That’s about 11 times the VPA’s most recent earnings before interest, tax, depreciation and amortisation. In return, Virginia International Terminals would become a CenterPoint subsidiary, and give the property developers exclusive rights to operate and collect revenues from the VPA’s assets.

But CenterPoint stresses this is not a privatisation. The VPA would retain ultimate ownership and regulatory oversight over Virginia International Terminals. It would also pocket $987 million in annual payments from CenterPoint, with a profit sharing scheme entitling it to anywhere between $440 million and $1.3 billion over the life of the concession.

Localities around Newport News, Portsmouth and Norfolk would also strike it rich. They originally owned the VPA’s facilities before the commonwealth assumed ownership in 1971, and still receive $1.5 million in annual payments from the port. CenterPoint plans to increase that to $5 million per year plus annual increases, for a total of $615 million over the life of the concession.

Finally, CenterPoint wants a first right to develop additional port facilities at Craney Island, something that has been planned for a decade. CenterPoint reckons it would commit $1.3 billion to the project’s construction costs, enabling it to go ahead in phases where the project is deemed commercially viable.

Tally it all up and it spells between $8.9 billion and $9.7 billion in economic benefits to the commonwealth – no small sum, especially in a recession.
 
Uncertain future

But just because they’ve put a lot of money on the table doesn’t mean someone else can’t come up with more. Under the PPTA, the unsolicited offer automatically triggered a 120-day period during which the authority can consider competing proposals. The clock started 27 March – 15 days after CenterPoint officially delivered its offer in a letter to VPA director Jerry Bridges.

So far, all signs point to a spirited contest. “We know that there is a lot of interest out there and we encourage other proposers,” says John Milliken, chairman of the VPA Board of Commissioners.
If CenterPoint does, it would be the first long-term lease of a whole port in the US. That could do wonders for warming up the market for such deals, as the $1.8 billion Chicago Skyway and $3.8 billion Indiana did for toll roads.

But the outcome is still far from certain. For one, the state could decide to do nothing if the bids don’t meet its standards. And politics is, as always, the wild card – especially with a change of governor this year. This deal isn’t done yet, but the potential is vast.