Asset Liability Management Report 4 Q 2014 Performance Indicators and Key Measures Cash, Investment and Debt Balances Restricted Cash and Investments $394.3 Unrestricted Cash and Investments 329.9 Total Cash and Investments $724.2 Current Debt Total Outstanding Debt $1,401 INVESTMENT PERFORMANCE INTEREST RATE RISK CREDIT RISK LIQUIDITY RISK Average Low Medium Low Interest earnings exceed budget. Performance returns are above benchmark for all portfolios. Future borrowing needs for capital projects is approximately $6.9B including the TIFIA loan. Agency is well diversified against counterparty credit risk. Investment portfolios are within policy parameters. Agency cash and investment balances are sufficient to meet all known funding and reserve requirements through March 2015. Key Measures Key Measures Key Measures Key Measures Interest earnings are $11.4M vs. $7.4M budget. Without unrealized gains and losses and the arbitrage rebate liability interest earnings were $361K above budget. The current average borrowing cost is below the assumed borrowing rate in the long-term financial model. All investment portfolios are in compliance with policy limits. Credit risk exposure is low. All reserves are fully funded to date. Book yield for unrestricted portfolio is 0.33% vs. State Pool at 0.10% and KC Pool at 0.51%. Annualized YTD total return for Capital Replacement is 3.66% vs. benchmark of 2.08%. Investment returns in the fourth quarter were lower than the assumed borrowing rate. ST has significant risks on its SILO deal guaranteed by AIG although AIG s financial standing has improved somewhat from 2009. Current liquidity exceeds policy requirement. 1
Market Environment 4 Q 2014 ALM Overview The Federal Open Market Committee ( FOMC ) met twice during the fourth quarter of 2014. The Fed noted that economic activity had continued to expand with solid job gains and a lower unemployment rate. As a result of the growth in economic activity the Fed ended its asset purchasing program in October. Significant declines in energy prices during the fourth quarter have led to declines in inflation which in turn have led to reduced consensus on the timing of a likely change in Fed policy. The U.S. economy grew at a rate of 5.0% in the third quarter as measured by Gross Domestic Product (GDP). Fourth quarter GDP is expected to be in excess of 2.3%. Economic growth in the later part of 2014 was stronger than previous forecasts. During the fourth quarter Treasury yields were mixed with a large decline in the 10-year note and a slight increase in two-year notes. Five-year notes decreased 11 basis points and the 10-year note decreased 32 basis points. The Federal Reserve stated that it is appropriate to keep the federal funds rate exceptionally low (in the 0.00% to 0.25% range) for a considerable time after the asset purchase program ended this past October. Yields on the two-year Treasury note began the quarter at 0.57% and ended the quarter at 0.67%. The highest yield achieved was 0.74% on December 23 and the lowest yield was 0.31% on October 15. Key Indicators Last Q This Q At what rate could ST borrow fixed-rate funds? 3.83% 3.70% At what rate could ST borrow variable-rate funds? 0.45% 0.44% At what rate could ST invest funds: For one year? 0.10% 0.22% For two years? 0.57% 0.67% For five years? 1.76% 1.65% For ten years? 2.49% 2.17% Credit Watch: ST is currently in "stand still" status on its Lease In/Lease Out agreement with AIG, awaiting further market and regulatory developments. AIG s financial standing has improved somewhat from 2009. 2
Cash, Investment and Debt Balances End 4Q 2014 ($M) End 3Q 2014 ($M) End 4Q 2013 ($M) Investment Yield (& trend vs. last Q.) Restricted Cash & Inv s 394.30 343.60 343.90 1.68% Unrestricted Cash & Inv s 329.90 414.20 517.50 0.34% Total Cash and Investments 724.20 757.80 861.40 1.07% Projected Next Bond Current Debt Future Debt Issue Total Debt ($M) 1,401 6,900* Q1 2015 Q2 2015 *Estimated future debt is based upon the 2015 draft Financial Plan and includes the TIFIA loan, authorized up to $1.33B. ALM Position ($M) Balance and Duration $ Value Interest Rate Duration Benchmark Assets (Cash/Investments) Restricted $ 394.30 1.68% 2.93 years 3.26 years Unrestricted 329.90 0.34% 0.13 years 0.64 years Liabilities (Debt) Fixed-Rate $(1,401.00) (4.02)% 19.8 years 18.2 years Variable-Rate $0.00 N/A 10.6 years Net Position $ (676.80) Net Interest 2013 Budget 2013 Actual 2014 Budget* 2014 YTD Actual Annual Debt Interest Expense $ (15.40) $ (32.70) $ (4.10) $ (1.40) Annual Interest earnings $ 5.60 $ (4.90) $ 7.40 $ 11.40 Net Interest $ (9.80) $ (37.60) $ 3.30 $ 10.00 *2014 budget is based upon the 2014 Adopted Budget. ** All interest expense is expected to be capitalized in 2015. 4 Q 2014 Investment Overview Strategy Key elements of the investment strategy focus on duration, yield curve and asset allocation selections. Staff monitors the portfolios duration exposure compared to the benchmark duration on a monthly basis and reviews duration prior to each investment purchase. The yield curve is reviewed to determine the best value within the maturity constraints of the portfolio before each investment purchase is made. A comparison of US Treasury rates to other allowable investments is conducted to ensure that value is added before taking on any additional risk. Earnings are expected to continue to decrease in the unrestricted portfolio due to the shortened duration of the portfolio in order to meet funding needs. The strategy for the Capital Replacement portfolio is to balance the yield earnings with the cash flow schedule and risk tolerance of the portfolio. The duration of the Capital Replacement portfolio moved closer to the benchmark in the fourth quarter when the 2014 contribution to the Capital Replacement portfolio was made. Securities were purchased with shorter maturities in part to bring duration closer to the benchmark and partly in anticipation of higher rates by the time these new purchases mature. At year end 2014 the actual duration of the portfolio was essentially identical to its benchmark. 3
Yield Current Quarter Activity There were no open market security purchases for the unrestricted portfolio during the fourth quarter. Interest revenue was reduced by $2.99M for an arbitrage rebate payment due to the IRS in May 2015. An additional $400K was paid to the IRS in November 2014 for arbitrage rebate on the 2009P-1 bonds. Purchased $51.6M US agency bonds for the Capital Replacement portfolio in the fourth quarter. Cash and Investments ($M) Book Net Average Benchmark Current Qtrly Yield Value Change Duration Duration Yield Change Unrestricted State Investment Pool 107.0 (4.5) 0.01 0.10% 0.00 Sweep account/uncleared checks 0.0 0.0 0.01 0.40% 0.00 King County Investment Pool 159.4 (49.8) 1.23 0.51% (0.02) ST Internal Investments 63.5 (30.0) 0.38 0.33% (0.07) Total Unrestricted 329.9 (84.3) 0.13 0.64 0.34% (0.05) Restricted Operating/Contingency (internal restricted) 51.1 (0.0) 0.01 0.10% 0.00 Capital Replacement (internal restricted) 305.7 50.6 3.22 2.91 1.80% (0.16) Emergency/Loss Reserve 7.9 0.0 0.01 0.10% 0.00 BNSF 8.0 0.0 0.01 0.05% 0.00 U-Link OCIP 1.9 (0.0) 7.71 N/A 3.68% 0.00 Prior Debt Service Reserve 16.9 0.1 8.11 N/A 5.15% 0.00 Parity Debt Service Reserve 2.8 (0.0) 7.28 N/A 4.97% 0.00 Total Restricted 394.3 50.7 2.93 N/A* 1.68% (0.11) Total 724.2 (33.6) 1.66 1.07% 0.05 *Restricted benchmarks are based upon projected cash flow needs. Calculating total benchmark duration for restricted investments is not applicable. Investment Performance Internal Portfolio vs. County & State Pools ST: 0.33% KCIP: 0.51% SIP: 0.10% Unrestricted ST Investments King County Pool State Pool Actual: $11.4 Million Budget: $7.4 Million $12,000,000 Investment Interest - Actual vs. Budget Budget Actual 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 2014 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 2014 4
Portfolio Composition State Inv Pool 33% Unrestricted $329.9M ST Inv's 19% Restricted $394.3M O & M and Emergency /Loss Reserve 15% Bond Reserves 5% BNSF, OCIP 3% KCIP 48% Cap Repl. 77% Asset Allocation Compliance Asset Class $ Par Value Percentage Allocation Policy Limit U.S. Treasuries 41,810,000 5.82% 100% U.S. Government Agencies 275,216,000 38.33% 75% Certificates of Deposit 0 0.00% 10% King County Investment Pool 159,443,912 22.20% 50% State Investment Pool 166,989,554 23.25% 100% Taxable Municipal/G.O. Bonds 74,640,000 10.39% 25% 4 Q 2014 Debt Overview Strategy Sound Transit will consider the diversification of its long-term liabilities in the context of its future borrowing needs. Debt Summary - Sound Transit entered into a Transportation Infrastructure Finance and Innovation Act (TIFIA) loan for up to the amount of $1.33B in January 2015. The interest rate on the loan is 2.38%. Sound Transit does not expect to draw on this loan until 2019. The 20-year MMD ended the quarter at 2.58%, down 20 basis points from the October 1 st rate of 2.78%. During the quarter the 20-year MMD reached a high of 2.82% on November 18. The low for the 20-year MMD was 2.44% and this occurred on October 15. The spread between the AAA MMD and the A MMD at the beginning of October was 56 basis points. As of December 30, the spread was 58 basis points. 5
Central Puget Sound Regional Transit Authority Summary of Outstanding Bonds Prior Bonds Amount All-in Financial Plan Series Issue Date Final Maturity Issue Size Outstanding Interest Cost Assumption 1999 1/6/1999 2/1/2028 $350,000,000 $303,790,000 4.97% 5.00% 2009P-1 9/29/2009 2/1/2016 $23,155,000 $23,155,000 2.52% 5.00% 2009P-2T (BABs) 9/29/2009 2/1/2028 $76,845,000 $76,845,000 3.31% 5.00% 2012P-1 8/22/2012 2/1/2028 $216,165,000 $188,900,000 2.62% 5.75% Total Prior Bonds $666,165,000 $592,690,000 3.91% Parity Bonds Amount All-in Financial Plan Series Issue Date Final Maturity Issue Size Outstanding Interest Cost Assumption 2005A 3/31/2005 11/1/2030 $422,815,000 $12,470,000 4.60% 5.00% 2007A 12/18/2007 11/1/2036 $450,000,000 $397,955,000 4.76% 5.00% 2009S-2T (BABs) 9/29/2009 11/1/2039 $300,000,000 $300,000,000 3.62% 5.00% 2012S-1 8/22/2012 11/1/2030 $97,545,000 $97,545,000 2.73% 5.75% Total Parity Bonds $1,270,360,000 $807,970,000 4.09% Total Prior & Parity Bonds $1,936,525,000 $1,400,660,000 4.02% Ratings as of 12/31/14 Prior Bonds Parity Bonds Moody's Aa1 Aa2 S&P AAA AAA Outstanding Par Breakdown by Tax Status Tax- Exempt $1,024M 73% Taxable BABs $377M 27% Outstanding Par Breakdown by Fixed and Variable Debt Fixed Rate, $1,401M, 100% 6
Asset Liability Management Report 4 Q 2014 Key for Performance Summary Above Average Average Below Average INVESTMENT PERFORMANCE Interest earnings forecast to exceed budget. ST Portfolio performance well above benchmark. Interest earnings forecast to meet budget. ST Portfolio performance at or near benchmark. Interest earnings forecast to be below budget. ST Portfolio performance below benchmark. Low Medium High INTEREST RATE RISK Change in interest rates will have less than $5M impact on ST financial plan over 5- year period. Change in interest rates will have less than $10M impact on ST financial plan over 5- year period. Change in interest rates will have less than $20M impact on ST financial plan over 5- year period. LIQUIDITY RISK All reserves and liquidity contingencies in place. Current liquidity contingency greater than policy minimum. All reserves and liquidity contingencies in place. Current liquidity contingency equal to policy minimum. Not all reserves and liquidity contingencies in place. CREDIT RISK No known credit risks that could materially impact ST balance sheet. Known credit risks could potentially materially impact ST balance sheet. Known credit risks are likely to materially impact ST balance sheet. 7
Glossary of Debt and Investment Terms Basis Point The smallest measure used in quoting yields on bonds and notes. One basis point is 0.01% of yield. For example, a bond's yield that changed from 3.50% to 3.00% would be said to have moved 50 basis points. Benchmark - A bond whose terms are used for comparison with other bonds of similar maturity. The global financial market typically looks to U.S Treasury securities as benchmarks. Book Value The amount at which an asset is carried on the books of the owner. The book value of an asset does not necessarily have a significant relationship to the market value of the security. Duration - The weighted maturity of a fixed-income investment's cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates. Federal Funds Rate The rate of interest at which Federal Funds are traded between banks. Federal Funds are excess reserves held by banks that desire to invest or lend them to banks needing reserves. The particular rate is heavily influenced through the open market operations of the Federal Reserve Board. Also referred to as the Fed Funds rate. General Obligation Bond (GO) - A municipal bond secured by the pledge of the issuer's full faith and credit, and backed by their taxing authority. Liquidity The ease and speed with which an asset can be converted into cash without a substantial loss in value. Local Government Investment Pool (LGIP) The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment. Market Price - For securities traded through an exchange, the last reported price at which a security was sold; for securities traded "over-the-counter," the current price of the security in the market. Par Value The nominal or face value of a debt security; that is, the value at maturity. Performance - An investment's return (usually total return), compared to a benchmark that is comparable to the risk level or investment objectives of the investment. TIFIA Loan Transportation Infrastructure Finance and Innovation Act loan with the United States Department of Transportation, acting by and through the Federal Highway Administrator. TIFIA loans are used to complement other sources of debt, resulting in a lower cost of funding than would be available in the capital markets. Total Return - Investment performance measure over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses. 8