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PAVING MARKET ASSESSMENT FOR THE

COMMONWEALTH OF VIRGINIA APRIL 2011

Market Intelligence Group

Ed Sullivan David E. Czechowski Jared S. Sathaye Vice President & Chief Economist Sr. Economist Market Research Analyst 847.972.9006 847.972.9010 847.972.9042

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Paving Market Assessment for the Commonwealth of Virginia

Overview PCA’s Market Intelligence Group (MIG) was tasked to provide an assessment of paving potential volumes in the Commonwealth of Virginia through 2015, segmented by paving system (highways, streets and local roads, and parking lots). Further, MIG was tasked to assess whether the near term cement volume opportunities for streets and local roads paving outweigh expected cement/concrete volume opportunities associated with parking lot paving in Virginia. The results of these assessments may yield guidance regarding the near term allocation of regional PCA promotion assets, and those of its partners, regarding paving opportunities. In this report, PCA compares the expected cement volumes attached to highways, streets and local roads and parking lots through 2015. Once the size of the paving market is determined, PCA evaluates the volume impact of an assumed 1% annual gain in market share attributed to successful promotion efforts. By this approach, paving sectors with the largest volume gains throughout the 2011-2015 horizon, yield the highest return on promotional investments (ROI) for Virginia’s regional promotional paving assets. The report is divided into eight sections. The first three sections establish a baseline from which the analysis is based and compares the ability of Virginia to meet its paving needs. The sections 4-5 of the report convert spending into paving opportunities for roadways and make a case for expecting future market share gains. The final sections of the report compare cement volumes resulting from 1% annual gains in market share for both roadways and parking lots.

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Key Findings

• Parking lot paving activity is expected to remain depressed for some time due to its link to nonresidential construction. Depressed occupancy and usage rates, soft leasing rates, declining commercial asset prices, and tight lending standard characterize the nonresidential market. Without a significant improvement in expected ROI’s, commercial construction activity will remain depressed. It will take time for these conditions to heal and give way to a nonresidential construction and a parking lot paving recovery.

• Based on funding conditions, Virginia may be poised for an increase in transportation spending during

the next several years. This conclusion is reached even in the context of reduced state transportation revenue collections due to the recession. Traditional revenue sources are expected to be amplified by the Governor’s program and unspent ARRA funds.

• Road conditions among VDOT districts may provide guidance regarding the regional deployment of

paving resources. Overall road conditions have deteriorated significantly in the past four years with twice as many interstates and more than three times as many primary roads now viewed as deficient. Districts in the eastern portion of the state reported some of the largest increases in deficiency conditions, particularly in primary road systems. Secondary road deficiency is even more pronounced across the districts with most districts indicating a third to half (Northern Virginia) of this road network in poor condition. Congestion metrics suggest that the districts of Richmond, Staunton, and Culpeper would be targets for road improvement investment.

• Based on changes in the relative prices of concrete and asphalt, paving share gains could materialize

over the next several years. New paving realities are now in place – reflecting changes in global oil demand and new refining practices which reduce liquid asphalt production. The new paving realities now show that comparative life cycle and initial bid cost and life cycle assessments will increasingly favor concrete over asphalt in the foreseeable future and may lead to paving share gains in Virginia.

• Econometric tests suggest the relationship between changes in relative prices and paving market

share is insensitive. The relative price insensitivity of changes in concrete’s market share to changes in relative prices is in part due to the lack of initial bid paving parity until 2008 and favored asphalt up until that time. Observed changes in relative prices, in essence do not have a potential impact on market share gains until parity is reached. The asphalt-concrete competitive arena has just entered this era, which PCA believes will be sustained. More significant sensitivities to changes in the relative price of asphalt-concrete are anticipated during the years ahead.

• Despite competitive pricing conditions favoring concrete, gains in concrete’s share in paving may be

initially constrained due to existing non-price factors surrounding the material selection processes in state highway administrations. Non-price policy barriers essentially prevent the free market price mechanism to fully operate – at least initially. PCA believes that non-price policy initiatives (escalators, alternative bid, and equivalent design) must be removed if the full potential of market share gains for concrete paved roads can be fully realized.

• The cumulative 2011-2015 incremental gain from a 1% annum increase in concrete paving market

share targeting road systems would yield roughly 250,000 additional cement tons to the market. The cumulative gain 2011-2015 incremental gain from a 1% annum increase in concrete paving market share targeting parking lots would yield roughly 75,000 additional cement tons to the market. In terms of paving asset deployment within Virginia, targeting road systems, yield the potential of a threefold return compared to parking lots.

• Risks associated with PCA’s analysis surround the expectancy of synchronized world growth. Slower

economic growth in China could have large impacts on world economic growth, and as a result oil and asphalt prices.

SECTION ONE Structure of Virginia’s Road Systems

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Section One – Structure of Virginia’s Road Systems

Overview

The current size, structure, and condition of Virginia’s road systems establish a baseline from which to begin an analysis of potential paving opportunities. Current VDOT information indicates that Virginia’s interstate system and primary roads are heavily skewed toward asphalt, with only slightly more concrete paving penetration in the eastern districts. Difficult economic conditions have lead to challenging fiscal conditions at the state, county and municipal levels of government. As a result, these governments have been forced to prioritize spending initiatives – often at the expense of maintaining and expanding existing roadways. As a result, overall road conditions have deteriorated significantly in the past four years with nearly twice as many interstates and more than 50% more primary roads now viewed as deficient. Furthermore, congestion metrics suggest that the districts of Hampton Roads, Northern Virginia, and Richmond rank high in current and projected congestion and could be prime regional targets for mitigation investment.

Virginia’s transportation agencies are not insulated from the public and political pressures of deteriorating road conditions and unmitigated congestion. Funding and project decisions are often made on the basis of those pressures. More important to PCA’s goals of positioning market resources is an understanding of the material distribution in Virginia’s road systems and by VDOT district.

Surface Analysis—Interstate Roads Virginia’s 1,119 miles of system interstate carries 30% of all vehicle travel in the state and is weighted toward asphalt, particularly in the districts of Staunton, Bristol, Salem, and Culpepper. Concrete captures an increased share in Northern Virginia as well as in the Richmond district. Hampton Roads, noted for its concentration of armed forces facilities, shipyards, and coal piers is the standout in terms of concrete interstate highway penetration. PCA assumes all interstate concrete roads will remain concrete and offer minimal opportunity to expand paving penetration. High asphalt share in a district may reflect a comfort with asphalt paving and hinder promotional opportunities.

District Concrete Asphalt Total District Concrete AsphaltRichmond 83.25 182.36 265.61 Richmond 31.34% 68.66%Staunton 0.81 234.51 235.32 Staunton 0.34% 99.66%Hampton Roads 84.24 80.31 164.55 Hampton Roads 51.19% 48.81%Bristol 0.55 124.53 125.08 Bristol 0.44% 99.56%Salem 0.52 117.28 117.80 Salem 0.44% 99.56%Northern Virginia 13.59 80.55 94.14 Northern Virginia 14.44% 85.56%Culpeper 0.00 69.68 69.68 Culpeper 0.00% 100.00%Fredericksburg 0.25 46.60 46.85 Fredericksburg 0.53% 99.47%

Total 183.21 935.82 1,119.03 Total 16.37% 83.63%

Source: Virginia Department o f Transportation

Interstate System by Surface Type (Miles) Interstate System by Surface Type (% Share)

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Surface Analysis—Primary Roads Virginia’s primary road system, consisting of 8,000 miles of two- to six-lane roads that connect cities and towns with each other and with interstates, is heavily skewed toward asphalt. Overall, these primary roads are close to 98% asphalt with only 2% concrete. Similar to the interstate materials mix, the districts of Northern Virginia, Richmond, and Hampton Roads are slightly more favorable to concrete, with the notable inclusion of Lynchburg.

Surface Analysis—Secondary Roads Virginia’s secondary road system encompasses 48,280 miles of local connector or county roads. Hard surface secondary roads information provided by VDOT encompasses both concrete and asphalt so an exact share distribution cannot be derived. The state’s asphalt profile in both interstate and primary roads, however, suggests the majority of these roads are asphalt. The “Other” segment of the secondary road system data encompasses untreated surfaces (i.e. gravel, ground aggregate, and chip seal). If PCA were to target this “Other” segment for an FDR or RCC application, the information suggests that the Bristol district offers a potential market opportunity with 31% of its secondary roads comprised of untreated or un-surfaced materials. Hampton Roads district, with only 8% of its secondary roads system untreated or un-surfaced, offers the least opportunity.

District Concrete Asphalt Other Total District Concrete Asphalt OtherBristol 0.64 1,193.53 5.49 1,199.66 Hampton Roads 8.42% 91.52% 0.06%Richmond 77.83 1,113.34 2.91 1,194.08 Richmond 6.52% 93.24% 0.24%Lynchburg 16.25 1,045.18 0.00 1,061.43 Lynchburg 1.53% 98.47% 0.00%Staunton 0.73 1,014.93 0.40 1,016.06 Northern Virginia 1.15% 98.85% 0.00%Salem 1.70 987.05 0.38 989.13 Fredericksburg 0.79% 99.21% 0.00%Fredericksburg 6.07 761.95 0.00 768.02 Salem 0.17% 99.79% 0.04%Culpeper 0.56 729.59 0.00 730.15 Culpeper 0.08% 99.92% 0.00%Hampton Roads 52.47 570.18 0.39 623.04 Staunton 0.07% 99.89% 0.04%Northern Virginia 4.81 412.61 0.00 417.42 Bristol 0.05% 99.49% 0.46%

Total 161.06 7,828.36 9.57 7,998.99 Total 2.01% 97.87% 0.12%

Source: Virginia Department of Transportation

Primary System by Surface Type (% Share)Primary System by Surface Type (Miles)

DistrictHard

Surfaced* Other Total Mileage DistrictHard

Surfaced* OtherSalem 5,600.31 1,715.06 7,315.37 Salem 76.56% 23.44%Richmond 5,891.71 851.73 6,743.44 Richmond 87.37% 12.63%Lynchburg 4,828.12 1,344.42 6,172.54 Lynchburg 78.22% 21.78%Bristol 4,227.44 1,915.78 6,143.22 Bristol 68.81% 31.19%Staunton 3,752.22 1,476.73 5,228.95 Staunton 71.76% 28.24%Northern Virginia 4,184.94 390.29 4,575.23 Northern Virginia 91.47% 8.53%Fredericksburg 4,090.60 440.34 4,530.94 Fredericksburg 90.28% 9.72%Culpeper 2,950.65 1,101.45 4,052.10 Culpeper 72.82% 27.18%Hampton Roads 3,227.14 291.47 3,518.61 Hampton Roads 91.72% 8.28%

Total 38,753.13 9,527.27 48,280.40 Total 80.27% 19.73%

*Hard surfaced pavement type consists of portland cement and asphalt.

Source: Virginia Department o f Transportation

Secondary System by Surface Type (Miles) Secondary System by Surface Type (% Share)

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Road Conditions Interstate—Road deficiency often determines replacement or rehabilitation and has accelerated significantly in the state over the past several years, reinforcing the need for investment. VDOT’s most recent interstate assessment suggests a sharp deterioration has occurred over the past four years with deficient pavement conditions now identified in 20% of interstate highways and 24% of primary roadways. A deficient pavement is the sum of the “poor” and “very poor” ratings.

Primary—Individual district interstate and primary road deficiency data is not available for 2006, however, a comparison against all roads by district in 2006 suggests most districts saw an increase in their deficient road inventory in 2009. Sharp increases in deficiency conditions are suggested in Richmond, Hampton Roads, Fredericksburg, and Northern Virginia. Richmond’s deficiency metric for all roads in 2006 was 12% versus the 24% rating for primary roads in 2009. Hampton Road’s stands out with a 9% rating (2006) versus the current 31% rating for primary roads. The district standout is Northern Virginia with close to half of all primary roads classified as deficient in 2009.

Secondary—Deficiency ratings for the secondary pavement network were derived by VDOT using a 20% sample of the secondary network. Based on this sample, Northern Virginia ranks highest with 46% of its secondary roads deficient. Hampton Roads and Fredericksburg follow with just over a third of their secondary network deficient.

Interstate 2006 2009 Primary 2006 2009Excellent 25% 31% Excellent 23% 33%Good 41% 38% Good 42% 34%Fair 23% 11% Fair 20% 9%Poor 6% 9% Poor 11% 11%Very Poor 5% 11% Very Poor 4% 14%

Deficient 11% 20% Deficient 15% 24%

Source: 2006, 2009 State o f the Pavement Report

Pavement Condition- State of Virginia

Northern Virginia Fredericksburg

Hampton Roads Salem Richmond Staunton Bristol Culpeper Lynchburg

Excellent 13% 22% 22% 30% 29% 43% 41% 54% 38%Good 25% 33% 39% 34% 33% 27% 38% 23% 44%Fair 17% 12% 8% 11% 13% 8% 2% 6% 5%Poor 15% 11% 16% 11% 9% 9% 14% 7% 6%Very Poor 30% 22% 15% 14% 15% 13% 5% 10% 7%

Deficient 45% 33% 31% 25% 24% 22% 19% 17% 13%

Source: 2009 State of the Pavement Report

Pavement Conditions: Primary Roads (2009)

Northern Virginia Fredericksburg

Hampton Roads Bristol Richmond Culpeper Staunton Salem Lynchburg

Excellent 10% 18% 19% 33% 21% 24% 21% 16% 18%Good 21% 33% 32% 25% 34% 34% 36% 35% 42%Fair 22% 12% 14% 11% 16% 11% 16% 24% 15%Poor 6% 8% 12% 8% 12% 11% 4% 4% 8%Very Poor 40% 29% 23% 24% 18% 20% 23% 21% 17%

Deficient 46% 37% 35% 32% 30% 30% 27% 26% 25%

Source: 2009 State of the Pavement Report

Pavement Conditions: Secondary Roads (2009)

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Congestion Analysis Daily vehicle miles traveled (DVMT) is a useful indicator for understanding road usage. The Northern Virginia district, the most populous of the nine districts, ranks first in the highest overall DVMT. The Lynchburg district has the least usage in terms of overall DVMT. PCA’s analysis suggests that the districts of Hampton Roads, Northern Virginia, and Richmond are most congested.

A more meaningful measure of road congestion is daily vehicle miles traveled DVMT per lane mile. Based on existing road characteristics and usage, PCA measured congestion on this basis in each of the nine districts. Accounting for the reduction in 2009 due to the recession and high fuel prices, the analysis suggests little change in congestion rankings during the past several years. The Northern Virginia district ranks second in terms of congestion and the Bristol district ranks last.

District DVMT- Total DVMT- Primary DVMT-Secondary DVMT- Interstate Bristol 10,720,784 4,590,157 2,591,125 3,539,502Culpeper 12,084,466 6,562,519 3,000,854 2,521,093Fredericksburg 15,491,190 6,448,228 3,705,997 5,336,966Hampton Roads 40,809,894 16,607,827 11,937,716 12,264,351Lynchburg 10,222,370 7,075,932 3,106,575 39,864Northern Virginia 48,539,176 16,521,111 17,985,246 14,032,819Richmond 39,157,668 13,749,962 11,085,452 14,322,254Salem 17,645,698 8,011,019 4,835,868 4,798,811Staunton 17,723,683 6,211,348 3,676,474 7,835,861

Total 212,394,928 85,778,101 61,925,307 64,691,520


2009 Daily Vehicle Miles Traveled (DVMT) by Physical Jurisdiction

District 2002 2004 2006 2007 2009 2009 RankBristol 688.3 703.4 702.4 685.0 674.5 9Culpeper 1,128.5 1,182.5 1,217.9 1,208.8 1,168.1 5Fredericksburg 1,207.3 1,276.6 1,334.4 1,334.7 1,333.7 4Hampton Roads 3,486.5 3,628.3 4,165.2 4,193.1 4,161.3 1Lynchburg 668.7 661.8 686.6 683.3 672.7 8Northern Virginia 3,617.9 3,869.1 3,910.3 4,027.0 3,876.9 2Richmond 2,081.0 2,094.6 2,151.1 2,150.8 2,118.6 3Salem 977.4 1,006.5 1,000.5 993.2 984.2 7Staunton 1,219.2 1,270.4 1,286.5 1,298.4 1,268.6 6

Total 15,074.7 15,693.0 16,454.9 16,574.4 16,258.7


Congestion (DVMT/ Lane Mile)

SECTION TWO Demographic Impact on Virginia’s Road Systems

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Section Two - Demographics Impact on Virginia’s Road Systems Overview PCA attempts to reconcile current and future paving needs in the context of prevailing budgetary pressures. Future needs are largely dictated by demographics. Demographic changes during the next twenty years could result in significant changes in road usage in Virginia. As a result, the safety, condition and congestion levels could change depending on the level and focus of VDOT spending initiatives. PCA derives road usage projections arising from changes in demographics by integrating Bureau of Census population growth estimates for Virginia and PCA estimates for population growth among each VDOT district. These estimates are then expanded to account for licensed drivers, vehicles on road, and vehicle miles travelled. PCA combines road usage projections with the existing structure of road miles and assumes no growth during a twenty-year horizon. Combining these factors yields estimates regarding future road congestion and road quality levels during the longer term horizon. These estimates provide a basis for identifying VDOT districts in most need of expansion (congestion estimates) and maintenance (deficient road paving conditions). It is assumed that similar analysis is performed by the state DOT and county decision makers to determine where to spend paving funds. Population Growth in Virginia Population growth in Virginia will translate into substantial demand to maintain and expand Virginia’s road systems. According to the United States Bureau of Census, Virginia’s population is expected to grow from 7.9 million persons in 2010 to 8.9 million persons in 2020 to 9.8 million persons in 2030. This translates into an increase in population of more than one million persons in the next ten years and two million persons in the next twenty years. Growth in the driving age segment (16-65 year olds) implies a 1.1% increase in licensed drivers by 2020 and a 2.0% increase by 2030 over existing levels. This roughly translates into an addition of nearly 725,000 more drivers on Virginia roads by 2020 and an addition of nearly 1.4 million drivers by 2030. Such increases roughly translate into an increase in registered vehicles on the road of roughly 1 million by 2020 and 1.8 million by 2030. As a result of these increases, PCA estimates daily vehicle miles travelled (DVMT) on Virginia’s roads will increase from 212.4 million miles currently to 228.1 million miles in 2015, 240.3 million in 2020, and 264.7 million miles in 2030. This translates into a 25% increase in total DVMT by 2030.

PCA’s district population analysis focuses on the largest 70 cities within the state and their assignments to a district level. Once allocated to their appropriate districts, the demographic growth rate of the Fredericksburg district is revealed. Population rates are essential in revealing leading or lagging markets. Since 2000, this district grew 2.1% in population size. PCA projects that the Fredericksburg district will continue this growth into 2020 (1.9% increase) and into 2030 (1.5% increase). Analysis of the Bristol

DistrictNumber of cities

% of Top Cities 2000 2009 2020 2030

Northern Virginia 32 46% 1,829,175 2,170,609 2,624,711 3,023,003Richmond 10 14% 1,139,119 1,274,291 1,454,068 1,611,750Salem 8 11% 649,129 671,845 702,057 728,556Hampton Roads 7 10% 1,576,429 1,647,430 1,741,860 1,824,685Staunton 6 9% 462,252 513,598 581,887 641,784Lynchburg 3 4% 380,524 390,748 404,346 416,272Culpeper 2 3% 321,782 383,206 464,899 536,552Fredericksburg 1 1% 376,589 463,744 579,659 681,328Bristol 1 1% 369,534 367,119 363,907 361,090

Total 7,104,533 7,882,590 8,917,395 9,825,019

Source: U.S. Census Bureau

Virginia Population by VDOT District

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district, on the other hand, showed a discouraging short and long-term outlook with declines in population density until 2030. Decision makers may focus more of their resources in areas with a growing population density; these areas being Fredericksburg, Culpeper, and the Northern Virginia districts for both the short-term (2009-2020) and the long term (2020-2030) and ignore declining areas such as the Bristol district. Congestion Growth in Virginia The 780,000 person growth increase in driving age population during the next ten years translates into nearly a 722,000 increase in licensed drivers, as well as a 1 million increase in registered vehicles and a 13% increase in daily vehicle miles travelled. For this analysis, lane miles by VDOT district are held constant at current levels. By holding current lane miles constant throughout the forecast horizon, pressures on the need to expand lane miles can be clearly identified.

With no expansion in lane miles, congestion levels will increase 13% by 2020 and by an additional 10% by 2030. The largest increases in congestion are projected to occur in Fredericksburg, Culpeper, and Northern Virginia. Richmond and Staunton districts also show substantial increases. More modest increases are expected to materialize in Hampton Roads, Lynchburg, and Salem districts. Bristol is expected to show an improvement in congestion due to anticipated population declines.

District 2009 2015 2020 2030% Change 2009-2020

% Change 2020-2030

Bristol 674.5 671.2 668.6 663.4 -0.87% -0.77%Culpeper 1,168.1 1,308.8 1,417.2 1,635.6 21.32% 15.41%Fredericksburg 1,333.7 1,522.0 1,667.1 1,959.5 25.00% 17.54%Hampton Roads 4,161.3 4,296.0 4,399.8 4,609.0 5.73% 4.75%Lynchburg 672.7 686.0 696.2 716.7 3.48% 2.95%Northern Virginia 3,876.9 4,334.9 4,688.0 5,399.4 20.92% 15.17%Richmond 2,118.6 2,287.3 2,417.5 2,679.6 14.11% 10.84%Salem 984.2 1,009.2 1,028.5 1,067.3 4.50% 3.77%Staunton 1,268.6 1,363.8 1,437.3 1,585.2 13.30% 10.29%

Total 1,806.5 1,942.1 2,046.7 2,257.3 13.29% 10.29%


Congestion Projections (DVMT/ Lane Mile)

District 2010 2015 2020 2030Bristol --- -79 -143 -254Salem --- 455 807 1,506Lynchburg --- 299 532 988Richmond --- 1,472 2,606 4,898Hampton --- 317 559 1,059Fredericksburg --- 1,639 2,904 5,447Culpeper --- 1,245 2,208 4,138Staunton --- 1,049 1,858 3,493Northern Virginia --- 1,479 2,617 4,920

Statewide 7,876 13,948 26,195

Source: PCA Estimates

Implied Expansion of Lane Miles To Maintain Current Congestion Levels

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To maintain existing levels of congestion, Virginia must expand existing lane miles in each VDOT district by the expected increase in congestion. Combining projected congestion increases with existing lane miles results in an estimate of lane mile increases by VDOT district. The VDOT districts with the largest need to expand due to congestion changes suggest the likelihood of increased state highway spending. According to our analysis, Fredericksburg represents the VDOT district in most need of expansion – requiring nearly a 5,500 lane mile expansion by 2030. In contrast, Bristol requires no expansion. Ride Quality Threat in Virginia VDOT’s most recent interstate system assessment (2009) suggests a sharp deterioration has occurred over the past four years with deficient pavement conditions now identified on 20% of interstate highways and 24% of primary roadways. Population growth will lead to greater road usage, raising DVMT on Virginia’s roadways. PCA has calculated a historical relationship between DVMT per lane mile (congestion proxy) and the percentage of roads rated as deficient according to VDOT’s ride quality rating system. A deficient pavement is the sum of the “poor” and “very poor” ratings and may reflect a lack of budget funding.

Based on the projected increases in future DVMT, PCA estimates the percentage of deficient roads in each district for the short and long term. Assuming lane mileage stays constant, and no changes are made to the roadway systems, PCA suggests that Northern Virginia’s roads will continue to increase in deficiency. If no changes are made to the roads in Northern Virginia, it’s possible that the roads could go from a 42% deficiency in 2009 to more than half being deemed deficient within a 10 year period.

District 2006 2009 2015 2020 2030Bristol 17% 24% 24% 24% 23%Culpeper 11% 21% 24% 26% 30%Fredericksburg 17% 34% 39% 42% 50%Hampton 9% 30% 31% 32% 33%Lynchburg 9% 18% 19% 19% 20%Northern Virginia 17% 42% 47% 51% 58%Richmond 12% 25% 27% 29% 32%Salem 20% 24% 25% 25% 26%Staunton 16% 21% 23% 24% 27%

Source: Virginia Department of Transportation, PCA Estimates

Projected Road QualityPercentage of Roads "Rated Poor or Very Poor"

District 2006 2009 2015 2020 2030Bristol 15,894 3,777 3,759 3,744 3,715Salem 17,929 4,299 4,408 4,492 4,462Lynchburg 15,195 2,810 2,866 2,908 2,994Richmond 18,483 4,705 5,079 5,368 5,950Hampton 9,807 2,930 3,025 3,098 3,245Fredericksburg 11,615 3,926 4,480 4,907 5,768Culpeper 10,345 2,213 2,479 2,685 3,908Staunton 13,971 2,981 3,204 3,377 3,724Northern Virginia 12,520 5,248 5,868 6,346 7,309

Statewide 125,759 32,889 35,168 36,925 41,075


Projected Lane Miles Required for Rehabilitation100% "Rated Fair or Better" (Lane Miles)

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Given projected deficiency levels based on current lane miles and projected road usage, PCA can estimate both the level of lane miles that must be rehabilitated for full road adequacy (all roads fair or better), and the level of lane miles potentially requiring rehabilitation by VDOT district if current levels of road deficiency are maintained. The combination of these assessments, for current and projected levels of deficiency, can shed light on potential VDOT rehabilitation spending priorities. Implications of Future Demographic Changes on Virginia’s Road Systems Paving activity results from one of two activities, the need to expand roadways, or the need to rehabilitate existing roadways. Demographic change during the next twenty years is a key factor in determining the level of future paving activity. Assessment of future congestion and rehabilitation levels can shed light on the level of paving activity that VDOT must initiate, as well as where those priorities lay among VDOT districts. PCA assumes that similar demographic analysis is also performed by the state DOT and county decision makers to determine where to spend paving funds. If past levels of road funding are maintained, demographic analysis reveals congestion and rehabilitation priorities faced by VDOT. Presumably, these spending priorities are either currently, or will be, reflected in VDOTs Six-Year Improvement Program (SYIP). To maintain existing road conditions, demographic analysis suggests that more than 2,000 lane miles of Virginia roadways will be in need of rehabilitation by 2015, nearly 4,000 lane miles by 2020 and more than 7,000 lane miles by 2030. Fredericksburg, Northern Virginia and Richmond account for roughly 70% of this road rehabilitation need. These needs must be compared against funding levels anticipated given PCA’s financing analysis. To maintain existing road congestion levels, demographic analysis suggests that nearly 7,500 lane miles of Virginia roadways will be in need of rehabilitation by 2015, nearly 14,000 lane miles by 2020 and more than 25,000 lane miles by 2030. Fredericksburg, Northern Virginia and Richmond account for roughly 60% of this road expansion demand.

District 2006 2009 2015 2020 2030Bristol 15,894 3,777 -19 -33 -62Salem 17,929 4,299 109 193 363Lynchburg 15,195 2,810 55 98 184Richmond 18,483 4,705 375 664 1,246Hampton 9,807 2,930 95 168 315Fredericksburg 11,615 3,926 554 981 1,842Culpeper 10,345 2,213 266 472 886Staunton 13,971 2,981 224 396 744Northern Virginia 12,520 5,248 620 1,098 2,061

Statewide 125,759 32,889 2,279 4,037 7,579


Projected Lane Miles Required for RehabilitationNo Improvement from Current Levels (Lane Miles)

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These estimates are based only on increased road usage arising from demographic changes and assume historical road spending levels are maintained. It is important to recognize that current fiscal duress, and reduced VDOT budgets, may influence funding timing and magnify these rehabilitation and expansion needs. Demographic analysis, for example, suggests VDOT priorities will increasingly be pushed toward expansion and congestion concerns. During times of tight budget conditions, VDOT spending actions could differ from these long term priorities and force them to stretch available dollars toward cheaper rehabilitation projects. These financial issues are addressed later in the report.

2010 2015 2020 2030 Rank 2015 2010 2015 2020 2030 Rank 2015Statewide --- 9,803 17,350 32,602 --- Statewide --- 9,803 17,350 32,602 --- - Rehabilitation --- 2,224 3,939 7,394 --- - Rehabilitation --- 2,224 3,939 7,394 --- - Expansion --- 7,579 13,411 25,207 --- - Expansion --- 7,579 13,411 25,207 ---

2010 2015 2020 2030 Rank 2015 2010 2015 2020 2030 Rank 2015Fredericksburg --- 2,193 3,885 7,289 1 Salem --- 564 1,000 1,869 6 - Rehabilitation --- 554 981 1,842 2 - Rehabilitation --- 109 193 363 6 - Expansion --- 1,639 2,904 5,447 1 - Expansion --- 455 807 1,506 6

Northern Virginia --- 2,099 3,715 6,981 2 Hampton Roads --- 412 727 1,374 7 - Rehabilitation --- 620 1,098 2,061 1 - Rehabilitation --- 95 168 315 7 - Expansion --- 1,479 2,617 4,920 2 - Expansion --- 317 559 1,059 7

Richmond --- 1,847 3,270 6,144 3 Lynchburg --- 354 630 1,171 8 - Rehabilitation --- 375 664 1,246 3 - Rehabilitation --- 55 98 184 8 - Expansion --- 1,472 2,606 4,898 3 - Expansion --- 299 532 988 8

Culpeper --- 1,512 2,675 5,024 4 Bristol --- -97 -176 -316 9 - Rehabilitation --- 266 472 886 4 - Rehabilitation --- -19 -33 -62 9 - Expansion --- 1,245 2,203 4,138 4 - Expansion --- -79 -143 -254 9

Staunton --- 1,273 2,254 4,237 5 - Rehabilitation --- 224 396 744 5 - Expansion --- 1,049 1,858 3,493 5

Source: PCA Estimates

Paving Requirements By VDOT DistrictTo Maintain Current Congestion/Ride Quality Levels (Lane Miles)

High Priority VDOT Districts Low Priority VDOT Districts

SECTION THREE Virginia’s Ability to Meet

Paving Needs

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Section Three - Virginia’s Ability to Meet Paving Needs Overview Based on the current road system structure, condition, and congestion levels facing Virginia, there is a need to rehabilitate and expand Virginia’s roadways. This dependency is based on current and expected future congestion levels and road quality. The need to spend on roadways must be combined with the ability to respond to current and expected future paving needs. To assess this, PCA analyzes the funding conditions facing VDOT and compares these levels against VDOT’s planned spending levels in the current Six-Year Improvement Program (SYIP). Comparing expected revenues against planned expenditures reveals upside and/or downside risk to VDOT spending in the years ahead. To properly assess the potential risk or opportunity to VDOT spending, this section is divided into three parts including; (1) an assessment of future funding sources, (2) an overview of VDOT expenditures, and (3) a conclusion regarding funding ability.

The sum of this analysis concludes that revenue sources for Virginia’s transportation systems will continue to be adversely influenced by the current business cycle. Despite this, Virginia may be poised for an increase in transportation spending during the next several years. This conclusion is reached even in the context of reduced state transportation revenue collections supporting the transportation budget. PCA expects total transportation funds to exceed $5.0 billion annually through 2013. This is largely funded by increases in ARRA support and Governor Bob McDonnell's three-year (2011-2013), $4.3 billion transportation funding plan. Once the transitory effects of ARRA and Governor’s spending plan have dissipated, stronger employment growth will likely add to state transportation revenues. This is likely to be supplemented by a new, and larger, highway bill. Despite the elements of stronger state revenues and a new highway bill, VDOT revenues are likely to decline during 2014-2015 due to the dissipation of transitory federal and state funding support.

In the meantime, acceleration in transportation spending during the next several years may materialize – adding to near term potential paving opportunities. PCA details its financial analysis by assessing the funding that supports state transportation spending. The five sources of funding include, (1) state transportation fund revenues, (2) federal SAFETEA-LU and its successor, (3) ARRA stimulus spending, (4) the Governor’s transportation program, and (5) bonds. I. Virginia’s Transportation Funding: State Revenues State transportation revenue sources are primarily the motor fuel tax, motor vehicles sales and use tax, motor license fees, and the state sales and use tax. PCA expects receipts from these sources will remain depressed throughout the forecast horizon. PCA calculates the relationship between employment and vehicle miles travelled (VMT). Projected employment levels result in projections for VMT. A modest annual improvement in fuel consumption efficiency is assumed to project total gallons consumed annually. The state fuel tax of 17.5 cents per gallon is applied to projected fuel consumption to arrive at fuel tax receipt projections. Typically, fuel tax receipts account for 29% of total transportation revenues. PCA assumes this ratio will hold throughout the forecast horizon – thereby leading to a total state transportation revenue estimate. Transportation revenues are tied directly or indirectly to total VMT. VMT is highly correlated to employment levels. A high proportion of VMT is due to drivers traveling for work commute. Alternatively, the unemployed are likely to reduce all expenses, including those associated with travel. A decline in employment results in a decline in VMT – and hence motor fuel tax revenues. With the onset of the recession, VA’s employment declined from 3.8 million in 2008 to 3.6 million in 2010 – or a decline of 3.5%. During the same time period, VMT declined 1.6 billion miles. Fuel tax revenues declined from $760 million in 2008 to an estimated $716 million in 2010 – roughly a 5.8% decline.

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While fuel tax revenues account for less than 30% of total transportation revenues, other factors that contribute to total transportation revenues are tied directly, or indirectly, to employment levels. As employment declines, VMT declines and toll receipts are reduced. Similarly, reduced employment levels result in fewer vehicle sales and the associated tax revenue. The estimation process is admittedly rough, but for the purposes of this report, the methodology is deemed appropriate. PCA expects a modest recovery in Virginia’s employment levels during 2011-2012, followed by acceleration in employment growth in 2013 and beyond. Transportation revenues are expected to remain near current depressed levels through 2013 according to PCA estimates. Once Virginia’s economic growth gains traction (post-2013), employment, VMT, and transportation revenues will increase at an accelerating rate. In the meantime, Virginia’s transportation revenues will remain depressed. According to PCA estimates, state transportation revenues will remain near $2.6 billion annually through 2012. This represents roughly a $100 million decline compared to 2007-2008 levels. With an employment recovery, past peak revenue levels are expected to be reached by 2014 and beyond. A stronger revenue recovery does not materialize due to PCA’s MPG improvement assumptions. SAFETEA-LU and its Successor Under the SAFETEA-LU highway program, Virginia received slightly more than $1.2 billion annually. PCA assumes that a new highway bill will be passed in fiscal year 2013. The size of the new highway bill is not expected to be as large as the $500 billion program initially discussed by Congressman Oberstar (Chairman of the Transportation and Industry Committee). For this assessment, PCA assumes a more modest bill reflecting a 20% increase over its predecessor. This level is calculated as the minimum nominal increase in the highway bill that equates real spending in the end year of the program with the same level as 2010. The level could be larger in light of potential inflation concerns in the out years. To some, however, this increase may seem too optimistic, since funding of the new highway bill remains the key obstacle for any increase in spending. In this analysis, PCA projects Virginia’s allocation of the new highway bill at $1.5 billion annually. Impact of Highway Bill Delays on Expected SYIP Highway Revenues SAFETEA-LU expired and funding was renewed at existing levels on a year-to-year basis. The funding renewal has not been an automatic process. Congress often debates the level of funding for an extension of SAFETEA-LU and the duration of the extension. This causes uncertainty in VDOT with regard to highway project commitment.

2008 2009 2010 2011 2012 2013 2014 2015

Total State Revenues 2,720 2,673 2,606 2,683 2,699 2,722 2,785 2,814 - Percent Change 3.4% -1.7% -2.5% 3.0% 0.6% 0.8% 2.3% 1.0%

Employment (000) 3,763 3,637 3,631 3,664 3,678 3,701 3,780 3,810Unemployment Rate (%) 4.0% 6.6% 7.0% 6.5% 6.0% 5.5% 5.3% 5.1%

Vehicle Miles Traveled (Mil) 78,623 77,524 76,981 78,044 78,712 79,572 81,648 82,487Average MPG 18.1 18.8 18.8 18.9 18.9 19.0 19.0 19.0Gallons Consumed (Mil) 4,344 4,124 4,095 4,140 4,165 4,199 4,297 4,341State Tax ($/Gallon) 0.175 0.175 0.175 0.175 0.175 0.175 0.175 0.175Fuel Taxes (Mil $) $760.16 $721.63 $716.58 $724.54 $728.81 $734.83 $752.02 $759.74

Fuel Tax Share of Total (%) 28.0% 27.0% 27.5% 27.0% 27.0% 27.0% 27.0% 27.0%

Other Revenues (Mil $) $1,959 $1,951 $1,889 $1,959 $1,970 $1,987 $2,033 $2,054


Virginia State Transportation Revenue Projections (Million $)

Fundamentals

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This uncertainty takes two forms. First, major construction projects require years of funding commitment. These projects are not guaranteed in the context of SAFETEA-LU extensions – particularly in light of new concerns regarding the level of the federal deficit. As a result, major projects – which now carry longer term funding risks – are postponed and VDOT allocates more of its spending toward smaller projects. This typically works to the detriment of cement consumption and favors smaller local road projects. Second, the uncertainty regarding the level of funding has prompted VDOT to put a greater portion of funds into its reserve account rather than obligating the funds to projects. In doing so, VDOT can partially guard against disruptions in priority projects caused by delays in the congressional reauthorization process. Due to SAFETEA-LU uncertainty, for example, VDOT put $103 million into the federal funds reserve account during 2010. In addition, due to uncertainty regarding the highway bill, VDOT reduced its SYIP federal funding revenues $85 million to $90 million annually – totaling $542 million over the six year plan. This suggests that the funding available for 2011-2016 reflected in the SYIP is underestimated, and implies the possibility of even greater paving spending activity than suggested by VDOT. ARRA Funding Virginia was awarded $695 million for road projects by the American Recovery and Reinvestment Act (ARRA). Only 24% of Virginia’s $695 million of ARRA funds has been spent through 2010. This implies more than $500 million will be released during 2011-2012. Most of these dollars are expected to be spent this year and completely dissipated in 2012. Governor’s Three-Year Investment Plan Governor Bob McDonnell issued a three-year (201-2013), $4.3 billion transportation funding plan. The proposal cleared Virginia’s house and senate. The plan represents the largest infusion of funds into the states cash-strapped transportation coffers in more than twenty years and is funded by $1.8 billion in acceleration in the sale of Capital Project Revenue bonds, $1.1 billion in Grant Anticipation Revenue Vehicles (GARVEE) bonds, and another $1 billion in a state revolving fund. To address the growing needs by localities to maintain roadways, the Governor’s plan includes the establishment of the Virginia Infrastructure Bank (the Bank). The Bank serves as a vehicle to loan money to local governments and private partners for road building. The Bank will be initially funded by at least $282 million from last year’s transportation budget surplus. Twenty percent of the fund will go to localities as grants and 80% will go to private and public entities for low interest loans. The plan also includes a proposed constitutional amendment to place all transportation funds in a "lock box" to prevent alternative uses. The Governor’s plan provides some certainty regarding funding through 2013, but not beyond. Risk assessment regarding VDOT funding beyond 2013 will be largely determined by the transportation revenues generated by the state. Virginia’s Bond Funding Transportation funding can also be supported by bond actions. The state of Virginia is one of only 15 states with AAA bond ratings from all three bond rating agencies. According to VDOT, roughly $215 million in annual funding has been generated by capital improvement bonds. Keep in mind; bonds are often a mechanism used for large county and municipal projects. The strength of bond ratings among counties and municipalities within each VDOT district is presumed to be influenced by past and expected future employment conditions within each district. These potential local bond actions are separate from VDOT funding assessments, but represent additional funding/spending actions. Local bond initiatives are not considered in PCA’s final assessment of Virginia’s ability to finance its transportation plans. PCA assumes all VDOT districts had favorable bond ratings going into the recession. Job loss analysis from Virginia’s recessionary peak suggests that Fredericksburg and Northern Virginia reflected the least job losses. This suggests that these areas probably suffered the least impairment to their bond ratings – and hence have maintained their ability to generate transportation funding through debt. In contrast, Richmond, Salem and Staunton were hit harder with job losses during the recession. This suggests the possibility of greater impairment of their bond ratings– and hence the potential of diminished ability to generate transportation revenues via debt.

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Bond ratings are also influenced by expected future employment conditions among VDOT districts. The Virginia Employment Commission ranks Northern Virginia as the employment engine for the state, followed by Fredericksburg. These districts also lost the least amount of jobs during the recession and are expected to be the regions of growth. This suggests that counties and municipalities within these districts will maintain a strong bond rating – adding to the potential of bond funding opportunities. In contrast, districts that suffered the most during the recession are also expected to be among the slowest in job recovery. This suggests generally less ability of counties and municipalities within these districts to generate funds for transportation projects via debt. The state of Virginia’s overall bond rating going into the recession was exceptional relative to other states. Furthermore, the employment declines were more muted compared to other states. Even in this context, it suggests that all counties and municipalities throughout the state should maintain relatively good bond ratings throughout the forecast horizon. This suggests a favorable outlook regarding the ability to supplement revenue sources with debt. Total VDOT Funding State transportation spending is supported by five sources of funding including, (1) state transportation fund revenues, (2) federal SAFETEA-LU support, (3) ARRA stimulus spending, (4) changes in transportation fund reserves, and (5) bonds. In the foregoing analysis, PCA has assessed the outlook for each of VDOT’s funding sources. PCA does not include in its calculations, bond revenues – although the potential for raising funds via this mechanism seems favorable. The sum of this analysis concludes that revenue sources for Virginia’s transportation systems will continue to be adversely influenced by the current business cycle. Despite this, Virginia may be poised for an increase in transportation spending during the next several years. This conclusion is reached even in the context of reduced state transportation revenue collections supporting the transportation budget. PCA expects total transportation funds available will exceed $5.0 billion annually through 2013. This calculation is largely funded by increases in ARRA support and Governor Bob McDonnell's three year (2011-2013) $4 billion transportation funding plan. By 2013, ARRA funding is expected to have run its course while the Governor’s three year plan dissipates a year later. Once the transitory effects of ARRA and Governor’s spending plan have eased, stronger employment growth will likely add to state transportation revenues. This is likely to be supplemented by a new highway bill. Finally, VDOT adds $500 million to its reserves through 2016

District 2008 2010 2015Job loss

2008-2010Job Loss %

of Peak2015 Projected Job Growth From Peak

Recovered % From Peak

Northern Virginia 1,199.5 1,195.1 1,310.5 -4.4 -0.4% 111.0 9.3%

Fredericksburg 229.0 226.4 243.0 -2.6 -1.1% 14.0 6.1%

Culpeper 192.1 186.5 199.3 -5.6 -2.9% 7.2 3.7%

Hampton Roads 757.1 732.8 777.4 -24.3 -3.2% 20.3 2.7%

Lynchburg 177.7 171.0 180.6 -6.7 -3.7% 2.9 1.6%

Bristol 158.4 152.2 160.8 -6.2 -3.9% 2.4 1.5%

Staunton 245.3 234.2 247.4 -11.1 -4.5% 2.1 0.9%

Richmond 635.7 606.6 646.2 -29.1 -4.6% 10.5 1.6%

Salem 323.3 306.1 322.0 -17.2 -5.3% -1.3 -0.4%

Total 3,918.1 3,811.0 4,087.1 -107.1 -2.7% 169.0 4.3%

Source: M oodys.com, Virginia Employment Commission

Employment (Thousands)

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according to the SYIP budget. Presumably, VDOT’s transportation reserve strategy may prove less cautious in the context of stronger economic conditions and highway bill certainty. Despite these factors, VDOT funding is likely to decline during 2014-2015 due to the dissipation of transitory federal and state funding support. II. Virginia’s Transportation Expenditure Outlook The Virginia Department of Transportation (VDOT) is responsible for the state’s transportation network, including responsibility for building, maintaining and operating the state's roads, bridges and tunnels. The agency maintains a 58,000-mile network of highways and bridges, which is the third largest state-maintained highway system in the country, behind North Carolina and Texas. VDOT’s road system priorities and spending plan is laid out in its Six-Year Improvement Program (SYIP). State law requires the coordinated development of a separate program for each county, known as the Secondary Six-Year Plan (SSYP). The SYIP reveals VDOT’s six year paving priorities by district and road type (interstate, primary and secondary). The SSYP establishes road improvement priorities in the counties secondary road system, however, VDOT has sole authority over the funding, construction, maintenance, and control of this system. The SYIP concentrates spending on three broad areas including; (1) system acquisition, (2) system maintenance, and (3) financial assistance to localities. The SYIP is developed by local governments and VDOT anticipating land use and travel patterns more than two decades into the future. To determine paving requirements, the SYIP takes into consideration statewide and regional plans that identify future needs and an analysis of projected traffic volumes as well as population, business, and residential growth. In general, SYIP needs and priority objectives parallel PCA’s demographic methodology and analysis. VDOT’s Six-Year Improvement Plan: Priority Setting Adopted by the Commonwealth Transportation Board (CTB) in June 2010, VDOT’s SYIP for fiscal years 2011-2016 focused on four main principles: 1) funding deficits for projects under way, 2) maximizing the use of federal funds, 3) funding projects already under way and those with new phases starting in fiscal year 2011, and 4) funding deficient bridges and pavements. The SYIP also allocates $103 million in reserve federal funding from the previous program due to uncertainty in federal transportation funding. SYIP funding, for this analysis, is partitioned into three primary areas: 1) Highway System & Acquisition (line item 603), 2) Highway System Maintenance (604), and 3) Financial Assistance to Localities (607). Highway System and Acquisition (603) funding typically supports three phases of new construction:

2008 2009 2010 2011 2012 2013 2014 2015

State Revenues 2,720 2,673 2,606 2,683 2,699 2,722 2,785 2,814

SAFETEA-LU Apportionment 1,280 1,280 1,280 1,280 1,280 1,536 1,536 1,536Unspent SAFETEA-LU 330 366 436 280 180 51 51 51SAFTEA-LU/New Highway Spend 950 914 844 1,000 1,100 1,485 1,485 1,485

ARRA 0 47 120 389 138 0 0 0

Governor's Program 0 0 0 873 1,527 1,527 436 0

Capital Improvement Bonds 425 370 230 221 259 202 203 203

Total Revenues 4,095 4,004 3,800 5,166 5,724 5,936 4,910 4,502


Virginia Total Transportation Revenue Projections (Million $)

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preliminary engineering (plan preparation, engineering design, environmental reviews), right of way (land or right of way acquisition, utility location), and construction. Highway System Maintenance (604) typically includes a broad range of activities such as structure, drainage, and roadside maintenance. The surface maintenance component of this category is more relevant in that it encompasses road base and surface treatment (repaving) maintenance. Financial Assistance to Localities (607) provides funding to 81 cities and counties for maintenance on arterial, collector, and local roads as well as facilities maintenance. The level of assistance is based on the number of qualifying lane-miles and available funding. The planning component of this category includes funding for access roads to public parks, historic sites, airports, and industrial sites.

VDOT’s most recent five-year budget projections for the highway program reflect weak revenue stream expectations and expose a focus toward system maintenance versus acquisition, particularly with respect to secondary and urban road systems. Highway System & Acquisition (603) declines from an average of 51% of the budget (2008-2010) to a 42% average in 2011-2015. On that same period basis, both the secondary and urban roads share each declined from 5% to 2%. Counter to that trend, Highway System Maintenance (604) share increased from 36% (2008-2010) to a 43% average in 2011-2015. Share gains are observed in all three road system categories. Financial Assistance to Localities (607) share of budget reflects marginal percentage gains. Excluding statewide initiatives, a review of projects and their value in the current VDOT SYIP database reveals that Northern Virginia leads the FY2011 district group with over $384 million in total project value. In terms of funding changes from FY2011, three districts show declines in average total project value for FY2012-2016 (Culpeper, Lynchburg, and Northern Virginia). Districts with double-digit project value increases in FY2012-2016 (from 2011 levels) include Salem, Fredericksburg, and Hampton Roads. SYIP project value toward specific road systems favors interstate and primary systems. A comparison of FY2012-2016 average spending against FY2011 spending levels reveals double-digit declines in all key road systems. These estimated project value commitments reflect roughly $100 million annually in unspent federal funds and pessimistic state revenue projections.

2008 2009 2010 2011 2012 2013 2014 2015

VDOT SYIP Budget Items 3,865 3,309 3,364 3,161 3,334 3,355 3,450 3,569

Highway System & Acquisition (603) 2,122 1,649 1,570 1,390 1,430 1,387 1,410 1,455

Interstate 340 300 319 306 277 236 218 277Primary Roads 758 729 663 628 698 739 788 796Secondary Roads 200 165 110 65 48 50 52 49Urban Roads 212 174 84 65 81 73 57 17Other 610 281 395 327 326 289 296 315

Highway System Maintanence (604) 1,258 1,186 1,312 1,345 1,390 1,443 1,498 1,556

Interstate Maintanence 269 265 322 345 358 373 387 403Primary Maintanence 461 340 445 457 431 448 466 485Secondary Maintanence 304 357 340 345 355 368 382 397Transportation Operations (excluded) 115 132 117 121 153 158 163 169Highway Management (excluded) 107 93 88 77 93 96 99 102

Financial Assistance to Localities (607) 486 473 481 425 515 526 542 559City Roads Maintanence 283 294 294 306 318 330 343 357County Roads Maintanence 43 44 44 46 48 50 52 54Planning 160 134 142 73 148 146 147 148


Virginia SYIP (Million $)

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The Governor’s Spending Plan Governor Bob McDonnell recently issued a three-year (2011-2013), $4.3 billion transportation funding plan. Of this, roughly $3.8 billion is targeted at Virginia’s road systems (87.5%) and the remainder is targeted at transit, rail and public transportation. Among the road systems, $1.6 billion is targeted at primary roads (37.5%); $1.2 billion is targeted at interstates (28.2%), $422 million at urban roads (15.7%), and $257 million (5.9%) at secondary roads. PCA distributes spending of the three year plan as follows, 15% in 2011, 35% in 2012, 35% in 2013 and 10% in 2014.

III. Virginia’s Ability to Fund Road Systems Needs Comparing expected transportation funds against expected VDOT expenditures reveals whether funding shortfalls or surpluses are expected to materialize during the forecast horizon. The sum of PCA’s analysis concludes that funding sources for spending on Virginia’s transportation systems will adequately support the current spending plans. According to PCA’s assessment, VDOT’s SYIP suggests that sustained surpluses will materialize through 2015. These surpluses average $270 million annually, or roughly 5.4% above planned expenditures.

2008 2009 2010 2011 2012 2013 2014 2015

Total 0 0 0 873 1,527 1,527 436 0

Enhancement 0 0 0 0 0 0 0 0Interstate 0 0 0 246 431 431 123 0Primary 0 0 0 328 574 574 164 0Secondary 0 0 0 51 90 90 26 0Urban 0 0 0 137 240 240 69 0Public Transportation 0 0 0 0 0 0 0 0Rail 0 0 0 16 28 28 8 0Transit 0 0 0 84 148 148 42 0Miscellaneous 0 0 0 9 15 15 4 0


Governor's Plan Expenditures (Million $)

2008 2009 2010 2011 2012 2013 2014 2015

Total Revenues 4,095 4,004 3,800 5,166 5,724 5,936 4,910 4,502

Non-SYIP Expenditures 758 729 663 628 698 739 788 796SYIP Expenditures 3,865 3,309 3,364 3,161 3,334 3,355 3,450 3,569Governor's Plan 0 0 0 873 1,527 1,527 436 0

Total 4,623 4,037 4,026 4,661 5,560 5,621 4,674 4,365 Net Balance -528 -33 -227 505 164 314 235 137


Transportation Revenues & Expenditure Balance (Million $)

SECTION FOUR Converting Spending Into Lane

Mile Paving Opportunity

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Section Four: Converting Spending Into Lane Mile Paving Opportunity

Overview

To reach an assessment regarding Virginia’s paving opportunities; paving dollars spent must be translated into lane miles paved. This section of the report parses out non-paving items from total VDOT spending to yield an estimate of the potential paving expenditures. Once paving expenditures are estimated, these estimates are translated into potential lane mile paving among types of road structures and by VDOT district.

Paving Funding

PCA expects VDOT expenditures will average more than $5 billion through 2013 and $4.5 billion thereafter. This reflects our assessment of VDOT funding streams. It would be a mistake, however, to assume that Virginia’s revenue flow equates to the amount available for the SYIP highway and road spending. A significant portion of Virginia’s transportation funds do not go to potential paving spending. PCA attempts to parse out non-paving items from total VDOT spending to yield an estimate of the potential paving expenditures.

Roughly $775 million annually, for example, is allocated to administrative support, environmental monitoring and evaluation, ground transportation planning, commonwealth toll facilities, non-toll transportation debt service, VDOT capital outlay, support to other agencies, and support to ports. PCA assumes the historical spending shares of total VDOT revenues associated with these activities remain constant throughout the forecast horizon - yielding future expected volumes of spending for these items. These items are subtracted from the total future SYIP expenditures potentially available for paving. The following table identifies these items and excludes these dollars from paving analysis.

Furthermore, a significant portion of SYIP funds, or roughly $600 million annually, are specifically targeted for bridge construction and other clearly non-paving activity. PCA assumes the historical spending shares of total VDOT revenues associated with these activities remain constant throughout the forecast horizon - yielding future expected volumes of spending for these items. These items are subtracted from the total future SYIP expenditures potentially available for paving. The following table identifies these items and excludes these dollars from paving analysis.

2008 2009 2010 2011 2012 2013 2014 2015

Total VDOT State Revenues 2,720 2,673 2,606 2,683 2,699 2,722 2,785 2,814

Non-SYIP/Non-Paving Relevant Budget Items 758 729 663 628 698 739 788 796 - Share of State Revenues 27.9% 27.3% 25.4% 23.4% 25.9% 27.1% 28.3% 28.3% Enviromental Monitor/Evaluation (514) 14 10 8 12 11 11 11 11Ground Transportation Planning (602) 51 45 45 42 44 45 46 46Commonwealth Toll Facilities (606) 115 122 62 51 85 99 108 109Non-Toll Transportation Debt Service (612) 243 244 248 248 280 294 323 326Administrative Support (699) 260 231 236 217 223 228 236 238VDOT Capital Outlay (998) 10 11 1 3 4 11 11 11Support to Other Agencies 49 45 45 42 39 40 40 41Support to Ports 0 0 1 1 1 1 1 1Support to DRPT Programs 15 20 18 11 11 11 11 11 Note: Items not contributing directly to paving funding and are excluded from PCA's paving analysis.


Virginia Exclusion of Non-SYIP Item Projections (Million $)

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The combination of administrative and clearly non-paving items totals roughly $1.2 to $1.4 billion annually. This represents the total items are subtracted from the total future SYIP expenditures potentially available for paving. The following table identifies these items and excludes these dollars from paving analysis.

Additions to Potential Paving Funds

According to PCA’s assessment, VDOT’s SYIP suggests that sustained surpluses will materialize through 2015. These surpluses average $270 million annually, or roughly 5.4% above planned expenditures. This suggests upside VDOT spending potential – favoring all transportation expenditures including paving initiatives. Some of these surpluses will be used to support highway spending. PCA assumes 67% of annual surpluses go to fund the Virginia Infrastructure Bank (VIB) and the remaining balance goes into reserve transportation funds. The VIB serves as a vehicle to loan money to local governments and private partners for road building will be initially funded by at least $282 million from last year’s transportation budget surplus. According to PCA’s assumption regarding the disbursement of transportation surpluses, VIB balances rise from the initial funding of $282 million to $650 million by the end of the forecast horizon. Keep in mind, Virginia’s goal is for the VIB to eventually reach $1 billion in assets.

2008 2009 2010 2011 2012 2013 2014 2015

Total SYIP Non-Paving Items 909 584 659 573 612 581 595 614

Highway System & Acquisition (603) 673 345 447 361 351 312 318 328

Primary Roads Category - Bridges 21 30 34 21 11 10 12 8Secondary Roads Category - Bridges 10 8 6 2 2 2 2 2Urban Roads Category - Bridges 32 26 13 10 12 11 9 3Other 610 281 395 327 326 289 296 315

Highway System Maintanence (604) 223 225 205 198 246 254 262 271

Highway Management (excluded) 115 132 117 121 153 158 163 169Highway Management (excluded) 107 93 88 77 93 96 99 102 Financial Assistance to Localities (607) 13 14 7 15 15 15 15 15

Planning 13 14 7 15 15 15 15 15

Source: Virginia Department of Transportation and PCA Estimates

Virginia Exclusion of SYIP Non-Paving Item Projections (Million $)

2008 2009 2010 2011 2012 2013 2014 2015

Total 1,667 1,313 1,322 1,201 1,310 1,320 1,383 1,410 - Annual Percent Change --- -21.2% 0.7% -9.1% 9.1% 0.8% 4.8% 1.9%

Non-SYIP 758 729 663 628 698 739 788 796SYIP 909 584 659 573 612 581 595 614

Source: Virginia Department of Transportation and PCA Estimates

Virginia Total Expenditure Exclusions (Million $)

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PCA assumes 20% of the VIB balance will be spent for infrastructure programs in addition to the SYIP. This equates to roughly $100 million annually. According to VIB guidelines, 20% of the fund will go to localities as grants and 80% will go to private and public entities for low interest loans. The transportation plan also includes a proposed constitutional amendment to place all transportation funds in a "lock box" to prevent alternative uses. Subtracting out administrative and clearly non-paving items and adding back a portion of expected surpluses results in an estimate of potential funds available for paving. . The resulting estimates suggest that 2012-2013 potential paving funds will be more than 35% above 2008 levels and eventually subsiding to 2008 levels by 2015. The following table identifies these funds and their expected dispersion among roadway categories.

2008 2009 2010 2011 2012 2013 2014 2015

Highway System & Acquisition (603)

Interstate 340 300 319 552 708 667 341 277Primary Roads 737 699 629 904 1,228 1,275 932 787Secondary Roads 190 157 104 112 132 134 74 47Urban Roads 181 148 71 170 272 265 106 15

Highway System Maintanence (604)

(604) Interstate Maintanence 269 265 322 345 358 373 387 403(604) Primary Maintanence 461 340 445 457 431 448 466 485(604) Secondary Maintanence 304 357 340 345 355 368 382 397

Financial Assistance to Localities (607)City Roads Maintanence 283 294 294 306 318 330 343 357County Roads Maintanence 43 44 44 46 48 50 52 54

Total 2,809 2,604 2,570 3,238 3,850 3,911 3,085 2,822 - Percent Change -7.3% -1.3% 26.0% 18.9% 1.6% -21.1% -8.5% - Percent Compared to 2008 Levels 92.7% 91.5% 115.3% 137.1% 139.2% 109.8% 100.5%

SYIP & Governors Plan: Net Paving Expenditure (Million $)

22

Keep in mind, a significant portion of these funds may still be targeted at spending other than paving activities and could distort the subsequent analysis. According to the Federal Highway Administration, roughly 60% of highway spending during the past five years has targeted system preservation, or paving. Capacity expansion and new routes account for the remaining balance. PCA applies this share to arrive at funds available for paving.

Translating Paving Funds into Lane Miles

To arrive at an estimate of the promotional paving opportunities, potential paving funds must be translated into lane miles. For this translation, PCA uses Florida Department of Transportation benchmark estimates regarding the spending cost-per-road mile by type of road construction system. The cost-per-road mile is as follows: $1.866 million per interstate mile, $1.070 million per primary mile, $568,928 per secondary mile and $959,505 per urban mile. These costs are modeled assuming 90% of activity is resurfacing and 10% is new construction. In addition, the costs are estimated by urban/rural designations of 71% rural and 29% urban based on FHWA lane mile figures for Virginia. Finally, lane mile conversions per road type extrapolated from the Florida DOT figures were used to convert road miles to lane miles. Based on the cost assumptions, PCA estimates paving opportunity lane miles in the following table Comparing PCA estimates for Virginia’s need to pave roads against its ability to pave roads during 2011-2016 suggests roughly 75% of Virginia’s need to pave will be satisfied

2008 2009 2010 2011 2012 2013 2014 2015

State of Virginia 7,213 6,641 6,755 6,634 6,779 6,847 6,937 7,222

Interstate 3,620 3,333 3,390 3,329 3,402 3,436 3,481 3,624

Primary 1,719 1,582 1,609 1,581 1,615 1,631 1,653 1,721

Secondary 533 490 499 490 501 506 512 533

Urban 1,342 1,235 1,257 1,234 1,261 1,274 1,290 1,344

Source: PCA

Statewide Paving Opportunity (Lane Miles)

SECTION FIVE Making the Case for Future

Paving Share Gains

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Section Five – Making the Case for Future Paving Share Gains

Overview In the past, paving cost estimates favored asphalt – resulting in the extremely high share of asphalt paved roads within the Virginia road system. Virginia is an asphalt state. Asphalt comprises 84% of the stock of interstate roads, 98% of primary roads, and an assumed 100% of local roads. If these shares are maintained during 2011-2020, very little improvement in concrete paving volumes will materialize. New paving realities, however, are now in place – reflecting changes in global oil demand and new refining practices which reduce liquid asphalt production. The new paving realities now show that comparative life cycle and initial bid cost assessments will increasingly favor concrete over asphalt in the foreseeable future. In this context, PCA believes it is unlikely that a constant paving share will materialize over the next several years. This implies potential gains in every paving sector concrete competes directly with asphalt paving materials including urban and rural streets, interstates, parking lots, and residential driveways. Consider the following assessments regarding the potentially new competitive realities – which are just beginning to unfold. Oil Prices and the Competitive Paving Environment Asphalt bitumen is a byproduct of oil refining processes, and represents around 2.5% of all refining output in the U.S.1 Currently; there are 126 refineries in 28 states that produce asphalt. These refineries have an estimated annual capacity of 840,000 barrels of asphalt per stream day, or roughly a capacity of 308 million barrels per year. Oil prices have a direct impact on asphalt’s cost structure. Future oil price changes are expected to be brought about by both cyclical and structural factors. Cyclical variations in oil prices are brought about by unsustainable short term movements in world demand or supply. Cyclical variations in oil prices are often short lived and explain the volatility in oil prices. Structural variations in oil prices are brought about by sustainable long term movements in world demand or supply. PCA believes the structural nature of world demand has changed so dramatically and rapidly that it has resulted in a sustained acceleration in oil prices, aside from cyclical volatility.

World economic growth is expected to become synchronized – with all regions recording strength. Global growth is expected to be characterized by high rates of growth among emerging and developing economies. This is expected to result in strong increases in consumption among the emerging middle class populations – driving up commodity prices, including oil.

1 EIA petroleum and other liquids Refinery Yield Average 2010

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PCA expects oil prices will remain in the range of $104 to $110 dollars per barrel during 2011-2012. Thereafter, oil prices are expected to reach nearly $120 per barrel by 2015. The combination of global business cycle recovery and accelerating structural growth among emerging economies plays a critical role in PCA’s oil price outlook. The cost of asphalt is heavily dependent on the price of oil. PCA estimates for every historical 5% increase in the price of West Texas Intermediate, the price of asphalt increases roughly the same amount, or 6%. Coker Investments and the Competitive Paving Environment Cokers are equipment installed by oil refineries that increase the ability to refine higher margin light crude products, such as gasoline, per barrel of oil. Refineries with installed cokers produce less lower-margin residual products, such as liquid asphalt. Such equipment can dramatically improve the profitability of a refinery. Installing cokers have become attractive investments as the price of gasoline and diesel increases relative to asphalt. The expected future margins between light and heavy crude oils determine the decision to bring more cokers online and reinforce the upward movement in the cost of asphalt. As a result of a widening in the relative margins between light and heavy crudes, 21 new coker projects at refineries are expected to come on-line in the United States by 2014. As these cokers come on line, asphalt production/supply is reduced. PCA estimates that cokers could reduce asphalt supply by roughly 35% from 2006 levels.

More cokers may materialize in the years ahead, further reducing asphalt supply. This assessment is based on the threshold margin differential between light and heavy crudes that is required to make a coker investment viable. Currently, the margin differential between light and heavy crudes is $31 per barrel. PCA estimates the threshold required to make a coker viable is roughly $14-$15 per barrel. As a result, some additional asphalt refiners could improve near term profitability by installing cokers. Concrete’s Relative Price Improvement and the Competitive Paving Environment Liquid asphalt composes 5% of material in a typical asphalt pavement mix. The rest of the composition is sand and aggregate. However, liquid asphalt costs comprise roughly 55% to 65% depending on the mix costs. PCA expects asphalt prices to rise as global demand picks up and refineries shift production in favor of higher margin products. PCA expects 2011 asphalt prices will increase 12.2% and will eventually reach $123 per barrel in 2015, reflecting a 53% increase from 2010 levels.

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Current United States Coker Capacity Projects at Asphalt Producing Refineries

- Firm and Probable Expansions

Company Refinery Start-

Up 2007 2008 2009 2010 2011 2012 2013 2014

Frontier Cheyenne, Wyoming 2007 1.4 4.3 4.3 4.3 4.3 4.3 4.3 4.3

Cenex Laurel,

Montana 2007 2.5 15.0 15.0 15.0 15.0 15.0 15.0 15.0

Frontier El Dorado,

Kansas 2008 ---- 3.0 3.0 3.0 3.0 3.0 3.0 3.0

Sinclair Sinclair,

Wyoming 2008 ---- 3.3 20.0 20.0 20.0 20.0 20.0 20.0

Holly Artesia, New

Mexico 2009 ---- ---- 20.8 25.0 25.0 25.0 25.0 25.0

Sinclair Tulsa,

Oklahoma 2009 ---- ---- 16.6 28.5 28.5 28.5 28.5 28.5

Marathon Garyville, Louisiana 2010 ---- ---- ---- 36.7 44.0 44.0 44.0 44.0

Marathon Catlettsburg,

Kentucky 2010 ---- ---- ---- 30.8 37.0 37.0 37.0 37.0

Conoco Phillips Wood River,

Illinois 2010 ---- ---- ---- 21.7 65.0 65.0 65.0 65.0

Hunt Tuscaloosa,

Alabama 2010 ---- ---- ---- 3.7 11.0 11.0 11.0 11.0

Marathon Detriot,

Michigan 2010 ---- ---- ---- 3.3 20.0 20.0 20.0 20.0

Valero St. Charles, Louisiana 2010 ---- ---- ---- 1.7 10.0 10.0 10.0 10.0

BP/Husky Toledo, Ohio 2011 ---- ---- ---- ---- 20.8 25.0 25.0 25.0 Atofina

Petrochemicals Port Arthur,

Texas 2011 ---- ---- ---- ---- 41.7 50.0 50.0 50.0

BP Whiting, Indiana 2011 ---- ---- ---- ---- 46.7 80.0 80.0 80.0

Conoco Phillips Wood River,

Illinois 2013 ---- ---- ---- ---- ---- ---- 17.5 30.0

Total Mbpd 3.9 25.6 79.8 193.6 392.0 437.8 455.3 467.8

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Sustained high asphalt prices may change future paving materials selection. Initial bid costs that once favored asphalt are now at parity or in concrete’s favor. In terms of life cycle cost, concrete roads require less frequent maintenance, and last more than twice as long. Prior to 2008 asphalt long enjoyed an initial bid cost advantage over concrete pavement. This plays a key role in asphalts dominant market share in road paving. Oil price changes and refining practices have changed the cost environment. PCA now estimates that concrete enjoys a competitive cost advantage over asphalt paved roads. The change in the initial cost advantage represents a significant turn in the competitive environment. PCA estimates the parity paving costs between asphalt and concrete at roughly $80 per barrel. Risks associated with PCA’s analysis surround the expectancy of synchronized world growth. Slower economic growth in China could have large impacts on world economic growth, and as a result oil and asphalt prices. Oil prices below that parity threshold suggest an initial bid paving advantage may favor asphalt.

Non-Price Factors and the Competitive Paving Environment PCA conducted several econometric tests to determine the relationship between changes in relative prices and market share. PCA’s historical econometric analysis concludes that the concrete-asphalt competitive paving arena is relatively insensitive to changes in the relative price of concrete to asphalt in terms of market share. PCA believes two factors account for this insensitivity to relative prices. First, initial bid paving parity was not achieved until 2008 and favored asphalt up until that time. Observed changes in relative prices, in essence do not have a potential impact on market share gains until parity is

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reached. The asphalt-concrete competitive arena has just entered this era, which PCA believes will be sustained. More significant sensitivities to changes in the relative price of asphalt-concrete are anticipated during the years ahead. Secondly, despite competitive pricing advantages favoring concrete, gains in concrete’s share in paving may be initially constrained due to existing non-price factors surrounding the material selection processes in state highway administrations. Key non-price factors include the following: Attitudes and Perceptions According to a recent perceptions survey of state highway administrations, respondents viewed concrete as having less than 10% of the share in paving projects. In contrast, 54% of these respondents expect concrete to gain in market share over the next five years citing these reasons for concrete’s rise:

• Increasing cost in asphalt paving • Awareness of the advantages of life cycle cost • Asphalt environmental impacts • Concrete’s need for less maintenance

However, all feedback was not positive. The same survey indicated several factors acting to the detriment of concrete’s use in paving activity. These factors include:

• Lower levels of funding available to the states • Lack of concrete industry influence/presence of qualified contractors • Decline in new pavement projects and growth in repair projects

The results indicate a favorable environment for concrete in the perceptions of those working in state highway administrations. However, the lack of qualified concrete contractors is identified as a key issue that may be impeding greater concrete paving activity. Specification Tradition Asphalt paved roads account for roughly 94% of existing roads. State DOT road designers have long used asphalt for paving and are comfortable in its use. Material specification for pavements may favor asphalt due to its habitual or traditional use as well as the paving material’s ability to be consistent with existing roads. According to PCA’s 2008 Highway Pavement Perception Survey, these factors represent 20% as primary reasons why asphalt was selected over concrete as a pavement material. Asphalt Price Escalators Asphalt price escalators, or price adjustment clauses, are provisions in which asphalt costs of a project are permitted to be increased after the bid has been won if the costs of asphalt increase above the original bid price. The use of price adjustment clauses allows the risk of asphalt price increases to shift from contractors to state highway agencies. This allowance gives asphalt the advantage of not having to incorporate a risk premium into their bid processes making their initial bids appear less expensive. The process of escalators essentially mitigates natural market effects that would normally give concrete a more favorable market position. Alternative Bidding Alternative pavement bidding is a process in which initial and life cycle costs are compared between asphalt and concrete pavement designs in order to assess the lowest cost solution. Alternative bidding is an important function in fostering a competitive environment in which market efficiencies can be realized to reduce costs, improve quality, and drive innovation. The absence of alternative bid policies produces bias in the paving material selection process. It is important to note that when alternative pavement designs are implemented, price adjustment clauses are removed. The Federal Highway Administration clearly states, “...it is very difficult, if not impossible, to

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administer equal treatment with price adjustment factors to alternate materials, using these clauses will result in different levels of materials cost risk being included in the bid for alternate pavement types.”2 Furthermore, if equivalent design is not an aspect of the alternative bid process, the potential competitive cost advantages for concrete paving envisioned by PCA will be largely sterilized. Non-price policy barriers essentially prevent the free market price mechanism to fully operate – at least initially. PCA believes that non-price policy initiatives (escalators, alternative bid, and equivalent design) must be removed if the full potential of market share gains for concrete paved roads can be fully realized. In time, however, given the magnitude of the expected improvement in concrete’s competitive price position, and in the context of long-term state entitlement spending pressures, some state DOTs may turn away from specifying practices that impede concrete paving share gains.

2 U.S. Federal Highway Administration, Clarification of FHWA Policy for Bidding Alternate Pavement Type on the National Highway System, http://www.fhwa.dot.gov/pavement/081113.cfm, November 13 2008

SECTION SIX Translating Lane Miles into

Cement Consumption

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Section Six - Translating Lane Miles into Cement Consumption

Overview To properly assess the paving opportunity for Virginia, the final step is to convert lane mile estimates to cement consumption. Given the lane mile estimates and cement market shares outlined previously, we now know what the paving opportunity is in terms of available lane miles. The next step is to apply a cement intensity factor to estimate overall cement potential. The cement intensity is based on average concrete paving thickness ranging from five to eight inches depending on road type and a constant 12 foot road width assumption. Upon determining the paving area per lane mile, concrete cubic yards were converted to cement using the benchmark factor of 4.41 metric tons of cement per cubic yard of concrete. The results of this analysis yielded a paving market in excess of 200,000 metric tons which can be validated by PCA’s Apparent Use Model which is driven by Dodge contract awards. However, the focus of the paving opportunity is not the market size; rather, it is what the market can be. With the adoption of the competitive materials scenarios, future market sizes assessments can be made and are outlined in the following tables.

The information above details incremental gains of cement consumption if the cement paving market share were to increase 1% per year. We feel that 1% is a conservative approach given the lack of saturation in the market due to the prevailingly low concrete market shares. Our estimates show that for every 1% increase in market share, roughly 25,000 metric tons of cement could be added to demand each year given the current ability of VDOT’s funding. Assuming a consistent 1% increase each year, within four years the paving market could be expanded by an additional 100,000 metrics tons of demand. In total, the cumulative gain from a 1% annum increase in concrete paving market share would yield roughly 250,000 additional cement tons to the market. Keep in mind, the 1% market share increase is a conservative approach assuming promotion activity is engaged in a challenging market without any economic or structural tailwinds. However, PCA does not feel that will be the case given the scenarios outlined in the competitive material section. Rising energy prices coupled with increasingly budget minded public officials is expected to vastly improve promotion results aimed at government officials and thus add further to market share gains.

2008 2009 2010 2011 2012 2013 2014 2015 Cumulative 2012-2015

State of Virginia 0 0 0 0 24,556 49,605 75,389 104,648 254,199

Interstate 0 0 0 0 12,500 25,251 38,376 53,271 129,399Primary 0 0 0 0 5,935 11,989 18,220 25,292 61,435Secondary 0 0 0 0 1,708 3,450 5,244 7,279 17,681Urban 0 0 0 0 4,413 8,915 13,548 18,807 45,683Source: PCA

Incremental Metric Ton Paving Gains Based on Market Share Growth, 1% per Annum Assumption

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The second table outlines a scenario for Virginia assuming the state can reach market shares seen in Iowa by 2020. Iowa is a state recognized by much of the industry as the example to strive for given the promotional successes and willingness of DOT officials to adopt concrete paving. Market shares in Iowa reached levels as high as 46% for interstates and primary roads and roughly 28% for secondary and urban roads. In the above table, paving market shares were set to Iowa’s levels in year 2020 and the Virginia paving model was escalated to those levels. Based on this schedule, Virginia cement consumption related to paving could increase by as much as an additional 375,000 metric tons per year by 2015. All told, Virginia’s paving market could increase an additional 900,000 metric tons between 2012-2015 through accelerated market share increases. Keep in mind, these estimates are based on market shares that are half that as seen in Iowa; even mild success relative to Iowa’s paving market share would dramatically increase cement consumption in Virginia.

Using project distributions from Virginia’s SYIP coupled with respective cement intensities per road type, our analysis reveals Hampton Roads and Northern Virginia carry the highest cement potential of the districts. Combined, these two districts receive roughly 73% of the paving funds under the current SYIP. In addition, these two districts have 61% of their funds allocated to interstates, the most cement intensive segment. By comparison, all other districts combined account for only 13% of the SYIP’s interstate spending.

2008 2009 2010 2011 2012 2013 2014 2015 Cumulative 2012-2015


Interstate 0 0 0 0 44,029 88,941 135,170 187,633 455,773Primary 0 0 0 0 29,410 59,411 90,290 125,334 304,445Secondary 0 0 0 0 6,642 13,418 20,392 28,307 68,760Urban 0 0 0 0 8,826 17,830 27,097 37,614 91,366Source: PCA

Based on Market Share Growth, Iowa BaselineIncremental Metric Ton Paving Gains

2008 2009 2010 2011 2012 2013 2014 2015 Cumulative 2012-2015


Hampton Roads 0 0 0 0 33,683 68,043 103,410 143,545 348,681Northern Virginia 0 0 0 0 28,006 56,574 85,979 119,349 289,908Richmond 0 0 0 0 6,903 13,944 21,192 29,418 71,457Salem 0 0 0 0 5,392 10,892 16,554 22,979 55,817Bristol 0 0 0 0 4,426 8,940 13,587 18,860 45,813Staunton 0 0 0 0 3,820 7,717 11,728 16,280 39,546Fredericksburg 0 0 0 0 3,481 7,031 10,686 14,833 36,031Culpeper 0 0 0 0 1,806 3,649 5,546 7,699 18,700Lynchburg 0 0 0 0 1,301 2,628 3,994 5,544 13,467Statewide 0 0 0 0 89 180 274 380 922Source: PCA

Incremental Metric Ton Paving Gains By MarketBased on Market Share Growth, Iowa Baseline

SECTION SEVEN Virginia’s Concrete Parking Lot

Outlook

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Section Seven - Virginia’s Concrete Parking Lot Outlook Overview Parking lot paving activity is expected to remain depressed for some time due to its link to nonresidential construction. Since its peak in 2007, parking lot construction has declined an estimated 54% through 2010. PCA estimates that the trough may not be reached until 2013 and past peak levels may not materialize until 2020. This assessment reflects PCA’s expectations regarding nonresidential construction activity. Parking lot paving opportunities are comprised of new parking lots and replacement of existing parking lots. Nonresidential construction activity is driven by expected return on investment (ROI). Without a significant improvement in expected ROI’s, commercial construction activity will remain depressed. ROI has two essential components including net operating income (NOI) and asset appreciation potential. Between the two, PCA believes NOI is the more important metric to focus on since it also plays a role in determining asset appreciation potential. Several issues confront a recovery in nonresidential expected ROI’s and construction activity including, depressed occupancy and usage rates, soft leasing rates, declining commercial asset prices, and tight lending standards. Job creation, either directly or indirectly, translates into higher occupancy and leasing rates. Combined, these factors determine the expected return on investment for most commercial properties. Weak economic conditions depress expected ROIs. Only with a significant increase in jobs, will the outlook for commercial construction activity accelerate. It will take time for these conditions to heal and give way to a nonresidential construction recovery. The speed at which the healing process begins will be largely dictated by the strength in the labor market recovery. While job creation is expected to be more robust than previously expected, PCA maintains the nonresidential recovery process will remain prolonged, with substantive cement volume gains materializing in 2013. In addition, the commercial real estate market is plagued with refinancing issues. Many commercial properties were refinanced during the easy credit era. This period also ran coincident with high property value assessments. Many of these properties were refinanced on five year balloon payments, which are now coming due, and based on asset values market conditions no longer support. Many commercial property owners have been successful in restructuring their debt – reducing, to some extent, the same threat posed by the single family mortgage market. While commercial real estate leverage is improving, it remains high on a historical basis. Over $1 trillion in commercial real estate debt is coming due over the next few years. The value of much of the collateral is still less than the loan balances. Finally, prospective asset appreciation adds to potential commercial property owners overall expected ROI. Unfortunately, the prospect of sustained low occupancy and leasing rates has prompted a decline in commercial real estate asset values compared to peak levels related to the housing boom. In light of poor NOI’s and difficult lending standards, PCA expects commercial property values will continue to decline through 2011. The asset price decline further hinders an improvement in the return on New Parking Lots New parking lot opportunities are determined by the amount of construction activity in key construction sectors. To reach rough estimates of new parking lot demand, PCA has designated specific construction segments that will likely include parking lot construction in its project plans. These segments include; hotels, motels, apartment and condominiums, public administrative buildings, religious buildings, hospitals, stores, restaurants and office buildings. Using Dodge contract awards data, PCA was able to identify historical square footage of buildings included in the parking lot subset of construction. PCA’s regional forecast for Virginia was overlaid on top of the contract awards data to yield a square footage forecast for buildings that will likely include parking lot construction in its plans. Using Reed’s parking lot survey data, PCA then establishes an average ratio between building square footage and parking lot square footage. This ratio, for each construction segment, is applied to historical and forecast building square footage estimates, to yield estimates for parking lot paving demand.

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Economic conditions are expected to restrain building activity and construction of new parking lots. Parking lot square footage has declined from an estimated 52 million square feet in 2007 to 23 million square feet in 2010 and is expected to remain near that level through 2012. By 2015, new parking lot square footage is expected to reach 39 million square feet. To measure the potential incremental gains in parking lot paving, PCA assumes a 1% annual share gain through 2015. These share gains reflect the assumed returns associated with parking lot paving promotion. These estimates suggest the potential incremental gain of 121,000 cubic yards of concrete or roughly 24,000 metric tons of cement during 2011-2015. Cumulative gains by segment are: 45,000 cubic yards of concrete, or 9,000 metric tons of cement, for public buildings; 42,000 cubic yards of concrete, or 8,400 metric tons of cement, for stores and restaurants; 19,000 cubic yards of concrete, or 3,800 metric tons of cement, for apartments and condominiums; 9,800 cubic yards of concrete, or 2,000 metric tons of cement, for office buildings; and 4,700 cubic yards of concrete, or 900 metric tons of cement, for hotels and motels. Replacement Parking Lots In addition to new parking lot construction, resurfacing of existing inventory must also be considered to properly assess total parking lot paving potential. Using a 30-year life cycle, PCA estimated resurfacing demand of existing parking lots that are likely candidates for replacement To reach rough estimates of existing parking lot repaving gains, PCA mirrored the same construction segments as in the new parking lot demand model. Dodge contract awards data for these segments was only available beginning in 1992, so to appropriately capture the 30-year parking lot life cycle (stock of inventory from 1985 through 2015); estimates of square footage for this missing period was required. Using average spending per capita and population estimates, total spending for each of the categories was derived. By applying an average spending per square foot, total square feet placed by each segment was estimated. Each segment then received its estimated share of parking lot square footage as defined in the new construction model. Segments were then summed to yield estimates of overall parking lot square footage placed in that year. A cumulative application of this square footage was used in order to arrive at the available square feet of parking lot inventory available in each year beyond 2010.

2007 2008 2009 2010 2011 2012 2013 2014 2015Total Parking Lot Subset 51,377 43,424 42,282 23,493 22,357 22,282 28,050 34,293 39,120 - Percent Change (%) 22.3% -15.5% -2.6% -44.4% -4.8% -0.3% 25.9% 22.3% 14.1%

Apartments 25,793 14,625 15,464 8,573 8,286 8,604 10,622 12,894 14,640 - Parking Lot Square Footage 12,897 7,312 7,732 4,286 4,143 4,302 5,311 6,447 7,320

Hotels 1,249 2,042 3,190 1,642 1,477 1,524 1,972 2,189 2,358 - Parking Lot Square Footage 899 1,471 2,297 1,183 1,064 1,097 1,420 1,576 1,698

Public Buildings 8,897 9,274 9,501 6,316 5,830 5,305 6,023 7,332 8,040 - Parking Lot Square Footage 16,903 17,620 18,051 12,001 11,078 10,080 11,444 13,930 15,275

Stores/Restaurants 7,098 8,496 7,820 3,264 3,037 3,209 4,794 6,511 8,049 - Parking Lot Square Footage 16,325 19,540 17,986 7,506 6,985 7,380 11,027 14,976 18,513

Office 8,340 8,988 6,307 3,699 3,726 3,641 4,639 5,366 6,033 - Parking Lot Square Footage 5,087 5,483 3,847 2,256 2,273 2,221 2,830 3,273 3,680

Source: F.W. Dodge,PCA Estimates

Virginia New Parking Lot Estimates (000 sq ft)

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Upon establishing the existing inventory of all parking lots, this inventory was discovered estimating a 30-year life cycle. Field consultations suggested a linear depreciation schedule, assuming constant technology, be applied. Based on this schedule, roughly 45% of existing inventory is a candidate for resurfacing in a given year. Of this amount, only an assumed 5% of deteriorated stock is resurfaced annually, and the remaining balance is carried forward into the next year with the depreciation schedule being reset. To measure the potential cement gains in parking lot paving, PCA assumes a 1% market share in 2011 and an annual 1% share gain through 2015. These market share gains reflect the expected returns associated with parking lot paving promotion. This market penetration scenario yields a possible cumulative 50,500 metric tons of cement demand through 2015 due to resurfacing of deteriorated inventory. Total Parking Lots Total parking lot paving opportunity can be estimated by adding the cumulative (2011-2015) 24,000 metric ton estimate for new parking lot paving potential with the cumulative (1985-2015) 50,500 metric ton estimate for repaving/resurfacing potential. This yields a statewide potential of approximately 75,000 metric tons for 2011-2015.

2007 2008 2009 2010 2011 2012 2013 2014 2015Total Parking Lot Subset 843,602 895,027 944,941 972,173 998,638 1,025,640 1,058,227 1,096,499 1,139,710 - Percent Change (%) 6.6% 6.1% 5.6% 2.9% 2.7% 2.7% 3.2% 3.6% 3.9%

Apartments 287,461 302,086 317,550 326,123 334,409 343,013 353,635 366,529 381,169 - Parking Lot Square Footage 143,730 151,043 158,775 163,061 167,204 171,506 176,816 183,263 190,583

Hotels 36,892 38,934 42,124 43,766 45,243 46,767 48,739 50,928 53,286 - Parking Lot Square Footage 26,563 28,033 30,330 31,513 32,576 33,674 35,094 36,670 38,368

Public Buildings 107,735 117,009 126,510 132,826 138,656 143,961 149,984 157,316 165,356 - Parking Lot Square Footage 204,714 222,334 240,385 252,386 264,387 276,387 288,388 300,389 312,390

Stores/Restaurants 157,514 166,010 173,830 177,094 180,131 183,340 188,134 194,645 202,694 - Parking Lot Square Footage 362,282 381,821 399,808 407,314 414,299 421,680 432,706 447,681 466,194

Office 174,284 183,272 189,579 193,278 197,004 200,645 205,284 210,650 216,683 - Parking Lot Square Footage 106,314 111,797 115,644 117,900 120,172 122,393 125,223 128,495 132,175

Source: F.W. Dodge,PCA Estimates

Virginia Existing Parking Lot Estimates (000 sq ft)Cumulative Inventory

SECTION EIGHT Potential Paving Opportunities:

Roads vs. Parking Lots

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Section Eight - Potential Paving Opportunities: Roads vs. Parking Lots PCA’s cumulative analysis of potential volume gains in the Virginia paving market suggests that for every 1% increase in market share, roughly 25,000 metric tons of cement could be added to demand each year given the current ability of VDOT’s funding. Assuming a consistent 1% increase each year, within four years the paving market could be expanded by an additional 100,000 metrics tons of demand. In total, the cumulative gain from a 1% annum increase in concrete paving market share would yield roughly 250,000 additional cement tons to the market. In comparison, under the same set of share gain assumptions, total parking lot paving opportunity can be estimated at 75,000 metric tons for 2011-2015. In terms of paving asset deployment within Virginia, targeting road systems, yield the potential of a threefold return compared to parking lots. At least some of this differential reflects PCA’s comparative assessments regarding construction activity for parking lots and road systems. In sum, PCA construction expectations for each paving sector are characterized by:

• Sufficient funding support for Virginia’s latest transportation plan during the next five years. With overall road conditions having deteriorated significantly in the past four years in all primary road networks, the need for investment suggests a continuing paving opportunity.

• A weak outlook for new and existing parking lot paving reflecting conditions that have embraced the nonresidential construction sector. While percentage gains in parking lot construction may materialize by 2013 and beyond, past peak levels may not materialize until 2020 suggesting a limited return on resource investment.

With the goal of focusing resources toward maximum ROI, PCA assessed and weighted the various metrics that influence road system paving opportunities in each district. Each of these market elements is in turn discussed earlier in this report, however, this consolidate view reveals recommendations for resource allocation across the nine Virginia districts.

DistrictOverall Ranking Population Congestion

Roadway Deficiency-

Primary

Roadway Deficiency-Secondary SYIP

Pavement Type-

Primary

Pavement Type-

SecondaryNorthern Virginia 1 2 3 1 1 1 4 6Fredericksburg 2 5 4 5 5 4 2 7Hampton Roads 3 4 5 6 7 5 8 1Richmond 4 6 6 3 3 2 1 8Staunton 5 1 1 2 2 7 5 9Culpeper 6 3 2 8 6 9 7 5Salem 7 9 9 7 4 3 9 2Bristol 8 7 7 4 8 6 6 3Lynchburg 9 8 8 9 9 8 3 4

paving market assessment for the commonwealth of … · the new paving realities now show that...

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