Merger of Mass Turnpike and Mass Highways

January 22, 2004

2

Assessment process for considering a merger between the Mass Turnpike and Mass Highways

Do functional duplications exist within both organizations?

Are MassHighway operations more efficient than Turnpike operations?

Can equipment and facilities be be shared?

Can restricted reserves be liberated?

Can outstanding debt be refinanced?

Can redundant land and facilities be sold?

Is it prudent for the Commonwealth to absorb $2.5 billion in existing Turnpike debt?

Quantify on-going operating savings

Identify one-time revenues liberated by

merger

Assess budgetary and debt service implications

3

The Turnpike generates a loss from its core operations, thereby requiring the on-going use of one-timers to meet its obligations

($ in Thousands) FY2005 FY2006 FY2007 FY2008 FY2009Turnpike Authority Core CashflowsCore Revenues After Toll Discount Program 278,560 283,664 288,324 308,898 329,825 Operating Expenses, Including Paygo Capital (187,444) (191,381) (195,851) (200,846) (205,991) Net Debt Service (Net of Contract Assistance) (100,863) (100,938) (100,730) (113,543) (125,407) Turnpike Core Cashflows (9,747) (8,656) (8,257) (5,491) (1,572)

Turnpike Authority O ne-time CashflowsSwaption 1 Receipts 3,281 3,281 3,281 3,281 3,281 Swaption 2 Receipts 5,416 5,416 5,416 5,416 - Copley Lease Revenues 2,778 2,778 2,778 2,778 2,778 Allston Pledged Revenues 13,500 13,500 13,500 13,500 13,500 Net Turnpike Results, Including O ne-timers 15,227 16,319 16,718 19,484 17,986

4

MHD

MTA

Lanemiles

Operatingcosts

9,354 $190M

0

20

40

60

80

100%

MHD

MTA

Interstatelane miles

Operatingcosts

3,186 $190M

0

20

40

60

80

100%

MHD

MTA

Interstate Op Cost(no MHS)

3,049 $165M

0

20

40

60

80

100%

The Turnpike is an expensive road to run…

All state lane miles Interstate lane miles Interstate lane miles and Western Turnpike

5

…yet, the Turnpike is not a “better road”

Poor

Fair

Good

Excellent

Turnpike MassHighways

130 403

0

20

40

60

80

100%

Centerline miles of Interstate Highway

Source: Pavement Management Data report 2001-02.

6

Specific MTA and MHD operating costs have been reviewed

Administration Executive, planning, development, HQ supplies & general expense, custodial, HQ utilities

Overhead

O&M

Excluded Costs

Finance CFO, budget, audit (non-toll), purchasing, insurance admin, cash mgt., credit union mgt.

HR Civil rights, personnel admin, employ. relations, benefits, training, worker’s comp admin, pension admin, payroll, occupational safety, T-passes, credit union

IT IT services, information systems, computer aided design

Legal Legal

Marketing Community relations, advertising, tourism and marketing, community services, patron services,

Engineering

Maintenance

Tolls

Police

Special projects

Parking

Snow & Ice

Field engineering, engineering services, communications, environment engineering, highway engineering, research and materials, construction engineering, right of way

Field personnel and OT, facilities mgt., highway operations, maintenance admin., district utilities, fleet mgt. and maintenance, service area maintenance, signage, carpentry, striping, litter, landscaping, machine shop

Toll collection, toll equipment, toll audit, toll training and logistics, ETC enforcement

Public safety administration, police patrol, special details

All CA/T related costs, tunnel utilities, tunnel maintenance, Route 3 north project

Parking operations

All snow and ice operations

7

Scale drives significant overhead productivity advantages at MHD

MTA WTMass

HighwaysMHDI-state

51.3

39.9

4.3

14.2

0

20

40

$60K

MHD MTA WT MHDMass HighwaysInterstate Only

4 4

34

10

0

10

20

30

40

MHDI-state

Turnpike

Mass Highways

Overhead cost per lane-mile Lane-miles per FTE

8

Administrative productivity (detail)

Admin Finance HR IT Legal Marketing0

10

20

$30K

Cost per lane mile

MHDMTA

10338

5837

6833

1918

88

135

Turnpike

Mass Highways

Total FTE169257

9

Benchmarking toll productivity highlights inefficiency

99 lanes,all manual

24 x 7

60 lanes,all manual

24 x 7

60 lanes50% 24x7 50% 16x7

MTACurrentFTE's

491

297248

428

0

100

200

300

400

500

Theoreticalreductions(39 lanes)

Actualreductions(39 lanes)

131

23

0

50

100

150

Required toll collector FTE’s MTA FTE reductions

Assumptions: 3.3 FTE’s per 16 hour lane and 4.96 per 24 hour lane; fully loaded employee cost of $70.7K; 7.5 working hours per day, 5 weeks annual vacation.

10

Savings are generated by eliminating duplicate overhead, not by lower the quality of the road

Savings

Turnpike costsmerged with MHD

MaintenanceLegal

ITPolice

Marketing

HR

Administration

Finance

Toll Collection

Current Turnpike Spending Savings

$130M $20.1M

0

20

40

60

80

100% ~$1M

11

Other sources of value

Closure and sale of overlapping facilities and depots

$1-2 million

Capital avoidance for Research and Materials Lab

$5 million

Equipment and machine shop sharing

$3-5 million

12

Up to $300M in funds could be liberated by a merger of the Turnpike and Mass Highways

Pro Forma Adjustments to Turnpike Authority Cashflows Upon Merger($ in Thousands) FY2005 FY2006 FY2007 FY2008 FY2009

Operating Synergies 20,100$ 20,100$ 20,100$ 20,100$ 20,100$

Elimination of Subordinated Expenses 1,350 1,350 1,350 1,350 1,350

Commonwealth Contract Assistance 25,000 25,000 25,000 25,000 25,000

Increase in Turnpike Debt Service (25,000) (25,000) (25,000) (25,000) (25,000)

Transfer of Debt Reserves 180,300 - - - -

Interest Earned on Debt Reserves (9,790) (9,790) (9,790) (9,790) (9,790)

Surety Bond Purchase (3,600) - - - -

Savings from WT Refinancing 3,000 - - - -

Escrow Restructuring 15,000 - - - -

Swaption Payments 8,697 8,697 8,697 8,697 8,697

Copley Lease 2,778 2,778 2,778 2,778 2,778

Allston Sale Proceeds 75,000 - - - -

Total Pro Forma Adjustments 292,835$ 23,135$ 23,135$ 23,135$ 23,135$

13

Summary

Cash flow negative

Non-strategic, short-term decision making to address financial problems

- Risky financial transactions

- Disposition of critical infrastructure assets

Ratings downgrades

Merger Rationale

Financial Distress $20M Annual SavingsInsufficient

Accountability

Eliminating duplicate overhead

- HR, finance, Admin, legal

Toll collection optimization

- Staffing levels- Complete the transition to electronic collection

Increasing facility and equipment utilization

Critical transportation assets are not controlled by the Commonwealth

Capital spending and asset management is outside of Commonwealth control

- The state needs to control transportation infrastructure

Surface artery park restoration is too important to be built and run by an independent authority