Financial Plan

5.28 MILE MINIMUM OPERABLE SEGMENT (MOS)

FY 2011 Section 5309 NEW STARTS

June 21, 2011

NORTH CORRIDOR FINANCE PLAN TABLE OF CONTENTS

CONTENTS PREFACE METRO Solutions Implementation North Corridor Alignment Map INTRODUCTION Description of the Project METRO Solutions Transit System Plan Project Sponsors and Funding Partners Summary CAPITAL PLAN FOR THE NORTH CORRIDOR PROJECT Proposed Capital Plan for the North Corridor LPA Capital Cost and Schedule LRV Re Procurement Escalation Clause Changes to Capital Cost Between Final Design and Full Funding Grant Agreement Local Sales Taxes Bond Proceeds Finance Charges Federal Funds OPERATION AND MAINTENANCE PLAN Operating Revenue Operating and Maintenance Cost CASH FLOW ANALYSIS Financial Capacity Debt Service Coverage Current Ratio CASH FLOW AND SENSITIVITY ANALYSIS METRO Base Case METRO Stress Cases Contingency Plan Financial Evaluation and Conclusions PAGE 1 3 4 11 11 12 12 18 19 19 21 22 25 31 34 37 41 42 42 47 56 57 60 60 63 63 65 70 70

NORTH CORRIDOR FINANCE PLAN TABLE OF APPENDICIES

APPENDIX A METRO Board of Directors Resolution No. 2003-93 APPENDIX B METRO Annual Reports 2003-2009 METRO FY 2003-2008 Audited Financial Reports METRO FY 2007, 2008, and 2009 Single Audit Reports APPENDIX C METRO FY 2007 Budget Book METRO FY 2007-2011 Business Plan and Budgets APPENDIX D METRO Bus Fleet Management Plan and Bus Plan METRO Light Rail Vehicle Fleet Management Plan APPENDIX E Cash Flow Inputs APPENDIX F Financing Assumptions METRO Solutions Phase 2 APPENDIX G METRO Board of Directors Resolution No. 2008-77 APPENDIX H FY 2007 Cost Allocation Performance Measurement Baseline O&M Cost Full METRO Solutions 2030 APPENDIX I Standardized Cost Category (SCC) APPENDIX J Historic Cash Flow Inputs APPENDIX K Barton Smith June 2007,2008,2009, 2010 and 2011 Reports APPENDIX L METRO Sales Tax Map APPENDIX M Historical Federal Dollars APPENDIX N METRO Organizational Chart

APPENDIX O 2035 Regional Transportation Plan APPENDIX P Bonding Prospectus/Credit Facility Documents (As of June 2010) APPENDIX Q Transportation Improvement Program (TIP) 2011-2014 APPENDIX R Transportation Code APPENDIX S General Mobility Agreement/List of General Mobility Projects

NORTH CORRIDOR FINANCE PLAN LIST OF TABLES

Table Number Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Table 14 Table 15 Table 16 Table 17 Table 18 Table 19 Title North Corridor Revision and Submission History Financial Assumptions LPA Detailed Project Cost Estimate (In 2010 Dollars) LPA Detailed Project Cost Estimate (In YOE Dollars) LPA Capital Cost Estimate and Schedule (In YOE Dollars) LPA Sources of Capital Funding (In YOE Dollars) Historical and Projected Sales Tax Rates and Revenues North Corridor Bond Issuance ($000) Borrowing Rate Assumptions Finance Charges Summary of Long Range Capital Plan Projected Ridership and Fare Revenue North Corridor LPA Daily Service Levels Bus Responsibility Center by Cost Factor Light Rail Responsibility Center by Cost Factor Bus Cost Factors 2010 Dollars Light Rail O&M Cost Factors (2010 Dollars) North Corridor LPA Cash Flow Analysis (YOE $) Current Ratio Calculations Page 10 17 23 23 24 30 32 35 36 37 38 44,45 48 50,51 52,53 53 54 58,59 61

NORTH CORRIDOR FINANCE PLAN LIST OF FIGURES

Figure Number Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Title METRO Solutions Implementation North Corridor LPA Alignment Organizational Chart Base Case Scenario General Mobility Continuation Sensitivity Sales Tax and Farebox Sensitivity Modified Capital Program Page 3 4 15 64 67 68 69

List of Acronyms CAF CMAQ CPI FFGA FGM FHWA FTA GMP H-GAC HOV HRT LPA LRT MADS MAP METRO MPO NTP PE PMOC ROC RTP SAFETEA-LU Construcciones y Auxilar de Ferrocariles Congestion Mitigation/Air Quality Consumer Price Index Full Funding Grant Agreement Fixed Guideway Modernization Federal Highway Administration Federal Transit Administration General Mobility Program Houston Galveston Area Council High Occupancy Vehicle Houston Rapid Transit Locally Preferred Alternative Light Rail Transit Maximum Annual Debt Service Motorist Assistance Program Metropolitan Transit Authority of Harris County Metropolitan Planning Organization Notice-To-Proceed Preliminary Engineering Project Management Oversight Consultant Rail Operating Center Regional Transportation Plan (RTP) Safe Accountable, Flexible Efficient Transportation Equality Act- A Legacy for Users Standardized Cost Category Surface Transportation Program Transportation Improvement Program University of Houston-Downtown Utah Transit Authority Year of Expenditure

SCC STP TIP UH-D UTA YOE

PREFACE
In November 2003, Houston-area voters approved the METRO Solutions transit system plan and granted approval for the Metropolitan Transit Authority of Harris County, Texas (METRO) to issue up to $640 million in sales tax revenue bonds to help fund implementation of the system through 2012. METRO Board Resolution No. 2003-93 calling for a special election and asking for bonding authority is included in Appendix A. Based on the November 2003 voter referendum, the METRO Board of Directors adopted a METRO Solutions Phase 2 program (Figure 1) which directs the implementation of light rail transit (LRT) lines in the North, Southeast, East End, Uptown, and University Corridors. In the Phase 2 program, the North, Southeast, and University LRT lines were proposed for federal funding. The East End and Uptown LRT lines would be locally funded. The North Corridor Locally Preferred Alternative (LPA) is shown in Figure 2. The METRO Solutions plan is the primary transit component of the Houston-Galveston Area Councils (H-GAC) adopted 2035 Regional Transportation Update Plan (RTP) adopted June 2010. With over three million new residents anticipated by the horizon year 2035, the RTP addresses regional growth and mobility needs. The information provided in the North Corridor Financial Plan will present a financial assessment as it relates to the expected regional growth patterns, demand for vehicle travel, and projections for future transportation revenues. This plan is based upon 60 percent capital funding for the project from the Federal Transit Administration, Section 5309 New Starts funding, and 40 percent from committed METRO local resources. In addition, this financial plan is written to support and document the assumptions for the Full Funding Grant Application (FFGA) for the North Corridor. While this project is one element of the METRO Solutions transit system plan, this document provides financial information for the North Corridor, as well as a cash flow for the full METRO Solutions transit system plan, to demonstrate METROs ability to afford the program. With its dedicated one-cent sales tax and voter approval of up to $640 million in bonding, METRO is in a stable financial position compared to peer transit agencies across the nation. The North Corridor financial plan includes, but is not limited to, updated capital costs, projected operating and maintenance cost estimates, and financing structure. This updated version of the financial plan builds on the FY 2010 New Starts Financial Plan for the North Corridor submitted to FTA in November 2009. While many assumptions have been retained from the 2009 Financial Plan, there are significant updates that are reflected in this report. A summary of these changes and improvements are listed later in this section.

Figure 1: METRO SOLUTIONS IMPLEMENTATION PLAN

Source: Metropolitan Transit Authority of Harris County, (METRO) 2010.

Figure 2: NORTH Corridor LPA Alignment

Source: Metropolitan Transit Authority of Harris County, (METRO) 2010.

This report provides background information on METRO and provides an overview of the methodology used to analyze the financial viability of the project. Additionally, it examines METROs capital and operating plans, both at the project and agency levels. Copies of the Board-adopted capital and operating budgets are provided in Appendix C. This report also includes documentation in support of METROs strong management practices in the form of the bus and light rail fleet management plans, provided in Appendix D. A complete description of the project is presented in the Introduction in Section 1 of this document. Estimated capital costs and funding sources are provided in the Capital Plan in Section 2 of this document. Estimated operating costs and supporting assumptions are provided in Operations and Maintenance Plan in Section 3 of this document. To determine the financial health of the Authority in relation to the proposed project, a cash flow analysis to 2035 is presented in the Cash Flow in Section 4 of this document. The financial feasibility of the North Corridor was determined by developing a cash flow analysis which demonstrates that METRO can implement the project and still have a positive cash balance at the end of the horizon year of 2035. The Cash Flow Sensitivity Analysis in Section 5 of this document demonstrates the robustness of the financial plan and the potential impact of specific operating and market changes. Appendix E 1 contains copies of detailed ridership, revenue operating characteristics, fares, operating and maintenance cost productivities, and capital costs assumptions for reference. These data were used as the background assumptions for the cash flow. The financial analysis of the LPA: Demonstrates the financial viability of a METRO/FTA partnership in implementing the LPA; Identifies the financial resources required to fund the capital and operating and maintenance costs associated with the 5.28-mile LPA in the context of the existing LRT line and bus service; and Demonstrates to the FTA the financial capacity of METRO to build, operate, and maintain the LPA while continuing to operate and expand its existing base transit system and complete the other components of the METRO Solutions transit system plan.

Appendix E shows the contents of the electronic file labeled as Cash Flow Inputs- FTALRP for All Corridors Full MS 3-2-11

Summary of Financial Plan Changes and Improvements Revised Assumptions and New Initiatives
Capital Cost Estimates The capital cost estimates have been updated to reflect changes in vehicle costs due to re-procurement of the vehicle supplier, revised forecasts for other Standardized Cost Categories, and inclusion of change orders to the design build contract (AFAs). The escalation description is no longer valid for the Design Build (DB) contract and is included in the DB fixed price. The year-of-expenditure (YOE $) cost estimate is $756 million. Financing Approach The current method of financing that will be used by Houston METRO is traditional financing. This method of financing pays costs as they are incurred by using traditional bonds, as well as revenue sources comprised of fare revenues, sales tax revenues, Federal grants and other sources. Previously, METRO assumed third party financing as its financing approach. The former plan of finance for the North Corridor involved the use of public-private partnerships (P3) agreements which included design-build, facility provider, conduit issuer, vehicle supplier, and operator. The bonds would have been issued through a conduit issuer of non-recourse revenue bonds. The initial series of bonds would have been issued to finance project costs, including capitalized interest that accrues during the milestone acceptance period, cost of insurance, hedging, and issuance. The financing strategy contemplated a deferred payment structure, which is an unsecured obligation payable from any lawfully available METRO funds subject to annual appropriation. The financing terms took into account the fact that METRO required assurances that the project would operate as specified and would be warranted for an extended period of time beyond the normal contract warranties of the design-build contract. A third party financier and deferred payments will no longer be used as the finance approach for the North Corridor and Southeast Corridor light rail projects. General Mobility Program (GMP) Twenty-five percent (25%) of METROs sales and use tax revenues through September 30, 2014 are dedicated to the member entities through a contract with the voters for street improvements, mobility projects, and other facilities. These dedicated funds and their associated projects are locally known as the General Mobility Program (GMP). An election seeking a local determination by voters regarding METROs continuing support after September 30, 2014 of the GMP will be called no later than January 1, 2013. A sensitivity analysis has been included to evaluate the potential impact to METROs program in both the long term and the short term if the program is continued beyond 2014.

Update of 2035 Regional Transportation Plan The Updated 2035 Regional Transportation Plan (H-GAC, June 2010) was initiated by new projections for future transportation revenues for highway projects and the Federal Highway Administration (FHWA) requirement for state departments of transportation to have a plan that is fiscally constrained to those projected revenues. As a result, the Texas Department of Transportation (TxDOT) cut $39.4 billion in projects from future programs and moved out the implementation date of other future transportation projects. The corresponding highway networks were used to rerun travel forecasts and refine ridership forecasts for the North Corridor and Southeast Corridor light rail projects. The 2035 RTP update also provided the opportunity to update regional project schedules, scopes, and budgets; to remove projects that may no longer be necessary or feasible; and to add projects that have since gained significant regional consensus. As part of the 2035 RTP update, METRO analyzed its project listing from the original 2035 RTP and made changes in order to reflect intergovernmental changes throughout the region. A Missouri City Park & Ride was added to the list of projects. Appendix O contains a complete list of the updated projects in the 2035 RTP. Local Sales Tax Projections The local sales tax projections have been updated for the METRO service area based on the December 2010 Barton Smith projections. The previous sales tax projections were based on the Barton Smith September 2008 projections. Changes in Operating Costs and Revenue Assumptions METRO will retain the same methodologies for estimating operating and maintenance costs, fare revenues, and miscellaneous operating revenues that were used in the November 2009 financial plan submission. However, the data used as the foundation of the estimates has been updated to reflect FY 2010 data. Additional changes and assumptions include: Operating and maintenance cost estimates assume in-house operation of rail and some fixed-route bus service, with future cost and productivity factors for rail, METROoperated bus, contractor-operated bus, and METROLIft based on FY 2010 actual experience. This approach is conservative and allows METRO to either exercise the existing contract for operations and maintenance through the Facility Provider or perform the services using in-house staff.; The same percentage of fixed-route bus service that is contracted today will be contracted in the future; Ridership and, therefore, fare revenues are based on 2030 demographics from H-GAC, with the background highway network from the RTP as revised in October 29, 2010; Estimates for inflation are based on the annual forecast of the Houston Consumer Price Index from Dr. Barton Smith in December 2010; and

Estimates of population growth, used as the basis for post-2030 fixed-route and post-2012 METROLift ridership growth rates, were estimated by Dr. Barton Smith in December 2010.

Light Rail Car Reprocurement On September 7, 2010, FTA issued a letter to METRO which stated that the existing contract held by METRO with Construcciones y Auxiliar de Ferrocarriles (CAF) to purchase light rail vehicles would produce two vehicles that would be noncompliant with FTA Buy America requirements. Further, FTAs investigation of METROs rail car procurement process failed to follow Federal procurement rules requiring full and open competition. Despite these violations, the FTA believed that the North and Southeast corridor projects had to continue to have merit. As a sign of good faith, the FTA retained the following: The Fiscal Year 2010 budget allocation of $150 million for the two projects; The Fiscal Year 2011 budget request of $150 million for the two projects; and METROs access to $64 million in formula grant funding obligated under the American Recovery and Reinvestment Act. Since this time, METRO has worked diligently with FTA to re-establish a fully compliant rail car procurement process, rebuild trust with FTA administration and staff, and reinitiate the full funding grant agreement process for the North Corridor and Southeast Corridor projects. The following actions have occurred as a symbol of the progress: METRO issued a stop work notification to CAF (9/9/2010); METRO issued a stop work notification to Houston Rapid Transit (HRT), the Facility Provider, for all work efforts on vehicle on-board equipment (9/9/2010); FTA granted METRO access to $50 million of the $150 million allocated in FY 2010 Federal Budget (12/17/2010); METRO terminated all contracts with CAF (12/17/2010); FTA approved METROs new plan for purchasing light rail vehicles that are Buy America compliant and follow all procurement requirements established by METRO and the FTA (1/26/2011); FTA approved METROs approach to purchase 19 vehicles for the Main St. line through a piggyback arrangement to the Utah Transit Authoritys (UTA) contract with Siemens (2/18/2011); and METRO issued a limited Notice To Proceed to Siemens to begin work on the 19 vehicles for the Main Street line (2/24/2011). All cost impacts associated with these changes have been included in the capital cost and long term cashflow shown in this financial plan.

Fares Base fares increase approximately eight percent every five years beginning in 2015. Risk and Uncertainties The new plan of finance consists of traditional bonds issued directly by METRO. While the Facility Provider agreement includes key risk transfer provisions, the risk transfers in the previous financing structure have been removed. In an effort to provide the most updated and accurate financial information, METRO has revised the North Corridor financial plan and supporting documents since the original submission in 2004. Table 1 below shows the history and progression of the North Corridor New Starts process.

Table 1

NorthCorridorRevisionandSubmissionHistory
Date(FY) Description
Templates NewStartsSubmission Templates StandardCostCategories MakingTheCase NewStartsReportFinancialPlan Templates FinancePlanAndTemplate13 Templates StandardCostCategories SummitReport MakingTheCase NewStartsReportFinancialPlan Templates StandardCostCategories MakingTheCase NewStartsReportFinancialPlan Templates NewStartsSubmission StandardCostCategories Templates NewStartsSubmission Templates StandardCostCategories NewStartsReportFinancialPlan Templates NewStartsReportFinancialPlan Templates StandardCostCategories NewStartsReportFinancialPlan MakingTheCase Templates StandardCostCategories NewStartsReportFinancialPlan Templates StandardCostCategories NewStartsReportFinancialPlan CashFlow CashFlowInputs NewStartsReportFinancialPlan

2004
Aug2004 Aug2004

2005
Aug2005 Aug2005 Aug2005 Aug2005

2006
Feb2006 Feb2006 Sep2006 Sep2006 Sep2006 Sep2006 Sep2006 Nov2006 Nov2006 Nov2006 Nov2006

2007
Mar2007 Mar2007 Nov2007 Nov2007 Nov2007

2008
Apr2008 Apr2008 Apr2008

2009
May2009 May2009 Jul2009 Jul2009 Jul2009 Nov2009 Nov2009 Nov2009 Nov2009

2011
Mar2011 Mar2011 Mar2011 Mar2011 Mar2011 May2011

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INTRODUCTION PROJECT PURPOSE AND NEED

The purpose of this project is to provide a safe, reliable, efficient, high capacity, transit alternative in a highly congested corridor. The North Corridor consists of a large transit dependent population; which include the elderly, handicapped, and low-income persons. This project will also provide a reliable transit alternative to the population located in the northern suburbs of Houston. The North Corridor generally travels parallel to IH-45 North Freeway, Hardy Toll Road, and U.S. 59 Eastex Freeway through a mostly residential inner urban community. It is bounded by the CBD on the southern end of the corridor and by Northline Commons and the Houston Community College System Northline Campus (HCCS-NE) on the northern end of the corridor. It connects emerging nodes in the study area: UH-D (University of Houston Downtown Campus) with 12,000 students, the 470,000 sf2 Northline Commons Shopping Center, and the 4,000-student HCCS Northline Campus. The North Corridor LRT would function as an extension of the Main Street LRT, providing a one-seat ride for 64,350 residents to the regions largest employment markets (Downtown 129,000 jobs and the Texas Medical Center (TMC) 73,600 jobs), the UH-D campus, two HCCS campuses, Rice University, the Midtown, Theater, and Museum Districts, Hermann Park, the Houston Zoo, and the Reliant Park stadium/convention complex. The LRT also provides access to medical services in the TMC.

Description of the Project

The LPA for the North Corridor is an integral part of the METRO Solutions transit system plan. The LPA Minimum Operable Segment extends from the existing University of Houston - Downtown (UH-D) Station to Northline Mall. The LPA is a 5.28mile project through Houstons near Northside that uses LRT technology to address the increasing demand for transit capacity in the corridor. In the North Corridor, the project would involve extending the existing METRORail Red Line LRT from the UH-D Station to an aerial station at Burnett Street. The light rail would operate in barrier-separated, exclusive right-of-way that would be fully grade separated from the UH-Downtown to the Burnett Station. The tracks would be fully embedded similar to the existing METRORail Red Line. The LRT would continue to operate in an exclusive right-of-way, while allowing for cross street traffic at major intersections to Northline Commons. A map of the alignment is shown in the Preface of this document as Figure 2. The vehicles will be completely interoperable with the LRT vehicles used on the existing METRO Red Line. The LPA will be an integral part of the regional fixed guideway system and will complement existing and proposed bus services to be implemented by METRO over the planning horizon extending from Fiscal Year FY 2011 to FY 2035. METROs fiscal year runs from October 1st through September 30th. FTA has provided pre-award authority to METRO to incur expenses prior awarding the grant for construction of the North and Southeast LRT projects.

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This pre-award authority allows METRO to incur certain project costs prior to grant approval and retain the eligibility of those costs for subsequent reimbursement after grant approval. METRO assumes all risk and is responsible for ensuring that all conditions are met to retain eligibility. Additionally, this pre-award spending authority permits METRO to incur costs for the construction of projects without prejudice to possible future Federal participation in the cost of the projects. The mechanism that FTA uses to provide pre-award authority is known as a Letter of No Prejudice (LONP). METRO has requested and received LONPs from FTA to commence early construction activities for the projects which included utility relocation, roadway and bridge construction, sound wall construction, rail operations center expansion, and the construction management activities associated with the work. To date, METRO has received authority to expend $76,569,029 on early construction activities. The LPA calls for operations to commence in FY 2015. The total estimated capital cost of the LPA over the FY 2008 to FY 2015 period is $717.866 million in 2010 dollars and $756.008 million in Year of Expenditure (YOE) and expense dollars. These include the initial capital costs of the project and interest during the construction period beginning from March 2008. METRO Solutions Transit System Plan In November 2003, the residents of the METRO service area voted to implement the METRO Solutions transit system plan. METRO Solutions represents METROs longrange service plan that identifies the expansion of the existing 7.5-mile (METRORail Red Line) Downtown to Reliant Park light rail line and the increase in existing local and commuter (park and ride) bus service through 2030. In addition to approving the overall METRO Solutions transit system plan, the voters authorized METRO to issue up to $640 million in bonds to finance future LRT lines in the program. North Corridor Assumptions The financial analysis for this corridor assumes that the future bus operating plan for the North Corridor LPA implements transit service changes from the METRO Solutions transit system plan. Specific details of the service changes are described in the New Starts Baseline report for the North Corridor, January 2011. This financial analysis also assumes FTA participation, as well as grants at 60 percent with the local share funded at 40 percent.

Project Sponsor and Funding Partners

Metropolitan Transit Authority of Harris County, Texas (METRO) METRO, the project sponsor, was created on December 16, 1977 pursuant to Chapter 451 of the Texas Transportation Code (The current organization of METRO is shown in Appendix N). Harris County voters approved METROs confirmation and tax rate referendum on August 12, 1978 (See Appendix L for a map of the METRO service area). With authorization of a one percent sales tax to fund the agency, this mandate by the voters gave Houston both the financial base and the regional authority to

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implement transportation solutions to improve mobility and relieve traffic congestion in the area. The METRO Board of Directors consists of nine members representing the city of Houston and the other member cities which comprise METROs service area. Five are nominated by the mayor of Houston and confirmed by Houston City Council. Two are appointed by the mayors of METRO's 14 other member cities. Two are appointed by the Harris County Commissioners Court. The boundaries of METROs service area are shown in Figure 1. The political jurisdictions participating in METROs service area are: portions of unincorporated Harris County, City of Houston, City of Bellaire, City of Bunker Hill Village, City of El Lago, City of Hedwig Village, City of Hilshire Village, City of Humble, City of Hunters Creek, City of Katy, City of Missouri City, City of Piney Point, City of Southside Place, City of Spring Valley Village, City of Taylor Lake Village, and City of West University Place.

Today, METRO has a well-established transit system, including a fleet of approximately 1,403 buses (includes METROLift vehicles), 18 light rail vehicles, and a regional system of more than 100 miles of HOV lanes. Federal Transit Administration FTA is proposed to have an important role as a 60 percent shared capital expense funding partner in this corridor. The following FTA grant programs are included in the development of the financial plan: Section 5307: These formula grants are based on various demographic, level of service, and ridership variables. Factors in the formula that allocate grants to urbanized areas were estimated based on annual growth in total SAFETEA-LU Section 5307 funds adjusted to account for a larger transit service and demographic base over which these grants are applied. SAFETEA-LU limits the application of these grants to capital purposes, but preventative maintenance expenses in the operating budget may be considered as capital for this purpose. Section 5309 New Starts: FTA requires that New Starts Project sponsors secure the adoption of the LPA into the financially constrained regional long range

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transportation plan as a prerequisite to the sponsor seeking approval from FTA for Section 5309 New Starts funding for Preliminary Engineering, Final Design, and Construction. The local Metropolitan Planning Organization (MPO), HoustonGalveston Area Council (H-GAC), has programmed the LPA into the regionallyadopted, financially constrained H-GAC 2035 Regional Transportation Plan (RTP), adopted August 2007, updated in June 2010, and the regionally-adopted FY2011 FY2014 Transportation Improvement Plan (TIP), adopted on October 2010. Appendix O contains a copy of the 2035 RTP. This analysis assumes that METRO and the FTA would share responsibility for the capital costs of this project, with the FTAs share from the Section 5309 New Starts program monies. Section 5309 Bus Related: These discretionary grants are applied to the purchase of buses and bus-related assets. Congestion Mitigation/Air Quality (CMAQ): This grant program is applied to capital projects and provides support in the operation of some transit services.

Organization and Structure In addition to its nine-member board, METRO has a staff of 3,500 employees and an annual operating budget of about $386 million. Figure 3 illustrates METROs organizational chart. For a larger version of the organizational chart, visit the METRO website at [Link].

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Figure 3: Organizational Chart

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Financing Alternatives METRO has numerous financing alternatives available to implement the North Corridor light rail project and other capital programs included in this analysis. The following discussion summarizes the principal types of debt securities that may be issued by action of the METRO Board under Texas law -- without voter approval -- to finance the agencys short term and long term plans. State law does not limit the principal amount of these securities that METRO may issue or have outstanding so long as METRO can demonstrate to the satisfaction of the Attorney General of Texas the agency's ability to pay the debt service on the proposed securities plus the debt service on METRO's other outstanding debt securities. At the time of the issuance, the Attorney General of Texas must generally approve the issuance of these securities. The available financing alternatives include: Contractual Obligations and Certificates of Participation. Chapter 271, Subchapter A, Texas Local Government Code, authorizes METRO to issue debt securities known as "Contractual Obligations" to finance the acquisition of personal property (but not real property). Contractual Obligations may have a maximum maturity of twenty-five years and be secured by a pledge of METRO's sales and use tax, as well as other agency revenues. Five-Year Notes. Section 451.362, Texas Transportation Code, which is part of METRO's enabling statute, authorizes the agency to issue notes (the "Notes"), without voter approval, with a maximum maturity of five years for any lawful METRO purpose. Notes may be secured by a pledge of METRO's sales and use tax or other revenues received after the issuance of the Notes. Commercial Paper. METRO currently has a $400 million commercial paper program (the "Commercial Paper Program") to finance a variety of METRO purposes, including the Project. The statutory authority for the Commercial Paper Program is a combination of Chapter 1371, Texas Government Code, and Section 451.362, Texas Transportation Code. No voter approval is required for such program. Because the Commercial Paper Program relies upon Section 451.362, its duration is limited to five years. However, METRO may effectively extend the duration of the Commercial Paper Program for at least one additional five year period by authorizing a new program to refund the outstanding notes of the existing or a prior program. Revenue Bonds. Chapter 451, Subchapter H, Texas Transportation Code, and Chapter 1371, Texas Government Code, either separately or together, authorize METRO to issue revenue bonds that are secured by and payable from revenues other than the agency's sales and use tax. Chapter 451 contains a provision that the expenses of operation and maintenance of METRO's system (including the Project) are a first lien and charge on any revenue of the system. Accordingly, for revenue bond financing under Chapter 451 to be feasible, other funds would need to be obligated to pay such expenses so as to effectively defease the first lien of system expenses on system revenues. If such funds were identified and committed, then system revenues could be utilized for the payment of debt service on revenue bonds, without voter approval.

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Additionally, it may be possible to structure the issuance of revenue bonds under one or both chapters that are secured by or payable from lawfully available funds of METRO, subject to annual appropriation by the agency's Board. Such bonds would also not be subject to voter approval. These financing tools, along with anticipated local revenues and New Starts Grants, can fully fund the projects. The basic terms and assumptions for each bond type used in the plan are detailed in the following table.

Summary
Table 2 summarizes the assumptions for each bond type. Table 2 Financial Assumptions Contractual Obligations Sales Tax Bonds (KOs) Issuance 2011, 2012, 2013, 2011, 2012, (1) (2) 2017 2013, 2014

Commercial Paper (CP)

Credit Rating Assumptions Aa2 / AA Term 35 years DSRF Requirement 50% DSRF Requirement Use of Proceeds North and SE projects; Later borrowing
1. 2. $462 million authorization remaining on sales tax bonds (2011 and 2012 issues), later issuance requires future authorization (2013 and 2017 issues). Voter authorization not required.

Aa2 / AA 12 years

P-1 / A-1+ / F1 270 days

50%

None

METROs financial plan for the LPA reflects a partnership between METRO and the Federal Transit Administration. This financial analysis confirms the ability of METRO to fund the capital and operating costs of its existing and expanded bus services and the LPA, through a shared capital expense responsibility. In this financing partnership, FTAs contribution will be 60 percent of the overall capital costs.

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Currently, METRO has authority from the voters to issue up to $640 million in sales tax revenue bonds to fund the capital costs associated with implementation of the North Corridor and Southeast Corridor light rail projects. As required by FTA, this financial plan analyzing the impact of these projects in 2030 along with other projects included in METROs long range plan. As a result, the financial assumes that the agency will seek authority to expand the sales tax revenue bond capacity to build the University Corridor and Uptown Corridor light rail projects in the short term. In addition, this plan assumes that all future capital projects will seek federal participation at a fifty percent commitment. This assumption will be affected by future congressional allocations of funds for transit. METROs long range plan is updated every three years to capture the changes in local, state, and federal assumptions.

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CAPITAL PLAN FOR THE NORTH CORRIDOR PROJECT

This section documents METROs capital spending plan and funding sources for the proposed project. Project estimated capital cost and expenditure schedules, funding sources, contingencies for potential cost over-runs and funding short falls, and the Authoritys project-related debt burden are reviewed and analyzed. Finally, the projectspecific capital plan is incorporated in METROs agency-wide capital plan, which serves as the foundation for the project capital plan. Proposed Capital Plan for the LPA The proposed capital plan for the LPA integrates annual projections of capital expenses and revenues. For the purpose of this FTA assessment, it includes the LPA, the METRO Solutions transit system plan, maintenance of METROs fixed assets in good repair, and routine replacement of buses and other assets. The plan addresses detailed estimates of annual construction costs and includes contingencies for cost increases. It applies local sales tax and internally generated revenues and various sources of Federal funding. Finally, the plan recognizes the practical limitations of METROs capital capacity and provides clear financial performance indicators addressing the level of working capital necessary and achieved in the plan. METRO Solutions Plan As previously stated, the METRO Solutions plan is the long range transit plan that the METRO Board adopted in August 2003 and was further endorsed by the service area voters in November 2003. While the overall plan set a blueprint for transit service growth to 2025, the short term rail program was anticipated to be completed by the end of 2012. As typical of a long range plan, the implementation schedules of the specific projects have adjusted over time to reflect changes in economic and capital resources, governing regulations, and local decisions. Appendix O includes a table of all projects included in the current plan and their anticipated year of operation. In addition, all projects shown in Appendix O have been adopted into the Houston-Galveston Area Councils 2035 Regional Transportation Plan. For the purpose of this document, a summary of the major capital projects is described in the table below. The additional capital improvements needed to support the regional expansion of local bus service are detailed in Appendix O, including additional shelters, curb and intersection improvements, and bus replacements: Complete by 2015 North Corridor LRT University of Southeast Corridor LRT CBD to Palm Houston-Downtown to Northline Commons Center East End LRT Corridor CBD to Magnolia Burnett Plaza Transit Center adjacent to Transit Center Burnett Station on North Corridor LRT Missouri City P&R Lot SH 288/Pearland P&R Lot

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Signature Service Bus Southeast Transit Clear Lake/El Dorado P&R Lot Center to Palm Center, Tidwell, Gessner Atascosita P&R Lot South Freeway Transit Center Complete by 2020 US 90A/Southwest Corridor Commuter University Corridor LRT Hillcroft Transit Rail Fannin South to Missouri City Center to Eastwood Transit Center Uptown Corridor LRT South Rice Transit Fairfield P&R Lot Center to Northwest Transit Center Signature Service Bus Westheimer, Town & Country Transit Center Magnolia Transit Center to Denver Harbor Transit Center Complete by 2030 Northwest Corridor/Hempstead Intermodal Wheeler Intermodal Terminal Terminal Uptown Corridor LRT Northwest Transit Cinco Ranch P&R Lot Center to Hempstead Intermodal Terminal North Corridor LRT Northline Commons Southeast Corridor LRT Palm Center to to Greenspoint/IAH Airport Hobby Airport (Hinman P&R Lot) Inner Katy Corridor LRT CBD to Sunnyside Corridor LRT University of Northwest Transit Center Houston/Texas Southern University to Cullen/Airport Blvd. Intermodal Terminal Northern vicinity of East End Corridor LRT Magnolia Transit the CBD Center to Telephone Rd.

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In the METRO Solutions plan, 72 miles of new rail, including light rail and commuter rail services, are added to the system. While the existing METRORail is considered as Phase 1 of the plan, Phase 2 includes at least 22 miles of additional light rail by 2012. Phase 2 light rail includes the following lines: Southeast Bagby/Capitol to Palm Center; North UH/Downtown to Northline Commons; University Hillcroft Transit Center to Eastwood Transit Center; East End Intermodal Terminal to Magnolia Transit Center; and Uptown Northwest Transit Center to South Rice Transit Center.

During this same time period, METRO is also pursuing the planning and implementation of commuter rail in the US 90ASouthwest Corridor. Other regional entities are currently studying the feasibility of implementing commuter rail in the US 290 and SH 3/Galveston corridors. Signature Service routes that will provide fast, limited-stop, and frequent service on high-volume bus routes are also being implemented. The 2030 METRO Solutions bus system includes an increase in todays bus service levels and expanded two-way, all-day park and ride service. New park and ride lots and transit centers will supplement the bus service expansion. All of these services are the background for the ridership forecasts of the North Corridor. This project benefits from the regional connectivity and dynamic travel choices offered by the METRO Solutions plan. These projects continue to forecast a significant travel time savings to the transit passengers in the North Corridor. Further details on the performance of the project are provided in the North Corridor New Starts Baseline Report dated February 2011. In May of 2011, METRO will begin a public process to update the long range transit plan to capture the impact of the 2010 Census, revised population and employment projections for 2040, changes in local economic conditions, and the changing needs and wants of the METRO service area customers. CAPITAL COSTS AND SCHEDULE The capital cost included in the SCC New Starts report have been updated to reflect changes in vehicle cost due to re-procurement of vehicle supplier, revised forecast for other Standard Cost Categories, inclusion of change orders to the Design/Build contract (AFAs), and forecasted values for other cost elements.

21

The capital costs include fixed price contract amounts for the Design Build (DB), Facility Provider (FP) and Operation & Maintenance (O & M) contracts with fixed negotiated escalation amount included as part of their fixed price for the project. The estimated costs for the vehicles included in the SCC worksheets have escalation for labor and material and were estimated as YOE dollars. However in the LRV Re-procurement Request for Proposal, section 5.7.7 (listed below) an escalation clause has been developed for potential bidders compliance. LRV RE-PROCUREMENT ESCALATION CLAUSE There will be no adjustments to the Total Base Contract Price to account for changes in labor and material costs for the base order cars, spare parts, or special tools and test equipment. However, an adjustment to the applicable Unit Price before Escalation will be made for any order of option cars. An Escalation Factor for option cars will be calculated as detailed below. 80 percent of the escalation factor will be based on the Consumer Price Index All Urban Consumers (CPI-U), U. S. city average, 1982-84 = 100, All Items, not seasonally adjusted, are published monthly in the United States Department of Labor Bureau of Labor Statistics. The Base Index is the referenced index for the month of Notice-To-Proceed (NTP). 20 percent of the Escalation Factor will be based on the Producer Price Index for Steel Mill Products, published monthly in the Producer Price Indexes by the United States Department of Labor Bureau of Labor Statistics. The Series ID is WPU1017. The Base Index is the Four Month Revised Producer Price Index for Steel Mill Products for the month of NTP. The escalation factor for each index is determined by dividing each Index for the month the option is exercised by the respective Base Index. This is done for each of the indices described above, and the Escalation Factor is the weighted average of the two factors.

The Escalated Price is calculated by multiplying the Base Price times the Escalation Factor. Since the indices will not be available at the time of exercising an option, the option execution may be by written notice and a Change Order issued after the four-month revised Producer Price Index is published. If the Bureau of Labor Statistics discontinues either of these indexes, then METRO and the Contractor shall mutually agree on an appropriate substitute index published by the Bureau of Labor Statistics. In the event that either index is rebased by the Bureau of Labor Statistics, METRO and the Contractor agree to accept the rebased indexes. Capital costs included in the New Starts report are in 2010 constant dollars deflated from the fixed escalated dollar amounts.

22

Capital Cost by Cost Categories Tables 3 through 5 summarize the project capital cost estimates. Table 3 summarizes the project capital cost in constant 2010 Dollars. Table 4 summarizes the project capital cost in YOE Dollars. The annual cashflow of project capital costs in YOE Dollars is presented in Table 5, based on the proposed project implementation schedule. Table 3 North Corridor LPA Detailed Project Cost Estimate (FY 2007-2030) In 2010 Dollars
Item Guideway and Trackwork Stations, Stops, Terminals, Intermodal Support Facilities Sitework and Special Conditions Systems Right-of-Way LRT Vehicles Professional Services Unallocated Contingency Finance Costs Total Quantity 5.28 8 5.28 5.28 5.28 22 1 1 1 Unit Miles Stations Facility Miles Miles Miles Vehicles Lump Sum 12.0% Lump Sum Total

70,590 11,494 44,330 144,645 58,179 37,787 74,612 149,987 85,608 40,634
717,866

Source: North Corridor FTA Standardized Cost Categories spreadsheets, February 8, 2011. All numbers are rounded. Note: Unallocated Contingency is a percentage of total project cost.

Table 4 North Corridor LPA Detailed Project Cost Estimate (FY 2007-2030) In Year of Expenditure Dollars
Item Guideway and Trackwork Stations, Stops, Terminals, Intermodal Support Facilities Sitework and Special Conditions Systems Right-of-Way LRT Vehicles Professional Services Unallocated Contingency Finance Costs Total Quantity 5.28 8 5.28 5.28 5.28 22 1 1 1 Unit Miles Stations Facility Miles Miles Miles Vehicles Lump Sum 12.0% Lump Sum Total 73,068 12,019 52,015 148,462 60,213 37,530 83,400 153,670 92,616 43,014 756,008

Source: North Corridor FTA Standardized Cost Categories spreadsheets, February 8, 2011. All numbers are rounded. Note: Unallocated Contingency is a percentage of total project cost.

23

Table 5 North Corridor LPA Capital Cost Estimate and Schedule in Year of Expenditure Dollars ($000, Rounded)
Item
10 GUIDEWAY & TRACK ELEMENTS (route miles) 20 STATIONS, STOPS, TERMINALS, INTERMODAL (number) 30 SUPPORT FACILITIES: YARDS, SHOPS, ADMIN. BLDGS 40 SITEWORK & SPECIAL CONDITIONS 50 SYSTEMS 60 ROW, LAND, EXISTING IMPROVEMENTS 70 VEHICLES (number) 80 PROFESSIONAL SERVICES 90 UNALLOCATED CONTINGENCY 100 FINANCE COSTS Period Total Cumulative Total

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20 $ $

Total 73,068 12,019 52,015 148,462 60,213 37,530 83,400 153,670 92,616 43,014 756,008

2,465

6,289 4,605 5,072 11,868 10,306 21,272

30,575 4,536 8,967 25,197 3,346 75,086

134,498 $

$
$

4,605
4,605 $

16,940
21,545 $

37,867
59,412 $

26,486 97 2,209 52,105 23,781 4,300 5,460 26,102 9,139 3,745 153,423
287,921 $

36,104 6,307 169 37,167 19,952 4,280 17,744 29,758 36,361 5,839 193,680
481,602 $

8,013 5,615 9,660 22,322 10,953 16,008 26,547 18,793 15,071 123,321
604,923 $

24,754

15,224

$ $ $ $

4 991 15,388 12,927 4,894 15,013 49,217

654,140 $ 654,140 $

13,574 2,886 12,546

666,686 $

15,226 $
$

7,394 32,148
698,834 $

4,548 19,771
718,605 $

4,055 17,629
736,234 $

4,548 $
$

19,774 $
756,008

Source: North Corridor FTA Standardized Cost Categories spreadsheets, February 8, 2011. All numbers are rounded.

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CHANGES TO CAPITAL COSTS BETWEEN FINAL DESIGN AND FULL FUNDING GRANT AGREEMENT The following changes have been made to the North Corridor capital costs since the financial plan submitted for Final Design. All changes are documented in the SCC labeled 02-08-2011 NORTH SCC FFGA R1 [Link] provided in Appendix I.
SCC No. & Category General Cost Change Explanation of change General Statement: The adjustment primarily reflect the following: Final contract negotiations with DB contractor in Jan 2010, mod1 to DB contract increasing the price by $97M, fixed amount for escalation for DB, conversion of all allowances to fixed price with the exception of two (Remediation & Collision Avoidance System which are included in METRO's portion of the cost), including AFAs that have been executed since the execution of the DB contract, adding individual tabs to the SCC workbook to show the costs by responsibility (METRO, Vehicles, FP, O&M & DB) and to demonstrate the deescalation/escalation methodology used for all SCC Categories, deletion of contract prices for CAF LRVs and including new cost estimate for LRVs and converting all Base Year Dollars from 2008 $ to 2010 $.

25

10 GUIDEWAY & TRACK ELEMENTS (route miles) 10.02 Guideway: At-grade semiexclusive (allows cross-traffic) 10.04 Guideway: Aerial structure 10.08 Guideway: Retained cut or fill 10.09 Track: Direct fixation 10.10 Track: Embedded 10.11 Track: Ballasted 10.12 Track: Special (switches, turnouts) 10.13 Track: Vibration and noise dampening 20 STATIONS, STOPS, TERMINALS, INTERMODAL (number) 20.01 At-grade station, stop, shelter, mall, terminal, platform 20.02 Aerial station, stop, shelter, mall, terminal, platform 20.07 Elevators, escalators 30 SUPPORT FACILITIES: YARDS, SHOPS, ADMIN. BLDGS 30.01 Administration Building: Office, sales, storage, revenue counting 30.03 Heavy Maintenance Facility (ROC Expansion)

$1,209,973

$231,547

See General Statement

$416,413 $35,545

See General Statement See General Statement

$92,697 $281,980 $47,927 $99,727

See General Statement See General Statement See General Statement See General Statement

$4,137 $223,514

See General Statement

$173,077

See General Statement

$41,016

See General Statement

$9,420 -$933,485

See General Statement

-$6,005

See General Statement

-$927,480

See General Statement

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40 SITEWORK & SPECIAL CONDITIONS 40.01 Demolition, Clearing, Earthwork 40.02 Site Utilities, Utility Relocation 40.03 Haz. mat'l, contam'd soil removal/mitigation, ground water treatments

$5,327,340

$367,257

See General Statement

$891,217

Cost increase due to change orders for utility relocation Cost increase due to change orders for environmental remediation. Amount was taken from allowance amount in METRO budget for the same item. See General Statement

$203,853

40.05 Site structures including retaining walls, sound walls 40.06 Pedestrian / bike access and accommodation, landscaping 40.07 Automobile, bus, van accessways including roads, parking lots 40.08 Temporary facilities and other indirect costs during construction

$18,102

$219,298

See General Statement

$411,448

See General Statement

$3,216,165

Cost increase due to change order for off duty police officers not included in the base contract.

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50 SYSTEMS 50.01 Train control and signals 50.02 Traffic signals and crossing protection 50.03 Traction power supply: substations 50.04 Traction power distribution: catenary and third rail 50.05 Communications 50.05.02 Communications (METRO Collision Avoidance)

$2,976,191 -$10,249 -$5,768 See General Statement See General Statement

-$7,920

See General Statement

-$7,637

See General Statement

$3,009,565

See General Statement New forecast avoidance due estimate. for to collision revised

50.06 Fare collection system and equipment

-$552

See General Statement

-$1,249 50.07 Central Control (SMS) 60 ROW, LAND, EXISTING -$12,512,835 IMPROVEMENTS 70 VEHICLES (number) 70.01 Light Rail $9,455,380 $10,183,778

See General Statement New forecast base on actuals and cost to complete for Real Estate. Revised cost estimate for reprocurement of LRT vehicle and changing the number of LRVs from 24 to 22. Non-Engineering (PM, OCIP) cost included in this SCC were redistributed to the appropriate SCC code. See General Statement

-$728,398 Light Rail METRO Phase 2 80 PROFESSIONAL SERVICES $4,829,585

80.01 Preliminary Engineering

-$2,574,304

80.02 Final Design

$1,082,684

Cost increase due to change orders for Design METRO non-Engineering (PM) cost included in 80.01 SCC were transferred to this SCC code.

80.03 Project Management Design and Construction

for

80.03.01 80.03.02

HRT - Design/Build HRT -Contingency

$384,354 $412,178

See General Statement See General Statement

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80.03.03 80.03.04 80.03.05

Facility Provider O&M METRO

$70,866 $70,866 $3,722,415

See General Statement See General Statement See General Statement See General Statement

80.04 Construction Administration $131,044 & Management 80.05 Insurance $1,113,342

METRO non-Engineering (OCIP) cost included in 80.01 SCC were transferred to this SCC code.

80.06 Legal; Permits; Review $189,219 Fees by other agencies cities, etc. 80.07 Surveys, Testing, Invest., $212,544 Inspect., Facilities Construction 80.08 Start up (METRO) 90 UNALLOCATED CONTINGENCY (PROGRAM RESERVE) $14,377 -$5,451,208

METRO permit cost based on revised forecast See General Statement

See General Statement Contingency adjustment made due to escalation methodology and increase vehicle cost. Also to balance to total project cost submitted previously. See General Statement

90.01 Unallocated Contingency 100 FINANCE CHARGES

-$5,451,208 -$1,786,629

At the request of FTA, METRO changed the Base Year for project capital cost from 2008 to 2010 which resulted in higher project capital cost due to inflation. The overall change in project capital costs in Base Year dollars between the February 15, 2010 SCC submittal in 2008 dollars and the February 18, 2011 SCC submittal in 2010 dollars have resulted in a net increase of $3,337,824. The project total cost in Year of Expenditure dollars (YOE) remained unchanged.

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LPA FUNDING SOURCES Funding sources for implementation of the LPA include a mix of federal and local funds. METRO is asking FTA to fund 59.5 percent of the preliminary and final engineering and construction cost of the North Corridor LPA. This section of the project capital plan identifies the proposed sources of funds for constructing the LPA and details the non-federal share of funds for the project. Table 6 provides a summary of the federal and non-federal sources of funding proposed for design and construction of the LPA. Table 6 LPA Sources Of Capital Funding In Year of Expenditure Dollars ($, 000) FY 2007 - 2030
METRO % of Total 100.00%

LRT CAPITAL COSTS LRT CAPITAL FUNDING Federal Sources

Sec 5309 New Starts Total Federal Sources

$756,008

$450,000 $450,000

59.52% 59.52%

Local Sources *
Bonds (supported by sales tax) Total Local Sources TOTAL, LRT CAPITAL FUNDING $306,008 $306,008 $756,008 40.48% 40.48% 100.00%

Source: North Corridor FTA Standardized Cost Categories spreadsheets, February 8, 2011. All numbers are rounded.

METROs capital reserve levels, projected future tax revenues, operating revenues, and FTA grants for purposes other than New Starts funding are projected to be sufficient to support existing transit services and non-transit programs, expansion of other transit services, and ongoing capital rehabilitation and replacement while maintaining a prudent level of working capital.

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FTA SECTION 5309 NEW STARTS These discretionary grants are applied as a percentage of the cost of each rail construction project. While the statutory maximum federal participation for Section 5309 New Starts funds is 80 percent, the amount FTA has applied to recent projects has been considerably less. Since the demand for these funds significantly exceeds the level of funding currently authorized or anticipated to be authorized in the future, projects with a lower percentage of federal participation are viewed more favorably by FTA for funding. FTA Section 5309 New Starts program is assumed to fund 54.68 percent of the preliminary and final engineering and construction cost of the LPA. New Starts funds totaling $450 million (YOE $) are assumed to be provided through a Full Funding Grant Agreement (FFGA). LOCAL SALES TAXES Dedicated transit sales tax will be a key source of local funding for the LPA and the rest of the METRO Solutions system. Tax revenues will provide annual capital and operating funding. To provide more detail regarding these sources, Table 7 documents past trends and future growth assumptions regarding the sales taxes. Monthly sales tax collections were provided in past submittals. Sales tax revenues are assumed to grow approximately 5.70 percent annually through 2030. This growth is consistent with the prior 20 years. The projected sales tax growth is derived from the methodology used by Dr. Barton Smith (See METRO Forecasts of Economic Growth, Inflation, and Interest Rates: December 2010 and March 2011Appendix K) who has consistently and reliably conducted sales tax forecasting for METRO for many years. The financial plan is robust even with somewhat lower sales tax receipts, as supported by the sensitivity analysis section. Dr. Barton A. Smith is a Professor of Economic Emeritus at The Institute for Regional Forecasting, which is responsible for regional and economic forecasting in the Houston area. METRO and The City of Houston use the results produced by Dr. Smith and the Institute for Regional Forecasting through a joint contract. Serving for twenty years as professor of economics at the University of Houston, Dr. Smith has gained the reputation as being one of the leading authorities on the City of Houstons economy. His numerous studies and publications have been relied on by a variety of government and business entities that require economic forecasting for their operations. Dr. Smith has conducted numerous studies and research work in education, housing, transportation, and regional economics. He has gained national and local recognition for his studies and analysis of the Houston economy and real estate markets. Dr. Smith reviews and prepares the economic forecast and financial assumptions for the period FY2011 through FY2030 for Houston on a quarterly basis. These forecasts and assumptions are the basis for METROs long range financial planning.

31

Table 7 Historical And Projected Sales Tax Rates And Revenues

FY

HOUSTON
Tax Revenues (Year of Expenditure $, 000) HISTORICAL DATA $182,479 $199,755 $213,368 $216,322 $225,649 $235,653 $252,562 $267,712 $285,009 $314,698 $333,461 $352,981 $364,509 $370,858 $357,496 $381,900 $395,067 $458,769 $481,721 $521,002 $518,025 $490,251 COMPOUND ANNUAL GROWTH RATE, FY 1989-2010 $508,979 $537,177 $563,928 $597,651 $634,675 $675,285 $717,914 $762,263 $809,273 $857,892 $908,264 $960,435 $1,014,375 $1,070,145 $1,128,512 $1,189,264 $1,252,770 $1,319,100 $1,388,376 $1,460,318 COMPOUND ANNUAL GROWTH RATE, FY 2011-2030 % Change

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

9.47% 6.81% 1.38% 4.31% 4.43% 7.18% 6.00% 6.46% 10.42% 5.96% 5.85% 3.27% 1.74% -3.60% 6.83% 3.45% 16.12% 5.00% 8.15% -0.57% -5.36% 4.82% 3.82% 5.54% 4.98% 5.98% 6.19% 6.40% 6.31% 6.18% 6.17% 6.01% 5.87% 5.74% 5.62% 5.50% 5.45% 5.38% 5.34% 5.29% 5.25% 5.18% 5.70%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Tax rate is 1.0 percent Data are for comparative purposes to indicate rate of growth of sales tax revenues. Forecasts based on December 2010 Barton Smith forecast.

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Bond Proceeds The proposed plan of finance for the North Corridor LPA involves the use of conventional financing using a combination of Sales Tax Bonds, Contractual Obligations, Revenue and Appropriation Bonds and Commercial Paper. These financing tools, together with anticipated local revenues and New Starts Grants will fully fund the project. The basic terms and assumptions for each bond type are detailed below. Sales Tax Bonds: Pledge of sales taxes Long-term, fixed rate bonds up to 40 years Purpose: Any capital improvements Authorization: $640 million approved by voters in 2003. $463 million remain as authorized but unissued Ratings: AA/Aa2 Reserve fund equal to maximum annual debt service (MADS) Assumed rate 5.00% for 2011, 5.50% for 2012, 6.00% for 2013 and 6.50% thereafter Issuance limitation: Voted amount or 2.0 times coverage of MADS by sales taxes Contractual Obligations: Pledge of sales taxes Long-term, fixed rate bonds up to useful life of asset being financed with a max of 25 years Purpose: Equipment such as rail cars and buses Ratings: AA/Aa2 Reserve fund equal to MADS Assumed rate 5.00% for 2011, 5.50% for 2012, 6.00% for 2013 and 6.50% thereafter Issuance limitation: 2.0 times coverage of MADS by sales taxes Commercial Paper: Pledge of sales taxes Short-term, variable rate notes Program limited to 5 years with extensions of additional 5 year periods with Texas Attorney General approvals Purpose: Interim financing of any capital improvements Ratings: Long-term: AA/Aa2 and Short-term: A1+/P1 No reserve fund but require bank liquidity facilities Assumed rate 2.00% for 2011, 3.00% for 2012 and thereafter

33

Issuance limitation: Board approval of $400 million (approximately $200 million outstanding). Must also fit under 2.0 times coverage of MADS by sales taxes. Other projects in the plan of finance will utilize sales tax bonds, contractual obligations, commercial paper and revenue and appropriation bonds. It is not anticipated that revenue and appropriation bonds will be utilized for the North Corridor LPA. Additionally, sales tax bonds issued above the currently authorized amount will require future voter approval. Table 8 below provides a comprehensive outline of the sources and uses of bond issues to finance the local share of the North Corridor. Additionally, the chart includes a breakdown of the financing charges 3 .

The financing assumptions for the other METRO Solutions Phase 2 LRT projects are included in Appendix F of this document.

34

Table 8 North Corridor BOND ISSUANCE ($000)

Sources ST Bonds (2003 Authorization) $ ST Bonds (New Authorization) KO Bonds $ Total Fund Sources 2011 2012 2013 2014 93,365 $ 368,635 $ $ $ 204,110 65,510 70,185 72,095 64,630 158,875 $ 438,820 $ 276,205 $ 64,630 $ 2015 $ 2016 Total $ 462,000 1,330,070 1,534,180 272,420 $ 1,330,070 $ 2,268,600 $ 2017

Uses of Funds Construction Fund Draws $ 150,661 $ 417,215 $ 261,448 $ 60,686 $ $ Costs of Issuance 794 2,194 1,381 323 Underwriter's Discount 953 2,633 1,657 388 Capitalized Interest Fund DSRF (Sales Tax) 3,188 13,262 8,116 DSRF (KO's) 3,275 3,509 3,605 3,231 DSRF (RA) Rounding 3 7 (2) 2 $ 158,875 $ 438,820 $ 276,205 $ 64,630 $ $ Total Fund Uses Source: Cashflow produced by the Facility Provider Finance Team, Houston Metro Model FTA - FINALv4. All numbers are rounded.

$ 1,264,509 $ 2,154,519 6,650 11,343 7,980 13,612 50,927 75,492 13,621 4 14 $ 1,330,070 $ 2,268,600

NOTE: Of the ST Bonds (2003 Authorization), 56% are allocated to North Corridor and 54% are allocated to Southeast Corridor.

35

Borrowing Assumptions The plan of finance assumes various rates for the issuance of the debt. Commercial Paper assumes an interest rate of 2.00 to 3.00 percent and the fixed-rate bonds assume an interest rate of 5.00 to 6.50 percent. These costs are based upon the effective yield for the respective years for reimbursement purposes. The table below outlines the borrowing costs associated with the financing. The bond rate assumptions for financing the North Corridor LRT are shown in Table 9. Table 9 Borrowing Rate Assumptions
Key Financial Drivers/Assumptions Interest Rates and Fees Commerical Paper Notes Sales & Use Tax Bonds Contractual Obligation Bonds Costs of Issuance Underwriter's Discount 2011 2012 2013 2014+

$ $

2.00% 5.00% 5.00% 5.00 $ 6.00 $

3.00% 5.50% 5.50% 5.00 $ 6.00 $

3.00% 6.00% 6.00% 5.00 $ 6.00 $

3.00% 6.50% 6.50% 5.00 6.00

Source: METRO Finance Team: Goldman Sachs, Merrill Lynch, First Southwest and Siebert, Bradford & Shank, and various METRO departments.

Finance Charges The finance charges associated with the plan of finance includes the costs of issuance and accrued interest during the construction period. These costs are paid at the bond effective yield rate between Years 2011-2014. The finance charges are based upon the effective yield of the anticipated Metro Obligation bonds issued between Years 2011 2014. The finance charges are only attributable to the Sales and Use Tax bonds issued for the local share of the project which includes to date, the Series 2009ABC bonds and the Sales and Use Tax Bonds in Year 2011 and 2012. As shown in Table 10, the eligible finance charges are approximately $43 million.

36

Table 10: Finance Charges

Applicable Intereston Southeast
3,969 4,441 6,925 17,875

Year 2010 2011 2012 2013 2014 TotalApplicableInterest

Applicable InterestonNorth
3,346 3,745 5,839 15,071

Total ApplicableInterest
7,315 8,186 12,764 32,946

15,013
43,014

17,806 32,818
51,016 94,030

Source: Cashflow produced by the Facility Provider Finance Team, Houston Metro Model FTA - FINALv4.

CAPITAL PLAN Table 18, the cashflow analysis through 2035 summarizes the overall capital plan in which the LPA will be implemented, assuming that the full METRO Solutions transit system plan is implemented. Bus capital and operating assumptions and costs used in this analysis are derived from short and long range plans. Estimated capital costs are reported in Year of Expenditure dollars, with both real growth and a base rate of inflation included. OTHER CAPITAL COSTS For the purpose of this analysis for FTA, capital costs included in the transit capital plan other than North Corridor LPA costs include bus capital, HOV, other METRO Solutions components, and General Mobility project costs. Over the FY 2011 FY 2035 period, transit capital costs other than the METRO Rail Expansion projects are briefly summarized in Table 11.

37

Table 11: Summary of Long Range Capital Plan

Capital Cost Capital Costs Construction Draws Phase 2 North Southeast East End University Uptown US 90A CRT Phase 3 North Southeast East End Inner Katy Sunnyside Uptown Total Phase 3 Intermodal Terminals Other Phase 2 - Capital Projects Planning and Other Facility Costs Miscellaneous Program Development Other Bus Replacement Capital Investment State of Good Repair Construction Period Total Expenditure Operation Commences Total FFGA

2007-2014 2007-2014 2011-2014 2011-2020 2010-2011; 2017-2021 2018-2020 2020-2026 2019-2026 2020-2026, 2035-2036 2015-2021 2023-2026 2022-2025 2013-2019, 2030-2032 2011-2015 2011-2015 2011-2035 2011-2035 2023-2035

657,412 704,187 539,629 1,531,769 522,146 235,440 1,000,000 233,732 816,092 815,931 252,000 60,000

2015 2015 2015 2016, 2017, 2019, 2021 2022 2021 2026 2026 2027 2021 2027 2026

(2011-2024) 405,094 409,162 703,787 117,720 (2015-2026) $ 500,000 87,650 258,046 407,966 126,000 30,000 $ 1,409,662 -

387,643 $ 35,575 36,965 554,215 2,322,698 85,032

Source: Cashflow produced by the Facility Provider Finance Team, Houston Metro Model FTA - FINALv4. All numbers are rounded

38

General Mobility Program METROs enabling legislation was amended, enacting Article 451.065, under which certain metropolitan rapid transit authorities were authorized to construct or maintain highways, streets and roads, sidewalks, and hike and bike trails. Twenty-five percent of METROs one-cent sales tax revenues were then to be set aside to fund projects for the general mobility. In 1999, METRO executed contracts with the City of Houston, Harris County and the Multi-Cities for distribution of general mobility funds. During the 2003 referendum approving the sales of bonds, notes and other obligations for implementation of METRO Solutions, the ballot language required the designation of 25 percent of METROs available sales and use tax revenues through September 30, 2014 to street improvements and related projects as authorized by law, and with no increase in the current rate of METROs sales and use tax. METRO began to participate in and contribute funds for various joint construction projects with the City of Houston, Harris County and Multi-Cities as early as 1982. The use of METROs sales tax revenues was formalized into the General Mobility Program in 1987, dedicating 25 percent of its sales tax revenues to its constituent entities for General Mobility projects. From 1982 through September 2010, the City of Houston, Harris County and the Multi-Cities have received a combined approximate total of $1.960 billion. The City of Houston alone has received approximately $1.269 billion. The 1999 contracts stated: METRO intends to make available 25 percent of its Available Sales Tax Revenues per year for Eligible Transportation Projects within the METRO service area, subject to METROs commitments for transit-related operational expenditures and capital project expenditures. Such term specifically does not include any projects or programs provided for by transit-related operational expenditures or capital projects expenditures. This clause, which allowed METRO to divert funds from the General Mobility Program into transit-related projects / programs, has not been carried forward into the new FY2010 to FY2014 City of Houston contract, executed in December 2009. In October 2010, METRO commenced making monthly deposits of its sales tax revenues into a special escrow account which has been established for the General Mobility Program. This monthly deposit is equal to: (1) twenty-five percent of the months sales tax received from the State plus; (2) one-twelfth of the fiscal years budgeted amount for sales tax revenues less the fiscal years budget for the General Mobility Program. (Current months sales tax revenues x 25%) + ((fiscal year budget for sales tax revenues fiscal year budget for General Mobility) / 12) The second component of this allocation is intended to make funds available to projects for which funding was available but unexpended by the City of Houston and Harris County in years prior to FY2011.

39

AGENCY-WIDE FUNDING SOURCES No new revenue sources have been assumed in the financial plan. The capital plan includes all existing local and federal sources of revenue. Principal sources include a dedicated local sales tax, federal formula and discretionary grants, and other miscellaneous income. Unlike costs, all of which increase with inflation, the only local revenue source assumed to increase with inflation is the local sales tax collected in the METRO service area. METRO SALES TAX The history and projections of METRO sales tax revenues are included in Table 7. Sales tax projections are developed by Dr. Barton A. Smith of the Center for Public Policy at the University of Houston. Dr. Smiths projections of METRO sales tax revenues in recent years have been relatively close to actual collections. Sales tax revenues are assumed to grow approximately 5.70 percent annually through 2030. This growth is consistent with the prior 20 years. The projected sales tax growth is derived from the methodology used by Dr. Barton Smith (See METRO Forecasts of Economic Growth, Inflation, and Interest Rates: December 2010 and March 2011Appendix K) who has consistently and reliably conducted sales tax forecasting for METRO for many years. The growth described in the assumptions of the forecast show significant increases in regional population and employment through 2035. This growth is a primary driver in service area sales tax projections. The one percent sales tax yielded over $500 million in FY 2010. It has grown at a compounded rate of growth of 4.82 percent since 1989 and is projected to grow at a compounded rate of growth of 5.70 percent from 2011 through 2035. One quarter of these funds is dedicated to General Mobility Plan projects through 2014. The balance is used to support METRO bus and paratransit operations and provides most of the nonFederal share of funding of capital projects. FEDERAL FUNDS METRO receives federal grants from a number of funding categories, including Section 5307 Urbanized Area Formula funds; Section 5309 New Starts; Section 5309 Discretionary Bus; Section 5309 Fixed Guideway Modernization (FGM); Section 5308, Clean Vehicle Program; and Congestion Mitigation / Air Quality (CMAQ), and Surface Transportation Program (STP)(See Appendix M-Historic Federal Funding). Section 5309 Discretionary Bus grants in the base case cashflow are all project specific and are estimated in the cashflow in accordance with the project schedules. Some of the grants have already been awarded. Applications have not been submitted for the other grants. These grants are included in the cashflow model under the Federal Grants Discretionary line.

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Federal Highway Administration (FHWA) CMAQ and STP funds are highway funds that can be flexed from highways to transit to fund projects that will improve air quality, reduce congestion or improve regional mobility. When programmed by the Transportation Policy Council (TPC) of the H-GAC, the CMAQ grant program may be applied to capital projects and to support operations of some transit services; the STP funds may be applied to transit capital projects. This cashflow includes CMAQ and STP funds that are programmed in the FY2008 - 2011 TIP. These grant totals range from approximately $5 million to $26 million per year over the four year period. The FY 2008 projected amount for the Section 5308 Clean Fuel Program is based on expected receipts. CMAQ grants include programmed receipts for the Clean Vehicle Program, bike racks, and Signature Bus Service. STP funds are those programmed in the TIP for the Intermodal Terminal. Both CMAQ and STP funds are included on the line in the cashflow model titled Federal Grants Formula.

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OPERATIONS AND MAINTENANCE PLAN

For the purpose of FTA evaluation, this section describes the operating plan for the North Corridor LPA and for agency-wide services. The operating plan presents the 25year forecasts to demonstrate the capability of the agency to operate and maintain the system, while continuing to provide and enhance existing transit service.

Operating Revenues
Operating revenues are presented in the table below as the following four line items: farebox receipts, sales tax receipts, miscellaneous revenue, and interest income. The sections following the table explain each of these items in further detail. Grant revenues are described in the Introduction.
Operating/SalesTaxRevenue
(YOE$000) FareboxRevenue SalesTax MiscellaneousRevenue MiscellaneousGrants FederalFormula/CMAQ,etc TotalOperating/SalesTaxRevenue 20082010 20112020 20212030 Total $184,239 $807,695 $2,511,734 $3,503,668 $1,529,278 $6,665,037 $11,691,559 $19,885,874 $2,757 $9,762 $12,986 $25,505 $58,417 $44,894 $54,725 $158,036 $380,813 $961,473 $1,063,237 $2,405,523 $2,155,504 $8,488,861 $15,334,242 $25,978,607

Source: Cash flow produced by the Facility Provider Finance Team, Houston Metro Model FTA - FINALv4. All numbers are rounded.

Sales Tax METROs primary source of operating revenue is a dedicated one percent tax on all sales in the METRO service area. When METRO was created, service area voters approved the tax via referendum. METRO has collected the tax since. This tax currently provides METRO approximately $500 million per year. Over the period between 1989 and 2010, sales tax revenues increased 4.82 percent (annual compounded rate). The growth rate of the sales tax receipts to METRO is forecasted by Dr. Barton A. Smith in METRO Forecasts of Economic Growth, Inflation, and Interest Rates: December 2010. The annual forecast of sales tax receipts, in YOE$, is provided in the CashfFlow Model (refer to Table 18 in CashFlow).

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Farebox Revenue The second source of operating revenues is farebox revenues. In 1985, METROs fare was $0.55. Over the years, the fare has been increased by $0.10, $0.20, and in 1994 by $0.15, which resulted in a fare of $1.00. In conjunction with the implementation of new fare collection technology in 2008, METRO made changes to its fare structure and levels to begin regular improvement of its fare recovery ratio. The fare structure was simplified and most discounts were eliminated or reduced (except those required by law). On November 2, 2008, METROs local base fare (bus and rail) increased $0.25 to $1.25 and premium services increased between $0.50 and $1.00 per trip as well. Passengers on the Southeast Corridor project will pay the local transit fare. Table 12 3 presents ridership, average fare, and fare revenue projections over the planning horizonincluding actual for FY 2007 through FY 2010-- for existing and proposed transit services. Over the 20-year period from FY2010 to FY 2030, ridership is projected to increase by 287 percent. The fare revenues (in YOE$) would increase by over 400 percent. Fares are scheduled to increase every five years in approximately 8 percent increments. Future (2030) total systemwide ridership of 304.868 million annual boardings is comprised of fixed-route bus ridership forecast of about 201.631 million, 80.427 million annual light rail boardings, 8.979 million annual commuter rail transit boardings, 11.666 million annual signature system boardings and about 2.165 million annual boardings for other METRO services such as METROLift.

Ridership figures presented in this table reflect the full build out of the METRO Solutions program. Ridership and a detailed analysis of the ridership is provided in the Southeast Corridor New Starts Baseline report.

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Table 12 Projected Ridership and Fare Revenue North Corridor LPA (Year of Expenditure $)
2007 ANNUAL TRIPS Fixed Route Bus System Annual Boardings LRT System Annual Boardings North Corridor Annual Boardings CRT System Annual Boardings Signature System Annual Boardings Subtotal Bus and Rail Annual Boardings Percent Change from Prior Year Special Bus Services Annual Boardings TOTAL System Annual Boardings Percent Change from Prior Year FARE REVENUES Total Fares Annual % Change AVERAGE FARE (per Trip) Annual % Change $0.54 $53,616,000 $52,860,000 -1.4% $0.54 -0.10% $68,767,000 30.1% $0.80 48.18% $62,612,000 -9.0% $0.80 -0.68% $61,758,000 -1.4% $0.80 0.00% $63,656,000 3.1% $0.80 0.00% $66,213,000 4.0% $0.80 0.00% $68,857,000 4.0% $0.80 0.00% $87,385,000 26.9% $0.86 8.02% $97,772,000 11.9% $0.86 0.01% $110,579,000 13.1% $0.86 0.01% 2,347,000 99,140,000 85,092,000 11,701,000 0 0 0 96,793,000 84,547,000 11,800,000 0 0 0 96,347,000 -0.46% 1,497,000 97,844,000 -1.31% 71,815,500 11,614,000 0 0 979,500 84,409,000 -12.39% 1,490,000 85,899,000 -12.21% 65,450,667 10,627,000 0 0 1,088,333 77,166,000 -8.58% 1,581,000 78,747,000 -8.33% 64,379,000 10,497,000 0 0 1,197,167 76,073,167 -1.42% 1,602,274 77,675,440 -1.36% 66,310,370 10,811,910 0 0 1,306,000 78,428,280 3.10% 1,633,175 80,061,455 3.07% 68,962,785 11,244,386 0 0 1,414,833 81,622,005 4.07% 1,653,501 83,275,506 4.01% 70,342,040 11,703,022 0 0 2,865,267 84,910,330 4.03% 1,688,346 86,598,676 3.99% 71,748,881 24,551,419 8,568,540 0 3,713,400 100,013,700 17.79% 1,730,954 101,744,654 17.49% 80,407,689 27,734,551 9,901,424 0 3,908,507 112,050,747 12.04% 1,779,492 113,830,239 11.88% 89,066,497 30,917,683 11,234,308 0 6,917,613 126,901,793 13.25% 1,826,808 128,728,601 13.09% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: North Corridor FTA Standardized Cost Categories spreadsheets, February 8, 2011. Cashflow produced by the Facility Provider Finance Team, Houston Metro Model FTA - [Link]. All numbers are rounded.

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Table 12 (continued) Projected Ridership and Fare Revenue NC LPA (Year of Expenditure $)
2018 97,725,305 33,238,975 12,567,192 0 7,458,628 138,422,908 9.08% 1,871,800 140,294,708 8.98% 2019 106,384,113 36,326,347 13,900,076 0 7,809,242 150,519,702 8.74% 1,915,570 152,435,272 8.65% 2020 115,042,921 38,871,079 15,232,960 1,827,600 8,159,856 163,901,456 8.89% 1,958,453 165,859,910 8.81% 2021 123,701,729 41,735,011 16,565,844 2,940,040 8,510,471 176,887,251 7.92% 2,000,725 178,887,976 7.85% 2022 132,360,537 48,813,037 17,898,728 3,135,258 8,861,085 193,169,916 9.21% 2,042,325 195,212,241 9.13% 2023 141,019,345 51,703,032 19,231,612 3,330,476 9,211,699 205,264,552 6.26% 2,083,374 207,347,926 6.22% 2024 149,678,153 54,593,027 20,564,496 3,525,693 9,562,314 217,359,187 5.89% 2,123,996 219,483,183 5.85% 2025 158,336,960 57,483,023 21,897,380 3,720,911 9,912,928 229,453,823 5.56% 2,164,159 231,617,982 5.53% 2026 166,995,768 60,373,018 23,230,264 3,916,129 10,263,543 241,548,458 5.27% 2,164,378 243,712,836 5.22% 2027 175,654,576 68,359,414 24,563,148 6,680,547 10,614,157 261,308,694 8.18% 2,164,593 263,473,287 8.11% 2028 184,313,384 72,381,942 25,896,032 7,446,698 10,964,771 275,106,796 5.28% 2,164,804 277,271,600 5.24% 2029 192,972,192 76,404,471 27,228,916 8,212,849 11,315,386 288,904,898 5.02% 2,165,011 291,069,909 4.98% 2030 201,631,000 80,427,000 28,561,800 8,979,000 11,666,000 302,703,000 4.78% 2,165,214 304,868,214 4.74%

$120,520,000 9.0% $0.86 0.00%

$130,955,000 $153,050,000 $165,078,000 $180,149,000 8.7% $0.86 0.00% 16.9% $0.92 7.41% 7.9% $0.92 0.00% 9.1% $0.92 0.00%

$191,353,000 6.2% $0.92 0.00%

$202,556,000 5.9% $0.92 0.00%

$228,501,000 12.8% $0.99 6.90%

$240,440,000 5.2% $0.99 0.00%

$259,944,000 8.1% $0.99 0.00%

$273,564,000 5.2% $0.99 0.00%

$287,184,000 5.0% $0.99 0.00%

$329,915,000 14.9% $1.08 9.68%

Source: North Corridor FTA Standardized Cost Categories spreadsheets, February 8, 2011. Cashflow produced by the Facility Provider Finance Team, Houston Metro Model FTA - FINALv4. All numbers are rounded.

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The pattern of ridership growth in the first five years is driven by planned service improvements, while the pattern in the later years is driven by expected population growth. As a comparison, population growth in the region is forecasted to grow over the period by over 64 percent. 4 The growth in the forecasted systemwide average fare is driven by two factors. First, base fares will be increased. With the implementation of the new fare collection technology (in place as of January 1, 2008), future adjustments to fare levels and structure will be easier to implement. While future fare increases are projected to be more frequent than very recent METRO history, the fare adjustments will still be conservative. Second, METROs fare structure includes a base local fare and significantly higher fares for its Park & Ride services. METROs Park & Ride fares are distance-based fares for four geographic zones. METRO expects the service mix to change over the planning period as commuter services are added to address the growing commuter markets. Even absent fare increases, this changing service mix will increase the average systemwide fare. Miscellaneous Revenue The third source of operating revenues is called Miscellaneous Revenue. This line item is small and includes income from sources such as right-of-way easement leases and concessions at park and ride lots. This line item is projected to increase with inflation over the study period. Interest Income The fourth source of operating revenue for METRO is investment income. In the past, METRO developed a significant cash reserve as its operating revenues exceeded the needs of both the operating and capital budgets. METRO invests this reserve in interest-bearing accounts and other conservative, statute-allowed investments, generating the interest income line item. Even in years where reserves are limited, required minimum working capital balances will generate some interest income. While METRO funds its operations and maintenance programs from its operating revenues, these operating revenues exceed the annual cost of operations and maintenance. The remainder of the operating revenues is then available to fund a portion of the capital program. METRO is not subject to any rules or limitations on how it may divide the use of its operating revenues between its operating and capital budgets.

Population and employment forecasts provided by H-GAC are included in the New Starts Baseline report for the North Corridor.

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Operating and Maintenance O&M Costs

METRO uses a cost allocation methodology (Cost Allocation Model) for estimating its systemwide operations and maintenance costs that are used as inputs to the costeffectiveness and operating efficiencies criteria. This methodology uses actual METRO operating experience as the foundation for the estimates. The methodology is described in more detail below. Overview of Service Alternatives Being Evaluated METRO has an extensive and expanding bus and paratransit service that has remained the backbone of the Authoritys program even as light rail has been implemented on the METRORail Red Line. Within any new fixed guideway transit corridors, the bus and LRT systems will be integrated to improve operating efficiencies. Therefore, selected bus routes will be restructured to eliminate segments that duplicate new fixed guideway service. Recognizing that light rail lines provide limited-stop, frequent service to stations, other adjacent or parallel bus routes will be restructured to provide local frequent service between North Corridor LRT stations. With the addition of more light rail service, METROs mix among its various types of bus and LRT service will change. However, the operating characteristics of each service type, and hence its unit O&M costs, should remain similar to todays services and service assumptions. Specifically, METRO Solutions includes the following service modes, along with their typical vehicle type: Local bus service 40 standard transit vehicles Signature (limited stop) bus service - 40 standard transit vehicles Park & Ride bus service 45 over-the-road transit coaches Light-rail service (inner city operations) -196 articulated light-rail vehicles Light-rail service (commuter rail operations) 196 articulated light-rail vehicles In addition, the amount of paratransit service and other non-fixed route transit functions are estimated outside the travel demand model and the costs are added to the cashflow model. Table 13 summarizes the daily level of service by mode provided for METRO Solutions as estimated by the model for the base year (2007) and the forecast year (2030). The average speed for each mode for the two years is also calculated.

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Table 13 Daily Service Levels

2007 VMT Local Bus Commuter Bus Light Rail Commuter Rail 112,135 41,497 2,365 0 VHT 7,599 1,424 143 0 Speed (mph) 14.76 29.14 16.54 VMT 166,390 45,425 252,666 8,988 2030 VHT 11,194 1,562 1,091 177 Speed (mph) 14.86 29.08 20.78 50.78

Source: METROs EMME/2-based long range travel demand forecasts prepared February 2011.

Development of O&M Cost Model for Existing Service METRO uses one model to develop cost factors for all of the modes used in the Southeast Corridor LPA. Since METRO currently operates all modes that are considered in the alternatives, current operating experience can be used to develop cost factors for all modes. While METRO expects its service mix to change over time, the service characteristics within a mode are quite stable. The speed and peak to base ratio of the current services are quite similar to those for the future services. Therefore, forecasting future costs by mode (rather than system-wide or sub-system wide) should increase accuracy. Selection of Key Driving Supply Variables METRO has a Cost Allocation Model in which actual operating expenditures and service levels are tracked by three major categories Operations, Maintenance, and General Administration and many subcategories. The Cost Allocation Model also allocates expenditures across many transit modes, such as METRO-operated local service or contractor-operated Park & Ride service. This tracking method provides METRO the current cost of providing each service type and allows the accurate cost estimation for future levels of service. More detail on the Cost Allocation Model is provided in Appendix H. METROs Cost Allocation Model allocates current costs on many driving variables called allocation bases in the METRO model. These are discussed in detail in the Assignment of Expense Items section below. METRO then rolls this detail up into a three-factor model for forecasting bus O&M costs (for consistency with FTA methodologies) and a five-factor model for rail operating costs. A detailed description of the cost allocation model is included in Appendix H and FY 2010 actuals are included in Appendix B. This documentation includes a detailed description for every responsibility center in METRO of how each expense was allocated. The key driving variables for forecasting bus O&M costs are revenue hours, revenue miles, and peak vehicles. In general, operations-related costs are allocated in the Cost Allocation Model to the various bus modes on scheduled revenue hours, scheduled vehicle hours, or scheduled operator pay hours. Since the travel demand model provides estimates of scheduled revenue hours for each mode, this factor is used as the
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key driving factor for bus operations costs. Bus maintenance costs are generally allocated on scheduled vehicle miles in the Cost Allocation Model. The corresponding key driving variable for the forecasts is scheduled revenue miles, since this is the corresponding output that is provided by the travel demand model. Administrative costs and facility maintenance costs are allocated in the Cost Allocation Model on a variety of basesdepending on the type of costsincluding ridership by mode, peak vehicles by mode, and number of park and ride lots. In the forecasts, these costs are driven by the future peak vehicles by mode. Rail operations and maintenance costs are booked separately in METROs financial system and can, therefore, be allocated directly to the light rail service mode. The estimation of light rail operating factors is analogous to traditional bus service. Service factors are highly influenced by the alignment definition (directional route miles, number of stations, yard/shop/operations and facilities), in addition to the travel demand forecasts (peak vehicles required, vehicle miles, and vehicle hours). A five-factor model is used for estimating light rail O&M costs to accurately capture changes in service characteristics in this mode over time. The technology will be the same; therefore, the same basic cost components will apply. However, the service will vary from slower inner city, mixed flow applications to higher speed, exclusive operations to the suburbs. METROs experience is based on one 7.5-mile line, while the future system will includes numerous lines running at different speeds, different station spacing, and different service characteristics from the current service. Therefore, a multi-factor model is used to capture these changes in the service characteristics over time. The five driving variables that are used are: revenue train hours, revenue car miles, peak vehicles, stations, and guideway miles. Data Assembled METRO has several systems that collect financial data and operating statistics. The agency uses the information to measure operating performance each month, to prepare the annual operating budget, and to support short and long range planning activities. METRO categorizes operating costs as either transit or traffic management. METROs transit O&M costs include the costs to operate its fixed-route bus service, its specialized services such as METROLift and METROVan, and light rail service. Traffic management O&M costs includes the cost to operate such non-transit functions as incident management on freeways. Transit and traffic management O&M costs for the existing and future systems are included in the CashFlow Model (Table 18). Input variables for application of this model were obtained from the alignment definition and travel demand model, which provide revenue hours of service for bus miles and directional route miles, number of stations, peak vehicles required, vehicle miles, and train hours for rail modes. Assignment of Expense Items The responsibility center costs included in each factor of the bus model are detailed in Table 14. The column labeled Annual Bus Expenses represents the sum of the amounts allocated by the Cost Allocation Model to the local, express, and park and ride bus modes.

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Table 14 Bus Responsibility Center by Cost Factor Expense Line Item Annual Bus Revenue Revenue Expenses Hours Miles (FY2010) Operations Senior Vice President/Operations Sr. Director Transportation Transportation General(2) Bus Operating Facilities Bus Operator Safety & Training Special Events 1 Contracted Bus Service Bus Dispatch Operations Planning Maintenance Central Shops Bus Preventive Maintenance Maintenance General 2 Sr Director Bus Maintenance Support Vehicle Maintenance Warranty, Quality Assurance, Technical Services Director Maintenance Support Electronic Maintenance $5,476,5869 $89,154,861 ($43,623,177) $717,883 $1,240,771 $1,821,402 X X X X X $795,965 $327,911 $(3,357,340) $90,517,854 $788,417 $255,765 $44,365,552 $4,414,281 $956,538 X X X X X X X X X

Peak Vehicles

$552,300 $853,030

X X

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Public Facilities (route maintenance) Facility Utilities Bus Facilities Maintenance MEAD (Maintenance Training) Administration Accounting Risk Management Environmental Services Security Public Safety Chief Financial Officer Treasury OMB Revenue Information Technology Executive Office Administration Human Resources Materials Distribution Procurement Communications & Marketing Contingency
1 2

$6,333,024 $27,712,453 $9,863,207 $11,486

X X X X X

$2,105,706 $2,890,801 $200,716 $967,126 $10,974,9689 259,4900 $531,231 $907,845 $5,906,551 $10,952,2726 $6,201,742 $2,261,037 $12,079,24032 $6,287,308 $1,032,3385 $5,946,340 $(440,968)

X X X X X X X X X X X X X X X X X

Includes administration of fixed-route contract Includes credit for federal grants that are added back into the relevant responsibility centers

The responsibility center costs included in each factor of the light rail model are detailed in Table 15. The column labeled Annual Rail Expenses represents the sum of the amounts allocated by the Cost Allocation Model to the light rail mode.

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Table 15 Light Rail Responsibility Center by Cost Factor Expense Line Item Annual Rail Expenses (FY2010) Rev Train Hours Rev Car Miles Station Guidewy Miles Peak Vhcls

Operations Senior Vice President/Operations Rail Operating Facilities Operations Planning Maintenance Rail Vehicle Maintenance Signal Maintenance Support Vehicle Maintenance Warranty Environmental Services Traction Power Rail Facilities Maintenance Rail Electronic Maintenance Administration Security Public Safety Chief Financial Officer Accounting Treasury OMB/Grants Revenue $157,439 $1,752,879 $46,271 $18,559 $84,846 $145,267 $792,254 $3,277,446 $2,310,472 $23,334 $12,150 $41,111 $773,640 $1,794,686 $447,626 X X X X X X X X X X X X X X X X $14,880 $5,929,1325 $19,603 X X X

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Information Technology Executive Office Engineering Planning and

$152,645 $990,518 $26,506 $2,155,163

X X X X

Human Resources/Diversity/ Corporate Development Materials Distribution Procurement Communications & Marketing Contingency

$125,918 $164,881 $949,726 ($78758) X X X

Calculation of Unit Costs Historical unit costs, or cost factors, for FY 2010 were derived from METROs Cost Allocation Model over the four bus transit modes (METRO Local, METRO Park & Ride, Contract Local, and Contract Park & Ride. Fully allocated bus cost factors are based on METROs audited financial and operating data from FY 2010. They are presented in Table 16. Table 16 Bus Cost Factors (2010 Dollars)
Transit Mode Operating Cost Operating Cost per Revenue Hour per Revenue Mile Operating Cost per Peak Vehicle

METRO Local Contract Local METRO P&R Contract P&R

$43.45 $65.51 $56.95 $91.73

$2.27 $0.16 $2.29 $0.03

$96.950 $53,544 $75,552 $30,719

Source: METRO Cost Allocation Model (2010 Actuals).

While METRO anticipates that it will continue to use a mix of METRO-operated and contract-operated services in the future, the determination of which services will be operated in-house versus a contractor will be determined on a periodic basis. Therefore, since the determination of which service will be contracted in the future is unknown, the cost estimates will assume that the same percentages of METROoperated and contract-operated services for local and Park & Ride will continue. In FY 2010, 23 percent of local service and 25 percent of Park and Ride service were operated by a contractor.

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The light rail O&M cost factors are based on detailed audited, actual operating costs for FY 2010 for the METRORail Red Line. The FY 2010 operating costs for light rail represent nearly seven full years of operating experience at METRO with light rail transit. Changes in rail service O&M costs were estimated using a five-factor modelthe summation of operating cost/revenue train hour, operating cost/revenue car mile, operating cost/peak vehicle, operating cost/station, and operating cost/guideway mile. The light rail cost factors (based on the METRORail Red Line) are presented in Table 17. Table 17 Light Rail O&M Cost Factors (2010 Dollars) Cost Factor FY 2010 Cost/Revenue Train Hour Cost/Revenue Car Mile Cost/Peak Vehicle Cost/Station Cost/Guideway Mile
Source: METRO Cost Allocation Model (2007 Actuals).

$124.83 $3.55 $468,627 $107,329 $308,063

Because the costs are broken down by service factor (train hours, stations, etc.) cost estimates derived from the model will appropriately reflect the cost of light rail service that may differ in operating characteristics from the line on which the factors are based. METROs Red Line is operated with mostly one-car trains (some two-car trains are used during peak periods). In order to meet the peak demand in 2030 and maintain acceptable loading standards, the North Corridor LPA would require two-car trains operating all day. The major inputs generated by the travel demand model for the O&M cost model are based on two-car consists. As such, they reflect the increased costs associated with additional cars and trains. Train hour costs include items such as operator wages and training and fare collection costs. Car mile costs include all vehicle maintenance and electric power costs. Station costs include station maintenance and security. Guideway costs include maintenance of guideway expenses, and peak vehicle costs include administrative overhead. The responsibility center costs included in each of the five cost factors are detailed in Table 17. Estimation of Inflation Rates A components operating cost in a future year is a cost factor multiplied by the service factor level multiplied by an inflation index. The inflation index is the Houston Area Consumer Price Index (CPI) as drawn from METRO Forecasts of Economic Growth, Inflation, and Interest Rates: December 2010. METRO does not currently forecast that any specific cost items will increase at a rate different from inflation. While certain cost items may exhibit a different pattern of growth over time, forecasting differential inflation rates over the very long term (more than 20 years) is very difficult to support.

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Results In 2030, the annual cost to operate and maintain the North Corridor LPA will be 22.22 million (YOE $). The cost to operate and maintain all of the LRT lines is presented in the cashflow presented in Table 18. The stability of METROs financial environment will allow for the long term maintenance and operation of the Southeast LRT in a wellplanned and financially prudent manner.

55

CASH FLOW ANALYSIS

INTRODUCTION This section presents the findings of the financial analysis including a detailed results of the financial analysis presented in tables on the following pages. The same tables are presented in Appendix E for reference purposes. The assumptions underlying the analysis are reviewed. The conclusions and limitations of the analysis are presented at the end of this section. UNDERLYING ASSUMPTIONS The financial analysis was structured around assumptions, described in terms of the following major considerations: Rail system construction and construction schedule; Federal funding and local funding including sales taxes; Fare increases; Inflation and interest rates; Bond financing Construction Schedule The following construction schedule was assumed: Final Design: August 17, 2009 Construction: July 2009- September 2014 Start of operations: December 2015 For the purpose of FTA evaluation, this section presents the summary cash flow analysis for the North Corridor LPA. METRO developed its Cash Flow Model as its primary tool for long range financial management and forecasting in the early 1990s. The model has been updated and enhanced many times over the past decade. The model includes summary-level line items for all of the Authoritys revenues and expenditures, including a history of all revenues and expenditures from FY 1989 - FY 2010 and forecasted revenues and expenditures from FY 2011 - FY 2035. Where available (for example, capital expenditures covered by the Capital Improvement Program), the summary-level line items are supported by detailed schedules for each year. The Cash Flow Model information is developed in Year of Expenditure dollars. The model includes the ability to track debt and debt service. The model allows METRO to track its forecasted ending balances to identify years in which the expenditure stream may need to be revised or additional revenues developed. METROs historical cash flow from 1989 to 2010 demonstrates how this model has enabled METRO to track cash flow, debt, and debt service and is provided in the Appendix J. Table 18, METROs Cash Flow Model for the LPA, shows the projected revenues and expenditures for METROs capital and O&M programs, including the North Corridor

56

LPA, in Year of Expenditure dollars. The table demonstrates the adequacy of the combined revenues available to METRO to cover the cost of the system, both cumulatively and by year.

Financial Capacity
Evaluation of the financial feasibility of the North Corridor LPA requires examination of several capital and operating financial indicators. The capital and operating financial indicators described below were considered in the evaluation of financial feasibility. Capital Financial Indicators METRO has historically maintained a working capital reserve to cover operating and capital expenses. The absolute minimum cash balance is defined by METROs Board approved debt policy. The required ending balance is 15 percent of annualized operating expenditures for the following fiscal year. The construction of the LPA will include debt financing. Debt financing will be used in the overall financial program for the agency. With voter approval of the METRO Solutions Plan, authorization was provided for the issuance of long-term debt. The original $640 million of voted authorization is adequate to cover the LPA and all needs for 2011 and 2012. The model assumes future bonds are authorized in 2013 and for future projects.

57

Table 18 North Corridor LPA Cash Flow Analysis (YOE$)

Metropolitan Transit Authority of Harris County FTA BaseCase ($ in Thousands) 2011 Beginning Balance Revenues Sales Tax Farebox Misc Revenue (includes KO DSRF releases) Total Revenues Grant Funds Other Grants ARRA Stimulus Formula SEC 5307 Fixed Guideway Misc and Bus Facility Grants Total Grants FFGA Funds North Southeast University Uptown CRT and Phase 3 Total FFGA Bond Proceed Draws Sales Tax - 2009ABC Sales Tax (New) Contractual Obligations - 09D & 10A Contractual Obligations Revenue and Appropriation Commercial Paper Notes Total Proceeds Total Sources of Funds Operating Expenses General Bus Signature Bus Traffic Management MetroLift/Van Rail - Main Rail - North Rail - Southeast Rail - East End University Uptown CRT Phase 3 Total Operating Expenses $ 119,449 $ 2012 47,819 $ 2013 49,744 $ 2014 51,543 $ 2015 80,152 $ 2016 90,716 $ 2017 68,895 $ 2018 72,946 $ 2019 77,471 $ 2020 85,194 $ 2021 94,100 $ 2022 100,306 $ 2023 105,522 $ 2024 112,170 $ 2025 117,110 $ 2026 122,072 $ 2027 133,898 $ 2028 413,008 $ 2029 723,151 $ 2030 1,049,279 $ 2031 1,355,539 $ 2032 1,699,266 $ 2033 2,092,781 $ 2034 2,598,062 $ 2035 3,010,035

$ $

508,979 61,758 865 571,602 78,000 68,157 11,500 4,441 162,099 75,000 75,000 12,758 1,177 163,934 85,584 89,149 61,512 25,515 261,760

$ $

537,177 63,656 888 601,721 69,520 11,730 6,751 88,001 75,000 75,000 94 150,094 351,315 65,900 54,744 471,960

$ $

563,928 66,213 911 631,052 70,911 11,965 4,266 87,141 75,000 75,000 12,902 162,902 14,000 193,751 67,697 25,804 301,252 1,232,091

$ $

597,651 68,857 931 667,439 72,329 12,204 4,351 88,884 75,000 75,000 32,554 182,554 60,686 65,107 125,793 1,116,213

$ $

634,675 87,385 957 723,017 12,000 73,776 12,448 4,438 102,662 43,392 75,000 12,902 322 131,616 -

$ $

675,285 97,772 984 774,041 75,251 12,697 4,527 92,475 7,599 519 75,000 2,539 85,657 1,042,889

$ $

717,914 110,579 1,012 829,505 76,756 12,951 4,617 94,324 19,472 75,000 21,606 116,078 160,180 160,180 1,268,982

$ $

762,263 120,520 1,041 883,824 78,291 13,210 4,710 96,211 11,975 3,364 75,000 115,245 205,585 402,569 402,569 1,661,134

$ $

809,273 130,955 1,071 941,299 79,857 13,474 4,804 98,135 10,678 14,271 75,000 146,468 246,416 465,933 465,933 1,829,255

$ $

857,892 153,050 1,102 1,012,044 81,454 13,744 4,900 100,098 11,977 16,008 75,000 169,380 272,364 235,827 235,827 1,705,526

$ $

908,264 165,078 1,134 1,074,476 83,083 14,018 4,998 102,100 75,000 130,260 205,260 1,475,935

$ $

960,435 180,149 1,167 1,141,751 84,745 14,299 5,098 104,142 75,000 174,557 249,557 1,595,755

$ $

1,014,375 191,353 4,476 1,210,204 86,440 14,585 5,200 106,224 75,000 205,153 280,153 1,702,103

$ $

1,070,145 202,556 4,746 1,277,447 88,169 14,876 5,304 108,349 32,578 230,245 262,823 1,760,788

$ $

1,128,512 228,501 4,879 1,361,892 89,932 15,174 5,410 110,516 225,362 225,362 1,814,880

$ $

1,189,264 240,440 4,543 1,434,247 91,731 15,477 5,518 112,726 106,247 106,247 1,775,292

$ $

1,252,770 259,944 1,352 1,514,066 93,565 15,787 5,628 114,981 1,762,946

$ $

1,319,100 273,564 1,393 1,594,057 95,437 16,103 5,741 117,280 2,124,345

$ $

1,388,376 287,184 1,436 1,676,996 97,345 16,425 5,856 119,626 2,519,773

$ $

1,460,318 329,915 1,480 1,791,713 99,292 16,753 5,973 122,019 2,963,011

$ $

1,541,309 335,129 1,525 1,877,963 101,278 17,088 6,092 124,459 3,357,961

$ $

1,626,792 340,425 1,572 1,968,789 103,304 17,430 6,214 126,948 3,795,003

$ $

1,717,016 345,806 1,620 2,064,442 105,370 17,779 6,339 129,487 4,286,710

$ $

1,812,244 351,273 1,669 2,165,186 107,477 18,134 6,465 132,077 4,895,325

$ $

1,912,754 388,312 1,720 2,302,786 109,627 18,497 6,595 134,718 5,447,540

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ 1,278,844

$ 1,359,595

$ 1,037,446

323,876 1,842 4,902 40,041 14,963 385,624

335,698 2,063 5,033 41,888 15,362 400,045

347,767 2,294 5,165 43,511 15,764 414,501

355,170 6,200 5,279 45,392 16,112 428,154

362,772 8,845 5,429 47,836 17,956 14,436 10,242 14,644 482,159

382,597 9,476 5,579 50,519 18,761 16,185 10,997 15,300 5,728 515,142

397,524 15,263 5,736 53,299 19,605 18,026 11,791 15,988 11,777 549,009

416,667 17,220 5,898 56,134 20,485 19,962 12,623 16,706 12,111 577,806

436,916 18,457 6,066 59,067 21,403 21,998 13,495 17,455 14,947 609,804

457,492 19,754 6,241 62,097 22,362 24,138 14,410 18,236 15,376 23,050 663,156

478,390 21,115 6,421 65,247 23,362 26,388 15,369 19,052 21,094 38,830 9,165 724,434

499,606 22,544 6,609 68,525 24,409 28,757 16,376 19,906 22,313 8,020 40,989 9,695 767,749

521,137 24,044 6,803 71,942 25,502 31,247 17,432 20,797 23,590 8,514 43,249 10,249 804,505

542,984 25,615 7,004 75,490 26,642 33,864 18,539 21,727 24,927 9,031 45,615 10,830 842,270

565,135 27,268 7,213 79,195 27,836 36,619 19,703 22,700 26,330 9,574 48,097 11,440 881,110

587,591 29,002 7,430 83,047 29,082 39,516 20,922 23,717 27,799 10,144 50,695 12,078 921,023

610,349 30,820 7,655 87,057 30,383 43,255 22,902 24,778 29,338 10,741 83,905 20,826 1,002,009

633,405 32,727 7,887 91,213 31,742 47,192 24,987 25,886 30,950 11,367 90,300 22,466 1,050,121

656,754 34,727 8,129 95,541 33,161 51,338 27,181 27,043 32,639 12,023 97,021 24,191 1,099,747

680,410 36,817 8,377 100,003 34,635 55,689 29,486 28,245 34,400 12,707 104,063 25,998 1,150,830

717,542 37,941 8,633 104,670 35,692 57,390 30,386 29,108 35,450 13,095 107,240 26,792 1,203,938

739,449 39,099 8,896 109,562 36,782 59,142 31,313 29,996 36,532 13,495 110,514 27,610 1,242,390

762,023 40,294 9,168 114,688 37,905 60,947 32,269 30,912 37,647 13,907 113,889 28,453 1,282,102

785,288 41,523 9,448 120,054 39,062 62,808 33,255 31,856 38,797 14,332 117,365 29,322 1,323,108

809,263 42,791 9,736 125,669 40,255 64,725 34,270 32,828 39,981 14,769 120,948 30,217 1,365,452

Source: Cash flow produced by the Facility Provider Finance Team, Houston Metro Model FTA - FINALv4. All numbers are rounded.

58

Table 18 (continued) North Corridor LPA Cash Flow Analysis (YOE$)

General Mobility General Mobility (25%) General Mobility Carryover Total GM & Existing Debt Capital & Other Expenses North Southeast East End University Uptown Intermodal Terminals Phase 3 Other Capital Costs Bus Replacement Total MRE Capital Expenses Capital Investment State of Good Repair Main Street North Southeast East End University Uptown Vehicles Phase 2 Total Debt Service Expense Existing Debt Service Sales Tax Contractual Obligations Revenue and Appropriation Commercial Paper Notes Commercial Paper Takeout Total D/S Expense Total Uses of Funds Ending Balance 15% Minimum Operating Reserves Revenues for Coverage Calulation Gross Sales Tax Net Sales Tax AG Test Combined Rev & Appropriation Coverage Ratios Gross Sales Tax AG Test Revenues and Appropriation Bond Issues Sales Tax Contractual Obligations Revenue and Appropriation

$ $ $

127,245 77,288 204,533 150,056 142,285 97,237 25,515 2,353 150 123,249 61,512 602,357

$ $ $

134,294 43,193 177,487 189,345 190,838 144,966 188 86,718 65,900 677,955

$ $ $

140,982 140,982 109,027 167,939 96,308 25,804 18,331 56,406 67,697 541,512

$ $ $

149,413 149,413 34,407 72,857 44,195 65,107 18,331 55,537 60,686 351,119

$ $ $

165,402 18,331 644 75,211 62,406 321,994

$ $ $

12,665 219,359 12,500 5,078 34,597 60,204 344,403

$ $ $

32,454 289,909 29,707 16,666 43,211 39,576 81,051 532,574

$ $ $

19,959 6,117 315,376 103,626 16,667 138,490 116,571 88,138 804,944

$ $ $

17,796 25,947 250,177 155,140 16,667 281,368 96,538 89,718 933,351

$ $ $

19,962 29,105 107,338 129,843 265,319 101,127 92,966 745,660

$ $ $

48,246 260,520 16,463 90,141 415,370

$ $ $

349,113 11,323 93,182 453,618

$ $ $

410,305 10,351 99,669 520,325

$ $ $

460,489 8,881 103,050 572,420

$ $ $

450,724 8,911 105,017 564,652

$ $ $

212,494 9,768 103,398 325,660

$ $ $

9,800 105,697 115,497

$ $ $

9,834 114,957 124,791

$ $ $

9,869 118,474 128,343

$ $ $

90,000 9,905 103,626 203,531

$ $ $

90,000 8,807 100,706 199,513

$ $ $

90,000 8,846 103,781 202,627

$ $ $

33,885 113,410 147,295

$ $ $

150,000 33,926 116,872 300,798

$ $ $

150,000 8,968 120,440 279,408

7,888 7,997 9,019 6,803 31,707

8,204 8,317 9,380 7,075 32,976

8,532 8,649 9,755 7,358 6,827 41,121

8,873 8,995 10,145 7,652 12,372 48,037

9,228 9,355 10,551 7,958 12,867 49,959

9,597 9,729 10,973 8,277 13,382 9,238 61,196

18,000 10,119 11,412 8,277 19,904 9,607 77,319

18,000 10,523 11,869 8,277 20,700 8,664 9,992 88,025

18,000 10,944 12,343 8,277 21,196 9,010 10,391 90,161

18,000 11,382 12,837 8,277 21,455 9,371 10,807 92,129

18,000 11,837 13,351 8,277 21,725 9,746 11,239 94,175

18,000 12,311 13,885 8,277 22,005 10,136 11,689 96,303

18,000 12,803 14,440 8,277 22,005 10,541 12,069 98,135

34,200 4,310 38,510

34,198 4,668 7,391 8,108 54,365

$ $ $ $

34,193 24,943 15,535 8,882 83,553 1,180,548 51,543 51,543

$ $ $ $

34,196 38,210 24,134 10,835 107,375 1,036,061 80,152 59,390

$ $ $ $

34,203 38,210 32,053 9,992 28,119 142,576 946,730 90,716 64,079

$ $ $ $

34,198 38,210 32,049 9,992 114,449 973,994 68,895 68,895

$ $ $ $

34,194 38,210 32,057 9,992 114,453 1,196,036 72,946 72,946

$ $ $ $

34,199 124,665 32,058 9,992 200,913 1,583,663 77,471 77,471

$ $ $ $

34,196 124,665 32,053 9,992 200,906 1,744,061 85,194 85,194

$ $ $ $

34,194 126,375 32,050 9,992 202,610 1,611,426 94,100 94,100

$ $ $ $

34,197 132,624 32,058 9,158 27,788 235,825 1,375,629 100,306 100,306

$ $ $ $

27,460 135,591 32,054 7,160 66,601 268,865 1,490,233 105,522 105,522

$ $ $ $

14,097 150,981 32,058 6,260 30,000 233,396 1,589,934 112,170 110,884

$ $ $ $

14,099 150,984 24,670 6,260 196,013 1,643,679 117,110 116,401

$ $ $ $

14,097 150,982 16,525 5,701 18,619 205,924 1,692,807 122,072 122,072

$ $ $ $

14,095 150,984 7,929 507 173,160 346,675 1,641,394 133,898 133,898

$ $ $ $

14,098 150,984 507 16,885 182,473 1,349,938 413,008 140,787

$ $ $ $

14,098 150,988 165,086 1,401,194 723,151 147,896

$ $ $ $

14,101 150,984 165,085 1,470,494 1,049,279 155,218

$ $ $ $

14,101 150,985 165,086 1,607,471 1,355,539 162,836

$ $ $ $

14,098 150,985 165,083 1,658,695 1,699,266 168,248

$ $ $ $

14,097 150,980 165,077 1,702,223 2,092,781 173,843

$ $ $ $

14,094 150,982 165,076 1,688,648 2,598,062 179,625

$ $ $ $

14,097 150,984 165,081 1,885,290 3,010,035 185,599

$ $ $

11,137 150,984 162,121 1,905,116 3,542,424 N/A

$ 1,231,024 $ $ 47,819 47,819

$ 1,309,852 $ $ 49,744 49,744

$ $ $ $

508,979 381,734 23,668 334,382

$ $ $ $

537,177 402,883 20,237 405,403

$ $ $ $

563,928 422,946 (13) 423,120

$ $ $ $

597,651 448,238 (7,599) 423,120

$ $ $ $

634,675 634,675 128,961 423,120

$ $ $ $

675,285 675,285 146,217 423,120

$ $ $ $

717,914 717,914 166,830 423,120

$ $ $ $

762,263 762,263 105,128 423,120

$ $ $ $

809,273 809,273 129,810 423,120

$ $ $ $

857,892 857,892 134,056 423,120

$ $ $ $

908,264 908,264 127,258 423,120

$ $ $ $

960,435 960,435 152,882 423,120

$ $ $ $

1,014,375 1,014,375 177,694 423,120

$ $ $ $

1,070,145 1,070,145 212,739 423,120

$ $ $ $

1,128,512 1,128,512 250,073 423,120

$ $ $ $

1,189,264 1,189,264 289,136 423,120

$ $ $ $

1,252,770 1,252,770 295,311 423,120

$ $ $ $

1,319,100 1,319,100 324,510 423,120

$ $ $ $

1,388,376 1,388,376 355,145 423,120

$ $ $ $

1,460,318 1,460,318 386,987 423,120

$ $ $ $

1,541,309 1,541,309 418,706 423,120

$ $ $ $

1,626,792 1,626,792 469,638 423,120

$ $ $ $

1,717,016 1,717,016 524,107 423,120

$ $ $ $

1,812,244 1,812,244 582,345 423,120

$ $ $ $

1,912,754 1,912,754 647,554 423,120

6.9x N/A 8.7x

5.9x N/A 7.5x

4.4x N/A 5.1x

3.8x N/A 3.9x

5.0x N/A 3.7x

5.4x N/A 3.7x

5.7x N/A 3.7x

3.6x N/A 2.1x

3.8x N/A 2.1x

4.0x N/A 2.1x

4.1x N/A 2.0x

4.4x N/A 2.1x

4.6x N/A 2.1x

5.1x N/A 2.2x

5.6x N/A 2.3x

6.1x N/A 2.4x

6.7x N/A 2.6x

7.1x N/A 2.6x

7.4x N/A 2.6x

7.8x N/A 2.6x

8.3x N/A 2.6x

8.7x N/A 2.6x

9.2x N/A 2.6x

9.7x N/A 2.6x

10.4x N/A 2.6x

93,365 65,510 -

368,635 70,185 -

204,110 72,095 -

64,630 -

1,330,070 -

Source: Cash flow produced by the Facility Provider Finance Team, Houston Metro Model FTA - FINALv4. All numbers are rounded.

59

Debt Service Coverage As METRO launches into a project as significant as METRO Solutions, it is vital that METRO has the confidence that it has the financial resources to complete the project. Therefore, it is important to understand the measurement of financing capacity known as the coverage ratio. The debt service coverage ratio is the measurement of the margin by which certain revenues exceed certain annual debt payments. The cash flow model calculates the coverage based upon Gross Sales Taxes / debt service. This ratio is used to calculate the amount of capacity available under specific revenue and expense assumptions. METROs bond covenants require that this ratio be greater than 2.0 times in order to issue additional bonds. Currently, METRO can only pledge 75 percent of the sales tax to bonds. The Gross Tax Coverage of Debt Service is 3.8x. The minimum coverage required is 2.0x. Please see the cash flow model for specific debt service coverage ratios. Operating Financial Indicators The financial analysis also addressed the farebox ratio (the portion of operating expenses covered by fares and other operating revenues). Consideration of operating financial indicators is important in the evaluation of financial feasibility because METRO has no legal limit on the application of its tax revenues on operations. As a practical matter, absent any debt financing, the first use of tax revenues is to support operations, with remaining funds applied to the ongoing capital improvement program and fixed guideway investment. The proforma indicates a farebox ratio of 16 percent for 2011 that stays in that range until 2015 when both new rail lines are open and fare increase is projected raising it to 18 percent. Increased ridership sends the farebox ratio over 20 percent by 2018. It averages 23 percent from 2011 to 2035. Table 18 presents the projection of passenger fares, total operating revenues, and operating cost. Projected values of both the farebox ratio and overall operating ratio are consistent with current and recent values. Current Ratio Table 19 shows the current ratios based on the FY 2009 and the FY 2008 classifications in METROs audited financial statements.

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Table 19 Current Ratio Calculations (Millions) FY 2009 FY 2008 Total Current Assets(1) Total Current Liabilities Current Ratio $343.292 $339,939 1.01 $299.789 $313.282 0.96

Source: Annual Report 2009, The Metropolitan Transit Authority of Harris County, Texas, See discussion below.

(1)Restricted cash and restricted investments are excluded from the current ratio calculations except for restricted investments included in FY2009 to cover current liabilities payable from the restricted investments

The current ratio - defined as current assets divided by current liabilities - is useful in assessing the current operating financial condition of an organization. It measures short-term liquidity, specifically the extent to which an organization can meet its current liabilities (those coming due within one year) with its current assets (generally cash and receivables and other assets that will be converted to cash within one year). Current liabilities incorporated in the calculation of the Authoritys current ratio include trade payables, accrued compensation and benefits, liabilities for injuries and damages, commercial paper, other post employment benefits, deferred rental payments, capital lease obligations, long-term debt interest payable and other current liabilities. Current assets incorporated in the calculation of the current ratio include cash (excluding restricted cash), short term investments (excluding restricted investments - except for restricted investments to cover current liabilities payable from restricted investments), receivables Sales Tax, Federal Transit Administration (FTA) receivables, interest, bus passes, material and supplies inventory, prepaid pension, prepaid lease payments and other current assets. The FY2009 Comprehensive Annual Financial Report shows METROs current liabilities at $339.9 million and current assets at $519 million. However after adjusting for restricted cash and investments set aside to cover long term obligations, the adjusted current assets used in the current ratio calculation should be $343.3 million. Based on these data, the current ratio for FY2009 is 1.01, an increase from FY2008 when the current ratio was 0.96. This increase in the current ratio over the two year period shows that there is an improvement in the Authoritys liquidity position and hence its ability to meet its short term obligations. Federal Funding The following levels of federal funding are assumed: Section 5309 New Starts: 60 percent federal participation. The estimated project cost of $756 million excludes items ineligible for the FFGA. Because METRO is willing to fund the local share of the project cost from other sources, the plan is based on a total of $450 million in New Starts funding.

61

Section 5307: Grants were projected based on the federal FY2011 federal funding formula and are applied to preventative maintenance Fare Increases Base fares are assumed to increase by $0.10 in 2015, 2020, and 2025, and by $0.15 in 2030 and 2035. This represents a compound annual growth rate in the base fare of 1.65% which is less than the 2.98% compound inflation rate. Inflation and Interest Rates Inflation assumptions were based on the December 2010 Barton Smith Report. The rate of growth for each year varied, but averaged 2.98% over the 2035 planning horizon. PROJECTIONS The cash flow table above and presented for reference in Appendix E summarizes the results of the financial analysis. The table is in the form of a sources and uses of funds analysis that projects the annual capital and operating programs.

62

CASH FLOW SENSITIVITY ANALYSES

The proposed plan of finance takes into account the full funding of all five METRO Solutions Corridors North, Southeast, East End, Uptown and University. It also considers other projected capital costs for completion of the remainder of the METRO Solutions plan. While the base case cash flow analyses use conservative projections of METRO's annual revenues and expenses, the sensitivity analyses are presented in which growth rate of METROs primary funding sources (i.e. #1: General Mobility, #2: sales taxes, #3: farebox revenues, and #4: modified capital program) are stressed. All other revenues and expenses, including debt service costs, are held constant in the stress scenarios. The stress cases presented assume a maximum of $75 million per year per project for the Southeast, North, and University corridors are received under the FFGA. The receipts will continue until the maximum federal grant amounts of each of the two projects are achieved. METRO Base Case Before the stress cases are presented, the METRO Base Case using the projections for sales tax projected by Dr. Barton Smith of the University of Houston is presented as a basis for comparison, Figure 4. The METRO Base Case would provide minimum gross sales tax coverage of over 3.6 times debt service though 2035. In addition, the cash balances achieved in the case remain positive and grow significantly starting in 2027 after all commercial paper is paid off.

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Figure 4 Base Case Scenario

Source: Facility Provider Finance Team, Houston METRO Model, v-4, 2011

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METRO Stress Cases Stress Case #1 General Mobility: The first stress case involves assuming that METRO extends the current practice of transferring 25 percent of the sales tax receipts annually to the General Mobility Fund beyond 2014. In 2003 voters authorized the General Mobility Program (GMP) through 2014. The referendum also specified calling an additional referendum for the purpose of considering the future of the GMP by January 2013. The projected GMP in 2015 would be $158.7 million growing to $478.2 million in 2035 or $6,189.7 million over this period. It is not possible to predict whether the GMP will be eliminated, extended temporarily or extended long term as it will be a local decision based on the will of the voters.. For purposes of Stress Case #1, we have assumed that the GMP is extended long term. As discussed above all other assumptions are held constant. The increase of $6,189.7 million of transfers to the GMP reduces the ending fund balance from a positive balance of $3,542.4 million to a negative balance of $2,647.3 million. Debt service coverage remains at an adequate 2.7 times. However, liquidity and the negative projected fund balance, (Figure 5) would require that METRO reevaluate the priority of projects planned for implementation, determine additional bond issuances needed, and consider opportunities for additional revenue streams. Stress Case #2 Sales Tax: This stress case assumes a five percent reduction of the annual sales tax. This lower sales tax generates lower amounts for the GMP through 2014. Otherwise, all other revenues and expenses are held constant. In total, Sales Tax Revenues in this scenario are $1,224.8 million lower than the base case. This scenario allows for the planning, construction, operation, and maintenance of the METRO Solutions plan as currently defined. While it is lower than the base case, the cash flow still projects a positive ending balance by 2035. Stress Case #3 Farebox Revenue: This stress case also assumes that only 50 percent of the planned fare increases are implemented over the study period, as well as the 5 percent reduction in sales tax. Ridership projections are not altered. The Base Case shows a compound annual growth rate of farebox revenues of 7.96 percent. In this stress case, the growth rate falls to 7.31%. As a result projected farebox revenues decline by $459.4 million through 2035. As a result of both reduced sales tax and farebox revenues, the projected ending balance declines from $3,542.4 million to $1,473.1 million. In this combined stress case, debt service coverage hits a low of 2.8 times in 2017, but exceeds 3.0 times coverage thereafter. Fund balance begins to exceed the required balance starting in 2029, Figure 6.

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Stress Case #4 Modified Capital Program (Three LRT Corridors Only-North, Southeast and East End): The fourth stress case involves assuming that METRO builds only the North, Southeast, and East End LRT corridors. Scenario one: This scenario assumes that METRO builds only the North, Southeast, and East End corridors, and extends GMP beyond 2014 in the long-term. Updated sales tax projections were also used in this sensitivity, as derived from the current March 2011 Barton Smith regional forecast. (See METRO Forecasts of Economic Growth, Inflation, and Interest Rates: December 2010 and March 2011- Appendix K) The projected allocation to GMP in 2015 would be $155 million, growing to $456.2 million in 2035 or an accumulation of $5,944.3 million over this period. As discussed above, all other assumptions are held constant. The increase of $5,944.3 million of transfers to the GMP increases the ending fund balance from a balance of $3,542.4 million in the base case to a balance of $3,820.7 million, Figure 7. Scenario two: This scenario assumes that METRO builds only the North, Southeast, and East End corridors, while ending GMP in 2014. This scenario also assumes updated sales tax projections as derived from the current March 2011 Barton Smith regional forecast. All other assumptions are held constant. The cash balances achieved in this case remain positive and grow significantly starting in 2015 after all commercial paper is paid off. This results in an ending fund balance of $9,782.2 million by 2035.

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Figure 5: General Mobility Continuation Sensitivity

Source: Facility Provider Finance Team, Houston METRO Model, v-4, 2011

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Figure 6: Sales Tax and Farebox Sensitivity

Source: Facility Provider Finance Team, Houston METRO Model, v-4, 2011

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Figure 7: Modified Capital Program

D/S, NetRevs $1,200,000 $1,000,000 $3,500,000 $800,000 $600,000 $2,000,000 $400,000 $200,000 $500,000 $
2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 Year TotalDebtService NetRevenues FundBalance

SalesTaxandFareboxSensitivity
($000)

Fund Balance $4,500,000 $4,000,000

$3,000,000 $2,500,000

$1,500,000 $1,000,000

Source: Facility Provider Finance Team, Houston METRO Model, v-4, 2011

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Contingency Plan
In the scenarios where the minimum balance drops below that required for METRO working capital, adjustments would have to be made to METROs capital or operating plan to assure the plans viability. Options include: Reprioritize the projects scheduled for implementation beyond the North and Southeast corridors. Evaluate the potential to issue additional bonds beyond current plans. Lengthen project construction schedules to reduce demand for capital and debt in the early years. Consider METROs opportunity to establish additional streams of revenue. Reduce the amount of service provided, thereby reducing operating costs. If METRO sales tax revenues are lower than expected, it is likely because the Houston economy grew more slowly than expected. In May 2011, METRO will begin public meetings to initiate an update of the current long range plan. This process will consider demographic changes and changes in travel patterns in addition to consideration of the options listed above. The agency plans to update the plan every three years to ensure a strong correlation with localized changes. In addition, this will ensure that the transit element of the regional transportation plan is current.

FINANCIAL EVALUATION AND CONCLUSIONS

The foremost conclusion is that METRO has the financial capacity to build and operate the North Corridor LRT project and the entire METRO Solutions program. The combination of funding from METRO and FTA provide a solid basis for developing a financial plan for the North Corridor Light Rail Transit Project. METRO is experienced in managing projects of this nature and magnitude and is fully aware of the risks involved. The risk analysis in this plan demonstrates the sufficiency of local resources and commitment to manage these risks. LIMITATIONS OF THIS REPORT This conclusion is shown to be valid with the current assumptions on revenues and costs. Possible variations may require adjustment of METROs capital or operating implementation plan to slow the growth of expenses. Uncertainties associated with fluctuating economic conditions and other factors may result in METROs revenues and expenditures varying from the projections in the financial plan, and the variations could be material. The financial results presented in this report are intended to chart a general course of action regarding project implementation, transit service expansion, and initiation of activities to establish new funding and financing approaches, as well as approaches to the specified deviations in assumptions.

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