$149,000,000 City of Cleveland, Ohio Airport System Revenue Bonds, Series 2000C (Non-AMT)

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1 REMARKETING CIRCULAR REMARKETING ISSUE Ratings: See RATINGS herein. BOOK ENTRY ONLY In the opinion of Squire, Sanders & Dempsey L.L.P., Bond Counsel, to be delivered on the date of conversion of the interest on the Series 2000C Bonds to fixed rates, under existing law (i) assuming continuing compliance with certain covenants and the accuracy of certain representations, interest on the Series 2000C Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and (ii) that interest, and any profit made on the sale, exchange or other disposition of the Series 2000C Bonds, are exempt from the Ohio personal income tax, the Ohio commercial activity tax, the net income base of the Ohio corporate franchise tax, and municipal and school district income taxes in Ohio. Interest on the Series 2000C Bonds may be subject to certain federal taxes imposed only on certain corporations, including the corporate alternative minimum tax on a portion of that interest. (For a more complete discussion of tax aspects, see Tax Matters.) $149,000,000 City of Cleveland, Ohio Airport System Revenue Bonds, Series 2000C (Non-AMT) The City of Cleveland, Ohio (the City ) is remarketing its Airport System Revenue Bonds, Series 2000C (the Series 2000C Bonds ), originally issued on February 27, The Series 2000C Bonds are being remarketed subsequent to a mandatory tender relating to a conversion of the interest rate on the Series 2000C Bonds from variable rates to fixed rates of interest extending to the final maturity of the Series 2000C Bonds (the Fixed Rates ). See CONVERSION OF SERIES 2000C BONDS. Following the conversion, interest on the Series 2000C Bonds will be payable semiannually on each January 1 and July 1, commencing January 1, The Series 2000C Bonds were issued and are secured under the Indenture on a parity with the City s outstanding Series 1997 Bonds, Series 2000A Bonds, Series 2000B Bonds, Series 2003 Bonds and any Additional Revenue Bonds that may be issued from time to time, including but not limited to the Series 2006 Bonds that the City expects to issue on or about November 16, The Series 2000C Bonds will be subject to optional redemption and mandatory redemption prior to maturity, as described herein. See DESCRIPTION OF THE SERIES 2000C BONDS Redemption Provisions. Book-entry interests in the Series 2000C Bonds will be available for purchase in minimum denominations of $5,000 or any integral multiple thereof. Owners of bookentry interests in the Series 2000C Bonds will not receive physical delivery of bond certificates. The Depository Trust Company, New York, New York ( DTC ), or its nominee, will receive all payments with respect to the Series 2000C Bonds from The Bank of New York Trust Company, N.A., successor trustee to J.P. Morgan Trust Company, National Association, Cleveland, Ohio (the Trustee ). DTC is required by its rules and procedures to remit such payments to participants in DTC for subsequent disbursement to the owners of book-entry interests. See Appendix F hereto. The payment of principal, premium, if any, and interest on the Series 2000C Bonds is secured by Airport Revenues and the Special Funds pledged by the Indenture. See SECURITY FOR THE SERIES 2000C BONDS. The Series 2000C Bonds are special obligations of the City. Payment of debt service charges on the Series 2000C Bonds is secured solely by the Airport Revenues and the Special Funds as provided in the Indenture. The Series 2000C Bonds do not constitute general obligations or a pledge of the faith, credit or taxing power of the City, the State of Ohio or any political subdivision thereof. No holder of any Series 2000C Bonds shall have the right to compel the exercise of the City s taxing power or to compel the City to pay debt service charges on the Revenue Bonds from any monies of the City other than the Airport Revenues and Special Funds. The scheduled payment of the principal of and interest on the Series 2000C Bonds when due is guaranteed under an insurance policy issued by Financial Security Assurance Inc. (the Bond Insurer ). See BOND INSURANCE POLICY herein and Appendix E hereto. MATURITY SCHEDULE Maturity Amount Interest Rate Yield CUSIP No. Maturity Amount Interest Rate Yield CUSIP No. 1/01/2014 $5,200, % 3.710% HZ6 1/01/2021* $7,300, % 4.020% JG6 1/01/2015 5,400, JA9 1/01/2022* 7,800, JH4 1/02/2016 5,700, JB7 1/01/2023* 8,200, JJ0 1/01/2017 6,000, JC5 1/01/2024* 8,600, JK7 1/01/2018* 6,300, JD3 1/01/2025* 9,200, JL5 1/01/2019* 6,500, JE1 1/01/2026* 9,600, JM3 1/01/2020* 7,000, JF8 $56,200, % Term Bonds Due January 1, 4.170% - CUSIP No JN1 * Priced to the Optional Redemption Date of January 1, 2017 at par. This cover page contains information for quick reference only. It is not a summary of this issue. Investors must read the entire Remarketing Circular to obtain information essential to making an informed investment decision. The Series 2000C Bonds are remarketed, subject to opinions on certain legal matters relating to their conversion and remarketing by Squire, Sanders & Dempsey L.L.P., and Wilkerson & Associates, Co., LPA, Co-Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the City by Robert J. Triozzi, Director of Law, and for the Remarketing Agents by Calfee, Halter & Griswold LLP. The Series 2000C Bonds will be remarketed to the Fixed Rates effective November 16, UBS INVESTMENT BANK BEAR STEARNS & CO. CABRERA CAPITAL MARKETS, INC. NATCITY INVESTMENTS, INC. SBK BROOKS INVESTMENT CORP. SEASONGOOD & MAYER, LLC Dated: November 2, 2006

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3 CITY OF CLEVELAND, OHIO AIRPORT SYSTEM MAYOR FRANK G. JACKSON PRESIDENT OF COUNCIL MARTIN J. SWEENEY COUNCIL AVIATION AND TRANSPORTATION COMMITTEE Chairman KEVIN KELLEY DEPARTMENT OF FINANCE Director Of Finance SHARON DUMAS DEPARTMENT OF PORT CONTROL Director Of Port Control RICKY D. SMITH DEPARTMENT OF LAW Director Of Law ROBERT J. TRIOZZI CO-BOND COUNSEL Squire, Sanders & Dempsey L.L.P. Cleveland, Ohio Wilkerson & Associates Co., LPA Cleveland, Ohio FINANCIAL ADVISORS Government Capital Management, LLC Tuxedo Park, New York Phoenix Capital Partners Philadelphia, Pennsylvania AIRPORT CONSULTANT Reed, Mandes & Associates, LLC San Francisco, California INDEPENDENT AUDITOR Auditor, State of Ohio Columbus, Ohio TRUSTEE The Bank of New York Trust Company, N.A. Cleveland, Ohio

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5 REGARDING THIS REMARKETING CIRCULAR This Remarketing Circular does not constitute an offering of any security other than the remarketing of the Series 2000C Bonds identified on the cover hereof. No person has been authorized by the City or the Remarketing Agents to give any information or to make any representation other than as contained in this Remarketing Circular. Any other information or representation should not be relied upon as having been given or authorized by the City. This Remarketing Circular does not constitute an offer to sell or the solicitation of an offer to buy, and there shall not be any sale of the Series 2000C Bonds by any person in any jurisdiction in which it is unlawful to make such offer, solicitation or sale. The information and expressions of opinion in this Remarketing Circular are subject to change without notice. Neither the delivery of this Remarketing Circular nor any sale made hereunder shall create, under any circumstances, or give rise to any implication that there has been no change in the affairs of the City since its date. Any statements made in this Remarketing Circular which involve opinions or estimates, whether expressly stated to be such, are made as such and are not representations of fact or certainty, and no representation is made that any of those statements have been or will be realized. Information in this Remarketing Circular that has been derived by the City from its officials and other sources is believed to be accurate and reliable. Information other than that obtained from official records of the City has not been independently confirmed or verified by the City. This Remarketing Circular contains statements relating to receipt of future revenues that are forward-looking statements as defined in the Private Securities Litigation Reform Act of When used in this Remarketing Circular, the words estimate, intend, expect, and similar expressions are intended to identify forwardlooking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Series 2000C Bonds have not been registered by the City under the Securities Act of 1933, as amended, or any state securities law, and will not be listed on any stock or other securities exchange. Neither the Securities and Exchange Commission nor any other federal, state or other governmental entity or agency will have passed upon the accuracy or adequacy of this Remarketing Circular or approved the Series 2000C Bonds for sale. The Remarketing Agents have provided the following sentence for inclusion in this Remarketing Circular. The Remarketing Agents have reviewed the information in this Remarketing Circular in accordance with, and as part of, their respective responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Remarketing Agents do not guarantee the accuracy or completeness of such information. Other than with respect to information concerning Financial Security Assurance Inc. (the Bond Insurer") contained under the caption BOND INSURANCE POLICY and in Appendix E SPECIMEN MUNICIPAL BOND INSURANCE POLICY herein, none of the information in this Remarketing Circular has been supplied or verified by the Bond Insurer and

6 the Bond Insurer makes no representation or warranty, express or implied, as to (i) the accuracy or completeness of such information; (ii) the validity of the Series 2000C Bonds; or (iii) the tax exempt status of the interest on the Series 2000C Bonds. In connection with this offering of the Series 2000C Bonds, the Remarketing Agents may overallot or effect transactions that stabilize or maintain the market prices of the Series 2000C Bonds at levels above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time, without prior notice. The prices and other terms of the offering and sale of the Series 2000C Bonds may be changed from time to time by the Remarketing Agents after the Series 2000C Bonds are released for sale, and the Series 2000C Bonds may be offered and sold at prices other than the initial offering prices, including sales to dealers, without prior notice. This Remarketing Circular including the front cover pages immediately preceding this page and all Appendices attached hereto is deemed final by the City for purposes of, and except for certain omissions as permitted by, Securities and Exchange Commission ( SEC ) Rule 15c2-12(b)(1) and is subject to completion, amendment or supplementation.

7 TABLE OF CONTENTS Page Part I REGARDING THIS REMARKETING CIRCULAR... 1 INTRODUCTION... 1 The City and the Airport System... 1 Description and Purpose of the Series 2000C Bonds... 2 Security for the Series 2000C Bonds... 2 Bond Insurance for Series 2000C Bonds... 3 Series 2006 Bonds and Outstanding Bonds... 3 Additional Revenue Bonds... 3 Airline Use Agreements... 3 Report of the Airport Consultant... 4 PLAN OF FINANCE... 4 Conversion of Series 2000C Bonds to Fixed Rates... 4 The Series 2006 Bonds and the Refunded Bonds... 5 SECURITY FOR THE SERIES 2000C BONDS... 5 Pledge of Airport Revenues... 5 Special Obligations...5 Rate Covenant... 5 Allocation of Airport Revenues to Special Funds... 6 Airline Use Agreements... 8 Bond Service Reserve Fund... 8 Renewal and Replacement Fund... 9 Improvement Fund and Surplus Fund... 9 Airport Development Fund... 9 Additional Revenue Bonds Special Revenue Bonds Remedies BOND INSURANCE POLICY DESCRIPTION OF THE SERIES 2000C BONDS Authorization General Description Transfer and Exchange of Series 2000C Bonds; Persons Treated as Owners Bond Insurer Deemed Owner of Series 2000C Bonds; Direction of Remedies Redemption Provisions Revision of Book-Entry System; Replacement Bonds i

8 LEGAL MATTERS REMARKETING OF THE SERIES 2000C BONDS CONTINUING DISCLOSURE AGREEMENTS The City Continental Airlines INDEPENDENT ACCOUNTANTS THE TRUSTEE RATINGS TAX MATTERS CONCLUDING STATEMENT Part II CERTAIN INFORMATION REGARDING THE CITY, THE AIRPORT SYSTEM AND THE AVIATION SECTOR... 1 Appendix A REPORT OF THE AIRPORT CONSULTANT... A-1 Appendix B CITY OF CLEVELAND, DEPARTMENT OF PORT CONTROL, DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS, REPORT ON AUDIT OF FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND B-1 Appendix C THE UNAUDITED FINANCIAL STATEMENTS OF THE CITY OF CLEVELAND, DEPARTMENT OF PORT CONTROL, DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, C-1 Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE... D-1 Appendix E SPECIMEN BOND INSURANCE POLICY...E-1 Appendix F BOOK-ENTRY ONLY SYSTEM...F-1 Appendix G FORM OF OPINIONS OF CO-BOND COUNSEL... G-1 ii

9 REMARKETING CIRCULAR Relating to $149,000,000 City of Cleveland, Ohio Airport System Revenue Bonds, Series 2000C (Non-AMT) INTRODUCTION The City of Cleveland, Ohio (the City ) is furnishing this Remarketing Circular to provide certain information in connection with the remarketing by the City of its $149,000,000 aggregate principal amount of Airport System Revenue Bonds, Series 2000C (Non-AMT) (the Series 2000C Bonds ). All terms, unless otherwise defined herein, shall have the meanings given to them in Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. The Series 2000C Bonds are special obligations of the City. The payment of principal, premium, if any, and interest on the Series 2000C Bonds is secured by and payable solely from the revenues and other monies assigned and pledged by the Indenture. In addition to converting the interest rates of the Series 2000C Bonds from variable rates to Term Rates (as defined in the Fourth Supplemental Trust Indenture, dated as of February 1, 2001, as supplemented by the Seventh Supplemental Trust Indenture, dated October 17, 2006) extending to the final maturity of the Series 2000C Bonds (hereinafter such Term Rates are referred to as the Fixed Rates ), the City expects to issue its Airport System Revenue Bonds, Series 2006 (the Series 2006 Bonds ) to advance refund certain outstanding Airport System Revenue Bonds consisting of designated maturities of the Series 1997B Bonds and the Series 2000A Bonds. See Series 2006 Bonds and Outstanding Bonds, below. An Official Statement with respect to the Series 2006 Bonds can be obtained from the City. This Remarketing Circular should be considered in its entirety and no one subject considered less important than another by reason of location in the text. Descriptions of instruments, including, without limitation, the Series 2000C Bonds, the Indenture and the Use Agreements, are qualified by reference to the entire text of those instruments, and reference should be made to laws, reports or documents referred to for more complete information regarding their content. Copies of the Indenture and the Use Agreements are available at the designated office of The Bank of New York Trust Company, N.A. (the Trustee ) at 250 West Huron Road, 4 th Floor, Cleveland, Ohio References to provisions of Ohio law or of the Ohio Constitution are references to such provisions in effect on the date hereof. Those provisions may be amended, repealed or supplemented. The City and the Airport System The City is a municipal corporation and political subdivision of the State of Ohio (the State ). The City s Department of Port Control operates Cleveland Hopkins International Airport (the Airport ) and Burke Lakefront Airport ( Burke ), which together comprise the Airport System (the Airport System ). The Airport is the primary commercial service airport for northeastern Ohio. For detailed information relating to the City and the Airport System, see

10 Part II - CERTAIN INFORMATION REGARDING THE CITY, THE AIRPORT SYSTEM AND THE AVIATION SECTOR and Appendix A - REPORT OF THE AIRPORT CONSULTANT attached hereto. The Airport System is owned and operated by the City and consists of the Airport and Burke, a general aviation reliever airport for the Airport. In 2005, the Airport was the 36 th busiest airport in the U.S. with 11,463,391 total passengers (enplaned and deplaned) according to data reported by Airports Council International/North America ( ACI ). The Airport primarily serves domestic origin and destination and domestic connecting passengers. The Airport is a connecting hub in the route system of Continental Airlines. Continental Airlines and its regional affiliates, Continental Express and Continental Connection, together accounted for 60.9 percent of total enplaned passengers at the Airport in Description and Purpose of the Series 2000C Bonds The City is remarketing the Series 2000C Bonds subsequent to a mandatory tender of the Series 2000C Bonds as a result of the conversion of the interest rates from variable rates to the Fixed Rates. The City originally issued the Series 2000C Bonds on February 27, 2001, to provide funds to (i) finance certain improvements to the Airport, (ii) pay the cost of issuance of the Series 2000 Bonds, (iii) fund capitalized interest on the Series 2000 Bonds, (iv) make the required deposit to the Bond Service Reserve Fund and (v) make the required deposit to the Renewal and Replacement Fund. Following the conversion and remarketing, the Series 2000C Bonds will mature on the dates and bear interest at the rates set forth on the cover of this Remarketing Circular. Interest on the Series 2000C Bonds following the conversion to the Fixed Rates will be payable on each January 1 and July 1, commencing January 1, Security for the Series 2000C Bonds In the Indenture, the City pledges the Airport Revenues and the monies in the Special Funds to the payment of the debt service charges on all Revenue Bonds issued under the Indenture, including the Outstanding Bonds described below, the Series 2000C Bonds and any other Additional Revenue Bonds (as defined herein) that the City may issue in the future. The Series 2000C Bonds are special obligations of the City and do not constitute general obligations or a pledge of the faith, credit or taxing power of the City, the State or any political subdivision thereof. The Series 2000C Bonds are payable on a parity with the Outstanding Bonds and any Additional Revenue Bonds outstanding under the Indenture, and are secured by a lien on the Airport Revenues and the Special Funds as provided in the Indenture. Holders of the Series 2000C Bonds do not have the right to compel taxation in any form or to compel the City to pay debt service charges on the Series 2000C Bonds from any monies of the City other than Airport Revenues and the Special Funds. Neither the land and improvements comprising the Airport System nor any other property of the City, other than the Airport Revenues and the Special Funds, have been pledged to secure the payment of the Series 2000C Bonds. 2

11 Bond Insurance for Series 2000C Bonds The scheduled payment of principal of and interest on the Series 2000C Bonds when due is guaranteed by a Municipal Bond Insurance Policy (the Bond Insurance Policy ) issued concurrently with the original delivery of the Series 2000C Bonds by Financial Security Assurance Inc. (the Bond Insurer ). See BOND INSURANCE POLICY. Series 2006 Bonds and Outstanding Bonds On November 2, 2006, the City authorized the sale of $107,750,000 Airport System Revenue Bonds, Series 2006A (Non-AMT) and $11,010,000 Airport System Revenue Bonds, Series 2006B (Taxable) for the purpose of refunding certain maturities of the outstanding Airport System Revenue Bonds, Series 2000A (Non-AMT) and the Airport System Revenue Bonds, Series 1997B (Taxable) (together, the Refunded Bonds ). After delivery of the Series 2006 Bonds and the refunding of the Refunded Bonds, the following Bonds, in addition to the Series 2006 Bonds, will be outstanding under the Indenture and secured by the Airport Revenues: $223,610,000 aggregate principal amount of Airport System Revenue Bonds, Series 1997A, Series 1997B, Series 1997C, Series 1997D and Series 1997E (together, the Series 1997 Bonds ), $461,755,000 aggregate principal amount of Airport System Revenue Bonds, Series 2000A, Series 2000B and Series 2000C (together, the Series 2000 Bonds ) and $139,250,000 aggregate principal amount of Airport System Revenue Bonds, Series 2003A, Series 2003B and Series 2003C (together, the Series 2003 Bonds ) (collectively, the Outstanding Bonds ). The City will issue the Series 2006 Bonds, concurrently with the conversion to the Fixed Rates and remarketing of the Series 2000C Bonds, to refund certain maturities of the Series 1997B Bonds and the Series 2000A Bonds. For a description of other Airport obligations, including interest rate hedge agreements entered into with respect to certain of the Series 2003 Bonds, see Part II - CERTAIN INFORMATION REGARDING THE CITY, THE AIRPORT SYSTEM AND THE AVIATION SECTOR - AIRPORT FINANCIAL INFORMATION Outstanding Bonds and Other Obligations. Additional Revenue Bonds Upon compliance with certain conditions set forth in the Indenture and the Use Agreements (defined below), the City may issue additional series of Revenue Bonds payable on a parity with the Series 2000C Bonds and the Outstanding Bonds with respect to Airport Revenues and the Special Funds (the Additional Revenue Bonds ). See SECURITY FOR THE SERIES 2000C BONDS Additional Revenue Bonds. Under the Indenture and the Use Agreements (defined below), the City also may issue or incur Subordinated Indebtedness. Debt service charges on Subordinated Indebtedness are payable from and secured by Airport Revenues on a basis subordinate to the payment of debt service charges on Revenue Bonds. Airline Use Agreements The Agreement and Lease, as supplemented and amended by Amendment No. 1 effective January 1, 2006 (together, the Use Agreements ), governs use of the Airport by airlines which are parties to such Use Agreements (the Signatory Airlines ). Amendment No. 1 extended the term of the Use Agreements to December 31, 2015, modified certain aspects of the 3

12 rates and charges methodology and provides that the Signatory Airlines have preferential rather than exclusive rights to use the Airport. Continental Airlines and Southwest Airlines, which together constituted 70.9 percent of the total enplaned passengers at the Airport in 2005, have each signed Amendment No. 1. The City is currently negotiating with, and expects additional airlines, including United Airlines, which accounted for 5.5 percent of total enplaned passengers in 2005, to sign Amendment No. 1 in the near future. Any airline which fails to sign Amendment No. 1 will be subject to significantly higher rates than are charged to Signatory Airlines to use the Airport, which rates will be charged retroactively to January 1, For additional information relating to the Use Agreements, see SECURITY FOR THE SERIES 2000C BONDS Airline Use Agreements, Part II - CERTAIN INFORMATION REGARDING THE CITY, THE AIRPORT SYSTEM AND THE AVIATION SECTOR - AIRPORT FINANCIAL INFORMATION Principal Sources of Revenues, and Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. Report of the Airport Consultant The City has retained Reed, Mandes & Associates, LLC as its Airport Consultant. The Report of the Airport Consultant, dated October 26, 2006, issued in connection with the conversion of the Interest Rate on the Series 2000C Bonds to a Term Rate Period and the issuance of the Series 2006 Bonds, is included herein as Appendix A and should be read in its entirety for a complete discussion of historical and forecast Airport Revenues, Operating Expenses and net revenues, and the assumptions and rationale underlying the forecasts. The Report of the Airport Consultant reflects the estimated principal amount of the Series 2006 Bonds to be issued and the estimated debt service charges on the Series 2000C Bonds and the Series 2006 Bonds. The Airport Consultant has concluded that the Additional Bonds Test (as defined herein) in connection with the issuance of the Series 2006 Bonds is met for Fiscal Years 2007 through See Appendix A - REPORT OF THE AIRPORT CONSULTANT. PLAN OF FINANCE Conversion of Series 2000C Bonds to Fixed Rates The Series 2000C Bonds were originally issued, together with the Series 2000A Bonds and the Series 2000B Bonds, under the Original Indenture, as supplemented and amended by supplemental indentures, including the Fourth Supplemental Indenture. Since their issuance, the Series 2000C Bonds have borne interest at variable rates determined as provided in the Fourth Supplemental Indenture. On October 17, 2006, in connection with the conversion of the interest rate from a Weekly Rate to a Daily Rate (as defined in the Fourth Supplemental Indenture), various provisions of the Series 2000C Bonds and the Fourth Supplemental Indenture were amended, with the requisite consents of Holders and others, as provided in the Seventh Supplemental Indenture. Those amendments permit the Series 2000C Bonds to be remarketed at a premium over their par amounts, modify the optional redemption provisions, and change the interest payment dates. On November 1, 2006, the City exercised its option to convert, on November 16, 2006, the interest rates on all of the Series 2000C Bonds from Daily Rates to the Fixed Rates to their final maturity date (2031). On November 2, 2006, the Series 2000C Bonds were remarketed at the Fixed Rates shown on the cover of this Remarketing Circular. All of the Series 4

13 2000C Bonds bearing interest at the Daily Rates will be purchased on November 16, 2006 upon mandatory tender by the Holders from the remarketing proceeds. The Series 2006 Bonds and the Refunded Bonds Concurrently with conversion on November 16, 2006 of the interest rates on the Series 2000C Bonds from variable rates to the Fixed Rates, the City will deliver the Series 2006 Bonds for the purpose of advance refunding the Refunded Bonds. See INTRODUCTION - Series 2006 Bonds and Outstanding Bonds, above. Pledge of Airport Revenues SECURITY FOR THE SERIES 2000C BONDS In the Indenture, the City has pledged and granted to the Trustee a first lien on the Airport Revenues and the Special Funds as security for the payment of the debt service charges on all Revenue Bonds issued and outstanding under the Indenture. Airport Revenues means generally all rentals, charges, landing fees, use charges and parking and concession revenues received by the City in connection with the City s operation of the Airport System. Passenger Facility Charges ( PFCs ) received by the City are not included in Airport Revenues. For a discussion of PFCs, see Part II - CERTAIN INFORMATION REGARDING THE CITY, THE AIRPORT SYSTEM AND THE AVIATION SECTOR - CAPITAL IMPROVEMENT PROGRAM Sources of Funds for Capital Improvement Program. Among the Special Funds established by the Indenture is the Bond Service Reserve Fund that is to be used for the payment of the maturing principal of and interest on the Revenue Bonds secured thereby (including the Series 2000C Bonds), when monies in the Bond Service Fund and certain other Special Funds are insufficient therefor. See Bond Service Reserve Fund below. Special Obligations The Series 2000C Bonds are special obligations of the City and do not constitute general obligations or a pledge of the faith, credit or taxing power of the City, the State or any political subdivision thereof. The Series 2000C Bonds are payable on a parity with the Outstanding Bonds and any Additional Revenue Bonds outstanding under the Indenture, and are secured by a lien on the Airport Revenues and the Special Funds as provided in the Indenture. Holders of the Series 2000C Bonds do not have the right to compel taxation in any form or to compel the City to pay debt service charges on the Series 2000C Bonds from any monies of the City other than Airport Revenues and the Special Funds. Neither the land and improvements comprising the Airport System nor any other property of the City, other than Airport Revenues and the Special Funds, has been pledged to secure the payment of the Series 2000C Bonds. Rate Covenant In the Indenture, the City covenants to prescribe and to charge such rates, fees and charges for the use of the Airport System to produce in each Fiscal Year Airport Revenues, together with Other Available Funds, less Operating Expenses, at least equal to 125 percent of the amount maturing and becoming due in such Fiscal Year for the payment of principal of and interest on all outstanding Revenue Bonds (the Rate Covenant ). (An alternative coverage ratio 5

14 applies if there are General Obligation Bonds outstanding for the Airport System. Currently there are none.) See Appendix D -- SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE for definitions of Airport Revenues, Other Available Funds and Airport Expenses and for a description of the assumptions to be made for computing debt service charges with respect to Revenue Bonds that bear interest at variable rates. Allocation of Airport Revenues to Special Funds Under the Indenture, all Airport Revenues are to be paid directly to the Trustee and deposited by the Trustee in the Revenue Fund, one of the Special Funds created by the Indenture and held by the Trustee. Beginning on the first day of each month, the Trustee transfers Airport Revenues in the Revenue Fund to the other Special Funds as follows (see also Figure 1. Flow of Funds, below): First, to the Bond Service Fund to provide for the payment of debt service charges on outstanding Revenue Bonds and to pay periodic payments under Hedge Agreements. Second, to the Bond Service Reserve Fund to maintain a reserve for debt service equal to the maximum annual debt service to be paid on all outstanding Revenue Bonds secured by the Bond Service Reserve Fund. Third, to the Operating and Maintenance Fund to pay all Operating Expenses of the Airport System and to maintain a working capital reserve. Fourth, to the Subordinated Debt Service Fund to provide for the payment of debt service charges on any Subordinated Indebtedness and any amount owed on early termination of a Qualified Hedge Agreement. Fifth, to the General Obligation Debt Service Fund to provide for the payment of debt service charges on any General Obligation Debt outstanding with respect to the Airport System. (The City has no General Obligation Debt outstanding with respect to the Airport System.) Sixth, to the Renewal and Replacement Fund to maintain a reserve equal to approximately 1.65 percent of the aggregate original principal amount of each issue of Revenue Bonds (excluding refunding bonds). Seventh, to the Improvement Fund and Surplus Fund in equal amounts to be used for any lawful Airport System purpose. The expenditures in the Improvement Fund may be disapproved by a Majority in Interest (as defined in the Use Agreements) of the Signatory Airlines. On or before December 31, 2006, (i) all monies on deposit in the Improvement Fund in excess of $350,000 shall be transferred to the Coverage Account of the Revenue Fund, (ii) from the moneys then on deposit in the Surplus Fund there shall be transferred to the Coverage Account of the Revenue Fund the amount of $2,340,000, and (iii) the balance of moneys in the Surplus Fund in excess of $350,000 shall be transferred to the Airport Account of the Airport Development Fund. After December 31, 2006, the Improvement Fund and the Surplus Fund shall each contain balances of no less than $350, Eighth, on and after January 1, 2007, to the Airport Development Fund after making the deposits provided in the funds above, annually the amount of $4,250,000 to the Airport Account of the Airport Development Fund and annually the amount of $4,250,000 to the Airline Account of the Airport Development Fund, in equal monthly installments. Money in the Airport Development Fund may be used for any Airport System purpose. Money in the Airport Account may be used at the discretion of the City. Money in the Airline Account may be used at the discretion of a Majority In Interest of the Signatory Airlines, including the reduction of airline rates and charges. The annual deposits to the Airport Account and the Airline Account shall be adjusted beginning January 1, 2008 based on an index composed of both changes in annual enplaned passenger levels and the Consumer Price Index. 1 See Improvement Fund and Surplus Fund, below. 6

15 Figure 1. Flow of Funds DEPOSIT ALL REVENUES OF THE AIRPORT REVENUE FUND FUND All All Airport Revenues deposited within within Coverage Account Contains certain Other Available Funds taken into account in the Rate Covenant BOND BOND SERVICE SERVICE FUND FUND Pay annual debt service requirement on all outstanding Revenue Bonds Pay annual debt service requirement on all outstanding Airport Revenue Bonds and periodic payments under Hedge Agreements BOND BOND SERVICE RESERVE FUND FUND Maintain a reserve equal equal to to maximum Maximum annual Annual debt Debt service Service on on all all outstanding o Airport Revenue Revenue Bonds Bonds OPERATING AND AND MAINTENANCE FUND Pay Pay all all O&M O & M expenses expenses of of the the Airport Airport System, System, maintain maintain a a working working apital c reserve reserve not not to to exceed exceed one-quarter one-quarter - of of the the gross gross expenses expenses in in the the Annual Annual Budget, Budget, and and fund fund certain cer tain capital capital improvements. improvements SUBORDINATED DEBT SERVICE FUND Pay annual debt service requirement on all outstanding Subordinated Indebtedness Pay annual and debt any service payments requirement on early and/or termination charges of Qualified on all outsta Hedge nding Subordinated Agreements Indebtedness 4 GENERAL OBLIGATION DEBT SERVICE FUND Pay annual debt service requirement on all outstanding General Obligation Bonds issued for Airport System Improvements bligation Bonds RENEWAL AND AND REPLACEMENT FUND Maintain Maintain a reserve a reserve based based on on outstanding outstanding principal Bond Principal. of Revenue Used Bonds. for rebuilding, Used for rebuilding, reconstructing, reconstructing, repairing, repairing, altering, altering, replacing replacing and renewing and renewing the Airport the System Airport System. IMPROVEMENT FUND Used for any lawful Airport System purpose purpose (Subject to disapproval by a Majority in Interest of Signatory Airlines) SURPLUS FUND Used Used for for any any lawful lawful Airport System purpose AIRPORT DEVELOPMENT FUND Airline Account Used for any lawful Airport System purpose (Subject to disapproval by a Majority in Interest of Signatory Airlines) Airport Account Used Used for for any any lawful Airport System purpose 7

16 Airline Use Agreements Continental Airlines and Southwest Airlines have each executed Use Agreements with the City for the use of the Airport. The City expects other airlines to execute Use Agreements in the near future. In the event that any air carrier fails to execute a Use Agreement, it will be considered non-signatory, and as such, will be required to pay additional fees for the use of the Airport, retroactive to January 1, The Use Agreements establish procedures for the annual review and adjustment of the terminal building space rental rates and landing fees paid by the Signatory Airlines. The Use Agreements provide for a cost-center residual cost formula for calculating rental fee rates and an Airport System residual cost formula for calculating landing fee rates. Under these formulas, terminal complex rental rates and landing fee rates are adjusted annually to produce Airport Revenues sufficient to meet the Rate Covenant discussed above, timely pay debt service charges on all Revenue Bonds, periodic payments under Hedge Agreements, and debt service on Subordinated Indebtedness, and provide for continued safe and efficient operation of the Airport. The Use Agreements require that such fees and rentals be deposited with the Trustee for application in accordance with the terms of the Indenture. In addition, if at any time during a Fiscal Year Airport Revenues are insufficient to cover the costs of operating the Airport System, the City may, upon providing 90 days notice to the Signatory Airlines, increase landing fees. The Use Agreements expire on December 31, There is no assurance that future leases will contain airline fees and charges provisions similar to those contained in the current Use Agreements. However, the expiration or termination of the Use Agreements prior to the maturity of the Outstanding Bonds does not release the City from its obligations under the Indenture, and the City reasonably expects it will be able to pay debt service charges on the Revenue Bonds (see Bond Service Reserve Fund, below). For more information on the terms of the Use Agreements, see Part II - CERTAIN INFORMATION REGARDING THE CITY, THE AIRPORT SYSTEM AND THE AVIATION SECTOR - AIRPORT FINANCIAL INFORMATION Principal Sources of Revenues, Appendix A - REPORT OF THE AIRPORT CONSULTANT - The Airline Agreements and Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. Bond Service Reserve Fund The Indenture requires that the balance in the Bond Service Reserve Fund equal the Required Bond Service Reserve. Under the Indenture, the Required Bond Service Reserve is defined as an amount equal to the maximum annual debt service charges on all Revenue Bonds secured by the Bond Service Reserve Fund. On November 1, 2006, the Required Bond Service Reserve was $68,427, Upon the issuance of the Series 2006 Bonds and the remarketing of the Series 2000C Bonds, the Required Bond Service Reserve will be $68,214, due to the conversion of the Series 2000C Bonds to the Fixed Rates. The excess amount in the Bond Service Reserve Fund will be transferred to the Bond Service Fund and used to pay debt service on the Series 2000C Bonds. All series of Outstanding Bonds, including the Series 2000C Bonds, are secured by the Bond Service Reserve Fund. Monies in the Bond Service Reserve Fund shall be used only for the purpose of payment when due of principal of or interest on the Revenue Bonds secured thereby when the monies in the Bond Service Fund and other Special Funds are 8

17 insufficient therefor. Amounts withdrawn from the Bond Service Reserve Fund must be restored from the first receipts of Airport Revenues available after the required deposits have been made to the Bond Service Fund as provided in the Indenture. The Indenture permits any supplemental indenture providing for the issuance of any series of Additional Revenue Bonds to provide that such series of Revenue Bonds be secured by a separate reserve fund or, alternatively, if the City maintains a rating on outstanding Revenue Bonds determined without regard to the issuance of credit enhancement (an underlying rating), that no reserve fund be established for that particular series of Revenue Bonds. Any Additional Revenue Bonds secured by a separate reserve fund or not secured by a reserve fund will not have a lien on the Bond Service Reserve Fund, and debt service charges on such Additional Revenue Bonds will not be included in computing the Required Bond Service Reserve. Subject to certain restrictions and conditions set forth therein, the Indenture also permits the City to satisfy the Required Bond Service Reserve in whole or in part with the deposit of a surety bond, insurance policy, letter of credit or other instrument, in lieu of a cash deposit. The City has funded the Required Bond Service Reserve attributable to the Series 2003C Bonds with a surety bond issued by Ambac Assurance Corporation in the amount of $4,933, For additional information relating to the Bond Service Reserve Fund, see Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. Renewal and Replacement Fund As of October 1, 2006, there was on deposit in the Renewal and Replacement Fund an amount equal to $17,969,641.17, sufficient to satisfy the then-required Renewal and Replacement Fund Payment. No deposit to the Renewal and Replacement Fund is required in connection with the issuance of Additional Revenue Bonds for the purpose of refunding Outstanding Revenue Bonds. Improvement Fund and Surplus Fund As of October 1, 2006, the unencumbered cash balances in the Improvement Fund and the Surplus Fund met the minimum requirements set forth in the Indenture. For additional information relating to the Improvement Fund and the Surplus Fund, see Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. Airport Development Fund The Airport Development Fund was created in connection with Amendment No. 1 to the Agreement and Lease. The Airport Development Fund contains two accounts, the Airport Account and the Airline Account. Each Account will be funded in 2007 in the amount of $4,250,000 from airline rates and charges. Beginning January 1, 2008, annual deposits to the Airport Account and Airline Account shall be adjusted through the date that the annual deposits to each Account first equal or exceed $5,000,000, as provided in the Use Agreements. After such time as annual deposits equal or exceed $5,000,000, such deposits shall be increased (or decreased) as computed in accordance with the Use Agreements, provided, however, that the yearly required deposit shall not be reduced below $5,000,000. Money in the Airport Account may be spent by the City at its discretion for any Airport System purpose. Money in the Airline Account may be spent by the City at the discretion of a Majority In Interest of the Signatory 9

18 Airlines for any Airport System purpose. However, no prior consent is required for the transfer of money from either Account to another Special Fund. Subject to certain provisions of the Use Agreements, the Signatory Airlines and the City may agree, in connection with the preparation of the Annual Reports (as defined in the Use Agreements) for any Additional Term (as defined in the Use Agreements), that amounts on deposit in the Airline Account and/or the Airport Account of the Airport Development Fund will be made available as Other Available Funds in the calculation of the landing fee for that Additional Term to aid in the reduction of Airport rates and charges. Amounts to be made available as Other Available Funds shall be transferred to the Coverage Account of the Revenue Fund established in the Indenture. In the event that the amount in the Coverage Account of the Revenue Fund exceeds 25 percent of the maximum annual debt service charges on all outstanding Revenue Bonds occurring in any subsequent Fiscal Year, the amount in excess of that 25 percent shall be transferred to the Airport Development Fund, unless the City and the Signatory Airlines otherwise agree in connection with the preparation of the Annual Reports. Any monies to be so transferred from the Coverage Account of the Revenue Fund to the Airport Development Fund shall be transferred to the Airport Account and the Airline Account in amounts proportionate to any transfers made to the Coverage Account from the Surplus Fund, Improvement Fund and the Accounts of the Airport Development Fund. Additional Revenue Bonds Upon compliance with certain conditions set forth in the Indenture and subject to the Majority In Interest procedures under the Use Agreements, the City may issue at one or more times Additional Revenue Bonds secured on a parity with the Series 2000C Bonds and the other Outstanding Bonds with respect to Airport Revenues and the Special Funds. See Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. The Outstanding Bonds are described above in INTRODUCTION - Outstanding Bonds. The City may issue Additional Revenue Bonds only for the purposes permitted by the Indenture, which include providing funds to make additional enlargements, replacements, extensions and improvements to the Airport System, or for any other proper Airport System purpose for which Revenue Bonds may be legally issued. The Use Agreements require that the City submit to the Signatory Airlines for review the proposed capital improvements which are to be funded through rentals, fees and charges to be imposed on the Signatory Airlines. If the proposed capital improvements are not disapproved by a Majority In Interest of the Signatory Airlines, the cost of the improvements (including debt service charges on Additional Revenue Bonds) may be included in airline rentals, fees and charges. Prior to issuing any Additional Revenue Bonds, the Trustee must receive from the City, among other things, a written report of the Airport Consultant, to the effect that (a) the projected Airport Revenues, together with Other Available Funds, during each of the first, second and third complete Fiscal Years immediately following the issuance of the Additional Revenue Bonds, less the projected Operating Expenses during each of such Fiscal Years, are at least equal to 125 percent of the debt service charges on all outstanding Revenue Bonds, including the Additional Revenue Bonds proposed to be issued, due during each of such Fiscal Years, less, in each case, such debt service charges on any Revenue Bonds which are to be redeemed or retired with the proceeds of such Additional Revenue Bonds, and (b) the projected 10

19 Airport Revenues, together with Other Available Funds, during each of the fourth and fifth complete Fiscal Years immediately following the issuance of the Additional Revenue Bonds, less the projected Operating Expenses during each of such Fiscal Years, are at least equal to 125 percent of the maximum annual debt service charges on all outstanding Revenue Bonds, including the Additional Revenue Bonds proposed to be issued, due in any subsequent Fiscal Year, less, in each case, such debt service charges on any Revenue Bonds which are to be redeemed or retired with the proceeds of such Additional Revenue Bonds (the Additional Bonds Test ). An alternative debt service coverage ratio applies to the Additional Bonds Test if there is General Obligation Debt of the City outstanding for Airport System purposes. The City currently has no outstanding General Obligation Debt for Airport System purposes. See REPORT OF THE AIRPORT CONSULTANT below, Appendix A REPORT OF THE AIRPORT CONSULTANT and Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. Special Revenue Bonds Under certain circumstances, the City may issue at one or more times Special Revenue Bonds for the purpose of financing Special Facilities of the Airport System. The Indenture provides that Special Revenue Bonds will not be payable from or secured by Airport Revenues or the Special Funds and will not be issued under or secured by the Indenture. See Part II - CERTAIN INFORMATION REGARDING THE CITY, THE AIRPORT SYSTEM AND THE AVIATION SECTOR - AIRPORT FINANCIAL INFORMATION Outstanding Bonds and Other Obligations. Remedies For a discussion of the remedies of the holders of the Series 2000C Bonds and the Trustee upon the occurrence of an Event of Default under the Indenture, including the rights of Bond Insurers and Liquidity Providers to act in place of the holders of the Outstanding Bonds, see the discussion under Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. The Indenture provides that holders of Revenue Bonds and the Trustee will have the right to accelerate the entire outstanding principal amount of Revenue Bonds upon the occurrence of certain Events of Default, subject to the consent of each Bond Insurer with respect to the acceleration of any Revenue Bonds it has insured. For a more detailed discussion of the terms of the Indenture, see Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. BOND INSURANCE POLICY The information in this section concerning the Bond Insurance Policy and the Bond Insurer has been obtained from the Bond Insurer, and neither the City nor the Remarketing Agents make any representation or warranty of, or otherwise take responsibility for, its accuracy or completeness. See Appendix E hereto for a specimen of the Bond Insurance Policy. 11

20 Bond Insurance Policy Concurrently with the issuance of the Series 2000C Bonds on February 27, 2001, Financial Security Assurance Inc. (for purposes of this Section, Financial Security ) issued the Bond Insurance Policy. The Bond Insurance Policy guarantees the scheduled payment of principal of and interest on the Series 2000C Bonds when due as set forth in the form of the Bond Insurance Policy included as Appendix E to this Remarketing Circular. The Bond Insurance Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Financial Security Assurance Inc. Financial Security is a New York domiciled financial guaranty insurance company and a wholly owned subsidiary of Financial Security Assurance Holdings Ltd. ( Holdings ). Holdings is an indirect subsidiary of Dexia, S.A., a publicly held Belgian corporation, and of Dexia Credit Local, a direct wholly-owned subsidiary of Dexia, S.A. Dexia, S.A., through its bank subsidiaries, is primarily engaged in the business of public finance, banking and asset management in France, Belgium and other European countries. No shareholder of Holdings or Financial Security is liable for the obligations of Financial Security. At June 30, 2006, Financial Security s combined policyholders surplus and contingency reserves were approximately $2,514,378,000 and its total net unearned premium reserve was approximately $1,937,740,000 in accordance with statutory accounting principles. At June 30, 2006, Financial Security s consolidated shareholder s equity was approximately $2,889,984,000 and its total net unearned premium reserve was approximately $1,556,639,000 in accordance with generally accepted accounting principles. The consolidated financial statements of Financial Security included in, or as exhibits to, the annual and quarterly reports filed after December 31, 2005 by Holdings with the Securities and Exchange Commission are hereby incorporated by reference into this Remarketing Circular. All financial statements of Financial Security included in, or as exhibits to, documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this Remarketing Circular and before the termination of the remarketing of the Series 2000C Bonds shall be deemed incorporated by reference into this Remarketing Circular. Copies of materials incorporated by reference will be provided upon request to Financial Security Assurance Inc.: 31 West 52nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) ). The Bond Insurance Policy does not protect investors against changes in market value of the Series 2000C Bonds, which market value may be impaired as a result of changes in prevailing interest rates, changes in applicable ratings or other causes. Financial Security makes no representation regarding the Series 2000C Bonds or the advisability of investing in the Series 2000C Bonds. Financial Security makes no representation regarding the Remarketing Circular, nor has it participated in the preparation thereof, except that Financial Security has provided to the City the information presented under the heading BOND INSURANCE POLICY for inclusion in this Remarketing Circular. 12

21 DESCRIPTION OF THE SERIES 2000C BONDS Authorization The Series 2000C Bonds were issued pursuant to the Constitution and laws of the State, the City Charter, Ordinance No passed by the Council of the City (the City Council ) on June 19, 2000, the Original Indenture, as supplemented and amended by supplemental indentures, including the Fourth Supplemental Indenture. On October 17, 2006, the Fourth Supplemental Indenture was amended by the Seventh Supplemental Indenture. See PLAN OF FINANCE. General Description Following the conversion of the interest rates, the Series 2000C Bonds will bear interest at the rates set forth on the cover page hereof, payable semiannually on January 1 and July 1 of each year, commencing January 1, 2007 (the Interest Payment Dates ), and will mature on January 1 in the years and in the principal amounts set forth on the cover page hereof. The Series 2000C Bonds will bear interest from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from their date. Principal and Interest Payments. Principal of the Series 2000C Bonds will be payable at the Designated Office of the Trustee. Interest on the Series 2000C Bonds will be payable to Bondholders registered at the close of business on the Record Date, which is the fifteenth day of the calendar month prior to each Interest Payment Date. Transfer and Exchange of Series 2000C Bonds; Persons Treated as Owners The person in whose name any Series 2000C Bond is registered will be deemed and regarded as the absolute owner thereof for all purposes, except as provided in the next caption, and payment of principal of or interest thereon will be made only to or upon the order of the registered owner thereof or his or her legal representative. All such payments will be valid and effective to satisfy and discharge the liability upon that Series 2000C Bond to the extent of the sum or sums so paid. So long as the Series 2000C Bonds are held in book-entry form, transfers of the Series 2000C Bonds by Beneficial Owners may be made only as described in Appendix G BOOK-ENTRY-ONLY SYSTEM. At any other time, any Series 2000C Bonds may be transferred or exchanged only upon the books kept for the registration and transfer of Series 2000C Bonds as provided in the Indenture. Bond Insurer Deemed Owner of Series 2000C Bonds; Direction of Remedies The Bond Insurer shall be deemed to be the sole Holder of the Series 2000C Bonds for purposes of any rights of Holders under the Indenture to consent to the execution of any supplement or amendment to the Indenture and to direct or consent to any action or remedy to be undertaken by the Trustee or any other party under the Indenture. The Bond Insurer acting alone shall have the right to control and direct all remedies upon default and to waive Events of Default. The foregoing rights of the Bond Insurer are subject to certain conditions, including that the Bond Insurer is not insolvent and is not in default of any of its payment obligations under the Bond Insurance Policy. See Appendix D SUMMARY OF CERTAIN PROVISIONS OF 13

22 THE USE AGREEMENTS AND THE INDENTURE; DEFINITIONS OF CERTAIN TERMS Remedies for Default and Supplemental Indentures. Redemption Provisions Scheduled Mandatory Redemption. The Series 2000C Bonds maturing January 1, 2031 (the Series 2000C Term Bonds ) are subject to mandatory redemption in part by lot from sinking fund payments prior to their respective maturity dates, at a redemption price equal to 100 percent of the principal amount redeemed, plus interest accrued to the redemption date, on January 1, in the years and principal amounts set forth below: $56,200,000 Series 2000C Term Bonds Due January 1, 2031 Year Amount 2027 $10,200, ,600, ,300, ,700, * 12,400,000 *Final Maturity. Credits against Scheduled Mandatory Redemption Obligations. At the option of the City, to be exercised by delivery of a written certificate to the Trustee on or before the 45th day next preceding any scheduled mandatory redemption date, the City may (1) deliver to the Trustee for cancellation Series 2000C Bonds subject to scheduled mandatory redemption on that date or portions thereof in Authorized Denominations or (2) specify a principal amount of Series 2000C Bonds or portions thereof in denominations of $5,000 and integral multiples thereof ( Authorized Denominations ) which prior to said date have been purchased or redeemed (otherwise than pursuant to these provisions) and cancelled by the Trustee at the request of the City and not theretofore applied as a credit against any scheduled mandatory redemption payment. Each Series 2000C Bond or portion thereof so delivered or previously redeemed shall be credited by the Trustee at the principal amount thereof against the obligation of the City to redeem Series 2000C Bonds on the scheduled mandatory redemption date or dates designated in writing to the Trustee by the City occurring at least 45 days after delivery of such designation to the Trustee, provided that if no such designation is made, such credit shall not be made against such obligation. 14

23 Optional Redemption The Series 2000C Bonds maturing on and after January 1, 2018 are subject to redemption prior to maturity by and at the option of the City, either in whole or in part on any date, on or after January 1, 2017, in the amount of $5,000 or any integral multiple thereof, and in any order determined by the City, at the redemption price equal to 100 percent of the principal amount of the Series 2000C Bonds redeemed, plus interest accrued to the redemption date. Selection of Series 2000C Bonds to be Redeemed. The Series 2000C Bonds shall be redeemed only in Authorized Denominations. If less than all of the Series 2000C Bonds of the same maturity are to be redeemed and paid prior to maturity, Series 2000C Bonds to be redeemed shall be selected by the Trustee by such method the Trustee shall deem fair and appropriate. In the case of a partial redemption of Series 2000C Bonds when Series 2000C Bonds of denominations greater than the minimum Authorized Denomination are then outstanding, then for all purposes in connection with such redemption each principal amount equal to the minimum Authorized Denomination shall be treated as though it were a separate Series 2000C Bond of minimum Authorized Denomination. If the Owner of any Series 2000C Bond shall fail to present such Series 2000C Bond to the Trustee for payment and exchange as aforesaid, the Series 2000C Bond shall, nevertheless, become due and payable on the redemption date to the extent of the principal amount called for redemption. Notice and Effect of Call for Redemption. Official notice of any redemption shall be given by the Trustee on behalf of the City by mailing a notice by first-class mail at least 30 days and not more than 60 days prior to the redemption date to each Holder of the Series 2000C Bonds to be redeemed at the address shown on the Bond Register or at such other address as is furnished in writing by such Holder to the Trustee. Any notice of optional redemption of Series 2000C Bonds may specify that the redemption is contingent upon the deposit of monies with the Trustee in an amount sufficient to pay the redemption price of all the Series 2000C Bonds or portions of Series 2000C Bonds which are to be redeemed on that date. Notice of redemption having been given as aforesaid, the Series 2000C Bonds or portions of Series 2000C Bonds so to be redeemed shall, on the redemption date, become due and payable at the redemption price therein specified, and from and after such date (unless the City shall default in the payment of the redemption price) such Series 2000C Bonds or portions of Series 2000C Bonds shall cease to bear interest. Failure to give any notice to any registered owner, or any defect therein, shall not affect the validity of any proceedings for the redemption of any other Series 2000C Bonds. Any notice mailed shall be conclusively presumed to have been duly given and shall become effective upon mailing, whether or not any registered owner received the notice. For so long as DTC is effecting book-entry transfers of the Series 2000C Bonds, the Trustee will provide the redemption notice described above to DTC. It is expected that DTC will, in turn, notify its participants, and that the participants, in turn, will notify or cause to be notified the Beneficial Owners of the Series 2000C Bonds to be redeemed. The City and the Trustee will have no responsibility or liability in connection with any failure on the part of DTC or a participant, or failure on the part of a nominee of a Beneficial Owner of a Series 2000C Bond, to notify the Beneficial Owner of the Series 2000C Bond so affected, and such failure shall not effect the validity of the redemption of such Series 2000C Bond. See Appendix F BOOK-ENTRY ONLY SYSTEM. 15

24 Revision of Book-Entry System; Replacement Bonds The Indenture provides for issuance of fully registered Series 2000C Bonds ( Replacement Bonds ) directly to owners of Series 2000C Bonds other than DTC or its nominee only in the event that DTC determines not to continue to act as securities depository for the Series 2000C Bonds. Upon occurrence of this event, the City may in its discretion attempt to have established a securities depository book-entry relationship with another securities depository. If the City does not do so, or is unable to do so, and after the Trustee has made provisions for notification of the owners of book-entry interests in the Series 2000C Bonds by appropriate notice to DTC, the City and the Trustee will authenticate and deliver Replacement Bonds for the Series 2000C Bonds, in fully registered form, in the denomination of $5,000 or any integral multiple thereof for the Series 2000C Bonds. If the elimination of a securities depository bookentry system for the Series 2000C Bonds is not the result of City action or inaction, the delivery of Replacement Bonds will be at the expense (including printing costs) of any persons requesting issuance of Replacement Bonds. Replacement Bonds will be exchangeable for fully registered Series 2000C Bonds of any denomination or denominations authorized by the Indenture in the aggregate principal amount not exceeding the unmatured and unredeemed principal amount of such Series 2000C Bonds and bearing interest at the same rate and maturing on the same date. Replacement Bonds will be transferable at the Designated Office of the Trustee or any Authentication Agent, without charge (except any tax, fee, or other governmental charge required to be paid). Exchange or transfer of then redeemable Replacement Bonds is not required to be made (i) during the 15 days preceding the date of a selection of Replacement Bonds to be redeemed, or (ii) of a particular Replacement Bond selected for redemption (in whole or part). See Appendix F BOOK- ENTRY ONLY SYSTEM. LEGAL MATTERS Certain legal matters incident to the interest rate conversion and remarketing of the Series 2000C Bonds are subject to the legal opinions of Squire, Sanders & Dempsey L.L.P. and Wilkerson & Associates Co., LPA, Co-Bond Counsel, whose legal services as Co-Bond Counsel have been retained by the City. Certain legal matters with regard to the tax status of the interest thereon (see TAX MATTERS ) are subject to the legal opinion of Squire, Sanders & Dempsey L.L.P., Co-Bond Counsel. The proposed texts of the legal opinions of Co-Bond Counsel are set forth in Appendix G. The actual legal opinions to be delivered to the Remarketing Agents on the conversion date may vary from those in Appendix G if necessary to reflect facts and law on the date of conversion. The opinions will speak only as of their respective dates, and subsequent distribution of the opinions by recirculation of the Remarketing Circular or otherwise shall create no implication that Co-Bond Counsel have reviewed or expressed any opinion concerning any of the matters referred to in their respective opinions subsequent to the dates thereof. In addition to rendering certain legal opinions, Co-Bond Counsel will assist in the preparation of and advise the City concerning documents for the bond transcript. The City has also retained the legal services of Squire, Sanders & Dempsey L.L.P. and Wilkerson & 16

25 Associates Co., LPA from time to time, as special counsel in connection with various legal matters. As Co-Bond Counsel, Squire, Sanders & Dempsey L.L.P. and Wilkerson & Associates Co., LPA have participated in the preparation of, and have reviewed those portions of, this Remarketing Circular pertaining to the Series 2000C Bonds, security and sources of payment for the Series 2000C Bonds, the Indenture, the Use Agreements and the Continuing Disclosure Agreement under INTRODUCTION Description and Purpose of the Series 2000C Bonds, Security for the Series 2000C Bonds, and Additional Revenue Bonds, SECURITY FOR THE SERIES 2000C BONDS and DESCRIPTION OF THE SERIES 2000C BONDS, insofar as such information summarizes the terms of the Series 2000C Bonds and the treatment of the interest on the Series 2000C Bonds under federal income tax laws and Ohio law, as well as Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. Squire, Sanders & Dempsey L.L.P. has participated in the preparation of, and has reviewed those portions of, this Remarketing Circular pertaining to certain matters relating to the tax status of the interest on the Series 2000C Bonds under TAX MATTERS. Co-Bond Counsel will deliver to the Remarketing Agents at the time of original delivery of the Series 2000C Bonds opinions as to the fairness and accuracy of those portions. Co-Bond Counsel have not been retained to, and will not, independently confirm or verify any other information in this Remarketing Circular or other information that may be provided by the City or others, and will not express opinions as to the accuracy or fairness of any such information or any other reports, financial information, offering or disclosure documents or other information pertaining to the Series 2000C Bonds that may be prepared or made available by the City or others to the purchasers or holders of the Series 2000C Bonds or of book-entry interests or to others. Certain legal matters will be passed upon for the City by Robert J. Triozzi, its Director of Law. Certain legal matters will be passed upon for the Remarketing Agents by their counsel, Calfee, Halter & Griswold LLP. The City has also retained the legal services of Calfee, Halter & Griswold LLP from time to time, as special counsel in connection with various legal matters. REMARKETING OF THE SERIES 2000C BONDS The Series 2000C Bonds are being remarketed as obligations bearing interest at the Fixed Rates by UBS Securities LLC, NatCity Investments, Inc., Bear Stearns & Co., SBK Brooks Investment Corp., Cabrera Capital Markets Inc. and Seasongood & Mayer LLC (collectively, the Remarketing Agents ) at an aggregate price of $158,333, (consisting of the par amount thereof plus a premium of $10,200,262.00, less a remarketing fee paid to the Remarketing Agents for their remarketing services of $866,735.96) in accordance with the Agreement to Remarket Bonds at Fixed Rates, dated November 2, 2006, between UBS Securities LLC, for itself and as representative of the Remarketing Agents, and the City. The public offering prices of the Series 2000C Bonds may be changed from time to time by the Remarketing Agents, and the Remarketing Agents may offer and sell the Series 2000C Bonds to certain dealers (including dealers depositing into investment trusts) and others at prices lower than the public offering prices. 17

26 CONTINUING DISCLOSURE AGREEMENTS The City At the time of issuance of the Series 2000 Bonds, the City agreed, for the benefit of the holders and beneficial owners from time to time of the Series 2000 Bonds, in accordance with SEC Rule 15c2-12 (the Rule ), to provide or cause to be provided such financial information and operating data ( Annual Financial Information ) and audited financial statements and notices, in such manner as may be required for purposes of paragraph (b)(5)(i) of the Rule (the Continuing Disclosure Agreement ), including specifically the following: (a) To each nationally recognized municipal securities information repository designated from time to time by the SEC ( NRMSIR ), to any state information depository ( SID ), and to the Trustee: (i) (ii) Annual Financial Information for each City Fiscal Year ending on or after December 31, 2000, not later than 210 days following the end of each Fiscal Year, consisting of annual financial information and operating data (historical only) of the type included under the captions THE AIRPORT SYSTEM Airport Passenger Activity and Airlines and Market Shares and AIRPORT FINANCIAL INFORMATION in Part II to the Remarketing Circular. The City expects that Annual Financial Information will be provided directly by the City and, in part, by cross reference to other documents; and Annual audited financial statements for the City s Department of Port Control, Divisions of Cleveland Hopkins International and Burke Lakefront Airports, if not submitted together with the Annual Financial Information, then when and if available. (b) To each NRMSIR or to the Municipal Securities Rulemaking Board ( MSRB ) and to the SID, in a timely manner, notice of the occurrence of any of the following events, within the meaning of the Rule, with respect to the Series 2000 Bonds (each a Listed Event ), if material: (i) (ii) (iii) (iv) (v) principal and interest payment delinquencies; non-payment related defaults; unscheduled draws on debt service reserves reflecting financial difficulties; unscheduled draws on credit enhancements reflecting financial difficulties; substitution of credit or liquidity providers, or their failure to perform; 18

27 (vi) (vii) (viii) (ix) (x) (xi) adverse tax opinions or events affecting the tax-exempt status of the Series 2000 Bonds; modifications to rights of holders or beneficial owners of the Series 2000 Bonds; bond calls for redemption; defeasances; release, substitution, or sale of property securing repayment of the Series 2000 Bonds; and rating changes. (c) (d) The City s failure to provide the Annual Information within the time specified above. Any change in the accounting principles applied in the preparation of its annual financial statements, any change in its fiscal year, its failure to appropriate funds to meet costs to be incurred to perform the Continuing Disclosure Agreement, and termination of the Continuing Disclosure Agreement. The City has reserved the right to amend the Continuing Disclosure Agreement, and noncompliance with any provision of the Continuing Disclosure Agreement may be waived, as may be necessary or appropriate to achieve its compliance with any applicable federal securities law or rule, to cure any ambiguity, inconsistency or formal defect or omission, and to address any change in circumstances arising from a change in legal requirements, change in law, or change in the identity, nature, or status of the City, or type of business conducted by the City. Any such amendment or waiver will not be effective unless the Continuing Disclosure Agreement (as amended or taking into account such waiver) would have complied with the requirements of the Rule at the time of the primary offering of the Series 2000 Bonds, after taking into account any applicable amendments to or official interpretations of the Rule, as well as any change in circumstances, and until the City shall have received either (i) a written opinion of bond or other qualified independent special counsel selected by the City, or determination by the Trustee, that the amendment or waiver would not materially impair the interest of holders or beneficial owners of the Series 2000 Bonds, or (ii) the written consent to the amendment or waiver of the bondholders of at least a majority of the principal amount of the Series 2000 Bonds then outstanding. Any such amendment or waiver shall be described by the City in the next submission of Annual Financial Information following the effective date of such amendment or waiver. The Continuing Disclosure Agreement is solely for the benefit of the holders and beneficial owners from time to time of the Series 2000 Bonds. The exclusive remedy for any breach of the Continuing Disclosure Agreement by the City is to be limited, to the extent permitted by law, to a right of holders and beneficial owners, or the Trustee to institute and maintain, to cause to be instituted and maintained, such proceedings as may be authorized at law or in equity to obtain the specific performance by the City of its obligations under the Continuing 19

28 Disclosure Agreement. Any individual holder or beneficial owner may institute and maintain, or cause to be instituted and maintained, such proceedings to require the City to provide or cause to be provided a pertinent filing if such a filing is due and has not been made. Any such proceedings to require the City to perform any other obligation under the Continuing Disclosure Agreement (including any proceedings that contest the sufficiency of any pertinent filing) may be instituted and maintained only by (i) a trustee appointed by the holders and beneficial owners of not less than 25 percent in principal amount of the Series 2000 Bonds then outstanding, which Trustee may, and upon request of holders and beneficial owners of not less than 25 percent in principal amount of the Series 2000 Bonds then outstanding would be required to, institute and maintain such proceedings or (ii) holders and beneficial owners of not less than 10 percent in principal amount of the Series 2000 Bonds then outstanding. The performance by the City of the Continuing Disclosure Agreement will be subject to the availability of funds and an annual appropriation to meet costs the City would be required to incur to perform it. The Continuing Disclosure Agreement will remain in effect only for such period that the Series 2000 Bonds are outstanding in accordance with their terms and the City remains an obligated person with respect to the Series 2000 Bonds within the meaning of the Rule. The obligation of the City to provide the Annual Financial Information and notices of the events described above will terminate if and when the City no longer remains such an obligated person. The City has also agreed to use reasonable efforts to cause each obligated person other than the City to provide or cause to be provided to the City and the Trustee for distribution by the City or Trustee to each NRMSIR and any SID, Airline Financial Information (as defined below) for the most recent fiscal year of that entity. Obligated Person means the City, and each airline or other entity using the Airport System (a) for any fiscal year of the City that is obligated under a lease, use agreement or other agreement and, for each of the two preceding fiscal years of the City, accounts for at least (1) 15 percent of the Airport Revenues and over 40 percent of the enplaned passengers at the Airport or (2) 20 percent or more of the Airport Revenues or (b) is otherwise an obligated person with respect to the Series 2000 Bonds within the meaning of the Rule if the Rule has been amended or modified after the date hereof to provide for a standard as to who constitutes such an obligated person that is different from the objective standard set forth in the forgoing clause (a) and that is applicable to any entity using the Airport System or if the SEC publishes information after the date hereof which make it otherwise clear that an airline or other entity using the Airport System is an obligated person. Currently, Continental Airlines is the only Obligated Person other than the City. Continental Airlines At the time of issuance of the Series 2000 Bonds, Continental Airlines entered into an agreement with the Trustee in which Continental Airlines agreed to provide or cause to be provided to the City and the Trustee (a) such reports as Continental Airlines files with the SEC on Form 10-K or a successor form and, in the event that Continental Airlines no longer is required to file such reports on Form 10-K or a successor form, Continental Airlines audited financial statements prepared in accordance with generally accepted accounting principals and such related financial and operating data disclosure as is made available to Continental Airlines public shareholders generally or, in the event that Continental Airlines no longer is required to file such reports on Form 10-K or a successor form and no longer has any public shareholders, 20

29 information concerning Continental Airlines business and properties, selected financial data and management s discussion and analysis, together with Continental Airlines audited financial statements prepared in accordance with generally accepted accounting principles, comparable to the information contained in such report on Form 10-K (the Airline Financial Information ) and (b) notice of the following events: (i) failure to provide or cause to be provided the Airline Financial Information on or prior to the Filing Date, (ii) any change in the Fiscal Year of Continental Airlines, (iii) any change in the accounting principles applied in the preparation of the Airline Financial Information and (iv) termination of the agreement. INDEPENDENT ACCOUNTANTS The financial statements of the City of Cleveland, Department of Port Control, Divisions of Cleveland Hopkins International and Burke Lakefront Airports for the years ended December 31, 2005 and 2004, included as Appendix B, have been audited by the Auditor of the State, as stated in her report. The audited financial statements are public records, no consent to their inclusion is required, and no bring down procedures have been undertaken by the Auditor of the State since their date. THE TRUSTEE The Trustee, The Bank of New York Trust Company, N.A., is a national banking association organized and existing under and by virtue of the laws of the United States of America and duly authorized to exercise corporate trust powers under the laws of the State. The Designated Office of the Trustee is 250 West Huron Road, 4 th Floor, Cleveland, Ohio RATINGS In connection with the original delivery of the Series 2000C Bonds, Moody s Investors Service, Inc. ( Moody s ) and Standard & Poor s Ratings Services, a division of the McGraw-Hill Companies Inc. ( S&P ) assigned their ratings of Aaa and AAA, respectively, on the Series 2000C Bonds, based upon the Bond Insurance Policy. Subsequently, Fitch Ratings ( Fitch ) assigned its rating of AAA on the Series 2000C Bonds, based upon the Bond Insurance Policy. In addition, Moody s, S&P and Fitch have assigned their ratings of A3, A- and A, respectively, to the Series 2000 Bonds, including but not limited to the Series 2000C Bonds, based upon the underlying credit without regard to insurance. No application has been made to any other rating agency for the purpose of obtaining an additional rating on the Series 2000C Bonds. A rating reflects only the views of the rating agency and any explanations of the significance of those ratings may be obtained from the respective rating agencies. There is no assurance that those ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by either or both of the rating agencies, if, in their judgment, circumstances so warrant. Any downward revision or withdrawal of those ratings may have an adverse effect on the market price of the Series 2000C Bonds. The City and the Remarketing Agents have undertaken no responsibility either to bring to the attention of the holders of the Series 2000C Bonds any proposed change in or withdrawal of the ratings or to oppose any revision or withdrawal. 21

30 TAX MATTERS On the date of the conversion of the interest on the Series 2000C Bonds, Squire, Sanders & Dempsey L.L.P., Co-Bond Counsel ( Squire Sanders ) will deliver its opinion that, under existing law: (i) interest on the Series 2000C Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the Code ), and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; and (ii) interest on, and any profit made on the sale, exchange or other disposition of, the Series 2000C Bonds are exempt from the Ohio personal income tax, the Ohio commercial activity tax, the net income base of the Ohio corporate franchise tax, and municipal and school district income taxes in Ohio. Squire Sanders expresses no opinion as to any other tax consequences regarding the Series 2000C Bonds. The opinion on tax matters will be based on and will assume the accuracy of certain representations and certifications, and continuing compliance with certain covenants, of the City contained in the transcript of proceedings and that are intended to evidence and assure the foregoing, including that the Series 2000C Bonds are and will remain obligations the interest on which is excluded from gross income for federal income tax purposes. Squire Sanders will not independently verify the accuracy of the City s certifications and representations or the continuing compliance with the City s covenants. The opinion of Squire Sanders is based on current legal authority and covers certain matters not directly addressed by such authority. It represents Squire Sanders legal judgment as to exclusion of interest on the Series 2000C Bonds from gross income for federal income tax purposes but is not a guaranty of that conclusion. The opinion is not binding on the Internal Revenue Service ( IRS ) or any court. Squire Sanders expresses no opinion about (i) the effect of future changes in the Code and the applicable regulations under the Code or (ii) the interpretation and the enforcement of the Code or those regulations by the IRS. The Code prescribes a number of qualifications and conditions for the interest on state and local government obligations to be and to remain excluded from gross income for federal income tax purposes, some of which require future or continued compliance after issuance of the obligations. Noncompliance with these requirements by the City may cause loss of such status and result in the interest on the Series 2000C Bonds being included in gross income for federal income tax purposes retroactively to the date of issuance of the Series 2000C Bonds. The City has covenanted to take the actions required of it for the interest on the Series 2000C Bonds to be and to remain excluded from gross income for federal income tax purposes, and not to take any actions that would adversely affect that exclusion. After the date of delivery of its opinion on tax matters, Squire Sanders will not undertake to determine (or to so inform any person) whether any actions taken or not taken, or any events occurring or not occurring, or any other matters coming to Squire Sanders attention, may adversely affect the exclusion from gross income for federal income tax purposes of interest on the Series 2000C Bonds or the market prices of the Series 2000C Bonds. A portion of the interest on the Series 2000C Bonds earned by certain corporations may be subject to a federal corporate alternative minimum tax. In addition, interest on the Series 2000C Bonds may be subject to a federal branch profits tax imposed on certain foreign corporations doing business in the United States and to a federal tax imposed on excess net passive income of certain S corporations. Under the Code, the exclusion of interest from 22

31 gross income for federal income tax purposes may have certain adverse federal income tax consequences on items of income, deduction or credit for certain taxpayers, including financial institutions, certain insurance companies, recipients of Social Security and Railroad Retirement benefits, those that are deemed to incur or continue indebtedness to acquire or carry tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. The applicability and extent of these and other tax consequences will depend upon the particular tax status or other tax items of the owner of the Series 2000C Bonds. Squire Sanders will express no opinion regarding those consequences. Legislation affecting tax-exempt obligations is regularly considered by the United States Congress. There can be no assurance that legislation enacted or proposed, or clarification of the Code, after the date of the remarketing of the Series 2000C Bonds, will not have an adverse effect on the tax status of interest on the Series 2000C Bonds or the market prices of the Series 2000C Bonds. Prospective purchasers of the remarketed Series 2000C Bonds should consult their own tax advisors regarding pending or proposed federal tax legislation, and prospective purchasers of the Series 2000C Bonds at other than their remarketing at the respective prices indicated on the cover of this Remarketing Circular should also consult their own tax advisors regarding other tax considerations such as the consequences of market discount, as to all of which Squire Sanders expresses no opinion. Squire Sanders engagement with respect to the Series 2000C Bonds ends with the date of the conversion of the interest on the Series 2000C Bonds to the Fixed Rates, and, unless separately engaged, Squire Sanders is not obligated to defend the City or the beneficial owners regarding the tax status of interest on the Series 2000C Bonds in the event of an audit examination by the IRS. The IRS has a program to audit tax-exempt obligations to determine whether the interest thereon is includible in gross income for federal income tax purposes. If the IRS does audit the Series 2000C Bonds, under current IRS procedures, the IRS will treat the City as the taxpayer and the beneficial owners of the Series 2000C Bonds will have only limited rights, if any, to obtain and participate in judicial review of such audit. Any action of the IRS, including but not limited to selection of the Series 2000C Bonds for audit, or the course or result of such audit, or an audit of other obligations presenting similar tax issues, may affect the market prices for the Series 2000C Bonds. Original Issue Premium All of the Series 2000C Bonds ( Premium Bonds ) have been remarketed and sold to the public at a price in excess of their stated redemption price (the principal amount) at maturity. That excess constitutes bond premium. For federal income tax purposes, bond premium is amortized over the period to maturity of a Premium Bond, based on the yield to maturity of that Premium Bond (or, in the case of a Premium Bond callable prior to its stated maturity, the amortization period and yield may be required to be determined on the basis of an earlier call date that results in the lowest yield on that Premium Bond), compounded semiannually. No portion of that bond premium is deductible by the owner of a Premium Bond. For purposes of determining the owner s gain or loss on the sale, redemption (including redemption at maturity) or other disposition of a Premium Bond, the owner s tax basis in the Premium Bond is reduced by the amount of bond premium that accrues during the period of ownership. As a result, an owner may realize taxable gain for federal income tax purposes from 23

32 the sale or other disposition of a Premium Bond for an amount equal to or less than the amount paid by the owner for that Premium Bond. A purchaser of a Premium Bond at the price for that Premium Bond stated on the cover of this Remarketing Circular who holds that Premium Bond to maturity (or, in the case of a callable Premium Bond, to its earlier call date that results in the lowest yield on that Premium Bond) will realize no gain or loss upon the retirement of that Premium Bond. Owners of Premium Bonds should consult their own tax advisors as to the determination for federal income tax purposes of the amount of bond premium properly accruable in any period with respect to the Premium Bonds and as to other federal tax consequences and the treatment of bond premium for purposes of state and local taxes on, or based on, income. CONCLUDING STATEMENT To the extent that any statements made in this Remarketing Circular involve matters of opinion, forecasts or estimates, whether or not expressly stated to be such, they are made as such and not as representations of facts or certainty, and no representation is made that any of such statements have been or will be realized. Information in this Remarketing Circular has been derived by the City from official and other sources and is believed by the City to be accurate and reliable. Information other than that obtained from official records of the City has not been independently confirmed or verified by the City and its accuracy is not guaranteed. The summaries and descriptions of provisions of the Indenture and all references to other materials not purporting to be quoted in full are qualified in their entirety by reference to the complete provisions of the documents and other materials summarized or described. Copies of the Indenture may be obtained from the City or, during the offering period, from the Remarketing Agents. The agreement of the City with the owners of the Series 2000C Bonds is fully set forth in the Indenture. Neither this Remarketing Circular nor any statement that may have been or that may be made orally or in writing is to be construed as or as part of a contract with the holders of the Series 2000C Bonds. This Remarketing Circular has been prepared and delivered by the City and executed for and on behalf of the City by its Director of Finance and Director of Port Control. CITY OF CLEVELAND, OHIO By: By: /s/ Sharon Dumas Director of Finance /s/ Ricky D. Smith Director of Port Control 24

33 PART II CERTAIN INFORMATION REGARDING THE CITY, THE AIRPORT SYSTEM AND THE AVIATION SECTOR

34 PART II TABLE OF CONTENTS THE CITY... 1 THE AIRPORT SYSTEM... 2 General... 2 Airport Facilities... 2 Management of the Airport System... 3 The Airport Service Region... 5 Airport Passenger Activity... 7 Airlines and Market Shares... 9 Role of Continental Airlines at the Airport CAPITAL IMPROVEMENT PROGRAM Sources of Funds for Capital Improvement Program AIRPORT FINANCIAL INFORMATION Principal Sources of Revenues Outstanding Bonds and Other Obligations Airport Special Revenue Bonds Historical Financial Data for the Airport System Operating Results Discussion of Financial Operations Debt Service Requirements REPORT OF THE AIRPORT CONSULTANT Forecast Enplanements Forecast Coverage and Signatory Airline Cost Per Enplaned Passenger AVIATION SECTOR Airline Information Investment Considerations LITIGATION General Matters Ohio Environmental Protection Agency... 27

35 THE CITY The City is a municipal corporation and political subdivision of the State of Ohio (the State ). It is located on the southern shore of Lake Erie and is the county seat of Cuyahoga County (the County ) in northeastern Ohio. The City operates under and is governed by its Charter, which was first adopted by the voters in 1913 and has been and may be further amended by the voters from time to time. The City is also subject to certain State laws that are applicable to all cities in the State. In addition, under Article XVIII, Section 3 of the Constitution of the State, the City may exercise all powers of local self-government and may exercise police powers to the extent not in conflict with applicable general State laws. The Charter provides for a mayor-council form of government. Legislative authority is currently vested in a 21-member City Council. City Council members and the Mayor serve for four-year terms. All City Council members are elected from wards. The current terms of the Mayor and all City Council members expire on January 3, The City Council fixes compensation of City officials and employees and enacts ordinances and resolutions relating to City services, tax levies, appropriating and borrowing money, licensing and regulating businesses and trades, and other municipal functions. The presiding officer is the President of City Council, who is elected by the City Council members. Martin J. Sweeney was elected as President of City Council in January The Clerk of Council is appointed by City Council. The City s chief executive and administrative officer is the Mayor, who is elected by the voters for a four-year term. Frank G. Jackson was elected as Mayor of the City in November 2005 and began his first term on January 2, Prior to assuming office as Mayor, Mr. Jackson served as President of Council from January 2002 through December 2005 and as Ward 5 Council Member since The Mayor may veto any legislation passed by City Council. A veto may be overridden by a two-thirds vote of all members of the City Council. The Charter establishes certain administrative departments, and the City Council may establish divisions thereof or additional departments. The Mayor appoints all of the directors of the City s 14 departments. The responsibilities for the City s major financial functions are vested in the Director of Finance. The Director of Finance is responsible for preparing and implementing the City s current Operating Budget and Capital Improvement Plan, collecting the City s revenues, and procuring the City s goods and services and making payments therefor. The Director of Finance is also responsible for maintaining an effective system of internal accounting control, which includes the maintenance of a centralized accounting system and supervision of the City s internal audit staff. The Director of Finance for the City is Sharon Dumas. Ms. Dumas was appointed Director of Finance on March 29, 2006, after serving as Interim Director of Finance since January In 2003, she became the Assistant Director of Finance, where she was responsible for directing the Office of Budget and Management. Prior to joining the Finance Department, Ms. Dumas served as Director of the Empowerment Zone and as Assistant Director of the Department of Community Development. She has a master s degree in accounting and financial information systems from Cleveland State University. 1

36 General THE AIRPORT SYSTEM The Airport System is comprised of Cleveland Hopkins Airport (the Airport ) and Burke Lakefront Airport ( Burke ). The Airport is the primary commercial service airport for northeastern Ohio. The Airport is located approximately 10 miles southwest of the City s downtown, and encompasses approximately 2,045 acres of land, with four air carrier runways, a large terminal complex and various cargo maintenance facilities. According to statistics compiled by ACI/North America ( ACI ), the Airport was the 36th busiest airport in terms of enplaned passengers and the 45th busiest in terms of operations for North American airports in The Airport had 5,724,440 enplaned passengers in 2005 and 5,613,255 enplaned passengers in Continental Airlines uses the Airport as one of its major hubs. Continental Airlines and its regional affiliates, Continental Express and Continental Connection, together accounted for 60.9 percent of the enplaned passengers at the Airport in 2005 and 61.5 percent of the enplaned passengers in The Airport also serves a significant origin-destination market, with origin-destination ( O&D ) passengers accounting for 75.3 percent of total enplaned passengers (revenue and non-revenue) at the Airport in Burke is a federally certified commercial and general aviation reliever airport located on 480 acres adjacent to the City s downtown. Burke is a full-service aeronautical facility offering two parallel runways, the longest of which is 6,200 feet in length. In 2005, 82,552 aircraft operations (landings and takeoffs) were performed at Burke, the majority of which were performed by air taxi operators serving the City s downtown business activities and the remainder of which were performed almost entirely by corporate and private general aviation aircraft. In addition, Burke is home to a public charter company, which operates out of the Burke Terminal. Airport Facilities The Airport has four runways, including three parallel runways (6L/24R, 6C/24C and 6R/24L) in the northeast-southwest primary wind direction and a crosswind runway (10/28) with an east-west orientation. The Airport commissioned Phase I of Runway 6L/24R in December 2002 at a length of 6,800 feet. Runway 6L/24R was further extended to 9,000 feet and was commissioned as a CAT III runway in November Runways 6R/24L and 6L/24R each measures 9,000 feet and are currently the longest runways at the Airport. Runway 6C/24C is 7,096 feet and is used only when the other two parallel runways are closed; otherwise, it serves as a taxiway. Runway 10/28 is 6,015 feet. Runway ends 6R, 24L, 24R and 28 are equipped with Instrument Landing System ILS navigational aids that allow for precision approaches during inclement weather conditions. The Airport s passenger terminal facilities consist of approximately 935,000 square feet in a main terminal building with four attached concourses which support 63 jet-gates and 33 commuter aircraft parking positions. The Airport opened the 170,000 square foot Concourse D in 1999 to serve the expanding regional jet operation of Continental Express. Pursuant to the Agreement and Lease and Amendment No. 1 to the Agreement and Lease (together, the Use Agreement ), the Leased Premises (as defined therein) 2

37 of the Airport are leased on a preferential basis to each of the Airlines that have signed the Use Agreement (the Signatory Airlines ). Each Signatory Airline shall have priority of use with respect to its Leased Premises, but may be required by the City to share the use of such Leased Premises. In addition, four gates remain common use gates under the control of the City. The Airport s public automobile parking facilities currently have more than 6,700 parking spaces, consisting of approximately 4,200 in the short-term parking garage and 2,500 in the long-term parking garage. The Airport also provides approximately 2,518 parking spaces for Airport employees. The Airport intends to convert approximately 600 of these spaces to public parking. An estimated 6,400 private off-airport parking spaces exist around the Airport s perimeter. A recent passenger survey identified that approximately 30 percent of Airport parkers use off-airport parking lots compared to on-airport lots and garages. Management of the Airport System Section 76-8 of the City s Charter provides that the Director of Port Control is in charge of administration and control of, among other facilities, the municipally owned airport facilities of the City. The City s Department of Port Control, through the Divisions of Cleveland Hopkins International Airport and Burke Lakefront Airport (the Divisions ), operates the two airports comprising the Airport System. The Divisions employ approximately 400 individuals in administration, airfield and building maintenance, vehicle maintenance, and aircraft rescue and fire fighting. There have been no strikes or work stoppages by employees of the Divisions in recent years. The City believes its relations with these employees are excellent. The Codified Ordinances of the City place management responsibility for the airports in the two Commissioners of Airports, one for each airport, or their duly authorized representatives. The Commissioner of Cleveland Hopkins International Airport fixes the charges for the use of hangar space and landing and take-off fees, subject to the approval of the City s Board of Control. Following are brief biographical sketches of the Department of Port Control officials: Ricky D. Smith was appointed Director of Port Control in June 2006 and is responsible for the management and operations of the Airport System. Prior to this appointment, Mr. Smith served as the Senior Deputy Executive Director and Chief Operating Officer for the Maryland Aviation Administration (MAA), owner/ operator of the Baltimore/ Washington International Thurgood Marshall (BWI) and Martin State Airports (MTN). While with the MAA over the last 17 years, Mr. Smith had management responsibility for business administration, airport operations, planning and engineering, marketing and air service development virtually every major function of a large commercial airport. During the course of this diverse experience, he is credited with overseeing the development and implementation of major airport capital projects and programs such as BWI s $2 billion expansion program, including the new Southwest Airlines terminal. In addition, he led the development of a new food, beverage and retail program, a new airport/airline use and lease agreement and expansion of the airport s domestic and international air service program to include new low-fare domestic service and international service to West Africa and Mexico. His professional experience is rounded out by employment with the Maryland State Highway Administration and private sector companies such as IBM, H&R Block and the May Company. Mr. Smith s academic pursuits include undergraduate and advanced degrees from Howard University and Loyola College of Maryland, respectively and his leadership development pursuits 3

38 include participation in programs such as the Greater Baltimore Committee s The Leadership and the world-renowned University of Maryland s Government Executive Institute. Kathleen Woidke was appointed Interim Chief of Finance in July 2004, after serving as Airport Comptroller since Ms. Woidke joined the Department of Port Control as an Accountant III in 1996 and was promoted to Fiscal Manager of Capital Projects in July From 1993 to 1996, she served as a tax auditor for the City s Division of Taxation. Ms. Woidke received a Bachelor of Arts in Accounting from John Carroll University. Percy Dangerfield was selected to join the Cleveland Department of Port Control team as the Chief of Staff in October He will serve as the principal assistant to the Director, charged with ensuring that the overall vision and key initiatives of the Department are implemented. Prior to this appointment, Mr. Dangerfield served as the Division Manager of the Disadvantaged/Minority Business Enterprise Program for the Maryland State Highway Administration. He has accumulated 17 years of experience in the public and private sector primarily with business development, governmental affairs, and organizational advancement. Mr. Dangerfield is a graduate of Frostburg State University, where he received both a Bachelors of Science Degree in Philosophy, and a Masters in Business Administration, with a concentration in Management. Jack Arnold has been with the Law Department of the City and assigned as senior counsel to the Cleveland Airport System since April Mr. Arnold has nearly 30 years of experience acting as legal counsel to various types of business organizations, and has served in various senior level corporate counsel positions with McDermott International Inc. and The Babcock & Wilcox Company. He has a B.A. in Political Science from Kent State University, a Juris Doctorate from the University of Akron School of Law and is currently pursuing an MBA from Baldwin-Wallace College. Patricia Singleton was appointed Interim Chief of Business Management and Development in August 2006, and Chief of Business Management and Development in October Ms. Singleton is responsible for managing all of the Airport s revenue generating assets. Ms. Singleton has over 20 years of experience in the planning, development, management and marketing of large commercial real estate portfolios in both the public and private sectors. She has over seven years of airport experience including service in the Properties, Concessions and Ground Transportation units. Ms. Singleton holds a Bachelor s Degree from Central State University and a Master s Degree from The Ohio State University. She also has been licensed as a real estate broker in four states. Robert Evans, PE, was appointed Interim Chief of Planning and Engineering in August 2006, having joined the Department of Port Control in August 2004, and is responsible for managing the planning, environmental, noise abatement, real estate, and engineering programs of the Airport System. Mr. Evans has over 19 years of experience in design, construction and project/program management of public works projects. Prior to accepting his current position, Mr. Evans served in various management, engineering, and construction roles in the Cleveland office of the architectural and engineering firm of Ralph C. Tyler. Mr. Evans received a B.S. in Environmental Engineering from the 4

39 University of Florida and an M.S. in Systems Management from the University of Denver. Fred Szabo was appointed Commissioner of the Airport in August 2001, and is responsible for operations at the Airport. Prior to accepting his current position, Mr. Szabo served as Assistant Director of Public Safety for the City. Mr. Szabo has nearly 30 years of experience in law enforcement and has served as Administrative Assistant to the Chief of Police and Safety Director and spokesman for the Cleveland Police Department and as Acting EMS Commissioner. Khalid Bahhur was appointed Airport Commissioner for Burke Lakefront Airport in August 2000 and is responsible for managing the operations of the Airport. Mr. Bahhur has over 16 years of experience in airport management and airport planning projects. Prior to accepting his current position, Mr. Bahhur served in various management positions at the Airport, including master planning, land acquisition and residential sound insulation programs. Mr. Bahhur received a B.S. in Political Science from Cleveland State University. In addition, Director Smith has created two new chief-level positions, the Chief of Administration and Performance Management and the Chief of Marketing and Air Service Development. These positions have not yet been filled. The Airport Service Region The air trade area for the Airport is comprised of the following 16 counties in Ohio: Ashland, Ashtabula, Carroll, Cuyahoga, Erie, Geauga, Huron, Lake, Lorain, Mahoning, Medina, Portage, Stark, Summit, Trumbull and Wayne. The City and the Airport System are located in the County. (These 16 counties comprise the Airport Service Region. ) This area is depicted by the map on the following page. To a lesser degree, the Airport draws passengers from outside the Airport Service Region, including Northern Ohio and Western Pennsylvania. The population of the Airport Service Region is 4.1 million. 5

40 THE AIRPORT SERVICE REGION Lake Superior Toronto Road miles from Cleveland to: Akron 39 Canton 58 Columbus 142 Detroit 174 Pittsburgh 137 Toledo 119 Youngstown 76 Less than 1 hour flight time from Cleveland: Toronto 45 minutes Chicago 55 minutes New York 55 minutes Washington, DC 55 minutes Chicago Lansing Flint Michigan Detroit Indiana Ohio Columbus Cincinnati Canada Lake Ontario New York Lake Erie Pennsylvania Fort Toledo Pittsburgh Wayne Cleveland West Washington, DC Virginia Kentucky Louisville Canada Lake Erie 90 Erie 80 Huron Cleveland Hopkins International Airport Burke Lakefront Airport Cleveland Cuyahoga 90 Lorain Summit 71 Medina Akron Lake Geauga Ashtabula Youngstown - Warren Regional Airport Trumbull 80 Portage Mahoning 76 Youngstown Ashland Wayne Stark Canton Akron-Canton Regional Airport Carroll 271 County Boundary State/International Boundary Air Carrier Airport Commuter Airport/ General Aviation/Other N 90 Cleveland 71 Westlake Cleveland Burke Lakefront Heights Airport CUYAHOGA Parma Cleveland Hopkins International Airport Solon 77 North Royalton 80 Strongsville 6

41 Airport Passenger Activity In 2005, enplanements at the Airport increased by 2.0 percent over From 1995 through 2005, enplaned passengers at the Airport increased at an average annual compound growth rate of 0.3 percent from approximately 5,570,790 passengers to approximately 5,724,440 passengers. In addition, O&D passengers have increased from 68.6 percent of total enplaned passengers at the Airport in 1995 to an estimated 75.3 percent of total enplaned passengers (including non-revenue passengers) in The following table shows total enplaned passengers, aircraft departures, and aircraft landing weight at the Airport for the calendar years indicated. SUMMARY OF RECENT HISTORICAL AIRLINE ACTIVITY Enplaned passengers Aircraft departures Aircraft weight Percent Percent Percent Increase increase 1,000 lb increase Year Number (decrease) Number(b) (decrease) unit(a) (decrease) ,570, ,542 (2.6) 9,424,985 (0.2) ,760, , ,767, ,039, , ,780, ,136, ,032 (2.0) 9,599,231 (1.9) ,456, , ,934, ,622, , ,173, ,919,560 (10.6) 131,857 (8.6) 9,198,655 (9.58) ,405,497 (8.6) 139, ,194,081 (10.92) ,257,224 (2.7) 147, ,827,776 (4.47) ,613, ,253 (1.0) 8,074, ,724, ,925 (3.0) 7,910,706 (1.76) (First eight months) 2005 (First eight months) 3,831,546 3,885,841 (a) Includes the sum of all commercial air carrier, commuter and all-cargo operations. Source: City of Cleveland, Department of Port Control records. 7

42 The table below presents total enplanements at the Airport by month between January 2002 and August MONTHLY ENPLANEMENT COMPARISON AT THE AIRPORT SINCE JANUARY 2002 Total Enplanements Month v Change in Monthly Percentage 2004 v v v January 394, , , , , % -9.7% 0.1% 2.7% February 390, , , , , % -0.4% 3.4% 0.3% March 492, , , , , % -3.4% 7.7% 3.8% April 461, , , , , % 4.5% 0.7% 5.2% May 478, , , , , % -2.2% 3.3% 3.7% June 490, , , , , % 8.1% 8.5% 5.7% July 502, , , , , % 8.0% 8.3% 2.8% August 515, , , , , % 1.9% 1.2% -1.8% September 403, , , , % 11.2% 15.1% October 443, , , , % 8.8% 7.1% November 390, , , , % 18.0% 15.8% December 441, , , , % 2.1% 1.2% Totals 5,405,497 5,257,224 5,613,255 5,724,440 3,831,546* -2.7% 3.8% 5.9% N/A Source: City of Cleveland, Department of Port Control records. *This figure includes only eight months of data. For the first eight months of 2006, total Airport enplanements (scheduled and non-scheduled) were approximately 1.4 percent lower than total Airport enplanements during the same period in 2005, while total U.S. enplanements were 1.5 percent lower than total U.S. enplanements during the same period in

43 The following table shows total domestic originating enplanements and total domestic connecting enplanements at the Airport from 1996 through HISTORICAL DOMESTIC ORIGINATING AND CONNECTING ENPLANEMENTS (1) Domestic Originations Domestic Connections Year Number % of Total Number % of Total ,463, % 1,732, % ,675, % 1,797, % ,759, % 1,827, % ,857, % 2,000, % ,868, % 2,121, % ,454, % 1,973, % ,132, % 1,874, % ,297, % 1,627, % ,657, % 1,577, % ,061, % 1,324, % (1) Figures do not include any non-revenue passengers. Source: City of Cleveland, Department of Port Control records. In 2005, domestic revenue originating passengers accounted for approximately 75.4 percent of total domestic revenue enplaned passengers, and domestic revenue connecting passengers accounted for an estimated 24.6 percent of total domestic revenue enplaned passengers at the Airport. Airlines and Market Shares As of October 1, 2006, the Airport was served by seven major or national carriers, 13 regional and commuter airlines, one foreign-flag airline, nine charter passenger airlines and four all-cargo airlines. According to the Department of Port Control, the major and national airlines accounted for 51.1 percent of all passengers enplaned at the Airport in The market share of the regional and commuter airlines in 2005 at the Airport was 45.6 percent of all enplaned passengers. International service accounted for about 2.5 percent of the Airport s enplaned passengers in The table on the following page sets forth the airlines serving the Airport and their market shares based on enplaned passengers for the calendar years indicated. 9

44 AIRLINE MARKET SHARES OF ENPLANED PASSENGERS Airlines Number Percent Number Percent Number Percent Number Percent Number Percent DOMESTIC SERVICE Major and National Continental 2,100, ,704, ,624, ,658, ,685, Southwest 595, , , , , US Airways 210, , , , , United 256, , , , , Delta 255, , , , , Northwest 271, , , , , American 1 263, , , , American West 45, , , , , ,000, ,435, ,142, ,138, ,928, Regional and Commuter Airlines Continental Express 1,414, ,451, ,445, ,612, ,600, American Eagle 118, , , , Delta Connection 36, , , , , Continental Connection , , , US Airways Express 44, , , , , United Express 42, , , , , Northwest Airlink 11, , , , , Midwest Express Connection 10, , , , , PSA Airlines-US Airways Connection , , , , USA , , , Midwest Express 10, Independence Air , , ,690, ,612, ,900, ,270, ,614, Charter Airlines 64, , , , , Total Domestic Service 5,755, ,098, ,098, ,450, ,578, INTERNATIONAL SERVICE Foreign Flag Airlines 39, , , , , U.S.-Flag Airlines 92, , , , , Charter Airlines 31, , , , , Total International Service 164, , , , , TOTAL ENPLANED PASSENGERS 5,919, ,269, ,257, ,613, ,724, Source: City of Cleveland, Department of Port Control Note: Totals may not add due to rounding. 1. Includes operations of the former TransWorld Airways (TWA) acquired by American on April 9, Ceased operations at the Airport in

45 Role of Continental Airlines at the Airport Together, Continental Airlines, Continental Express and Continental Connection enplaned approximately 60.9 percent of the total enplaned passengers at the Airport in The Airport is the third largest domestic hub for Continental Airlines. Continental Airlines mainline jet service at each of its domestic hub cities is coordinated with ExpressJet, which operates new-generation regional jets under the name Continental Express. Continental Airlines has entered into a capacity purchase agreement with ExpressJet pursuant to which Continental Airlines purchases in advance all of ExpressJet s available seat miles for a negotiated price. Under the agreement, ExpressJet operates regional flights on Continental Airlines behalf, while Continental Airlines is responsible for all scheduling, pricing and seat inventories, and is entitled to all revenue associated with those flights. On July 21, 2006 Continental entered into a new capacity purchase agreement with Chautauqua Airlines to provide and operate 44 regional jets as a Continental Express carrier beginning in The new capacity purchase agreement will replace the regional capacity provided by 69 regional jets operated by ExpressJet. Continental Airlines, Delta Air Lines and Northwest Airlines have entered into a marketing agreement that allows them to offer reciprocal frequent flyer and airport lounge benefits to passengers and permits code-sharing among the three carriers. For additional information regarding Continental Airlines, see the Form 10-K/A-1 for the fiscal year ended December 31, 2005 and other reports and information filed subsequent to December 31, 2005 by Continental Airlines with the SEC pursuant to the Exchange Act. Neither the City nor any of the Underwriters makes any representation or assurance regarding the accuracy or completeness of any such information prepared and filed by Continental Airlines or its continued operations at the Airport. Continental Airlines has not participated in the preparation of this Official Statement and makes no representation as to the accuracy or completeness of the information contained herein. Except for Continental Airlines, no airline operating at the Airport under a lease, use agreement or other agreement, has made any agreement regarding the continuing disclosure of information for the benefit of the holders and beneficial owners of the Series 2006 Bonds. See CONTINUING DISCLOSURE AGREEMENTS Continental Airlines herein. However, certain of the major domestic airlines (or their respective parent corporations), including Continental Airlines, are subject to the information reporting requirements of the Exchange Act, and thus must file reports and other information with the SEC. See THE AIRLINE INDUSTRY. In addition, pursuant to SEC Rule 15c2-12 certain airlines may have agreed to continuing disclosure undertakings in connection with the issuance and sale of obligations other than the Series 2006 Bonds or the revenue bonds of the City. CAPITAL IMPROVEMENT PROGRAM The City maintains an ongoing Capital Improvement Program ( CIP ) for the Airport System. The CIP includes the rehabilitation and/or reconstruction of facilities already in place (e.g., Concourse C apron replacement), the continuation of capital projects already or substantially completed (e.g., runway extension of 6L/24R) and projects which are currently under construction (e.g., midfield deicing facility). The on-going CIP currently totals 11

46 approximately $140 million. These projects are already funded from existing sources. Funding sources include existing bond proceeds, federal grants and local funds. Airport management has also identified an additional $171 million in future CIP projects (the Future CIP Projects ) that may be implemented during the next five years. Major projects include the extension of Runway 6R/24L, uncoupling of the 6R/24L runway intersection, expansion of the Airport s concessions program and implementation of a new ground transportation center. The Future CIP Projects are anticipated to be funded through a combination of Additional Revenue Bonds, existing bond proceeds, passenger facility charges ( PFCs ), federal grants-in-aid and other Airport revenues. For a summary and description of key projects envisioned for the Airport s future CIP, see Appendix A - REPORT OF THE AIRPORT CONSULTANT. Sources of Funds for Capital Improvement Program sources: In addition to bond proceeds, the City is funding the CIP from the following Federal Grants. A key component of the financing plan for the CIP is the Airport Improvement Program (the AIP ) grant from the FAA in the form of a Federal Letter of Intent (the LOI ). The Airport and Airway Improvement Act of 1982 ( AAIA ) created the AIP grant program, which is administered by the FAA. The AIP grants include entitlement grants and discretionary grants and are limited in annual total dollar amounts by federal budgetary restrictions. To receive an AIP grant an airport must have projects that are eligible for AIP funding under the AAIA guidelines and receive approval from the FAA. Entitlement grants are allocated among airports by the FAA in accordance with a formula based on an airport s number of enplaned passengers. Discretionary grants are awarded to airports based on the highest priority project under the FAA s U.S. project ranking system. To enable airports to predict the availability of AIP grants, the FAA has created a procedure by which an airport can request an LOI from the FAA indicating the FAA s intention of making AIP grants to the airport in the future. The issuance of an LOI is subject to Congressional approval and AIP budgetary restrictions and does not constitute a binding appropriation or commitment of funds by the FAA. In a letter to the Airport dated December 22, 2000 and amended August 25, 2005, the FAA announced its intention to provide the Airport with AIP Grants in the form of an LOI in the amount of $ million. The FAA intends to disburse the AIP Grants over a 17-year period which commenced in 2001 and ends in The City has received $85.7 million of such funds to date. Passenger Facility Charges. On November 5, 1990, Congress passed the Aviation Safety and Capacity Expansion Act of 1990 (the PFC Act ), which enables a public agency such as the City which controls a commercial service airport to charge each paying passenger enplaning at such airport 12

47 (subject to limited exceptions) a PFC of $1, $2 or $3. A PFC is available to airports to finance specific, eligible airport-related projects that (i) preserve or enhance capacity, safety or security of the national air transportation system, (ii) reduce noise resulting from an airport, or (iii) furnish opportunities for enhanced competition among air carriers. Before imposing and using PFCs, a public agency must apply to the FAA for approval. PFCs are collected on behalf of airports by air carriers and their agents. The Wendell H. Ford Aviation Investment and Reform Act for the 21st Century ( AIR 21 ), which became law in 2000, made several modifications to the PFC Act. Among the modifications was the option for airports to apply to the FAA for approval to increase the PFC charge to a level of $4.00 or $4.50. On November 1, 1992, the City implemented a PFC of $3.00 per enplaned passenger for certain approved projects, which was increased to $4.50 per enplaned passenger on March 1, As of July 14, 2005, the City had authority to impose and use $340,044,767 in PFCs at the Airport. The FAA has approved the imposition of a PFC of $4.50 per enplaned passenger through October Pursuant to a letter agreement dated October 28, 1997, between the City and Continental Airlines, the City is applying 40 percent of the PFC revenues collected at the Airport from 2000 through 2019 to the payment of debt service on Revenue Bonds issued by the City to fund certain PFC-approved projects. Beginning in 2001, the City has transferred each year to the Revenue Fund the amount of PFC revenues collected in the prior year that the City agreed would be applied to debt service on such Revenue Bonds that would otherwise be included in the calculation of airline landing fees. See Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE. The amount of actual PFC revenues will vary depending on actual levels of passenger enplanements at the Airport and, accordingly, no assurance can be given as to the timing or amount of PFC revenues that will be available. The FAA may terminate its approval of the City s imposition of a PFC if the FAA determines that the City is in violation of the PFC Act or the regulations promulgated thereunder or certain provisions of the Airport Noise and Capacity Act (the Noise Act ). However, both the PFC regulations and the Noise Act provide procedural safeguards to ensure that the City s ability to impose a PFC will not be summarily terminated. AIRPORT FINANCIAL INFORMATION Principal Sources of Revenues The principal sources of Airport Revenues include non-airline revenues, terminal complex space rentals paid by the Signatory Airlines and landing fees paid by the Signatory Airlines pursuant to the Use Agreements with the City. Non-airline revenues (consisting primarily of parking, rental cars and terminal retail) accounted for 36.8 percent of Airport Revenues in 2005 and 37.6 percent for the six-month period ended June 30, 2006, respectively. Revenues from parking and rental cars comprised a large part of the non-airline revenues. Terminal complex space rentals and landing fees paid by airlines which were Signatory Airlines under the original Lease and Agreement accounted for 57.3 percent and 57.4 percent of Airport Revenues in 2005 and for the six-month period ended June 30, 2006, respectively. 13

48 The principal sources of Airport Revenues for 2005 and for the six-month period ended June 30, 2006 are summarized as follows: Sources of Revenues Audited 2005 (in thousands) Percent of Total Unaudited Six Months Ended June 30, 2006 Percent of Total Cleveland Hopkins International Signatory Airline Revenues Terminal Complex Space Rent $28, % $14, % Landing fees 31, , Other 2, Total Signatory Airline Revenues $63, % $31, % Non-Signatory Landing fees 3, % 1, % Non-Airline Revenues 40, , Interest Income 2, Subtotal-Cleveland Hopkins $109, % $53, % Burke Lakefront Total Revenues (1)(2) $110, % $54, % (1) Excludes $3,388,593 in I-X Center leaseback credits in (2) Excludes $1,694,296 in I-X Center leaseback credits in Source: City of Cleveland records Outstanding Bonds and Other Obligations Revenue Bonds of the Airport System Following the refunding of the Refunded Bonds (defined below), the following Bonds, in addition to the Series 2006 Bonds, will be outstanding under the Indenture and secured by Airport Revenues: $223,610,000 of Series 1997 Bonds, $461,755,000 of Series 2000 Bonds and $139,250,000 of Series 2003 Bonds. The Series 1997 Bonds, the Series 2000 Bonds and the Series 2003 Bonds are secured equally and ratably by Airport Revenues and the Special Funds, including the Bond Service Reserve Fund. The proceeds of the Series 2006A Bonds will be used to advance refund the Series 2000A Bonds maturing on January 1, 2014 through January 1, 2022 and a portion of the Series 2000A Bonds maturing on January 1, 2031 and proceeds of the Series 2006B Bonds will be used to advance refund a portion of the Series 1997B Bonds maturing on January 1, 2017 (collectively, such refunded maturities of the Series 2000A Bonds and the Series 1997B Bonds are herein referred to as the Refunded Bonds ). Other Obligations of the Airport System Liquidity Facilities. In connection with the issuance of certain prior Series of Revenue Bonds, the City entered into liquidity facilities which are payable from amounts in the Airport Account of the Airport Development Fund established by the related Series Trust Indenture (after payment of all amounts then due to the related Bondholders), to the extent such Airport Revenues are available therefor, and then from other assets and revenues of the City not pledged to Bondholders under the Indenture. Hedge Agreements. The City entered into interest rate hedges on October 21, 2003 with respect to its outstanding Airport System Revenue Bonds, Series 2003A and Series 2003B (the Swap Agreements ). Bear Stearns Financial Products Inc. is the counterparty to hedges in the notional amounts of $12,906,250 and $35,125,000 relating to the Series 2003A Bonds and the Series 2003B Bonds, respectively. JPMorgan Chase Bank is the counterparty to hedges in the notional amounts $7,743,750 and $21,075,000 relating to the Series 2003A Bonds and the Series 2003B Bonds, respectively. The City pays each of the counterparties a fixed rate, 14

49 and each of the counterparties pays the City a floating rate based on the BMA Municipal Swap Index plus, on the Series 2003B Bonds, a spread. The notional amounts decline at the same times and in the same amounts as principal of the related Series 2003 Bonds is retired. Each of the Swap Agreements is a Qualified Hedge Agreement within the meaning of the Indenture. The periodic payments owed by the City to the counterparties under the Swap Agreements are treated as debt service charges on the Revenue Bonds under the Indenture and are secured by a pledge of the Airport Revenues on a parity with the pledge of the Airport Revenues securing Revenue Bonds issued and outstanding under the Indenture. At the time the Swap Agreements were executed, the Indenture did not permit any payments owed on any early termination of Qualified Hedge Agreements to be secured. Consequently, the Swap Agreements provided that any payment owed on early termination was payable from the Surplus Fund. Subsequently, the then-existing Indenture was amended in connection with the amendment of the Use Agreements and with the consent of the deemed Holders of the Outstanding Bonds (the insurers and liquidity providers) and the consent of the counterparties to the Swap Agreements. The Sixth Supplemental Indenture dated as of January 1, 2006 permits amounts owed to a counterparty in respect of early termination of a Qualified Hedge Agreement, and any amounts required to be delivered as collateral in respect of a Qualified Hedge Agreement, to be considered Subordinated Indebtedness secured by the Airport Revenues on a basis subordinate to the payment of debt service charges on the Revenue Bonds. The Swap Agreements provide that amendments of the Indenture are incorporated in the Swap Agreements. Brook Park Residential Acquisition Project Under a settlement agreement with Brook Park dated September 6, 2001 (the Brook Park Settlement Agreement ), the City agreed, among other things, to purchase residential properties in Brook Park in a defined area south of the Airport for the purpose of airport expansion. The intent was to include land for a future third parallel runway at the Airport. Under the Brook Park Settlement Agreement, the City is obligated over a seven-year period, which commenced in 2002, to use up to approximately $36 million for this purpose. The City s obligation includes making purchase offers to homeowners in the defined area, for up to $5.14 million each year, with unused funds in any year to be carried over for purchase offers in the following year. 15

50 Airport Special Revenue Bonds In March 1998, the City issued $75,120,000 principal amount of Airport Special Revenue Bonds (the Series 1998 Special Revenue Bonds ) to finance the design and construction of certain airport facilities leased to Continental Airlines, including portions of a new regional jet concourse, Concourse D. At the same time, the City authorized and sold for forward delivery (September 2, 1999) $71,440,000 of Airport Special Revenue Refunding Bonds, Series 1999 (the Series 1999 Special Revenue Bonds ), the proceeds of which were used to currently refund $74,975,000 aggregate principal amount of the City s Airport Special Revenue Bonds, Series 1990 (the Series 1990 Special Revenue Bonds ), outstanding as of the date thereof. The Series 1990 Special Revenue Bonds were issued by the City on behalf of Continental Airlines to finance certain facilities at the Airport, including the expansion of Concourse C. The Series 1998 Special Revenue Bonds and the Series 1999 Special Revenue Bonds are payable solely from revenues derived by the City under a net lease agreement with Continental Airlines and are not payable out of or secured by Airport Revenues or the Special Funds. Historical Financial Data for the Airport System The financial statements of the City of Cleveland, Department of Port Control, Divisions of Cleveland Hopkins International and Burke Lakefront Airports for the years ended December 31, 2005 and 2004, included as Appendix B to the Official Statement, have been audited by the Auditor of the State of Ohio, as stated in her report. The unaudited financial statements of the City of Cleveland, Department of Port Control, Divisions of Cleveland Hopkins International and Burke Lakefront Airports for the sixmonth period ended June 30, 2006, are included as Appendix C to the Official Statement. [Remainder of page intentionally left blank] 16

51 Operating Results The following table describes the operating results for the Airport System for the years 2001 through 2005 and the unaudited results for the six months ended June 30, This information has been compiled from the audited financial statements for the years 2001 to 2005, inclusive, prepared for the Department of Port Control. Statement of Net Revenues in accordance with the Indenture: (Amount in 000 s) Unaudited 2006 Six months ended June 30 Airport Revenues $95,432 $88,134 $88,248 $111,467 $110,019 $54,198 Airport Expenses (56,794) (59,025) (57,845) (58,647) (66,957) 30,287 Net Revenues $38,638 $29,109 $30,403 $52,820 $43,062 23,911 Statement of Income (GAAP): Total Operating Revenue $92,825 $86,277 $89,854 $110,852 $111,075 $55,011 Total Operating Expense (80,394) (86,777) (91,606) (98,665) (114,022) (53,917) Operating Income 12,431 (500) (1,752) 12,187 (2,947) 1,094 Non-operating Revenues 20,244 11, ,493 18,110 3,201 Net Income (Loss) $32,675 $11,045 ($1,633) $16,680 $15,163 $4,295 The following is a reconciliation of the operating results shown above, which were prepared in accordance with generally accepted accounting principles ( GAAP ), with those prepared with reference to the Indenture and the Use Agreements. Reconciliation: (Amount in 000 s) Unaudited 2006 Six months ended June 30 Net Income (GAAP) $32,675 $11,045 ($1,633) $16,680 $15,163 $4,295 Add Back: Depreciation $23,599 $27,752 $33,761 $40,018 $47,065 $23,630 Interest Expense 28,869 23,804 21,216 31,175 28,717 18,116 Other Adjustments 12,589 20,846 27,191 12, Deduct: PFC Revenue ($15,024) ($18,911) ($21,886) ($22,587) ($22,785) ($12,010) Other Interest Income (13,533) (8,038) (6,040) (3,005) (7,588) (6,778) Other Adjustments/ Contributed Capital (30,537) (27,389) (22,206) (21,981) (18,190) (3,342) Net Revenues $38,638 $29,109 $30,403 $52,820 $43,062 $23,911 17

52 Discussion of Financial Operations The preceding Operating Results table summarizes the audited financial results of the Airport for the years 2001 through 2005 and the unaudited results for the six months ended June 30, Operating revenues in the table are comprised of landing fees, terminal rentals, concessions and utility reimbursements. Operating expenses are comprised of salaries and wages, employee benefits, utilities, maintenance, materials and supplies and professional and other contractual services. Operating revenues In 2005, the number of operations remained constant at the Airport. However, due to a change in the type of aircraft servicing the Airport, landed weight decreased 164,037,000 pounds, or 2.0 percent from the previous year. Of the $111,075,000 in total operating revenue, $31,771,000 or 28.6 percent was from Signatory Airline landing fees, representing a 6.0 percent decrease from Signatory Airline terminal rental accounted for $28,275,000 or 25.5 percent of total operating revenue. This represents an increase of 4.6 percent, which is primarily due to an increase in rates and charges. Parking operations accounted for $17,155,000 or 15.4 percent of total operating revenues. This is an increase of 9.6 percent over the prior year s parking revenue. This increase is due to increased traffic at the Airport. Rental car revenues, the fourth largest revenue source, accounted for 8.7 percent of total Airport System Revenues, representing a decrease of 4.7 percent over the prior year. Operating expenses Total operating expenses increased $15,357,000, due to an increase in depreciation expense and an increase in operations and maintenance expense. Depreciation expense increased due to the addition of phase two of Runway 6L/24R, which opened in November Non-operating revenue and expense Expenses related to the Airport s sound insulation program decreased by $2,953,000, due to the fact the Airport is nearing completion of the 65 day and night levels ( dnl ) sound insulation program and is transitioning into the next phase of the program. Capital and other contributions The Divisions received $18,190,000 in Federal Airport Improvement Grants in These grants were primarily for the residential sound insulation program, airfield safety improvements and the construction of runway 6L/24R. As of December 31, 2005, the Airport reported $3,393,000 of unrestricted cash and cash equivalents and $271,816,000 of restricted cash and cash equivalents, compared to December 31, 2004 balances of $11,511,000 and $306,104,000, respectively. The decrease in unrestricted cash and cash equivalents is primarily due to an increase in investments. The decrease in restricted cash and cash equivalents is due to capital expenditures, primarily in connection with the Airport s 2000 expansion program. 18

53 Discussion of the Six-Month Period ended June 30, 2006 Financial Results Operating revenues: In the first six months of 2006, total passengers declined 0.5 percent over the same period in Of the $55,011,000 in total operating revenue, $15,492,000 or 28.2 percent was from Signatory Airline landing fees. This is consistent with 2005 amounts. Signatory Airline terminal rentals accounted for $14,960,000 or 27.2 percent of total operating revenue. This represents a slight increase from the 2005 results, which is due to an increase in terminal rental rates. Parking operations accounted for $7,554,000 or 13.9 percent of total operating revenues. This decrease is due to the fact that the Long Term Parking Garage was undergoing rehabilitation during Rental car revenues, the fourth largest revenue source, accounted for 10.2 percent of total operating revenues. This increase is due primarily to an increase in the number of rental car transactions. Operating expense: Operating expenses are slightly below 2005 results, primarily due to a mild winter season. Depreciation expense increased due to the addition of capital assets in 2005, specifically airfield improvements and equipment. Non-operating revenue and expense: Capital and other contributions appears to be significantly lower than However, Airport Improvement Program Grants are generally not received until the second half of the year. Debt Service Requirements The following table sets forth the annual debt service requirements accruing in each year on the Bonds outstanding following the issuance of the Series 2006 Bonds. The debt service shown on the table is for the period in which it accrues. Year Ending December 31 Outstanding Series 2006 Bonds 1 Bonds 19 Total Debt Service 2006 $ 60,771,473 $ 760,560 $ 61,532, ,334,082 6,179,476 66,513, ,160,271 6,174,499 66,334, ,390,466 7,194,522 66,584, ,394,065 7,195,846 66,589, ,246,859 7,199,025 66,445, ,475,961 7,198,800 66,674, ,414,831 12,980,169 66,394, ,611,246 13,083,871 66,695, ,554,923 13,094,155 66,649, ,769,465 13,134,510 66,903, ,786,299 13,240,275 67,026, ,375,426 13,411,988 66,787, ,860,423 13,299,838 67,160, ,979,132 15,196,950 67,176, ,175,911 15,101,750 67,277, ,178,972 15,134,750 67,313, ,218,941 15,193,500 67,412, ,921,088 67,921, ,941,806 67,941, ,009,413 68,009, ,065,150 68,065, ,108,513 68,108, ,164,225 68,164, ,214,425 68,214, ,866,863 4,866, ,903,425 4,903,425 1 Does not include debt service on the Refunded Bonds. Interest on the Series 1997D Bonds is assumed at five percent. Interest on the Series 1997E Bonds is assumed at 5.30 percent. Interest on the Series 2000C Bonds is based on the fixed rates following the conversion from the variable rates. Interest on the Series 2003A Bonds is based on a swap fixed rate of percent and interest on the Series 2003B Bonds is based on a swap fixed rate of percent. Interest on the Series 2003C Bonds is assumed at 5.45 percent.

54 REPORT OF THE AIRPORT CONSULTANT Reed, Mandes & Associates, LLC prepared the Report of the Airport Consultant which is included as Appendix A to the Official Statement. The Report of the Airport Consultant describes key factors that will affect future airline traffic, presents airline traffic and financial forecasts for Fiscal Years 2007 through 2011, and sets forth the assumptions upon which the forecasts are based. Forecast Enplanements See Appendix A REPORT OF THE AIRPORT CONSULTANT for a discussion of projections of future growth of passenger traffic at the Airport. The Report of the Airport Consultant forecasts passenger enplanements at the Airport to increase an average of 2.3 percent per year between 2006 and Forecast Coverage and Signatory Airline Cost Per Enplaned Passenger The following table, which is derived from information included in the Report of the Airport Consultant, shows Signatory Airline cost per enplaned passenger and forecast net revenues and debt service coverage for the Outstanding Bonds and the Series 2006 Bonds. The Airport Consultant has concluded that the Additional Bonds Test in connection with the issuance of the Series 2006 Bonds is met for Fiscal Years 2007 through See Appendix A - REPORT OF THE AIRPORT CONSULTANT - CALCULATION OF DEBT SERVICE COVERAGE AND ADDITIONAL BONDS TEST and Exhibit G to Appendix A. FORECAST OF DEBT SERVICE COVERAGE AND AIRLINE COST PER ENPLANED PASSENGER Fiscal Year Net Revenues Available for Debt Service Revenue Bond Debt Service Requirement Revenue Bond Debt Service Coverage Signatory Airline Cost Per Enplaned Passenger 2007 $ 92,301 $66, x $ ,717 75, ,353 75, ,952 77, ,386 77, The Report of the Airport Consultant has been included herein in reliance upon the knowledge and experience of Reed, Mandes & Associates, LLC, as the Airport Consultant. The Report of the Airport Consultant should be read in its entirety for an understanding of the forecasts and the underlying assumptions. As noted in the Report of the Airport Consultant, any financial forecast is subject to uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances may occur. The actual financial results achieved will vary from those forecasts, and the variations may be material, particularly as they relate to possible additional terrorist acts or acts of war. See Appendix A REPORT OF THE AIRPORT CONSULTANT. 20

55 Airline Information AVIATION SECTOR Certain Signatory Airlines (or their respective parent corporations) are subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, (the Exchange Act ), and in accordance therewith file reports and other information with the Securities and Exchange Commission (the SEC ). Only companies with securities listed on a national securities exchange or registered under 12(g) of the Exchange Act, or companies which are required to file with the SEC pursuant to 15(d) of the Exchange Act, are subject to the information reporting requirements. Certain information, including financial information, concerning each reporting Signatory Airline (or its respective parent corporation) is disclosed in such reports and statements filed with the SEC. Such reports and statements can be inspected in the Public Reference Rooms of the SEC which can be located by calling the SEC at SEC In addition, electronically filed SEC Reports can be obtained from the SEC s website at In addition, each domestic Signatory Airline is required to file periodic reports of financial and operating statistics with the U.S. Department of Transportation (the DOT ). Such reports can be inspected at the following location: Office of Airline Information, Bureau of Transportation Statistics, Department of Transportation, Room 4201, 400 Seventh Street, S.W., Washington, D.C , and copies of such reports can be obtained from the DOT at prescribed rates. For more information about the airline industry, see Investment Considerations, below. Investment Considerations Recent Developments Affecting the Air Transportation Industry Recent Events. The financial difficulties of most domestic airlines, including the bankruptcy of several airlines, the general economic downturn of the U.S. economy, the significant fluctuations in fuel prices, the terrorist attacks of September 11, 2001 and the threat of future terrorist attacks, the conflicts in Iraq and Afghanistan and the increased security requirements in air transportation have significantly adversely affected the North American aviation system, including operations of the Airport and the financial condition of the airlines. Certain airlines have filed for protection under the U.S. Bankruptcy Code.. Potential investors are urged to review the airlines financial information on file with the SEC, described in AVIATION SECTOR - Airline Information, above. The Airport has experienced increased operating costs due to compliance with federally mandated and other security and operating changes. The City cannot predict the likelihood of future incidents similar to September 11, 2001, the likelihood of future air transportation disruptions or the impact on the Airport or the airlines from such incidents or disruptions. Aviation Security Concerns and Related Costs. Concerns about the safety of airline travel and the effectiveness of security precautions, particularly in the context of international hostilities (such as those that have occurred in Iraq and Afghanistan) and terrorist attacks, may influence passenger travel behavior and air travel demand. These concerns intensified in the aftermath of the events of September 11, Travel behavior may be affected by anxieties about the safety of flying and by the inconveniences and delays associated with more stringent security screening procedures, both of which may give rise to the avoidance of air travel generally and the switching from air to surface travel modes. 21

56 Intensified security precautions have been instituted by government agencies, airlines and airport operators since the events of September 11, These precautions include the strengthening of aircraft cockpit doors, the federal program to allow and train domestic commercial airline pilots to carry firearms during flights, changes to prescribed flight crew responses to attempted hijackings, increased presence of armed air marshals, federalization of airport security functions under the Transportation Security Administration ( TSA ), revised procedures and techniques for the screening of baggage for weapons and explosives and technology for the screening of passengers, such as the United States Visitor and Immigration Status Indicator Technology ( US VISIT ). No assurance can be given that these precautions will be successful. Also, the possibility of international hostilities and/or further terrorists attacks involving or affecting commercial aviation are a continuing concern that may affect future travel behavior and airline passenger demand. After the events of September 11, 2001, the United States government launched military offensives against Afghanistan and Iraq, and has warned that these hostilities may continue for years. The City cannot predict the duration of the effects of the recent hostilities on the air transportation system, the likelihood of any retaliation or the likelihood of any future terrorist attacks. Any such action could directly or indirectly reduce passenger traffic and depress airline industry revenues and Airport Revenues. The City also cannot predict the effect of any future government-required security measures on passenger activity at the Airport, nor can the City predict how the government will staff the security screening functions or the effect on passenger activity of government decisions regarding its staffing levels. The Report of the Airport Consultant states that, historically, air travel demand in the United States has recovered after temporary declines stemming from terrorist attacks and international hostilities. Provided that the intensified security precautions now in place in the United States and elsewhere are effective in instilling confidence in the safety of commercial aviation while not imposing unacceptable inconveniences for air travelers, of which there can be no assurance, it can be expected that future demand for airline travel at the Airport will depend primarily on economic rather than security factors. See Appendix A - REPORT OF THE AIRPORT CONSULTANT. The Aviation and Transportation Security Act (the Aviation Security Act ) requires that all United States airports use TSA-approved explosive detection systems ( EDS ) to screen all checked baggage. EDS equipment purchased by the federal government has been installed at the Airport. The Aviation Security Act also requires that all passenger bags, mail and cargo be screened to prevent the carriage of weapons (including chemical and biological weapons), explosives or incendiary devices. The Airport continues to follow and implement security initiatives based on the policy and guidelines established by the TSA and is currently in compliance with all federally mandated security requirements. However, TSA has broad discretion to modify security requirements from time to time. To the extent that the Airport incurs substantial security costs in the future, such costs could adversely affect the Airport s financial condition. Although the City has received various capital grants and reimbursements for a portion of security operating costs from the federal government since 2002, there can be no assurance that the Airport will continue to receive such federal assistance or that such assistance will be sufficient to mitigate the impact of such costs. In addition, if the airlines are required to pay substantial security costs, it would place an additional financial burden on many already financially troubled airlines which, in turn, 22

57 could have a negative impact on the operations of the Airport and Airport Revenues. The City cannot predict the likelihood or impact of any future government-required security measures. Financial Condition of Airlines Serving the Airport The airlines serving the Airport have all been impacted by the events described above. Current and future financial and operational difficulties encountered by the airlines serving the Airport, most notably Continental Airlines, could have a material effect on operations at, and the financial condition of, the Airport. Continental Airlines In 2005, Continental Airlines, Continental Express and Continental Connection accounted for 60.9 percent of enplaned passengers at the Airport. In its annual report to the SEC for the year ended December 31, 2005, Continental Airlines reported a net loss of $68 million for the year ended December 31, 2005, compared with a net loss of $409 million for the year ended December 31, Loss per common share was $0.96 in 2005 compared with a loss per common share of $6.19 in Operating losses were $39 million in 2005 compared with an operating loss of $409 million in Operating revenues for the year ended December 31, 2005 were $1,309 million higher than for the year ended December 31, In its quarterly report to the SEC for the nine months ended September 30, 2006, Continental Airlines reported net income of $237 million (or $2.17 diluted earnings per share) for the nine-month period ended September 30, These results compare to a reported net income of $61 million (or $0.80 diluted earnings per share) for the nine-month period ended September 30, Impact of Uncertainties of the Airline Industry on the Airport The demographic and economic characteristics of the Cleveland-Akron Consolidated Metropolitan Statistical Area (the Airport Service Region) comprise the underlying components of air transportation demand for passengers and commercial goods. These demand components are affected by individual airline decisions regarding air service, hubbing operations and aircraft fleet mix. The financial strength of airlines serving the Airport also are key determinants of future airline traffic. In addition, individual airline decisions regarding level of service, particularly hubbing activity, at the Airport will affect total enplanements. Continental Airlines maintains substantial hubbing operations at the Airport. If Continental Airlines were to discontinue or reduce its hubbing operations at the Airport, its current level of connecting activity may not be replaced by other carriers. There is no assurance that the Airport, despite a demonstrated level of airline service and operations, will continue to maintain such levels in the future. The continued presence of the airlines serving the Airport, and the levels at which that service will be provided, are a function of a variety of factors. Future airline traffic at the Airport will be affected by, among other things, the financial situation of the airlines serving the Airport, terrorist activities or the threat of such activities, security and other costs, disease, the growth or decline in the population and the economy of the Airport Service Region and by national and international economic conditions, federal regulatory actions, airline service, air fare levels and the operation 23

58 of the air traffic control system. Accordingly, no assurance can be given as to the levels of aviation activity that will be achieved at the Airport. Competition from Other Airports Besides the well-established midwestern hubs such as Chicago/O'Hare, Cincinnati, Pittsburgh, Minneapolis/St. Paul and Detroit with which the Airport competes in some degree for connecting passengers, the Akron-Canton Regional Airport ( Akron ) located approximately 60 miles away provides competition for the Airport Service Region s O&D passenger base. In recent years, an increased number of the Airport Service Region s O&D passengers utilized Akron as that airport introduced new air carrier service, primarily offered by low fare air carrier AirTran. In addition to increased air service, the southward migration of the Airport s population base over the last decade has made Akron a more reasonable alternative for air travel. In calendar year 2005 Akron enplaned approximately 711,000 passengers. For more information, see Appendix A - REPORT OF THE AIRPORT CONSULTANT - REGIONAL COMPETITION. Status of Use Agreements A significant portion of Airport Revenues is derived from the landing fees and terminal rental charges imposed under the Use Agreements. Pursuant to these agreements, each Signatory Airlines has agreed to pay certain rates and charges for its use of the Airport. Airlines which have not signed a Use Agreement ( Non-Signatory Airlines ) pay higher rates and charges for use of Airport facilities. Currently, the two primary airlines at the Airport, Continental Airlines and Southwest Airlines, are Signatory Airlines. In the event that other air carriers fail to sign Amendment No. 1 to the Agreement and Lease that became effective January 1, 2006, they will be considered non-signatory airlines and will be subject to considerably higher fees. The Airport expects additional air carriers will become Signatory Airlines. See Effect of Airline Bankruptcies below and SECURITY FOR THE SERIES 2006 BONDS - Airline Use Agreements above. Effect of Airline Bankruptcies Certain airlines, including Delta and Northwest Airlines, have filed for and remain under bankruptcy protection. US Airways and United Airlines have only recently emerged from bankruptcy. Additional bankruptcies, liquidations or reorganizations of other airlines could occur. Each of these airlines were Signatory Airlines prior to January 1, The bankruptcy of a Signatory Airline with significant operations at the Airport, such as Continental Airlines, could have a material adverse effect on operations at the Airport, Airport Revenues and the cost to the other airlines operating at the Airport. The gates and related facilities at the Airport are leased on a preferential basis to the Signatory Airlines pursuant to respective Use Agreements, with the exception of four gates that are operated on a common use basis. In the event of bankruptcy proceedings involving any Signatory Airline, including Continental Airlines, the debtor or its bankruptcy trustee must determine within a time period determined by the court whether to assume or reject the applicable Use Agreement. In the event of assumption, the debtor would be required to cure any prior defaults and to provide adequate assurance of future performance under the relevant agreement. 24

59 Rejection of a Use Agreement by any Signatory Airline that is a debtor in a bankruptcy proceeding would result in the termination of that Use Agreement. Such rejection of a Use Agreement would give rise to an unsecured claim of the City against the debtor s estate for damages, the amount of which may be limited by the Bankruptcy Code. However, the amounts unpaid as a result of a rejection of a Use Agreement by a Signatory Airline in bankruptcy would be passed on to the remaining Signatory Airlines under their Use Agreements. Whether or not a Use Agreement is assumed or rejected in a bankruptcy proceeding, it is not possible to predict the subsequent level of utilization of the gates leased under such agreement. Decreased utilization of gates could have a material adverse effect on Airport operations and on the cost to the airlines of operating at the Airport. Cost of Aviation Fuel The price of aviation fuel continues to be an important and uncertain determination of an air carrier s operating economics. According to the Air Transportation Association, airlines spent more than $30 billion on fuel during 2005, double what they spent in 2003, and up from $21 billion in In January 2006, the price of aviation fuel was approximately 40 percent higher than the price of aviation fuel in January Historically, aviation fuel prices have been particularly sensitive to worldwide political instability. Economic expansion in emerging markets also contributes to higher aviation fuel prices. Significant and prolonged increases in the cost of aviation fuel have had and are likely to continue to have an adverse impact on the air transportation industry by increasing airline operating costs, hampering airline recovery plans and reducing airline profitability. See Appendix A -- REPORT OF THE AIRPORT CONSULTANT. Geopolitical Risks The terrorist attacks in the United States and other parts of the world, the conflicts in Iraq and Afghanistan and the increased threat of further terrorist attacks decreased passenger traffic levels commencing in The City cannot assess the threat of terrorism and the probability of another attack on American soil or against Americans traveling or American interests abroad. Should new attacks occur against the air transportation industry, the travel industry, cities, utilities, infrastructure, office buildings or manufacturing plants, the effect on travel demand could be substantial. Loss of PFCs The Federal Aviation Administration ( FAA ) has the power to terminate the authority to impose passenger facility charges ( PFCs ) if the City s PFCs are not used for approved projects, if project implementation does not commence within the time period specified in the FAA s regulations or if the City otherwise violates FAA regulations. The City s plan of funding for the CIP is premised on certain assumptions with respect to the timing and amounts of the City s PFC applications, and the availability of PFCs to fund portions of certain projects in the CIP. In the event the PFCs are lower than those expected or that certain portions of the CIP are not determined to be PFC-eligible, the City may elect to delay certain projects or seek alternative sources of funding, including the possible issuance of Additional Revenue Bonds. See Part II - THE CITY AND THE AIRPORT SYSTEM - CAPITAL IMPROVEMENT PROGRAM. It is not possible to predict whether future restrictions or limitations on Airport operations will be imposed, whether future legislation or regulations will affect anticipated 25

60 federal funding or PFC revenue collections for capital projects for the Airport or whether such restrictions or legislation would adversely affect Airport Revenues. Hedge Agreements The City has entered into certain hedge agreements relating to the Series 2003A Bonds and the Series 2003B Bonds, by which the City simulated fixed rates of interest with respect to the variable rate Series 2003A Bonds and Series 2003B Bonds. The City may enter into additional hedge agreements. Under certain circumstances, hedging transactions may be terminated prior to the maturity of the related Revenue Bonds. Accordingly, no assurance can be given that any hedging transaction will continue to be in existence. If a hedging transaction is terminated by the City, under certain market conditions the City may owe a termination payment to a hedging counterparty. Such a termination payment generally would be based upon the market value of the hedging transaction on the date of termination and could be substantial, but such payments would be subordinate to payments of principal and interest on the Bonds. See Outstanding Bonds and Other Obligations - Other Obligations of the Airport System - Hedge Agreements, above. Assumptions in the Report of the Airport Consultant: Forward-Looking Statements The Report of the Airport Consultant incorporates numerous assumptions as to the utilization of the Airport and other matters and states that any forecast is subject to uncertainties. The Report of the Airport Consultant should be read in its entirety regarding all of the assumptions used to prepare the forecasts made therein. No assurances can be given that the assumptions contained in the Report of the Airport Consultant will occur. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, the actual results achieved during the forecast period will vary, and the variations may be material. See Appendix A - REPORT OF THE AIRPORT CONSULTANT. This Official Statement, including particularly the Report of the Airport Consultant, contains statements relating to future results that are forward looking statements as defined in the Private Securities Litigation Reform Act of When used in this Official Statement, the words estimate, anticipate, forecast, project, propose, plan, expect, assume and similar expressions identify forward looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward looking statements. General Matters LITIGATION To the knowledge of the appropriate officials of the City, no litigation or administrative action or proceeding is pending or threatened (a) restraining or enjoining, or seeking to restrain or enjoin (i) the issuance and delivery of the Series 2006 Bonds, (ii) the execution and delivery of the Seventh Supplemental Indenture, or (iii) the collection or pledge of the Airport Revenues or the Special Funds to pay debt service on the Series 2006 Bonds, or (b) contesting or questioning (i) the proceedings and authority under which the Series 2006 Bonds have been authorized and are to be issued, sold, executed or delivered or under which the 26

61 Indenture, including the Seventh Supplemental Indenture, has been executed and delivered, (ii) the validity of the Series 2006 Bonds or the Indenture, including the Seventh Supplemental Indenture, or (iii) the powers of authority of the City with respect thereto or with respect to the fixing and collecting of rates and charges for the Airport System, or (c) challenging the City s right to own or operate the Airport System. The City will deliver a certificate to that effect to the Underwriters at the time of original delivery of the Series 2006 Bonds to the Underwriters. In addition to the legal proceedings described below, the City is a party to various legal proceedings seeking damages or injunctive or other relief generally incidental to its operations. These proceedings are not directly related to the Series 2006 Bonds or the security for the Series 2006 Bonds. The ultimate disposition of these proceedings is not now determinable. It is the opinion of the City s Director of Law, based on his present understanding and knowledge of these proceedings, that the disposition of these proceedings, individually or in the aggregate, will not result in liabilities in an amount which, in the opinion of the City s Director of Finance, will have a material adverse effect on the Series 2006 Bonds, the security for the Series 2006 Bonds or the current operations of the Airport System. Ohio Environmental Protection Agency On April 20, 2001, the Airport and the State of Ohio executed a consent order allowing the Airport to proceed with its expansion program. The consent order required the Airport to address environmental issues, which included handling of de-icing chemicals, removal of soils during construction, and an investigation into the effects of past de-icing on Airport property. In cooperation with the Ohio Environmental Protection Agency ( OEPA ) the City has implemented numerous capital improvements that address the consent order. The most significant recent event is that the City is in the process of commissioning a Centralized Deicing Facility, which will eliminate most discharges of de-icing chemicals into local waters. A source area reduction program has been implemented that removes soils adversely impacted by de-icing chemicals as those soils are discovered. The City has sought a modification to the National Pollutant Discharge Elimination System ( NPDES ) permit from the OEPA, which will address new effluent limits on de-icing chemicals. The OEPA has also notified the City that Burke Lakefront Airport is no longer eligible for a general NPDES permit. The City will have to apply for an individual permit that specifically addresses the needs of Burke Lakefront Airport. Submittal of the application is expected in

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63 APPENDIX A REPORT OF THE AIRPORT CONSULTANT A-1

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65 REED, MANDES & ASSOCIATES, LLC 1890 Broadway Street Suite 502 San Francisco, CA Tel: (415) Fax: (415) October 26, 2006 Ms. Sharon Dumas Director of Finance City of Cleveland 601 Lakeside Avenue Room 104 Cleveland, OH Mr. Ricky D. Smith Director of Port Control City of Cleveland 5300 Riverside Drive Cleveland, Ohio Re: Report of the Airport Consultant, City of Cleveland, Ohio, Airport System Revenue Bonds (Cleveland Hopkins International Airport), Series 2006 $77,860,000 Dear Ms. Dumas and Mr. Smith: We are pleased to submit this Report of the Airport Consultant (this Report) on the proposed issuance of City of Cleveland, Ohio, Airport System Revenue Bonds, Series 2006 (the Series 2006 Bonds). This Report addresses the requirements related to the issuance of the Series 2006 Bonds. Attached to this Report are certain background, assumptions and rationale for the financial forecasts included in this Report (the Attachment). The City of Cleveland, Ohio (the City) owns and operates two airports Cleveland Hopkins International Airport (the Airport), the principal air carrier facility serving the Cleveland metropolitan area, and Burke Lakefront Airport, a reliever airport. The Airport together with Burke Lakefront Airport is referred to in this report as the Airport System. The City operates the Airport System through its Department of Port Control. The City is issuing the Series 2006 Bonds to 1) advance refund the City s Airport System Revenue Bonds, Series 2000A maturing January 1, 2014 to and including January 1, 2021, 2) advance refund the City s Airport System Revenue Bonds, Series 1997B maturing January 1, 2010 to and including January 1, 2017, A-1

66 Ms. Dumas and Mr. Smith October 26, 2006 Page 2 of 7 and 3) pay related costs of issuance, underwriter s discount and bond insurance. The Bond Service Charges associated with the Series 2006 Bonds will be paid by Airport Revenues. The Series 2006A Bonds will be issued on a tax-exempt basis. Bond Counsel will opine that the interest on the Series 2006A Bonds is not an item of tax preference for purposes of the alternative minimum tax (AMT). The Series 2006B Bonds will be issued on a taxable basis. The total principal amount of the Series 2006A and Series 20006B Bonds (collectively, the Series 2006 Bonds) to be issued is estimated to be $77,860,000. When issued, the Series 2006 Bonds will be on parity with previously issued and outstanding Airport System Revenue Bonds. After issuance of the Series 2006 Bonds the total principal amount outstanding of Airport System Revenue Bonds issued by the City will be $944,885,000. The Report also incorporates the financial impacts associated with the anticipated conversion of $149,000,000 of Series 2000C Bonds from variable interest rates to fixed interest rates extending to the final maturity date of such Bonds. The Series 2006 Bonds will be issued under the terms of the Trust Indenture between the City of Cleveland and The Bank of New York Trust Company, N.A., as successor trustee (the Trustee), dated November 1, 1976, as supplemented and amended by the First through Eighth Supplemental Trust Indentures (the Indenture). In the Indenture, the City has pledged and granted to the Trustee a first lien on the Airport Revenues and Special Funds as security for the payment of the Bond Service Charges on all Revenue Bonds. Certain capitalized terms used in this report are as defined in the Indenture. In the Indenture the City covenants to prescribe and charge such rates, fees and charges for the use of the Airport System as to produce in each Fiscal Year (FY) 1 Airport Revenues, together with Other Available Funds, less Operating Expenses in an amount at least equal to 125% of the amount maturing and becoming due in such FY for the payment of principal of and interest on all outstanding Revenue Bonds referred to as the Rate Covenant. (An alternative Rate Covenant ratio applies if there is General Obligation Debt outstanding for the Airport System. There is none outstanding nor does the City anticipate issuing any in the future for the Airport System.) Further, the Indenture requires that, as a condition of issuing any Additional Revenue Bonds, the City must provide a written report of the Airport Consultant demonstrating that (a) the projected Airport Revenues, together with 1 The City s fiscal year begins January 1 and ends December 31. A-2

67 Ms. Dumas and Mr. Smith October 26, 2006 Page 3 of 7 Other Available Funds, during each of the first, second and third complete Fiscal Years immediately following the issuance of the Additional Revenue Bonds, less the projected Operating Expenses during each of such Fiscal Years, are at least equal to the Rate Covenant after adding Bond Service Charges associated with the Additional Revenue Bonds, and (b) the projected Airport Revenues, together with Other Available Funds, during each of the fourth and fifth complete Fiscal Years immediately following the issuance of Additional Revenue Bonds, less the projected Operating Expenses during each of such Fiscal Years, is at least equal to 125% of the maximum annual Bond Service Charges on all outstanding Revenue Bonds, including the Additional Revenue Bonds to be issued. This is referred to as the Additional Bonds Test. (An alternative Additional Bonds Test ratio applies if there is General Obligation Debt outstanding for the Airport System. There is none outstanding.) Compliance with the Additional Bonds Test as defined above and contained in the Indenture is demonstrated in Exhibit G of the Attachment. The City has historically entered into agreements with most of the airlines serving the Airport. The agreements are referred to as the Use Agreements and the airlines signatory to those agreements are the Signatory Airlines. The Use Agreements were recently amended to, among other items, extend the lease period 10 years to December 31, As of October 1, 2006, Continental Airlines (Continental) and Southwest Airlines (Southwest) are party to the amended Use Agreement. (Continental and Southwest accounted for 70.9% of the Airport s total enplaned passengers in 2005.) The City is in the process of finalizing lease documents with several other airlines (including former Signatory Airlines) that are expected to become Signatory Airlines. Airlines serving the Airport who are not Signatory Airlines pay the same rates and charges as the Signatory Airlines, but with a 25% administrative fee added to their payments. * * * * * In preparing this Report, we evaluated the ability of the Airport to generate Airport Revenues sufficient to meet the funding requirements established by the Indenture and the Additional Bonds Test during the forecast period FY 2007 to FY 2011, and analyzed, among other factors, the following: Future airline traffic demand at the Airport, giving consideration to the demographic and economic characteristics of the region served, historical trends in airline traffic and key factors that will affect future traffic. A-3

68 Ms. Dumas and Mr. Smith October 26, 2006 Page 4 of 7 The current economic condition of the U.S. as it relates to the demand for air travel. The current state of the airline industry as it relates to air service provided at the Airport. The Airport s continuing role as a connecting passenger hub in the route system of Continental Airlines and its commuter/regional operators (Continental). Impact of provisions in the amended Use Agreement on future air service activity and enplaned passenger levels. Estimated sources and uses of funds related to the Series 2006 Bonds, including annual Bond Service Charges provided by UBS Securities, LLC. (UBS), representative of the underwriters for the Series 2006 Bonds. Historical relationships among Airport Revenues, Operating Expenses and airline traffic at the Airport, and other factors that may affect future Airport Revenues and Operating Expenses. The Airport s historical financial performance in terms of Airport Revenues and Operating Expenses. The City s policies and contractual agreements related to the use and occupancy of Airport facilities, including the calculation of rentals, rates, fees and charges; the operation of concession privileges; and the leasing of buildings and grounds. FYs 2001 through 2005 (audited) and FY 2006 year-to-date (unaudited) Financial Statements. Additionally, in preparing this Report, we did not analyze the impacts of possible future terrorist attacks or additional military action by the United States or others, and any associated global economic effect. We also did not analyze the potential disruption to the airline industry as a result of possible future terrorist attacks or the implementation of additional security mandates. Any one or any combination of the above could materially affect the forecasts. We also identified key factors upon which the future financial results of the Airport may depend, and formulated assumptions about those factors. On the basis of those assumptions, we assembled the financial forecasts presented in the Attachment. The forecasts of Net Revenues (Airport Revenues plus Other Available Funds less Operating Expenses), total Bond Service Charges and debt service coverage are summarized below. As presented, Net Revenues are forecast to be at least equal to (a) 125% of the Bond Service Charges on all Revenue Bonds to be outstanding in each of the first, second and third complete Fiscal Years A-4

69 Ms. Dumas and Mr. Smith October 26, 2006 Page 5 of 7 immediately following the issuance of the Series 2006 Bonds, and (b) 125% of the maximum annual Bond Service Charges on all Revenue Bonds to be outstanding in each of the fourth and fifth Fiscal Years following issuance of the Series 2006 Bonds, and fulfill the requirements of the Additional Bonds Test. Fiscal Year 2006E 2007F 2008F 2009F 2010F* 2011F* Net Revenues (In Thousands) [A] $73,727 92, , , , ,386 Bond Service Charges (In Thousands) [B] $57,521 66,701 75,686 75,933 77,357 77,357 Debt Service Coverage [A] [B] *Per the Indenture, maximum annual Bond Service Charges on all Revenue Bonds to be outstanding in each of the fourth and fifth Fiscal Years is included. Forecasts of revenues to be derived by the Airport System from airline landing fees, terminal building rentals and other charges (airline costs) are often expressed on a per enplaned passenger basis to compare airline costs at different airports. Forecast Signatory Airline cost per enplaned passenger for the Airport is summarized in the table below. The Signatory Airline cost per enplaned passenger at the Airport in each year is reasonable for the size and nature of operation at the Airport as compared to other airports in the U.S. Fiscal Year 2006E 2007F 2008F 2009F 2010F 2011F Signatory Airline Revenue (In Thousands) [A] Signatory Enplaned Passengers (In Thousands) [B] Signatory Airline Cost Per Enplaned Passenger [A] [B] $55,838 63,268 64,247 62,740 65,654 72,251 5,543 5,610 5,726 5,861 6,049 6,211 $ * * * * * The financial forecasts included in this Report are based on assumptions that were discussed with Airport management. Airport management has represented to us that the assumptions underlying the financial forecasts are, in their view, reasonable and appropriate, and further, that the assumptions reflect A-5

70 Ms. Dumas and Mr. Smith October 26, 2006 Page 6 of 7 conditions expected by Airport management and Airport management s expected course of action during the forecast period. These assumptions and the key factors that are significant to the financial forecasts are set forth in the Attachment to this Report. We believe that these assumptions are reasonable, and provide an appropriate basis for the financial forecasts. However, any financial forecast is subject to uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized, and unforeseeable events and circumstances may occur. The actual financial results achieved will vary from those forecasts, and the variations may be material, particularly as they relate to possible additional terrorists acts or acts of war. In preparing its findings and conclusions, Reed, Mandes & Associates has relied upon the accuracy and completeness of financial and other data provided to it by the referenced sources, without independent verification. We have no responsibility to update this Report for events or circumstances, including additional terrorist acts or acts of war, occurring after the date of this Report. * * * * * We appreciate the opportunity to serve as the City s Airport Consultant on this proposed financing. Sincerely, REED, MANDES & ASSOCIATES, LLC A-6

71 Attachment BACKGROUND, ASSUMPTIONS AND RATIONALE FOR THE FINANCIAL FORECASTS A-7

72 TABLE OF CONTENTS I. BACKGROUND OVERVIEW... A-11 THE AIRPORT... A-11 Origin-Destination Market... A-12 Connecting Hub... A-13 International Air Service... A-13 AIRLINES SERVING THE AIRPORT... A-14 AIRPORT FACILITIES... A-14 CAPITAL IMPROVEMENT PROGRAM... A-16 Future CIP Projects... A-16 Funding Sources Future CIP Projects... A-18 FINANCIAL FRAMEWORK FOR OPERATION OF THE AIRPORT... A-20 The Trust Indenture... A-20 The Airline Agreements... A-23 Accounting Principles and Historical Financial Operations... A-24 Outstanding Debt... A-25 CONCLUSION... A-25 II. AIRPORT SERVICE REGION OVERVIEW... A-27 THE AIRPORT AND ITS SERVICE REGION... A-27 GENERAL ECONOMY OF THE AIRPORT SERVICE REGION... A-29 Population... A-29 Personal Income... A-30 Employment... A-31 BUSINESS AND INDUSTRY IN THE AIRPORT SERVICE REGION... A-33 Major Employers in the Region... A-33 Services... A-34 Manufacturing... A-36 A-8

73 Transportation... A-37 General Economic and Business Climate Factors... A-37 CONCLUSION... A-39 III. ACTIVITY AND AIR SERVICE OVERVIEW... A-41 AIRLINE PASSENGER TRAFFIC... A-41 Domestic Passenger Traffic... A-41 Originating and Connecting Passengers... A-43 International Passenger Traffic... A-44 Airline Market Share of Passenger Traffic... A-44 AIRLINE AIRCRAFT DEPARTURES AND LOAD FACTORS... A-47 DOMESTIC ORIGIN-DESTINATION PATTERNS AND AIRLINE SERVICE... A-48 CONTINENTAL HUBIING ACTIVITY... A-49 CARGO SERVICE... A-50 AIRCRAFT LANDED WEIGHT... A-51 AIRCRAFT OPERATIONS... A-51 CONCLUSION... A-52 IV. KEY FACTORS AFFECTING FUTURE AVIATION DEMAND OVERVIEW... A-53 NATIONAL AND INTERNATIONAL ECONOMIC CONDITIONS AND EVENTS... A-53 STATE OF THE U.S. AIRLINE INDUSTRY... A-55 CONTINENTAL AND THE ROLE OF THE AIRPORT AS A CONNECTING HUB... A-56 ROLE OF POINT-TO-POINT, LOW COST AIR CARRIER SERVICE... A-59 A-9

74 REGIONAL COMPETITION... A-60 FEDERAL GOVERNANCE AND OVERSIGHT... A-62 CONCLUSION... A-64 V. AVIATION DEMAND FORECAST Assumptions... A-65 Enplaned Passengers... A-66 Aircraft Departures... A-67 Aircraft Landed Weight... A-68 Cargo... A-68 CONCLUSION... A-68 VI. FINANCIAL ANALYSIS OVERVIEW... A-69 THE SERIES 2006 BONDS... A-69 BOND SERVICE CHARGES REQUIREMENT... A-69 AIRPORT SYSTEM OPERATING EXPENSES... A-70 AIRPORT SYSTEM REVENUES... A-71 SIGNATORY AIRLINE LANDING FEES AND COST PER ENPLANED PASSENGER... A-73 CALCULATION OF BOND SERVICE CHARGES COVERAGE AND ADDITIONAL BONDS TEST... A-73 CONCLUSION... A-74 FINANCIAL EXHIBITS SUPPLEMENTAL TABLES A-10

75 I. BACKGROUND OVERVIEW The City of Cleveland s (the City) airport system comprises Cleveland Hopkins International Airport (the Airport) and Burke Lakefront Airport (Burke), collectively referred to as the Airport System. Both are owned by the City and are operated by the City s Department of Port Control. The Airport serves the sixteenth most populous metropolitan region in the U.S. the Cleveland-Akron Consolidated Metropolitan Statistical Area (CMSA). Located in the State of Ohio s most populous county, the Airport is situated approximately 10 miles southwest of the downtown area of the City and is accessible from multiple directions via interstate highways I-71 and I-480. The Airport is also accessible via the Greater Cleveland Regional Transit Authority s light rail transit system, which links the Airport with downtown areas and points east and west of downtown. The Airport has four runways, including three parallel runways (6L/24R, 6C/24C and 6R/24L) in the northeast-southwest primary wind direction and a crosswind runway (10/28), with an east-west orientation. In calendar year (CY) 2005, the Airport handled approximately 259,000 operations. Located downtown on the shores of Lake Erie, Burke serves as a designated reliever airport to the Airport. Burke has two parallel runways, the longest being Runway 6L/24R (6,200 feet), which is equipped with an instrument landing system. In CY 2005, Burke handled approximately 82,500 operations, serving mostly corporate and general aviation aircraft. This section of this Attachment (which addresses certain background, assumptions and rationale for the financial forecasts included in the Report of the Airport Consultant, and hereinafter, is referred to as the Attachment ) contains further information on the following: the Airport; the Airlines Serving the Airport; Airport Facilities; the Airport s Capital Improvement Program; and the Financial Framework for Operation of the Airport. THE AIRPORT The first municipally owned airport in the U.S., the Airport opened in 1925 as Cleveland Municipal Airport, and was renamed Cleveland Hopkins International Airport in The Airport is the primary commercial service airport for northeastern Ohio and serves a 16-county air service region with a population of 4.1 million (Ohio Department of Development). A-11

76 The region served by the Airport is classified as a "medium hub" community by the Federal Aviation Administration (FAA). A "medium hub" is defined as a community that accounts for 0.25% or more, but less than 1% of the total revenue passengers enplaned in all services and operations of U.S. certificated route carriers within the 50 states, the District of Columbia and other U.S. territorial possessions. The Airport enplaned approximately 5.72 million passengers in CY 2005 which represented 0.8% of total U.S. enplaned passengers (the term enplaned passengers and enplanements have the same meaning as used in this Attachment). According to Airports Council International, the Airport ranked 36th in terms of total passengers and 45th in terms of operations for North American airports in CY Enplaned passengers at the Airport increased at an average annual rate of approximately 1.9% between CY 1992 and CY The Airport serves a significant Origination & Destination (O&D) market as well as being one of four connecting passenger hub airports for Continental Airlines and its affiliated code-share commuter partners, Continental Express and Continental Connection (collectively referred to as Continental in this Attachment unless otherwise indicated). In CY 2005, Continental accounted for 60.9% of total enplaned passengers at the Airport. Origin Destination Market In CY 2005, the Airport served the sixth largest O&D market in the Midwest, generating 4.3 million total enplaned O&D passengers. The O&D traffic segment accounted for 75.3% of total enplaned passengers (revenue and non-revenue) at the Airport in CY While O&D traffic declined 11.9% and 10.0% in CY 2001 and CY 2002, respectively, following the impacts from the September 11, 2001 terrorist attacks, Airport O&D traffic activity averaged an 8.5% annual increase from CY 2002 to CY CY 2005 O&D traffic segment levels represented the highest ever experienced at the Airport, surpassing the previous record set in CY Continental accounted for 48.0% of total O&D passengers at the Airport in CY The share of O&D traffic served by Continental s commuter/regional operators has increased since the inception of such service at the Airport in Continental s commuter/regional operators represented 23.6% of total Airport O&D passengers in CY Non-hubbing carriers (those air carriers other than Continental) represented 52.0% of the Airport s O&D passenger base in CY After Continental, Southwest Airlines (Southwest) enplaned the next largest portion of O&D passengers at the Airport, approximately 13.4% in CY A-12

77 Connecting Hub In CY 2005, connecting passengers accounted for 24.7% of total enplaned passengers at the Airport. The total number and percentage share of connecting passengers has decreased significantly since CY The CY 2005 total of connecting enplaned passengers of 1.4 million was approximately one million less than that experienced in CY The Airport serves as one of four connecting passenger hubs in the route system of Continental. For Continental, the Airport ranks behind George Bush Intercontinental Airport (Houston) and Newark Liberty Airport (Newark) in terms of the number of Continental departures, available seat miles and enplaned passengers. (Continental also maintains an airport hub in Guam to serve its Micronesia operations.) Continental operated an average of 208 daily scheduled non-stop departures at the Airport in CY Continental s operations at the Airport accounted for 7.6% of its total scheduled non-stop departures systemwide in CY 2005, compared to 10.9% in CY The decline in connecting traffic at the Airport reflects an overall industry trend of increased point-to-point activity by air carriers over the last five years as well as Continental s emphasis on Houston and Newark to develop its connecting route network. Continental s connecting passenger traffic at the Airport represented 40.5% of Continental s total enplaned passengers at the Airport in CY Since the inception of commuter air service at the Airport in 1995, Continental has increasingly utilized regional operators ExpressJet (Continental Express) and more recently Continental Connection, substituting smaller gauge aircraft (e.g., regional jets) for traditional mainline service. Continental s commuter and regional affiliates represented 50.7% of total Continental enplaned passengers at the Airport in CY Following the September 11, 2001 terrorist attacks, Continental reduced its systemwide capacity, as measured by scheduled seats, by approximately 10%. Over the last three years, Continental has increased systemwide capacity to a point that CY 2005 service surpassed pre-september 11, 2001 levels. The Airport represented 5.8% of Continental s systemwide scheduled seats in CY International Air Service As of October 2006, the Airport offered non-stop service to four international destinations in Canada (Toronto and Montreal), Europe (London Gatwick seasonal service offered until October 1 st ), and Mexico (Cancun), with 71 scheduled weekly departures. Numerous other international destinations are accessed via convenient one-stop service through Continental s other hub airports. For example, passengers enplaning at the Airport are able to fly to one of 26 European cities via Continental A-13

78 service from Newark. Approximately 87% of total international non-stop departures offered from the Airport are to points in Canada, with Toronto representing the transborder destination served by the most non-stop departures (43). Both Continental and Air Canada Jazz serve the Toronto market from the Airport. On September 15, 2006, Continental announced plans to initiate seasonal service from the Airport to Paris, France (Charles De Gaulle) beginning in The new service will provide convenient connections within Europe and other destinations served by Continental s fellow Sky Team alliance member Air France. Conversely, the service will allow passengers arriving from France the ability to connect to Continental s route network served from the Airport. The Airport enplaned 145,523 international passengers in CY 2005, representing 2.5% of the Airport s total traffic base. CY 2005 international enplaned passenger levels represented about three-quarters of that experienced in CY 2000 (202,033), with the majority of the decline accounted for by a decline in non-scheduled (i.e., charter) international service. Between CY 1992 and CY 2000, international enplaned passengers increased on average 16.7% per year. Approximately 25% of the Airport s international enplaned passengers in CY 2005 were served by charter air carriers. Charter air carriers provide seasonal air service to three additional international destinations, Puerta Vallarta (Mexico), Nassau (Bahamas) and Punta Cana (Dominican Republic). AIRLINES SERVING THE AIRPORT The Airport is currently served by seven national/major domestic airlines, one foreign-flag airline, 13 commuter/regional airlines and three cargo airlines. Mainline scheduled passenger air service is currently provided by the following air carriers: Continental; Delta Air Lines (Delta); Northwest Airlines (Northwest); Southwest; United Airlines (United); USA 3000 and US Airways (including the operations of the former America West). Primary commuter and regional air carriers include: American Eagle; Atlantic Southeast Airlines (Delta Connection); Comair (Delta Connection); Continental Express; Continental Connection; Mesa (United Express and US Airways Express); Mesaba (Northwest Airlink); Midwest Connect; Pinnacle (Northwest Airlink); and PSA Airlines (US Airways Express). The Airport is served by the following scheduled cargo carriers: ABX Air (Airborne Express); United Parcel Service; and Federal Express. The Airport is also served regularly by several charter air carriers providing non-scheduled service to both domestic and international destinations. AIRPORT FACILITIES The Airport encompasses approximately 2,045 acres of land (including land associated with the International Exposition Center, which is not currently used for A-14

79 Airport purposes) with four air carrier runways (including three parallels), a large terminal complex with four concourses and various cargo and maintenance facilities. Figure 1. Airport Layout Cleveland Hopkins International Airport RW 10/28 A B Terminal Parking Complex C D RW 6C/24C RW 6R/24L RW 6L/24R The current airfield capacity of the Airport supports 112 hourly operations under Visual Flight Rules (VFR) conditions. The Airport commissioned Phase I of Runway 6L/24R in December 2002 at a length of 6,800 feet. Runway 6L/24R was further extended to 9,000 feet, and was commissioned as a CAT III runway in November Runway 6R/24L also measures 9,000 feet and is separated from Runway 6L/24R by 1,241 feet allowing for simultaneous arrivals and departure as authorized by the FAA. Runway 6C/24C is 7,096 feet and is only used when either 6L/24R or 6R/24L is closed. Otherwise, the center runway is used as a taxiway. The Airport has a total of eight runway approaches, four of which (Runway ends 6R, 24L, 24R and 28) are equipped with Instrument Landing System (ILS) navigational aids that allow for precision approaches during inclement weather conditions. A-15

80 Passenger terminal facilities consist of approximately 935,000 square feet in a main terminal building with four attached concourses, which support 63 jet-gates and 33 commuter aircraft parking positions. The Airport opened the 170,000 square foot Concourse D in 1999 to serve the expanding regional jet and commuter operation of Continental Express. The Airport s public automobile parking facilities currently have more than 6,700 parking spaces, consisting of approximately 4,200 in the Short Term parking garage and 2,500 in the Long Term parking garage. The Airport also has 2,500 employee parking spaces. Airport management is currently planning to convert several employee lots adjacent to public parking areas (approximately 500 spaces) into paid public parking lots. An estimated 6,400 private off-airport parking spaces exist around the Airport s perimeter. A 2003 passenger survey identified that approximately 30% of Airport parkers utilize off-airport parking lots versus on-airport lots and garages. CAPITAL IMPROVEMENT PROGRAM The City maintains an ongoing Capital Improvement Program (CIP) for the Airport System. The ongoing CIP for the Airport includes the rehabilitation and/or reconstruction of facilities already in place, the continuation of capital projects already or substantially completed (e.g., runway extension of 6L/24R) and projects which are currently under construction (e.g., Concourse C apron replacement). The ongoing CIP totals approximately $140 million. Funding sources for the ongoing CIP include proceeds from already issued Revenue Bonds, federal grants-in-aid and local funds. Future CIP Projects Airport management has also identified approximately $171 million in new CIP projects that may be implemented during the next five years (the Future CIP Projects). Major projects include the extension of Runway 6R/24L, uncoupling of the 6R/24L runway intersection, expansion of the Airport s concessions program and implementation of a new ground transportation center. The following is a summary and description of key projects envisioned for the Airport s future CIP: Airfield Projects Runway 6R/24L Extension. Runway 6R/24L will be lengthened to 11,250 feet to support the introduction of long-range flights by wide-body jets to new destinations which current runways cannot serve. This project includes related taxiway improvements and relocation of associated navigational aids. Estimated cost: $11.9 million. Runway Uncoupling Project. Pursuant to FAA requirements, Runway 6R/24L and Runway 10/28 will be uncoupled to eliminate potential runway incursions at the 24L A-16

81 runway end. This project includes the relocation of the 24L threshold by approximately 1,000 feet to the southwest. Estimated cost: $44.5 million (the Airport has already received $33.4 million in federal grants for this project). Midfield Deicing Pad. A centralized deicing pad is being constructed to eliminate on-gate deicing operations in winter conditions. In addition to satisfying environmental regulatory requirements, the project will enhance airfield operations and processing times. The project also includes the construction of related taxiways to access the deicing pad and storm water system to collect spent deicing fluid. Estimated cost: $50.0 million. Runway 10/28 Touchdown Zone Rehabilitation. This project addresses pavement, lighting and marking deficiencies at the 28 runway end. Estimated cost: $8.8 million (the Airport has already received $6.6 million in federal grants for this project). Taxiway J Reconstruction. Taxiway J is the primary taxiway between the runways and passenger terminal. Due to heavy use, the base and sub-base layers have been subject to frequent repair. This project requires the full reconstruction of the existing taxiway and related appurtenances. Estimated cost: $7.6 million. North Drainage System. This project requires the rehabilitation of airside and sanitary drainage systems located north of Concourse B to address state environmental requirements for storm water management of the existing taxiway and related appurtenances. Estimated cost: $5.2 million. Terminal Projects Terminal Modifications Project. Due to aging infrastructure, an upgrade to critical utility components is needed to improve overall airport asset condition, to expand electrical/hvac capacity and to reduce ongoing maintenance costs. This project also includes the replacement of certain roof areas in the terminal area and the replacement of the ceiling and lighting in Concourse B. Estimated cost: $13.1 million. Concessions Expansion Program. This project includes the renovation of existing retail space and expansion of additional space to increase the Airport s concessions square footage by [25,000] square feet. Estimated cost: $6.5 million. FIDS/BIDS Replacement. This project will implement a centralized Flight Information Display System (FIDS) and Baggage Information Display System (BIDS) at the Airport. The systems will replace and consolidate existing information displays that are currently operated by each airline. Estimated cost: $3.5 million. A-17

82 Information Technology Upgrade. A new fiber-optic network will be installed to provide Internet access and digital telephone service throughout the Airport. The network will also provide connectivity for airport-wide security systems and information displays. Estimated cost: $3.0 million. FIS Rehabilitation. The existing Federal Immigration Service (FIS) facility will be expanded to provide additional checkpoints, a baggage belt and screening areas to increase passenger processing during peak arrival times. The project includes the construction of a new corridor that will allow for the efficient separation and screening of connecting passengers. Estimated cost: $6.0 million. Transportation Security Administration (TSA) Baggage Expansion. This project supports installation of four in-line explosive detection system (EDS) units to double the existing baggage screening capacity. Estimated cost: $2.8 million. Landside Projects Ground Transportation Center. Existing terminal access roadways become routinely crowded at peak arrival periods. This project will develop a dedicated commercial vehicle facility to reduce congestion on the terminal access roadways. Estimated cost: $6.0 million. Parking Lots 2 and 3 Conversion. This project will convert existing employee airport parking areas that are located close to the passenger terminal into revenue-generating, public parking lots. Estimated cost: $2.0 million. Funding Sources Future CIP Projects The CIP is anticipated to be funded through a combination of proceeds from existing Revenue Bonds, passenger facility charge (PFC) revenues, federal grants-in-aid, other Airport revenues and the issuance of Additional Revenue Bonds. Table 1 summarizes the anticipated sources of funding for the Future CIP Projects. Passenger Facility Charges Under the Aviation Safety and Capacity Expansion Act of 1990 and reauthorization in 2000, the FAA may authorize a public agency that controls an airport to impose a PFC of $1.00, $2.00, $3.00, $4.00 or $4.50 for each qualifying enplaned passenger at such airport to be used to finance eligible airport-related projects. The City currently imposes a $4.50 PFC at the Airport, with total impose and use collection authority of $340.0 million. The City intends to file a new PFC application to increase collection authority to fund project and financing costs related to the Future CIP A-18

83 Projects. As of June 30, 2006, the Airport has received a total of $261.6 million in PFC revenues. Federal Grants-in-Aid In accordance with FAA Record of Decision dated December 22, 2000 and subsequently amended on August 25, 2005, the City anticipates receiving a total of $181.8 million in Letter-of-Intent (LOI) funds to pay project costs of the Runway Uncoupling Project ($33.4 million) and debt service associated with airfield projects funded in part from the Series 2000 Bonds ($148.4 million). As of October 1, 2006, the City has received $85.7 million of the LOI proceeds. The following table presents the anticipated schedule for receiving the remaining LOI fund balance: Year LOI Payment Year LOI Payment 2007 $20,182, $3,233, ,975, ,304, ,516, ,378, ,269, ,455, ,165,000 Source: FAA letter AGL dated August 25, 2005 Additional Revenue Bonds The City anticipates issuing Additional Revenue Bonds to pay for construction costs of the Future CIP Projects, provide required fund deposits and pay related costs of issuance. For purposes of the financial projections included in Section VI, it is anticipated that 95% of eligible Bond Service Charges related to the issuance of Additional Revenue Bonds will be paid from PFC revenues. Table 1: Sources and Uses Future CIP Projects Project Airfield Projects Terminal Projects Landside Projects Project Cost Estimate (in $000 s) Existing Bond Proceeds Sources of Funding (in $000 s) Pay-As- You-Go PFCs Airport Funds Federal Grants-in- Aid Additional Revenue Bonds $128,000 $20,877 $4,348 $900 $39,975 $61,900 34,900 2, ,100 8, ,000 Total $170,900 $23,677 $4,348 $900 $39,975 $102,000 A-19

84 FINANCIAL FRAMEWORK FOR OPERATION OF THE AIRPORT The Trust Indenture The Series 2006 Bonds are being issued pursuant to Ordinance No passed by City Council on April 10, 2006, and a Trust Indenture dated November 1, 1976, as supplemented and amended (the Indenture) between the City and The Bank of New York Trust Company, N.A. as successor trustee (the Trustee). Pursuant to the Indenture, the City has pledged and granted to the Trustee a first lien on Airport Revenues and Special Funds as security for the payment of the Bond Service Charges on all Bonds. Pursuant to the Rate Covenant provision in the Indenture, the City has covenanted to prescribe and charge such rates, fees and charges for the use of the Airport System as to produce in each Fiscal Year (FY) Airport Revenues, together with Other Available Funds, less Operating Expenses at least equal to 125% of the amount maturing and becoming due in such FY for the payment of principal of and interest on all outstanding Revenue Bonds. Should the City have any outstanding General Obligation Debt or Temporary Revenue Bonds for use by the Airport System, the Indenture includes an alternative Rate Covenant provision of 116% of the amount maturing and becoming due in such FY for the payment of principal and interest on such bonds. (The City has not had any outstanding General Obligation Debt or Temporary Revenue Bonds for use by the Airport System since 1997, nor does the City anticipate issuing any in the future). Under the Indenture, all Airport Revenues are to be paid to the Trustee and deposited by the Trustee in the Revenue Fund, one of the Special Funds created by the Indenture and held by the Trustee. Land and facilities comprising the Airport have not been pledged or mortgaged pursuant to the Indenture nor have they been pledged to secure payment of the Series 2006 Bonds or any other Bonds. The Indenture also establishes certain funds and accounts and the priority flow of such funds through which Airport Revenues are deposited. Figure 2 depicts the Flow of Funds for the Airport. The moneys on deposit in the Revenue Fund are to be applied monthly in the following order: First, to the Bond Service Fund to provide for the payment of debt service on outstanding Airport Revenue Bonds and to pay periodic payments under Hedge Agreements. Second, to the Bond Service Reserve Fund to maintain a reserve for debt service equal to the maximum annual debt service to be paid on all outstanding Airport Revenue Bonds. Third, to the Operating and Maintenance Fund to pay all Operating Expenses of the Airport System and maintain a working capital reserve not to exceed three months of gross expenses contained in the Annual Budget. A-20

85 Figure 2. Flow of Funds DEPOSIT ALL REVENUES OF THE AIRPORT REVENUE FUND FUND All All Airport Airport Revenues deposited within within Coverage Account Maintain an an amount at at least least 25% 25% of of maximum annual annual Bond Bond Service Service Charges BOND BOND SERVICE FUND FUND Pay Pay annual debt debt service requirement on on all all outstanding Airport Airport Revenue Bonds Bonds and and periodic payments under under Hedge Hedge Agreements BOND BOND SERVICE RESERVE FUND FUND Maintain a reserve reserve equal equal to to maximum annual annual debt debt service service on on all all outstanding Airport Airport Revenue Bonds Bonds OPERATING AND AND MAINTENANCE FUND FUND Pay Pay all all O&M O&M expenses of of the the Airport Airport System, maintain a working working capital capital reserve reserve not not to to exceed one-quarter of of the the gross gross expenses in in the the Annual Budget, and and fund fund certain certain capital capital improvements SUBORDINATED DEBT DEBT SERVICE FUND FUND Pay Pay annual annual debt debt service requirement on on all all outstanding Subordinated Indebtedness and and any any payments on on early early termination of of Qualified Hedge Hedge Agreements GENERAL OBLIGATION DEBT DEBT SERVICE FUND FUND Pay Pay annual annual debt debt service requirement on on all all outstanding General Obligation Bonds Bonds issued issued for for Airport Airport System System purposes RENEWAL AND AND REPLACEMENT FUND FUND Maintain a reserve based based on on outstanding principal of of Revenue Bonds. Used Used for for rebuilding, reconstructing, repairing, altering, replacing and and renewing the the Airport Airport System IMPROVEMENT FUND FUND Used Used for for any any lawful lawful Airport Airport System purpose (Subject to to disapproval by by a Majority Majority in in Interest Interest of of Signatory Airlines) SURPLUS FUND FUND Used Used for for any any lawful lawful Airport Airport System purpose AIRPORT DEVELOPMENT FUND FUND Airline Airline Account Used Used for for any any lawful lawful Airport System purpose purpose (Subject to to disapproval by by a Majority in in Interest of of Signatory Airlines) Airport Airport Account Used Used for for any any lawful lawful Airport Airport System purpose A-21

86 Fourth, to the Subordinated Debt Service Fund to provide for the payment of debt service on any outstanding Subordinated Indebtedness and any amount owed on an early termination of a Qualified Hedge Agreement. Fifth, to the General Obligation Debt Service Fund to provide for the payment of debt service on any outstanding General Obligation Debt. (The City has no General Obligation Debt outstanding with respect to the Airport System.) Sixth, to the Renewal and Replacement Fund to maintain a reserve equal to approximately 1.65% of the aggregate original principal amount of each issue of Airport Revenue Bonds (excluding refunding bonds). Monies in the Renewal and Replacement Fund may be used at the City s discretion to pay for the costs of rebuilding, reconstructing, repairing, altering, replacing and renewing the Airport System. Seventh, to the Improvement Fund and Surplus Fund in equal amounts to be used for any lawful Airport System purpose. The expenditures in the Improvement Fund may be disapproved by a Majority in Interest (MII) of the Signatory Airlines. On or before December 31, 2006, (i) all monies on deposit in the Improvement Fund in excess of $350,000 shall be transferred to the Coverage Account of the Revenue Fund, (ii) from the moneys then on deposit in the Surplus Fund there shall be transferred to the Coverage Account of the Revenue Fund the amount of $2,340,000, and (iii) the balance of moneys in the Surplus Fund in excess of $350,000 shall be transferred to the Airport Account of the Airport Development Fund. After December 31, 2006, the Improvement Fund and Surplus Fund shall each contain balances of no less than $350,000. Eighth, to the Airport Development Fund after making the deposits provided in the funds above, annually the amount of $4,250,000 shall be deposited in the Airport Account of the Airport Development Fund and annually the amount of $4,250,000 shall be deposited in the Airline Account of the Airport Development Fund, in equal monthly installments. Money in the Airport Development Fund may be used for any Airport System purpose. Money in the Airport Account may be used at the discretion of the City. Money in the Airline Account may be used at the discretion of an MII of the Signatory Airlines, including the reduction of airline rates and charges. The annual deposits to the Airport Account and the Airline Account shall be adjusted beginning January 1, 2008 based on an index composed of both changes in annual enplaned passenger levels and the Consumer Price Index. The Indenture also establishes a Coverage Account within the Revenue Fund which will be funded at a level equal to 25% of the maximum annual debt service on all outstanding Revenue Bonds. In the event that the amount in the Coverage Account of the Revenue Fund exceeds 25% of the maximum annual debt service on all outstanding Revenue Bonds occurring in any subsequent Fiscal Year, the amount in excess of 25% may be transferred to the Airport Development Fund per concurrence between the City A-22

87 and the Signatory Airlines. The Coverage Account will initially be funded by deposits from the Improvement Fund and Surplus Fund, as discussed above. The Airline Agreements The City recently amended the Airline Agreement (the Use Agreement) with the Signatory Airlines, to replace the Original Agreement that expired on December 31, The Use Agreement extends the lease term another 10 years to December 31, As of the date of this Report, only two of the previous seven Signatory Airlines, Continental and Southwest, had executed the Use Agreement with City. Continental and Southwest accounted for 70.9% of total enplaned passengers at the Airport in CY The City anticipates that the majority of the remaining former Signatory Airlines and one new air carrier will ultimately sign the Use Agreement. The City is currently in the process of finalizing Use Agreement documents with these airlines. The Use Agreement establishes procedures for the periodic review and adjustment of the terminal building space rental rates and landing fees paid by the Signatory Airlines, as well as other airlines serving the Airport who are not party to the Use Agreement. The Airport operates under a cost-center residual cost formula for setting initial terminal building rental fee rates, and an Airport System residual cost formula for calculating landing fees. Terminal building rental rates and landing fee rates are adjusted annually to produce Airport Revenues sufficient to meet the Rate Covenant discussed above. Pursuant to the Use Agreement, if at any time during the fiscal year Airport Revenues are insufficient to cover the costs of operating the Airport System, the City may, upon providing 90 days notice to the Signatory Airlines, increase landing fees. The Use Agreement also establishes voting rights of the Signatory Airlines (socalled MII provisions) for the funding of certain capital projects at the Airport. The Signatory Airlines may disapprove capital improvements which will be funded through rentals, fees and charges and which will require the commitment by the City for the purchase or construction of (i) a single item at a cost of $200,000 or more, or (ii) items which in the aggregate cost in excess of $700,000 (as such numbers are adjusted for inflation since 1975). If such capital improvements are disapproved, the City may still budget the cost of such capital improvements for the next Fiscal Year under certain circumstances. Separate MII provisions are established for terminal complex and nonterminal complex related projects. The Use Agreement provides several new provisions that are beneficial to the City and Airport. First, all Leased Premises included in the Use Agreement will be changed from an Exclusive Use to Preferential Use basis. The change in Leased Premises allows the City to achieve a balanced utilization of Airport space and accommodate expanded and/or new entrant airline space requirements. Second, an Airport Development Fund was created to provide a guaranteed, annual discretionary funding source for the A-23

88 Airport. Third, financial incentives were created for the Airport to increase non-airline revenues. If annual non-airline revenues are greater than certain performance thresholds, the amount of discretionary funding available to the Airport (as described above) will be increased. Finally, if connecting passenger levels fall below 15% of total passengers, the City may open the Use Agreement to renegotiation with the Signatory Airlines. This so-called dehubbing clause allows the City to modify the terms of the Use Agreement should structural shifts in air service operations at the Airport occur. For purposes of estimating financial impacts contained in this Report, it is assumed that the Airport and the Signatory Airlines (including those anticipated to sign in the future) will operate under the terms of the Use Agreement. The rate-making methodology included in the Use Agreement will govern the Airport s financial structure and financial forecasts included in this Report. Accounting Principles and Historical Airport Financial Operations The Airport System is owned by the City and operated by the Department of Port Control. The Airport accounts for its activities according to generally accepted accounting principles for governmental entities. Revenues and Operation and Maintenance Expenses are accounted for on an accrual basis. Table 2 presents a summary of five-year historical operating results from CY 2001 to CY 2005, based on the Airport s audited financial statements. Table 2. Historical Operating Results (in $000 s) CY 2001 CY 2002 CY 2003 CY 2004 CY 2005 Airport Revenues Airline Revenues $50,637 $46,649 $51,263 $63,532 $63,019 Non-Airline Revenues 44,795 41,485 36,985 47,935 47,000 Total Airport Revenues $95,432 $88,134 $88,248 $111,467 $110,019 Airport Expenses Personnel & Benefits $19,139 $20,220 $21,434 $21,918 $22,607 Utilities 10,188 7,158 7,021 7,126 6,344 Contractual Services 6,380 6,153 6,547 8,680 12,793 Repairs & Maintenance 6,212 7,412 7,701 7,644 8,590 Property Tax 8,559 8,416 5,982 7,005 7,754 Security 3,942 5,564 5,280 4,662 4,035 Other 2,373 4,102 3,880 1,612 4,834 Total Airport Expenses $56,794 $59,025 $57,845 $58,647 $66,957 Net Revenues $38,638 $29,109 $30,403 $52,820 $43,062 Note: Totals may not add due to rounding. Source: Department of Port Control A-24

89 Outstanding Debt The City has issued, under the Indenture, in aggregate, $1,101,856,243 principal amount of Airport System Revenue Bonds to provide funds for the capital development of the Airport. After issuance of the Series 2006 Bonds, the City will have, in aggregate, $944,885,000 principal amount of outstanding Airport System Revenue Bonds. CONCLUSION Despite serving as a connecting hub for Continental, the Airport has increasingly become an O&D airport over the last five years. The large O&D traffic segment provides an underlying foundation for regional aviation demand. Adequate airspace and capacity are available for the peaking type of aircraft activity associated with hubbing operations and airfield facilities are in place to support the role of the Airport. Both airfield and landside capacities are anticipated to be ample during the forecast period. The Use Agreement provides for the full cost recovery of Airport operations, the guaranteed funding of Airport discretionary funds and financial incentives for the City to increase non-airline revenues. The Use Agreement also provides the ability to periodically adjust airline rates and charges to increase Airport working capital in a reduced demand environment. A-25

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91 II. AIRPORT SERVICE REGION OVERVIEW The Airport is located in the northeast central region of the U.S. According to the U.S. Census Bureau, the Cleveland-Akron Consolidated Metropolitan Statistical Area (the Cleveland CMSA), represents the sixteenth most populous region in the U.S. Per capita income levels for the Cleveland CMSA have historically been higher than the State of Ohio and the nation. The Airport Service Region (the Region) is home to 25 Fortune 1000 companies and ranks as the tenth largest industrial market (in terms of manufacturing facilities) in the U.S. The cost of living in the region is moderate compared to most large cities in the U.S. With 44% of the U.S. households living within 500 miles of the City, the Cleveland area is being promoted as a destination for conventions, trade shows and business meetings. Other airports located in the Region include Akron-Canton Regional Airport and Youngstown-Warren Municipal Airport. To a lesser degree, the Airport draws passengers from outside the service region, including northwestern Ohio and western Pennsylvania. In a 2003 passenger survey, approximately 6% of the Airport s O&D passengers traveled more than 100 miles to the Airport. THE AIRPORT AND ITS SERVICE REGION The Airport is the primary commercial service airport for northeastern Ohio and serves a 16-county air service region with a population of 4.1 million. The Region comprises Cuyahoga County, which is situated on Lake Erie and is Ohio s most populous county. Cuyahoga County is surrounded by an Inner Ring of six counties, specifically, listed from west to east, Lorain, Medina, Summit, Portage, Geauga and Lake (the Inner Ring Counties). The Inner Ring Counties are surrounded by an Outer Ring of nine counties, specifically, listed from west to east, Erie, Huron, Ashland, Wayne, Stark, Carroll, Mahoning, Trumbull and Ashtabula (the Outer Ring Counties). In CY 2005, the Region accounted for 35.8% of the State of Ohio s total population. The Cleveland CMSA (which is used frequently for statistical comparison purposes) includes the following eight counties: Ashtabula, Cuyahoga, Geauga, Lake, Lorain, Medina, Portage and Summit Counties. A-27

92 THE AIRPORT SERVICE REGION Lake Superior Toronto Road miles from Cleveland to: Akron 39 Canton 58 Columbus 142 Detroit 174 Pittsburgh 137 Toledo 119 Youngstown 76 Less than 1 hour flight time from Cleveland: Toronto 45 minutes Chicago 55 minutes New York 55 minutes Washington, DC 55 minutes Chicago Lansing Flint Michigan Detroit Indiana Canada Ohio Columbus Cincinnati West Virginia Lake Ontario New York Lake Erie Pennsylvania Fort Toledo Pittsburgh Wayne Cleveland Washington, DC Kentucky Louisville Canada Lake Erie 90 Cleveland Hopkins International Airport Burke Lakefront Airport Lake Ashtabula Erie Huron Lorain Cleveland Cuyahoga Summit 71 Medina Akron Geauga Youngstown - Warren Regional Airport Trumbull 80 Portage Mahoning 76 Youngstown Ashland Wayne Stark Canton Akron-Canton Regional Airport Carroll 271 County Boundary State/International Boundary Air Carrier Airport Commuter Airport/ General Aviation/Other N 90 Cleveland 71 Westlake Cleveland Burke Heights Lakefront Airport CUYAHOGA Parma Cleveland Hopkins International Airport Solon 77 North Royalton 80 Strongsville A-28

93 GENERAL ECONOMY OF THE AIRPORT SERVICE REGION The demand for air transportation is, to a large degree, dependent on the demographic and economic characteristics of an airport s air service region. This relationship is particularly true for O&D passenger traffic, which historically has been a significant component of demand at the Airport, accounting for 75.3% of the Airport s total enplaned passengers in CY This significant portion of demand for air travel, therefore, is influenced more by the local characteristics of the area served than by individual air carrier decisions regarding hubbing and service patterns in support of connecting activity. Population According to the U.S. Census Bureau, the State of Ohio was the seventh most populous state and accounted for 4.0% of the total U.S. population in CY The Region represents a population of 4.1 million with the eight-county Cleveland CMSA representing 71.1% of the Region s population. Over the last 10 years, the Region experienced an annual average growth rate of 0.1% (as compared to average annual increases of 0.3% and 1.3% in the State of Ohio and the U.S., respectively). Figure 3 presents the population changes experienced in the Region from CY 1990 to CY During the last 15 years, the population in the Region has shifted from Cuyahoga County toward the Inner Ring Counties, particularly those counties located south of the Airport. The Region s overall growth has come from strong population expansion in the Inner Ring Counties surrounding Cuyahoga County with continued overall growth being sustained by population gains in the Inner and Outer Ring Counties. In CY 1990, Cuyahoga County contained 35.1% of the Region s population, 33.4% resided in the Inner Ring Counties and 31.5% lived in the Outer Ring Counties. In CY 2005, the Inner Ring population increased to represent 36.2% of the Region with Cuyahoga County representing 32.4% and the Outer Ring counties representing 31.4%. Ohio Department of Development census projections forecast the Region s population will experience overall growth over the next 10 years, although population growth rates are anticipated to be below those forecast for the State of Ohio and the U.S. as a whole. Over the next 10 years, the Region s population is forecast to increase by less than 0.1% per year as compared to 0.3% and 0.8% for the State of Ohio and the U.S., respectively. Census projections forecast Inner Ring Counties will account for 37.1% of the Region s population by 2015, 31.6% will reside in Cuyahoga County, and 31.3% will live in the Outer Ring Counties. A-29

94 Figure 3. Population Changes in the Region (1990 to 2005) Canada Lake Erie Cleveland Hopkins International Airport Burke Lakefront Airport Lake Ashtabula Erie 90 Lorain Cleveland Cuyahoga Summit Geauga Youngstown - Warren Regional Airport Trumbull Huron Medina Akron Portage Mahoning Youngstown N Ashland Wayne Stark Canton Airport Service Region Population Change Less than 0% Between 0% and 10% 10% - 20% Over 20% Akron-Canton Regional Airport Carroll Source: U.S. Census Bureau; Ohio Department of Development (Office of Strategic Research) Personal Income Over the last 20 years, per capita income in the Cleveland CMSA has trended higher than State and national levels (U.S. Department of Commerce). In CY 2004 (latest data available), the Cleveland CMSA s per capita income was $33,522 compared to $33,050 for the U.S. and $31,161 for the State of Ohio. Per capita income in the Cleveland CMSA averaged annual increases of 4.2% over the last 20 years, comparable with state and national growth rates. Within the Region, per capita income in Cuyahoga County has been consistently higher than per capita income in the Inner and Outer Ring Counties. The per capita income in Cuyahoga County was $35,463 in CY 2004, which was 10.9% higher than the A-30

95 Region s overall per capita income. Cuyahoga County represented 38.5% of the Region s total personal income in CY Employment From CY 1995 to CY 2005, employment levels in the Region increased at an annual rate of 0.3%. In the Inner Ring Counties, employment increased at an annual rate of 0.9% for the same period, which is higher than the State of Ohio s average rate of 0.5%, but lower than national employment growth of 1.2%. In the Outer Ring Counties, employment increased at a rate of 0.2% annually, while employment levels in Cuyahoga County declined 0.2% per year from CY Labor Force According to the Ohio Department of Jobs & Family Services, the Region s civilian labor force (representing individuals over 16 who are available for work, both employed and unemployed) increased from 2,163,900 in CY 1995 to 2,243,500 in CY Approximately 86% of the gain in labor force occurred in the Inner Ring Counties. Between CY 1995 and CY 2005, the civilian labor force in the Region increased by 0.4% annually, which was below the State s 0.6% growth rate. The overall labor force growth rate in the Region is lower than that experienced by the State due to the lower civilian labor force average annual growth rate in the Outer Ring Counties and decline in labor force in Cuyahoga County over the last 10 years. From CY 1980 to CY 1992, Cuyahoga County had the lowest unemployment rates in the Region; however, after CY 1992, the lowest unemployment rates were experienced in the Inner Ring Counties. Unemployment rates in the Outer Ring Counties have been historically higher than the rates reported in the Inner Ring Counties and Cuyahoga County. Until CY 2003, the Region s unemployment rates have remained consistent with State and national levels. However, in the last three years, the Region s unemployment rate has surpassed state and national levels, with the highest unemployment rates experienced in the Outer Ring Counties. In CY 2005, the Region s unemployment rate was 6.0% compared to 5.1% in the U.S. and 5.9% in the State of Ohio. Employment Distribution Among Industry Sectors This section provides a summary of employment distribution located in the Region, the State of Ohio and the U.S. In CY 2004 (most recent available data), employment concentration in the Region was centered around non-healthcare-related services (38.5%), wholesale and retail trade (15.4%), manufacturing (13.3%), government/public administration (11.8%) and health care (11.5%) sectors. The Ohio Department of Job & Family Services forecasts that the Inner Ring Counties and Outer Ring Counties will experience sustained growth over the next decade, in particular in A-31

96 service and healthcare related industries. Total employment in the Region is forecast to increase by 0.7% per year between CY 2004 and CY Figure 4. CY 2004 Employment Distribution (Airport Service Region vs. Ohio and U.S.) CY 2004 Employment Distribution 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 9.5% 9.5% 10.8% 15.4% 15.3% Services 11.5% 11.3% 10.1% 11.8% 12.8% 14.2% 13.3% 12.8% 8.9% 14.9% 38.5% 38.3% 41.1% Airport Service Region Ohio U.S. Other Healthcare Government Manufacturing Trade Services Source: Ohio Department of Jobs & Family Services; U.S. Department of Commerce Services Sector The State of Ohio s services industry accounted for 38.3% of employment in CY 2004, compared with 41.1% in the U.S. Ohio Department of Job & Family Services projects an annual growth rate of 1.6% in state-wide employment for the services sector over the next 10 years. In the Region, Cuyahoga County had the highest concentration of services employment (43.8%) in CY Services employment in the Inner and Outer Ring Counties in CY 2004 was 37.1% and 32.9%, respectively. Trade Sector Retail and wholesale trade represented 15.4% of employment in Ohio and accounted for 13.2% of state Gross State Product (GSP) in CY Retail and wholesale trade employment at the national level represented 14.9% of total U.S. employment in CY Retail trade represented a higher employment concentration in the Inner and Outer Ring Counties, 16.2% and 16.0% respectively, as compared to Cuyahoga County, 14.2% in CY According to the Ohio Department of Job & A-32

97 Family Services, the State s trade related employment levels will grow at an annual rate of 1.1% over the next decade. Manufacturing Sector While the percent of Ohio s GSP attributable to manufacturing is declining, manufacturing still represented 19.7% of Ohio s GSP and 12.8% of state employment in CY In CY 2004, manufacturing employment concentration in the Region was 13.3%, which was higher than the State and the U.S. (8.9%) manufacturing employment rate levels. For CY 2004, the manufacturing employment concentration was 16.2%, 14.7%, and 9.9% in the Outer Ring, Inner Ring and Cuyahoga Counties, respectively. According to the Ohio Department of Job & Family Services, manufacturing employment in the Region is forecast to decline by 1.3% per year between CY 2004 and CY Government Sector In CY 2004, government employment concentration in the Region was 11.8%, which was lower than the State (12.8%) and the U.S. (14.2%) government employment rate levels. For CY 2004, the government employment concentration was 12.0%, 11.7%, and 11.6% in the Inner Ring, Cuyahoga and Outer Ring Counties, respectively. Healthcare Sector The healthcare sector accounted for 11.3% of the State s employment and 7.8% of the State s GSP in CY Over the last four years, the healthcare sector increased the fastest among industries in the State. For the U.S., healthcare employment represented 10.1% of total national employment in CY For CY 2004, the healthcare employment concentration was 13.2%, 10.6%, and 10.3% in Cuyahoga, Outer Ring and Inner Ring Counties, respectively. Healthcare employment in the Region is forecast to increase by 1.7% per year between CY 2004 and CY According to the Ohio Department of Job & Family Services, eight out 10 of the fastest growing occupations in the Region over the next decade will be healthcare-related. BUSINESS AND INDUSTRY IN THE AIRPORT SERVICE REGION The following section provides a summary of key industries and employers located in the Region and their impact on the strength of the Region s economy. Major Employers in the Region In CY 2005, the Region was home to 25 Fortune 1000 companies. Cleveland ranked fifteenth in Fortune 500 headquarters located within its metropolitan area. In addition, approximately one-third of all employees working for international companies in Ohio are based in the Region. A-33

98 Ohio Rank COMPANY NAME U.S. Rank Revenue (millions $) CITY 6 Goodyear Tire & Rubber 112 $19,723 Akron 7 Progressive ,303 Mayfield Village 8 FirstEnergy ,195 Akron 10 Eaton ,115 Cleveland 11 National City Corp ,036 Cleveland 14 Parker Hannifin 279 8,270 Cleveland 16 Sherwin-Williams 311 7,190 Cleveland 18 KeyCorp 325 6,695 Cleveland 23 Timken 417 5,168 Canton 27 Lubrizol 486 4,098 Wickliffe 33 Nacco Industries 589 3,157 Cleveland 38 Diebold 671 2,587 North Canton 40 PolyOne 674 2,570 Avon Lake 42 RPM International 678 2,555 Medina 44 Aleris International 704 2,429 Beachwood 48 J.M. Smucker 765 2,179 Orrville 50 American Greetings 825 1,933 Cleveland 51 Jo Ann Stores 839 1,882 Hudson 52 Medical Mutual of Ohio 846 1,860 Cleveland 53 Cleveland-Cliffs 878 1,739 Cleveland 54 Applied Ind. Technologies 888 1,717 Cleveland 56 Agilysys 922 1,622 Mayfield Heights 57 Lincoln Electric Holdings 928 1,601 Cleveland 58 Invacare 955 1,529 Elyria 62 Schulman (A.) 995 1,435 Akron Source: Fortune, April 17, 2006 Services Healthcare In CY 2004, total national health expenditures were $1.9 trillion, which represented 16% of U.S. Gross Domestic Product (GDP). U.S. healthcare spending is expected to increase at similar levels for the next decade, reaching $4 trillion by 2015, or approximately 20% of GDP. As the U.S. population continues to age, additional healthcare facilities and providers will be required. The State of Ohio is home to 17 of the top 100 hospitals/healthcare systems in the U.S. as ranked by Solucient (a leading data source for the healthcare industry). The majority of these hospitals and healthcare systems are located in the Region, including the Cleveland Clinic, which is perennially ranked in the top 10 U.S. hospitals. The Cleveland Clinic is the largest employer in Cuyahoga County and ranked as the third largest company in Ohio by employees (non-governmental) in CY 2004, with 9,500 employees working at the Cleveland headquarters and other facilities in the Region. Other major hospital systems in the Region include University Hospitals A-34

99 Health System, MetroHealth System, Akron General Medical Center, Aultman Health Foundation, St. Thomas Medical Center and St. Elizabeth Health Center. Healthcare insurance plan companies with headquarters or single locations in the Region include Medical Mutual of Ohio, Kaiser Foundation Health Plan, Aultcare Corp, QualChoice Health Plan, Home Town Health Network, Blue Cross Blue Shield, Summa and Benefit Services Agency of Ohio. The Region is also home to leading medical equipment manufacturers such as Medical Imaging Equipment (Cleveland), Steris (Lake County) and Invacare (Lorain County). The Ohio Department of Jobs & Family Services estimates that healthcare-related employment will represent one of the fastest growing employment sectors in the state over the next 10 years. Universities The Region has more than 22 colleges and universities enrolling, collectively, over 143,000 students (as reported by the Ohio Board of Regents and individual universities for Fall 2005). The largest four-year universities in Cuyahoga County are Cleveland State University (approximately 15,500 students), Case Western Reserve University (9,950 students), Baldwin-Wallace College (4,400 students) and John Carroll University (4,050 students). Cuyahoga Community College, a two-year institution that serves over 55,000 students (25,000 full-time) is also located in Cuyahoga County. Larger colleges and universities in the Inner Ring Counties include Kent State University (34,000 students), University of Akron (23,200 students), Lorain County Community College (10,000 students), Lakeland Community College (8,300) and Oberlin College (2,800 students). Universities located in Outer Ring Counties include Youngstown State University (12,700 students), Ashland University (4,700 students), Mount Union College (2,300 students) and the College of Wooster (1,850 students). Banking, Financial Services and Insurance The Region has developed a large banking and financial services industry and is home to one of the nation s 12 regional reserve banks which constitute the Federal Reserve System. The Federal Reserve Bank of Cleveland serves the Fourth Federal Reserve District, which comprises Ohio, western Pennsylvania, eastern Kentucky and the northern panhandle of West Virginia. National City and KeyCorp are the two largest national commercial banks with headquarters in Cleveland. Both rank in the top 20 of the 100 largest banks in the U.S. (in terms of total assets). Other banks with a substantial presence in the Region include JPMorganChase, Charter One, Fifth Third Bank and Second National Bank of Warren. A-35

100 Federal savings institutions include Ohio Savings Bank, Third Federal Savings, First Place Bancorp and Home Savings and Loan Company in Youngstown. Ohio ranks sixth among the 50 states in insurance industry employment. The Region is home to the headquarters of Progressive Insurance, a Fortune 500 company that employs 10,000 workers in the Region. Manufacturing Approximately one-third of Ohio s 200 largest manufacturers are located in the Region. The largest manufacturing sector in the Region is related to automotive assembly, parts and supplies. Automotive While improvements in productivity and competition have decreased automotive employment in Ohio over the last eight years, approximately 16% of the total motor vehicles produced in the U.S. each year are assembled in the State of Ohio (second only to Michigan). The State of Ohio accounts for approximately 13% of the nation s motor vehicle industry work force. The largest automotive manufacturing presence in the Region is by Ford Motor Company (Ford) and General Motors (GM). While some Ford production plants will experience downtime or close as part of Ford s recently announced Way Forward initiative, the Ohio Assembly plant in Avon Lake will continue to operate on straight time or overtime in response to consumer demand for the vehicles produced at that facility. Ford employs approximately 2,000 workers at the Avon Lake assembly facility, including those workers transferred from the Lorain Assembly Plant which closed in December Ford s 365-acre Brook Park plant is located just to the northeast of the Airport perimeter. The plant manufactures engine blocks for the company s heavy and light-duty truck lines and employs more than 2,100 workers. Over the last five years, Ford invested $350 million in the Brook Park plant to handle production of the Duratec 30 engines for several of its Ford and Mercury vehicle lines. GM s Lordstown Plant is located in Mahoning County, one of the Outer Ring Counties. In 2002, GM announced investment of more than $500 million to retool the Lordstown facility for production of the next generation of small cars. The facility employs approximately 500 workers. Daimler Chrysler also maintains an automotive stamping and assemblies plant in Twinsburg, located in Summit County. Approximately 1,850 workers are employed at the manufacturing facility. The State of Ohio ranks first among the 50 states in plastics and rubber products employment. Goodyear Tire & Rubber Co., headquartered in Akron Ohio, is the 112 th A-36

101 largest business in the U.S., according to Fortune magazine s 2005 rankings, and is the largest tire company in the world. Goodyear employs over 3,700 workers in the Region. On October 5, 2006, the United Steelworkers union launched a strike at 16 locations in the U.S. and Canada over Goodyear s plan to close two manufacturing plants located outside of the Region. Goodyear continues to operate affected manufacturing plants albeit at reduced operating levels. Other auto parts manufacturing facilities and service providers in the Region include Canton Steel Plant, Timken, Delphi Chassis Systems, Gerstenslager Company, Bendix Commercial Vehicle Systems, LLC and XVision. Transportation The State of Ohio has a 1,330-mile interstate road system and is served by several national rail carriers. In CY 2002, the State of Ohio exported $34 billion in goods with over 49% being shipped to Canada. The Region benefits from a well developed multimodal transportation system which, in addition to the Airport, includes significant interstate highway and rail infrastructure. The Region also includes several ports on Lake Erie with access to global markets via the St. Lawrence Seaway. The Port of Cleveland is the third largest port on the Great Lakes, handling 12.8 million tons of cargo in CY The Port offers 417,000 square feet of storage and distribution facilities and has more heavy lift equipment and cranes than any other Great Lakes port. The Port brings more than $575 million into the Greater Cleveland economy annually through payroll and business expenditures. General Economic and Business Climate Factors State of Ohio Ohio s GSP was $442.4 billion in CY 2005, ranking seventh in the nation after California, Texas, New York, Florida, Illinois and Pennsylvania. Over the last five years, Ohio s GSP increased at an annual rate of 3.5%, the same pace for the Great Lakes Region as a whole, but below the nation s 4.9% annual growth rate for the same period. Airport Service Region The Region is central to a significant portion of the nation s economic base, with 44% of the U.S. population and 45% of the nation s effective buying income residing within 500 miles of the Airport. This strategic geographic location, coupled with the Region s large O&D population, positions the Airport for significant air service activity, in particular east-west connecting traffic. The Region offers numerous recreational and leisure attractions, including professional sports teams, museums and the Rock and Roll Hall of Fame. According to the Cleveland Convention & Visitor s Bureau, over nine million leisure visitors traveled to Cleveland in CY Trade and convention business has the ability to select from a A-37

102 number of facilities including the Quicken Loans Arena, the I-X Center, Cleveland State University Convocation Center and the Cleveland Convention Center. The Greater Cleveland Partnership was formed in 2003 to assist businesses in accessing financing, job training programs and tax incentives. Figure 5. The Region is Central to the Nation s Economic Base (Within 500 Miles of Cleveland) 44% of US Households 43% of US Population 45% of US Effective Buying Income 56% of Fortune 500 US Headquarters 46% of Total US Employment 49% of Total US Manufacturing Employment Source: Convention & Visitor s Bureau of Greater Cleveland The Region is also benefiting from significant redevelopment initiatives. The Greater Cleveland Regional Transit Authority s (RTA) $168 million transportation project to revitalize Euclid Avenue is scheduled for completion by the end of CY Upon completion of the Euclid Avenue project, electric busses will connect downtown (and, via rail, the Airport) with both Playhouse Square and University Circle. Euclid Avenue is expected to benefit from an additional $700 million in real estate investment to line the route of the electric busses with sidewalks, shops, hotels, art galleries, housing and restaurants. Housing in downtown Cleveland has also become increasingly popular, with more than 2,900 new units developed in the last decade. An additional 900 residential units and 260,000 square feet of commercial space in downtown are either currently under A-38

103 construction or planned in the next year. The Region has historically offered attractive housing prices and reasonable cost of living levels. CONCLUSION The air travel demand in the Region is supported by a high concentration of Fortune 1000 companies, and historically strong per capita income, particularly in the Cleveland CMSA, which represents a large majority (71%) of the population. Population trends in the Region suggest relative stability with a shift within the Region to the counties surrounding Cuyahoga County (where the Airport is located). The population levels of the Region are forecast to grow over the next 10 years, however at a rate slower than the national average. Although employment concentration has shifted from manufacturing to service industries in the last decade, the Region continues to experience moderate job growth. The Airport s geographic position facilitates effective east-west connecting traffic routes and the ability to leverage the large economic and population base located within 500 miles of the Airport. A-39

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105 III. ACTIVITY AND AIR SERVICE OVERVIEW With approximately 5.7 million enplaned passengers in CY 2005, the Airport represented the 36th largest airport in North America. The Airport serves a significant O&D market as well as a connecting traffic segment via Continental and its affiliated code-share partners route network. The underlying strength of the O&D passenger traffic, accounting for 75.3% of total enplaned passengers in CY 2005, assures the role of the Airport as a major aviation facility even if connecting passenger traffic were to diminish. As a pure O&D airport, the Airport would still rank (in terms of total passengers) in the top 50 airports in the U.S. AIRLINE PASSENGER TRAFFIC Figure 6 presents historical enplaned passenger activity at the Airport between CY 1992 and CY Enplaned passengers at the Airport increased at an annual average rate of 5.0% between CY 1992 and CY Pre-September 11, 2001 increases in total enplaned passenger activity were the result of both a strong local O&D market and expanded connecting activity at the Airport by Continental and its code-share partner airlines. Year-over-year passenger activity declined 10.6% in CY 2001 and 8.7% in CY 2002, similar to declines experienced in U.S. enplaned passenger activity. Since CY 2003, total enplaned passenger levels at the Airport increased on average 4.3 % per annum. Through the first eight months of CY 2006 total scheduled enplaned passengers at the Airport increased by 0.1% over the same period in CY As a basis for comparison, according to the Air Transport Association (ATA), total scheduled enplaned passengers in the entire U.S. declined 1.4% for the same period. Domestic Passenger Traffic The Airport primarily serves a domestic-based air service market. Domestic enplaned passengers account for approximately 97% of total enplaned passengers at the Airport. As of the date of this Report, seven major/national and 13 commuter/regional airlines provided scheduled domestic passenger service at the Airport. Total domestic enplaned passengers increased an average of 4.8% per year from CY 1992 to CY Total domestic enplaned passengers decreased by 10.4% in CY 2001 and 9.0% in CY A-41

106 2002 given the reduced travel demand environment in the U.S. Since CY 2003, total domestic enplaned passengers have increased 2.1% per year. Figure 6. Historical Enplaned Passenger Activity (000s) 7,000 Enplaned Passengers (000s) 6,000 5,000 4,000 3,000 2,000 1, Source: Department of Port Control For CY 2006, scheduled domestic enplaned passengers declined 0.3% through the first eight months of the year. (This compares to a 2.3% decline for scheduled domestic enplaned passengers in the U.S. as a whole for the same period.) Both United and Continental experienced the largest increase in domestic enplaned passengers at the Airport for the first eight months of CY 2006, 11.5% and 2.2%, respectively, over the same period for CY Delta and Northwest experienced the largest decline in domestic enplaned passengers for the first eight months of CY 2006, 12.0% and 8.9%, respectively, over the same period for CY Most of the decline in domestic enplaned passengers for Delta and Northwest is attributable to the marketing agreement with Continental, and the ability to code-share respective flights among the three air carriers. Given the greater number and frequency of flights at the Airport, Continental has been able to increase its market share (in terms of domestic enplaned passengers) among the three marketing agreement air carriers. Continental s increase in domestic enplaned passengers in the first eight months of CY 2006 was greater than the combined reduction of domestic enplaned passengers by Delta and Northwest. A-42

107 Originating and Connecting Passengers In CY 2005, the Airport generated more than 4.3 million O&D passengers, accounting for 75.3% of total passengers (revenue and non-revenue) at the Airport. The Airport served the sixteenth most populous metropolitan region in the U.S. The percentage of passengers originating at the Airport increased from 64.6% in CY 2000 to 75.3% in CY 2005 primarily as a result of increased O&D traffic and a decline in connecting passengers. Total O&D passengers served by the Airport in CY 2005 (4.3 million) surpassed the previous high set in CY 2000 (4.1 million). Figure 7. Historical O&D and Connecting Enplaned Passenger Activity (000s) Enplaned Passengers (000s) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Origination/Destination Connecting Source: Department of Port Control Approximately 1.4 million total connecting passengers were enplaned at the Airport in CY 2005, representing 24.7% of total enplaned passengers. The connecting passenger segment experienced the largest decline over the last five years, with CY 2005 connecting passenger levels approximately one million less than CY The decline in connecting traffic at the Airport reflects an overall industry trend of increased pointto-point activity by air carriers over the last five years as well as Continental s emphasis on Houston and Newark to develop its connecting route network. A-43

108 However, there are preliminary indications that Continental is beginning to increase its connecting traffic operations at the Airport. The connecting passenger segment experienced the strongest growth than any other passenger segment for the first eight months of CY 2006, increasing 2.1% over the same period for CY As mentioned in Section I, Continental recently announced new air service to Paris beginning in CY As is the case at many other airports, international air service benefits from a strong domestic network that can provide passengers the ability to connect to/from such flights. Continental also recently announced its plans to increase the number of and upgauge certain commuter aircraft serving the Airport. For example, scheduled departures by Continental s commuter/regional operator, Continental Connection, are forecast to increase by 30% in CY 2007 (over CY 2006 schedule). International Passenger Traffic The Airport has historically offered limited scheduled international air service, with most activity focused toward Canadian destinations. From CY 1992 to CY 2000, the number of international enplaned passengers at the Airport increased at an average rate of 16.7% per year. Since CY 2000, international enplaned passengers have declined at an annual average rate of 6.7%. Most of the reduction in international passengers has occurred in the connecting traffic segment. O&D international enplaned passengers declined 3.2% per annum between CY 2000 and CY CY 2005 international enplaned passengers (145,523) represented approximately 75% of corresponding CY 2000 levels (202,033). The share of total enplaned passengers accounted for by international passengers increased slightly from 1.3% in CY 1992 to 3.2% in CY 2002 and then declined to 2.5% in CY Current available statistics for the first eight months of CY 2006 indicate that international enplaned passengers accounted for 2.6% (or 100,651) of total enplaned passengers at the Airport. Scheduled international enplaned passengers increased 21.0% in the first eight months of CY 2006, primarily reflecting increased service offered by USA Airline Market Share of Passenger Traffic Given that the Airport serves as a connecting hub for Continental, Continental accounted for the largest share of total enplaned passengers in CY 2005 (60.9%). Southwest represented the second largest market share at the Airport, accounting for 9.9% of total enplaned passengers in CY Regional/commuter air service accounted for 47.0% of total enplaned passengers in CY Figure 8 presents domestic and international market shares for the airlines serving the Airport in CY A-44

109 Figure 8. CY 2005 Airline Market Shares Enplaned Passengers Market Share- Category 1 Market Share- Total Domestic Mainline Continental 1,685, % 29.4% Southwest 569, % 9.9% Delta 173, % 3.0% Northwest 172, % 3.0% United 157, % 2.7% America West 143, % 2.5% US Airways 26, % 0.5% 2,928, % 51.2% Regional/Commuter Continental Express 1,600, % 28.0% American Eagle 266, % 4.6% USA , % 1.9% Continental Connection 107, % 1.9% SkyWest (United Express) 94, % 1.6% Comair (Delta Connection) 72, % 1.3% Mesa (United Express) 60, % 1.1% Mesa (US Airways Express) 58, % 1.0% PSA Airlines (US Airways Express) 51, % 0.9% Pinnacle (Northwest Airlink) 51, % 0.9% Independence Air 43, % 0.8% Atlantic Southeast (Delta Connection) 29, % 0.5% Midwest Connect 25, % 0.4% Mesaba (Northwest Airlink) 18, % 0.3% Air Wisconsin (US Airways Express) 17, % 0.3% Shuttle America 5, % 0.1% Chautauqua (US Airways Express) 2, % 0.0% Midwest Airlines % 0.0% 2,614, % 45.7% Charter 35, % 0.6% Total Domestic 5,578, % 97.5% International Mainline Continental 35, % 0.6% Regional/Commuter Continental Express 57, % 1.0% Air Canada Jazz 16, % 0.3% 74, % 1.3% Charter 35, % 0.6% Total International 145, % 2.5% TOTAL ENPLANED PASSENGERS 5,724, % 1 Market Share-Category: Domestic or International. Source: Department of Port Control A-45

110 Domestic Market Share Mainline air carriers accounted for 52.5% of domestic traffic in CY Continental and Southwest represented the two largest mainline air carriers in terms of domestic market share in CY 2005, accounting for 30.2% and 10.2%, respectively. Commuter/regional airlines represented 46.9% of total domestic enplaned passengers in CY Continental Express and Continental Connection, collectively, accounted for 30.6% of domestic enplaned passengers at the Airport in CY The next largest commuter/regional air carrier in terms of domestic market share was American Eagle with 4.8%. Several charter airlines provided domestic service at the Airport in CY 2005, accounting for 0.6% of domestic enplaned passengers. Trans Meridian provided the majority of the charter service accounting for 42.2% of non-scheduled domestic enplaned passengers in CY International Market Share Continental was the only air carrier offering mainline international air service and accounted for 24.5% of total international enplaned passengers in CY International enplaned passengers served by commuter/regional airlines represented 50.9% of total international enplaned passengers. Continental Express and Air Canada Jazz accounted for 39.9% and 11.0%, respectively, of international enplaned passengers at the Airport in CY Several charter airlines provided international service at the Airport in CY 2005, accounting for 24.6% of international enplaned passengers. USA 3000 provided the majority of the charter service, accounting for 77.8% of non-scheduled international enplaned passengers in CY O&D Market Share The Airport s O&D enplaned passenger level in CY 2005 surpassed the previous high set in CY 2000, representing the strongest growing traffic segment in the last five years. As presented in Figure 9, the majority of the Airport s O&D traffic in CY 2005 was served by non-hubbing air carriers (those air carriers other than Continental), representing 52.0% of total O&D passengers. Southwest represented the largest nonhubbing O&D market share with 13.4% of total O&D enplaned passengers. In total, low-cost air carriers represented 21.2% of the total O&D passenger market in CY The diverse air service availability offered to the Region s O&D passenger base provides a strong foundation for meeting future demand levels. A-46

111 Figure 9. CY 2005 O&D Market Shares (Continental vs. Other Air Carriers) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Other Airlines Continental Continental Express Source: Department of Port Control AIRLINE AIRCRAFT DEPARTURES AND LOAD FACTORS As of October 2006, the Airport served 81 non-stop destinations worldwide via 2,172 weekly non-stop departures. Continental served 75 of these destinations with 1,492 weekly non-stop departures. Given the greater frequency in aircraft departures associated with a regional jet/commuter operation, airline aircraft departures at the Airport have historically increased at a greater rate than enplaned passengers. From CY 1994 to CY 2000, airline aircraft departures increased an average of 4.8% per year as compared to 3.0% in enplaned passengers during the same period. After September 11, 2001, airlines reduced capacity as a means to improve financial performance. Reduced capacity coupled with growing demand has increased industry load factors. As such, enplaned passenger levels at the Airport have been increasing at a faster rate than departures. From CY 2003 to CY 2005, enplaned passengers increased on average 1.9% per year as compared 1.7% for departures for the same period. A-47

112 Figure 10. Historical Airport Non-Stop Departures (By Aircraft Category) 160, ,000 Mainline Regional/Commuter Non-Stop Departures (000s) 120, ,000 80,000 60,000 40,000 20, Source: Official Airline Guide The average number of enplaned passengers per aircraft departure decreased from 68 passengers in CY 1992 to 51 in CY 2005, primarily driven by the smaller seat capacity of regional jets and other commuter aircraft. Scheduled seats per departure decreased from 126 in CY 1992 to 69 in CY 2005, again, a result of the greater reliance by Continental and other air carriers on regional aircraft to serve the Airport. The average domestic load factor at the Airport has steadily increased over the last 10 years, from 51.9% in CY 1992 to 70.1% in CY DOMESTIC ORIGIN-DESTINATION PATTERNS AND AIRLINE SERVICE The Airport s top 25 O&D domestic passenger markets accounted for 74.2% of total domestic O&D enplaned passengers in CY The top five markets Chicago, Washington DC/Baltimore, New York, Las Vegas and Los Angeles accounted for 32.5% of the Airport s domestic passenger origins and destinations during CY The top three O&D markets, which represented 22.5% of total domestic passengers, are short haul markets located less than 500 miles from the Airport. Low-cost carriers provide service in five of the Airport s top seven O&D markets. Southwest was the leading air carrier in terms of passenger market share in the A-48

113 Airport s top two domestic markets in CY 2005 Chicago and Washington DC/Baltimore. Overall, Southwest represented 13.5% of total domestic O&D enplaned passengers at the Airport in CY Figure 11. Top 25 Domestic O&D Markets from the Airport (CY 2005) Rank O&D Market Between the Airport and: % of Scheduled Passengers #1 Air Carrier/Market Share #2 Air Carrier/Market Share 1 Chicago (a) 9.5% Southwest 37.7% CO Express 30.0% 2 Washington, DC Area (b) 6.6% Southwest 32.6% CO Express 31.4% 3 New York Area 6.5% Continental 66.4% CO Express 18.4% 4 Las Vegas 5.7% Continental 59.0% Southwest 21.1% 5 Los Angeles 4.3% Continental 54.8% Mixed Carriers 17.2% 6 Phoenix 3.6% Continental 40.6% America West 29.7% 7 Florida South (c) 3.6% Continental 52.4% USA % 8 Orlando 3.5% Continental 71.5% Mixed Carriers 9.3% 9 Atlanta 2.9% Delta 48.6% CO Express 36.4% 10 Bay Area (d) 2.6% Continental 46.6% Mixed Carriers 21.0% 11 Houston 2.4% Continental 68.5% Mixed Carriers 14.0% 12 Fort Myers 2.4% Continental 57.4% USA % 13 St. Louis 2.3% Southwest 54.3% CO Express 38.8% 14 Nashville 2.1% Southwest 71.7% CO Express 24.5% 15 Boston 2.1% Continental 84.0% CO Express 7.6% 16 Tampa 2.1% Continental 66.4% Southwest 9.8% 17 Minneapolis/ St. Paul 1.9% Northwest 35.8% CO Express 28.7% 18 Dallas 1.8% American Eagle 42.6% CO Express 32.4% 19 Denver 1.6% Continental 46.7% Mixed Carriers 16.0% 20 Philadelphia 1.4% Mesa Airlines 34.9% CO Express 33.9% 21 San Diego 1.2% Mixed Carriers 26.6% Continental 22.5% 22 Seattle 1.2% Continental 35.9% Mixed Carriers 26.1% 23 Kansas City 1.2% CO Express 71.6% Southwest 16.2% 24 Raleigh/Durham 1.1% CO Express 74.5% Southwest 9.9% 25 Milwaukee 1.0% CO Express 54.2% Midwest 39.8% Cities Listed: 74.2% Other Cities: 25.8% (a) Chicago includes O Hare and Midway. (b) Washington D.C. area includes Washington Dulles, Reagan National and Baltimore Washington Thurgood Marshall. (c) Florida South includes Miami and Fort Lauderdale. (d) Bay Area includes San Francisco, Oakland and San Jose. Source: Department of Transportation Domestic airline service at the Airport has historically been focused on shorter haul markets (500 miles or less). The predominance of short haul service is primarily a function of the large number of major metropolitan areas located within 500 miles of the Airport. Air carriers at the Airport have also utilized commuter/regional aircraft to increase service frequencies to effectively serve these perimeter destinations. Short haul destinations accounted for 54.5% of total domestic enplaned passengers at the Airport in CY CONTINENTAL HUBBING ACTIVITY Since the U.S. airline industry was deregulated in 1978, most major airlines developed hub-and-spoke route networks as a means of increasing their service A-49

114 frequencies and passenger volumes. Despite declines over the last few years, Continental still continues to use the Airport as a connecting hub. Approximately 39% of total Continental passengers enplaned at the Airport in CY 2005 were connecting passengers. Continental s scheduled available seat miles (ASMs) at the Airport accounted for 3.4% of its systemwide ASMs in CY 2005 (as compared to 23.7% and 23.0% for Newark and Houston, respectively). As of October 2006, Continental operated an average of 214 daily non-stop departures from the Airport, an approximate 8% increase from October Figure 12. Continental Hubbing Activity at the Airport (As Percent of Entire Continental System) Available Seat Miles 3.4% 4.8% Scheduled Seats 5.8% 7.5% Non-Stop Departures 7.6% 10.9% Source: Official Airline Guide 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% The Airport represented 5.8% of Continental s total systemwide scheduled seats in CY 2005 (as compared to 17.7% and 25.8% for Newark and Houston, respectively). The Airport s ASMs increased by 1.0% annually between CY 1994 and CY 2005 to 5.3 billion. Continental accounted for 64.8% of total ASMs at the Airport in CY 2005, a decrease from 69.1% in CY CARGO SERVICE In CY 2005, four all-cargo airlines ABX Air, DHL, Federal Express and United Parcel Service provided regular service at the Airport. Total cargo volume, which A-50

115 includes mail and belly cargo carried by passenger airlines, increased 0.7% in CY For the first seven months of CY 2006, total enplaned cargo declined 1.1% as compared to the same period in CY Total cargo volume in CY 2005 was 21.0% less than that carried in CY 2000, primarily due to decreases in enplaned mail freight. The reduction in mail freight was in response to the TSA s requirement to limit mail cargo in the belly of commercial scheduled aircraft to 16 ounces or less (per parcel). AIRCRAFT LANDED WEIGHT Total aircraft landed weight decreased 2.0% in CY 2005 reflecting the overall reduction in domestic capacity experienced in the U.S. CY 2005 landed weights represented approximately 80% of the previous high set in CY Despite the decrease in CY 2005, landed weights averaged a 0.5% annual increase in the last two calendar years. In CY 2005, scheduled U.S. airlines accounted for 93.3% of the total aircraft landed weight at the Airport; foreign-flag airlines accounted for 0.4%; nonscheduled U.S. airlines accounted for 1.1%; and the all-cargo airlines accounted for the remaining 5.5%. Total landed weight at the Airport for the first eight months of CY 2006 decreased 6.2% when compared to the same period in CY For the U.S., domestic capacity as measured by ASMs also declined 3.4% in the first eight months of CY AIRCRAFT OPERATIONS Total aircraft operations (landings and takeoffs) increased from 243,260 in CY 1992 to 322,379 in CY Since CY 2000, total operations (air carrier, air taxi and commuter, general aviation, and military) decreased on average 4.2% per year. CY 2005 aircraft operations represented approximately 80% of CY 2000 aircraft operations. Air carrier operations are those performed in revenue service by the scheduled, certificated, large air carriers serving the Airport (airlines operating aircraft having over 60 seats, or having payloads greater than 18,000 pounds). These operations include scheduled flights, charter flights and diverted flights. Air carrier operations increased 2.0% in CY Air taxi and commuter aircraft operations consist primarily of the scheduled operations of commuter airlines but also include the unscheduled operations of forhire air taxis. Air taxi and commuter operations decreased 2.9% in CY General aviation operations, consisting of all civil operations except air carrier, air taxi and commuter, decreased 8.5% in CY A portion of this traffic has been A-51

116 diverted to Burke which serves as the Airport System s primary general aviation airport. Total commercial air service operations for the first seven months of CY 2006 (most recent data available) decreased 3.9% when compared to the same period in the prior year. The reduction reflects decreased flight schedules by air carriers at the Airport and is consistent with air service trends in the U.S. For the first eight months of CY 2006, total scheduled operations in the U.S. decreased 5.6% compared to the same period in CY CONCLUSION The existing strength of O&D passenger traffic at the Airport, accounting for 75.3% of total enplaned passengers in CY 2005, provides a supporting foundation for travel demand at the Airport. The Airport benefits from low-cost air carrier service, which operated in five of the Region s top seven O&D destinations in CY 2005, and accounted for 21.2% of domestic O&D enplaned passengers. Despite declines in connecting passenger levels, the Airport continues to serve as a connecting hub airport for Continental. For the first eight months of CY 2006, connecting passenger levels increased 2.1% over the same period for CY 2005, and represented the strongest growth segment for the Airport. Other initiatives announced by Continental indicate a greater emphasis will be placed on increasing its network air service at the Airport. Despite declines in operations, the Airport continues to experience increases in passenger levels, indicating higher load factors on air service offered. A-52

117 IV. KEY FACTORS AFFECTING FUTURE AVIATION DEMAND OVERVIEW Despite U.S. airlines record passenger levels in CY 2005, much uncertainty around the future of the aviation industry remains. Rising fuel costs, intense competition and the continued threat of further terrorist attacks, among other concerns, make industry forecasts less clear. The reduced travel demand following the events of September 11, 2001 forced airlines to cut costs and restructure operations. Among other initiatives, mainline U.S. air carriers shed more than 169,000 jobs and reduced operating fleets by 23% to improve financial performance. Even with these cost reduction initiatives, the U.S. airline industry posted cumulative losses of $35 billion from 2001 to Rising fuel costs have further eroded airline financial performance just as the industry appears to be turning a corner on profitability. This section addresses key factors (the Key Factors) that may impact future demand levels at the Airport. The Key Factors section evaluates the following: National/International Economic Conditions and Events; State of the U.S. Airline Industry; Continental and the Role of the Airport as a Connecting Hub; Role of Point-to- Point, Low Cost Carriers; Regional Competition; and Federal Governance and Oversight. Previously, in Section II. Airport Service Region, one additional Key Factor (the population and economy of the Region) was discussed. NATIONAL AND INTERNATIONAL ECONOMIC CONDITIONS AND EVENTS Airline passenger traffic both globally and nationwide has historically been correlated with prevailing economic conditions such as GDP growth and increases in real disposable income levels. In early CY 2001, the U.S. economy entered a recessionary period, as measured by declines in employment, business spending and production, and slowing demand for air travel even before the events of September 11, The events of September 11, 2001 and a stagnant economy over the ensuing years further negatively affected the demand for air travel. Over the last several years, economic fundamentals have improved significantly in the U.S. and worldwide. In the U.S., increased job creation, a rising housing market and significant levels of consumer spending contributed to the economic recovery. Real GDP output averaged a 2.8% annual growth rate over the last four years, and more than three million new jobs were created. During the same period, per capita income increased by more than 10%. As a result of this economic recovery, U.S. aviation demand levels rebounded and recorded more than 725 million enplaned passengers in CY 2005, an all time high. A-53

118 Figure 13. Historical U.S. Aviation Demand and Real GDP Output 800,000 $12,000 US Enplaned Passengers (000s) 700, , , , , , , Source: US Department of Commerce; FAA Enplaned Passengers Real GDP Output $10,000 $8,000 $6,000 $4,000 $2,000 The demand for air travel at the Airport will be a function of both the strength of the national economy as well as the regional economy. This is particularly true for the leisure travel segment which represents more than 60% of total passengers in the U.S (64% of passengers at the Airport according to a 2003 survey). Consumer spending, which accounts for approximately two-thirds of U.S. GDP, is a key influencer of the leisure travel market. The FAA forecasts that GDP will increase 3.1% on average between CY 2006 and CY Per the FAA s 2006 Aerospace Forecast, the underlying GDP growth will support average annual passenger activity growth rates of 3.2% from CY 2006 to CY In recent years, international economics, currency exchange rates, trade balances, political relationships and conflicts within and among foreign countries have become increasingly important influences on passenger traffic at major U.S. airports. Economic downturns in some foreign countries contributed to the slowing of growth in international air travel in the early 1990s, particularly on transatlantic routes and those routes impacted by the Persian Gulf War. The Asian financial crisis of 1997/1998 also highlights the global nature of the airline industry, as international $0 U.S. Real GDP ($ Billion in 2000$) A-54

119 traffic was affected by the crisis. A similar pattern of slowdown in international travel to Asia/Pacific was experienced in due to economic recession and concerns over health issues (i.e., Severe Acute Respiratory Syndrome SARS). Conversely, as international economic conditions have improved, so has the demand for air travel. International passenger traffic growth rates have been consistently stronger than domestic growth rates over the last several years. This is in part due to increased travel demand in growing regions, such as those in Asian-Pacific markets, where economic growth rates have surpassed those in the U.S. Given the limited nature of international air carrier operations at the Airport (2.5% of the total passenger base in CY 2005), the Airport is somewhat insulated from international economic events impacting passenger demand levels. The Airport s primary hubbing air carrier, Continental, is exposed to international economic events as approximately 40% of that air carrier s capacity is on international routes. However, the majority of Continental s international route structure is served from airports other than the Airport. In addition to economic factors, the level of aviation demand at the Airport may be impacted negatively from exogenous events such as terrorist attacks and natural disasters. While these events may have temporary impacts on air carrier service at the Airport some of them may have more lasting impacts on travel patterns and passenger demand levels. For example, some major airports in the U.S., including the Airport, have yet to fully recover to passenger levels experienced prior to September 11, STATE OF THE U.S. AIRLINE INDUSTRY The current aviation environment has never been so dynamic. Despite the events of September 11, 2001 (and its lingering effects), conflict in the Middle East, economic recession and global health concerns (i.e., SARS), aviation demand has proven to be resilient. Total U.S. passenger traffic surpassed pre-9/11 levels in July 2004, with 2005 setting an all-time high for demand. Over the last few years, demand levels increased with improving economic fundamentals and low airfares as legacy air carriers and lowcost carriers (LCCs) aggressively competed for market share. Despite increased aviation demand, airlines have had limited ability to raise airfares, primarily due to the increased competition by the LCCs. Coupled with mounting debt, rising fuel costs and other operating obligations (e.g., under-funded pensions), a large number of legacy carriers entered bankruptcy proceedings to reorganize their corporations. At one point, approximately 50% of all airline seats offered in the U.S. were by air carriers in bankruptcy proceedings. As of the date of this Report, Northwest and Delta remain in bankruptcy protection. Those air carriers that have emerged from bankruptcy have undergone significant restructuring, from airline mergers to increased emphasis on segmenting value (and tailoring resulting service options) in today s travel environment. A-55

120 Airports have naturally felt the impact of the evolving aviation environment. Some airports have experienced the effects of airline dehubbing or downsizing while other airports continue to grow rapidly as LCC service enters and/or expands in their respective markets. As such, some airports find themselves in more difficult financial positions, especially if they implemented large capital programs in hopes of supporting and/or attracting increased air service levels. For example, according to the FAA total annual airport charges (airline rates and charges) in the U.S. increased by $500 million between 2000 and 2005, an approximate 11% increase. Passenger traffic levels, however, increased by only 4% for the same period. Due to their strong market positions, airport operators have historically demonstrated financial stability even when the airline industry has performed poorly. Despite the large number of airline bankruptcies and mounting losses in the airline industry, airport owners have not defaulted on payments on bonds issued and secured by revenues generated from airport operations. However, as witnessed at several airports around the country, the financial strength of an airport s dominant or hubbing air carrier is becoming increasingly important in assessing the financial and operating risk of the airport owner. CONTINENTAL AND THE ROLE OF THE AIRPORT AS A CONNECTING HUB Although the population and economy of an airport service region are the most significant influences on air traffic, the overall level of airline service and the number of passengers using an airport also depend to some extent on the route networks of the airlines serving that airport. Since deregulation, many airlines have emphasized the development of "hub-and-spoke" route networks as a means of increasing their service frequencies, passenger volumes, and profitability. Over the last five years, many of these network air carriers restructured operations by, among other initiatives, using smaller aircraft or reducing flight frequency on unprofitable routes; replacing the service with regional airline service or alternative low-fare service, often from a new, start-up unit; and eliminating the service completely. Some network airlines have also looked to restructure their hub operations to increase aircraft utilization and operating efficiency by depeaking departure and arrival banks. Because most major airlines operate hub-and-spoke route networks, many passengers have a choice of airlines (and connecting hubs) for their travels, and hubbing airlines must compete for these passengers. For example, Continental competes at the Airport for connecting passengers with, among others, American and United (Chicago O Hare), American (St. Louis), US Airways (Pittsburgh), Delta (Cincinnati) and Northwest (Detroit). The number of passengers enplaning at the Airport depends to some extent on the ability of Continental to attract connecting passengers that might otherwise use airlines hubbing through competing hub airports. A-56

121 The level of connecting activity at the Airport is also influenced by Continental s own routing network and schedule. Despite a decline in connecting traffic over the last five years, Continental continues to use the Airport as a connecting passenger hub and represents the largest scheduled seat capacity offered by any other air carrier at the Airport. Continental accounted for 58.7% of total scheduled seats at the Airport in CY Systemwide, the Airport represented 5.8% of Continental s scheduled seats in CY 2005 (this compares to 17.7% for Newark, and 25.8% for Houston). Continental anticipates increasing its annual mainline systemwide capacity by 5% from CY 2007 to CY The Airport also represents the least congested hub airport for Continental in terms of departure delays (defined as 15 minutes or more delay from scheduled departure time). According to the Department of Transportation (DOT), 14.2% of Continental departures at the Airport were delayed in the first eight months of CY In comparison, Continental departures at Newark and Houston were delayed 26.8% and 21.0% respectively, for the same period. As Newark and Houston become increasingly congested, Continental could redirect a greater portion of connecting passengers, in particular the east-west traffic flow, to the Airport. Figure 14. Percent of Continental Departures Delayed (Domestic Hub Airports) Percent of Continental Departures Delayed 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 10.0% Airport 26.8% Newark Houston 13.6% 14.2% 9.0% 21.0% * * Based on eight months of data for Source: Department of Transportation A-57

122 Historically, Continental s average fare has been lower at the Airport than that experienced at its other two domestic hubs. However, Continental generates one of its highest yield premiums (as measured by difference in regional revenue yield revenue per revenue passenger mile flown to mainline revenue yield) on regional jet service and commuter operations at the Airport as compared to Newark and Houston. Given the yield premium generated from such service, it is anticipated that Continental will continue to emphasize its regional/commuter operations at the Airport. Many major U.S. airlines have also formed alliances and code-share agreements to improve the number of total connections available at their hub airport, expanding the network of available flights without significant investment requirements. For example, the marketing agreement between Continental, Northwest and Delta increases the number of domestic flights arriving in time to connect to international departures at respective hub airports. By increasing the number and frequency of domestic flights, airlines can get passengers to international connections with less layover time, thereby decreasing total elapsed travel time. For example, Continental will be able to leverage a wider domestic route network via its marketing partners to allow passengers the ability to connect with the new Paris air service from the Airport. As global alliances are becoming the rule rather than the exception, many major airlines are increasing their alliance memberships in aims of establishing a network that covers all major destinations worldwide. Continental is a member of Sky Team, a 10- member, global airline alliance that offers more than 14,000 daily flights to 728 destinations in 149 countries. The alliance allows member airlines to sell seats on each other's planes, to provide convenient world-wide check-in when connecting on member airlines and to offer passengers the ability to earn frequent flyer miles in any one of the member airlines programs. The relatively strong financial position of the Airport s existing network air carrier (Continental) as compared to other network air carriers and Continental s commitment as party to the amended Use Agreement positions the Airport in a more favorable position to maintain the status of the hub. (For the nine months ended September 30, 2006, Continental reported net income of $237 million and unrestricted cash and shortterm investments of $2.5 billion.) The Airport and its facilities also enable Continental to quickly respond to aviation trends (e.g., "down-gauging" aircraft, to permit more frequent operations with smaller aircraft) without making any significant capital investment to restructure airport operations. The marketing agreement between Continental, Northwest and Delta should also improve increased connection and international routing possibilities from the Airport. However, the current financial environment faced by the airline industry may prompt additional airline mergers and/or consolidation, including that of Continental. Such consolidation may have material impacts on the level of air service, in particular lower frequencies, offered at the Airport. Given that approximately 75% of the Airport s passenger base is O&D- A-58

123 oriented, it is anticipated that this passenger segment would continue to be served and O&D demand levels maintained at the Airport. ROLE OF POINT-TO-POINT, LOW-COST AIR CARRIER SERVICE Over the last decade, the network airlines experienced increasing competition from LCCs, including established airlines such as Southwest and America West, new entrant airlines operating large jet aircraft (e.g., AirTran and JetBlue), and regional airlines operating smaller turbo-prop aircraft (and more recently, regional jets). Since 1990, numerous new airlines, including those started by existing legacy air carriers (e.g. Ted, Song, etc.), began scheduled low fare operations in the U.S. Some of these air carriers have been successful while others have since ceased operations and/or been acquired by larger carriers. In certain markets, the expansion of service by these airlines has resulted in fare competition and lower fares (including those offered by network air carriers such as Continental), which has proved extremely beneficial to the traveling public. While rising fuel costs have contributed to increased operating costs for LCCs, LCCs continue to operate at unit costs significantly below that of the traditional network air carriers. However, increased competition (sometimes from other LCCs) and operating costs may limit opportunities for expanded LCC service. For example, AirTran and JetBlue recently announced plans to scale back future expansion plans due to weaker than projected financial performance. Low cost carriers provide competition on point-to-point domestic air service and continued competition on the longer-haul markets served by Continental and other network carriers into the Airport through their respective hubs. Inter-regional airport competition is also present with the emergence of low cost/low fare air carrier service at Akron-Canton Regional Airport over the last five years. As of the date of this Report, Southwest, US Airways (including the operations of the former America West) and USA 3000 offered scheduled LCC air service from the Airport with destinations to the following cities: Chicago, Baltimore, Las Vegas, Orlando, St. Louis, Nashville, Phoenix, Fort Myers and Saint Petersburg. LCC air carriers represented 21.2% of total domestic O&D passengers at the Airport in CY In certain markets, the expansion of LCC air service has resulted in fare competition, as network air carriers typically lower air fares on competed routes. The additional service provided by these LCCs results in lower air fares which in turn increases domestic traffic from the Airport by stimulating latent price-sensitive demand. Lowfare alternatives to the traditional major air carriers provide effective regional competition for the Airport by emphasizing point-to-point service, bypassing connecting hubs altogether. Southwest is currently the second largest air carrier (in terms of enplaned passengers) behind Continental at the Airport. Currently, Southwest offers service A-59

124 from the Airport to Las Vegas, Phoenix, St. Louis, Nashville, Baltimore and Chicago (Midway). Continental also provides service to all of these cities. The Airport benefits from the presence of low-cost carriers Southwest, US Airways (America West) and USA 3000 in its top 25 O&D markets. The yields for Continental (revenue per revenue passenger mile flown) on competed routes with Southwest have been lower than the average yield for Continental on non-competed routes, indicating the presence of price pressure from the low-cost carrier. The result has been an increase in passenger load factors on these routes and more importantly, an increase in enplanement activity for the Airport. The increase in enplanement activity for these routes has been higher than for other non-competed routes. REGIONAL COMPETITION According to a July 2003 passenger survey, approximately 94% of the Airport s O&D passenger base is within a 100-miles radius of the Airport. Besides the wellestablished midwestern hubs such as Chicago O'Hare, Cincinnati, Pittsburgh, Minneapolis/St. Paul and Detroit, with which the Airport competes in some degree for connecting passengers, the Akron-Canton Regional Airport (Akron) located approximately 60 miles away provides competition for the Region s O&D passenger base. In recent years, an increased number of the Airport Service Region s O&D passengers utilized Akron as that airport introduced new air carrier service, primarily that offered by low fare air carrier AirTran. In addition to increased air service, the southward migration of the Airport s population base to the Inner Ring Counties over the last decade has made Akron a more reasonable alternative for air travel. O&D enplaned passengers increased 13.7% annually from CY 2000 to CY 2005 at Akron, while in comparison the Airport s O&D passenger base increased on average 0.2% per year for the same period. Akron enplaned approximately 711,000 passengers in CY 2005, equivalent to 12.4% of the Airport s total enplaned passengers for CY Akron s market share of the combined Airport and Akron O&D passenger market increased to 14.1% in CY 2005 from 8.0% in CY As of October 1, 2006, Akron provided non-stop service to 12 destinations, all of which are also offered by air carriers serving the Airport. Akron offered 231 weekly non-stop departures compared to 2,172 for the Airport. Akron via AirTran offers competitive airfares in five of the Airport s top 25 markets: New York (LaGuardia), Orlando, Atlanta, Boston and Tampa. In addition, certain network air carriers operating at Akron (i.e., Delta Connection) have matched AirTran airfares on competed routes (e.g., Atlanta). The Airport s share of O&D passengers declined the greatest in the Atlanta market. Since Akron initiated service to Atlanta via Delta Connection and AirTran in 1997 and 1998, respectively, the Airport s market share declined to 52% in CY In CY 2002, Delta Connection experienced the greatest increase in A-60

125 enplanement activity in the Akron-Atlanta market, more than tripling prior year enplanement levels. As a result of low fare air service introduced at Akron, air carriers operating at the Airport responded by lowering air fares on competed routes. In certain markets passenger levels and market shares increased faster at the Airport rather than Akron once lower airfares were introduced. For example, Continental started matching AirTran s airfares to New York LaGuardia in late CY 2004 after this service was introduced from Akron in CY This has resulted in the Airport increasing its market share (in terms of passengers) on the New York LaGuardia route from 60.5% in CY 2003 to 67.4% in CY The matching of air fares from air carriers located at the Airport has also resulted in air service reductions at Akron due to the increase of seat capacity on those competed routes. As Figure 15 presents, the Airport offers the most low-fare destinations in the Region. Figure 15. Low-Fare Air Service from the Region LEGEND Existing low cost air carrier service from CLE Low fare air service available from CLE on competed routes with CAK Both existing low cost air carrier service/competed low fare air service from CLE Chicago (MDW) Boston New York (LGA) Number of Non-Stop Low Fare Destinations Airport Akron Las Vegas Phoenix Denver St. Louis CLE Washington DC Area (BWI) Nashville Atlanta Tampa/ Orlando St. Petersburg Fort Fort Myers Lauderdale Further air service development at Akron, especially any increases in low-fare air carrier service may impact future O&D passenger growth at the Airport. However, these impacts will most likely be experienced on a limited city-pair basis as competitive air service is introduced at Akron. The majority of the top 25 O&D destinations from the Region are already served by low fare carriers operating at either the Airport or Akron. In addition, low fares introduced at Akron are typically matched by air carriers serving the Airport on competed routes and results in stimulated passenger demand which benefits both airports. For example, average annual O&D trips in the Region (including both the Airport and Akron) increased 31% in CY 2005 from CY 2002 levels. A-61

126 Future air service development at Akron may also be impacted by the airport s airfield capacity. Currently, Akron s airfield consists of two runways that intersect which limits airfield operations during IFR conditions. Under VFR conditions, Akron s airfield operational capacity is estimated to be about 50% of that of the Airport. FEDERAL GOVERNANCE AND OVERSIGHT Action by the federal government influences aviation demand in three primary ways: 1) Increasing passenger airfares through federal ticket taxes, 2) Enabling operating capacity of the nation s air traffic control system and 3) Impacting the ease and cost of travel with increase security measures. Each of these factors is evaluated in this section. Federal Taxes and Aviation Legislation Since 1941, airlines have been charged a tax on all tickets by the federal government, with the revenues from the federal ticket tax being used to support and maintain the FAA and to fund the Airport Improvement Program. Among other fees, the FAA currently imposes a 7.5% federal ticket tax and $3.30 federal segment tax on all domestic airfares. Airlines also pay federal tax on aviation fuel currently 4.3 cents per domestic gallon (not deposited into the Aviation Trust Fund) authorized periodically by the U.S. Congress. Congress passed the Wendell H. Ford Aviation and Reform Act, known as AIR-21, in April 2000, which provided the FAA with a $10 billion increase in authorized funding over ten years to support Air Traffic Control (ATC) modernization and airport construction. AIR-21 increased the maximum PFC that airports can impose from $3.00 to $4.50. The Airport currently collects a $4.50 PFC. Current federal aviation taxes and user fees amount to approximately 28% of the average one-way airfare. As additional taxes are imposed or existing ones raised, a commensurate increase in airfares may result in lower demand levels. This is especially true on low-fare routes which typically attract more price-sensitive passengers. Security On November 19, 2001 the President signed into law the Aviation and Transportation Security Act, which among other things established the TSA within the DOT. (The TSA was subsequently moved to the Department of Homeland Security, created by the Homeland Security Act of 2002 and signed into law on November 25, 2002.) The Aviation and Transportation Security Act legislation also required all checked baggage to be screened by explosive detection devices by December 31, The TSA has been collecting a passenger security service fee from the traveling public at $2.50 per departure or connection, not to exceed $5.00 per one-way trip (pursuant to the Emergency Wartime Supplemental Appropriations Act 2003 signed into law on April 16, A-62

127 The security checkpoint requirements and the impact of the Homeland Security Advisory System on airport operations significantly increase the inconvenience and delays at many airports; however at the Airport, the relocation of security checkpoints actually facilitated passenger movement and access to concourses. According to the Airport passenger survey conducted in July 2003, approximately 75% of passengers incurred a security screening waiting time of 15 minutes or less. About 90% of passengers responded that heightened security procedures result in no impact in travel plans or increased the likelihood of travel. The TSA plans to deploy in-line EDS machines in the Airport s terminal complex. The location of additional in-line EDS machines is not yet determined, but will be incorporated into the facility design to maximize efficiency and to provide for the least amount of interruption to passengers. Tighter security standards lead to increased airline and airport costs as well as decreased airline operating efficiency. For example, as response to security requirements discussed above, the Airport added approximately $1 million to its budget for enhanced security measures. Key areas of increased spending include additional law enforcement officers and funds for airport personnel background checks. More stringent security standards, such as those imposed following the August 10, 2006 foiled terrorist plot in London, may also impact future demand levels at the Airport, in particular shorter haul markets (500 miles or less). For example, two-thirds of the Airport s decline in domestic passenger activity in CY 2002 was attributable to decreased travel in short haul markets. In CY 2005, short haul markets accounted for 54.5% of total domestic enplaned passengers. Some airlines, including Continental, reported that elevated security concerns may result in reduced travel demand and airline financial performance. Air Traffic Control and Airport Systems The current capacity benchmark at the Airport is 52 arrivals and 52 departures per hour in Visual Flight Rule (VFR) conditions and 32 arrivals and 32 departures (or fewer) per hour in adverse Instrument Flight Rule (IFR) weather conditions, which may include poor visibility, unfavorable winds or heavy precipitation. When weather (low ceilings and/or reduced visibility) requires the use of IFR as opposed to VFR, where the pilots may assist in their separation from other aircraft an airport's capacity may be reduced because of the increases in required separation between aircraft. An individual airport's capacity may be stretched when one or more airlines choose to operate a hub from an airfield as large numbers of aircraft are scheduled to either land or takeoff at virtually the same time the existing weather conditions and the runways available then determine the capacity of a hub airport at a given moment. Arrivals are scheduled in "banks" which allows more runways to be dedicated to either arrivals or departures depending on the airline's schedule. (Local airport environmental restrictions can play a major part in capacity using this approach.) Accurate prediction A-63

128 of severe weather (wind shear, microbursts and aircraft-produced wake vortices) that may influence airport closures is also a high priority to increasing capacity with extensive research currently underway in these areas. The FAA is currently implementing a far-reaching Capital Investment Plan intended to automate and enhance the computer, radar, and communications equipment of the Air Traffic Control (ATC) system and provide needed additional capacity. CONCLUSION The economic fundamentals of the U.S. are strong and provide the foundation for continued growth in aviation demand levels. While the Airport is third in the number of connecting passenger traffic among Continental s hubs, the Airport does provide Continental with its only major regional jet facility and is the only Continental hub in the north-central part of the country (allowing for the effective transfer of east-west flow traffic). Continental s marketing agreements with Northwest and Delta, and its membership within the Sky Team alliance, allows more passenger connection possibilities for the Airport, especially to an expanded number of international destinations. While the Airport does have increasing competition from a regional airport with low fare air carrier service (Air Tran at Akron), the Airport also benefits from the lower airfares on competed routes. The majority of top 25 O&D markets from the Airport already provide for low-fares, either from LCCs or network air carriers matching LCC airfares. Airport demand levels are susceptible to elevated security concerns and increased security standards, in particular in shorter haul markets. A-64

129 V. AVIATION DEMAND FORECAST The following section summarizes the aviation demand forecast for the Airport for the period FY 2007 through FY Aviation demand and financial forecasts are presented in fiscal years for ease of comparison with provisions in the Indenture (the Airport s fiscal year is the calendar year). Assumptions The forecast is based on conservative assumptions regarding the growth in the general economy of the Region and the U.S. Accordingly, the forecast was based on the analyses of historical and forecast population and economic indicators for the Region, historical airline traffic at the Airport and an analysis of Airport air service activity. In general, it was assumed that future growth in airline traffic at the Airport will not be constrained by the availability of aviation fuel, limitations in airline service at the Airport, limitations in the capacity of the air traffic control system or landside terminal areas, or government policies or actions that restrict growth, including tighter security measures. In particular, it also was assumed that over the forecast period: 1. At the national level, strong economic fundamentals, including increased GDP output and per capita income levels, will continue. 2. At the local level, the Region s stable population levels and moderate job growth provides an underlying foundation for O&D aviation demand. O&D share is forecast to represent 70-75% of total traffic at the Airport. Regional competition will continue to stimulate latent passenger demand. 3. The majority of airlines party to the Original Airline Agreement will become Signatory Airlines under the amended Use Agreement. 4. The Airport will remain as a connecting hub for Continental and experience Continental s shift of increasing connecting passenger activity through the Airport (most notably, benefiting from spill traffic from Newark). 5. Departure growth will trail enplaned passenger and seat capacity increase as Continental will up-gauge aircraft on appropriate routes prior to adding increased frequencies. A-65

130 6. For the remainder of CY 2006, there will be continued softness in the overall air travel market, resulting in flat passenger activity growth at the Airport. 7. No external events (e.g., terrorism, local natural disasters, etc) are assumed to occur nor anticipated to impact activity levels. Enplaned Passengers The base year for the purposes of generating traffic forecasts is CY This data was sourced primarily from the Airport in the form of monthly traffic reports. The total number of passengers enplaned at the Airport is forecast to increase from 5,750,000 in CY 2006 to 6,443,000 in CY Enplaned passengers are forecast to increase by 2.3% on average per year. Figure 16. Historical and Forecast Enplaned Passenger Activity Enplaned Passengers (000s) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Domestic International Forecast Domestic: 2.1% International: 8.8% Total: 2.3% Source: Department of Port Control; Reed, Mandes & Associates, LLC Domestic enplaned passengers at the Airport are forecast to increase 2.1% per year through CY The number of domestic originating passengers is forecast to increase 1.7% per year from CY 2006 to CY Originating passengers are forecast to represent 73.9% of all domestic enplaned passengers in CY The number of domestic connecting passengers enplaned is forecast to increase 3.3% per year from CY A-66

131 2006 to CY International enplaned passengers (accounting for 2.6% of the Airport total in CY 2006) are forecast to increase an average of 8.8% per year between CY 2006 and CY Figure 17. Historical and Forecast Domestic Enplaned Passenger Activity Domestic Enplaned Passengers (000s) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 O&D Connecting Forecast O&D: 1.7% Connecting: 3.3% Total: 2.1% Source: Department of Port Control; Reed, Mandes & Associates, LLC As a basis for comparison, the FAA forecasts total U.S. enplaned passengers to increase at an average rate of 3.4% per year between Federal Fiscal Year (FFY) 2006 and FFY The FAA forecasts that total domestic and international enplaned passengers will increase 3.2% and 5.3%, respectively, on average per year from FFY 2006 and FFY For the Airport, the FAA forecasts that total enplaned passengers will increase on average 2.5% from CY 2006 to CY Aircraft Departures The mix of airline aircraft used at the Airport is forecast to change moderately through the forecast period, reflecting continued emphasis on Continental s regional jet operation. As market demand on certain routes from the Airport increases, it is anticipated that some level of aircraft up-gauging would occur. The average number of passengers enplaned per flight is anticipated to slightly increase during the forecast 1 Federal Aviation Administration, FAA Aviation Forecasts Fiscal Years , February 2006 A-67

132 period reflecting increases in boarding load factors. Passenger aircraft departures are forecast to increase 1.4% from FY 2006 to FY Aircraft Landed Weight Total Signatory Airlines landed weight at the Airport is forecast to increase from 7,600,000 thousand-pound units in CY 2006 to 8,212,000 units by CY 2011 an average of 1.6% per year. Cargo Total enplaned cargo at the Airport is forecast to increase by 1.6% per year from FY 2006 to FY Potential impacts from extending Runway 6R/24L to attract longhaul cargo carriers are not factored into the forecast. CONCLUSION The forecast represents a conservative and gradual increase in the Airport s enplanement activity over the forecast period. Total enplaned passengers are forecast to increase at an average annual rate of 2.3% during the forecast period, with 1.7% growth in O&D passengers and 3.3% growth in connecting passengers, which corresponds to historical growth patterns and trends. A-68

133 VI. FINANCIAL ANALYSIS OVERVIEW The following section provides an analysis of the estimated financial impacts associated with the issuance of the Series 2006 Bonds. Financial projections are presented through FY 2011 (the forecast period) in accordance with the Indenture and amended Use Agreement provisions. The Airport accounts for its activities according to generally accepted accounting principles for governmental entities. All Airport System Revenues and Operating Expenses are accounted for on an accrual basis with moneys maintained in accounts and funds separate from the City s General Fund. Section I: Financial Framework of the Airport provided detail on those provisions of the Indenture and Use Agreements that impact the Airport s financial structure and projections, as included herein. For purposes of estimating financial impacts contained in this report, it is assumed that the terms of the Use Agreements govern the Airport s financial operations, including rates and charges for those air carriers anticipated to become Signatory Airlines. THE SERIES 2006 BONDS The Series 2006 Bonds are being issued to 1) advance refund the City s Airport System Revenue Bonds, Series 2000A maturing January 1, 2014 to and including January 1, 2021, 2) advance refund the City s Airport System Revenue Bonds, Series 1997B maturing January 1, 2010 to and including January 1, 2017, and 3) pay related costs of issuance, underwriter s discount and bond insurance. The Series 2006 Bonds will be issued and secured under the Indenture on a parity with the City s outstanding Series 1997 Bonds, Series 2000 Bonds, Series 2003 Bonds and any Additional Revenue Bonds that may be issued from time to time. Exhibit B summarizes the estimated sources and uses of funds for the Series 2006 Bonds as provided by UBS Securities, LLC. (UBS), the representative for the underwriters of the Series 2006 Bonds. The Series 2006A Bonds will be issued on a taxexempt basis. Bond Counsel will opine that the interest on the Series 2006A Bonds is not an item of tax preference for purposes of the alternative minimum tax (AMT). The Series 2006B Bonds will be issued on a taxable basis. The par amount of the Series 2006 Bonds is estimated to be $77.9 million. BOND SERVICE CHARGES REQUIREMENTS Exhibit C presents historical and estimated Bond Service Charges requirements for FY 2006 through FY 2011 as provided by the City and UBS. Bond Service Charges associated with Future CIP Projects (as outlined in Section I of this Report) are included A-69

134 in the forecast period and are referred to as the Future Bonds. PFCs are anticipated to pay 95% of Bond Service Charges related to the Future Bonds. Bond Service Charges also reflect the proposed conversion of the Airport System s Series 2000C Bonds ($149.0 million outstanding) by the close of CY 2006 from variable interest rates to fixed interest rates to the final maturity of the Series 2000C Bonds. Projections of Bond Service Charges associated with outstanding Revenue Bonds in a variable rate mode are calculated in accordance with the Indenture. Total Bond Service Charges are estimated to increase from $57.5 million in FY 2006 to $75.8 million in FY Pursuant to the Rate Covenant provision of the Indenture, the landing fee calculation includes 125% of the Bond Service Charges on all Revenue Bonds outstanding in FY 2007 through FY In accordance with a letter agreement dated October 28, 1997 between the City and Continental, a portion of the Airport s PFC revenues are used to offset a portion of PFCeligible debt service through FY Specifically, 40% of the previous year s PFC collection is used to reduce Bond Service Charges. The City recently amended the Airport s PFC collection authority to expire in November The Airport collects a PFC at the $4.50 level. The City intends to file a new PFC application to increase collection authority to fund project and financing costs related to the Future CIP Projects. For purposes of estimating financial impacts contained in this report, it is assumed that City s $4.50 PFC collection authority will continue throughout the forecast period. In accordance with FAA Record of Decision dated December 22, 2000 and subsequently amended on August 25, 2005, the City anticipates receiving a total of $181.4 million in LOI funds to pay projects costs of the Runway Uncoupling Project and debt service associated with airfield projects funded in part from the Series 2000 Bonds. For the latter, LOI funds are considered Other Available Funds which are credited against payment of Bond Service Charges (See Exhibit C). As of October 1, 2006, the City has received $85.7 million of the LOI proceeds. Exhibit C-1 presents the historical and estimated allocation of Airport Systemrelated Bond Service Charges to the various Airport System cost centers. Bond Service Charges are allocated to cost centers based on the proportionate share of bond proceeds for projects included in each Airport System cost center. PFC, federal LOI and other credits to Bond Service Charges are allocated entirely to the Airfield Area cost center to offset impacts to the Airport s landing fee. AIRPORT SYSTEM OPERATING EXPENSES Exhibit D presents historical and forecast Airport System Operating Expenses for FY 2006 through FY FY 2006 Operating Expenses represent estimated expenditure levels as provided by Airport management (based on six-month actual performance). A-70

135 Historical and estimated allocation of Operating Expenses into Airport System cost centers is also presented. Total Operating Expenses are anticipated to increase from $70.4 million in FY 2006 to $80.1 million in FY 2011, representing an annual average increase of 2.6%. Growth rates are based on forecast inflation rates, historical trends and relationships in the Airport s Operating Expenses and Airport management s strategies for reducing costs. Forecast Annual O&M Expense Item Growth Rate Salaries & Wages 2.0% Employee Benefits 1.6% Training & Professional Dues 2.0% Utilities 4.0% Contractual Services 2.8% Materials & Supplies 3.0% Maintenance 3.6% Claims, Refunds & Miscellaneous 3.0% Inter-Departmental Service Charge 2.7% Equipment & Capital Outlay 2.3% Total 2.6% AIRPORT SYSTEM REVENUES Exhibit E presents historical and forecast Airport Revenues for FY 2006 through FY FY 2006 Revenues represent estimated expenditure levels as provided by Airport management (based on six-month actual performance). Total Airport Revenues are anticipated to increase from $105.7 million in FY 2006 to $138.5 million in FY Airline Revenues The Airport operates under a cost-center residual cost formula for setting initial terminal building rental fee rates and an Airport System residual cost formula for calculating landing fees. Terminal building rental rates and landing fee rates are adjusted annually to produce Airport Revenues sufficient to meet the Rate Covenant. Other provisions of the Airport s rates and charges structure were recently amended as part of the revision to the Use Agreements. The allocation of non-airline revenues, which previously was done on a landed weight basis, is now based on share of Signatory Airlines passengers. This provision is referred to as the passenger credit and respective shares are calculated on a trailing 12-month basis. New terms of the Use Agreement also include the transition in FY 2007 of the Airport s debt service coverage basis to a rolling coverage structure. This will be accomplished by depositing Other Available Funds in a Coverage Account of the Revenue Fund. Those Other Available Funds will reduce the amount of Airport A-71

136 Revenues required to achieve the 125% coverage requirement of the Rate Covenant. The rolling coverage structure will reduce airline rates and charges and provide the 125% coverage requirement on the first day of the fiscal year. Under the existing paidin coverage structure, airline rates and charges are higher, and the 125% coverage requirement is not collected until the end of the fiscal year. The City and Signatory Airlines have agreed to fund the initial rolling coverage requirement of $17.1 million in FY 2007 from existing Surplus Fund and Improvement Fund monies. An additional $1.9 million is anticipated to be transferred to the Coverage Account in the first full fiscal year following the issuance of the Future Bonds (assumed to be in FY 2008). For purposes of the financial forecasts, it is assumed that 95% or $1.8 million of the additional coverage amount will be paid from PFCs and $95,000 from Airport Revenues. Total airline revenues are estimated to increase from $58.1 million in FY 2006 to $76.0 million in FY 2011, reflecting the increase in Bond Service Charges requirements on outstanding bonds, the Series 2006 Bonds and the Future Bonds. Airline revenues are forecast to represent 54.8% of total Airport System Revenues in FY Non-Airline Revenues Total non-airline revenues are forecast to increase from $44.6 million in FY 2006 to $58.8 million in FY Primary non-airline revenue sources at the Airport consist of public parking, rental cars and terminal concessions (food and beverage/retail). The contractual agreements for the operations of these concessions establish certain financial terms that allow the City to earn the greater of a percentage of gross revenues and a minimum annual guarantee. For example, rental care companies pay a Privilege Fee for operating on the Airport which is calculated as the greater of 10 percent of gross revenues or a minimum annual guarantee equal to 85% of the Privilege Fee paid for the prior lease year. Over the next three years, most of the primary non-airline revenue concessions agreements will expire according to the following schedule: Terminal Retail: August 31, 2007 Terminal Food & Beverage: January 15, 2009 Public Parking: April 29, 2009 Rental Cars: April 30, 2008 (Counter space) February 18, 2018 (Service space) The City expects to bid each of these agreements and to sign new/amended agreements prior to the respective expiration dates listed above. For purposes of the financial forecasts contained in this Report, it is assumed that the new/amended concessions agreements will contain, at a minimum, similar contractual terms to those currently in place. The financial forecasts also assume that no material impact on Airport Revenues will be realized from the potential transition of concessions operators. A-72

137 Non-airline revenues per enplaned passenger increased from $5.00 per passenger in FY 2000 to $7.64 in FY This increase is attributable to several factors: 1) a larger proportion of the Airport s traffic base shifting to O&D passengers, who typically spend more than connecting passengers; 2) expanded retail and concessions areas; and, 3) the implementation of more favorable contract terms with concessionaires. Non-airline revenues are anticipated to increase during the forecast period with enplaned passenger levels, increased retail capacity, pricing practices of concessionaires and enhanced yield or sales per passenger levels. For example, the financial forecasts assume the City will make periodical adjustments to the parking rate fee schedule as demand levels and parking capacity dictates. The financial forecasts also assume that the City will not trigger certain financial incentives of the Use Agreement which provide for the sharing on non-airline revenues over a certain performance threshold. SIGNATORY AIRLINE LANDING FEES AND COST PER ENPLANED PASSENGER Exhibit F presents historical and estimated Signatory Airline landing fees and airline cost per enplaned passenger for FY 2006 through FY Signatory Airline cost per enplaned passenger is forecast to remain in the $10-$11 range (in 2006 dollars) during the forecast period, from $10.07 in FY 2006 to $10.03 in FY 2011 (in 2006 dollars). Signatory Airline landing fees are forecast to increase from $3.73 in FY 2006 to $5.63 in FY 2011 (in 2006 dollars and as measured per 1,000-lb units). CALCULATION OF BOND SERVICE CHARGES COVERAGE AND ADDITIONAL BONDS TEST Exhibit G presents the calculation of Net Revenues and Bond Service Charges coverage for FY 2006 through FY Coverage levels are forecast to remain at or above 1.25x debt service throughout the forecast period. Other Available Funds consist of PFCs, federal grant (LOI) receipts and Airport Development Fund monies used at the discretion of the City and/or Signatory Airlines. The initial Coverage Account balance of $17.1 million is anticipated to be funded from a combination of Surplus Fund and Improvement Fund monies. In accordance with the Indenture, Net Revenues are forecast to be at least equal to (a) 125% of the Bond Service Charges on all Revenue Bonds to be outstanding in each of the first, second and third complete Fiscal Years immediately following the issuance of the Series 2006 Bonds, and (b) 125% of the maximum annual Bond Service Charges on all Revenue Bonds to be outstanding in each of the fourth and fifth Fiscal Years following issuance of the Series 2006 Bonds, and fulfill the requirements of the Additional Bonds Test. Maximum annual Bond Service Charges are estimated to be $68.2 million and payable in FY A-73

138 CONCLUSION The Additional Bonds Test in connection with the issuance of the Series 2006 Bonds is met during the forecast period, with coverage levels forecast to range from 1.28x to 1.39x. Major elements of the Airport s capital program have already been implemented and the costs associated with the improvements in service today are reflected in the financial analysis. The future capital investment required at the Airport is anticipated to be minimal. Signatory Airline cost per enplaned passenger levels are forecast to remain in the $10-$11 range during the forecast period. While this represents a higher than average airline cost per enplaned passenger for the industry, the cost is reasonable when assessing future aviation demand levels for the Airport. It is also anticipated that other hub airports currently finishing or about to start expansion and modernization programs will also incur significant increases to their respective cost structures. A-74

139 FINANCIAL EXHIBITS A-75

140 Exhibit A AIR TRAFFIC Cleveland Airport System For Fiscal Years Ending December 31 (In thousands, except as noted) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and adopted by, Airport management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Historical Estimated Forecast Enplaned Passengers FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Domestic Originating 3,826 4,216 4,221 4,264 4,323 4,388 4,504 4,589 Connecting 1,624 1,363 1,377 1,402 1,432 1,490 1,556 1,622 Total Domestic 5,450 5,579 5,598 5,666 5,755 5,878 6,060 6,211 International Total Enplaned Passengers 5,613 5,724 5,750 5,820 5,940 6,080 6,275 6,443 Total Signatory Enplaned Passengers 5,400 5,473 5,543 5,610 5,726 5,861 6,049 6,211 Air Carrier Landed Weight (1,000 -lb units) Signatory Landed Weight 7,531 7,372 7,600 7,645 7,784 7,865 8,045 8,212 Non-Signatory Landed Weight Total Air Carrier Landed Weight 8,075 7,911 8,085 8,137 8,281 8,367 8,552 8,724 Note: Totals may not add due to rounding. Figures include non-revenue passengers. Sources: Historical: Department of Port Control Estimated/Forecast: Reed, Mandes & Associates, LLC

141 Exhibit B ESTIMATED SERIES 2006 BONDS SOURCES & USES Cleveland Airport System (in thousands of dollars, except as noted) Series 2006A Series 2006B Total Series 2006 Bonds SOURCES OF FUNDS Par Amount Revenue Bond Proceeds $ 66,850 $ 11,010 $ 77,860 Premium 6,054-6,054 Bond Fund Monies 1, ,622 Total Sources of Funds $ 74,251 $ 11,285 $ 85,536 USES OF FUNDS Refunding Escrow Deposits: $ 72,808 11,065 $ 83,873 Cost of Issuance 1, ,663 Total Uses of Funds $ 74,251 $ 11,285 $ 85,536 Note: Totals may not add due to rounding. Source: UBS Securities LLC (10/24/2006)

142 Exhibit C BOND SERVICE CHARGES REQUIREMENT Cleveland Airport System For Fiscal Years Ending December 31 (In thousands, except as noted) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and adopted by, Airport management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Historical Estimated Forecast Bond Service Charges Requirement FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Airport System Revenue Bonds Outstanding Bonds 1 $ 52,090 $ 54,831 $ 57,015 $ 62,563 $ 62,391 $ 61,622 $ 61,627 $ 61,482 Series 2006 Bonds 2 $ - $ - $ 506 $ 4,138 $ 4,138 $ 5,153 $ 5,154 $ 5,156 Future Bonds $ - $ - $ - $ - $ 9,157 $ 9,157 $ 9,157 $ 9,157 Total Bond Service Charges $ 52,090 $ 54,831 $ 57,521 $ 66,701 $ 75,686 $ 75,933 $ 75,939 $ 75,795 Bond Service Charges Coverage 13,844 15,761 16,206 16,675 18,922 18,983 18,985 18,949 Total Bond Service Charges Requirement $ 65,934 $ 70,592 $ 73,727 $ 83,377 $ 94,608 $ 94,916 $ 94,923 $ 94,744 Less: Other Available Funds Passenger Facility Charges $ 12,343 $ 20,577 $ 15,209 $ 14,850 $ 20,087 $ 20,308 $ 19,615 $ 18,882 AIP Grants (LOI) 10,307 9,560 10,576 11,536 14,819 16,077 10,710 3,807 Transfers from other Funds 1,000-12,701 4,250 4,468 4,710 5,007 5,295 Total Other Available Funds $ 23,650 $ 30,137 $ 38,486 $ 30,636 $ 39,373 $ 41,095 $ 35,332 $ 27,984 Net Bond Service Charges Requirement $ 42,284 $ 40,455 $ 35,241 $ 52,741 $ 55,234 $ 53,821 $ 59,591 $ 66, Note: Totals may not add due to rounding. Reflects anticipated conversion of Series 2000C Bonds from variable interest rate to fixed interest rate by end of FY Bond Service Charges for Outstanding Bonds includes debt service on variable rate demand obligations (Series 1997D, Series 1997E and Series 2003C) calculated in accordance with the Indenture. These Bonds are calculated at the following rates: 1997D--5.00%, 1997E--5.24% and 2003C--5.38%. Includes refunding of a portion of the Series 1997B and Series 2000A Bonds. Sources: Department of Port Control; UBS Securities LLC; Reed, Mandes & Associates, LLC

143 Exhibit C-1 BOND SERVICE CHARGES REQUIREMENT ALLOCATION TO COST CENTERS Cleveland Airport System For Fiscal Years Ending December 31 (In thousands, except as noted) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and adopted by, Airport management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Historical Estimated Forecast Bond Service Charges By Cost Center FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Net Bond Service Charges Requirement $ 42,284 $ 40,455 $ 35,241 $ 52,741 $ 55,234 $ 53,821 $ 59,591 $ 66,760 Terminal Complex Terminal Building $ 6,023 $ 6,264 $ 5,656 $ 8,759 $ 8,724 $ 8,774 $ 7,509 $ 7,480 Concourse A 1,129 1,219 1,068 1,640 1,633 1,642 1,398 1,392 Concourse B Concourse C Concourse D 2,687 2,073 1,813 3,901 3,885 3,908 3,326 3,312 Parking & Roadways 7,669 10,443 9,179 11,153 11,108 11,172 9,568 9,530 Hangars & Other Areas Burke Lakefront Airport Airfield Area Bond Service Charges 2,744 2, ,742 9,100 7,467 17,212 24,509 Bond Service Charges Coverage 13,844 15,761 16,206 16,675 18,922 18,983 18,985 18,949 Net Bond Service Charges Requirement $ 35,384 $ 39,543 $ 35,241 $ 52,741 $ 55,234 $ 53,821 $ 59,591 $ 66,760 Note: Totals may not add due to rounding. Sources: Department of Port Control; Reed, Mandes & Associates, LLC

144 Exhibit D AIRPORT SYSTEM OPERATING EXPENSES Cleveland Airport System For Fiscal Years Ending December 31 (In thousands, except as noted) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and adopted by, Airport management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Historical Estimated Forecast Operating Expenses by Type FY 2004 FY 2005 FY FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Salaries & Wages $ 16,572 $ 16,968 $ 17,458 $ 18,571 $ 18,757 $ 19,132 $ 19,515 $ 20,100 Employee Benefits 5,346 5,639 6,481 6,871 6,940 7,079 7,220 7,437 Training & Professional Dues Utilities 7,126 6,344 7,437 8,383 8,718 9,067 9,430 9,807 Contractual Services 15,616 20,565 20,064 18,068 18,610 18,982 19,551 20,138 Materials & Supplies 4,015 4,427 4,731 5,396 5,557 5,724 5,896 6,073 Maintenance 3,629 4,163 4,400 5,107 5,291 5,481 5,678 5,883 Claims, Refunds & Miscellaneous , Inter-Departmental Service Charge 6,086 7,785 5,541 6,276 6,464 6,658 6,858 7,064 Subtotal Operating Expenses $ 58,647 $ 66,957 $ 68,144 $ 69,651 $ 71,339 $ 73,152 $ 75,204 $ 77,588 Equipment & Capital Outlay $ 1,330 $ 2,141 $ 2,295 $ 2,341 $ 2,388 $ 2,436 $ 2,485 $ 2,559 Total Airport System Operating Expenses $ 59,977 $ 69,098 $ 70,439 $ 71,993 $ 73,728 $ 75,588 $ 77,689 $ 80,148 Operating Expenses by Cost Center Airfield Area $ 15,830 $ 18,237 $ 14,365 $ 14,681 $ 15,035 $ 15,414 $ 15,843 $ 16,344 Terminal Complex 24,134 27,804 32,570 33,288 34,091 34,951 35,922 37,059 Parking & Roadways 12,067 13,902 14,172 14,484 14,833 15,208 15,630 16,125 Hangars & Other Areas 5,592 6,442 6,567 6,712 6,874 7,047 7,243 7,473 Burke Lakefront Airport 2,355 2,713 2,765 2,826 2,894 2,967 3,050 3,146 Total Airport System Operating Expenses $ 59,977 $ 69,098 $ 70,439 $ 71,993 $ 73,728 $ 75,588 $ 77,689 $ 80,148 Note: Totals may not add due to rounding. 1 Based on six month actual results for FY Sources: Department of Port Control; Reed, Mandes & Associates, LLC

145 Exhibit E AIRPORT SYSTEM REVENUES Cleveland Airport System For Fiscal Years Ending December 31 (In thousands, except as noted) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and adopted by, Airport management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Historical Estimated Forecast Airport System Revenues FY 2004 FY 2005 FY FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Airline Revenues Signatory Airline Revenues Terminal Complex Space Rentals $ 27,025 $ 28,275 $ 27,464 $ 33,125 $ 32,969 $ 32,408 $ 25,642 $ 24,591 Landing Fees 33,802 31,771 28,373 30,143 31,278 30,331 40,011 47,661 Subtotal Signatory Airline Revenues $ 60,827 $ 60,046 $ 55,838 $ 63,268 $ 64,247 $ 62,740 $ 65,654 $ 72,251 Non-Signatory Airline Landing Fees 3,240 3,226 2,263 2,424 2,496 2,419 3,151 3,714 Total Airline Revenues $ 64,066 $ 63,272 $ 58,101 $ 65,692 $ 66,743 $ 65,159 $ 68,804 $ 75,965 Non-Airline Revenues Terminal Complex Rental Cars $ 10,133 $ 9,652 $ 10,000 $ 10,506 $ 10,652 $ 10,812 $ 11,096 $ 11,307 Concession revenues 5,407 5,660 6,000 6,577 6,914 7,360 7,899 8,387 Utility Reimbursements 1,451 1,486 1,500 1,560 1,622 1,687 1,755 1,825 Security Space Rentals 2,611 2,006 3,058 3,150 3,244 3,342 3,442 3,545 FIS Fees Other 4,528 1, Subtotal Terminal Complex $ 24,763 $ 20,958 $ 21,954 $ 23,259 $ 23,943 $ 24,756 $ 25,795 $ 26,715 Parking & Roadways Automobile Parking $ 15,659 $ 17,155 $ 17,200 $ 17,825 $ 18,333 $ 19,459 $ 22,707 $ 24,371 Employee Parking Utility Reimbursements Subtotal Parking & Roadways $ 16,403 $ 17,899 $ 17,810 $ 18,457 $ 18,989 $ 20,139 $ 23,411 $ 25,101 Airfield Area Fuel Flowage Fees $ 646 $ 744 $ 1,000 $ 1,150 $ 1,171 $ 1,230 $ 1,259 $ 1,285 In-flight Catering Utility Reimbursements Other ,270 1,308 1,464 1,612 1,682 Subtotal Airfield Area $ 1,184 $ 1,310 $ 1,815 $ 2,813 $ 2,884 $ 3,114 $ 3,306 $ 3,417 Hangars & Other Areas Concession and Ground Rents $ 1,900 $ 2,163 $ 2,000 $ 2,040 $ 2,105 $ 2,196 $ 2,268 $ 2,345 Utility Reimbursements 926 1, ,014 1,055 1,097 1,141 1,186 Subtotal Hangars & Other Areas $ 2,826 $ 3,331 $ 2,975 $ 3,054 $ 3,160 $ 3,293 $ 3,409 $ 3,532 Total Non-Airline Revenues $ 45,176 $ 43,498 $ 44,554 $ 47,583 $ 48,976 $ 51,302 $ 55,921 $ 58,765 Burke Lakefront Airport Revenues Interest Income 1,298 2,332 2,250 2,492 2,546 2,562 2,744 2,964 Total Airport System Revenues $ 111,468 $ 110,020 $ 105,681 $ 116,558 $ 119,071 $ 119,846 $ 128,309 $ 138,549 Note: Totals may not add due to rounding. Based on six month actual results for FY Sources: Department of Port Control; Reed, Mandes & Associates, LLC 1

146 Exhibit E-1 AVERAGE TERMINAL RENTAL RATES Cleveland Hopkins Airport System For Fiscal Years Ending December 31 (In thousands, except as noted) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and adopted by, Airport management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Forecast Terminal Complex Area FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Terminal Building Operating Expenses $ 8,455 $ 8,658 $ 8,877 $ 9,124 $ 9,412 Bond Service Charges Requirement 8,759 8,724 8,774 7,509 7,480 Terminal Building Capital Expenditures Allocated Parking & Roadway Bond Service Charges 1,974 1,966 1,977 1,693 1,687 Parking & Roadway Capital Expenditures Allocated FIS Facility Expense Subtotal Terminal Building $ 19,275 $ 19,438 $ 19,721 $ 18,421 $ 18,677 Less: Allocated Non-Airline Revenues Terminal Building Net Requirement $ 19,275 $ 19,438 $ 19,721 $ 18,421 $ 18,677 Terminal Building Sq. Ft. Leased to Signatory Airlines Terminal Building Average Gross Rental Rate $ $ $ $ $ Concourse A Operating Expenses $ 2,900 $ 2,970 $ 3,045 $ 3,129 $ 3,228 Bond Service Charges Requirement 1,640 1,633 1,642 1,398 1,392 Allocated Parking & Roadway Bond Service Charges Parking & Roadway Capital Expenditures Allocated FIS Facility Expense Subtotal Concourse A $ 5,246 $ 5,307 $ 5,397 $ 5,140 $ 5,232 Less: Allocated Non-Airline Revenues $ - $ - $ - $ - $ - Less: FIS Portion of Concourse A Requirement Concourse A Net Requirement $ 5,246 $ 5,307 $ 5,397 $ 5,140 $ 5,232 Concourse A Sq. Ft. Leased to Signatory Airlines Concourse A Average Gross Rental Rate $ $ $ $ $

147 Exhibit E-1 AVERAGE TERMINAL RENTAL RATES Cleveland Hopkins Airport System For Fiscal Years Ending December 31 (In thousands, except as noted) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and adopted by, Airport management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Forecast Terminal Complex Area FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Concourse B Operating Expenses $ 3,945 $ 4,040 $ 4,142 $ 4,257 $ 4,392 Bond Service Charges Requirement Allocated Parking & Roadway Bond Service Charges Parking & Roadway Capital Expenditures Allocated FIS Facility Expense Subtotal Concourse B $ 5,694 $ 5,783 $ 5,896 $ 5,763 $ 5,893 Less: Allocated Non-Airline Revenues Concourse B Net Requirement $ 5,694 $ 5,783 $ 5,896 $ 5,763 $ 5,893 Concourse B Sq. Ft. Leased to Signatory Airlines Concourse B Average Gross Rental Rate $ $ $ $ $ Concourse C Operating Expenses $ 8,573 $ 8,780 $ 9,001 $ 9,252 $ 9,544 Bond Service Charges Requirement Allocated Parking & Roadway Bond Service Charges 2,002 1,994 2,005 1,717 1,710 Parking & Roadway Capital Expenditures Allocated FIS Facility Expense Subtotal Concourse C $ 11,000 $ 11,199 $ 11,437 $ 11,352 $ 11,640 Less: Allocated Non-Airline Revenues Concourse C Net Requirement $ 11,000 $ 11,199 $ 11,437 $ 11,352 $ 11,640 Concourse C Sq. Ft. Leased to Signatory Airlines Concourse C Average Gross Rental Rate $ $ $ $ $

148 Exhibit E-1 AVERAGE TERMINAL RENTAL RATES Cleveland Hopkins Airport System For Fiscal Years Ending December 31 (In thousands, except as noted) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and adopted by, Airport management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Forecast Terminal Complex Area FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Concourse D Operating Expenses $ 11,047 $ 11,313 $ 11,599 $ 11,921 $ 12,299 Bond Service Charges Requirement 3,901 3,885 3,908 3,326 3,312 Allocated Parking & Roadway Bond Service Charges 2,579 2,569 2,584 2,212 2,204 Parking & Roadway Capital Expenditures Allocated FIS Facility Expense Subtotal Concourse D $ 17,641 $ 17,885 $ 18,211 $ 17,584 $ 17,943 Less: Allocated Non-Airline Revenues Concourse D Net Requirement $ 17,641 $ 17,885 $ 18,211 $ 17,584 $ 17,943 Concourse D Sq. Ft. Leased to Signatory Airlines Concourse D Average Gross Rental Rate $ $ $ $ $ Airline Constructed Space Operating Expenses $ 12,853 $ 13,163 $ 13,495 $ 13,870 $ 14,309 Bond Service Charges Requirement Allocated Parking & Roadway Bond Service Charges 3,001 2,989 3,006 2,574 2,564 Parking & Roadway Capital Expenditures Allocated FIS Facility Expense Subtotal Airline Constructed Space $ 15,986 $ 16,288 $ 16,641 $ 16,589 $ 17,022 Less: Allocated Non-Airline Revenues Airline Constructed Space Net Requirement $ 15,986 $ 16,288 $ 16,641 $ 16,589 $ 17,022 Airline Constructed Space Sq. Ft. Leased to Signatory Airlines Airline Constructed Space Average Gross Rental Rate $ $ $ $ $ Total Terminal Complex Space Rentals 1 $ 74,842 $ 75,900 $ 77,304 $ 74,849 $ 76,407 Note: Totals may not add due to rounding. Represents Gross Terminal Complex Space Rentals prior to Passenger Credit Allocation. Sources: Department of Port Control; Reed, Mandes & Associates, LLC 1

149 Exhibit F SIGNATORY AIRLINE LANDING FEE AND AIRLINE COST PER ENPLANED PASSENGER Cleveland Airport System For Fiscal Years Ending December 31 (In thousands, except as noted) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and adopted by, Airport management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Estimated Forecast Airport System Requirement FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Airport System Operating Expenses $ 70,439 $ 71,993 $ 73,728 $ 75,588 $ 77,689 $ 80,148 Airport System Bond Service Charges 57,521 66,701 75,686 75,933 75,939 75,795 Airport Development Fund - 8,500 8,936 9,421 10,014 10,591 Airport Non-Airline Revenue Incentive Bond Service Charges Coverage Requirement 16, Total Airport System Requirement $ 144,166 $ 147,194 $ 158,444 $ 160,941 $ 163,641 $ 166,534 Less Credits: Non-Airline Revenues $ 44,554 $ 47,583 $ 48,976 $ 51,302 $ 55,921 $ 58,765 Allocable Passenger Credit Revenues 39,764 41,717 42,931 44,896 49,206 51,816 Other Non-Airline Revenues 4,790 5,867 6,044 6,407 6,715 6,949 Burke Lakefront Revenues Signatory Airline Terminal Rentals (1) 27,464 33,125 32,969 32,408 25,642 24,591 Non-Signatory Landing Fees 2,263 2,424 2,496 2,419 3,151 3,714 Interest Income 2,250 2,492 2,546 2,562 2,744 2,964 Other Available Funds 38,486 30,636 39,373 41,095 35,332 27,984 Total Credits $ 115,793 $ 117,052 $ 127,166 $ 130,609 $ 123,630 $ 118,873 Signatory Airline Landing Fee Requirement $ 28,373 $ 30,143 $ 31,278 $ 30,331 $ 40,011 $ 47,661 Signatory Airline Landed Weight (1,000-lb) 7,600 7,645 7,784 7,865 8,045 8,212 Signatory Landing Fee (per 1,000-lb unit) $ 3.73 $ 3.94 $ 4.02 $ 3.86 $ 4.97 $ 5.80 (in 2006 Dollars) $ 3.73 $ 3.83 $ 3.90 $ 3.74 $ 4.83 $ 5.63 Signatory Airline Cost Per Enplaned Passenger Signatory Airline Revenues (Exhibit E) $ 55,838 $ 63,268 $ 64,247 $ 62,740 $ 65,654 $ 72,251 Signatory Enplaned Passengers (Exhibit A) 5,543 5,610 5,726 5,861 6,049 6,211 Airline Cost Per Enplaned Passenger $ $ $ $ $ $ (in 2006 Dollars) $ $ $ $ 9.80 $ 9.64 $ (1) Net of Allocable Passenger Credit Revenues. Note: Totals may not add due to rounding. Sources: Department of Port Control; Reed, Mandes & Associates, LLC

150 Exhibit G BOND SERVICE CHARGES COVERAGE AND ADDITIONAL BONDS TEST Cleveland Airport System For Fiscal Years Ending December 31 (In thousands, except as noted) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and adopted by, Airport management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Estimated Forecast Bond Service Charges Coverage FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Airport System Revenues $ 105,681 $ 116,558 $ 119,071 $ 119,846 $ 128,309 $ 138,549 Other Available Funds: Passenger Facility Charges 15,209 14,850 20,087 20,308 19,615 18,882 AIP Grants (LOI) 10,576 11,536 14,819 16,077 10,710 3,807 Coverage Account Balance - 17,100 19,000 19,000 19,000 19,000 Transfer from coverage and other funds 12,701 4,250 4,468 4,710 5,007 5,295 Total Airport System Revenues $ 144,166 $ 164,294 $ 177,444 $ 179,941 $ 182,641 $ 185,534 Less: Airport System Operating Expenses 70,439 71,993 73,728 75,588 77,689 80,148 Net Revenues [A] $ 73,727 $ 92,301 $ 103,717 $ 104,353 $ 104,952 $ 105,386 Bond Service Charges [B] $ 57,521 $ 66,701 $ 75,686 $ 75,933 $ 75,939 $ 75,795 Bond Service Charges 1 [C] $ 57,521 $ 66,701 $ 75,686 $ 75,933 $ 77,357 $ 77,357 Bond Service Charges Coverage =[A]/[B] Additional Bonds Test Airport System Revenues $ 105,681 $ 116,558 $ 119,071 $ 119,846 $ 128,309 $ 138,549 Other Available Funds 38,486 47,736 58,373 60,095 54,332 46,984 $ 144,166 $ 164,294 $ 177,444 $ 179,941 $ 182,641 $ 185,534 Less: Operating Expenses 70,439 71,993 73,728 75,588 77,689 80,148 Net Revenues [D] $ 73,727 $ 92,301 $ 103,717 $ 104,353 $ 104,952 $ 105, % of Bond Service Charges 1 [E]=1.25x[C] $ 71,901 $ 83,377 $ 94,608 $ 94,916 $ 96,696 $ 96,696 [D] is at least equal to or greater than [E] Note: Totals may not add due to rounding. 1 Per the Indenture, the Additional Bonds Test includes the maximum annual Bond Service Charges for all outstanding Revenue Bonds for FY 2010 and FY Source: Reed, Mandes & Associates, LLC

151 SUPPLEMENTAL TABLES A-87

152 Table 1. Historical and Forecast Population Population Distribution (in thousands) Historical Projected COUNTY Ashland Ashtabula Cuyahoga 1,412 1,407 1,394 1,335 1,333 1,310 1,302 Carroll Erie Geauga Huron Lake Lorain Mahoning Medina Portage Stark Summit Trumbull Wayne Airport Service Region 4,030 4,099 4,141 4,123 4,143 4,140 4,152 State of Ohio 10,847 11,155 11,353 11,501 11,667 11,816 12,006 United States 249, , , , , , ,805 Source: U.S. Census Bureau; Ohio Department of Development Year Table 2. Historical Labor Force and Unemployment Rates Labor Force Airport Service Region U.S. State of Ohio Unemployment Rate Airport Service Region U.S. State of Ohio ,979, ,940,000 5,070, % 7.10% 8.50% ,969, ,670,000 5,112, % 7.60% 9.60% ,979, ,204,000 5,157, % 9.70% 12.70% ,944, ,550,000 5,122, % 9.60% 12.20% ,947, ,544,000 5,115, % 7.50% 9.40% ,952, ,461,000 5,156, % 7.20% 8.90% ,971, ,834,000 5,217, % 7.00% 8.20% ,961, ,865,000 5,254, % 6.20% 7.00% ,978, ,669,000 5,316, % 5.50% 6.10% ,008, ,869,000 5,383, % 5.30% 5.50% ,986, ,840,000 5,389, % 5.60% 5.70% ,978, ,346,000 5,401, % 6.80% 6.60% ,008, ,105,000 5,475, % 7.50% 7.40% ,017, ,200,000 5,509, % 6.90% 6.70% ,043, ,056,000 5,568, % 6.10% 5.60% ,054, ,304,000 5,604, % 5.60% 4.90% ,069, ,943,000 5,660, % 5.40% 5.00% ,087, ,297,000 5,712, % 4.90% 4.60% ,094, ,673,000 5,736, % 4.50% 4.30% ,108, ,368,000 5,780, % 4.20% 4.30% ,115, ,583,000 5,807, % 4.00% 4.00% ,115, ,734,000 5,825, % 4.70% 4.40% ,112, ,863,000 5,836, % 5.80% 5.70% ,116, ,510,000 5,866, % 6.00% 6.20% ,111, ,401,000 5,875, % 5.50% 6.20% ,117, ,320,000 5,900, % 5.10% 5.90% Source: Ohio Department of Jobs & Family Services A-88

153 Table 3. Historical and Forecast Enplaned Passengers Total Enplaned Passengers (in Thousands) Domestic Domestic Total Total Total O&D Connecting Domestic International Enplaned Historical ,147 2,274 6, , ,662 2,092 5, , ,275 1,960 5, , ,531 1,567 5, , ,826 1,624 5, , ,216 1,364 5, ,724 Estimated ,221 1,377 5, ,750 Forecast ,264 1,402 5, , ,323 1,432 5, , ,388 1,490 5, , ,504 1,556 6, , ,589 1,622 6, , Growth Rates 1.7% 3.3% 2.1% 8.8% 2.3% Source: Department of Port Control; Reed, Mandes & Associates, LLC A-89

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155 APPENDIX B CITY OF CLEVELAND, DEPARTMENT OF PORT CONTROL, DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS, REPORT ON AUDIT OF FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 B-1

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157 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS REPORT ON AUDITS OF FINANCIAL STATEMENTS For the years ended December 31, 2005 and 2004

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159 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS TABLE OF CONTENTS Independent Accountants Report Page Management s Discussion and Analysis Balance Sheets Statements of Revenues, Expenses and Changes in Net Assets Statements of Cash Flows Notes to Financial Statements Schedule of Airport Revenues and Operating Expenses as Defined in the Airline Use Agreements... 48

160 INDEPENDENT ACCOUNTANTS REPORT Divisions of Cleveland Hopkins International and Burke Lakefront Airports Department of Port Control City of Cleveland Cuyahoga County 601 Lakeside Avenue Cleveland, OH To the Honorable Frank G. Jackson, Mayor, Members of Council, and the Audit Committee: We have audited the accompanying financial statements of the Divisions of Cleveland Hopkins International and Burke Lakefront Airports, Department of Port Control, City of Cleveland, Cuyahoga County, Ohio, as of and for the years ended December 31, 2005 and December 31, 2004, as listed in the table of contents. These financial statements are the responsibility of the Divisions of Cleveland Hopkins International and Burke Lakefront Airports management. Our responsibility is to express opinions on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to reasonably assure whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions. As discussed in Note A, the financial statements present only the Divisions of Cleveland Hopkins International and Burke Lakefront Airports, and do not purport to, and do not, present fairly the financial position of the City of Cleveland, Cuyahoga County, Ohio as of December 31, 2005 and December 31, 2004, and the changes in its financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Divisions of Cleveland Hopkins International and Burke Lakefront Airports as of December 31, 2005 and December 31, 2004, and the changes in its financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Management s Discussion and Analysis is not a required part of the financial statements but is supplementary information the accounting principles generally accepted in the United States of America requires. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. 1

161 Divisions of Cleveland Hopkins International and Burke Lakefront Airports City of Cleveland Cuyahoga County Independent Accountant s Report Page 2 We performed our audits to form an opinion on the financial statements of the Divisions of Cleveland Hopkins International and Burke Lakefront Airports taken as a whole. The Schedule of Airport Revenue and Operating Expenses as defined in the Airline Use Agreement for the year ended December 31, 2005 is presented for purposes of additional analysis and is not a required part of the Divisions of Cleveland Hopkins International and Burke Lakefront Airports financial statements. Such information has been subjected to the auditing procedures applied in the audit of the Divisions of Cleveland Hopkins International and Burke Lakefront Airports financial statements and, in our opinion, is fairly presented, in all material respects, in relation to the Divisions of Cleveland Hopkins International and Burke Lakefront Airports financial statements taken as a whole. Betty Montgomery Auditor of State May 26,

162 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS GENERAL As management of the City of Cleveland s (the City ) Department of Port Control, Divisions of Cleveland Hopkins International and Burke Lakefront Airports (the Divisions ), we offer readers of the Divisions financial statements this narrative overview and analysis of the financial activities of the Divisions for the years ended December 31, 2005 and December 31, Please read this information in conjunction with the Divisions basic financial statements and footnotes that begin on page 23. The Divisions are charged with the administration and control of, among other facilities, the municipally owned airport facilities of the City. The Divisions operate a major public airport and a reliever airport serving not only the City of Cleveland, but also suburban municipalities in Cuyahoga, Medina, Summit and Geauga counties. In 2005, the Divisions were served by 24 scheduled airlines and 8 cargo airlines. There were 117,000 scheduled landings with landed weight amounting to 7,910,706,000 pounds. There were 5,724,000 passengers enplaned at Cleveland Hopkins International Airport during In 2004, the Divisions were served by 27 scheduled airlines and 8 cargo airlines. There were 117,000 scheduled landings with landed weight amounting to 8,074,743,000 pounds. There were 5,613,000 passengers enplaned at Cleveland Hopkins International Airport during COMPARISON OF 2005 DATA TO 2004 DATA FINANCIAL HIGHLIGHTS The assets of the Divisions exceeded its liabilities at December 31, 2005 by $404,312,000 (net assets). Of this amount, $124,515,000 (unrestricted net assets) may be used to meet the Divisions ongoing obligations to customers and creditors. The Divisions total net assets increased by $15,163,000 during This change is due to an increase in terminal rental rates and concession revenue offset by an increase in operating costs and depreciation expense and a decrease in net non-operating expense. Additions to construction in progress totaled $56,722,000 in The principal capital expenditures during the year were for the construction of the Concourse C rehabilitation, Runway safety improvements and the structural rebuilding of the long term garage. Approximately 17.7% was spent on the acquisition of property south of the Airport. Another 10.5% was spent on the construction of a centralized deicing pad, which is expected to be completed in The Divisions total debt decreased by $9,373,000 during the current fiscal year. The key factor for this decrease was the payment of principal on the Series 1990 and 1997 Airport System Revenue Bonds (see Note B for additional information). 3

163 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Divisions basic financial statements. The accompanying financial statements present financial information for the City of Cleveland s Divisions of Cleveland Hopkins International and Burke Lakefront Airports Fund, in which the City accounts for the operations of the Department of Port Control. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The Divisions are considered an enterprise fund because the operations of the Divisions are similar to a private sector business enterprise. Accordingly, in accounting for the activities of the Divisions, the economic resources measurement focus and the accrual basis of accounting is used. This is similar to businesses in the private sector. The basic financial statements of the Divisions can be found on pages of this report. The notes to the financial statements provide additional information that is essential to gain a full understanding of the data provided in the basic financial statements. The notes to the basic financial statements can be found on pages of this report. 4

164 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED BALANCE SHEET INFORMATION Provided below is condensed balance sheet information for the Divisions as of December 31, 2005 and 2004: Increase/ (Decrease) (In thousands) Assets: Current assets $ 103,832 $ 92,282 $ 11,550 Restricted assets 372, ,877 (30,712) Unamortized bond issuance costs 12,631 13,523 (892) Capital assets, net 927, ,298 9,657 Total assets $ 1,416,583 $ 1,426,980 $ (10,397) Net assets and liabilities: Liabilities: Current liabilities $ 60,885 $ 74,466 $ (13,581) Long-term obligations 951, ,365 (11,979) Total liabilities 1,012,271 1,037,831 (25,560) Net assets: Invested in capital assets, net of related debt (35,388) (56,180) 20,792 Restricted for capital projects 130, ,886 (21,063) Restricted for debt service 115, ,005 (1,330) Restricted for passenger facility charges 68,687 66,297 2,390 Unrestricted 124, ,141 14,374 Total net assets 404, ,149 15,163 Total net assets and liabilities $ 1,416,583 $ 1,426,980 $ (10,397) Assets: Total assets decreased $10,397,000 between 2004 and Capital assets increased $9,657,000 mainly due to land purchased south of the Airport and airfield improvements. The reduction in restricted assets of $30,712,000 is mainly attributable to payments for airfield improvements that significantly reduced cash and cash equivalents. 5

165 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED BALANCE SHEET INFORMATION (Continued) Capital assets: The Divisions investment in capital assets as of December 31, 2005 amounted to $927,955,000 (net of accumulated depreciation). This investment in capital assets includes: land; land improvements; buildings, structures and improvements; furniture, fixtures and equipment; and construction in progress. The Divisions investment in capital assets increased 1.1% in the current year. A summary of the activity in the Divisions capital assets during the year ended December 31, 2005 is as follows: Balance Balance January 1, December 31, 2005 Additions Reductions 2005 (In thousands) Land $ 140,296 $ 10,532 $ $ 150,828 Land improvements 642,095 23, ,207 Buildings, structures and improvements 409,509 1, ,686 Furniture, fixtures, and equipment 39,287 1,185 40,472 1,231,187 36,006-1,267,193 Less: Accumulated depreciation (331,915) (47,065) (378,980) 899,272 (11,059) - 888,213 Construction in progress 19,026 56,722 (36,006) 39,742 Capital assets, net $ 918,298 $ 45,663 $ (36,006) $ 927,955 Major events during the current fiscal year affecting the Divisions capital assets included the following: Phase I safety improvements to Runway were completed in These improvements are driven by safety concerns and the Federal Aviation Administration s Runway Safety Area compliance initiative. Phase I included the reconstruction of approximately 300 ft of the touchdown zone for Runway 28 which has been deteriorating for several years and could no longer be repaired. In addition shoulders were added to the portions of the runway that currently do not have shoulders on the east side of the runway. Phase II, which includes shoulder work and edge lights on the west side of the runway, drainage improvements and asphalt overlay work, will commence in August of 2006, pending the availability of Airport Improvement Program Grants. During 2005, construction continued on the rehabilitation of the Concourse C apron. The rehabilitation work is a complete full depth replacement and any necessary environmental remediation work. This project is anticipated to be completed by December

166 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED BALANCE SHEET INFORMATION (Continued) Land south of Cleveland Hopkins International Airport ( Hopkins Airport ) was purchased in accordance with the settlement agreement between the City of Cleveland and the City of Brook Park. In 2005, the Divisions spent $11,532,000 on these properties. The Divisions plan on purchasing approximately 334 homes under this agreement. Additional information on the Divisions capital assets, including commitments made for future capital expenditures, can be found in Notes A and F to the basic financial statements. Liabilities: Total liabilities decreased $25,560,000 due to a decrease in accrued interest payable and a decrease in payables from restricted assets. The decrease in accrued interest payable is due to the fact the Series 1990 capital appreciation bonds are approaching their final maturity; therefore, a large portion of the accrued interest has been paid out. The decrease in payables is due to the fact that there was less construction going on at Hopkins Airport at the end of 2005 due to the completion of phase two of the new runway. Long-term debt: At December 31, 2005, the Divisions had $957,415,000 in total debt outstanding. The Airport System Revenue Bonds are secured by the pledge of all airport revenues, as defined in the revenue bond indenture. 7

167 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED BALANCE SHEET INFORMATION (Continued) The activity in the Divisions debt obligations outstanding during the year ended December 31, 2005 is summarized below: Balance Balance January 1, Debt Debt Debt December 31, 2005 Issued Refunded Retired 2005 (In thousands) Airport System Revenue Bonds: Series 1990 $ 5,443 $ $ $ (2,818) $ 2,625 Series ,555 (6,555) 241,000 Series , ,190 Series , ,600 Total $ 966,788 $ - $ - $ (9,373) $ 957,415 The 2005 bond ratings for the Divisions revenue bonds are as follows: Moody s Investors Service Standard & Poor s A3 A- In 2003, Moody s removed the negative outlook on the Divisions bond rating and reaffirmed the A3 rating. Standard & Poor s lowered the Divisions rating from A to A- due to above average decline in passenger enplanements compared to national averages and an increased dependence on Continental Airlines as a hub carrier. The ratio of net revenue available for debt service to debt service requirements (revenue bond coverage) is a useful indicator of the Divisions debt position to management, customers and creditors. The Divisions revenue bond coverage for 2005, 2004, and 2003, was 1.36%, 1.69%, and 1.38%, respectively. Additional information on the Divisions long-term debt can be found in Note B to the basic financial statements on pages Net Assets: Net Assets serves as a useful indicator of an entity's financial position. In the case of the Divisions, assets exceed liabilities by $404,312,000 at the close of the most recent year. 8

168 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED BALANCE SHEET INFORMATION (Continued) Of the Divisions net assets, ($35,388,000) reflects its investment in capital assets (e.g., land, land improvements, buildings, fixtures and equipment), net of accumulated depreciation, less any related, still-outstanding debt used to acquire those assets. The Divisions use these capital assets to provide services to their customers. Consequently, these assets are not available for future spending. Although the Divisions investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other resources since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the Divisions net assets, $315,185,000 represents resources that are subject to external restrictions. These restricted net assets include proceeds from debt; amounts set aside in various fund accounts for payment of revenue bonds, which are limited by the bond indentures; unspent bond proceeds relating to capital projects; and Passenger Facility Charges imposed and collected at Cleveland Hopkins International Airport based on an approved Federal Aviation Administration application. Passenger Facility Charges are restricted for designated capital projects and approved debt service. The remaining balance of unrestricted net assets, $124,515,000 may be used to meet the Divisions ongoing obligations to customers and creditors. 9

169 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS INFORMATION The Divisions operations increased its net assets by $15,163,000 and $16,680,000 in 2005 and 2004, respectively. Key elements of these changes are summarized below: Increase/ (Decrease) (In thousands) Operating revenues Landing fees $ 35,168 $ 37,203 $ (2,035) Terminal and concourse rentals 43,539 43, Concessions 26,710 25,482 1,228 Utility sales and other 5,658 5, Total operating revenues 111, , Operating expenses 114,022 98,665 15,357 Operating income (loss) (2,947) 12,187 (15,134) Non-operating revenue (expense): Passenger facility charges revenue 22,785 22, Non-operating expense (2,332) (11,152) (8,820) Sound insulation program (1,736) (4,689) (2,953) Loss on disposal of capital asset (68) (68) Interest income 9,920 7,009 2,911 Interest expense (27,037) (29,483) (2,446) Amortization of bond issuance expense, bond discounts and loss on debt refundings (1,680) (1,692) (12) Total non-operating revenue (expense), net (80) (17,488) (17,408) Capital and other contributions 18,190 21,981 (3,791) Increase (decrease) in net assets 15,163 16,680 (1,517) Net assets, beginning of year 389, ,469 16,680 Net assets, end of year $ 404,312 $ 389,149 $ 15,163 10

170 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS INFORMATION (Continued) Operating revenues: In 2005 traffic remained constant at Hopkins Airport, however, due to a change in the type of aircraft servicing Hopkins Airport, landed weight decreased 164,037,000 pounds, or 2.0% from last year. Of the $111,075,000 in total operating revenue, $31,771,000 or 28.6% was from signatory landing fees. This represents a 6.0% decrease from 2004, which is primarily due to a change in aircraft servicing Hopkins Airport. Signatory terminal rentals accounted for $28,275,000 or 25.5% of total operating revenue. This represents an increase of 4.6%, which is primarily due to an increase in rates and charges. Parking operations accounted for $17,155,000 or 15.4% of the total operating revenues. This is an increase of 9.6% over the prior year s parking revenue. This increase is due to increased traffic at Hopkins Airport. Rental car revenues, the fourth largest revenue source accounted for 8.7% of total airport system revenues, representing a decrease of 4.7% over the prior year. Operating expenses: Total operating expenses increased $15,357,000, due to an increase in depreciation expense and an increase in operations and maintenance expense. Depreciation expense increased due to the addition of phase two of the new runway, which opened in November of Non-operating revenue and expense: Expenses related to the Sound Insulation Program decreased by $2,953,000. This is due to the fact the Airport is nearing completion of the 65dnl and is transitioning into the next phase. Capital and other contributions: The Divisions received $18,190,000 in Federal Airport Improvement Grants. These grants were primarily for the residential sound insulation program, airfield safety improvements and the construction of runway 6L/24R. COMPARISON OF 2004 DATA TO 2003 DATA FINANCIAL HIGHLIGHTS The assets of the Divisions exceeded its liabilities at December 31, 2004 by $389,149,000 (net assets). Of this amount, $110,141,000 (unrestricted net assets) may be used to meet the Divisions ongoing obligations to customers and creditors. The Divisions total net assets increased by $16,680,000 during This change is due to an increase in signatory landing fees, terminal rental rates and concession revenue offset by an increase in depreciation expense and an increase in interest expense. 11

171 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) FINANCIAL HIGHLIGHTS (Continued) Additions to construction in progress totaled $110,998,000 in The principal capital expenditures during the year were for the construction of the second phase of the new runway and other associated projects such as the NASA relocation, which account for approximately 64.4% of the total expenditures. Approximately 8.9% was spent on the acquisition of property south of the Airport. Another 9.2% was spent on the rehabilitation of Concourse C, which is expected to be completed in The Divisions total debt decreased by $11,104,000 during the current fiscal year. The key factor for this decrease was the payment of principal on the Series 1990, 1994 and 1997 Airport System Revenue Bonds (see Note B for additional information). OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Divisions basic financial statements. The accompanying financial statements present financial information for the City of Cleveland s Divisions of Cleveland Hopkins International and Burke Lakefront Airports Fund, in which the City accounts for the operations of the Department of Port Control. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The Divisions are considered an enterprise fund because the operations of the Divisions are similar to a private sector business enterprise. Accordingly, in accounting for the activities of the Divisions, the economic resources measurement focus and the accrual basis of accounting is used. This is similar to businesses in the private sector. The basic financial statements of the Divisions can be found on pages of this report. The notes to the financial statements provide additional information that is essential to gain a full understanding of the data provided in the basic financial statements. The notes to the basic financial statements can be found on pages of this report. 12

172 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED BALANCE SHEET INFORMATION Provided below is condensed balance sheet information for the Divisions as of December 31, 2004 and 2003: Increase/ (Decrease) (In thousands) Assets: Current assets $ 92,282 $ 87,033 $ 5,249 Restricted assets 402, ,213 (77,336) Unamortized bond issuance costs 13,523 14,420 (897) Capital assets, net 918, ,385 70,913 Total assets $ 1,426,980 $ 1,429,051 $ (2,071) Net assets and liabilities: Liabilities: Current liabilities $ 74,466 $ 82,942 $ (8,476) Long-term obligations 963, ,640 (10,275) Total liabilities 1,037,831 1,056,582 (18,751) Net assets: Invested in capital assets, net of related debt (56,180) (138,971) 82,791 Restricted for capital projects 151, ,921 (84,035) Restricted for debt service 117, ,349 (5,344) Restricted for passenger facility charges 66,297 57,183 9,114 Unrestricted 110,141 95,987 14,154 Total net assets 389, ,469 16,680 Total net assets and liabilities $ 1,426,980 $ 1,429,051 $ (2,071) Assets: Total assets remained fairly consistent between 2003 and The major decrease in restricted assets and increase in capital assets is due primarily to the cost of construction of the second phase of the new runway. 13

173 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED BALANCE SHEET INFORMATION (Continued) Capital assets: The Divisions investment in capital assets as of December 31, 2004 amounted to $918,298,000 (net of accumulated depreciation). This investment in capital assets includes: land; land improvements; buildings, structures and improvements; furniture, fixtures and equipment; and construction in progress. The Divisions investment in capital assets increased 8.4% in the current year. A summary of the activity in the Divisions capital assets during the year ended December 31, 2004 is as follows: Balance Balance January 1, December 31, 2004 Additions Reductions 2004 (In thousands) Land $ 130,332 $ 9,964 $ $ 140,296 Land improvements 360, ,431 (38) 642,095 Buildings, structures and improvements 402,088 8,058 (637) 409,509 Furniture, fixtures, and equipment 37,224 2,063 39, , ,516 (675) 1,231,187 Less: Accumulated depreciation (292,505) (40,018) 608 (331,915) 637, ,498 (67) 899,272 Construction in progress 209, ,998 (301,516) 19,026 Capital assets, net $ 847,385 $ 372,496 $ (301,583) $ 918,298 Major events during the current fiscal year affecting the Divisions capital assets included the following: Final construction of Runway 6L-24R was completed in 2004 with full Category III commissioning achieved on November 25, The commissioning of the runway was the culmination of a three-year construction project valued at $129,000,000. The runway was completed on schedule and on budget. The greater separation of the Runways 6L- 24R and 6R-24L and the enhanced navigational aids for operating in poor weather will provide significant capacity and safety improvements for Cleveland Hopkins International Airport and the national airspace system. In order to construct Runway 6L- 24R, several NASA research, support and ancillary facilities had to be relocated. The projects completed for an aggregate cost of $118 million over five years included construction at both NASA Glenn Research Center and NASA s Plumbrook Station near Sandusky. Additionally, the NASA projects also included the resolution of environmental concerns and the preparation of various items to document and preserve the history of the Altitude Combustion Stand, which was demolished to enable the runway to be constructed. 14

174 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED BALANCE SHEET INFORMATION (Continued) The Abram Creek Culvert project was completed in 2004 at a cost of $54,000,000. This three-year project included the installation of four parallel 10 ft. diameter culverts for a total length of approximately 3,600 liner feet. The project included culverting Abram Creek, filling a ravine with approximately 4 million cubic yards of earth, and construction of a central detention basin for storm water management for approximately 60% of the airport. Completion of the project was essential to the construction of Runway 6L-24R and the upcoming construction of the Runway 6R-24L Uncoupling and Extension. Additionally, the project provides for improved storm water management of runoff from the airport to prevent downstream flooding and improve water quality. Land south of the Cleveland Hopkins International Airport ( Hopkins Airport ) was purchased in accordance with the settlement agreement between the City of Cleveland and the City of Brook Park. In 2004, the Divisions spent $9,964,000 on these properties. The Divisions plan on purchasing approximately 334 homes under this agreement. Additional information on the Divisions capital assets, including commitments made for future capital expenditures, can be found in Notes A and F to the basic financial statements. Liabilities: Total liabilities decreased $18,751,000 due to a decrease in payables from restricted assets and a decrease in revenue bonds. The decrease in payables is due to the fact that there was less construction going on at Hopkins Airport at the end of 2004 due to the completion of phase two of the new runway in November of Long-term debt: At December 31, 2004, the Divisions had $966,788,000 in total debt outstanding. The Airport System Revenue Bonds are secured by the pledge of all airport revenues, as defined in the revenue bond indenture. 15

175 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED BALANCE SHEET INFORMATION (Continued) The activity in the Divisions debt obligations outstanding during the year ended December 31, 2004 is summarized below: Balance Balance January 1, Debt Debt Debt December 31, 2004 Issued Refunded Retired 2004 (In thousands) Airport System Revenue Bonds: Series 1990 $ 8,487 $ $ $ (3,044) $ 5,443 Series ,045 (2,045) Series ,570 (6,015) 247,555 Series , ,190 Series , ,600 Total $ 977,892 $ - $ - $ (11,104) $ 966,788 The 2004 bond ratings for the Divisions revenue bonds are as follows: Moody s Investors Service Standard & Poor s A3 A- In 2003, Moody s removed the negative outlook on the Divisions bond rating and reaffirmed the A3 rating. Standard & Poor s lowered the Divisions rating from A to A- due to above average decline in passenger enplanements compared to national averages and an increased dependence on Continental Airlines as a hub carrier. The ratio of net revenue available for debt service to debt service requirements (revenue bond coverage) is a useful indicator of the Divisions debt position to management, customers and creditors. The Divisions revenue bond coverage for 2004, 2003, and 2002, was 1.69%, 1.38%, and 1.33%, respectively. Additional information on the Divisions long-term debt can be found in Note B to the basic financial statements on pages Net Assets: Net Assets serves as a useful indicator of an entity's financial position. In the case of the Divisions, assets exceed liabilities by $389,149,000 at the close of the most recent year. 16

176 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED BALANCE SHEET INFORMATION (Continued) Of the Divisions net assets, ($56,180,000) reflects its investment in capital assets (e.g., land, land improvement, buildings, machinery, and equipment), net of accumulated depreciation, less any related, still-outstanding debt used to acquire those assets. The Divisions use these capital assets to provide services to their customers. Consequently, these assets are not available for future spending. Although the Divisions investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other resources since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the Divisions net assets, $335,188,000 represents resources that are subject to external restrictions. These restricted net assets include proceeds from debt; amounts set aside in various fund accounts for payment of revenue bonds, which are limited by the bond indentures; unspent bond proceeds relating to capital projects; and Passenger Facility Charges imposed and collected at Cleveland Hopkins International Airport based on an approved Federal Aviation Administration application. Passenger Facility Charges are restricted for designated capital projects and approved debt service. The remaining balance of unrestricted net assets, $110,141,000 may be used to meet the Divisions ongoing obligations to customers and creditors. 17

177 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS INFORMATION The Divisions operations increased its net assets by $16,680,000 in 2004 and decreased its net assets by $1,633,000 in Key elements of these changes are summarized below: Increase/ (Decrease) (In thousands) Operating revenues Landing fees $ 37,203 $ 31,370 $ 5,833 Terminal and concourse rentals 43,123 36,842 6,281 Concessions 25,482 17,102 8,380 Utility sales and other 5,044 4, Total operating revenues 110,852 89,854 20,998 Operating expenses 98,665 91,606 7,059 Operating income (loss) 12,187 (1,752) 13,939 Non-operating revenue (expense): Passenger facility charges revenue 22,587 21, Non-operating expense (11,152) (7,561) 3,591 Sound insulation program (4,689) (9,427) (4,738) Loss on disposal of capital asset (68) (13,592) (13,524) Interest income 7,009 7,823 (814) Interest expense (29,483) (19,927) 9,556 Amortization of bond issuance expense, bond discounts and loss on debt refundings (1,692) (1,289) 403 Total non-operating revenue (expense), net (17,488) (22,087) (4,599) Capital and other contributions 21,981 22,206 (225) Increase (decrease) in net assets 16,680 (1,633) 18,313 Net assets, beginning of year 372, ,102 (1,633) Net assets, end of year $ 389,149 $ 372,469 $ 16,680 18

178 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS INFORMATION (Continued) Operating revenues: In 2004 traffic increased at Hopkins Airport resulting in an increase in landed weight of 247,067,000 pounds, or 3.2% from last year. Of the $110,852,000 in total operating revenue, $33,802,000 or 30.5% was from signatory landing fees. This represents a 20.0% increase from 2003, which is primarily due to increased landing fee rate and increased traffic. Signatory terminal rentals accounted for $27,025,000 or 24.4% of total operating revenue. This represents an increase of 17.1%, which is primarily due to an increase in rates and charges. Parking operations accounted for $15,659,000 or 14.1% of the total operating revenues. This is an increase of 30.9% over the prior year s parking revenue. This increase is due to increased traffic at Hopkins Airport. Rental car revenues, the fourth largest revenue source accounted for 9.1% of total airport system revenues, representing an increase of 17.9% over the prior year. Operating expenses: Total operating expenses increased $7,059,000, due to an increase in depreciation expense and a slight increase in operations, maintenance and administrative expense. Depreciation expense increased due to the addition of phase two of the new runway, which opened in November of Non-operating revenue and expense: Expenses related to the Sound Insulation Program decreased by $4,738,000. The 2003 expenses were significantly higher due to the fact that in 2003 the program included insulation of St. Patrick s School. Loss on disposal of capital assets decreased $13,524,000 primarily due to the sale of property of the Divisions in This property was acquired under the Federal Noise Program and was not needed for future Hopkins Airport development. Interest expense increased $9,556,000 due to a decrease in the amount of interest that could be capitalized. Capital and other contributions: The Divisions received $21,981,000 in Federal Airport Improvement Grants. These grants were primarily for the residential sound insulation program, airfield safety improvements and the construction of runway 6L/24R. FACTORS EXPECTED TO IMPACT THE DIVISION S FUTURE FINANCIAL POSITION OR RESULTS OF OPERATIONS The Master Lease and Use Agreement for Hopkins Airport expired on December 31, A ten year lease extension was negotiated and signed by Continental Airlines, and Southwest Airlines, the Airport s two largest carriers. American Eagle, US Airways, Delta, Northwest and United Airlines are expected to sign the lease extension before June 30, All airlines continue to operate at Hopkins Airport. The extension retains the residual rate structure of the Airport. 19

179 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) FACTORS EXPECTED TO IMPACT THE DIVISION S FUTURE FINANCIAL POSITION OR RESULTS OF OPERATIONS (Continued) In 2005, construction began on the uncoupling and extension of Runway 6R-24L, which when completed will allow for unrestricted direct international service from Cleveland to any worldwide destination. Also in 2005, construction began on a centralized deicing pad, thereby significantly reducing the amount of on-gate deicing operations at Hopkins Airport. This project will enhance environmental stewardship and operational efficiency at the Airport. ADDITIONAL INFORMATION This financial report is designed to provide a general overview of the Divisions finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Office of the Finance Director, City Hall, Room 104, 601 Lakeside Avenue, Cleveland, Ohio

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181 BASIC FINANCIAL STATEMENTS 22

182 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS BALANCE SHEETS December 31, 2005 and 2004 ASSETS CURRENT ASSETS Cash and cash equivalents 3,393 (In thousands) $ $ 11,511 Restricted cash and cash equivalents 9,678 11,736 Investments 77,406 53,053 Receivables: Accounts-net of allowance for doubtful accounts of $1,034,257 in 2005 and $201,987 in ,890 7,135 Unbilled revenue 7,167 4,399 Accrued interest receivable Total receivables 9,591 11,840 Prepaid expenses Due from other City of Cleveland departments, divisions or interfund accounts Due from Federal government 2,695 2,712 Materials and supplies-at cost TOTAL CURRENT ASSETS 103,832 92,282 RESTRICTED ASSETS Cash and cash equivalents 262, ,368 Investments 106, ,104 Accrued interest receivable 815 1,199 Bond retirement reserve Accrued passenger facility charges 3,119 3,153 TOTAL RESTRICTED ASSETS 372, ,877 UNAMORTIZED BOND ISSUANCE COSTS 12,631 13,523 CAPITAL ASSETS Land 150, ,296 Land improvements 665, ,095 Buildings, structures and improvements 410, ,509 Furniture, fixtures, equipment 40,472 39,287 1,267,193 1,231,187 Less: Accumulated depreciation (378,980) (331,915) 888, ,272 Construction in progress 39,742 19,026 CAPITAL ASSETS, NET 927, ,298 TOTAL ASSETS $ 1,416,583 $ 1,426,980 (Continued) 23

183 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS BALANCE SHEETS December 31, 2005 and December 2004 LIABILITIES AND NET ASSETS LIABILITIES CURRENT LIABILITIES Current portion of long-term debt, due within one year 10,895 (In thousands) $ $ 9,373 Current portion of long-term deferred payment obligation, due within one year 1,881 1,741 Accounts payable 2,610 3,487 Due to other City of Cleveland departments, divisions or interfund accounts 684 1,483 Current portion of accrued wages and benefits 2,740 2,617 Accrued interest payable 23,172 32,754 Accrued property taxes 7,573 6,780 Construction fund payable from restricted assets 3,689 7,693 Other construction accounts payable from restricted assets 5,989 4,043 Landing fee adjustment - payable to Airlines 1,652 4,495 TOTAL CURRENT LIABILITIES 60,885 74,466 LONG-TERM OBLIGATIONS - excluding amounts due within one year Revenue bonds 932, ,249 Deferred payment obligation 18,425 20,307 Accrued wages and benefits TOTAL LONG-TERM OBLIGATIONS 951, ,365 TOTAL LIABILITIES 1,012,271 1,037,831 NET ASSETS Invested in capital assets, net of related debt (35,388) (56,180) Restricted for capital projects 130, ,886 Restricted for debt service 115, ,005 Restricted for passenger facility charges 68,687 66,297 Unrestricted 124, ,141 TOTAL NET ASSETS 404, ,149 See notes to financial statements. TOTAL LIABILITIES AND NET ASSETS $ 1,416,583 $ 1,426,980 (Concluded) 24

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185 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS For the Years Ended December 31, 2005 and December 2004 (In thousands) OPERATING REVENUES Landing fees: Scheduled airlines $ 31,771 $ 33,802 Other 3,397 3,401 35,168 37,203 Terminal and concourse rentals: Scheduled airlines 28,275 27,025 Other 15,264 16,098 43,539 43,123 Concessions 26,710 25,482 Utility sales and other 5,658 5,044 TOTAL OPERATING REVENUES 111, ,852 OPERATING EXPENSES Operations 62,794 55,019 Maintenance 4,163 3,628 Depreciation and amortization 47,065 40,018 TOTAL OPERATING EXPENSES 114,022 98,665 OPERATING INCOME (LOSS) (2,947) 12,187 NON-OPERATING REVENUE (EXPENSE) Passenger facility charges revenue 22,785 22,587 Non-operating expense (2,332) (11,152) Sound insulation program (1,736) (4,689) Loss on disposal of capital asset (68) Interest income 9,920 7,009 Interest expense (27,037) (29,483) Amortization of bond issuance expense, bond discounts, and loss on debt refundings (1,680) (1,692) TOTAL NON-OPERATING REVENUE (EXPENSE) - NET (80) (17,488) INCOME (LOSS) BEFORE CAPITAL AND OTHER CONTRIBUTIONS (3,027) (5,301) Capital and other contributions 18,190 21,981 INCREASE (DECREASE) IN NET ASSETS 15,163 16,680 NET ASSETS, BEGINNING OF YEAR 389, ,469 See notes to financial statements. NET ASSETS, END OF YEAR $ 404,312 $ 389,149 26

186 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2005 and 2004 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ 107,693 $ 113,605 Cash payments to suppliers for goods and services (45,485) (40,338) Cash payments to employees for services (22,462) (21,383) NET CASH PROVIDED BY OPERATING ACTIVITIES 39,746 51,884 CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Cash payments for sound insulation of homes (1,584) (5,043) Cash payments for other non-operating costs (2,048) (939) NET CASH USED FOR NON-CAPITAL FINANCING ACTIVITIES (3,632) (5,982) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition and construction of capital assets (52,736) (133,370) Cash receipts for passenger facility charges 22,818 22,435 Principal paid on long-term debt (10,895) (9,373) Interest paid on long-term debt (43,666) (36,162) Capital grant proceeds 18,208 19,621 NET CASH USED FOR CAPITAL AND RELATED FINANCING ACTIVITIES (66,271) (136,849) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities (92,545) (83,513) Proceeds from sale and maturity of investment securities 66,256 89,301 Interest received on investments 14,040 17,423 NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITES (12,249) 23,211 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (42,406) (67,736) Cash and cash equivalents, beginning of year 317, ,351 Cash and cash equivalents, end of year $ 275,209 $ 317, (Continued)

187 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS STATEMENTS OF CASH FLOWS (Reconciliation) For the Years Ended December 31, 2005 and 2004 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES (In thousands) OPERATING INCOME (LOSS) $ (2,947) $ 12,187 Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Depreciation and amortization 47,065 40,018 Non-cash rental income (3,389) (3,389) Loss on disposal of equipment 68 Changes in assets and liabilities: Accounts receivable and accrued interest receivable 5,017 (2,543) Unbilled revenue (2,768) 1,514 Landing fees - due from airlines (109) Prepaid expenses 350 (19) Due from other City departments, divisions or funds (31) 2 Materials and supplies, at cost 42 (16) Accounts payable (877) (962) Due to other City departments, divisions or funds (799) (154) Accrued wages and benefits Landing fees - due to airlines (2,843) 4,495 Accrued property taxes TOTAL ADJUSTMENTS 42,693 39,697 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 39,746 $ 51,884 (Concluded) See notes to financial statements. 28

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189 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Divisions of Cleveland Hopkins International and Burke Lakefront Airports (the Divisions ) are reported as an enterprise fund of the City of Cleveland Department of Port Control and are part of the City of Cleveland s (City) primary government. The Divisions were created for the purpose of operating the airports within the Cleveland metropolitan area. The following is a summary of the more significant accounting policies. Reporting Model and Basis of Accounting: The accounting policies and financial reporting practices of the Divisions comply with accounting principles generally accepted in the United States of America applicable to governmental units. Beginning January 1, 2002, the Divisions changed its financial reporting to comply with GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. Effective January 1, 2005, the Divisions implemented GASB Statement No. 40, Deposit and Investment Risk Disclosures. In November 2003, the GASB issued Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, which is effective for the year ended December 31, The Divisions have determined that GASB Statement No. 42 has no impact on its financial statements as of December 31, The Divisions net assets are accounted for in the accompanying balance sheets and the net assets are divided into the following categories: Amount invested in capital assets, net of related debt Amount restricted for capital projects Amount restricted for debt service Amount restricted for Passenger Facility Charges Remaining unrestricted amount In addition, certain additional financial information regarding the Divisions is included in these footnotes. The implementation of the new GASB statements did not result in a change in the Divisions beginning net asset/equity balance as previously reported. Basis of Accounting: The Divisions financial statements are prepared under the accrual basis of accounting. Under this method, revenues are recognized when earned and measurable and expenses are recognized when incurred. Under GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Activities, all Proprietary Funds will continue to follow Financial Accounting Standards Board (FASB) standards issued on or before November 30, However, from that date forward, Proprietary Funds will have the option of either 1) choosing not to apply future FASB standards (including amendments of earlier pronouncements) or 2) continuing to follow new FASB pronouncements (unless they conflict with GASB pronouncements). The City has chosen not to apply future FASB standards. 30

190 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Statement of Cash Flows: The Divisions utilize the direct method of reporting for the statement of cash flows as defined by the GASB Statement No. 9, Reporting Cash Flows of Proprietary and Non-expendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting. In the statement of cash flows, cash receipts and cash payments are classified according to operating, non-capital financing, capital and related financing, and all investment activities. Cash and Cash Equivalents: Cash and cash equivalents represent cash on hand and cash deposits maintained by the City Treasurer on behalf of the Divisions. Cash equivalents are defined as highly liquid investments with a maturity of three months or less when purchased. Investments: The Divisions follow the provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and External Investment Pools, which requires governmental entities to report certain investments at fair value in the balance sheet and recognize the corresponding change in the fair value of investments in the year in which the change occurred. The fair market value is based on quoted market values. The City has invested funds in the State Treasurer Asset Reserve of Ohio (STAROhio) during 2005 and STAROhio is an investment pool managed by the State Treasurer s Office, which allows governments within the State to pool their funds for investment purposes. STAROhio is not registered with the SEC as an investment company, but does operate in a manner consistent with Rule 2a7 of the Investment Company Act of Investments in STAROhio are valued at STAROhio s share price, which is the price the investment could be sold for on December 31, 2005 and Restricted Assets: Proceeds from debt and amounts set aside in various fund accounts for payment of revenue bonds are classified as restricted assets since their use is limited by the bond indentures. Restricted for Passenger Facility Charges: These assets are for Passenger Facility Charges imposed and collected at Cleveland Hopkins International Airport based on an approved Federal Aviation Administration application. These are restricted for designated capital projects or debt service. Capital Assets and Depreciation: Capital assets are stated on the basis of historical cost or, if contributed, at fair market value as of the date received. Depreciation is computed by allocating the cost of capital assets over the estimated useful lives of the assets using the straight-line method. A capital asset is defined as a tangible item with a useful life in excess of one year and an individual cost of more than $5,000 for furniture, fixtures and equipment and $10,000 for all other assets. When capital assets are disposed, the cost and related accumulated depreciation are removed from the accounts with gains or losses on disposition being reflected in operations. The estimated useful lives are as follows: Airfield (land improvements) Buildings, structures and improvements Furniture, fixtures and equipment 3 to 75 years 5 to 50 years 3 to 35 years 31

191 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Divisions policy is to capitalize interest on construction projects up to the point in time that the project is substantially completed. Capitalized interest is included in the cost of the assets and is depreciated on the straight-line basis over the estimated useful lives of such assets. The Divisions apply Statement of Financial Accounting Standards No. 62, Capitalization of Interest Cost in Situations Involving Certain Tax-Exempt Borrowings and Certain Gifts and Grants, for its revenue bonds. This statement requires capitalization of interest cost of eligible borrowings less interest earned on investment of the related bond proceeds from the date of borrowing until the assets constructed from the bond proceeds are ready for their intended use. For 2005 and 2004, total interest costs incurred amounted to $38,852,000 and $41,303,000, respectively, of which $8,215,000 and $5,639,000, respectively, was capitalized, net of interest income of $3,600,000 in 2005 and $6,181,000 in Bond Issuance Costs, Discounts and Unamortized Losses on Debt Refundings: Bond issuance expense is carried on the Divisions books as a deferred expense and deferred bond discounts are netted against longterm debt. Both are amortized over the lives of the applicable bonds. Unamortized loss on debt refundings is netted against long-term debt and is amortized over the shorter of the defeased bond or the newly issued bond. Compensated Absences: The Divisions accrue for compensated absences such as vacation, sick leave and compensatory time using the termination payment method specified under GASB Statement No. 16, Accounting for Compensated Absences. These amounts are recorded as accrued wages and benefits in the accompanying balance sheets. The portion of the compensated absence liability that is not expected to be paid or utilized within one year is reported as a long-term liability. Normally, all vacation time is to be taken in the year available. The Divisions allow employees to carryover vacation time from one year to the next with proper approval. Sick days not taken may be accumulated until retirement. An employee is paid one-third of accumulated sick leave upon retirement, calculated at three-year average base salary rate, with the balance being forfeited. Environmental Expenses: Environmental expenses consist of costs incurred for remediation efforts to airport property. Environmental expenses that relate to current operations are expensed or capitalized, as appropriate. Environmental expenses that relate to existing conditions caused by past operations and which do not contribute to future revenues are expensed. Liabilities are recorded when remedial efforts are probable and the costs can be reasonably estimated. Non-operating Expenses: Non-operating expenses relate to expenses of the Divisions incurred for purposes other than the operations of the airports and consist primarily of costs incurred for noise abatement for residents of communities surrounding Cleveland Hopkins International Airport. The funding for nonoperating expenses is non-operating revenue (passenger facility charges, revenue bonds and federal grants). Interfund Transactions: During the course of normal operations, the Divisions have numerous transactions between other City divisions and departments. Unpaid amounts at year end are generally reflected as due to or due from in the accompanying financial statements. 32

192 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Interfund receivables and payables balances at December 31, 2005 and 2004 are as follows: Due From Due To Due From Due To (In thousands) City of Cleveland General Fund $ $ 202 $ $ 1,027 Division of Water Pollution Control Division of Cleveland Public Power Division of Research Planning & Development Special Revenues - Transportation Fee Worker's Compensation Refund Reserve Division of Radio Communication Division of Printing 4 5 Division of Motor Vehicle Maintenance Division of Telephone Exchange $ 573 $ 684 $ 542 $ 1,483 33

193 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE B - LONG-TERM OBLIGATIONS Long-term debt outstanding at December 31 is as follows: Interest Rate Original Issuance (In thousands) Airport Expansion and Noise Mitigation Airport System Revenue Bonds: Series 1990, due through % 66,006 $ $ 2,625 $ 5,443 Series 1997, due through %-7.00% 277, , ,555 Series 2000, due through %-5.50% 573, , ,190 Series 2003, due through 2033 Variable 140, , ,600 $ 1,056, , ,788 Less: Unamortized discount (8,124) (8,340) Unamortized loss on debt refunding (6,254) (6,826) Current portion (due within one year) (10,895) (9,373) Total Long-Term Debt excluding the deferred payment obligation $ 932,142 $ 942,249 Summary: Changes in long-term obligations for the year ended December 31, 2005 are as follows: Balance January 1, 2005 Increase Decrease Balance December 31, 2005 Due Within One Year (In thousands) Airport System Revenue Bonds Series 1990 $ 5,443 $ $ (2,818) $ 2,625 $ 2,625 Series ,555 (6,555) 241,000 6,920 Series , ,190 Series , ,600 1,350 Total revenue bonds 966,788 - (9,373) 957,415 10,895 Accrued wages and benefits 3, ,559 2,740 Total $ 970,214 $ 133 $ (9,373) $ 960,974 $ 13,635 34

194 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE B - LONG-TERM OBLIGATIONS (Continued) Summary: Changes in long-term obligations for the year ended December 31, 2004 are as follows: Balance January 1, 2004 Increase Decrease Balance December 31, 2004 Due Within One Year (In thousands) Airport System Revenue Bonds Series 1990 $ 8,487 $ $ (3,044) $ 5,443 $ 2,818 Series ,045 (2,045) Series ,570 (6,015) 247,555 6,555 Series , ,190 Series , ,600 Total revenue bonds & notes 977,892 - (11,104) 966,788 9,373 Accrued wages and benefits 3, ,426 2,617 Total $ 981,022 $ 296 $ (11,104) $ 970,214 $ 11,990 Minimum principal and interest payments on long-term debt are as follows: Principal Interest Total (In thousands) 2006 $ 10,895 $ 54,144 $ 65, ,775 47,894 65, ,990 47,107 67, ,880 45,805 66, ,200 44,692 66, , , , , , , , , , ,205 55, , ,505 2,356 75,861 Total $ 957,415 $ 787,055 $ 1,744,470 35

195 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE B - LONG-TERM OBLIGATIONS (Continued) Of the Airport System Revenue Bonds issued in 1990, $15,276,000 were issued in the form of Capital Appreciation Bonds. Interest on the Capital Appreciation Bonds is payable only as a component of their appreciated principal amount at maturity or redemption. Interest on the Capital Appreciation Bonds is compounded semiannually on each interest payment date beginning July As of December 31, 2005 and 2004, the Divisions have recorded a liability in the amount of $5,325,000 and $9,914,000, respectively, for compounded interest payable on the Capital Appreciation Bonds. The Airport System Revenue Bonds are secured by the pledge of all airport revenues, as defined in the revenue bond indenture. Further, the City has assigned all its rights and interest in and to the airline use agreements to the Trustee under the revenue bond indenture. Amounts held in trust may be invested by the City Treasurer or the Trustee in permitted investments. However, the use of funds is limited by the bond indenture and, accordingly, are classified as restricted assets in these financial statements. As of December 31, 2005, the Divisions were in compliance with the terms and requirements of the bond indenture. The indenture, as amended, requires, among other things, that the Divisions (1) make equal monthly deposits to the Bond Service Fund to have sufficient assets available to meet debt service requirements on the next payment date; (2) maintain the Bond Service Reserve Fund equal in amount to the maximum annual debt service to be paid in any year; and (3) as long as any revenue bonds are outstanding, charge such rates, fees and charges for use of the Airport System to produce in each year, together with other available funds, net revenues (as defined) at least equal to the greater of (a) 116% of the annual debt service due in such year on all outstanding revenue bonds and general obligation debt or (b) 125% of the annual debt service due in such year on all outstanding bonds. Interest Rate Swap Transactions: Terms: Simultaneously with the issuance of the City s $140,600,000 Series 2003A-C Airport System Revenue Bonds on October 23, 2003 the City entered into floating-to-fixed rate swap agreements on the declining notional amount of the $20,650,000 Series A Bonds and the $56,200,000 Series B Bonds. Bear Stearns Financial Products Inc. is the counterparty on a five-eighths pro rata share of the notional amount of each Series while JPMorgan Chase Bank is the counterparty on the remaining three-eighths of the notional amount. Under the swap agreement for the Series 2003A Bonds, the Airport System will be the fixed rate payor, paying a fixed rate of 4.169% semiannually, while the Counterparties will pay the Airport System at the Bond Market Association index (BMA) every 35 days. The swap agreement for the Series 2003B Bonds requires the Airport System to pay a fixed rate of 4.273% semiannually and the Counterparties will pay the Airport System the BMA index plus 10 basis points every 35 days. The obligation of the Airport System to make periodic fixed rate payments (but not any termination payment) is secured by a pledge of Airport Revenues. Both the bond debt service payments and the periodic swap payments are insured by AMBAC. 36

196 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE B - LONG-TERM OBLIGATIONS (Continued) Interest Rate Swap Transactions (Continued): Objective: The City entered into the swaps in order to minimize the costs associated with the refunding of the Series 1994A Bonds. Because all debt service charges of the Airport System are ultimately paid by the various airlines utilizing the City s airports, it was important to reduce the debt related costs as much as possible and the synthetic fixed rate debt provided the greatest debt service relief to the airlines. Basis Risk: By entering into swaps based upon the BMA index, the City sought to minimize this risk. Since both the underlying bonds and the swap payments are based on the tax exempt market, any potential difference between the rate paid by the City on the bonds and the amount received by the City from the counterparties has been greatly reduced. The amount received on the 2003B Bonds incorporates an additional 10 basis points to take into account the fact that the underlying bonds are subject to the Alternative Minimum Tax. Counterparty Risk: The City has selected highly rated counterparties in order to minimize this risk. However, over the long term it is possible that the credit strength of Bear Stearns and JPMorgan could change and this event could trigger a termination payment on the part of the City. Termination Risk: The swap agreement may be terminated prior to its stated termination date under certain circumstances. Upon termination, a payment may be owed by the City to Bear Stearns and JPMorgan, or by Bear Stearns and JPMorgan to the City, depending upon the prevailing economic circumstances at the time of the termination. The City obtained insurance to mitigate much of the risk associated with termination due to the event of a rating downgrade of the City. Fair Value: The fair value of the swaps at December 31, 2005 and December 31, 2004, as reported by JPMorgan Chase Bank was $838,000 and $1,136,000, respectively, for the Series 2003A and $2,325,000 and $3,134,000, respectively, for the Series 2003B which would be payable by the City to Bear Stearns and JPMorgan. Defeasance of Airport System Revenue Bonds: In prior years, the City defeased certain Airport System Revenue Bonds by placing the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the City s financial statements. The Airport System currently has no defeased debt outstanding. 37

197 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE C SPECIAL FACILITY REVENUE BONDS Airport Special Revenue Bonds, Series 1990, totaling $76,320,000 were issued to finance the acquisition and construction of a terminal, hangar and other support facilities of Continental Airlines at Cleveland Hopkins International Airport. These bonds were refunded in 1999 by the issuance of Airport Special Revenue Refunding Bonds, Series 1999, totaling $71,440,000. Airport Special Revenue Bonds, Series 1998, totaling $75,120,000 were issued in 1998 to finance the design and construction of certain airport facilities leased to Continental Airlines, including a new regional jet concourse. Because all principal and interest on these bonds is unconditionally guaranteed by Continental Airlines and paid directly by Continental Airlines, these bonds do not constitute a debt, liability or general obligation of the City or a pledge of the Divisions revenues. As such, no liabilities relating to these bonds are included in the accompanying financial statements. NOTE D ACQUISITION OF INTERNATIONAL EXPOSITION CENTER In January 1999, the City purchased the International Exposition (I-X) Center and the land on and around it for $66.5 million as part of its master plan to expand Cleveland Hopkins International Airport. As part of the purchase agreement, the City leased the building back to the former owner for 15 years, after which the City plans on tearing the building down to make way for airport development. Of the $66.5 million purchase price, $36.5 million was paid in cash in The remaining $30.0 million, including interest at 7.75%, is being deferred by the seller and will be offset by future lease payments owed to the City over the 15 year lease period. The future lease payments are equal to the remaining purchase price plus interest at 7.75%, and as such, no cash will be exchanged between the City and the lessee over the term of the lease. The deferred payment is reported as Deferred Payment Obligation in the accompanying balance sheet. In the event that either a similar facility is developed that exceeds a specified size or there is an expansion of an existing facility that exceeds specified size within the municipal boundary of the City of Cleveland, the lessee has the right to terminate the lease. Such termination would require the City to pay the lessee the remaining portion of the deferred purchase price. 38

198 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE D ACQUISITION OF INTERNATIONAL EXPOSITION CENTER (Continued) Minimum principal and interest payments due by the City on the deferred payment obligation and future minimum lease rentals due to the City under this lease for the next five years and thereafter are as follows: Deferred Payment Obligation Principal Interest Total Future Minimum Rentals (In thousands) 2006 $ 1,881 $ 1,508 $ 3,389 $ 3, ,032 1,357 3,389 3, ,195 1,194 3,389 3, ,371 1,018 3,389 3, , ,389 3,389 Thereafter 9,265 1,180 10,445 10,445 $ 20,306 $ 7,084 $ 27,390 $ 27,390 Rental income recognized by the City under this agreement was $3,389,000 in 2005 and Of these amounts in 2005, $1,648,000 was offset against interest expense and $1,741,000 was offset against the principal balance of the deferred obligation. Of these amounts in 2004, $1,777,000 was offset against interest expense and $1,612,000 was offset against the principal balance of the deferred obligation. NOTE E DEPOSITS AND INVESTMENTS Deposits: The Divisions carrying amount of deposits at December 31, 2005 and 2004 totaled approximately $5,748,000 and $6,968,000, respectively, and the Divisions bank balance was approximately $3,660,000 and $540,000, respectively. The differences represent normal reconciling items. Based on the criteria described in GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements) and Reverse Repurchase Agreements, $3,660,000 and $540,000 of the bank balances were insured or collateralized with securities held by the City or by its agent in the City s name. Custodial credit risk for deposits is the risk that in the event of bank failure, the Divisions will not be able to recover deposits or collateral for securities that are in possession of an outside party. At year end, the Divisions deposits were fully insured or collateralized. All deposits are collateralized with eligible securities pledged and deposited either with the City or with a qualified trustee by the financial institution as security for repayment of all public monies deposited in the financial institution whose market value at all times is equal to at least 110% of the carrying value of the deposits being secured. 39

199 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE E DEPOSITS AND INVESTMENTS (Continued) Investments: The City s investment policies are governed by the state statutes and City Ordinances which authorize the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities; bonds and other State of Ohio obligations; certificates of deposit; U.S. Government Money Market Mutual Funds; STAROhio; guaranteed investment contracts and repurchase transactions. Such repurchase transactions must be purchased from financial institutions or registered broker/dealers. Repurchase transactions are not to exceed a period of one year and confirmation of securities pledged must be obtained. Under City policy, investments are limited to repurchase agreements, U.S. Government securities, certificates of deposit, investments in certain money market mutual funds, STAROhio and guaranteed investment contracts. Generally, investments are recorded and are kept at the Federal Reserve Bank in the depository institutions separate custodial account for the City, apart from the assets of the depository institution. Ohio statutes prohibit the use of Reverse Repurchase Agreements. Investment securities are exposed to various risks such as interest rate, market and credit risk. Market values of securities fluctuate based on the magnitude of changing market conditions; significant changes in market conditions could materially affect portfolio value. Interest rate risk: As a means of limiting its exposure to fair value losses caused by rising interest rates, the Divisions invest primarily in short-term investments maturing within five years from the date of purchase. The intent is to avoid the need to sell securities prior to maturity. Investment maturities are disclosed in the table on the following page. Custodial Credit Risk: For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Divisions will not be able to recover the value of the investments or collateral securities that are in the possession of an outside party. Credit Risk: The Divisions investments as of December 31, 2005 include U.S. Agencies, Victory Federal Money Market Funds, Allegiant Government Money Market Funds, STAROhio, mutual funds and guaranteed investment contracts. The Divisions maintain the highest ratings for their investments. Investments in FHLMC, FNMA, FFCB and FHLB agency securities are rated AAA by Standard & Poor s. Investments in the Victory Money Market Fund, Allegiant Government Money Market Fund and STAROhio carry a rating of AAAm, which is the highest money market fund rating given by Standard & Poor s. Ohio law requires that STAROhio maintain the highest rating provided by at least one nationally recognized standard rating service. The Divisions have no investment policy that would further limit its investment choices. 40

200 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE E DEPOSITS AND INVESTMENTS (Continued) The Divisions have the following investments at December 31, 2005 and 2004, which include those classified as cash and cash equivalents in the balance sheet in accordance with the provisions of GASB Statement No. 9 since they have a maturity of three months or less: Investment Maturities Type of Fair 2005 Fair 2004 Less than Years Investment Value Cost Value Cost One Year Years or More (In thousands) U.S. Agency Obligations $ 183,446 $ 185,757 $ 157,080 $ 159,028 X* U.S. Treasury Bills 1,845 1,845 3,014 3,014 X* STAROhio 18,881 18,881 35,597 35,597 X* Guaranteed Investment Contract 46,044 46, , ,682 X^ X^ X^ Investment in Mutual Funds 4,014 4, X* Other 198, , , ,429 X* Total Investments 452, , , ,752 Total Deposits 5,748 5,748 6,968 6,968 Total Deposits and Investments $ 458,655 $ 460,966 $ 474,772 $ 476,720 * Investment maturities apply to the investment categories for both 2005 and ^ At December 31, 2005, the amount maturing in one to five years is $17,064,000 and the amount maturing in more than five years is $28,980,000. At December 31, 2004, the amount maturing in less than one year is $81,638,000; the amount maturing in one to five years is $17,064,000 and the amount maturing in more than five years is $28,980,000. These amounts are monies invested by the City Treasurer on behalf of the Divisions and are used in daily operations with excess monies invested daily in STAROhio, guaranteed investment contracts, mutual funds and other investments. These investments are carried at cost which approximates market value. Amounts represented by "Other" consist of deposits into a collective pool managed by JPMorgan, as trustee. Concentration of Credit Risk: The Divisions place no limit on the amount it may invest in any one issuer. As of December 31, 2005, the investments in U.S. Agency Obligations, guaranteed investment contracts and deposits in the collective pool ( Other ) are approximately 41%, 10% and 44%, respectively, of the Divisions total investments. As of December 31, 2004, the investments in U.S. Agency Obligations, STAROhio, guaranteed investment contracts and deposits in the collective pool ( Other ) are approximately 34%, 8%, 27% and 31%, respectively, of the Divisions total investments. 41

201 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE F - CAPITAL ASSETS Capital Asset Activity: Capital Asset Activity for the year ended December 31, 2005 was as follows: January 1, 2005 Additions Reductions December 31, 2005 (In thousands) Capital Assets, not being depreciated: Land $ 140,296 $ 10,532 $ $ 150,828 Construction in progress 19,026 56,722 (36,006) 39,742 Total capital assets, not being depreciated 159,322 67,254 (36,006) 190,570 Capital assets, being depreciated: Land improvements 642,095 23, ,207 Buildings, structures and improvements 409,509 1, ,686 Furniture, fixtures and equipment 39,287 1,185 40,472 Total capital assets, being depreciated 1,090,891 25,474-1,116,365 Less: Total accumulated depreciation (331,915) (47,065) (378,980) Total capital assets being depreciated, net 758,976 (21,591) - 737,385 Capital assets, net $ 918,298 $ 45,663 $ (36,006) $ 927,955 Capital Asset Activity: Capital Asset Activity for the year ended December 31, 2004 was as follows: January 1, 2004 Additions Reductions December 31, 2004 (In thousands) Capital Assets, not being depreciated: Land $ 130,332 $ 9,964 $ $ 140,296 Construction in progress 209, ,998 (301,516) 19,026 Total capital assets, not being depreciated 339, ,962 (301,516) 159,322 Capital assets, being depreciated: Land improvements 360, ,431 (38) 642,095 Buildings, structures and improvements 402,088 8,058 (637) 409,509 Furniture, fixtures and equipment 37,224 2,063 39,287 Total capital assets, being depreciated 800, ,552 (675) 1,090,891 Less: Total accumulated depreciation (292,505) (40,018) 608 (331,915) Total capital assets being depreciated, net 507, ,534 (67) 758,976 Capital assets, net $ 847,385 $ 372,496 $ (301,583) $ 918,298 42

202 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE F - CAPITAL ASSETS (Continued) Commitments: As of December 31, 2005 and 2004, the Divisions had capital expenditure purchase commitments outstanding of approximately $95,108,000 and $53,000,000, respectively. NOTE G LEASES AND CONCESSIONS The Divisions lease specific terminal and concourse areas to the various airlines under terms and conditions of the airline use agreements. These agreements remain in effect until December 31, 2005 and, under the terms of the agreements, rental payments and landing fees paid by the airlines are adjusted annually to provide airport revenues sufficient to meet the financial requirements of the airport system. Other areas are leased to various occupants under separate agreements. The Divisions have various concession agreements that permit the concessionaires and certain others to operate on airport property. These agreements usually provide for payments based on a percentage of the revenues, with an annual minimum payment guarantee and in certain circumstances for the offset of percentage rents to the extent of certain improvements made to the leased property. Portions of the building costs in the balance sheet are held by the Divisions for the purpose of rental use. The net book value of property held for operating leases as of December 31, 2005 and 2004 is approximately $155,533,000 and $160,788,000, respectively. Minimum future rental on non-cancelable operating leases to be received is as follows: (In thousands) 2006 $ 10, , , , ,841 Thereafter $ 7,423 39,763 The Master Lease and Use Agreement, which leases space in the terminal building and other areas, are subject to fluctuating rates. Contingent operating revenues aggregated approximately $22,828,000 and $20,894,000, respectively, in 2005 and

203 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE H - CONTINGENT LIABILITIES AND RISK MANAGEMENT Contingent Liabilities: Various claims are pending against the City involving the Divisions for personal injuries, property damage and other matters. The City is responsible for the suits. The City s management is of the opinion that ultimate settlement of such claims will not result in a material adverse effect on the Divisions financial position, results of operations or cash flows. Risk Management: The Divisions are exposed to various risks of loss related to torts; thefts of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Divisions carry insurance to cover particular liabilities and property protection. Otherwise, the Divisions are generally self-insured. No material losses, including incurred but not reported losses, occurred in 2005 or There was no significant decrease in any insurance coverage in 2005 or In addition, there were no material insurance settlements in excess of insurance coverage during the past three years. The City provides the choice of four separate health insurance plans for its employees. These plans are provided by two different insurers through commercial insurance. Operating funds are charged a monthly rate per employee, by type of coverage. The City participates in the State of Ohio workers compensation retrospective rating program. In accordance with GASB Statement No. 10, claims liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines, and damage awards. Accordingly, claims are re-evaluated periodically to consider the effects of inflation, recent claim settlement trends (including frequency and amount of pay-outs), and other economic and social factors. The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses, regardless of whether allocated to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. Claims payable has been included with accounts payable and is considered to be immaterial for the Divisions. NOTE I - EMPLOYEES RETIREMENT PLAN All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans as described below: 1) The Traditional Pension Plan (TP) a cost-sharing, multiple-employer defined benefit pension plan. 2) The Member-Directed Plan (MD) a defined contribution plan in which the member invests both member and employer contributions (employer contributions vest over five years at 20% per year). Under the Member-Directed Plan members accumulate retirement assets equal to the value of member and (vested) employer contributions plus any investment earnings. 44

204 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE I - EMPLOYEES RETIREMENT PLAN (Continued) 3) The Combined Plan (CO) a cost-sharing, multiple-employer defined benefit pension plan. Under the Combined Plan, employer contributions are invested by OPERS to provide a formula retirement benefit similar in nature to the Traditional Pension Plan benefit. Member contributions, the investment of which is self-directed by the members, accumulate retirement assets in a manner similar to the Member- Directed Plan. OPERS provides retirement, disability, survivor and death benefits and annual cost-of-living adjustments to members of the Traditional Pension and Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits. Authority to establish and amend benefits is provided by state statute per Chapter 145 of the Ohio Revised Code. OPERS issues a stand-alone financial report. Interested parties may obtain a copy by making a written request to OPERS, 277 East Town Street, Columbus, Ohio or by calling (614) or The Ohio Revised Code provides statutory authority for member and employer contributions. Member and employer contribution rates were consistent across all three plans (TP, MD and CO). Member contribution rates were 8.5% and employer contribution rates were 13.55% of covered payroll. The Divisions required employer contributions to OPERS for all plans for the years ending December 31, 2005, 2004 and 2003 were approximately $1,594,000, $1,538,000 and $1,381,000 each year, respectively. The required payments due in 2005, 2004 and 2003 have been made. NOTE J - OTHER POST EMPLOYMENT BENEFITS Ohio Public Employees Retirement System (OPERS) administers three separate pension plans: The Traditional Pension Plan (TP) a cost-sharing, multiple-employer defined benefit pension plan; the Member- Directed Plan (MD) a defined contribution plan; and the Combined Plan (CO) a cost-sharing, multipleemployer defined benefit pension plan that has elements of both a defined benefit and defined contribution plan. OPERS provides retirement, disability and survivor benefits as well as postretirement health care coverage to qualifying members of both the Traditional Pension and the Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits, including postemployment health care coverage. In order to qualify for postretirement health care coverage, age and service retirees under the Traditional Pension and Combined Plans must have 10 or more years of qualifying Ohio service credit. Health care coverage for disability recipients and qualified survivor benefit recipients is available. The health care coverage provided by OPERS is considered to be an Other Postemployment Benefit (OPEB) as described in GASB Statement No. 12. A portion of each employer s contribution to OPERS is set aside for the funding of postretirement health care. The Ohio Revised Code provides statutory authority for employer contributions. The Divisions contribution rate was 13.55% of covered payroll, and 4.00% was used to fund health care for the year. The Ohio Revised Code provides the statutory authority requiring public employers to fund postretirement health care through their contributions to OPERS. The assumptions and calculations below were based on OPERS latest actuarial review performed as of December 31, An entry age normal actuarial cost method of valuation is used in determining the present value of OPEB. The difference between assumed and actual experience (actuarial gains and losses) becomes part of the unfunded actuarial accrued liability. 45

205 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE J - OTHER POST EMPLOYMENT BENEFITS (Continued) All investments are carried at market value. For actuarial valuation purposes, a smoothed market approach is used. Under this approach, assets are adjusted to reflect 25% of unrealized market appreciation or depreciation on investment assets annually. The investment assumption rate for 2004 was 8.00%. An annual increase of 4.00%, compounded annually, is the base portion of the individual pay increase assumption. This assumes no change in the number of active employees. Additionally, annual pay increases, over and above the 4.00% base increase, were assumed to range from 0.50% to 6.30%. Health care costs were assumed to increase at the projected wage inflation rate plus an additional factor ranging from 1% to 6% for the next 8 years. In subsequent years (9 and beyond) health care costs were assumed to increase at 4% (the projected wage inflation rate). OPEBs are advance-funded on an actuarially determined basis. At year-end 2005, the number of active contributing participants in the Traditional and Combined Plans totaled 376,109. The employer contribution rates are the actuarially determined contribution requirements for OPERS. The Divisions actual contributions for 2005 which were to fund postemployment benefits were approximately $668,000. $10.8 billion represents the actuarial value of OPERS net assets available for OPEB at December 31, The actuarially accrued liability and the unfunded actuarial accrued liability, based on the actuarial cost method used, were $29.5 billion and $18.7 billion, respectively. The Health Care Preservation Plan (HCPP) adopted by the OPERS Retirement Board on September 9, 2004, will be effective January 1, In addition to the HCPP, OPERS has taken additional action to improve the solvency of the Health Care Fund in 2005 by creating a separate investment pool for health care assets. As an additional component of the HCPP, member and employer contribution rates increased as of January 1, 2006, which will allow additional funds to be allocated to the health care plan. NOTE K - RELATED PARTY TRANSACTIONS The Divisions are provided various intra-city services. Charges are based on actual use or on a reasonable pro rata basis. The more significant costs for the years ended December 31, 2005 and 2004, were as follows: (In thousands) City Central Services, including police $ 5,307 $ 5,837 Electricity purchased Motor vehicle maintenance NOTE L LANDING FEE ADJUSTMENT AND INCENTIVE COMPENSATION Under the terms of the airline use agreements, if the annual statement for the preceding term demonstrates that airport revenues over expenses (both as defined) is greater or less than that used in calculating the landing fee for the then current term, such difference shall be charged or credited to the airlines over the remaining billing periods in the current term. The landing fee adjustment for 2005 was a payable to the Airlines of $1,652,000. In 2004, the landing fee adjustment was a payable to the Airlines of $4,495,

206 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2005 and 2004 NOTE L LANDING FEE ADJUSTMENT AND INCENTIVE COMPENSATION (Continued) The airline use agreements also provide an incentive for the City to provide the highest quality management for the airport system. There was no incentive compensation expense in 2005 and NOTE M PASSENGER FACILITY CHARGES On November 1, 1992, Cleveland Hopkins International Airport began collecting passenger facility charges (PFC s) subject to title 14, Code of Federal Regulations, Part 158. PFC s are fees imposed on passengers enplaned by public agencies controlling commercial service airports for the strict purpose of supporting airport planning and development projects. The charge is collected by the airlines and remitted to the airport operator net of an administrative fee to be retained by the airline and refunds to passengers. Under its federally approved program from inception in 1992 to 2007, the airport expects to collect approximately $340 million, of which an estimated 27% will be spent on noise abatement for the residents of communities surrounding the airport, 33% on runway expansion, and 40% on airport development. PFC revenues and related interest earnings are recorded as non-operating revenues, and non-capitalized expenses funded by PFC revenues are recorded as non-operating expenses. NOTE N MAJOR CUSTOMER In 2005 and 2004, operating revenues from one airline group for landing fees, rental and other charges amounted to approximately 29% and 34% respectively, of total operating revenue. 47

207 CITY OF CLEVELAND DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS SCHEDULE OF AIRPORT REVENUES AND OPERATING EXPENSES AS DEFINED IN THE AIRLINE USE AGREEMENTS For the Year Ended December 31, 2005 Cleveland Hopkins Burke International Lakefront Total REVENUE Airline revenue: Landing fees $ 31,771 $ $ 31,771 Terminal rental 28,275 28,275 Other 2,974 2,974 63,020-63,020 Operating revenues from other sources: Concessions 26, ,710 Rentals 10, ,714 Landing fees 3, ,397 Other 3, ,845 43, ,666 Non-operating revenue: Interest income 2,332 2,332 TOTAL REVENUE $ 109,102 $ 918 $ 110,018 OPERATING EXPENSES Salaries and wages $ 16,068 $ 900 $ 16,968 Employee benefits 5, ,639 City Central Services, including police 5, ,785 Materials and supplies 8, ,590 Contractual services 29, ,976 TOTAL OPERATING EXPENSES $ 65,100 $ 1,858 $ 66,958 48

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209 CITY OF CLEVELAND - DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS CUYAHOGA COUNTY REPORT ON PASSENGER FACILITY CHARGES FOR THE YEAR ENDED DECEMBER 31, 2005

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211 CITY OF CLEVELAND DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS REPORT ON PASSENGER FACILITY CHARGES FOR THE YEAR ENDED DECEMBER 31, 2005 TABLE OF CONTENTS TITLE PAGE Report on Compliance with Requirements Applicable to the Passenger Facility Charge Program and on Internal Control Over Compliance in Accordance with 14 CFR Part Schedule of Expenditures of Passenger Facility Charges 3 Notes to the Schedule of Expenditures of Passenger Facility Charges 4

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213 REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO THE PASSENGER FACILITY CHARGE PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH 14 CFR PART 158 Divisions of Cleveland Hopkins International and Burke Lakefront Airports Department of Port Control City of Cleveland Cuyahoga County 5300 Riverside Drive Cleveland, Ohio To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee: Compliance We have audited the compliance of the Divisions of Cleveland Hopkins International and Burke Lakefront Airports, Department of Port Control, City of Cleveland, Ohio, (the Divisions) with the compliance requirements described in the September 2000 Passenger Facility Charge Audit Guide for Public Agencies, issued by the Federal Aviation Administration (Guide), for its passenger facility charge program for the year ended December 31, Compliance with the requirements of laws and regulations applicable to its passenger facility charge program is the responsibility of the Divisions management. Our responsibility is to express an opinion on the Divisions compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in the Comptroller General of the United States Government Auditing Standards; and the Guide. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect occurred on the passenger facility charge program. An audit includes examining, on a test basis, evidence about the Divisions compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the Divisions compliance with those requirements. In our opinion, the Divisions complied, in all material respects, with the requirements referred to above that are applicable to its passenger facility charge program for the year ended December 31, Internal Control Over Compliance The management of the Divisions is responsible for establishing and maintaining effective internal control over compliance with requirements of laws and regulations applicable to the passenger facility charge program. In planning and performing our audit, we considered the Divisions internal control over compliance with requirements that could have a direct and material effect on the passenger facility charge program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with the Guide. 1

214 Divisions of Cleveland Hopkins International and Burke Lakefront Airports City of Cleveland Cuyahoga County Report on Compliance with Requirements Applicable to the Passenger Facility Charge Program and on Internal Control Over Compliance In Accordance with 14 CFR Part 158 Page 2 Our consideration of the internal control over compliance would not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that noncompliance with applicable requirements of laws and regulations that would be material in relation to the passenger facility charge program being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over compliance and its operation that we consider to be material weaknesses. Schedule of Expenditures of Passenger Facility Charges We have audited the basic financial statements of the City of Cleveland, Divisions of Cleveland Hopkins Airport and Burke Lakefront Airport, Department of Port Control as of and for the year ended December 31, 2005, and have issued our report thereon dated May 31, Our audit was performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule of Expenditures of Passenger Facility Charges is presented for the purposes of additional analysis as specified by the Guide and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. This report is intended for the information of the audit committee, management, and the Federal Aviation Administration and is not intended to be and should not be used by anyone other than these specified parties. Betty Montgomery Auditor of State May 31,

215 Divisions of Cleveland Hopkins International and Burke Lakefront Airports Department of Port Control City of Cleveland Schedule of Expenditures of Passenger Facility Charges For the Year Ended December 31, 2005 Approved Project Budget Cumulative Expenditures at 12/31/04 1st Quarter 2005 Expenditures 2nd Quarter 2005 Expenditures 3rd Quarter 2005 Expenditures 4th Quarter 2005 Expenditures Total 2005 Expenditures Cumulative Expenditures at 12/31/05 Insulate Residences - full program phase I 16,960,400 16,770, , ,245 16,960,400 Extension of Taxiway "Q" 2,500,000 2,155, ,155,743 Land Acquisition - Resident Relocation 16,883,240 14,689, ,689,459 Sewer Construction 5,500,000 5,500, ,500,000 Asbestos Removal in Terminal CHIA 1,000, , ,842 Acquisition of Analex Office Building and Vacant Land 13,025,000 13,025, ,025,000 Waste Water-Glycol Collection System Construction 6,320,642 5,835, ,835,921 NASA Feasibility and Preengineering Study 355, , ,000 Land Acquisition 30,360,000 25,279,832 1,442 1, ,466 25,282,298 Sound Insulation 8,675,000 8,401, , ,396 8,595,641 Environmental Assessment/Impact Studies 2,309,570 2,309, ,309,570 Terminal Passenger Flow and Security Study 300, Railway System/Vehicular Ingress-Egress Study 200, Runway 5R Extension Engineering Runway 5R Extension Design Runway 5R Construction FIS Facility Construction FIS Facility Design Brook Park Land Transfer 8,750,000 3,810, ,113,838 1,113,838 4,924,593 Analex Demolition 1,229, , , , ,203 Sound Insulation 20,000,000 11,466,817-93,821 (169,252) 1,430,039 1,354,608 12,821,425 Baggage Claim/Expansion 9,526,087 9,526, ,526,086 Tug Road Replacement 1,019, , ,553 Interim Commuter Ramp 5,560,338 2,418, , ,808 3,126,571 Concourse D Ramp/Site Utilities 51,305,804 22,323, ,531,014 6,531,014 28,854,272 Burke Runway Overlay 6L/24R 530, , , , ,855 Install Instrument Landing System-Burke 2,181, , ,503 67, ,183 Runway 6L/23R 82,106,000 10,613, ,451,749 10,451,749 21,065,054 Runway 6R/24L Uncoupling 2,148, , , ,439 Runway 10/28 Safety Improvements 2,200, , , ,483 Midfield Deicing Pad 39,100,000-3,785,191 3,785,191 3,785, ,044, ,021,913 1,442 94,845 20,993 25,828,589 25,945, ,967,782 3

216 Divisions of Cleveland Hopkins Airport and Burke Lakefront Airport Department of Port Control City of Cleveland Notes to Schedule of Expenditures of Passenger Facility Charges For the Year Ended December 31, 2005 General The accompanying schedule presents all activity of the Airport s Passenger Facility Charge (PFC) program. The Airport s reporting entity is defined in Note A to the Airports financial statement. Basis of Presentation The accompanying schedule is presented on the cash basis of accounting. 4

217 CITY OF CLEVELAND DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL & BURKE LAKEFRONT AIRPORTS CUYAHOGA COUNTY CLERK S CERTIFICATION This is a true and correct copy of the report which is required to be filed in the Office of the Auditor of State pursuant to Section , Revised Code, and which is filed in Columbus, Ohio. CLERK OF THE BUREAU CERTIFIED JULY 13, 2006

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219 APPENDIX C THE UNAUDITED FINANCIAL STATEMENTS OF THE CITY OF CLEVELAND, DEPARTMENT OF PORT CONTROL, DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006 C-1

220 UNAUDITED CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS BALANCE SHEETS For Six Months Ended June 30, 2006 (In thousands) For the Six Months Ended June 30, 2006 ASSETS CURRENT ASSETS Cash and cash equivalents $ 5,957 Restricted cash and cash equivalents Investments 64,224 Receivables: Accounts-net of allowance for doubtful accounts of $1,034,257 in 2006 and $201,987 in ,123 Unbilled revenue 6,120 Accrued interest receivable - Total receivables 9,243 Prepaid expenses 653 Due from other City of Cleveland departments, divisions or interfund accounts 538 Due from Federal government 772 Materials and supplies-at cost 194 TOTAL CURRENT ASSETS 81,581 RESTRICTED ASSETS Cash and cash equivalents 265,988 Investments 95,029 Accrued interest receivable Bond retirement reserve 53 Accrued passenger facility charges 3,819 TOTAL RESTRICTED ASSETS 364,889 UNAMORTIZED BOND ISSUANCE COSTS 12,188 CAPITAL ASSETS Land 150,828 Land improvements 665,207 Buildings, structures and improvements 410,686 Furniture, fixtures, equipment 40,472 1,267,193 Less: Accumulated depreciation (402,610) 864,583 Construction in progress 79,787 CAPITAL ASSETS, NET 944,370 TOTAL ASSETS $ 1,403,028

221 UNAUDITED CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS BALANCE SHEETS For Six Months Ended June 30, 2006 (In thousands) For the Six Months Ended June 30, 2006 LIABILITIES AND NET ASSETS LIABILITIES CURRENT LIABILITIES Current portion of long-term debt, due within one year $ 17,775 Current portion of long-term deferred payment obligation, due within one year 2,032 Accounts payable 827 Due to other City of Cleveland departments, divisions or interfund accounts 517 Current portion of accrued wages and benefits 2,443 Accrued interest payable 17,937 Accrued property taxes 2,500 Construction fund payable from restricted assets 5,461 Other construction accounts payable from restricted assets 10,367 Landing fee adjustment - payable to Airlines 1,652 TOTAL CURRENT LIABILITIES 61,511 LONG-TERM OBLIGATIONS - excluding amounts due within one year Revenue bonds 914,756 Deferred payment obligation 17,335 Accrued wages and benefits 819 TOTAL LONG-TERM OBLIGATIONS 932,910 TOTAL LIABILITIES 994,421 NET ASSETS Invested in capital assets, net of related debt (8,346) Restricted for capital projects 125,077 Restricted for debt service 104,777 Restricted for passenger facility charges 62,834 Unrestricted 124,265 TOTAL NET ASSETS 408,607 TOTAL LIABILITIES AND NET ASSETS $ 1,403,028

222 UNAUDITED CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS For the Six Months Ended June 30, 2006 (In thousands) For the Six Months Ended June 30, 2006 OPERATING REVENUES Landing fees: Scheduled airlines $ 15,492 Other 1,489 16,981 Terminal and concourse rentals: Scheduled airlines 14,960 Other 7,741 22,701 Concessions 12,596 Utility sales and other 2,733 TOTAL OPERATING REVENUES 55,011 OPERATING EXPENSES Operations and maintenance 30,287 Depreciation and amortization 23,630 TOTAL OPERATING EXPENSES 53,917 OPERATING INCOME (LOSS) 1,094 NON-OPERATING REVENUE (EXPENSE) Passenger facility charges revenue 12,010 Non-operating expense (1,012) Interest income 7,659 Interest expense (17,283) Amortization of bond issuance expense, bond discounts, and loss on debt refundings (833) TOTAL NON-OPERATING REVENUE (EXPENSE) - NET 1,635 INCOME (LOSS) BEFORE CAPITAL AND OTHER CONTRIBUTIONS Capital and other contributions 2,660 INCREASE (DECREASE) IN NET ASSETS 4,295 NET ASSETS, BEGINNING OF YEAR 404,312 NET ASSETS, June 30, 2006 $ 408,607

223 APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS AND THE INDENTURE DEFINITIONS Additional Revenue Bonds means any Revenue Bonds authorized pursuant to and issued under the Indenture on a parity with the outstanding Revenue Bonds, but shall not include Special Revenue Bonds. Affiliate shall mean any air transportation company that is (i) a parent or subsidiary of Airline, or (ii) shares an International Air Transport Association (IATA) flight designator code with Airline at the Airport (Code- Sharing Partner), or (iii) otherwise operates at the Airport under essentially the same trade name as Airline, or a derivative thereof, and uses essentially the same livery as Airline; provided that no major airline, as such term is defined by the FAA, shall be classified as an Affiliate of another major airline, unless either clause (i) or (iii) above defines the relationship between such airlines at the Airport; and provided, further, that Airline may at any time give the City ninety (90) days prior written notice that such an air transportation company otherwise meeting the definition of an Affiliate hereunder shall no longer be considered an Affiliate of Airline for purposes of the Agreement. Airport Revenues means (a) all rentals, charges, landing fees, use charges and concession revenues now or hereafter received by or on behalf of the City in its proprietary capacity as the owner of the Airport System in connection with the operation, improvement and enlargement of the Airport System, or any part thereof; (b) subject to the provisions of the Indenture, all income or revenues resulting from the investment of any of the Special Funds; and (c) all gifts, grants, reimbursements or payments received from governmental units or public agencies for the benefit of the Airport System which are (i) not restricted in application to a special purpose and (ii) otherwise lawfully available for the payment of charges with respect to the Revenue Bonds. Airport Revenues shall not include any passenger facility charge or tax which may be authorized by the United States Congress (unless the City otherwise elects) or any revenue or income from any Special Facilities to the extent such revenue or income is pledged to pay principal, interest or any other charges for Special Revenue Bonds or other obligations issued in anticipation thereof, or to the extent such revenue or income is for the use of the City in reimbursement of costs incurred by it in the construction or provision of Special Facilities. Airport System means Cleveland Hopkins International Airport and Burke Lakefront Airport. Annual Reports means the reports prepared by the Director of Port Control pursuant to the Use Agreements. Assumed Amortization Period means the period of time specified in paragraph (a) or paragraph (b) below, as selected by the Fiscal Officer: (a) Five (5) years; or (b) The period of time, exceeding five (5) years, set forth in a written opinion delivered to the City, of an investment banker selected by the City and experienced in underwriting indebtedness of the character of the Revenue Bonds, as being not longer than the maximum period of time over which indebtedness having comparable terms and security issued or incurred by similar issuers of comparable credit standing would, if then being offered, be marketable on reasonable and customary terms. D-1

224 Assumed Interest Rate means the rate per annum (determined as of the last day of the calendar month next preceding the month in which the determination of Assumed Interest Rate is being made) set forth in an opinion delivered to the City of an investment banker selected by the City and experienced in underwriting indebtedness of the character of the Revenue Bonds, as being not lower than the lowest rate of interest at which indebtedness having comparable terms, security and federal tax status amortized on a level debt service basis over a period of time equal to the Assumed Amortization Period, and issued or incurred by similar issuers of comparable credit standing would, if being offered as of such last day of the calendar month, be marketable on reasonable and customary terms; provided that such rate shall be neither (a) lower than the rate specified in the Thirty Bond Index published in The Bond Buyer, or successor index, as in effect on the date of such opinion, nor (b) higher than the highest rate permitted by law at which such Revenue Bonds could be sold on said day. Balloon Bonds means any Revenue Bonds, or notes issued in anticipation thereof, including any Variable Rate Bonds, (a) 25% or more of the principal payments of which are due in a single year, excluding any such principal payments that are subject to mandatory sinking fund requirements in a prior year, or (b) 25% or more of the principal of which may, at the option of the holder or holders thereof, or shall, upon the occurrence of events specified in the Bond proceedings providing for those Revenue Bonds or notes, be redeemed at one time. Bond Insurer means, as to the Series 1997A Bonds, Series 1997B Bonds and Series 1997C Bonds Financial Security Assurance Inc. (the Series 1997 Bond Insurer); as to the Series 2000 Bonds, Financial Security Assurance Inc. (the Series 2000 Bond Insurer); as to the Series 2003 Bonds, Ambac Assurance Corporation (the Series 2003 Bond Insurer); as to the Series 2006 Bonds, Ambac Assurance Corporation (the Series 2006 Bond Insurer); and as to any other series of Additional Revenue Bonds, any issuer of a municipal bond insurance policy insuring Revenue Bonds of that series. Completion Date means, for each Project or component thereof, the cost of which is to be paid in whole or in part from the proceeds of a series of Revenue Bonds, the date on which such Project, or component thereof, is substantially completed and placed in service, as evidenced pursuant to Section 6.03 of the Indenture. Credit Provider means, with respect to a series of Revenue Bonds, the provider of any Credit Support Instrument for that series of Revenue Bonds specified in the applicable Supplemental Indenture. Credit Support Instrument means an insurance policy, surety, letter of credit, standby bond purchase agreement or other credit enhancement, support or liquidity device used to enhance the security or liquidity of any Authorized Additional Bonds or any Hedge Agreements. Defeasance Obligations means obligations of the character described in clause (a) of the definition of Eligible Investments to which the full faith and credit of the United States of America has been pledged and which, with respect to Government Certificates, consist only of CATS, TIGRS, STRPS, or other evidences of ownership of proportionate interests in future interest or principal payments of Government Obligations to which the full faith and credit of the United States of America has been pledged and which are stripped on the records of the Federal Reserve System. Eighth Supplemental Indenture means the Eighth Supplemental Trust Indenture, dated as of November 1, 2006, relating to the Series 2000C Bonds. Eligible Investments means and includes any of the following, if and to the extent the same are at the time legal for the investment of the City s money: (a) (b) Government Obligations and Government Certificates; Obligations issued or guaranteed by any of the following: (i) Federal Home Loan Bank System, D-2

225 (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) Export-Import Bank of the United States, Federal Financing Bank, Government National Mortgage Association, Farmers Home Administration, Federal Home Loan Mortgage Company, Federal Housing Administration, Private Export Funding Corp., Federal National Mortgage Association, Federal Farm Credit Bank, and Resolution Trust Corporation, or any indebtedness issued or guaranteed by any instrumentality or agency of the United States; (c) Pre-refunded municipal obligations rated in the highest rating category by at least two Rating Agencies and meeting the following conditions: (i) (A) such obligations are not to be redeemed prior to maturity or the Trustee has been given irrevocable instructions concerning their call for redemption, and (B) the issuer of such obligations has covenanted not to redeem such obligations other than as set forth in such instructions; (ii) such obligations are secured by Government Obligations or Government Certificates that may be applied only to interest, principal, and premium payments on such obligations; (iii) the principal of and interest on such Government Obligations or Government Certificates (plus any cash in the escrow fund with respect to such pre-refunded obligations) are sufficient to meet the liabilities of the obligations; (iv) the Government Obligations or Government Certificates serving as security for the obligations are held by an escrow agent or trustee; and (v) such Government Obligations or Government Certificates are not available to satisfy any other claims, including those against the trustee or escrow agent; (d) Direct and general long-term obligations of any state of the United States of America or the District of Columbia (a State ), to the payment of which the full faith and credit of such State is pledged and that are rated in either of the two highest rating categories by at least two Rating Agencies; (e) Direct and general short-term obligations of any State, to the payment of which the full faith and credit of such State is pledged and that are rated in the highest rating category by at least two Rating Agencies; (f) Interest-bearing demand or time deposits with, or interests in money market portfolios rated AAA-m by Standard & Poor s issued by, state banks or trust companies or national banking associations that D-3

226 are members of the Federal Deposit Insurance Corporation ( FDIC ). Such deposits or interests must be (i) continuously and fully insured by FDIC, (ii) if they have a maturity of one year or less, with or issued by banks that are rated in one of the two highest short-term rating categories by at least two Rating Agencies, (iii) if they have a maturity longer than one year, with or issued by banks that are rated in one of the two highest rating categories by at least two Rating Agencies, or (iv) fully secured by Government Obligations or Government Certificates. Such Government Obligations or Government Certificates must have a market value at all times at least equal to the principal amount of the deposits or interests. The Government Obligations or Government Certificates must be held by a third party (who shall not be the provider of the collateral), or by any Federal Reserve Bank or depository, as custodian for the institution issuing the deposits or interests. Such third party shall have a perfected first lien in the Government Obligations or Government Certificates serving as collateral, and such collateral is to be free from all other third party liens; (g) Eurodollar time deposits issued by a bank with a deposit rating in one of the two highest short-term credit rating categories by at least two Rating Agencies; (h) Repurchase agreements, (i) the maturities of which are 30 days or less or (ii) the maturities of which are longer than 30 days and not longer than one year, provided the collateral subject to such agreements is marked to market daily, and in either case are entered into with financial institutions such as banks or trust companies organized under State law or national banking associations, insurance companies, or government bond dealers reporting to, trading with, and recognized as a primary dealer by, the Federal Reserve Bank of New York and a member of the Security Investors Protection Corporation ( SIPC ), or with a dealer or parent holding company that is rated investment grade ( A or better) by at least two Rating Agencies. The repurchase agreement shall be in respect of Government Obligations or Government Certificates or obligations described in paragraph (b) of this definition. The repurchase agreement securities and, to the extent necessary, Government Obligations and Government Certificates or obligations described in paragraph (b), exclusive of accrued interest, shall be maintained in an amount equal to at least 103% of the amount invested in the repurchase agreements. In addition, the provisions of the repurchase agreement shall meet the following additional criteria: (A) the third party (who shall not be the provider of the collateral) has possession of the repurchase agreement securities and the Government Obligations or Government Certificates; (B) failure to maintain the requisite collateral levels will require the third party having possession of the securities to liquidate the securities immediately; and (C) the third party having possession of the securities has a perfected, first priority security interest in the securities; (i) Public housing bonds issued by public agencies. Such bonds must be: fully secured by a pledge of annual contributions under a contract with the United States of America; temporary notes, preliminary loan notes, or project notes secured by a requisition or payment agreement with the United States of America; or obligations of a state, public agency or municipality rated in the highest credit rating category by at least two Rating Agencies; (j) Money market accounts of any state or federal bank, or bank whose holding parent company is rated in one of the two highest short-term or long-term rating categories by at least two Rating Agencies; (k) Investment agreements, the issuer or guarantor of which is rated in one of the two highest rating categories by at least two Rating Agencies, provided that any investment in investment agreements shall be required to be approved by the Series 1990 Bond Insurer if the moneys proposed to be so invested may be required to be applied to the payment of Bond service charges on the Series 1990 Bonds; and (l) Any debt or fixed income security, the issuer of which is rated in the highest rating category by at least two Rating Agencies. D-4

227 Escrow Agreement means the Escrow Agreement, dated as of November 1, 2006, between the City and the Trustee, in its capacity as escrow trustee for the Refunded Bonds. Fifth Supplemental Indenture means the Fifth Supplemental Trust Indenture, dated as of October 15, 2003, between the Trustee and the City, relating to the Series 2003 Bonds and containing amendments to the Original Indenture. First Supplemental Indenture means the First Supplemental Trust Indenture, dated as of April 1, 1990, between the Trustee and the City, relating to the Series 1990 Bonds (no longer Outstanding), and containing amendments to the Original Indenture. Fiscal Officer means the Director of Finance of the City. Fiscal Year means the twelve-month period commencing on January 1 of any year and expiring on December 31 of such year. Fitch means Fitch Ratings, and its successors and assigns, or, if such firm shall be dissolved or liquidated or shall no longer perform the functions of a securities rating service, Fitch means any other nationally recognized securities rating service designated by the City. Fixed Rate Index means (a) if the outstanding Revenue Bonds (without regard to any credit enhancement) are rated not lower than A3 by Moody s or A by S & P, the yields for Aaa insured bonds as provided by Municipal Market Data or any successor thereto and published or made available in The Bond Buyer or similar publication, or, if Municipal Market Data ceases to provide that index, then such other publicly available and comparable index selected by the City and acceptable to the Rating Agencies, and (b) if the outstanding Revenue Bonds (without regard to any credit enhancement) are rated lower than the aforesaid ratings by either Rating Agency, the Revenue Bond Index or successor index published in The Bond Buyer, or, if The Bond Buyer ceases to publish such an index, then such other publicly available and comparable index selected by the City and not disapproved by the Trustee after reasonable notice from the City. Fourth Supplemental Indenture means the Fourth Supplemental Trust Indenture, dated as of February 1, 2001, between the Trustee and the City, relating to the Series 2000 Bonds. General Obligation Debt means the general obligation notes and bonds issued by the City in connection with the financing of improvements and additions to the Airport System. Currently there is no outstanding General Obligation Debt. Governing Body means the Council of the City. Government Certificates means (in the case of Governmental Obligations) evidences of ownership of proportionate interests in future interest or principal payments of Government Obligations, including depository receipts thereof. Investments in such proportionate interest must be limited to circumstances wherein (i) a bank or trust company acts as custodian and holds the underlying Government Obligations; (ii) the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor of the underlying Government Obligations; and (iii) the underlying Government Obligations are held in a special account, segregated from the custodian s general assets, and are not available to satisfy any claim of the custodian, any person claiming through the custodian, or any person to whom the custodian may be obligated. Government Obligations means direct and general obligations of, or obligations the timely payment of principal and interest on which are unconditionally guaranteed by, the United States of America. Hedge Agreement means interest rate swaps, swap option, rate cap, rate collar and other arrangements undertaken with respect to Revenue Bonds or Subordinated Indebtedness to reduce costs of borrowing or optimize relative amounts of fixed and variable rate obligations or reduce the risk of variations in debt service costs, including D-5

228 without limitation, arrangements by which different interest costs or receipts at, between or among fixed or variable interest rates, or at different fixed or variable interest rates or maturities are exchanged in respect of Revenue Bonds or Subordinated Indebtedness. Indenture means the Original Indenture, as supplemented and amended by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, the Fourth Supplemental Indenture, the Fifth Supplemental Indenture, the Sixth Supplemental Indenture, the Seventh Supplemental Indenture and the Eighth Supplemental Indenture. Majority In Interest means, except with respect to the Terminal Complex, either: (i) fifty percent or more in number of all the Signatory Airlines, which percentage has, on the date in question, more than fifty percent of the aggregate by Maximum Landing Weight of Revenue Aircraft Arrivals of all Signatory Airlines at the Airport during the latest Fiscal Year for which such figures are available as to all Signatory Airlines; or, alternatively, (ii) forty percent or more in number of all Signatory Airlines, which percentage has, on the date in question, more than seventy percent of the aggregate by Maximum Landing Weight of Revenue Aircraft Arrivals of all Signatory Airlines at the Airport during the latest Fiscal Year for which such figures are available as to all Signatory Airlines. Majority in Interest with respect to the Terminal Complex means fifty percent or more in number of all Signatory Airlines having Exclusive Leased Premises and Preferential Leased Premises in the Terminal Complex, which percentage has, on the date in question, more than fifty percent of the total Exclusive Leased Premises and Preferential Leased Premises of all Signatory Airlines, on a square foot basis, in the Terminal Complex. (Capitalized terms not otherwise defined herein have the meanings set forth in the Use Agreements.) Maximum Landing Weight means the maximum weight, in 1,000 pound units, at which each aircraft operated by Airline or the Signatory Airlines is authorized to land at the Airport, as specified in Airline s flight manual approved by the Federal Aviation Administration governing that type of aircraft. Moody s means Moody s Investors Service, Inc., a corporation existing under the laws of the State of Delaware, its successors and assigns, and, if such corporation shall no longer perform the functions of a securities rating agency, Moody s shall mean any other nationally recognized rating agency designated by the City. Operating Expenses means all expenses incurred by the City as set forth in its Annual Reports prepared pursuant to Article VIII of the Use Agreements, including all costs and expenses for the operation, maintenance, repair and administration of the Airport System in order to maintain, repair and operate the Airport System in a reasonable and prudent manner, and including items normally included as essential expenses in the operating budget of a municipally owned facility comparable to the Airport System, and including without limiting the generality of the foregoing: insurance premiums; the City s administrative expenses allocable to the Airport System (including, without limitation, engineering, architectural, legal, consultants, and accounting fees and expenses); the City s Airport System employees compensation (including, without limitation, costs of worker s compensation insurance and all employee fringe benefits applicable to such employees from time to time); any taxes or assessments, whether general or special, which are lawfully imposed on the Airport System or on the revenue or income derived from the operation thereof; charges for electricity, water, telephone and other public or private utility services; fees and expenses of the Trustee and Paying Agents; fees and expenses of independent engineers, architects, consultants, accountants and attorneys retained by the City in connection with the Indenture; and other reasonable current expenses, which shall include repayment to the City for any moneys voluntarily advanced from its general funds to the Airport System, and all as calculated and determined in accordance with generally accepted accounting practices. Operating Expenses shall not include: (1) any such expenses (including payment of principal, interest and redemption premium, if any, on Special Revenue Bonds) paid or incurred by the City in connection with a Special Facility to the extent such expenses are not properly includable in the City s Annual Reports; (2) Bond service charges; (3) debt service on General Obligation Debt; (4) any charges for depreciation or obsolescence, or reserves therefor, amortization of intangibles or other bookkeeping entries of a similar nature; (5) any other expenses for which or to the extent to which the City has been reimbursed from or through any source whatsoever (including the Renewal and Replacement Fund, the Improvement Fund, the Surplus Fund, or any similar funds or accounts), and the amount so received or credited, or to be received or credited, is not included or includable as Airport Revenues; (6) expenditures for capital improvements to the Airport System; (7) losses from the sale, abandonment, D-6

229 reclassification, revaluation or other disposition of any properties of the Airport System; and (8) all maintenance, operating and administrative expenses attributable to the operation of Burke Lakefront Airport and all debt service on General Obligation Bonds issued by the City in connection with improvements at Burke Lakefront Airport, to the extent that such expenses and debt service exceed the Burke Deficit as defined in the Use Agreements and as adjusted pursuant to Section 8.05(b)(vi) thereof. Original Indenture means the Trust Indenture, dated as of November 1, 1976, between the City and the Trustee. Other Available Funds means any moneys transferred to the Revenue Fund by the City from any other Special Fund, including without limitation, moneys transferred to the Revenue Fund from the Improvement Fund or the Surplus Fund or the Airport Development Fund, and any moneys not otherwise constituting Airport Revenues and deposited in, or transferred to, the Revenue Fund or the Bond Fund, including without limitation Passenger Facility Charges; provided that such moneys have not been taken into account in the calculation of the amount of Bond service charges on outstanding Revenue Bonds with the effect of reducing those Bond service charges. Paying Agent means the Trustee and any other commercial bank or trust institution organized under the laws of any state of the United States of America or any national banking association designated by the Fifth Supplemental Indenture or any supplemental indenture as paying agent for the Bonds at which the principal of and redemption premium, if any, and interest on such Bonds shall be payable. Qualified Hedge Agreement means a Hedge Agreement provided that: (i) the Issuer s obligations to the Hedge Counterparty in respect of periodic, interest-equivalent payments are insured by a policy of insurance or financial guarantee issued by a monoline insurance company with a claims paying ability rating at the time of issuance from S&P or Fitch of AAA or a financial strength rating from Moody s of Aaa or an equivalent rating determined by another nationally recognized ratings service, or (ii) the Hedge Counterparty does not have any right to terminate the Hedge Agreement, or to require collateral to be posted by the Issuer, upon the downgrade of the Issuer s credit rating by S&P or Moody s or Fitch or other nationally recognized ratings service, or (iii) the Hedge Agreement permits the Issuer to elect to satisfy any payment owed to the Hedge Counterparty upon early termination in annual installments over a period of not less than five years. Rating Agency means, with respect to any series of Revenue Bonds, Moody s, Standard & Poor s, or Fitch, or any other nationally recognized credit rating agency or agencies specified as such in the applicable Supplemental Indenture. Rebate Amount means, as of the end of every fifth Bond Year for any series of Revenue Bonds, and as of the date of final payment of the Revenue Bonds of such series, the amount described in Section 148(f)(2) of the Code. Renewal and Replacement Payment means the sum of (i) $1,500,000, and (ii) for each issue of Additional Revenue Bonds, the amount specified in the Series Bond Legislation and Supplemental Indenture for each such issue of Additional Revenue Bonds, which amount shall be in the same ratio to the principal amount of such issue of Additional Revenue Bonds as $1,500,000 bears to the principal amount of the Series 1976 Bonds (which was $91,000,000); provided that to compute the Renewal and Replacement Payment attributable to any Additional Revenue Bonds, the principal amount of any such Additional Revenue Bonds that are issued to refund Revenue Bonds shall be excluded. Required Bond Service Reserve means as of any date of calculation an amount equal to the highest annual Bond service charges to be paid on the Revenue Bonds in any fiscal year. Revenue Aircraft Arrivals means any aircraft arrival at the Airport for which Airline has received or made a monetary fee or charge, including, without limitation, scheduled trips, charters, sightseeing, and other trips for which revenue is received. Such term shall also include training and test flights, ferry, courtesy, inspection, or other trips for which no fee or charge is received, but only to the extent that the number of such flights operated by D-7

230 Airline during any calendar month is in excess of five percent of the number of Revenue Aircraft Arrivals of Airline at the Airport during such calendar month. A revenue flight which returns to the Airport because of mechanical, meteorological, or other precautionary reasons, without landing at another airport, shall not be considered a Revenue Aircraft Arrival. Revenue Bonds or Bonds means the Revenue Bonds issued and outstanding under the Indenture, currently the Series 2000 Bonds, the Series 2003 Bonds, the Series 2006 Bonds and any Additional Revenue Bonds issued in the future. In determining the interest payable with respect to any Revenue Bonds, there shall be included any amounts owed by the Issuer to a provider of a Credit Support Instrument for those Revenue Bonds and to a counterparty under any Hedge Agreement relating to those Revenue Bonds in respect of periodic, interest equivalent payments but not any amounts owed in respect of early termination of any Hedge Agreement. Revenue Bond Anticipation Notes means any notes issued in anticipation of the issuance of a series of Additional Revenue Bonds. Signatory Airlines (or Scheduled Airlines) means any Air Carrier that has entered into an agreement with the City substantially similar to the Agreement and commits to lease from the City one or more preferential or exclusive use aircraft gates or in the case of an all cargo Air Carrier commits to concurrently sign a lease for a cargo building or other premises containing at least 5,000 square feet, if that space is available. If that minimum amount of square footage is not available for lease to an all cargo Air Carrier, the Director of Port Control may grant Signatory Airline status to an all cargo Air Carrier leasing a lesser amount of space until such time as additional space becomes available. Second Supplemental Indenture means the Second Supplemental Trust Indenture, dated as of August 1, 1994, between the Trustee and the City, relating to the Series 1994 Bonds (no longer Outstanding). Series Bond Legislation means, with respect to any series of Revenue Bonds, the ordinance passed by the Governing Body authorizing the issuance of such series of Revenue Bonds. Series Bond Proceedings means, with respect to any series of Revenue Bonds, the Series Bond Legislation for such series of Revenue Bonds and any resolution of award or Series Certificate of Award applicable to such series of Revenue Bonds. Series Certificate of Award means, with respect to any series of Revenue Bonds, a certificate executed on behalf of the City by the Director of Finance, setting forth and determining, pursuant to the applicable Series Bond Legislation and subject to any limitations, restrictions, and requirements as may be specified therein, such terms, conditions, and other details of such series of Revenue Bonds (including, without limitation, the original purchasers thereof) as are authorized to be set forth and determined therein by such Series Bond Legislation. Series 1997 Bonds means the City s Airport System Revenue Bonds, Series 1997, aggregating $277,165,000 in original principal amount and consisting of these series: Series 1997A (AMT), Series 1997B (Taxable) and Series 1997C (Non-AMT), all bearing interest at fixed rates and dated as of November 1, 1997, and the City s Airport System Revenue Bonds, Series 1997D (AMT) and Series 1997E (Taxable), dated December 11, 1997 and bearing interest at variable rates. Series 2000 Bonds means the City s Airport System Revenue Bonds, Series 2000, aggregating $573,190,000 in original principal amount, dated February 27, 2001 and consisting of these series: Series 2000A (Non-AMT) and Series 2000B (AMT), bearing interest at fixed rates, and Series 2000C (Non-AMT) initially bearing interest at variable rates. Series 2003 Bonds means the City s Airport System Revenue Bonds, Series 2003, aggregating $140,600,000 in original principal amount, dated October 23, 2003 and consisting of these series: Series 2003A (Non-AMT), Series 2003B (AMT) and Series 2003C (Taxable). All of the Series 2003 Bonds bear interest at variable rates. D-8

231 Seventh Supplemental Indenture means the Seventh Supplemental Trust Indenture, dated October 17, 2006, between the Trustee and the City, containing amendments to the Fourth Supplemental Indenture relating to conversions between interest rate modes. Sixth Supplemental Indenture means the Sixth Supplemental Trust Indenture, dated as of January , between the Trustee and the City, containing amendments to the Indenture to conform the Indenture and the Use Agreements. Special Facility or Facilities means any hangar, maintenance buildings, or any other facility, improvement, or structure to be acquired or constructed on the Airport System, the cost of construction, acquisition, maintenance and operation of which are financed by Special Revenue Bonds and user charges. Special Funds under the Indenture means collectively the Revenue Fund, the Construction Fund, the Bond Service Fund, the Bond Service Reserve Fund, the Operating and Maintenance Fund, the Subordinated Debt Service Fund, the General Obligation Debt Service Fund, the Renewal and Replacement Fund, the Improvement Fund, the Surplus Fund, the Airport Development Fund (and the Airport Account and the Airline Account therein), and any other funds or accounts permitted by, established under, or identified in the Indenture, except the Rebate Fund. Special Revenue Bonds means revenue bonds or obligations authorized and issued by the City for the purpose of acquiring, constructing or improving a Special Facility to be leased to, or contracted for operation by, any person or entity, including the City, with the income therefrom to be used for the payment of sums adequate to pay all principal, interest, redemption premiums, if any, and reserves, if any, as required in the legislation authorizing such Special Revenue Bonds and all operating expenses incurred in the operation of the Special Facility. Special Revenue Bonds are not issued under or secured by the Indenture. Standard & Poor s means Standard & Poor s Ratings Group, a division of McGraw-Hill, a corporation existing under the laws of the State of New York, its successors and assigns, and, if such corporation shall no longer perform the functions of a securities rating agency, Standard & Poor s shall mean any other nationally recognized rating agency designated by the City. Subordinated Indebtedness means any obligation or evidence of indebtedness incurred by the City in accordance with the Indenture, the debt service charges on which are payable and secured on a basis subordinate to the Bond service charges on Revenue Bonds. In determining the interest payable with respect to any Subordinated Indebtedness, there shall be included any amounts owed by the Issuer to a provider of a Credit Support Instrument for that Subordinated Indebtedness and to a counterparty under any Hedge Agreement relating to that Subordinated Indebtedness in respect of periodic, interest equivalent payments but not any amounts owed in respect of early termination of any or Hedge Agreement. Third Supplemental Indenture means the Third Supplemental Trust Indenture, dated as of November 1, 1997, between the Trustee and the City, relating to the Series 1997 Bonds and containing amendments to the Original Indenture. Variable Rate Bond means any Revenue Bond that does not bear interest throughout its term at a fixed rate, but that does bear interest at a rate that, during part or the entirety of the term of such Revenue Bond, varies from time to time based upon a formula or other method of determination set forth in the applicable Series Bond Proceedings or Supplemental Indenture, subject to a maximum rate of interest set forth therein. Once the rate of interest on any Revenue Bond that had been a Variable Rate Bond becomes fixed for the balance of the period until its maturity, that Revenue Bond shall cease to be a Variable Rate Bond. A Revenue Bond shall not be deemed a Variable Rate Bond solely on the basis that the rate of interest thereon may be adjusted if such interest becomes includable in gross income for purposes of federal income taxation. D-9

232 SUMMARY OF CERTAIN PROVISIONS OF THE USE AGREEMENTS Each of the Use Agreements between the City and the Signatory Airlines is in substantially the same form. The Use Agreements consist of (i) the Agreement and Lease, effective as of the later of January 1, 1976 or the date it was signed by the Signatory Airline, and (ii) Amendment No. 1 effective as of January 1, Each Use Agreement generally provides that the Signatory Airline will pay rentals for space occupied at the Airport and will pay landing fees in consideration for the rights to use the Airport granted under the Use Agreement. The Signatory Airlines currently consist of Continental Airlines and Southwest Airlines. The Use Agreements enable the City to adjust the landing fees and rentals of the Signatory Airlines to provide Airport Revenues sufficient to meet the financial requirements of the Airport System, including debt service. Term The current Use Agreements terminate at midnight on December 31, Calculation of Signatory Airline Payments The Use Agreements require the City to prepare and submit to the Signatory Airlines, at least 90 days prior to each Fiscal Year, Annual Reports (as defined in the Use Agreements) setting forth (i) the proposed Annual Budget (as defined in the Use Agreements) for the Airport System for the next Fiscal Year, reflecting all estimated Airport System maintenance, operating and administrative expenses and certain capital improvements; (ii) a schedule of all debt service to accrue in such Fiscal Year in connection with Revenue Bonds, any Subordinated Indebtedness, any General Obligation Debt, any Credit Support Instrument and any Hedge Agreement; (iii) a statement of estimated Airport Revenues for such Fiscal Year from parties other than the Signatory Airlines; and (iv) the City s calculation of rentals and landing fees for such Fiscal Year. The deficit allocable in any Fiscal Year to Burke Lakefront Airport in excess of the amount of the Burke Lakefront Airport deficit in 1975 (as described in the Use Agreement and as such deficit is adjusted for inflation) shall not be included as an Airport System Expense (as defined in the Use Agreements) in the calculation of landing fees. The Use Agreements, while permitting the Signatory Airlines to raise objections to the Annual Reports, authorize the City to adopt the Annual Budget substantially in accordance with the proposed Annual Reports, as it may have been revised as a result of the City s giving due consideration to Signatory Airline s suggestions, comments or requests. A Majority In Interest of the Signatory Airlines, however, may disapprove capital improvements which will be funded through rentals, fees and charges and which will require the commitment by the City for the purchase or construction of (i) a single item at a cost of $200,000 or more, or (ii) items which in the aggregate cost in excess of $700,000 (as such numbers are adjusted for inflation since 1975). If such capital improvements are disapproved, the City may still budget the cost of such capital improvements for the next Fiscal Year under certain circumstances unless the Signatory Airlines file an action for declaratory judgment in a court of competent jurisdiction contesting either the justification for the proposed capital improvements based on factors set forth in the Use Agreements or the reasonableness of the City s method of financing the costs of such improvements. If, after diligent prosecution by the Signatory Airlines of such action, it is dismissed by Signatory Airlines or a ruling thereon is ultimately made in favor of the City, the City may then proceed with the capital improvements at issue. The Use Agreements authorize the City to adjust rentals and landing fees annually to reflect budgeted Airport Revenues, debt service coverage, and Airport System Expense (including debt service), and capital improvements included in the Annual Report for the Fiscal Year. In addition, if at any time during a Fiscal Year, Airport Revenues are insufficient to pay, when due, all items included in the Annual Reports for such Fiscal Year or to pay any other expense or cost incidental or necessary to, or arising out of, the operation of the Airport System, the City may at any time during such Fiscal Year, upon 90 days notice to the Signatory Airlines, increase landing fees to such amount as is sufficient to assure the City that all such items, costs and expenses shall be paid in full solely from Airport Revenues. The Use Agreements also permit the landing fees to be adjusted if any of the quarterly statements for a Fiscal Year vary by more than 10% from the projected landing fees for such quarter. Finally, if the D-10

233 audited financial statements for any Fiscal Year indicate that Airport Revenues did not equal Airport System Expenses, the difference shall be charged to the Signatory Airlines over the remaining billing periods of the then current Fiscal Year. In the event that the landing fees produce Airport Revenues in excess of Airport System Expenses and a rebate is to be made to any Signatory Airlines, the City will reduce landing fees paid by general aviation users so that the resulting reduction in landing fees charged to general aviation users will equal any rebate paid to the Signatory Airlines. Landing fees may not be payable by the Signatory Airlines in any period during which the Airport is closed or none of the Signatory Airlines are landing aircraft and, if such period is an extended one, Airport Revenues could be adversely affected. Incentive Compensation As an incentive to the City to provide efficient management of the Airport System, the Use Agreements provide that additional deposits will be made to the Airport Account of the Airport Development Fund (the City s discretionary account) in any year when the Airport System Expenses for the prior year were less than the Target Expenses for that year. Targeted Expenses are defined in the Use Agreements to be the budgeted Airport System Expenses adjusted for changes in the Consumer Price Index and adjusted for the percentage change in total enplaned passengers at the Airport. Additional deposits also will be made to the Airport Account of the Airport Development Fund based on the growth of non-airline revenue per enplaned passenger, exclusive of international passengers, over the non-airline revenue per enplaned passenger in Damage or Destruction The Use Agreements generally require that, prior to payment and discharge of all Revenue Bonds (or provision for their payment having been made), the Signatory Airlines must continue to pay rentals and landing fees without abatement or reduction if the leased premises are damaged or partially or totally destroyed by a casualty. The portion of the leased premises that was damaged or destroyed will generally be repaired from insurance proceeds, after payment of any expenses of obtaining or recovering them, as well as any additional moneys necessary therefor. To the extent such proceeds are insufficient to pay the costs of repair, each Signatory Airline is required to pay the costs of repairing the premises leased by such Signatory Airline. In addition, the City and the Signatory Airlines may determine to issue Additional Revenue Bonds to pay such costs. If Revenue Bonds are outstanding, any excess insurance proceeds will be paid into the Revenue Fund (as defined in the Use Agreements). Condemnation The Use Agreements generally require that, prior to payment and discharge of all Revenue Bonds (or provision for their payment having been made), the Signatory Airlines must continue to pay rentals and landing fees without abatement or reduction if title to or temporary use of the Airport System or any part of the Airport System is taken under the exercise of eminent domain. The proceeds of any condemnation award will be used to restore the remaining facilities of the Airport System to substantially the same prior condition or to acquire additional land or improvements. Any remaining net proceeds of a condemnation award shall be used to redeem Revenue Bonds if any Revenue Bonds are then subject to redemption. Events of Default and Remedies Events of default under the Use Agreements include: (i) the failure of the Signatory Airline to pay rentals, landing fees or other payments within 10 days after written demand for such payment; D-11

234 (ii) the failure of the Signatory Airline to observe and perform any other covenant, condition or agreement on its part to be observed or performed and to remedy same, or commence action which will promptly remedy same which action is thereafter diligently pursued, within 30 days after written notice is given by the City to the Signatory Airline; (iii) any execution or attachment shall be issued against the Signatory Airline in connection with its operations at the Airport System and shall not be discharged within 90 days after levy or seizure thereunder or the leased premises shall be occupied by someone other than the Signatory Airline; (iv) premises; the City shall determine that the Signatory Airline has deserted or vacated the leased (v) the Signatory Airline shall violate any provision of any insurance policy referred to in the Use Agreement resulting in such policy becoming void or unenforceable and the Signatory Airline shall not cure the violation or the inadequate insurance upon written notice; or the Signatory Airline shall in any way fail to perform and satisfy the requirements of any insurance policy referred to in the Use Agreement and the Signatory Airline shall fail to conform to such requirements upon written notice; and (vi) the occurrence of certain events of bankruptcy. Unless governmental restrictions or any other cause beyond its control have prevented the defaulting Signatory Airline from curing any event of default (other than a non-payment default), or the Signatory Airline is contesting or protesting such default, the City may, in addition to other remedies, reenter the leased premises and terminate the Use Agreement. The defaulting Signatory Airline is thereupon required to pay all amounts then owing to the City, and the City may relet the leased premises. The defaulting Signatory Airline is also required to pay to the City each month, as liquidated damages, an amount equal to the difference between amounts received from subsequent users of the leased premises and the monthly rentals, fees and charges which would have been payable had the Signatory Airline maintained the same average monthly level of operations at the Airport as the Signatory Airline maintained during the calendar year preceding the default. Assignment and Subletting The Signatory Airline may not assign or sublet the leased premises without the prior approval of the City, but no such approval is required for the assignment of the Use Agreement to an Affiliate (subject to certain requirements) or to any corporation with which the Signatory Airline may merge or consolidate or which may succeed to the Signatory Airline s business. Signatory Airline s Right to Terminate After either the payment in full of the Revenue Bonds or the aggregation of moneys in certain funds sufficient to pay and redeem the Revenue Bonds then outstanding, a Signatory Airline may terminate its Use Agreement. A Signatory Airline may also terminate its Use Agreement if, as a result of any legislative action of the United States or any action or non-action of any federal or other governmental agency, such Signatory Airline shall cease to have the necessary authority to transport persons, property and mail at the Airport; no Signatory Airline shall have the right to terminate the Use Agreement under such circumstances, however, unless such governmental action or non-action was not requested by the Signatory Airline, the Signatory Airline made all reasonable efforts to prevent it, and it was not part of legislative action affecting any other Signatory Airline. Renegotiation of Use Agreement In the event that the connecting passengers as a percent of total passengers at the Airport falls below 15% for any consecutive three-month period during the term of the Use Agreement, the City may renegotiate the terms of the Use Agreements. If mutually agreeable terms cannot be reached within one calendar year, the Use Agreements will terminate. D-12

235 Expiration of the Use Agreements The City may agree, in its sole discretion, to permit a Signatory Airline to continue a tenancy at the Airport on a month-to-month basis. The City or the Signatory Airline may terminate that month-to-month tenancy upon 30 days prior written notice to the other. During such tenancy, the Signatory Airline will pay to the City the same rates of rental and landing fees as were in effect at the expiration of the term of the Use Agreement, as subsequently adjusted as provided in the Use Agreement, unless different rates are agreed upon. The Signatory Airline will be bound by all of the additional provisions of the Use Agreement insofar as they may be pertinent. Pledge of Airport Revenues SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE The Revenue Bonds issued under the Indenture, including the Series 2000C Bonds, are secured by a pledge and assignment of the Airport Revenues and the Special Funds. Neither the Series 2000C Bonds nor the Indenture shall constitute a general obligation, general debt or general bonded indebtedness of the City, and the general resources of the City shall not be required to be used, nor the full faith and credit of the City be pledged, for the performance of any duty thereunder, and the holders of the Series 2000C Bonds shall have no right to have excises or taxes levied by the City Council or any taxing authority of the State of Ohio or any political subdivision for the payment of debt service on the Series 2000C Bonds. The City has assigned to the Trustee all its rights and interests in and to the Use Agreements for the benefit of the Holders of the Revenue Bonds. The City covenants in the Indenture to instruct the Signatory Airlines and all other users of the Airport System, including concessionaires and other aircraft operators, to pay directly to the Trustee all amounts due to the City as the owner and operator of the Airport System. The City will hold all amounts received by it from the Trustee pursuant to the Indenture in trust and such moneys will be held separate and apart from, and will not be commingled with, the general funds or any other funds of the City. The City will restrict the use and application of such amounts in the manner set forth in the Indenture. The amounts held by the City are pledged to the payment of Bond service charges on the Revenue Bonds, subject to the condition that such amounts shall be appropriated, transferred, expended or used for the purposes of the Airport System as provided in the Indenture. Additional Bonds Test Additional Revenue Bonds may be issued by the City if there shall have been received by the Trustee, among other things, a written report of the Airport Consultant that (a) the projected Airport Revenues together with Other Available Funds, during each of the first, second and third complete Fiscal Years immediately following the issuance of the Additional Revenue Bonds, less the projected Operating Expenses during each of such Fiscal Years, is at least equal to 125% of the Bond service charges on all outstanding Revenue Bonds, including the Additional Revenue Bonds proposed to be issued, due during each of those three Fiscal Years, less, in each case, such Bond service charges on any Revenue Bonds that are to be redeemed or retired with the proceeds of such Additional Revenue Bonds, and (b) the projected Airport Revenues, together with Other Available Funds, during each of the fourth and fifth complete Fiscal Years immediately following the issuance of the Additional Revenue Bonds, less the projected Operating Expenses during each of such Fiscal Years, is at least equal to 125% of the maximum annual Bond service charges on all outstanding Revenue Bonds, including the Additional Revenue Bonds proposed to be issued, due in any subsequent Fiscal Year, less, in each case, such Bond service charges on any Revenue Bonds that are to be redeemed or retired with the proceeds of such Additional Revenue Bonds. An alternative coverage ratio applies if there is General Obligation Debt of the City Outstanding for Airport System purposes. There is none. Computation of Bond Service Charges Any series of Additional Revenue Bonds may be issued as Variable Rate Bonds. The Supplemental D-13

236 Indenture applicable to any series of Variable Rate Bonds shall specify the method and procedure by which the rate of interest to be borne thereby shall be determined and may provide for the right of the holders thereof to tender such Variable Rate Bonds for purchase by the City at the times, on the terms, and subject to the conditions set forth therein. In the event that all or any portion of any series of Additional Revenue Bonds have been issued as or are proposed to be issued as Variable Rate Bonds, then in order to compute the Bond service charges on such Additional Revenue Bonds for the purposes of the Indenture, the following rules shall apply: (i) For the purpose of determining compliance with the rate covenant for any period prior to the date of calculation, the rate of interest borne by such Variable Rate Bonds, including Variable Rate Bonds, which are Balloon Bonds, shall be deemed to be the actual weighted average rate in effect thereon during such period; (ii) For the purpose of determining whether Additional Revenue Bonds may be issued in compliance with the Additional Bonds Test, regardless of whether such Additional Revenue Bonds are to be Variable Rate Bonds, the rate of interest borne by any outstanding Variable Rate Bonds, except for Variable Rate Bonds which are Balloon Bonds, shall be deemed to be the highest of (a) the highest rate of interest borne by such Variable Rate Bonds during the preceding twelve months or such shorter period that such Variable Rate Bonds may have been outstanding, (b) the actual rate on the date of calculation, (c) if the outstanding Variable Rate Bonds have been outstanding for at least twelve months, the average rate over the twelve months immediately preceding the date of calculation, or (d)(l) if interest on the outstanding Variable Rate Bonds is excludable from gross income under the applicable provisions of the Internal Revenue Code, the most recently published Fixed Rate Index plus fifty (50) basis points, or (2) if interest is not so excludable, the interest rate on direct U.S. Treasury Obligations with comparable maturities plus fifty (50) basis points; and (iii) For the purpose of determining whether Additional Revenue Bonds that are to be Variable Rate Bonds may be issued in compliance with the Additional Bonds Test, and for the purpose of determining the amount of the Required Bond Service Reserve attributable to those Additional Revenue Bonds, those Additional Revenue Bonds shall be deemed to bear interest at the Assumed Amortization Rate and to be amortized on the basis of the Assumed Amortization Period; (iv) If the City has entered into a Hedge Agreement with respect to any Variable Rate Bonds under which the City will make fixed interest rate payments in exchange for a Hedge Counterparty making variable rate payments to the City, (a) at the election of the City, those Variable Rate Bonds may be assumed to bear interest at the fixed rate of interest simulated by the Hedge Agreement, in lieu of the rate determined under the above clauses (i), (ii) or (iii) and (b) for purposes of determining compliance with the rate covenant, payments owed and received under the Hedge Agreement may be netted against each other for purposes of determining the interest paid on the Variable Rate Bonds. (v) For the purpose of determining whether any outstanding Variable Rate Bond is deemed paid and discharged under the Indenture, such Variable Rate Bond shall be deemed to bear interest at the actual rate of interest borne thereby for the remainder of the period that such rate shall remain in effect, and for any subsequent period prior to the time at which such Variable Rate is actually to be paid and discharged, such Variable Rate Bond shall be deemed to bear interest at the maximum rate of interest such Variable Rate Bond may bear pursuant to the Series Bond Proceedings. All or any portion of any series of Additional Revenue Bonds may be issued as Balloon Bonds. Regarding any Additional Revenue Bonds that are or are to be Balloon Bonds, for the purpose of (i) determining compliance with the rate covenant for any period prior to the date of calculation, (ii) determining whether Additional Revenue Bonds, regardless of whether they are to be Balloon Bonds, may be issued in compliance with the Additional Bonds Test when any Balloon Bonds are outstanding, (iii) determining whether Additional Revenue Bonds that are to be Balloon Bonds may be issued in compliance with the Additional Bonds Test, and (iv) determining the amount of the D-14

237 Required Bond Service Reserve attributable to such Balloon Bonds, the Bond service charges on such Additional Revenue Bonds shall be determined: (I) if such Balloon Bonds are not Capital Appreciation Bonds (as defined in the Indenture), by assuming that such Bonds are to be amortized on the basis of level debt service over the Assumed Amortization Period at the Assumed Interest Rate; and (II) if such Balloon Bonds are Capital Appreciation Bonds, by assuming that the Appreciated Principal Amount (as defined in the Indenture) of such Bonds at maturity is to be amortized on the basis of level principal payments over the Assumed Amortization Period. All or any portion of any series of Additional Revenue Bonds may be issued as Capital Appreciation Bonds. Regarding any Additional Revenue Bonds that are or are to be Capital Appreciation Bonds, for the purpose of (i) determining compliance with the rate covenant for any period prior to the date of calculation, (ii) determining whether Additional Revenue Bonds, regardless of whether they are to be Capital Appreciation Bonds, may be issued in compliance with the Additional Bonds Test when any Capital Appreciation Bonds are outstanding, (iii) determining whether Additional Revenue Bonds that are to be Capital Appreciation Bonds may be issued in compliance with the Additional Bonds Test, and (iv) determining the amount of the Required Bond Service Reserve attributable to such Capital Appreciation Bonds, the Bond service charges on such Additional Revenue Bonds shall include the Appreciated Principal Amounts at maturity. Bond service charges shall not include payments potentially required to be made by the City under any Reimbursement Agreement to reimburse any Credit Provider for payments made to pay the principal of or interest or any premium on Revenue Bonds, but Bond service charges shall include such payments if the City s obligation to make such payments shall have accrued and become actual. In anticipation of the issuance of any series of Additional Revenue Bonds, the City may issue one or more series of Revenue Bond Anticipation Notes. All requirements of the Indenture applicable to Revenue Bonds shall apply to Revenue Bond Anticipation Notes, including, without limitation the conditions precedent for the issuance of a series of Revenue Bonds. For the purpose of (i) determining compliance with the rate covenant for any period prior to the date of calculation, (ii) determining whether Additional Revenue Bonds may be issued in compliance with the Additional Bonds Test when any Revenue Bond Anticipation Notes are outstanding, (iii) determining whether Revenue Bond Anticipation Notes may be issued in compliance with the Additional Bonds Test and (iv) determining the amount of the Required Bond Service Reserve attributable to such Revenue Bond Anticipation Notes, the Bond service charges payable on any Revenue Bond Anticipation Notes shall be computed for purposes of the Indenture in the same manner as for Balloon Bonds. Credit Providers In addition to the Airport Revenues payable into the Special Funds and other amounts, proceeds, moneys, investments, rights, and interests pledged and assigned by the City to the Trustee under the Original Indenture to secure the payment of the Bond service charges on the Revenue Bonds, the Supplemental Indenture for any series of Additional Revenue Bonds may provide for credit enhancement or liquidity support applicable to such series of Revenue Bonds without any requirement that the security or protection afforded by such credit enhancement or liquidity support extend or apply to the Revenue Bonds of any other series. The fees, charges, and expenses initially payable to the Credit Provider for any such credit enhancement or liquidity support may be paid from the proceeds of the Revenue Bonds to which such credit enhancement or liquidity support applies. The Supplemental Indenture for any series of Revenue Bonds to which any such credit enhancement or liquidity support applies may include provisions permitting the Credit Provider to act as, or in the place of, the holders of such Revenue Bonds for the purposes and on the terms and conditions set forth in such Supplemental Indenture. Bond Reserve Fund In connection with any issuance of Additional Revenue Bonds, and provided that the City maintains a D-15

238 rating on Outstanding Revenue Bonds determined without regard to any credit enhancement, the City may, in the applicable Supplemental Indenture, provide that no deposit to the Bond Service Reserve Fund shall be made for or with respect to such Additional Revenue Bonds, in which case: (i) the holders of such Additional Revenue Bonds shall have no right or entitlement to have any portion of the Bond service charges on such Additional Revenue Bonds be paid from amounts in the Bond Service Reserve Fund, (ii) the lien of and pledge on the Bond Service Reserve Fund shall not extend to or be for the benefit of the holders of such Additional Revenue Bonds, and (iii) the Bond service charges on such Additional Revenue Bonds shall not be taken into account in determining the Required Bond Service Reserve. In the event that the Supplemental Indenture applicable to an issue of Additional Revenue Bonds provides as described in the preceding sentence, then such Supplemental Indenture may also provide for the creation of a special reserve fund solely for such Additional Revenue Bonds, separate from the Bond Service Reserve Fund, and may provide for the deposit therein, at the time of issuance or in one or more subsequent deposits thereto, of an amount specified in the applicable Supplemental Indenture as the required reserve for such Additional Revenue Bonds, or may require the City to provide a municipal bond insurance policy, a bank letter or line of credit, or a surety bond to enhance the security for such Additional Revenue Bonds in lieu of a funded reserve fund, provided that such credit facility meets certain requirements set forth in the Indenture. If the Supplemental Indenture applicable to such a series of Additional Revenue Bonds so provides for such a special reserve fund and further requires that deposits be made thereto from Airport Revenues at any time, then such deposits may be made from Airport Revenues on a parity with payments made to the Bond Service Reserve Fund to replenish any cash withdrawals from the Bond Service Reserve Fund. In addition, if the Supplemental Indenture applicable to a series of Additional Revenue Bonds provides as described in the immediately preceding paragraph, then such Supplemental Indenture shall also provide that the amount of any defaulted interest or principal on such series of Revenue Bonds, which would have been timely paid had the Required Bond Service Reserve for those Revenue Bonds been fully funded in the Bond Service Reserve Fund, shall be paid from Airport Revenues on a parity with payments to be made to any providers of credit facilities held for the Bond Service Reserve Fund in lieu of cash and investments to reimburse those providers for claims or draws on those credit facilities. Subordinated Indebtedness The City may, at any time and from time to time, issue or incur Subordinated Indebtedness for the purpose of financing any capital improvement to the Airport System. In addition, any amounts owed by the City to a Hedge Counterparty in respect of termination of a Qualified Hedge Agreement will be considered as Subordinated Indebtedness. Subordinated Indebtedness is secured by, and is payable from, Airport Revenues on a basis subordinate to payment of Bond service charges on Revenue Bonds. Any supplemental indenture providing for the issuance of Subordinated Indebtedness shall provide that the trustee for such Subordinated Indebtedness shall have no right, power or authority to cause acceleration of such Subordinated Indebtedness unless and until the Trustee has exercised its power to accelerate the Revenue Bonds. Particular Covenants Payment: The City will pay, solely from the sources provided in the Indenture, the Bond service charges on the Revenue Bonds on the dates and at the places and in the manner mentioned in the Revenue Bonds, and it will faithfully observe and perform at all times all agreements, covenants, undertakings, stipulations and provisions contained in the Series Bond Proceedings, in the Indenture and in every Revenue Bond executed, authenticated and delivered under the Indenture and in all proceedings of Council pertaining to the Revenue Bonds. Maintenance and Operation of Airport System: The City will, but only from Airport Revenues, maintain or cause to be maintained the Airport System in a good state of repair and sound operating condition, will with reasonable diligence prudently develop, improve, and at all times operate in an economical and efficient manner the Airport System, and will comply with all valid acts, rules, regulations, orders and directions of any executive, legislative, administrative or judicial body applicable to the Airport System. D-16

239 Payment of Taxes and Claims: The City will cause the payment of all lawful taxes, assessments and charges at any time levied or assessed upon or against the Airport Revenues or the Airport System, and will not create or suffer to be created any debt, lien or charge on the Airport System or on the Airport Revenues. Insurance: To the extent reasonably obtainable at a reasonable cost, the City will procure, and maintain at all times while any of the Revenue Bonds shall be outstanding, insurance covering the Airport System and its operations. Accounting Records and Financial Statements: The City will have an annual audit of the Airport System made by nationally recognized independent certified public accountants in accordance with generally accepted accounting principles, and will furnish a copy of such audit to the Trustee promptly upon its completion along with a copy of the financial statements and reports which are regularly prepared by the City. Tax-Exempt Status of Bonds: The City will take or cause to be taken such actions that may be required of it for the interest on the Series 2000C Bonds to be and to remain excluded from gross income for federal income tax purposes. Rates and Charges: So long as any Revenue Bonds are outstanding, the City will at all times prescribe and charge such rates, fees and charges for the use of the Airport System, its services and supplies, and will provide for the charging of such rates, fees and charges and the making of payments to the City of such rentals or other considerations for the use and operation of the Airport System, so as to produce, in each fiscal year, Airport Revenues, together with Other Available Funds, less Operating Expenses at least equal to 125% of the amount maturing and becoming due in such fiscal year for the payment of principal of and interest on all Outstanding Revenue Bonds. Supplemental Indentures The City and the Trustee, without the consent of the Bondholders, may enter into supplemental indentures for the purpose of correcting ambiguities or inconsistencies in the Indenture, granting additional rights to the Trustee, subjecting additional revenues to the lien of the Indenture, adding to the covenants of the City, evidencing any succession of the City with respect to the Airport System, complying with federal tax or securities laws, or governing the issuance of Additional Revenue Bonds. With the consent of the holders of not less than 66 and 2/3% in aggregate principal amount (and Appreciated Principal Amount) of the Revenue Bonds then outstanding, the City and the Trustee may enter into supplemental indentures modifying, altering, amending, adding to or rescinding any of the terms or provisions of the Indenture. No such supplemental indenture, however, shall (a) extend the maturity of the principal of or the interest on any Revenue Bond issued under the Indenture, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any premium payable or redemption thereof, or extend the time of any payment required by any mandatory sinking fund requirements, without the consent of the holder of each Revenue Bond affected thereby, or (b) permit a privilege or priority of any Revenue Bond or Revenue Bonds, or a reduction in the aggregate principal amount of the Revenue Bonds required for consent to such supplemental indenture, without the consent of the holders of all of the Revenue Bonds then outstanding. Provided that (1) the Bond Insurer is and remains solvent and not a party to any proceeding for the rehabilitation, liquidation, conservation or dissolution of the Bond Insurer, (2) each bond insurance policy of the Bond Insurer insuring Revenue Bonds is in full force and effect, and (3) the Bond Insurer shall have made and be continuing to make all payments and meet all of its obligations under the bond insurance policy, then each Bond Insurer shall be deemed to be the holder of all the Revenue Bonds insured by that Bond Insurer and may act in the place of the holders of those Revenue Bonds for purposes of giving consents and approvals with respect to proposed supplemental indentures requiring the consent of Bondholders. Any rating agency rating any series of Revenue Bonds must receive notice of any supplemental indenture and a copy thereof at least fifteen (15) days in advance of its execution or adoption. D-17

240 Events of Default Each of the following occurrences or events is declared to be an Event of Default: (a) The failure to make payment of any installment of interest on any Revenue Bond when and as the same shall have become due. (b) The failure to make payment of the principal or mandatory sinking fund payment of, or any premium on, any Revenue Bond when and as the same shall become due, whether at the stated maturity thereof, by acceleration or call for redemption. (c) The filing by the City of a petition for reorganization or rearrangement or readjustment of its obligations under the provisions of any bankruptcy or moratorium laws or similar laws relating to or affecting creditors rights. (d) Default in the performance or observance of any other of the covenants, agreements or conditions on the part of the City included in the Indenture or in the Revenue Bonds and the continuance thereof for a period of 90 days after written notice to the City given by the Trustee or the holders of not less than 25% in aggregate principal amount (and Appreciated Principal Amount) of Revenue Bonds then outstanding. In determining whether a payment default has occurred or whether a payment on the Bonds has been made under the Indenture no effect shall be given to payments made under a bond insurance policy for a series of Revenue Bonds. Remedies for Default Upon the occurrence of an Event of Default the Trustee may, and upon the request of the holders of at least 25% in aggregate principal amount (and Appreciated Principal Amount) of Revenue Bonds outstanding, the Trustee shall, declare the principal of all Revenue Bonds to be immediately due and payable. The Trustee may require indemnification before taking any such action under the Indenture. The Indenture does not require the filing of any periodic evidence as to the absence of default or as to compliance with the Indenture. Upon the occurrence of an Event of Default, the City shall, upon demand of the Trustee, surrender control of any Special Funds held by the City and possession of the Airport System to the Trustee, and the Trustee may operate the Airport System for the benefit of the holders of Revenue Bonds. Provided that (1) the Bond Insurer is and remains solvent and not a party to any proceeding for the rehabilitation, liquidation, conservation or dissolution of the Bond Insurer, (2) each bond insurance policy of the Bond Insurer insuring Revenue Bonds is in full force and effect, and (3) the Bond Insurer shall have made and be continuing to make all payments and meet all of its obligations under each such bond insurance policy, then each Bond Insurer shall be deemed to be the holder of all the Revenue Bonds insured by that Bond Insurer and may act in the place of the holders of those Revenue Bonds for purposes of (A) making requests and giving directions and consents to the Trustee and exercising any and all other rights which Bondholders would have the power and authority to make, give, or exercise under Article XI of the Original Indenture as a result of the occurrence and continuation of an Event of Default, and (B) making or giving any other consent, direction, or approval permitted or required under the Indenture to be made or given by holders of Revenue Bonds insured by that Bond Insurer. Furthermore, provided the conditions enumerated in clauses (1), (2), and (3) in the first sentence of this paragraph are met and as long as any Revenue Bonds insured by that Bond Insurer remain outstanding, the Trustee will not accelerate the principal of a series of insured Revenue Bonds without the consent of the Bond Insurer that issued the bond insurance policy for that series of Revenue Bonds. D-18

241 Waiver of Events of Default The Trustee may in its discretion waive any event of default at the request of the holders of 25% in aggregate principal amount (and Appreciated Principal Amount) of Revenue Bonds then outstanding; provided, however, an event of default occasioned by the failure to pay principal or interest may not be waived until such principal or interest payment, plus penalty interest at the rate borne by the Revenue Bonds, and all expenses of the Trustee, shall be paid. At any time after the Revenue Bonds have been accelerated and before a receiver has been appointed and confirmed and if all sums then due on the Revenue Bonds (other than pursuant to the acceleration) have been paid and all existing defaults have been cured, the holders of not less than 25% in aggregate principal amount of all Revenue Bonds then outstanding may rescind such acceleration. Defeasance If the City shall pay or cause to be paid the principal of, premium, if any, and interest due on the outstanding Revenue Bonds at the times and in the manner stipulated in the Indenture, and shall have paid all fees and charges of the Trustee and any Paying Agents, the Indenture shall cease, determine and become null and void, and the Trustee shall release the Indenture and discharge the lien thereof. To the extent that proceeds of a credit facility or a bond insurance policy are used to pay principal of or interest on Revenue Bonds, however, the Credit Provider or Bond Insurer will be subrogated to the rights of the holders of those Revenue Bonds to receive the amount of such principal and interest from the City, with interest thereon, and will be otherwise treated as the owner of such rights to the amount of such principal and interest, and the City s obligation with respect to such Revenue Bonds will not be discharged. All the outstanding Revenue Bonds (including any coupons appertaining thereto) of one or more series shall be deemed to have been paid and discharged within the meaning of the Indenture if: (a) the Trustee and the Paying Agents shall hold, in trust for and irrevocably committed thereto, sufficient moneys, or (b) the Trustee shall hold, in trust for and irrevocably committed thereto, Defeasance Obligations which an independent public accounting firm of national reputation certifies to be of such maturities and interest payment dates and to bear such interest as will, without further investment or reinvestment of either the principal amount thereof or the interest earnings therefrom (likewise to be held in trust and committed, except as hereinafter provided), be sufficient together with moneys referred to in (a) above, for the payment, at their maturity, redemption or due date, as the case may be, of all Bond service charges thereon to the maturity, redemption, or due date, as the case may be, or if default in such payment shall have occurred on such date, then to the date of the tender of such payment; provided, that if any of such Revenue Bonds are to be redeemed prior to the stated maturity thereof, notice of such redemption shall have been duly given or irrevocable provision satisfactory to the Trustee shall have been duly made for the giving of such notice, which provision, however, shall be subject to change as to the date or dates specified for such redemption as described in the next paragraph hereof. If a forward supply contract is employed in connection with the defeasance (i) the verification report shall expressly state that the adequacy of the escrow to accomplish the defeasance relies solely on the initial Defeasance Obligations and the maturing principal thereof and interest income thereon and does not assume performance under or compliance with the forward supply contract and (ii) the applicable escrow agreement shall provide that in the event of any discrepancy or difference between the terms of the forward supply contract and the escrow agreement, the terms of the escrow agreement shall be controlling. Any moneys held by the Trustee for the defeasance of Revenue Bonds may be invested by the Trustee but only in Defeasance Obligations the maturities or redemption dates of which, at the option of the Trustee, shall D-19

242 coincide as nearly as practicable with, but not later than, the time or times at which those moneys will be required to pay Bond service charges. Any income or interest earned by, or increment to, the investments held shall, to the extent determined from time to time by the Trustee to be in excess of the amount required to be held by it for the purpose, be transferred to the City free and clear of the lien of the Indenture, pursuant to instructions by the Director of Finance. In the event that the Indenture is satisfied and discharged and if, but only if, the City shall then so direct the Trustee, the holders of any Revenue Bonds then outstanding, the maturity or redemption dates of which have not then arrived, may (to the extent that such will not be in conflict with the provisions of a trust agreement, if any, under which the Trustee holds moneys and/or Defeasance Obligations and will not result in insufficient moneys to pay Bond service charges on other Revenue Bonds at maturity or redemption) as of and on any Interest Payment Date or Dates stated in such direction by the City to the Trustee, surrender those Revenue Bonds to a Paying Agent and, upon such surrender, be paid the principal amount of any Revenue Bond surrendered, with any applicable redemption premium, as stated in the direction by the City to the Trustee, plus interest accrued on any such Revenue Bond so surrendered. Such right may be exercised only after the holders of any such Revenue Bonds to be surrendered have given written notice to the Trustee, at least 70 days (or such other period as may be stated in such direction to the Trustee) before the Interest Payment Date on which they request such payment, of their intent so to surrender the Revenue Bonds for such payment and setting forth in such notice the Revenue Bonds to be surrendered. If any Revenue Bond as to which such notice of intent has been given is not surrendered on or before such Interest Payment Date, surrender thereof for payment need not be accepted at any time thereafter prior to maturity or call for redemption. After receiving the aforesaid directions from the City and within 30 days after such discharge and satisfaction of the Indenture, the Trustee shall give Bondholders notice of the provisions described in this paragraph in the same manner as provided for in the Indenture for mailing notice of redemption of Revenue Bonds. In the case of discharge and satisfaction of the Indenture pursuant to an advance refunding, a second notice of such discharge and satisfaction shall be given by the Trustee to the holders of the Revenue Bonds so affected, by the same manner as provided for the mailing of notice of redemption, at least 30 days prior to the actual redemption date of such Revenue Bonds. Notwithstanding the foregoing, those provisions of the Original Indenture or any Supplemental Indenture relating to the maturity of Revenue Bonds, interest payments and dates thereof, optional and mandatory redemption provisions, credit against mandatory sinking fund installments, exchange, transfer and registration of Revenue Bonds, replacement of mutilated, destroyed, lost, or wrongfully taken Revenue Bonds, the safekeeping and cancellation of Revenue Bonds, non-presentment of Revenue Bonds, the holding of moneys in trust, repayments to the City from the Special Funds, compliance with any applicable Federal tax law and the duties of the Trustee in connection with all of the foregoing, shall remain in effect and shall be binding upon the Trustee and the Bondholders notwithstanding the release and discharge of the lien of the Indenture. Condemnation and Destruction In the event of the condemnation or destruction of the Airport System or a portion thereof, the net proceeds of any insurance or condemnation award will be applied to reconstruct or restore the Airport System to substantially the same level as prior to such condemnation or destruction. The Indenture does not provide for any extraordinary optional redemption of Revenue Bonds in the event of condemnation or destruction of the Airport System, but any excess net proceeds not required to reconstruct or restore the Airport System may, and in the event of condemnation shall, be used to redeem Revenue Bonds then subject to redemption. Investments of Amounts in Special Funds Moneys held in any Special Fund maintained by the Trustee shall be invested in Eligible Investments by the Trustee at the written request of the City s Director of Finance, and moneys held in any Special Fund maintained by the City shall be invested by the City only in Eligible Investments. Any such investment shall be deemed at all times a part of the Special Fund from which the investment has been made, and profits and losses on such investments shall be credited or charged, as the case may be, to such Special Funds; provided that (i) earnings on amounts in the Bond Service Reserve Fund which are not needed to satisfy the Required Bond Service Reserve shall D-20

243 be transferred to the City for deposit in the Renewal and Replacement Fund and (iii) earnings on amounts in the Renewal and Replacement Fund which are not needed to satisfy the Renewal and Replacement Payment shall be deposited in equal amounts to each of the Improvement Fund and the Surplus Fund, until the amount in the Improvement Fund and the Surplus Fund totals $350,000 and thereafter such earnings and all earnings on amounts in the Improvement Fund and the Surplus Fund not needed to maintain said balances shall be transferred to the Revenue Fund at the end of each year ending December 31 during the term of the Use Agreements. Release of Property The Indenture provides that the City may remove from the Airport System any unimproved and unneeded part of the real property or interests in real property comprising part of the Airport System, and may grant easements with respect to any such real property or interests therein, upon delivery of certain documents to the Trustee, including the following: (a) An ordinance adopted by the City Council stating that the City is not in default under the Indenture, giving an adequate legal description of the real property to be released, stating the purpose for which the release is desired and the improvements to be made on such real property, and requesting its release from the lien of the Indenture; and (b) A certificate of an Airport Consultant stating that real property proposed to be released is not otherwise needed for, or has become inexpedient to use in connection with, the Airport System, and that such release would not impair the City s ability to produce Airport Revenues sufficient to meet all the requirements to be met therefrom under the Indenture and the Revenue Bonds. The Indenture also permits the City to sell Burke Lakefront Airport at any time without having to deliver an ordinance of the City Council or a certificate of an Airport Consultant. All net proceeds of the sale of Burke Lakefront Airport, after reimbursing the Airport System for all amounts paid from any of the Special Funds in excess of the Burke Deficit, shall be paid to the City and may be applied by the City for any purpose, whether or not related to the Airport System. The proceeds from the sale of any other real property or interests in real property, which are part of the Airport System, as improved with the proceeds from the sale of the Bonds, will be deposited in the Revenue Fund, except where in conflict with agreements between the City and the United States of America. The proceeds from the sale of any future-acquired property will be payable to the City after reimbursing the Airport System for all costs and expenses incurred by the Airport System in connection with the acquisition, improvement and disposition of any such future-acquired property. Amendment of Use Agreement The City has covenanted in the Indenture that it will not amend or modify the Use Agreements, without the consent of the holders of at least a majority in aggregate principal amount of Revenue Bonds then Outstanding, if such action would materially impair the City s ability to produce adequate Airport Revenues sufficient to meet all the requirements of the Indenture. D-21

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