Skyway Concession Company Holdings, LLC and Subsidiary (A Delaware Limited Liability Company)

Transcription

1 Skyway Concession Company Holdings, LLC and Subsidiary (A Delaware Limited Liability Company) Consolidated Financial Statements as of and for the Years Ended December 31, 2014 and 2013, and Independent Auditors Report

2 SKYWAY CONCESSION COMPANY HOLDINGS, LLC AND SUBSIDIARY (A Delaware Limited Liability Company) TABLE OF CONTENTS INDEPENDENT AUDITORS REPORT 1 2 CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013: Balance Sheets 3 4 Statements of Operations 5 Statements of Members Investment 6 Statements of Cash Flows 7 Page Notes to Consolidated Financial Statements 8 22

3 INDEPENDENT AUDITORS REPORT To Skyway Concession Company Holdings, LLC: We have audited the accompanying consolidated financial statements of Skyway Concession Company Holdings, LLC and Subsidiary (the Company ), which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of operations, members investment, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reason nableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Skyway Concession Company Holdings, LLC and Subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. March 30,

5 SKYWAY CONCESSION COMPANY HOLDINGS, LLC AND SUBSIDIARY (A Delaware Limited Liability Company) CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2014 AND 2013 (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 19 $ 21 Restricted cash and cash reserves 19,542 24,568 Accounts receivable 5,137 4,844 Receivable from related parties Other current assets Total current assets 25,731 30,257 PROPERTY AND EQUIPMENT: Bridges and roads 413, ,824 Machinery and equipment 1,860 1,723 Furniture and fixtures Computers and office equipment 1, , ,177 Less accumulated depreciation (85,800) (77,658) 332, ,519 Projects in progress Net property and equipment 332, ,829 CONCESSION RIGHTS Net of accumulated amortization of $151,859 and $136,572 as of December 31, 2014 and 2013, respectively 1,361,499 1,376,786 DEFERRED FINANCING COSTS Net of accumulated amortization of $6,767 and $6,124 as of December 31, 2014 and 2013, respectively 7,055 7,698 PREPAID FINANCIAL GUARANTY INSURANCE POLICY 5,414 8,528 SECURITY DEPOSITS RESTRICTED CASH AND CASH RESERVES Long-term 95,268 81,430 TOTAL $ 1,827,367 $ 1,842,543 (Continued) - 3 -

6 SKYWAY CONCESSION COMPANY HOLDINGS, LLC AND SUBSIDIARY (A Delaware Limited Liability Company) CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2014 AND 2013 (In thousands) LIABILITIES AND MEMBERS INVESTMENT CURRENT LIABILITIES: Accounts payable $ 148 $ 272 Due to related parties Accrued other liabilities Current portion of accrued interest 12,340 12,002 Total current liabilities 13,604 13,349 ACCRUED INTEREST Long-term 15,821 15,001 DERIVATIVE LIABILITY 682, ,229 CREDIT ENHANCEMENT LIABILITY 6,321 6,901 LONG-TERM DEBT 1,578,138 1,572,190 Total liabilities 2,296,603 2,310,670 COMMITMENTS AND CONTINGENCIES (Note 9) MEMBERS INVESTMENT: Members capital 460, ,305 Accumulated deficit (929,541) (928,432) Total members investment (469,236) (468,127) TOTAL $ 1,827,367 $ 1,842,543 See notes to consolidated financial statements. (Concluded) - 4 -

7 SKYWAY CONCESSION COMPANY HOLDINGS, LLC AND SUBSIDIARY (A Delaware Limited Liability Company) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 (In thousands) REVENUES: Toll revenue $ 80,671 $ 79,845 Lease revenue Total revenues 80,790 79,967 OPERATING EXPENSES: Salaries and wages 1,637 1,534 Operations overhead Routine repairs and maintenance 1,402 1,437 Toll collection expenses 2,584 2,561 Office and administrative expenses 1,779 1,630 Insurance 1,344 1,256 Depreciation and amortization 23,429 23,491 Total operating expenses 32,858 32,591 OPERATING INCOME 47,932 47,376 DERIVATIVE GAIN (LOSS) (25,652) 25,817 INTEREST EXPENSE Net (23,389) (24,671) NET INCOME (LOSS) $ (1,109) $ 48,522 See notes to consolidated financial statements

8 SKYWAY CONCESSION COMPANY HOLDINGS, LLC AND SUBSIDIARY (A Delaware Limited Liability Company) CONSOLIDATED STATEMENTS OF MEMBERS INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 (In thousands) Members Accumulated Capital Deficit Total MEMBERS INVESTMENT January 1, 2013 $ 460,305 $ (976,954) $ (516,649) Net income (loss) - 48,522 48,522 MEMBERS INVESTMENT December 31, ,305 (928,432) (468,127) Net income (loss) - (1,109) (1,109) MEMBERS INVESTMENT December 31, 2014 $ 460,305 $ (929,541) $ (469,236) See notes to consolidated financial statements

9 SKYWAY CONCESSION COMPANY HOLDINGS, LLC AND SUBSIDIARY (A Delaware Limited Liability Company) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (1,109) $ 48,522 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of financing costs Amortization of prepaid financial guarantee insurance 5,980 6,292 Depreciation of property and equipment 8,142 8,205 Amortization of concession rights 15,287 15,286 Net unrealized gain on interest rate swap contracts (20,510) (65,301) Settlement payments on interest rate swap contracts 46,431 40,375 Amortization of credit enhancement (580) (891) Changes to operating assets and liabilities: Accounts receivable (293) (733) Receivable from related parties 51 (64) Prepaid expenses and other assets (260) 73 Accounts payable (124) 181 Accrued other liabilities Due to related parties (218) 27 Accrued interest 8,796 8,813 Net cash provided by operating activities 62,438 61,636 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,640) (3,180) Change in restricted cash and cash reserves (8,812) (13,655) Net cash used in investing activities (11,452) (16,835) CASH FLOWS FROM FINANCING ACTIVITIES: Financial guaranty insurance premium paid (4,557) (4,429) Settlement payments on interest rate swap contracts (46,431) (40,375) Net cash used in financing activities (50,988) (44,804) NET CHANGE IN CASH AND CASH EQUIVALENTS (2) (3) CASH AND CASH EQUIVALENTS: Beginning of year End of year $ 19 $ 21 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest and swaps $ 54,743 $ 49,263 SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: Purchase of property and equipment, but not yet paid $ 175 $ 544 Conversion of interest to additional subordinated debt $ 5,948 $ 6,149 See notes to consolidated financial statements

10 SKYWAY CONCESSION COMPANY HOLDINGS, LLC AND SUBSIDIARY (A Delaware Limited Liability Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND DESCRIPTION OF OPERATIONS Skyway Concession Company Holdings, LLC (the Company ) is a limited liability company formed pursuant to the laws of the state of Delaware. The Company wholly owns a subsidiary, Skyway Concession Company LLC (SCC). The Company is indirectly owned 55% by Cintra Concesiones de Infraestructuras de Transporte, S.A. and 45% by Macquarie Infrastructure Partners and Macquarie Atlas Roads (collectively, the Members ). The Company was formed for the purpose of (1) leasing the Skyway Toll Bridge (the Chicago Skyway ) from the city of Chicago and (2) operating and collecting the toll revenues and maintaining the Chicago Skyway per the terms of the Concession and Lease Agreement between SCC and the city of Chicago. The Chicago Skyway is a 7.8-mile limited access highway that was opened to traffic in 1959 and provides an important link between downtown Chicago and the surrounding communities. The Chicago Skyway provides two, three-lane roadways, separated by a continuous reinforced concrete barrier median that links the Indiana Toll Road (I-90) on the eastern end to the Dan Ryan Expressway (I-94) on the western end. Approximately five miles of the highway consist of paved roadway. The remaining portion of the Chicago Skyway consists of various types of elevated bridge structures, such as overpasses, long viaduct sections, and the Calumet River Bridge and connected ramps. The Calumet River Bridge is 2,458 feet in length and provides navigation clearance of 125 feet vertically and 200 feet horizontally. Mile and feet measurement data is unaudited. On January 24, 2005, the closing date, as defined under the Concession and Lease Agreement, SCC made a payment of $1.83 billion to the city of Chicago and consequently assumed the operations of the Chicago Skyway. The Concession and Lease Agreement conveyed the following rights to SCC: Right to use roads and bridges which form part of the Chicago Skyway Right to use buildings which house the office and the toll booths A leasehold interest in the land associated with the Chicago Skyway Right to use certain computer software and hardware for the operation of the Chicago Skyway Right to use certain furniture and fixtures A concession right to operate the Chicago Skyway The Company has determined that a lease exists (the Lease Arrangement ) in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 840, Leases, as the Concession and Lease Agreement conveyed the right to SCC to operate the underlying property and equipment, and SCC has assumed the financial risk associated with operating such property and equipment. The Company has also determined that the Lease Arrangement qualifies as a capital lease since the term of the Concession and Lease Agreement exceeds 75% of the economic useful life of the leased property

11 Consequently, the one-time lease payment of $1.83 billion was allocated to the tangible assets, property and equipment, and the intangible asset, concession rights, on the consolidated balance sheets based on the relative fair market values. The Concession and Lease Agreement, among other things, requires SCC to: Be responsible for all aspects of the Chicago Skyway operations and in accordance with the provisions of the Concession and Lease Agreement and applicable laws. Fund and complete certain capital improvements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Statement Presentation The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates, judgments, and assumptions include the estimates required to value derivative assets and liabilities and traffic assumptions used to calculate depreciation expense for highway-related assets. The estimates, judgments, and assumptions used in the accompanying consolidated financial statements are based upon management s evaluation of the relevant facts and circumstances as of December 31, 2014 and Actual results could differ from those estimates. Cash and Cash Equivalents The Company consider all short-term investments with original maturities of three months or less to be cash equivalents. Restricted Cash and Cash Reserves SCC deposits all of its cash collections into a designated bank account. Transfers of funds from this designated bank account into the operation and capital expenditure bank accounts require the approval of SCC s lenders. Restricted cash and cash reserves as of December 31, 2014 and 2013, pertain to project accounts (see Note 3). Accounts Receivable Prior to July 2014, SCC s electronic toll collection (ETC) transactions were collected and processed by a related party, ITR Concession Company LLC (ITRCC). Starting in July 2014, all ETC transactions are collected and settled with the E-Z Pass Inter-Agency Group (IAG) directly by SCC (see Note 2, Traffic and Revenue Recognition). Amounts due from ITRCC or IAG for tolls collected and not yet transferred to SCC are recorded in accounts receivable in the Company s consolidated balance sheets as of December 31, 2014 and Management regularly reviews the tolls receivable and provides an allowance for those amounts when it considers them uncollectible. In establishing the allowance for doubtful accounts, the Company considers historical write-off experience and amounts past due exceeding predetermined criteria. The actual amount of accounts that are not collected in a timely manner may differ from the allowance estimated by management

12 Financial Guaranty Insurance Policy As a condition precedent to the Series A and Series B bonds (collectively, the Bonds ) and the interest rate swaps ( the Swaps ), the Company was required and thus entered into a financial guaranty insurance arrangement with Financial Security Assurance Inc, now named Assured Guaranty Municipal Corp., ( AG ), which guarantees the repayment of the Bonds and Swaps. Under the terms of the agreement, at inception, SCC was required to prepay $38.9 million as well as to make the remaining premium payments over the life of the policy. SCC accounts for the portion of the financial guarantee related to the Bonds in combination with the Bonds themselves. Accordingly, the portion of the premium prepayment related to the Bonds, $32.5 million, has been accounted for as deferred financing costs and the portion of the remaining premium payments related to the Bonds is recognized when payable over the life of the policy as interest expense. SCC amortizes deferred financing costs to interest expense using the effective interest method over the life of the Bonds. As of December 31, 2014 and 2013, $5.4 million and $8.5 million, respectively, of prepaid financial guarantee insurance cost was recorded in long-term assets in the accompanying consolidated balance sheets. SCC accounts for the portion of the financial guarantee related to the Swaps separately from the derivative liability. Accordingly, the portion of the premium prepayment related to the Swaps, $6.4 million plus the present value of the future premium payments related to the Swaps, has been recognized as an asset, prepaid financial guaranty insurance policy on the accompanying consolidated balance sheets. The prepaid financial guaranty insurance policy is amortized to expense on a straightline basis over the life of the policy. The present value of the future premium payments related to the Swaps has been recognized as a credit enhancement liability on the accompanying consolidated balance sheets, and the portion of the future premium payments related to the Swaps is recognized when paid as a debt service payment on the credit enhancement liability resulting in reduction of derivative gain (loss) and reduction of the credit enhancement liability. For the years ended December 31, 2014 and 2013, SCC recorded $0.6 million and $0.9 million, respectively, related to amortization of the swap credit enhancement liability as interest expense in the accompanying consolidated statements of operations. As of December 31, 2014 and 2013, $6.3 million and $6.9 million, respectively, was recorded as a long-term credit enhancement liability in the accompanying consolidated balance sheets. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. SCC capitalizes additions and improvements that add to productive capacity or extend an asset s useful life. Maintenance and repair expenditures are charged to expense as incurred. The Company accounts for the depreciation of highway-related property and equipment using a modified units of production method that makes use of traffic volume over an asset s estimated useful life. This method is referred to as the traffic-based depreciation method. Under the traffic-based depreciation method, depreciation of an asset is a function of both time and usage. The impact of usage on depreciation is taken into account with traffic volume. The time factor implies that an asset has a maximum longevity, regardless of usage. Depreciation expense cannot be less than the straight-line amount, which would be calculated using the asset s maximum economic life, which is longer than its estimated useful life. Depreciation expense for an individual asset is the greater of the amount computed under the traffic-based depreciation method or straight-line method over the individual asset s maximum economic life

13 Depreciation is recorded under the traffic-based depreciation method for highway-related assets, bridges, and roads, and the straight-line method for all other assets during the years ended December 31, 2014 and 2013, over the following lives: Bridges and roads Machinery and equipment Furniture and fixtures Computer and office equipment 4 99 years 5 years 7 years 3 years Concession Rights The value assigned to the right to operate the Chicago Skyway is amortized on a straight-line basis over the life of the Concession and Lease Agreement of 99 years and assumes no residual value. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flow expected to be generated by the asset (undiscounted and without interest charges). If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. The Company has not recognized any impairment on long-lived assets as of December 31, 2014 and Deferred Financing Costs Deferred financing costs consist of costs incurred in connection with obtaining the Company and SCC s debt. The costs have been capitalized and are amortized to interest expense over the terms of the debt using the straight-line method, which approximates the effective interest method. Amortization expense related to deferred financing costs was $0.6 million and $0.7 million for the years ended December 31, 2014 and 2013, respectively. Construction Retention Retention amounts represent amounts due to contractors upon substantial completion of construction contracts, which are withheld pending final inspection of the work performed. Retention amounts withheld from invoices range from 5% to 10% of the underlying invoice total and are recorded as accrued liabilities at the time payment is made on the underlying invoice. As of December 31, 2014 and 2013, $0.2 million and $0.1 million, respectively, was recorded for construction retention within accrued other liabilities in the accompanying consolidated balance sheets. Income Taxes The Company operates as a limited liability company and is a tax pass-through entity for federal and state income tax purposes. The Company is not liable for federal and state income taxes as its members recognize their share of income and loss in their respective tax returns. Accordingly, no provision for federal or state income taxes is recorded. Traffic and Revenue Recognition Revenues include toll revenues, which are recognized at the time vehicles use the Chicago Skyway. Toll revenue is collected in two ways: Cash Collections Cash received at the actual toll booths each day is deposited into deposit accounts. Electronic Toll Collection Beginning in July 2014, SCC became a member of the IAG. IAG is an organization with 26 member agencies in 15 states that operate the E-Z Pass on a number of roads, bridges, and tunnels in the Northeast and the Midwest, and as such, the Company accepts the transponders issued by other members of the IAG. SCC currently does not issue its own transponders. Charges incurred by customers using other agencies transponders are settled between agencies on a monthly basis

14 Total ETC transactions accounted for $59.0 million and $54.6 million of the total toll revenue in 2014 and 2013, respectively. Toll rates are based on number of axles per vehicle and are subject to the maximum amounts to which SCC is entitled in accordance with the terms of the Concession and Lease Agreement. The toll rates in effect as of December 31, 2014 and 2013, were as follows: Vehicle Classification 4 a.m. to 8 p.m. 8 p.m. to 4 a.m. 2 axles $ 4.00 $ axles axles axles axles or more axles Lease revenue consists of two components, fixed and variable. The fixed component is recognized on a straight-line basis over the life of the lease, while the variable component is recognized as a percentage of the lessees gross revenues at the time those revenues are contractually earned. Accounting for Derivative Instruments All derivative financial instruments are recorded in the consolidated balance sheets at fair value, and changes in fair values are recorded each period in derivative gain (loss) in the consolidated statements of operations. Although the interest rate swap contracts are guaranteed by AG, the benefit of the guarantee insures the interest rate swap counterparties and not the Company. Consequently, the fair value of the interest rate swaps are determined without consideration of the guarantee. The fair value of the interest rate swap contracts are determined using estimating techniques, such as discounted cash flow analysis and comparison to similar instruments. The estimates involve subjective judgment about the amount, timing, and probabilities of potential future cash flows. These estimates are susceptible to material changes over time. The Company has applied a credit valuation adjustment (CVA) to the derivative valuations in order to capture the potential impact of the Company s own nonperformance risk disregarding the insurance wrap. In calculating the CVA, the Company has considered interest rate spreads that would apply to comparable debt and, where possible, used bid-ask trading data to determine the fair value estimates. Fair Value of Financial Instruments As of December 31, 2014 and 2013, the carrying amounts of certain financial instruments held by the Company, including cash equivalents, accounts receivable, accounts payable, and accrued expenses were representative of their fair values because of the shortterm maturity of these instruments. The carrying amount for the Bonds reported in the consolidated balance sheets as of December 31, 2014 and 2013, was $1.4 billion. The Company estimated the fair value of this debt to be $1.0 billion and $1.1 billion as of December 31, 2014 and 2013, respectively. The carrying amount for the subordinated debt reported in the consolidated balance sheets as of December 31, 2014 and 2013, was $178.1 million and $172.2 million, respectively. The Company estimated the fair value of this debt to be $115.7 million and $144.3 million as of December 31, 2014 and 2013, respectively. Using a discounted cash flow technique, the Company considered an interest rate spread that would be issued for comparable debt and based upon the Company s own credit standing (within consideration of the third-party credit enhancement). Due to the volatility in the marketplace and the unique nature of the underlying assets, fair value determinations are highly subjective

15 Interest rate swap agreements have been recorded at their estimated fair values as discussed in Notes 6 and 7. New Accounting Guidance In January 2014, the FASB issued Accounting Standards Update (ASU) , Service Concession Arrangements. This ASU, effective January 1, 2015, clarifies that, unless certain circumstances are met, operating entities should not account for certain concession arrangements with public sector entities as leases and should not recognize the related infrastructure as property, plant, and equipment. Management is currently evaluating the impact that the adoption of ASU would have on the Company s financial position, results of operations, and cash flows. 3. PROJECT ACCOUNTS SYSTEM Under the terms of the Bonds, SCC maintains the following restricted cash project accounts: Operating accounts Collection account Proceeds account Bond payment accounts Distribution account Operating disbursements Schedule 2 works disbursements Major Maintenance disbursements Reserve accounts Operational Debt service Major maintenance Schedule 2 works Other accounts must be established as required by the Terms of the Bonds, however, these other accounts are not actively used or are not required as of December 31, All of the project accounts are under the control of a common security representative. Amounts are classified as current or longterm based on the requirements within the loan agreement and the expected timing of the withdrawal

16 The restricted cash and cash reserve accounts as of December 31, 2014 and 2013, consisted of the following (in thousands): Collection account $ 461 $ 519 Proceeds account 4,453 1,046 Operating accounts Distribution account 14,199 22,187 Major maintenance disbursement account 18 1 Operational reserve account 4,000 4,000 Debt service reserve account 59,951 54,375 Major maintenance reserve account 17,780 9,517 Schedule 2 works reserve account 13,538 13,538 Total restricted cash and cash reserves 114, ,998 Less current portion (19,542) (24,568) Total restricted cash and cash reserves long-term $ 95,268 $ 81, INTANGIBLE ASSETS The Company s intangible assets as of December 31, 2014 and 2013, consisted of the following (in thousands): Estimated Useful Life Accumulated Net Book Accumulated Net Book (in Years) Cost Amortization Value Cost Amortization Value Concession rights 99 $ 1,513,358 $ 151,859 $ 1,361,499 $ 1,513,358 $ 136,572 $ 1,376,786 Amortization expense related to intangible assets was $15.3 million for the years ended December 31, 2014 and Annual amortization expense of intangible assets for each of the next five years is $15.3 million per year. 5. LONG-TERM DEBT Outstanding debt as of December 31, 2014 and 2013, consisted of the following (in thousands): Series A bonds $ 439,000 $ 439,000 Series B bonds 961, ,000 Subordinated debt 178, ,190 Total $ 1,578,138 $ 1,572,190 Series A Bonds and Series B Bonds On August 16, 2005, SCC issued two series of bonds totaling $1.4 billion. The Series A Senior Secured Floating Rate Bonds bear interest at three-month London InterBank Offered Rate (LIBOR) (0.26% and 0.25% as of December 31, 2014 and 2013, respectively), plus a margin of 0.28% per annum. Principal on the Series A bonds is payable in full at maturity on June 30,

17 The Series B Senior Secured Floating Rate Bonds are due in 2026 and bear interest at three-month LIBOR (0.26% and 0.25% as of December 31, 2014 and 2013, respectively), plus a margin of 0.38% per annum. Principal on the Series B bonds is payable on the 30th day of June and December of each year, commencing on June 30, 2019, in accordance with the principal payment schedule set forth below (in thousands): Payment Date Series B Bonds Principal Payment Schedule Principal Payment June 30, 2019 $ 25,192 December 30, ,033 June 30, ,033 December 30, ,955 June 30, ,955 December 30, ,475 June 30, ,475 December 30, ,174 June 30, ,174 December 30, ,218 June 30, ,218 December 30, ,765 June 30, ,765 December 30, ,284 June 30, ,284 Total $ 961,000 Interest on the Bonds is payable quarterly in arrears on the 30th day of March, June, September, and December. Pursuant to a financial guaranty insurance policy and the bond insurance policy issued by AG, AG unconditionally and irrevocably guarantees the timely payment of scheduled installments of principal and interest on the Bonds and the related interest rate swap payments (see Note 6). The terms of the Bonds also provide for the following: a. Optional redemption by SCC at any time after September 30, 2010, at a redemption price set as follows: i. 101% of the principal amount, plus any accrued interest if the optional redemption occurs during the 12-month period commencing on September 30, 2012 ii. 100% of the principal amount, plus any accrued interest if the optional redemption occurs on or after September 30, 2013 b. Various restrictive covenants common to such agreements, including limitations on sale of assets (not to exceed $2 million per year), incurrence of additional debt outside of the permitted indebtedness, and limitations on investments and distributions. The Bonds were issued pursuant to an indenture and offered within the United States to qualified buyers in reliance on Rule 144A under the Securities Act and to a limited number of institutional accredited investors (as defined in Rule 501(a)(1), (2), (3), or (7) under the Security Act), and outside the United States pursuant to Regulation S under the Securities Act

18 Subordinated Debt On August 17, 2005, the Company entered into a loan agreement for a term loan of $150.0 million. The subordinated loan matures on August 17, 2035, and is subject to interest rates equivalent to the six-month LIBOR at the beginning of each calculation period, plus an applicable margin, which are set out as follows: August 17, 2005 to August 16, month LIBOR % August 17, 2008 to August 16, month LIBOR % August 17, 2011 to August 17, month LIBOR % The six-month LIBOR rate for the periods ended December 31, 2014 and 2013, was 0.35% and 0.50%, respectively. Interest payments are due on January 10 and July 10 of each year. During the years ended December 31, 2014 and 2013, no principal payments were made. The subordinated loan agreement allows for payment of interest in kind, and $6.0 million and $6.2 million of interest was converted to additional principal during the years ended December 31, 2014 and 2013, respectively. The aggregate principal amount of the loan is due upon maturity. However, the terms of the subordinated loan agreement provide for prepayments of the loan at the option of the Company. The agreement also has various restrictive covenants, including a limitation on incurrence of indebtedness outside of the subordinated loan agreement. The Company believes it was in compliance with all covenants as of December 31, 2014 and 2013, except for the restricted payment minimum ratio covenant, which does not allow distributions to the Members or payments of principal and interest on the subordinated debt. The Bonds are secured by substantially all property, rights, and interests of the SCC. The subordinated loan is secured by the Members investment subject to security interest. 6. DERIVATIVES The Bond agreements between SCC and its lenders require SCC to enter into a hedging transaction to hedge the variable cash flows of interest payments. Accordingly, SCC entered into four interest rate swaps (the Series A and Series B Swaps ), as set out in the table below (in thousands): Notional Description Amount Counterparty Series A Swap $ 219,500 Citibank Series A Swap 219,500 Goldman Sachs Series B Swap 480,500 Citibank Series B Swap 480,500 Dexia Credit Local

19 The details of the Series A and Series B Swaps are as follows: Series A Series B Trade date August 8, 2005 August 8, 2005 Effective date August 16, 2005 August 16, 2005 Termination date June 30, 2017 June 30, 2026 Floating rate option USD-LIBOR-BBA USD-LIBOR-BBA Spread Plus 0.28% Plus 0.38% Floating rate day count fraction Actual/360 Actual/360 Floating rate period-end date Quarterly on each March 30, Quarterly on each March 30, June 30, September 30, and June 30, September 30, and December 30 commencing on December 30 commencing on September 30, 2005 September 30, 2005 Fixed rate amount See Table A See Table B The following tables more fully describe the notional amounts and the required fixed leg payments for the respective Series A and Series B Swaps (in thousands): Table A: Series A Swaps Fixed Payments Fixed Notional Fixed Notional Payment Dates Payment Amount Payment Dates Payment Amount September 30, 2005 $ 439,000 September 30, 2011 $ 439,000 December 30, 2005 $ 10, ,000 December 30, 2011 $ 10, ,000 March 30, ,000 March 30, ,000 June 30, , ,000 June 30, , ,000 September 30, ,000 September 30, ,000 December 30, , ,000 December 30, , ,000 March 30, ,000 March 30, ,000 June 30, , ,000 June 30, , ,000 September 30, ,000 September 30, ,000 December 30, , ,000 December 30, , ,000 March 30, ,000 March 30, ,000 June 30, , ,000 June 30, , ,000 September 30, ,000 September 30, ,000 December 30, , ,000 December 30, , ,000 March 30, ,000 March 30, ,000 June 30, , ,000 June 30, , ,000 September 30, ,000 September 30, ,000 December 30, , ,000 December 30, , ,000 March 30, ,000 March 30, ,000 June 30, , ,000 June 30, , ,000 September 30, ,000 September 30, ,000 December 30, , ,000 December 30, , ,000 March 30, ,000 March 30, ,000 June 30, , ,000 June 30, , ,

20 Table B: Series B Swaps Fixed Payments Fixed Notional Fixed Notional Payment Dates Payment Amount Payment Dates Payment Amount September 30, 2005 $ 961,000 March 30, 2016 $ 961,000 December 30, 2005 $ ,000 June 30, 2016 $ 19, ,000 March 30, ,000 September 30, ,000 June 30, ,000 December 30, , ,000 September 30, ,000 March 30, ,000 December 30, ,000 June 30, , ,000 March 30, ,000 September 30, ,000 June 30, ,000 December 30, , ,000 September 30, ,000 March 30, ,000 December 30, ,000 June 30, , ,000 March 30, ,000 September 30, ,000 June 30, ,000 December 30, , ,000 September 30, ,000 March 30, ,000 December 30, , ,000 June 30, , ,000 March 30, ,000 September 30, ,808 June 30, , ,000 December 30, ,808 September 30, ,000 March 30, ,775 December 30, , ,000 June 30, ,775 March 30, ,000 September 30, ,742 June 30, , ,000 December 30, ,742 September 30, ,000 March 30, ,787 December 30, , ,000 June 30, ,787 March 30, ,000 September 30, ,832 June 30, , ,000 December 30, ,832 September 30, ,000 March 30, ,357 December 30, , ,000 June 30, ,357 March 30, ,000 September 30, ,882 June 30, , ,000 December 30, ,882 September 30, ,000 March 30, ,708 December 30, , ,000 June 30, ,708 March 30, ,000 September 30, ,534 June 30, , ,000 December 30, ,534 September 30, ,000 March 30, ,316 December 30, , ,000 June 30, ,316 March 30, ,000 September 30, ,098 June 30, , ,000 December 30, ,098 September 30, ,000 March 30, ,333 December 30, , ,000 June 30, ,333 March 30, ,000 September 30, ,568 June 30, , ,000 December 30, ,568 September 30, ,000 March 30, ,284 December 30, , ,000 June 30, ,

21 A summary of the changes in fair value for the years ended December 31, 2014 and 2013, of the Company and SCC s derivatives (net of CVA) is as follows (in thousands): Series A Series B Swaps Swaps Total Balance as of January 1, 2013, net of CVA $ (78,627) $ (689,903) $ (768,530) Change in fair value 17,771 47,530 65,301 Balance as of December 31, 2013, net of CVA (60,856) (642,373) (703,229) Change in fair value 16,894 3,616 20,510 Balance December 31, 2014, net of CVA $ (43,962) $ (638,757) $ (682,719) The Company made payments related to the amount that the fixed leg was in excess of the floating leg of the swaps of $46.4 million and $40.4 million under the swaps during the years ended December 31, 2014 and 2013, respectively. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company classifies all assets and liabilities carried at fair value in one of the following three categories: Level 1 Based upon quoted market prices in active markets for identical assets or liabilities Level 2 Based upon observable market-based inputs or unobservable inputs that are corroborated by market data Level 3 Based upon unobservable inputs that are not corroborated by market data The valuation of the Company s financial instruments by the above categories as of the valuation dates listed is as follows (in thousands): December 31, 2014 Significant Quoted Other Market Observable Unobservable Price Inputs Inputs (Level 1) (Level 2) (Level 3) Restricted cash and cash reserves (money market investments) $ - $ 113,920 $ - Total assets $ - $ 113,920 $ - Derivative liability (interest rate swaps) $ - $ - $ (682,719) Total liabilities $ - $ - $ (682,719)

22 December 31, 2013 Significant Quoted Other Market Observable Unobservable Price Inputs Inputs (Level 1) (Level 2) (Level 3) Restricted cash and cash reserves (money market investments) $ - $ 104,663 $ - Total assets $ - $ 104,663 $ - Derivative liability (interest rate swaps) $ - $ - $ (703,229) Total liabilities $ - $ - $ (703,229) Money market investments are valued based on current market prices and are included in current and long-term restricted cash and cash reserves in the accompanying consolidated balance sheets. The unrealized gain (loss) on money market investments is included in interest expense net in the accompanying consolidated statements of operations. The unrealized gain (loss) on derivatives (see Note 6) is included in derivative gain (loss) in the accompanying consolidated statements of operations. The Company s derivative instruments require the Company to pay a fixed dollar amount of interest while the Company receives a variable dollar amount of interest based on the LIBOR swap rate. The LIBOR swap rate is observable at commonly quoted intervals for the full term of the swaps. The potential impact of the Company s own nonperformance has been factored into the fair value measurement of the derivative instruments by applying the CVA (see Note 3). The CVA is considered a significant unobservable input in the valuation of the derivative instruments, and as such, derivatives valuations are classified as Level 3 (see Note 6 for the reconciliation of the fair value of derivative liability). 8. RELATED-PARTY TRANSACTIONS SCC is party to a cost-sharing agreement with ITRCC. The terms of the agreement provide that SCC and ITRCC share the compensation costs of certain SCC and ITRCC employees based upon an estimate of the amount of time spent by such employees to ITRCC and SCC. Likewise, the agreement provides for ITRCC to reimburse SCC approximately 50% of the utilities, repairs, supplies, and other costs of maintaining and operating the SCC office. From time to time, ITRCC and SCC may add to, delete, change, or modify the expenses to be shared and the percentages of such expenses that each party shall bear. For the years ended December 31, 2014 and 2013, the total amount of costs charged to ITRCC in relation to this agreement amounted to $1.3 million, respectively, of which $0.1 million and $0.2 million remained outstanding as of December 31, 2014 and 2013, respectively. These amounts are included in the accompanying consolidated statements of operations as salaries and wages and other office and administrative expenses and in the accompanying consolidated balance sheets as receivable from related parties. The total amount of costs charged to SCC by ITRCC amounted to $0.2 million and 0.3 million for the years ended December 31, 2014 and 2013, of which $18,000 and $20,000 remained outstanding as of December 31, 2014 and 2013, respectively. These amounts are included in salaries and wages and other office and administrative expenses in the accompanying consolidated statements of operations and in due to related parties in the accompanying consolidated balance sheets

23 On September 23, 2008, SCC entered into an Electronic Toll Collection Agreement ( ETC Agreement ) with ITRCC. The terms of the ETC Agreement permit ITRCC to collect and process ETC transactions occurring on the Chicago Skyway on behalf of SCC. Cash received by ITRCC for ETC transactions having occurred on the Chicago Skyway is remitted to SCC according to terms of the ETC Agreement. In exchange for collecting and processing ETC transactions on behalf of SCC, SCC reimbursed ITRCC for credit card and transaction fees incurred by ITRCC. The total amount of costs charged to SCC by ITRCC per the ETC Agreement amounted to $0.4 million and $1.3 million for the years ended December 31, 2014 and 2013, respectively, of which $7,000 and $107,000 remained outstanding as of December 31, 2014 and These amounts are included in toll collection expenses in the accompanying consolidated statements of operations and due to related parties in the accompanying consolidated balance sheets. Under the terms of the ETC Agreement, ITRCC processed $28.4 million and $57.3 million on behalf of SCC during the years ended December 31, 2014 and 2013, respectively, and collected $32.8 million and $56.5 million during the years ended December 31, 2014 and 2013, respectively, which was remitted to SCC. ETC transactions processed on behalf of SCC that remained outstanding as of December 31, 2014 and 2013, were $0.4 million and $4.8 million, respectively, and are included in trade accounts receivable in the accompanying consolidated balance sheets. The ETC Agreement was terminated in July 2014, at which time SCC started to receive and process ETC funds directly (see Note 2). As part of the agreement between the Company s Members, SCC is provided with certain secondees from the Company s Members or their affiliates, and these secondees provide management services to the Company and SCC. The secondment arrangements are ongoing for the duration of the Concession and Lease Agreement. In addition, the Company s Members, or their affiliates, from time to time, provide the Company and SCC with certain services related to operations of the Chicago Skyway. The services provided include, but are not limited to, the payment of the initial start-up costs, acting as members on the Company s board of directors, maintenance of certain information technology systems, and working or consulting on behalf of the Company and SCC. The Company and SCC reimburse their Members for the cost of providing these services. The total amount of costs incurred by the Company and SCC in relation to services provided by the Company s Members and the secondment arrangements for the years ended December 31, 2014 and 2013, were $0.7 million, of which $114,000 and $230,000 remained outstanding as of December 31, 2014 and 2013, respectively. These amounts are included in salaries and wages in the accompanying consolidated statements of operations and due to related parties in the accompanying consolidated balance sheets. 9. COMMITMENTS AND CONTINGENCIES The Company and SCC may be subject to certain liabilities, claims, and commitments in the ordinary course of business. The Company and SCC retain insurance for property and casualty risks related to the Chicago Skyway. Management believes purchased insurance coverage is adequate to cover all claims. Under the terms of the Concession and Lease Agreement, SCC is obligated to indemnify the city of Chicago for losses suffered by the city of Chicago arising out of, among other things, any failure on SCC s part to comply with or observe any of the terms or obligations under the Concession and Lease Agreement, any liabilities assumed by SCC relating to the Chicago Skyway or its operation, and any tax attributable to the transfer of SCC s interest to the Concession and Lease Agreement

24 10. RISKS AND UNCERTAINTIES The Company and SCC are subject to credit risk due to the risk of nonperformance by counterparties to the derivative agreements. In order to manage counterparty credit risk, management monitors the counterparties credit ratings as determined by independent rating agencies. The counterparties credit ratings ranged from BBB to A as of December 31, 2014 and The Company s counterparty credit exposure is limited to the extent forward LIBOR interest rates rise to a level that would cause the swaps to migrate into an asset position. 11. SUBSEQUENT EVENTS The Company has evaluated events occurring subsequent to the date of the consolidated balance sheet through March 30, 2015, the date the consolidated financial statements were available to be issued. ******