F INANCIAL S TATEMENTS

Transcription

1 F INANCIAL S TATEMENTS Ports America Chesapeake, LLC As of December 31, 2011 and 2010, Year Ended December 31, 2011, and Period From January 12, 2010 (Inception) Through December 31, 2010 With Report of Independent Auditors

2 Financial Statements As of December 31, 2011 and 2010, Year Ended December 31, 2011, and Period From January 12, 2010 (Inception) Through December 31, 2010 Contents Report of Independent Auditors...1 Balance Sheets...2 Statements of Operations...3 Statements of Member s Equity...4 Statements of Cash Flows...5 Notes to Financial Statements

3 Ernst & Young LLP Ernst & Young Tower One Renaissance Square Suite North Central Avenue Phoenix, AZ Tel: Fax: To the Member of Ports America Chesapeake, LLC Report of Independent Auditors We have audited the accompanying balance sheets of Ports America Chesapeake, LLC (the Company) as of December 31, 2011 and 2010, and the related statements of operations, member s equity, and cash flows for the year ended December 31, 2011 and for the period from January 12, 2010 (inception) through December 31, These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ports America Chesapeake, LLC at December 31, 2011 and 2010, and the results of its operations and its cash flows for the year ended December 31, 2011 and for the period from January 12, 2010 (inception) through December 31, 2010 in conformity with U.S. generally accepted accounting principles. April 11, 2012 ey A member firm of Ernst & Young Global Limited

4 Balance Sheets (In thousands) Assets Current assets: Cash 5,838 December 31, $ $ 6,899 Trade accounts receivable, net 14,869 11,712 Receivables from affiliates 11,930 1,386 Inventories 1,954 1,956 Prepaid expenses and other current assets 1, Total current assets 36,080 22,291 Cash restricted 63, ,952 Property and equipment, net 181, ,144 Other intangible assets, net 45,795 46,826 Prepaid rent 20,561 20,989 Deferred financing costs, net 11,530 12,256 Total assets $ 358,406 $ 346,458 Liabilities and member s equity Current liabilities: Accounts payable $ 10,227 $ 2,769 Accrued expenses and other current liabilities 4,997 5,139 Payable to affiliates 7,042 1,968 Total current liabilities 22,266 9,876 Deferred rent Capital lease and concession obligations 41,899 41,519 Long-term debt, net of unamortized discount of $3,318 and $3,523 at December 31, 2011 and 2010, respectively 245, ,152 Total liabilities 310, ,837 Member s equity 48,322 49,621 Total liabilities and member s equity $ 358,406 $ 346,458 See accompanying notes

5 Statements of Operations (In thousands) Period From January 12, 2010 (inception) Year Ended through December 31, December 31, Stevedoring and terminal operations revenue $ 88,695 $ 63,694 Labor brokerage and other revenue related party 31,511 44,528 Total revenue 120, ,222 Operating costs and expenses: Labor stevedoring and terminal operations 39,023 31,673 Labor brokerage 26,724 35,451 Insurance 2,733 2,243 Equipment 5,074 3,702 Facilities 3,506 3,621 Depreciation and amortization 9,435 9,355 Other 3,347 1,055 89,842 87,100 Selling, general and administrative 4,415 3,688 Total operating costs 94,257 90,788 Operating income 25,949 17,434 Interest expense (14,324) (15,813) Net income $ 11,625 $ 1,621 See accompanying notes

6 Statements of Member s Equity (In thousands) Balance at January 12, 2010 (inception) $ Capital contributions 75,000 Net income 1,621 Capital distributions (27,000) Balance at December 31, ,621 Net income 11,625 Capital distributions (12,924) Balance at December 31, 2011 $ 48,322 See accompanying notes

7 Statements of Cash Flows (In thousands) Period From January 12, 2010 (inception) Year Ended through December 31, December 31, Operating activities Net income $ 11,625 $ 1,621 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 9,482 9,367 Amortization of deferred financing costs Amortization of bond discount Long-term accrued interest Loss on sale of equipment 3 Changes in operating assets and liabilities Change in restricted cash 5,864 (8,653) Trade accounts receivable (3,361) (11,508) Amounts due to and from affiliates (5,470) 361 Prepaid expenses and other current assets (945) (2,498) Prepaid rent 428 (20,989) Accounts payable and accrued expenses (403) 7,205 Deferred rent Net cash provided by (used in) operating activities 18,805 (23,722) Investing activities Purchases of equipment (39,902) (74,012) Change in restricted cash 32,964 (70,755) Net cash used in investing activities (6,938) (144,767)

8 Statements of Cash Flows (continued) (In thousands) Period From January 12, 2010 (inception) Year Ended through December 31, December 31, Financing activities Proceeds from bonds, net of discounts $ $ 244,955 Principal payments on concession obligations (82,292) Financing costs (12,731) Increase in restricted cash (4) (22,544) Contribution of capital 75,000 Distribution of capital (12,924) (27,000) Net cash (used in) provided by financing activities (12,928) 175,388 Net (decrease) increase in cash (1,061) 6,899 Cash at beginning of year 6,899 Cash at end of year $ 5,838 $ 6,899 Supplemental disclosures of cash flow information Cash paid for interest, net of amounts capitalized $ 16,839 $ 15,001 Noncash investing and financing activities Acquired property and equipment under capital lease $ $ 75,765 concession obligation Acquired intangible assets - concession obligation $ $ 47,857 Accrued property costs $ 7,719 $ 703 Financing costs payable to related party $ $ 221 See accompanying notes

9 Notes to Financial Statements December 31, Nature of Operations Ports America Chesapeake, LLC (the Company or PAC) was formed under the laws of the state of Delaware. The Company was originally incorporated on September 15, 2009 as Ports America Chesapeake, Inc. and converted to Ports America Chesapeake, LLC on January 12, The Company is a wholly owned subsidiary of Ports America Baltimore, Inc. (PAB). The Company was organized to operate the Seagirt Terminal at the Port of Baltimore (Port), Maryland. The Company s operations include providing stevedoring, terminal services including railcar loading and unloading, terminal equipment and terminal computer systems, as well as providing brokered labor and other services to related parties. Operations at the Port commenced on January 12, 2010 in conjunction with the Maryland Port Authority s grant of the exclusive right to operate certain berths at the Seagirt terminal to the Company for a term of 50 years beginning on that date. 2. Summary of Significant Accounting Policies Revenue Recognition Revenue is primarily derived from stevedoring and marine terminal operations provided under contracts with customers. Revenue is also derived from providing brokered labor and other administrative services to related parties. Revenue is recognized generally as services are performed which is when persuasive evidence of an arrangement exists, the services are rendered to the customer, the price is fixed or determinable and collectability is reasonably assured. Inventory Inventory is stated at the lower of average cost or market and consists of crane and other repair parts. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates

10 2. Summary of Significant Accounting Policies (continued) Fair Value of Financial Instruments The Company s financial instruments consist mainly of cash and cash equivalents, trade accounts receivable, and trade accounts payable. The fair values of cash and cash equivalents, trade accounts receivable and trade accounts payable approximate their carrying amounts due to their short-term nature. Cash Cash represents bank deposits that can be withdrawn at any time. Restricted Cash The Company has restricted cash consisting of bond issue proceeds held in trust at Wells Fargo Bank amounting to $63.1 million and $102.0 million as of December 31, 2011 and 2010, respectively. These funds are restricted for the build-out and refurbishment of certain facilities at the Seagirt terminal as part of the concession agreement (see Notes 5 and 8). Allowance for Doubtful Accounts The Company s management determines and periodically reviews the allowance for doubtful accounts based on the aging of account balances, historical write-off experience, changes in customer creditworthiness, and industry trends. A valuation allowance is provided for known and anticipated credit losses. Customer account balances are charged off against the allowance after all means for collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts was $0.05 million at both December 31, 2011 and Concentration of Credit Risk As of December 31, 2011, and at various times during the year, the Company maintained cash balances in its bank in excess of federally insured limits. Given the current economic environment and risks in the banking industry, there is risk that these deposits may not be readily available or covered by insurance

11 2. Summary of Significant Accounting Policies (continued) The Company grants credit to its customers on an unsecured basis. However, for stevedoring services, which represented 27.9% of total revenue in 2011, the Company has certain rights to perfect liens as provided under maritime law. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that trade accounts receivables credit risk exposure is limited. A valuation allowance is provided for known and anticipated credit losses. Long-Lived Assets Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment annually or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of an asset is measured by comparison of the carrying amount of the asset to the net undiscounted future cash flows expected to be generated from the asset. If the future undiscounted cash flows are not sufficient to recover the carrying value of the asset, the asset s carrying value is adjusted to fair value. Property and Equipment Property and equipment are recorded at cost, including applicable construction-period interest, and depreciated over the applicable estimated useful lives. On January 12, 2010, the Company placed into service capitalized stevedoring and terminal equipment costs and construction costs incurred in preparation of the Company s operations of the terminal which commenced January 12, Included in property and equipment are assets under capital lease. Depreciation is provided over the estimated useful lives of the various assets, ranging from 1 to 20 years, using the straight-line method of depreciation. Leasehold improvements are amortized over the shorter of the useful life or term of the lease. Maintenance and repairs are charged to expense as incurred while major remodels or improvements are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income. Intangible Assets In connection with the commencement of operations under the Concession described in Note 5, the Company recorded intangible assets relating to the concession granted and a right of first refusal to lease additional land for development. Intangible assets are amortized on a straight-line basis over their anticipated economic useful lives

12 2. Summary of Significant Accounting Policies (continued) Deferred Financing Cost Deferred financing costs are capitalized and amortized as interest expense using the effective interest method over the term of the related obligation. The unamortized value of deferred financing costs amounted to $11.5 million and $12.3 million as of December 31, 2011 and 2010, respectively. During both 2011 and 2010, the Company recorded $0.7 million in interest expense representing amortization of these deferred financing costs. Interest Expense Interest expense is presented net of amounts capitalized. Interest expense is subject to capitalization as a construction-period cost of property, and equipment. Income Taxes The Company is a limited liability company and has elected to be treated as a partnership for federal and state tax purposes and, accordingly, the income or loss of the Company will be included in the returns of its members. As a result, no provision for income taxes has been recorded in these financial statements. Reclassifications Certain amounts in the 2010 financial statements have been reclassified to conform to the current year presentation. New Accounting Pronouncement In September 2011, the FASB issued an accounting standard update requiring companies participating in multi-employer pension plans to disclose more information about their involvement in those plans. Retrospective application of the disclosures is required. This guidance is effective for the Company for the fiscal year ending December 31, The Company is currently evaluating the impact of adopting this standard and is uncertain as to the impact, if any, on the Company s financial position, results of operations or cash flows

13 3. Property and Equipment Property and equipment consisted of the following (in thousands): Useful Lives December 31, Assigned Stevedoring equipment 7 15 years $ 37,564 $ 34,561 Buildings and leasehold improvements 7 20 years 76,671 76,400 Computer hardware and software 3 7 years 1,620 1,170 Assets not yet placed in service 82,242 38, , ,480 Less accumulated depreciation (16,786) (8,336) Property and equipment, net $ 181,311 $ 142,144 At December 31, 2011 and 2010, buildings and leasehold improvements includes assets substantially financed with capital leases as a result of the Concession described in Note 5 with a cost of $75.8 million and accumulated depreciation of $9.9 million and $4.9 million, respectively. Depreciation expense related to property and equipment, which included amortization for assets under capital leases, was $8.5 million and $8.3 million at December 31, 2011 and 2010, respectively. The Company capitalized construction-period interest of $3.4 million and $1.1 million during 2011 and 2010, respectively. Computer hardware and software includes capitalized software costs of $0.5 million and $0.4 million at December 31, 2011 and 2010, respectively with related accumulated amortization of $0.3 million and $0.1 million, respectively. Amortization of capitalized software costs totaled $0.2 million and $0.1 million for 2011 and 2010, respectively. At December 31, 2011 and 2010, the unamortized cost of capitalized software was $0.2 million and $0.3 million, respectively. The weighted average amortization period for capitalized software is three years. 4. Related-Party Transactions During 2011 and 2010, the Company provided stevedoring labor, management labor and certain administrative services to PAB for total revenue of $31.5 million and $44.5 million, respectively. As of December 31, 2011 and 2010, $4.3 million and $1.1 million, respectively, was due from PAB

14 4. Related-Party Transactions (continued) During 2011 and 2010, American Intermodal Services, Inc (AIS), an affiliate, provided crane mechanic and related services to PAC. For 2011 and 2010, the Company incurred $2.0 million in each year for such services. At December 31, 2011 and 2010, $1.6 million and $0.4 million, respectively, was due to AIS for these services. Ports America Insurance Company (PIC), an affiliate, provides insurance coverage to PAC. Among the insurance coverage provided are: workers compensation; property and terrorism risk; cargo/general liability; asbestos liability; and auto liability. For 2011 and 2010, the Company incurred $1.8 million and $2.2 million, respectively, for such services. PAC also incurs insurance costs from other unrelated commercial insurance providers which are paid in advance by PIC and expensed monthly by PAC. As of December 31, 2011, $0.4 million was prepaid to PAC, and at December 31, 2010, $0.9 million was due to PIC for insurance premiums. During 2010, the Company entered into an agreement with Ports America, Inc. (PAI) whereby PAI provides management services for a monthly fee. For 2011 and 2010, the Company incurred $0.8 million for such services. As of December 31, 2011 and 2010, $1.2 million and $0.3 million was due to PAI for the services. During 2010, PAI paid for financing costs of $0.2 million on behalf of PAC in connection with the bond issue which is further described in Note 5 below. As of December 31, 2010, $0.2 million was due to PAI for the financing costs. During 2010, PAB sold equipment to PAC at a net book value of $0.5 million. No amounts were due to PAB as of December 31, PAB, in connection with the bond issue, which is further described in Note 5 below, made an equity contribution of $75.0 million to PAC in Also in 2011 and 2010, PAC provided capital distributions of $12.9 million and $27.0 million, respectively, to PAB. The Company has a performance surety bond (the Surety Bond) in favor of the Maryland Port Administration for $3.2 million expiring on January 12, 2013 that was put in place by PAI as principal. The Company has irrevocable letters of credit that have been taken out on the Company s behalf by an affiliate. These letters of credit serve as collateral on the revenue bonds (discussed in Note 5) and the Surety Bond and amount to $11.9 million as of December 31, 2011, and expire on May 13, For the years ended December 31, 2011 and 2010, the Company has incurred no interest expense or fees on the letters of credit

15 5. Long Term Debt Concession Agreement Beginning January 12, 2010, the Company entered into a concession and lease agreement (the Concession) with the Maryland Port Authority to operate the Seagirt Terminal for a term of 50 years. The Concession gives the Company the exclusive right to operate all berths at the Seagirt terminal over the life of the Concession. The Concession required an up-front fee payment of $140.0 million and requires minimum basic monthly rental payments, and additional fees based on the volume of movements through the Terminal. The Concession includes both tangible and intangible assets that were recorded at their relative fair value of the present value of the Company s minimum cash flows associated to the agreement. As a result of recording the tangible and intangible assets acquired under the Concession, the Company recorded corresponding capital lease and other concession obligations (the Concession Obligations) of $75.8 million and $47.9 million, respectively. During 2011, and in accordance with the amortization schedule for the concession obligations, there were no payments applied toward principal on the concession obligations. During 2010, the Company made up front principal payments on the capital lease and other concession obligations of approximately $50.5 million and approximately $31.9 million, respectively. Real property acquired as part of the Concession (discussed in Note 3) was valued using the market approach. The market approach is a technique used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date. Intangible assets acquired as part of the Concession (discussed in Note 6) were valued using the income approach. The income approach explicitly recognizes that the current value of an asset is premised on the expected receipt of future economic benefits generated over its remaining life. Bonds Payable The Company entered into an agreement with the Maryland Economic Development Corporation related to a Transportation Facility Revenue Bond for $166,920,000 and a Terminal Project Revenue Bond for $81,755,000. The Company recorded $3.7 million as bond discount and amortized $0.2 million in both 2011 and 2010 resulting in an unamortized balance of $3.3 million and $3.5 million as of December 31, 2011 and 2010, respectively. The amortization of bond discount costs is included in interest expense. The terms of the bonds require principal

16 5. Long Term Debt (continued) payments starting in June 2016 until maturity date (June 2035). The bonds are secured by the cash flows from operations of the Seagirt Terminal and assets constructed with their proceeds. The interest rates on the bonds range from 5.125% to 5.75%, with interest payable semiannually. Interest accrued and not paid on the bonds as of both December 31, 2011 and 2010 was $1.2 million. Principal maturities of the bonds and the Concession Obligations for each of the next five years as of December 31, 2011 is as follows (in thousands): Bonds Concession Obligations Total 2012 $ $ $ ,170 2,170 Thereafter 243,187 41, ,086 Totals $ 245,357 $ 41,899 $ 287,256 Payments on the Concession Obligations through 2031 are applied entirely toward interest with a remaining unpaid portion of interest being accretive to the Concession Obligations. Interest paid and accreted on the Concession Obligations throughout 2011 amounted to approximately $2.5 million and $0.4 million, respectively. Interest paid and accreted on the Concession Obligations throughout 2010 amounted to approximately $2.3 million and $0.3 million, respectively. Beginning in 2032, payments on the Concession Obligations will be applied toward both interest and principal until the principal is fully paid by Intangible Assets, Net On January 12, 2010, with the commencement of the Concession, the Company recorded an intangible asset related to the right to operate the terminal. The value attributed to this right was $47.0 million. The Company is amortizing this intangible asset over the term of the Concession of 50 years

17 6. Intangible Assets, Net (continued) PAC has a one-time right of first refusal to operate or lease the Seagirt Intermodal Container Transfer Facility (ICTF Option) which would require additional rents of $30,000 per acre per year. The value attributed to this right was $0.9 million. The Company is amortizing this intangible asset through October 2019, which is the estimated economic life of the ICTF Option. During both 2011 and 2010, the Company recorded $1.0 million in amortization expense related the intangible assets arising from the Concession granted and the ICTF Option. The carrying amount and accumulated amortization of identifiable intangible assets acquired as a result of the Concession consisted of the following (in thousands): December 31, Identifiable intangible assets: Intangible assets subject to amortization: Concession and operating agreements $ 46,950 $ 46,950 Right of first refusal Total identifiable intangible assets 47,857 47,857 Less accumulated amortization (2,062) (1,031) $ 45,795 $ 46,826 The following is a summary table representing the remaining amortization of identifiable intangible assets with definitive lives, by year, as of December 31, 2011 (in thousands): 2012 $ 1, , , , , and thereafter 40,640 $ 45,

18 7. Lease In connection with the Concession agreement, the Company has allocated its non-cancelable minimum Concession lease payments between an operating lease and the Concession Obligations. The Concession operating lease relates to the use of land at the Seagirt Terminal. The Concession operating lease requires minimum basic monthly rental payments, additional fees based on the volume of movements through the Terminal and requires the Company to pay all executory costs such as maintenance and insurance. Rental payments include minimum rentals plus contingent rentals and are recorded within facilities expense. Minimum rent payments under the operating lease are recognized on a straight-line basis over the term of the lease including any periods of free rent. Rental expense for the Concession operating lease was $1.4 million in 2011 and $1.4 million in Future minimum lease payments under the Concession operating lease and for the Concession Obligations as of December 31, 2011 are (in thousands): Concession Operating Lease Concession Obligations Totals 2012 $ 661 $ 2,539 $ 3, ,539 3, ,577 3, ,616 3, ,655 3, and thereafter 41, , ,075 Total minimum lease payments $ 45, ,062 $ 219,366 Less amount representing interest (132,163) Present value of minimum lease payments $ 41,899 The cost of the assets under capital leases was approximately $75.8 million as of December 31, 2011 and 2010, with accumulated amortization of $9.9 million and $4.9 million, respectively. The cost of the concession intangible assets as of both December 31, 2011 and 2010 was $47.9 million, with accumulated amortization of $2.1 million and $1.0 million, respectively

19 8. Commitments and Contingencies Liabilities for loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines, and penalties and other sources, are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Concession obligates the Company to build out and refurbish certain facilities at the terminal. Improvements commenced in 2010 and the Company has $37.8 million in contractual construction and purchase commitments remaining outstanding at December 31, Approximately 85% and 84% of the Company s payroll is covered through collective bargaining agreements for 2011 and 2010, respectively. The current bargaining agreements with various unions will expire on September 30, The Company, as signatory to union collective bargaining arrangements, can be subject to pension withdrawal liabilities associated with certain under-funded multiemployer pension plans. The amount of contingent liability associated with these contracts, if any, has not been determined, and only applies if the Company were to cease doing business in the port areas subject to withdrawal liability provisions. Pension contributions by the Company to the multiemployer pension plans amounted to $2.8 million and $2.1 million for 2011 and The Company, through an affiliate, provides a 401(k) savings plan (the Plan) for its nonunion full-time employees. These employees are eligible to join immediately upon employment with the Company. The Company provided a matching contribution of 75% of the employees contributions up to 6% of the employees salary in 2011 and The total contributed by the Company amounted to approximately $0.2 million in 2011 and $0.1 million in Subsequent Events The Company has evaluated subsequent events from the balance sheet date through April 11, 2012, the date at which the financial statements were available to be issued, and determined there are no other items to disclose