D E C E M B E R 1 2, 2 0 0 6D E C E M B E R 1 2, 2 0 0 6 I N F R A S T R U C T U R E F I N A N C I N G S T R A T E G I E SI N F R A S T R U C T U R E F

D E C E M B E R 1 2 , 2 0 0 6

I N F R A S T R U C T U R E F I N A N C I N G S T R A T E G I E S

FHWA: Northern Border Finance WorkshopDetroit, Michigan

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N O R T H E R N B O R D E R T R A N S P O R T A T I O N P R O G R A M

Overview

Private Sector Capital: A financing tool

A new Detroit River International Crossing

Federal Sector Capital: Co-investment

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Private Capital Can Add Value

Aggressive use of capital to maximize asset value given a projected stream of tolls

Private capital structure using both debt and equity

Equity demands a higher rate of return, but may be more flexible during ramp up

Optimal use of debt

Upfront payment to sponsoring government, even in a new construction project

Extract value from existing assets

Infrastructure private purchasing power > $200 billion

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Infrastructure Financing Alternatives

Conventional Innovative

Initial Public Offering

Separate assets into operating company

Offer shares to public and maintain significant ownership

Sell additional ownership percentages over time

Likely to give more autonomy to management and attract local retail investors

Possibly lower initial proceeds than sale or concession

Leverage Asset with Debt

Debt Service coverage levels to Baa/BBB rating category

Debt proceeds fund Project

No asset sale or transfer

Comply with existing bond covenants, if applicable

Transfer Asset to Public Authority

Create a new Public Authority in which the sponsor has significant participation

Authority borrows funds for purchase

Authority purchases transportation assets or concession

Apply purchase price to pay existing debt and to finance new projects

Public Private Concession Agreement

Accept bids for long term lease from private operators and investors

Retain asset ownership

Critical controls negotiated in concession agreement

Potential for upfront cash and revenue sharing

Direct Asset Sale

Direct sale of either a portion of or entire asset

Complete divestiture of transportation assets

Parent company likely to assume control over day-to-day operations

Likely to produce maximum proceeds

Brownfield or Greenfield

Brownfield

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Infrastructure Assets are Attractive to Investors

Long term, stable cashflows, inflation adjusted

Low correlation to other asset classes

Increase in share price due to revaluation and growth

Income stream with tax deferred components

Predictable Cashflow

DiversificationCapital

AppreciationTax Benefits

Unique Investment

Class

Previously unavailable for investment

Broad Appea

l

Traditional institutions

Pension plans

Hedge funds

Retail investors

Rapid Shift to Funded Pension Systems Shift to funded pension systems Duration match of liabilities to assets

Incentive for Private Sector Participation Investment encouraged by government

Long-Term Investment Returns Valued Using Discounted Cash Flow Investors seek high-yield, low risk, bond-like returns with potential for capital

growth

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Striking the “Right” Public-Private Partnership Balance

Deliver project Promote economic development Maximize financial resources

Build project if it produces good financial return

Generate stable long-term equity returns Maximize return on investment

Public Agency Objectives:Public Agency Objectives: Private Sector Objectives:Private Sector Objectives:

• Long-term mindset• Tailored agreements

MaximizeEquity Returns

Maximize Traffic Flow and Economic

Development

Public Sector

Private Sector

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1 Includes concession ($67mm for 100% implied) and construction $621mm

Recent North American Road Privatizations

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U.S. Transportation PPP Projects In-Progress

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Projects Completed Between US and Canada

Blue Water Bridge

Managed by: Michigan Dept. of Transportation (MDOT) & Blue Water Bridge Authority (BWBA)

Description: Connects Port Huron, MI and Sarnia, ON

Financing: MDOT 2005 Refunding of $54.5MM 1996 Bonds; C$100MM BWBA bonds outstanding

Security: State Trunk Line Fund (MDOT); Toll revenues (BWBA)

Traffic1: Two way traffic

Notes: AA- rating from S&P (MDOT & BWBA) Bridge is tolled in both directions

2001 2002 2003 2004 2005

5,687,559

5,596,911

5,441,207

5,568,845

5,513,809

International Bridge

Managed by: Federal Bridge Corporation Limited

Description: Connects Sault Ste. Marie, MI and Sault St Marie, ON

Financing: No bonds outstanding - $16MM issued in 1960 have been retired

Security: Toll revenues

Traffic1: One way traffic

Notes: Nov. 06, JIBA proposed a toll increase to meet long term needs and decreasing revenue

Bridge is tolled in both directions

1Respective websites

2003 2004 2005 2006 est.

1,898,580

1,849,382

1,926,660

1,941,353

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Detroit River International Border Crossings

Canada and the US have the largest bilateral trading partnership in the world Over $1 billion (USD) in daily trade1

28% of surface trade between Canada and the US passes through the Detroit River Area2

Currently, crossing occurs via: Ambassador Bridge

— Privately owned by the Detroit International Bridge Company and the Canadian Transit Company

Detroit-Windsor Tunnel— $53.5MM Macquarie concession for US side – January 2001

Detroit Windsor Rail Tunnel— Controlled by Canadian Pacific Railway, owned by CPR and Borealis Infrastructure Fund

1Detroit River International Crossing Study - Evaluation of Illustrative Alternative on US Side of Border – Volume 22 Detroit River International Crossing Study - Travel Demand Forecasts

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Forecasted Need for a New Detroit River International Crossing

By 2035, base forecast traffic is expected to increase1: Passenger traffic – 57% Truck traffic - 128% Capacity of the connections and plaza operations will be exceeded sooner than

roads

Since 1999 traffic in the Detroit River area has declined by 25%

1Detroit River International Crossing Study – Travel Demand Forecasts (Sept. 2005)

Source: DRIC Study - Travel Demand Forecast

Bridge and Tunnel Operators Associations Bridge and Tunnel Operators Associations

Annual Passenger CarsAnnual Passenger Cars Annual Commercial VehiclesAnnual Commercial Vehicles

2001 – US Attacked on 9/112003 – SARS outbreak in Canada

Historical Events1989 – FTA Agreement1999 – Casinos open in Detroit

Average annual growth rates:

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Forecasted Need for a New Detroit River International Crossing

Crossing speed and capacity

Source: Detroit River International Crossing Study – Travel Demand Forecasts1Based on PCE factor of 3 for commercial vehicles

Base forecast physical crossing capacity exceeded: Ambassador Bridge – 2020 Detroit Windsor Tunnel - 2035

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Detroit River International Crossing Project

Proposed Bridge

Canadian Inspection

Plaza

US Inspection

Plaza

Canadian Highway

Connection

US Highway Connection

A new border crossing will have five components

Access roads leading to the border crossing

Toll collection facilities Physical crossing Border inspection system

— Primary and secondary Egress roads leading from border

crossing

Source: Detroit River International Crossing Study – Travel Demand Forecasts

Summary of future Detroit River crossings capacity needs

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Recent Border Processing Improvements

Ambassador Bridge Four new truck customs booths – Jan. 8, 2004 New Fast and Secure Trade (FAST) program improvements – Nov. 1, 2004

Improved technology and staffing levels have improved mobility patterns

Mean Commercial Travel TimesMean Commercial Travel Times

Source: Detroit River International Crossing Study – Travel Demand Forecast

1Detroit River International Crossing Study – Travel Demand Forecasts

Crossing Times – Canada to USCrossing Times – Canada to US

Delay times on the critical US-bound Ambassador Bridge crossing reduced by 80%1

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Political Risk

Market Position Existing competition

— Bridges— Rail— Ferries

Alternate proposals — Detroit River Tunnel Partnership - Jobs Tunnel (~$400 million to construct)— Mich-Can - Rouge River Bridge Project (~$400-$500 million to construct)

Traffic and Revenue Forecasting

Competing truck toll ($USD)

Investor Considerations: Detroit River Crossing Greenfield Project

Socioeconomic

Event Risk

Source: DRIC Study – Travel Demand Forecast

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Funding Sources for a New Crossing

12006 State of Michigan – State Trunk Line Funds Official Statement, 2New and Publications – Michigan Infrastructure & Transportation Association

Public Private Partnerships

???

Canada Would concession be allowed across border? Would the restrictions from both countries deter investors from taking on the project? A number of other crossings are privately owned – agreements?

Michigan Department of Transportation In FY 2005 surface transportation

revenues - $1.97 billion1 Each year, Michigan falls more than $700

million short in meeting basic maintenance needs2

State of Michigan Senate approved 2007 capital outlay budget contains language prohibiting any state expenditures for renewed crossing over Detroit River

Federal Funding Transportation Infrastructure Finance and

Innovation Act (TIFIA)—Can TIFIA be applied to the US

portion? Private Activity Bonds (PABs)

—Potential for use with TIFIA if allowed—Would allow for less expensive

financing

Province of Ontario May 2005 - Ontario releases

infrastructure investment plan with transportation investments of $11.4 billion by 2010

Federal Funding Transport Canada manages the

Highways and Border Infrastructure Fund, with a commitment of $2.4 billion in 2006 budget

Strategic Highway Infrastructure Program

—5-year program to renew and enhance Canada’s highway infrastructure

—$600 million dedicated to overall program, with $65 million set aside for border crossings

Cost of the crossing is estimated at $1 billion

United StatesUnited States CanadaCanada

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Federal-Aid Highway Program (FAHP) funded by contract authority

Major criteria:

National or regional significance

Federal requirements (Civil Rights, NEPA, Titles 23/49 of U.S.C.)

Eligible project costs must be at least:

— At least $50 million or 33% or more of the State’s Federal-aid highway

apportionments

— Assistance cannot exceed 33% of total eligible costs

Sponsor must pledge a revenue source to repay the TIFIA obligation

State and local transportation approvals must be obtained

Dedicated Revenue Sources

Tolls, user fees, special assessments, tax increment financings and any portion of a

tax or fee that produces revenue pledged for debt retirement

General obligation pledges or Corporate Priority pledges

No pledge of US federal funds

Transportation Infrastructure Finance and Innovation Act (TIFIA): Background

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Loan Guarantee

Direct Loan Will Generate Proceeds for Construction

Program Application

Direct Benefit

Original Proceeds

Generated?

Direct Loan

Line of Credit

Finance/refinance eligible

project costs

Sponsor receives a loan with more flexibility than

third party loans

Yes

Enhances participation by

third party lenders

NoGuarantees loan

for eligible project costs

Available only after Substantial

Completion

No

Pay debt service on obligations to finance eligible

costs, O&M costs, etc.

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Title 23 / Title 49

Project Definition

$15 billion limitation – No expiration date No annual limitation

PAB Authorization

PABs Can Allow Private Partners Access to Less Expensive Funding

Private Ownership

Can be loaned to a private entity to construct Private entity may own Private entity can keep all tolls and other revenue

Private Management

Can be owned by a governmental entity and leased to, or managed by, another private entity Management agreement need not comply with the limitations imposed by IRS Revenue Procedure 97-

13

“Qualified Highway and Surface Freight Transfer Facilities” (“Qualified Transportation Facilities”) include Any surface transportation project which receives Federal assistance under title 23, United States

Code Any project for an international bridge or tunnel for which an international entity authorized under

Federal or State law is responsible and which receives Federal assistance under title 23, United States Code

Any facility for the transfer of freight from truck to rail or rail to truck which receives Federal assistance under either title 23 or title 49, United States Code

Project must comply with Title 23 (United States Code) (Highway) and/or Section 5333(a) of Title 49 U.S.C.(Rail)

TIFIA funding qualifies as Title 23 funds and will establish eligibility for PAB approval

Subject to the Alternative Minimum Tax (“AMT”) AMT premium of 15-30 basis points on long-term fixed rate bonds and the premium on floating-rate

securities is 5 basis points Primary buyers are institutional investors

AMT

Depreciation & Interest Expense

Private party can deduct depreciation if treated for tax purposes as the owner Generally, the private party is treated as the tax owner if:

Legal owner Lease or otherwise has the right to use for their full economic lives, or Lease with a bargain payment option

Private entity can deduct interest payments

Significant interest rate advantage relative to taxable rates

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Conclusion

A new crossing for the Detroit River –- or any similar project –- can only be done based on good underlying fundamentals

Federal sector co-investment: TIFIA can fund project costs, and can drive down capital costs directly and indirectly

Effective tool when used properly

Not a magic bullet

Not a pot of gold

Private sector capital

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Questions and Answers

Bob Walsh, JPMorgan Securities

Phone: (312) 732 – 2010

E-Mail: [email protected]

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Documents

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