Toronto, Ontario – June 26, 2007: Aecon Group Inc. (TSX: ARE) today announced that Derech Eretz Highways Ltd. (DEC), the company owning concession rights for the Cross Israel Highway, has achieved financial close on an 18km northern extension of the highway.
Aecon, which owns 25% of DEC, had previously disclosed that an agreement was reached between DEC and the State of Israel granting it concession rights for the extension, known as Section 18, subject to a number of conditions, including financial close. Under the agreement, which is structured as an addendum to the original concession contract signed in 1998, DEC is responsible for the financing, construction and operation of Section 18.
Total project cost, including development, financing and construction costs, is approximately US$210 million. Section 18 is being project financed with approximately US$142 million in senior debt, a grant of US$9 million from the Israeli government, and US$56 million in mezzanine financing provided by Israeli banks and financial institutions. In addition to the grant, the government will turn over to the concession some previously completed engineering and construction work.
Under the deal, DEC is authorized to repay approximately US$40 million of the subordinated debt invested by the DEC partners at financial close of the original project in 1999. The repayment of this subordinated debt was subject to government and lender approval. As a 25% partner in DEC, Aecon will receive approximately US$10 million of the debt repayment.
Construction, which is expected to cost approximately US$160 million, is scheduled to take about 30 months to complete. The construction work for Section 18 was awarded by DEC to the construction joint venture that built the main section of the highway, in which Aecon holds a 25% share. However, Aecon also announced today that it has sold its right to participate in the joint venture building this extension to its DEC partners for approximately US$3.5 million.
“This is a positive and important deal for Aecon on a number of levels,” said John M. Beck, Chairman and CEO of Aecon Group Inc. “In addition to being the first significant monetization of our investment in the highway, it also enhances the value of our equity in the project by strengthening the overall concession, and allows us to effectively realize construction profits in advance of the extension being built and without the risk normally associated with a project of this kind.”
Under applicable accounting rules, the approximately US$10 million repayment will be accounted for as a return of capital. As such, the carrying value of Aecon's investment in the concession will be reduced by the full amount of the repayment, with no impact on earnings. The sale of Aecon's participation in the construction joint venture will be accounted for as the sale of a right, thus contributing approximately US$3.5 million in pre-tax earnings.
The deal was signed Sunday in a ceremony attended by the Israeli Minister of Transport Mr. Shaul Mofaz as well as representatives of Aecon and its Israeli partners, Africa Israel Investment Ltd. and Housing & Construction Holding Co..
The Cross Israel Highway, which has now been fully opened and tolled for over three years, continues to meet the traffic projections set by the concessionaire. Average week day traffic on the highway in March 2007 reached 86,000, a 17.9% increase over March 2006. The new extension is expected to contribute significantly to traffic volumes on the main section of the highway.
As was the case in the original Cross Israel Highway concession contract, this deal also requires some limited security and performance guarantees from the DEC partners.
Aecon Group Inc. is Canada's largest publicly traded construction and infrastructure development company. Aecon and its subsidiaries provide services to private and public sector clients throughout Canada and internationally.