Pacific Coast Container Terminal Competitiveness Study - TP 14837E

 

 

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CHAPTER 9 - FINANCIAL PERFORMANCE

 

 

 

 

 

In this section, we discuss issues related the financial statements of terminal leaseholders as indicators of competitiveness. We review the impact of recent equity investments and debt financing on container terminal pricing and competitiveness. The marine terminals are competitive when they earn a sufficient return for their shareholders and are able to attract further shareholder investments to increase efficiency.

In the past two years, all four of the Canadian marine container terminal leases have been taken over by investment companies. We summarize the high return on investment targets set by these new owners. Since the terminal land is publicly owned we also compare the book values, assessed values, and payments to the host communities. We show payments to US port communities are much higher than payments in Canada.

9.1 - Assets, liabilities and equity comparison

Information on the value of assets, liabilities and equity of Pacific Coast container terminals are summarized in Exhibit 32. The amount of equity and the historical average return on equity investment are discussed in this section. We also describe the loans used to purchase the terminals and the interest rates for these loans. The equity and debt structure of the terminals affects competitiveness because more of the US terminal leases are held by integrated shipping companies and do not have such large outstanding loans.

In the US the total public debt to be paid back by lease payments is significantly less than the private debt now carried by Canadian terminals. The average cost of debt for container terminals in the Port of Los Angeles is 4.5 percent.¹

In Canada and at some of the US container terminals owned by financial institutions, the average return on equity expected from the terminals is above 20 percent and the 80 percent debt interest rate is above 7.0 percent for an average cost of capital of 9.6 percent. This is double the US costs and could adversely affect Canadian terminals’ competitiveness.

Exhibit 32 Terminal Assets, Liabilities and Equity Dec. 31, 2007²

Terminal	Operator	Million TEU/y	Land Ha	Cranes	Assets $Million	Debt	Equity
CKHY Alliance					600	0	600
LB Pier G & J North	K-Line	2.8	156	25
Oakland, Trans Bay	K-Line	0.2	20	2
Tacoma, Husky	K-Line	0.3	37	4
Grand All., LA Yusen	NYK	1.1	34	3
New World Alliance					960	0	960
LA, APL	APL-NOL	1.3	117	12
Oakland, Eagle	APL-NOL	0.3	32	4
Seattle Terminal 5	APL-NOL	0.4	73	6
LB, Pier E &F	Hyundai	1.0	66	8
Tacoma, Wash	Hyundai	0.3	32	4
LA Traypac	Mitsui OSK	1.2	69	11
Oakland Traypac	Mitsui OSK	0.2	13	3
Maersk					760	0	760
LA	APM	1.5	194	14
Oakland	APM	0.8	63	9
Tacoma	APM	0.3	54	5
LB, Hanjin Pier T	MTC	1.1	138	14
Oakland Hanjin	MTC	0.3	48	4
Seattle, Hanjin	MTC	0.4	34	6
LA, Evergreen	MTC	1.9	82	18
Oakland, Evergreen	MTC	0.4	23	4
Tacoma, Evergreen	MTC	0.4	68	7
Tacoma, Olympic	YM, MTC	0.3	22	4
LA, West Basin	YM, MTC	1.0	104	9
Subtotal AIG		5.8	519	66	1,250	500	750
Gold Sachs – SSAM
Oakland		0.4	58	6
Seattle T 18		0.8	78	11
LB, Pier J South	Cosco, SSA	1.3	102	16
LB, Pier A	CS, SSA	0.8	68	10
Manzanillo	SSA	0.5	13	4
Subtotal					2,500	2,000	500
Ontario Teachers
Deltaport		1.2	64	6
Vanterm		0.7	30	5
Subtotal					1,500	1,200	300
DP World, Van., Centerm		0.4	29	6	400	300	100
Hutchison					400	0	400
Manzanillo		0.3	4	2
Lazaro Cardenas		0.4	15	2
Balboa		1.5	8	3
Deutsche Bank, P. Rupert		0.5	23	3	400	370	30
Subtotal investor					320	200	120
Average		0.8	60	7	260	130	130

 

 

 

The main asset of each terminal is its lease from the government owners of the property. In the US, local port authorities have created more land for marine terminals by filling in waterfront space and by renovating and expanding existing terminals. Los Angeles and Long Beach have created 1,260 ha, Seattle/Tacoma, 484 ha, and Oakland, 220 ha. By creating new space the US Ports have attracted multiple terminal competitors within each port. The Port of Vancouver has created much less container terminal land only 145 ha.

 

 

 

In the US and Mexico, the Pacific Coast leases have an average of 15 years remaining while in Canada they average 35 years. In Canada and the US autonomous local port authorities administer the terminal leases with an important difference that in the US the lease revenues stay in the host community since the port authorities are municipally owned. In Canada and Mexico, the terminal land is owned by the federal government. In Canada, 94 percent of the lease gross revenues flows back to the whole Vancouver region, and 6 percent to the federal government.

In the past year many of the leases have changed ownership and the market valuation of the assets has increased dramatically. The largest terminal sale took place this year when AIG New York purchased DP World’s six eastern US terminals for $700 million and then purchased Marine Terminal Corporation’s interest in eight Pacific Coast container terminals for $625 million. American Insurance manages $700 billion in equity, fixed income, hedge funds, private equity, and real estate and now has a 50 percent share in Hanjin terminals in Long Beach, Oakland and Seattle, Evergreen terminals in Los Angeles, Oakland and Tacoma and minority shares in Los Angeles West Basin Terminal.

The acquisition was financed by 20 percent equity from AIG and 80 percent debt syndicated by the Royal Bank of Scotland.³ The seven-year debt facility features a $540 million term loan, a $50 million revolving loan, and a $35 million second lien debt. Six banks, including Dexia, Nord LB, and BNP Paribas, committed in the region of $70 million, eight banks committed around $40 million and eleven took $25 million or less. The interest rate starts at 1.75 percent above the London inter-bank prime rate and decreases with the debt-to-earnings ratio. AIG’s after tax income on revenues was 12 percent in 2006 and 14 percent in 2007. The income on revenues from its asset management group, including the container terminals, is more than double the average of all of its business groups.⁴ Maintaining these corporate targets may require price increases at the terminals.

Macquarie Bank of Australia has a 20 percent interest in the three Hanjin terminals. Hanjin restructured its 50 percent interest in the Long Beach, Oakland, and Seattle, Tokyo, Osaka, and Kaohsiung terminals into a stand-alone operating company and then sold 40 percent of this business to Macquarie Bank of Australia at a price that valued the business at around $870 million.⁵ In 2006 Macquarie also purchased Halterm in Halifax, NS, for $173 million and in 2007 Fraser Surrey Docks LP in Surrey, BC.⁶ The Macquarie group manages over $35 billion in infrastructure equity around the world, including container terminals at Gdansk, Poland, and Changshu Xinghua, China.

In July 2007, Carrix Inc., Seattle, the parent company of Stevedoring Services of America sold a 49 percent interest to investment bank Goldman Sachs, NY. The $2.5 billion debt was syndicated by Citigroup, NY with eight other banks.⁷ Carrix owns 11 container terminals in the ports of Los Angeles, Long Beach, Oakland, Seattle, Panama, Mexico and Chile. The seven-year debt includes a $1.95 billion term loan, a $500 million capital expenditure commitment, and revolving loan. Interest starts at 1.5 percent over the London inter-bank prime rate adjusted by earnings to debt ratio. Goldman Sachs Infrastructure Partners investments in ports, airports, and regulated utilities achieved a return on equity of 33 percent in 2006.

Centerm in Vancouver was sold in February of 2006 to the Dubai-based DP World as part of a worldwide acquisition. In 2003, P&O Ports purchased Centerm from provincial government-owned BCR Marine for $106 million. An 80 percent interest in the similar size Montreal Gateway terminal was purchased by New York investment banker Morgan Stanley in February 2007 for $394 million.⁸

Deltaport and Vanterm and terminals in New York and New Jersey were sold in November 2006 to the Ontario Teacher’s Pension Fund for US $2.35 billion. OOCL reported a gain of $2.0 billion on the $2.35 billion sale.⁹ The NY Port Authority asked for a $37 million consent fee, security deposits, access to financial reports, and a 24 percent increase in lease rates.¹⁰ The equity portion of the investment was 20 percent and the remaining 80 percent was financed by the Bank of Scotland.¹¹

The Ontario Teachers’ Pension Plan net assets at the end of 2006 were $106 billion, investment income was $12 billion and rate of return was 13 percent.¹² A 7 percent return on the $1.2 billion loan and 13 percent on $300 million equity investment would require earnings of $123 million per year. This is double past before tax earnings but can be reached once berth 3 at Deltaport is operating and with increased throughput at Vanterm.

In July 2007, RREEF Infrastructure, a subsidiary of Deutsche Bank, acquired Maher Terminals LLC, operators of container terminals in Elizabeth, NJ, and Prince Rupert, BC for $2.1 billion. RREEF has $95 billion in assets under management world wide. ¹³ Deutsche Bank’s pre-tax target rate of return on equity is 25 percent and for the first quarter of 2007 was 41 percent. ¹⁴ The Royal Bank of Canada, Citigroup and Dexia provided $1.1 billion in debt.¹⁵ The seven-year facility featured an $800 million loan, a $260 million capital expenditure commitment, $35 million in working capital and an eight-year subordinated debt of $150 million. The pricing was based on a debt to earnings ratio, starting at 1.5 percent above the London inter-bank rate. The interest rate decreases to a minimum of 0.7 percent above prime when the debt is less than seven times the equity.

For the Prince Rupert container terminal this new financing adds about $192 per TEU to the required terminal tariff. A 7 percent return on the $800 million loan and 20 percent return on $200 million equity adds up to $96 million per year required for the bank lenders and Deutsche Bank’s infrastructure equity investors. However, the required returns provide a strong incentive and the financial resources for increasing the port throughput.

Our conclusion is that the recent equity investments and debt financing of container terminals are likely to increase marine terminal fees. The terminal purchases indicate the value of Canada’s four major Pacific Coast container terminals has grown from a total of $0.2 billion current assessed value to more than $2.3 billion market value. The new capitalization indicates a blended cost of capital of 8 percent equivalent to a $0.2 billion per year cash cost plus principal repayments. For example, $0.2 billion per year cost of capital on 3.7 million TEUs per year total throughput is equivalent to an added cost of $54/TEU, about 14 percent of the current average export terminal service tariff.

 

 

 

9.2 - Revenue, lease payments and income comparison

 

 

 

Information on the terminal revenues and lease costs for the major Pacific Coast container terminals is summarized in Exhibit 33. The average gross terminal revenue of Pacific coast container terminals is about $300 million per year. The US terminals have four berths, compared with two in Canada and Mexico. Terminal Systems’ sales revenues from Deltaport and Vanterm in 2007 are estimated from tariffs and throughput to be about $400 million. Based on past financial reports, earnings before interest, taxes, depreciation and amortization will be about $90 million and $45 million after tax. DP World’s Centerm sales and earnings would be expected to be about half that of Terminal Systems Incorporated.

The average lease payment per terminal in the US is about $15 million per year. The $15 million average includes only the fees based on developing the terminal site and used to repay port investments to fill in land, build on-site roads and rail tracks. US leaseholders pay additional fees for wharf use, dockage, and other services based on throughput. Some leaseholders, such as Mitsui at Oakland, have repaid the bonds early and the port registers the prepayment as income over the remaining term of the lease. For some leases in Oakland the lease payment declines as the principal is retired. Some terminal leases in Long Beach and Tacoma include an escalation clause indexed to the price index. The US lease payments are about 5 percent of gross revenue in the US and less than 1 percent in Canada and Mexico.

California port authorities regularly ask for higher payments from their long-term lease holders, and hold managed auctions with pre-agreed operators and carriers.¹⁶ As leases expire, port authorities put the lease out for bid and collect large lump sum payments and higher rents. For example, the City of Long Beach charter requires terminal leases to be renegotiated every five years allowing the municipality to capture a share of the increasing revenues from container business. The leases include a minimum payment based on the land area and a throughput charge based on the terminal tariff rates.

In Tacoma, the new 68-ha 1.8 million TEUs per year NYK Container Terminal is expected to open in 2012. It is designed for an annual capacity of 1.8 million TEUs per year with eight cranes. The port will build the terminal, and lease it to NYK for $40 million a year for 25 years.¹⁷

Exhibit 33 - Terminal Revenues and Leases 2007¹⁸

Terminal		Operator	Million TEU/y	Revenue $million/y	Berths	Expires	Lease $million/y
CKHY Alliance	LB Pier G & J North	K-Line	2.8	1,100	16	2022	34
	Oakland, Trans Bay	K-Line	0.2	66	2	2013	3
	Tacoma, Husky	K-Line	0.3	110	2	2025	7
	Grand All., LA Yusen	NYK	1.1	440	5	2016	12
Evergreen-AIG	LA	MTC	1.9	760	3	2028	11
	Oakland	MTC	0.4	132	2	2023	4
	Tacoma	MTC	0.4	150	2	2025	9
New World Alliance	LA, APL	APL-NOL	1.3	520	4	2026	20
	Oakland, Eagle	APL-NOL	0.3	100	4	2021	7
	Seattle Terminal 5	APL-NOL	0.4	150	3	2028	24
	LB, Pier E &F	Hyundai	1.0	400	5	2009	14
	Tacoma, Washington	Hyundai	0.3	110	2	2029	6
	LA Traypac	Mitsui OSK	1.2	480	5	2020	10
	Oakland Traypac	Mitsui OSK	0.2	66	1	2019	2
Maersk	LA	APM	1.5	600	6	2027	30
	Oakland	APM	0.8	260	5	2021	12
	Tacoma	APM	0.3	110	2	2015	10
AIG-MTC-Hanjin	LB, Hanjin Pier T	MTC	1.1	440	6	2027	42
	Oakland Hanjin	MTC	0.3	100	2	2026	7
	Seattle, Hanjin	MTC	0.4	150	2	2015	10
	Tacoma, Olympic	YM, MTC	0.3	110	1	2016	4
	LA, West Basin	YM, MTC	1.0	400	5	2011	15
Goldman Sachs – SSAM	Oakland	SSAM	0.4	130	3	2029	8
	Seattle T 18	SSAM	0.8	290	4	2032	22
	LB, Pier J South	Cosco, SSAM	1.3	520	8	2022	38
	LB, Pier A	CS, SSAM	0.8	320	3	2027	19
	US Average		0.8	310	4	15	15
Ontario Teachers	Deltaport	TSI	1.0	400	2	2059	2
	Vanterm	TSI	1.0	400	2	2022	2
DP, Van., Centerm			1.2	480	2	2055	2
Deutsche Bk, P. Rupert		Maher	0.5	100	1	2030	1
Canada average			0.9	345	2	35	2
Hutchison	Manzanillo		0.3	60	2	2019	1
	Lazaro Cardenas		0.4	80	1	2033	1
	Balboa		1.5	300	2	2022	1
Goldman,  Manzanillo		SSAM	0.5	100	2	2015	1
Mexico & Panama avg			0.7	135	2	15	1

 

 

 

In Canada total payments by container terminals to their host municipalities are about $4 million per year each, including municipal taxes and payment in lieu of taxes, as shown in Exhibit 34. By comparison the US container terminals pay much higher wharfage fees and an average lease payment of $15 million per year to their host municipality. Property taxes are relatively low, $1.4 million per terminal in Canada, because improvements are exempt from tax, cranes are excluded, and terminal owners are considered joint occupiers.¹⁹ Under BC’s Ports Competitiveness Initiative terminal property taxes have been capped at $27.50 per $1,000 of assessed value of land and improvements until 2019.²⁰ The total assessed value of the four terminals is $177 million, compared with the book value of $2.3 billion.

 

 

 

Exhibit 34 Payments to Host Communities 2007 (excludes wharfage)²¹

Terminal	Book Value $ million	Assessed Value $ million	Municipal $ millions/year	Payments in Lieu of Taxes $ Million
Deltaport	900	65.1	1.8	0.1
Centerm	400	44.5	1.9	1.0
Vanterm	600	39.7	1.7	1.0
Port of Vancouver	1,900	149.3	5.4	2.1
Fairview, Prince Rupert	400	28.0	0.0	0.5
Total	2,300	177.3	5.4	2.6
Average	575	44.3	1.4	0.6

We were surprised in our study by the finding that the top priority of the largest port in North America with the most modern container terminals is creating a superior quality of life in the port area. The City of Los Angeles’ set a goal in 2001 for the port to lead in innovation, efficiency, environmental performance, community outreach and involvement and appears to be achieving this goal. Urban renewal with many public amenities are a key component of the Port of Los Angeles’ competitiveness strategy.²² The Port successfully integrates port operations with community and recreational activities that are fun, educational, and inclusive of the entire community as shown in Exhibit 35.

Exhibit 35 - Port of Los Angeles Property Development 2007²³

 

 

 

Chamber of Commerce leaders also state that the Port’s economic competitiveness requires a mix of arts and cultural amenities. They are trying to make the Port area more attractive to workers and young professionals starting a career or business. The port economy and quality of life is considered to depend on retaining and growing arts and cultural assets, ethnic dining choices, coffee shops, bookstores, cafés, and galleries. Working closely with the Longshore Union and other stakeholders they are striving to make the port community a better place for workers to live.

 

 

 

The Port of Los Angeles has built a large club for family activities. A 2 km long strip of container ship channel has been redeveloped with a cruise ship terminal, maritime museum, fire boat display, restaurants, street car line, marina, historic boats, harbor tour operators, aquarium, bathhouse, historic buildings and public restrooms. They also have a separate bay for commercial fishing boats and a dozen small commercial fish receiving and processing rooms and fish market. This part of the Port used to be avoided and now has become a tourist draw. Major hotels in the area are set well back from the waterfront.

Long Beach also has created a “Green Port” area with access to the waterfront for fishing, a tourist attraction, the Queen Mary ship, and a world trade centre, and convention centre very close to the Port.

Our comparison of revenues, lease payments and incomes of marine container terminals indicates lower wharfage, lease rates and property taxes give Canadian terminals an advantage over the US. Although the average terminal size is similar, the total of lease payments, payments in lieu of taxes, and municipal property tax to host municipalities averages $4 million per year per terminal in Canada, compared with $15 million per year per terminal in the US. In the US lease rates are more frequently renegotiated.

Lease payments and taxes are higher in the US because the terminal land is owned by the host municipality, whereas in Canada the land is owned by the Federal government. Cities such as Los Angeles, Long Beach and Oakland have much more control of port activities than the City of Vancouver, Corporation of Delta and City of Prince Rupert. As a result, in the US, port operations provide more environmental and recreational benefits to their host communities.

 

 

¹ Port of Los Angeles, Financial Statements, 2006.

 

 

² Source: Compiled by Hanam Canada

³ Project Finance Magazine, June 2007. http://www.projectfinancemagazine.com/

⁴ American Insurance Group, New York. http://www.sec.gov/Archives/edgar/data/5272/000095012307007211/y32085e10vq.htm

⁵ Hanjin Shipping News Release, September 20, 2006. http://www.hanjin.com/en/news/060920.jsp?id=060920.jsp&backUrl=newsnotice.jsp&curPage=1&blockSize=5

⁶ Finance Asia.com, Hong Kong, Nov. 27, 2006. http://www.financeasia.com/print.aspx?CIID=69061

⁷ Project Finance, August 1, 2007. http://www.projectfinancemagazine.com/

⁸ Times Colonist, Victoria, February 23, 2007.

⁹ American Shipper, New York, August 3, 2007. http://www.americanshipper.com/SNW_story_main.asp?news=65530

¹⁰ American Shipper, New York, April 16, 2007. http://www.americanshipper.com/news/news_carrier_story.asp?news=55563

¹¹ Smartbrief.com, Washington, DC, February 1, 2007. http://www.smartbrief.com/news/aaaa/industryBW-detail.jsp?id=E8F859CC-4BE7-4673-B8AB-FD254F7746F9

¹² Ontario Teachers’ Pension Plan, Toronto. http://www.otpp.com/web/website.nsf/web/fastfacts

¹³ RREEF Infrastructure, New York, News Release, September 2, 2007. https://www.rreef.com/cps/rde/xchg/infr_en/hs.xsl/2250.html

¹⁴ Newratings.com, May 10, 2007. http://www.newratings.com/analyst_news/article_1529985.html

¹⁵ Project Finance, June 2007. http://projectfinancemagazine.com/

¹⁶ Jeffrey D. Holt, Vice President Municipal Finance, Goldman Sachs, New York. February 16, 2007. http://www.americanshipper.com/SNW_story_main.asp?news=49632

¹⁷ The Signal, August 2, 2007. http://www.miltonedgewoodsignal.com/article/181

¹⁸ Source: Compiled by Hanam Canada.

¹⁹ BC Community Charter, Port Improvements (Berth Corridor) Tax Exemption Regulation, April 30, 2004. http://www.qp.gov.bc.ca/statreg/reg/C/CommuCharter/198_2004.htm#section2

²⁰ BC Ministry of Finance, News Release September 11, 2007. http://www2.news.gov.bc.ca/news_releases_2005-2009/2007FIN0024-001108.htm

²¹ Source: Corporation of Delta, City of Vancouver, and City of Prince Rupert

²² Geraldine Knatz, Port Executive Director, Port of Los Angeles, San Pedro Business Journal, October-November 2007.

²³ Photos: Hanam Canada

 

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