407ETR heading for $790m, 2nd or 3rd pike in N America, profit $630m is neck and neck with #1 NJ Turnpike + ADDITION

July 19, 2013

2013-07-18: 407ETR the investor owned tollroad across the north of the Toronto metro area has just reported toll revenues of $372m in the first six months of the year, meaning that it is now vying with the Pennsylvania Turnpike as the second highest revenue pike in North America. The New Jersey Turnpike with $992m last year is still the clear leader.

In terms of cash flow - this is a more tricky comparison - the 407ETR is by our estimate running neck and neck with the New Jersey Turnpike as the most profitable tollroad in north America.

The Canadian tollroad is actually reducing its operating costs slightly this year (2013H1) compared to last - down 3% compared to 2012H1.

A stronger Canadian economy, larger immigration to Canada and a commercially oriented management at the Toronto pike has in the past five years propelled 407ETR up from the middle ranks to #3 in gross revenue with $734m in 2012 vs the Penn Pike's $781m.

Revenue this year on the 407ETR is up a strong 7.8% on the same first half year of 2012 which if continued in the second half would produce annual tolls of $790m.

2012 toll revenue was $734m.

Operating expenses on the 407ETR are $126m/yr so it had cash flow of $608m last year - very close to our estimate of $614m at the New Jersey Turnpike. (see METHODOLOGY at end)

Huge difference in op exp

407ETR's operating expenses are 17% of toll revenue versus an average 44% (range 37% to 64%) for the US state pikes.

The Toronto road has a huge operating expense advantage in its all-electronic toll collection - its lack of toll collector costs and personnel benefits - as compared to all the big US pikes.

Perhaps being more recently built helps too.

Its greater freedom from political influence in price setting and contracting is likely another factor.

Business maybe runs business better than government can run business?

The 407ETR is not particularly positively reported in the local media in Toronto and there are regular complaints that its tolls are "too high."

But the real test of what its customers think about its value is its traffic and revenue - which looks strong.

METHODOLOGY: These operating expense calculations exclude depreciation and amortization charges often misleadingly, we think, called an operating expense in US accounting. They are rather arbitrary annual capital charges, we learned in Accounting at college.

In the case of the New Jersey Turnpike, Florida Turnpike Mainline, Garden State Parkway, and the Tristate Tollway operating expenses are only extractable from the CAFR for the larger multi-pike authority (NJTA = NJ Turnpike + Garden State Parkway), not for each pike separately, so we allocated authority operating expenses proportionately to toll revenue. Thus the NJ Turnpike is 71% of NJTA toll revenue. Operating expenses at the NJTA are $532m so we applied 532x0.71 as the op exp of the Turnpike itself, the Parkway getting 29% of op exp. Same with the others.

We've also ignored $C, US$ differences and used the latest full year reported in the CAFR or calendar 2012, so the reporting years aren't fully consistent - editor.



This list of the biggest North American tollroads ranked by revenues and profit has generated quite a bit of interest.

Several people have asked if it says that the New York State Thruway with 64% of revenue consumed in operating expenses is poorly managed. My answer is: yes from a business perspective it's terrible.  And so to a lesser extent are the other state pikes relative to 407ETR.

But state toll authorities are only partly businesses.

Most state turnpike officials will say that they have to balance their business function against a political or 'public service' duty to keep tolls as low as possible. So they'll tell you they sacrifice revenues and probably incur some costs that a for-profit investor owned operation wouldn't. That's part of being state owned with directors answerable to the state governor and the legislature rather than to shareholders.

The ranking table really can't say more than that most state tollroads have substantially higher costs than 407ETR.

That's partly because 407ETR has been all-electronic in its toll collection from the beginning whereas the big American pikes are older operations only now moving to exploit the full economies of electronic toll collection in the future. They still have large toll collector and other staff costs including pension commitments that 407ETR doesn't have.

And it's partly because a business answering to investors is likely to be more singleminded about what helps its bottom line over the whole gamut of its operation than a government-owned business - editor.

TOLLROADSnews 2013-07-18 ADDITION July 24 17:00

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