THE VIRGIN ISLANDS PORT AUTHORITY FISCAL YEAR 2018 OPERATING AND CAPITAL BUDGET SUMMARY STATEMENT

Transcription

1 THE VIRGIN ISLANDS PORT AUTHORITY FISCAL YEAR 2018 OPERATING AND CAPITAL BUDGET SUMMARY STATEMENT

2 Table of Contents I. Introduction...4 The Authority...4 FY2018 Budget in Overview...4 The Numbers at a Glance...5 II. The Economic Background Used for FY 2017 Budget Preparation Hurricane Season...6 Expected Near-Term Economic Conditions...8 Significant Factors for World Tourism U.S.V.I. Tourism Factors III. Forecast of U.S.V.I. Air and Cruise Passengers IV. Strategic Goals and Initiatives V. Budget Summaries Operating Budget Summary Capital Budget Summary Cash Flow Budget Summary APPENDICES -SCHEDULES P a g e

3 I. Introduction Presented herewith is the budget for the Virgin Islands Port Authority ( VIPA or Authority ) for the fiscal year ending September 30, 2018 (the FY2018 Budget ). The FY2018 Budget has been prepared in accordance with the budgetary policy established by the VIPA Governing Board in the statement of Financial Policies for the Virgin Islands Port Authority. The Authority The Authority was established by Virgin Islands law (Act No. 2375) as a public corporation and autonomous governmental instrumentality of the Government of the Virgin Islands. Its statutory purpose is to own, manage and operate the air and marine ports and facilities and to control the harbors of the U.S. Virgin Islands and to make economic and other benefits available in the widest economic manner to promote the general welfare and to increase commerce and prosperity. The Authority is expected to be financially self-sufficient and does not receive funding from the General Fund of the Government of the Virgin Islands. Accordingly, it is statutorily authorized to charge and collect fees, dues and charges for the use of its facilities. Through its Aviation Division, the Authority owns and operates two airports: The Cyril E. King Airport (CEKA) on St. Thomas and the Henry E. Rohlsen Airport (HERA) on St. Croix. Through its Marine Division, the Authority owns and operates marine cargo and passenger facilities on St. Thomas, St. Croix, and St. John. FY2018 Budget in Overview In the aggregate, the FY2018 Budget anticipates operating expenses, excluding depreciation, of $47M, debt service cost of $4.6M, and capital expenditures of $41.4M for a total outlay of $93M. Table 1: FY2018 Budget Aggregate Outlays (In $1,000's) FY2018 Bdgt. FY2017 Bdgt. FY2016 ACT. FY2015 Act. FY2014 Act. FY20 13 Act. Operating Expense [1] $47,017 $44,599 $54,342 $43,760 $45,868 $43,530 Debt Service 4,556 5,479 4,553 3,861 3,614 3,617 Capital Expenditure 41,401 44,747 14,749 17,743 28,088 13,521 Total $92,974 $94,825 $73,644 $65,364 $77,570 $60,668 Depreciation Expense $17,587 $17,510 $17,587 $17,179 $19,239 $20,451 [1] Excluding depreciation. These outlays are funded by $57.3M from current revenues (operating fees and charges), $121K from renewal and replacement reserves, $2. 3M from passenger facility charges, $449K from car rental facility charges, $19.7M from capital grants, $5.8M from cash on hand, $500K from government grants (PFA) and $7.8M from debt funded marine proceeds- a total of $93.9M. [See Table 2] 4 P a g e

4 Table 2: FY2018 Budget Aggregate Resources (In $1,000's) [2] FY2018 Bdgt [1] FY2017 Bdgt FY2016 Bdgt Operating Revenues $57,327 $54,696 $54,587 Renewal & Replacement Reserve Passenger Facility Charges 2,260 2,232 2,932 Car Rental Facility Charges Capital Grants 19,651 14,181 7,162 Cash Reserves & Other 5,822 4,272 2,193 Government Grants Debt Funded Marine Projects 7,835 21,640 15,707 [1] FY 2018 Cash Flow Budget [2] Inclusive of Cash Reserves $93,965 $98,266 $82,819 The Numbers at a Glance revenues of $57.3M are $2.6M higher ( 5%) when compared to the $54.7 budgeted for FY2017; however, when compared to the projected FY2017 revenue collections of $55.5M (See Schedule 4), FY2018 revenues of $57.3M are $1.8M higher ( 3.3 %). because of increases in Marine fees. Aviation When compared to projected FY2017 revenues of $25.0M (See Schedule 5), aviation revenues for FY2018 of $25.3M are $250K higher ( 1 %). In contrast, aviation revenues for FY2018 ($25.3M) when measured against the FY2017 budget ($25M), reflects an increase of 3.2%. As depicted below, passenger activity in FY2017 is partially correlated to a moderate increase in revenues for FY2018: CEKA is expected to end FY2018 with approximately 795,427 enplaned passengers ( 2.05%) percent from the 779,463 of FY2017; HERA is expected to end FY2018 with approximately 224,573 enplaned passengers ( 1.8%) percent from the estimated 220,537 in FY2017; and, In Total VIPA should have approximately 1,020,000 enplanements for FY 2018 ( 2%) percent from the estimated 1,000,000 in FY2017. Marine When compared to FY2017 projected revenue collections of $30.4M (See Schedule 6), marine revenues anticipated for FY2018 of $32.0M are $1.6M higher ( 5.2%). Conversely, when marine revenues projected for FY2018 ($32.0M) are measured against the FY2017 budget ($30.2M), marine revenues suggest an increase of $1.8M ( 6.1%). core operating expenses of $47M reflects a ( 9%) increase when compared to the FY2017 year-end estimate of $43.1M. When measured against last year s 5 P a g e

5 budget, core operating expenses also realized a $2.4M ( 5.42%) increase. Using the FY2017 year-end estimates, the assumptions underlying core operating expenses are as follows: Payroll cost are expected to increase by $3.8K ( 16.4%), largely because of the implementation of negotiated salary increases of (2% to 2.5%), and a projected 5% increase in medical insurance, and 5% increase in dental insurance. Maintenance costs are expected to increase by $64K ( 2.4%). Materials and supplies, are anticipated increase by $94K ( 7.4%) Professional services are expected to increase by $86K ( 1.8%) due to security & service contracts for recurring mandatory costs and re-certifications. Insurance remains the same as a result of a flat market. Utilities is anticipated to be increased by$725k ( 13.3%), due to VIWAPA increase on commercial property electricity. Travel and related expenses are expected to decrease by $2K ( -0.3%). Other expenses are expected to decrease by $863K ( 30.9%). II. The Economic Background Used for FY 2017 Budget Preparation 2017 Hurricane Season On September 6, 2017, the U.S. Virgin Islands were struck by Hurricane Irma, the strongest storm ever measured in the Atlantic Ocean. With wind speeds in excess of 185 miles per hour, the category 5 hurricane resulted in catastrophic destruction. The islands of St. Thomas and St. John sustained the most damage with several hotels reporting significant property damage. Nevertheless, JetBlue resumed passenger flights to the Virgin Islands on September 8 th, followed by American Airlines on September 12 th. Both airlines subsequently suspended flights as Hurricane Maria approached and made landfall on September 20, 2017 causing significant damage to St. Croix which had experienced relatively minimal damage from Hurricane Irma. The recovery process has commenced; however, the effects of the storms have threatened the economicallycritical, winter tourism season. According to the Federal Emergency Management Agency ( FEMA ), a coordinated response to in response to Hurricane Irma is presently underway. Highlights of the FEMA s recovery efforts, obtained from the official FEMA website as of September 20, 2017, are provided below. The FEMA Incident Management Assistance Team has been deployed to the Virgin Islands and Puerto Rico. In addition, a FEMA Urban Search and Rescue Incident Support Team, Six Mobile Emergency Response Support personnel and a Virginia Task Force Two (VA- TF2) were also deployed to the Virgin Islands to assist in recovery efforts. 6 P a g e

6 Through a network of distribution centers, FEMA recently provided more than 443,000 meals, 146,000 liters of water and 56 rolls of tarps to the Virgin Islands. The American Red Cross has coordinated a major response, which includes the Virgin Islands. The U.S. Department of Labor will provide funding and grants to evaluate workforce needs in the Virgin Islands, Puerto Rico, Florida, and other states effected by Hurricane Irma. The US Department of Health and Human Services is maintaining two medical teams in Puerto Rico and four additional teams throughout the region effected by Hurricane Irma. The U.S. Small Business Administration will provide low interest disaster loans to Virgin Islands residents and businesses to assist with recovery. The U.S. Army Corps of Engineers has deployed four Power Planning and Response Teams in Puerto Rico, the Virgin Islands, Florida, and South Carolina to supply temporary power. The U.S. Northern Command is assisting with urban search and rescue efforts in the Virgin Islands. The Department of the Interior has expressed its intent to provide all possible support and assistance to all areas affected by the hurricane, including the Virgin Islands. In addition, the Interior s Office of Insular Affairs is working with both the Virgin Islands government and FEMA to identify Federal technical expertise and financial assistance that may be available to help get public facilities and services back up. The U.S. Marine Corps has deployed approximately 1,000 Marines in the Caribbean to assist with recovery. The U.S. Coast Guard is working with the Virgin Islands to assess damage and to inspect port facilities. The National Park Service Eastern Incident Management Team is coordinating recovery operations specific to Virgin Islands parks. In addition to the federal relief efforts, various other efforts are also underway. Despite these efforts, a full recovery will likely take many months. Notwithstanding the significant impact of the recent storms, the following sections provide a discussion of the global, national and Virgin Islands economies. Economic Conditions Tourists and cargo from all over the world enter and leave the U.S. Virgin Islands through its airport and marine facilities. With tourism as the economic cornerstone of the Virgin Islands, the economy is largely dependent upon its ports. Per 2016 statistical information provided by the World Travel & Tourism Council, travel and tourism contributed to approximately 31.8% of the Virgin Islands GDP and accounted for nearly 28.5% of all jobs. As the provider of physical gateways to and from the Virgin Islands, the Port Authority remains largely dependent upon 7 P a g e

7 tourism and travel to generate revenue. Therefore, a brief analysis of expected mainland economic activity, as well as issues impacting air and cruise travel, is vital in preparing the budget. This section of the budget provides background information and forecasts on those external economic issues. Key areas of focus include trends in business activities, industry, income, employment levels, the (Real) Gross Domestic Product, inflation, and climate. Based on the most current information from the U.S.V.I. Bureau of Economic Research (the USVI BER ), the Virgin Islands hosted a total of 2,573,574 arriving tourists in 2016, representing an overall 2.6% decrease compared to 2015 arrivals. Arrival by cruise ship accounts for 69.0% of the 2016 total, which represented a decline of 5.4% compared to the previous year. Air arrivals accounted for 31.0% of all 2016 arrivals, which was an increase of 4.3% compared to According to the USVI BER, for the first quarter 2017, air arrivals were trending at a rate of 8.3% above those measured for the first quarter of Over the same period, cruise arrivals were trending down by 16.8%. With an estimated resident population of 104,116 in 2015, according to the USVI BER, this means during 2016 there were approximately 25 tourist arrivals for each Virgin Islander. If the 2016 tourist arrivals were spread evenly throughout the year, there would be 2,183 incoming air passengers and 4,867 incoming cruise passengers each day. The US Virgin Islands government has made it a priority to evaluate the tourism industry and its position as a Caribbean and global destination. In fact, the Federal Economic Development Administration recently awarded grant funding to the USVI BER to conduct a 2017 Tourism Master Plan. The USVI BER is anticipated to commence work on the plan in the fall of The Virgin Islands and its related tourism industry remains vulnerable to storms. On September 6, 2017, a category 5 hurricane, Irma, made landfall, resulting in catastrophic damage. On September 20, Hurricane Maria also made landfall. The 2017 hurricane season continues, with additional storms forecasted in the vicinity of the Virgin Islands. See Storm Damage above. Expected Near-Term Economic Conditions Global economic growth was projected by the World Bank in its June 2017 Global Economic Forecast. The June 2017 report also forecast an upturn in growth for the United States. Economic conditions for the Virgin Islands, as reported by the USVI BER, are projected to be somewhat tempered for 2018 and beyond due to uncertainties surrounding fiscal conditions. The following sections provides a detailed financial outlook for the world, the United States, and the Virgin Islands. The World Economy The World Bank projects economic growth of 2.7% for 2017, which represents an increase from 2.6% that was estimated for For 2018 and 2019, 8 P a g e

8 annual growth has been forecasted at 2.9%. The estimates reflect assumptions that investment in advanced economies will continue to strengthen, with concurrent slow growth in private consumption. Despite its deceleration in early 2017, private consumption continues to be sustained by general improvements in the labor market. In its report, the World Bank indicated that risks to the global outlook remain tilted to the downside. These include increased trade protectionism, elevated economic policy uncertainty, the possibility of financial market disruptions, and, over the longer term, weaker potential growth. The United States appears to be one of the strongest world economies, with projected growth in Europe and Japan lagging. Despite the comparatively lower growth projections, the outlooks for Europe and Japan were upgraded by the World Bank due to an increased domestic demand for exports. Advanced economies were projected to demonstrate growth of 1.9%, 1.8% and 1.7% for 2017 through 2019, respectively. Growth rates for emerging and developing economies for 2017 through 2019 were projected growth of 4.1%, 4.5% and 4.7%, respectively. The following table is based on information obtained from the Word Bank and provides the Real GDP growth for the World, advanced economies and emerging and developing economies. Actual percentages are provided for each of the years 2014 and 2015, with an estimated percentage for 2016 and forecasted percentages for 2017 through Percent Change of Real GDP (Actual) (Actual) (Estimated) (Projected) (Projected) (Projected) World 2.8% 2.7% 2.4% 2.7% 2.9% 2.9% Advanced Economies Emerging & Developing Economies Source: The World Bank Global Economic Prospectus (June 2017). 9 P a g e

9 The United States Economy According to the World Bank (Global Economic Forecast June 2017), subsequent to a 2016 slowdown, growth is forecasted to recover and remain moderate during During 2016, growth was stalled due to investments and exportrelated weaknesses. For the beginning portion of 2017, economic activity was hampered by consumer spending levels, however, these levels were partially counterbalanced by private investment. Overall, moderate growth has been forecasted for the United States through This includes growth rates of 2.1%, 2.2% and 1.9% for each of the years 2017 through 2019, respectively. Nevertheless, the growth forecasts are contingent upon a variety of governmental policies. Policy shifts could result in considerable upside and downside risks, which could alter the projections. For instance, the implementation of tax reductions or infrastructure programs could result in the growth rate beating expectations. Conversely, amendments to trade policies could spur regulatory action, which could negatively impact growth projections. The following table is based on information obtained from the Word Bank and provides the Real GDP growth for the United States for the period 2014 through Actual percentages are provided for each of the years 2014 and 2015, an estimated percentage is provided for 2016 and forecasted are provided for 2017 through Percent Change of Real GDP (Actual) (Actual) (Estimated) (Projected) (Projected) (Projected) United States 2.4% 2.6% 1.6% 2.1% 2.2% 1.9% Source: The World Bank Global Economic Prospectus (June 2017). The US Virgin Islands Economy A recent downturn in the global financial system has impacted the economy of the US Virgin Islands. Although diverse, its economy is deeply reliant on several factors which remain sensitive to fluctuations both locally and globally. In addition, a complex system of federal regulations and political matters further constrains the Virgin Islands ability to manage change in response to the fiscal environment. Several key components of the Virgin Islands economy, including tourism, oil refining and rum production, are further discussed in this section. 10 P a g e

10 Real GDP. Subsequent to four consecutive years of declines, the U.S. Department of Commerce, Bureau of Economic Analysis released 2015 data showing growth of 0.2% for the Virgin Islands. The trend of declines was primarily triggered by the 2012 closure of the HOVENSA refinery. However, during 2015, both tourism and consumer spending strengthened, resulting in modest growth. Despite the reported growth, the weakened fiscal conditions of Virgin Islands remain a focal point for the economy. The Governor recently submitted to the Legislature a multi-year plan which intends to address the fiscal imbalances. In connection with the plan, the tax structure of certain good will be reviewed, while other new taxes may be introduced. The following paragraph has been extrapolated for the USVI BER s US Virgin Islands Economic Review & Outlook FY & 1st Quarter FY , and provides a summary of the Bureau s economic outlook The Territory s weak fiscal conditions have taken center stage during this budgetary year. As fiscal policies evolve and cost cutting measures are implemented, there should be a period of elevated short-term volatility where some of the gains in the past year might be lost. However, an expansionary fiscal and economic policy program, consisting of tax increases and large-scale infrastructure spending and other private sector investments should support the economy. But the impact of the fiscal plan and other policy changes will not be evident until much later in fiscal year 2018 and beyond. Reflecting these concerns, our constructive view of the economy is tempered by the recognition that there is much uncertainty about the Territory s financial picture. Source: The USVI BER, US Virgin Islands Economic Review & Outlook FY & 1st Quarter FY HOVENSA. Until 2012, the petroleum industry was a leading component in the Virgin Islands economy. The island of St. Croix was home to one of the world s largest crude oil refineries, HOVENSA. According to the EIA, during its operation, the St. Croix refinery supplied approximately 350,000 barrels a day of refined products primarily to the U.S. Gulf Coast, the eastern seaboard, and to most of the Virgin Islands. After several years of negative results, in December of 2011 HOVENSA reached an agreement to commence a shutdown of operations in St. Croix. On February 21, 2012, after 45 years of operations, the closure of the facility was complete. 11 P a g e

11 As the Virgin Islands largest private sector employer, the closure of the HOVENSA refinery sent shockwaves through the area s economic system. Employment levels were significantly impacted which resulted in a decline in household spending. As a result, local demand for certain products diminished and several small businesses were forced to close. In addition, the Virgin Islands also lost important governmental tax revenue, further constraining the fiscal system. Since its closure in 2012, ownership of the HOVENSA refinery site has been transferred. On December 29, 2015, the legislature of the Government ratified an operating agreement between the Government and Limetree Bay Terminals, LLC ( Limetree ). Pursuant to the agreement, Limetree will own and operate the idled refinery. Full implementation of the agreement will result in substantial payments to the Virgin Islands Government and the hiring of several new employees. It is anticipated that operation will commence in various phases over the next several years. Rum Production. Rum distilling has been another of the largest components of the Virgin Islands economic system. However, over many years the manufacturing industry expanded to include refined oil products, pharmaceuticals, and electronics. With the closure of the HOVENSA petroleum refinery in February of 2012, rum has again emerged as an increasingly important component of the local economy. According to the USVI Bureau of Economic research, there are two primary rum distilleries located within the Virgin Islands: Cruzan VIRIL, Ltd. and Diageo Plc. According to the USVI BER, during 2016, the distilleries shipped approximately 17.5 million gallons of rum to the United States, equating to $249.6 million in excise taxes. Compared to 2015, the taxes collected for 2016 represented an increase of 33.5%. For the first quarter of 2017, rum shipments were tracking approximately 10.1% higher than the first quarter of Tourism. Tourism and related services represent the primary economic activity of the Virgin Islands. In fact, according to 2016 statistical information provided by the World Travel & Tourism Council, travel and tourism contributed to approximately 31.8% of the Virgin Islands GDP and accounted for nearly 28.5% of all jobs. However, since tourism influences several components of the economy, the collective effect is much larger. The World Travel & Tourism Council expects tourism-related revenue will grow annually by 2.6% through However, due to elements which are beyond the direct control of the Virgin Islands, forecasting future levels of tourism is an exceptionally difficult task. The tourism industry is highly sensitive to fluctuations in the global economy and can also be influenced by climate and weather conditions. Further detail relating to tourism in the Virgin Islands is presented in the following section. 12 P a g e

12 Significant Factors for World Tourism As previously identified, both the Government of the Virgin Islands and the Port Authority is highly dependent upon in-bound tourism. Therefore, this section discusses the outlook for growth of global tourism. According to the World Travel & Tourism Council, despite threats of terrorist attacks, political instability, and various natural disasters, the global growth rate of travel and tourism outpaced total economic growth during Over the first four months of 2017, international tourist arrivals were trending positively by approximately 6.2% compared to the same period for For this same period, air passenger traffic also showed positive growth (8.3% when compared to 2016). The outlook for global travel and tourism through the remainder of 2017 is anticipated to remain strong, according to the World Travel Council. By 2027, tourism is forecasted to contribute approximately 380 million jobs globally, or 1 out of every 9 jobs in the world. The World Travel Council projects the growth rate of tourism, at the global level, will continue to outpace that of the global economy over the next ten years. World Tourism Factors General factors for the expected growth of world tourism include: Most world economies are growing and there is a strong desire to explore other cultures and locations. Oil prices are lower which reduces the direct operating costs of air and cruise lines. There are new business opportunities for air and cruise companies, as well as strong competition for their services, which is expanding the availability and lowering the cost of travel. Further, travel providers are being even more innovative to attract tourists. U.S. Aviation Forecast The Federal Aviation Administration (FAA) sees the number of U.S. air carrier passengers growing at an average annual rate of 1.9 percent over the next 20 years. 1 This forecast is based upon review of GDP, employment, consumer confidence and the other economic factors. Note that the FAA sees growth for international carriers at a faster rate than domestic because foreigners are discovering the value of travel and new low-fare carriers are opening-up international markets at a rapid rate. Over the longer term, the FAA expects the number of enplaned U.S. passengers to grow to 1.4 billion by Again, the fastest growth rate is expected in international flying. For example, the U.S. and Mexico just completed a liberal air service agreement that lifts restrictions on flights between the two countries. 1 FAA Aerospace Forecasts, Fiscal Years P a g e

13 There has been continued consolidation among U.S. air carriers in recent years and now there are only a total of six major carriers (American, Delta, Southwest, United, Alaska/Virgin and Jet Blue) that control over 85 percent of domestic seat capacity. However, many specialized service, local area, or low-fare carriers continue to operate. These non-major carriers include relatively large operators such as Allegiant, Spirit, Hawaiian, Alaska, and Frontier. The smaller or specialized carriers often stimulate air traffic with new routes or special fares. Cruise Industry Forecast Cruise Market Watch indicates the number of passengers will grow at a compound annual rate of 6.55% from 1990 to More specifically from 2016 to 2017, they project a 4.5 percent overall growth of cruise passengers. 2 Cruise Market Watch sees the following trends: more ships, larger ships, different destinations, and more diversity both in on-board and in-port activities. There have been 15 new ocean cruise ships announced for entry into service in the period. Once online, these ships will add 39,637 to the global passenger capacity, or an increase of approximately 8.1%. Just like the airline market, there are a limited number of major cruise lines. Carnival (which operates about 100 ships) controls nearly half the market. Royal Caribbean has about one quarter of the berths and Norwegian about 10 percent. Other operators like Disney and MSC compete for the remaining market. 3 Ocean cruise passengers are generally older (average age 48) and more affluent (annual household income of $109,000) than typical tourists. Further, Cruise Line International Association statistics indicate: 20% are retired, 75% have college degrees, and 78% are married. Another interesting statistic is that 58% of the cruise passengers are currently from North America and 26% from Europe. 4 Other statistics indicate that only a small share of the world s population has been on a cruise. Americans remain the top country source for passengers, with the Caribbean being the largest single cruise destination. As an example of the growth of cruising, the Cruise Line International Association estimated 17.8 million cruise passengers in 2009, but 25.8 million in 2017, an increase of nearly 44%. The fastest growth rate in cruising is on small boats on rivers. The number of river cruise boats was 184 in 2015, but 18 new ships are expected to be added in Europe is the 2 Cruise Market Watch, Downloaded June Cruise Line Industry Association, 2017 data summary 14 P a g e

14 current hub of river cruising, but new ships have been added in Asia and North America as well. 5 Therefore, the trend in worldwide cruising remains a story of growth. However, at the other extreme, the 21-year-old Legend of the Seas was retired in March This 69,130- ton ship was once one of the largest and most luxurious afloat, but now it seems to its owners to be too small and its facilities are outdated. One of its replacements is the Harmony of the Seas, which will have its maiden run from Southampton to Barcelona in late June. This new ship is 1,187 feet long and displaces 227,000 tons. 6 U.S.V.I. Tourism Factors The U.S. Virgin Islands. is viewed mainly as a sun and sand destination offering warm weather, beaches, and tropical resort amenities. As a get-away for visitors from cold or land-locked areas, the U.S.V.I. competes for tourists with other Caribbean islands, Mexico s beach resorts, and Florida, as well as other similar tropical vacation locations. These beach resort destinations each compete vigorously for tourists. Vacation choices are not limited to the where-you-go decision, for example, travelers can choose to take a cruise or fly directly to a destination. Further, there are locations that focus on gambling (Las Vegas), kids (Disney), and parties (Cancun). Other vacation decisions include the all-inclusive type resort or just renting just a hotel room or house. Further, the airlines, cruise companies, and hotels are competing to maximize use of their businesses, as are the travel agents (and/or web sites) who often help plan vacations. Within the U.S.V. I., all of the arriving large cruise ship passengers are tourists, staying in the U.S.V.I. for less than a day. The V.I. Department of Tourism indicates approximately 80 percent of air passenger arrivals are tourists. U.S.V.I. hotel statistics indicate that 95 percent of hotel guests are from off-island. More specifically, 85% of 2016 hotel guests were from the mainland United States, with the next largest geographic source of tourists being Europe with 2.4%. 7 Virgin Island residents accounted for an additional 6.9% of guests. The V.I. Department of Tourism is the agency charged with promoting visits to the U.S. Virgin Islands. One factor limiting growth of air passengers is that the U.S.V.I. has only approximately 5,000 hotel rooms. 8 The number of available hotel rooms has not 7 U.S.V.I. Bureau of Economic Research, statistics for U.S.V.I. Bureau of Economic Research, 2016 Tourism Indicator 15 P a g e

15 significantly changed in many years. Therefore, meaningful growth of air passengers is not possible unless more hotel rooms are added. According to the USVI BER, hotel establishments reported approximately 987,000 occupied room nights in the Virgin Islands for This amount was approximately 0.2% below 2015 levels. For 2016, guests were reported to stay an average of 4.7 nights, which was generally equivalent to the average for While no major new hotels have been constructed recently, many of the others have changed ownership, temporarily closed, been renovated, or changed names. Pursuant to Title 33 of the U.S. Virgin Islands Code, Section 54, hotel guests in the Virgin Islands are now required to pay a hotel occupancy tax of 12.5% of the gross room rate or rental. Prior to January of 2016, the hotel occupancy tax was 10%. The hotel or innkeeper is responsible for collecting, reporting and remitting such revenues to the Government. According to the USVI BER, hotel tax revenues collections during 2016 were $29,909,549, which represents an increase of 19.4% compared to During 2011 the Virgin Islands Government enacted the Hotel Development Act of 2011 as a tool to attract hotel development. To date, several hotel developers have expressed interest in the program. During 2014, the Hotel Development Act was extended through December 31, In contrast to the constrained number of available hotel rooms, the U.S.V.I. has large cruise ship docking facilities at Crown Bay and Havensight on St. Thomas and Fredriksted on St. Croix. Smaller cruise ships have multiple docking locations throughout the Territory. Further, ships can anchor and tender their passengers onto land. On peak days, over ten cruise ships might be visiting in the U.S.V.I.; however, on most days dock space is available. The USVI BER reports several public-sector projects have commenced or are scheduled through Many of these projects are forecast to have an impact on tourism. For example, the Port Authority recently began construction on a $5 million project to construct a two-level parking garage at the Urman Fredericks Marine Red Hook Terminal. Further growth of cruise passengers at Port Authority facilities may be hindered by: Construction of new port facilities at competing destinations including those owned by the cruise lines themselves. Highway congestion in and around the port facilities, as well as overcrowding of beaches and other Virgin Island attractions (such as downtown stores and visitor services), during peak periods. Desire of tourists to cruise to new islands or visit new attractions at other ports, avoiding the Virgin Islands 16 P a g e

16 Efforts by ship operators to get passengers to use their on-ship facilities (attractions, stores, casinos, and restaurants) rather than those on available on-island. The construction of larger and larger cruise ships which strain port and island facilities. The negative perceptions of certain passengers concerning friendliness, safety, level of service, quality of attractions, congestion, or other visitor issues in the U.S.V.I. and other Caribbean area ports. Unpredictable changes in climate. To increase the number of cruise passengers, the Government of the Virgin Islands and the Port Authority continue efforts to spread out cruise ship arrivals, construct facilities for larger ships, improve port facilities, encourage investors to add new visitor attractions, improve local roads/facilities and provide incentives to ship owners for improved service. In addition, the local government works with cab drivers, shop personnel and other persons who interface with visitors to improve customer service. Most issues impacting growth of air visitors and air traffic are like those at marine ports. There is extreme congestion on peak days at the Cyril E. King Airport. This overcrowding results in potential delays for aircraft and their passenger. At the peak hours, there is essentially no room for additional aircraft to park at the terminal or for the hold room to accommodate more passengers. Facility constraints at both airports somewhat limit the ability of the Port Authority to maximize air traffic. Airlines themselves control air service, including routes, type of aircraft, flight frequency, and ticket pricing. Therefore, the Port Authority is largely at the mercy of the airlines to increase air service. However, the Port Authority attempts to encourage additional air service and offers incentives for flights to new destinations. The United States has lifted many of the economic and travel restrictions that were imposed in the 1960s, including those imposed on Cuba. In May 2016, Carnival Cruise lines began port visits to Cuba and several airlines, American, Delta, Spirit, Southwest, and JetBlue, now have commercial flights to the island. As result, tourism to the Virgin Islands could be impacted. On June 10, 2016, the Department of Transportation authorized six airlines to offer flights from five U.S. cities to three in Cuba. Flights could start as early as this fall. Although many travelers may be anxious to visit this island, tourism to the Virgin Islands could be impacted. III. Forecast of U.S.V.I. Air and Cruise Passengers The number of Port Authority air and cruise passengers is usually relatively stable. That is, from one year to the next air and cruise schedules rarely change significantly. As noted above, various economic and political factors influence traffic volume, but such differences usually evolve slowly. 17 P a g e

17 With continuation of a strong economic base in the United States, air and cruise traffic is expected to be similar to previous years. The last five years of total arriving U.S.V.I. air and cruise passengers, as well as an estimate for 2017 and forecast for 2018 is shown below. Table 3: Passengers (In 1,000's) 2018P 2017P 2016A 2015A 2014A 2013A Cruise 1,657 1,645 1,771 1,878 2,041 1,915 Air 1, This forecast assumes air and cruise ship schedules continue in a similar manner as they are currently. Based on data from the first six months of the Port Authority s 2017 fiscal year, the number of total cruise passengers to the U.S.V.I. is expected to be down from the previous year, while air passengers are up very slightly. For 2018, air passenger numbers are expected to increase very modestly based upon a continued strong U.S. economy, while cruise passengers will increase slightly based upon current ships schedules. IV. Strategic Goals and Initiatives The FY2018 budget embodies several strategic goals and initiatives. These include: Maintaining Marine Debt Service coverage at 1.25 times. Maintaining 6 months cash reserves for Marine. Continuation of the Marine and Aviation capital program. Protecting and sustaining our facilities for generations. V. Budget Summaries Table 4: FY2018 Operating Revenue & Expense Summary[1] (In $1,000's) FY 18 Bdgt FY 17 Bdgt FY 16 Act FY 15 Act FY 14 Act FY 13 Act Aviation Revenues $25,296 $24,520 $24,673 $23,693 $22,456 $21,261 Marine Revenues 32,031 30,175 30,123 29,393 28,925 26,410 Total Operating Revenues $57,327 $54,695 $54,796 $53,086 $51,381 $47,671 Operating Expense 47,017 44,599 54,342 43,760 45,868 43,530 Depreciation Expense 17,587 17,510 17,587 17,179 19,239 20,451 Operating Income (Loss) -7,277-7,414-17,133-7,853-13,726-16,310 Non-Operating Revenue(Expense), net ,294 1,684 2,918 2,377 Capital Contributions 19,651 14,181 5,001 6,554 12,103 6,561 Government Grants Change in Net Assets $13,755 $7,857 -$9,838 $385 $1,295 -$7,372 EBID 1 $10,310 $10,096 $454 $9,326 $5,513 $4,141 1 Earnings Before Interest & Depreciation. [1] Source: VIPA Audited Financial Statement Fiscal Years P a g e

18 Operating Budget Summary In summary, as presented in Table 4 above, the FY2018 operating budget is based on $57.3M in combined Aviation and Marine operating revenues and $64.6M (see Schedule 1) in operating expenses (including $17.6M of depreciation expense), resulting in an operating loss of $7.3M. Non-operating revenues of $2.9M (primarily passenger and customer facilities charges) are offset by $2.1 interest expense (on long term debt), for a net contribution of $881K. An additional $19.7M in capital grant contributions and $500K in government grants (PFA) results in net assets of $13.8M. Excluding depreciation expense, operating revenues exceed operating expense by $10.3M. Table 5: Revenue & Expense Contribution (In $1,000's) Aviation Marine Admin & Gen FY18 Total Operating Revenues $25,296 $32,031 $0 57,327 Operating Expense 15,224 14,807 16,986 47,017 Admin & Gen Exp. Allocated 8,616 8,370 (16,986) 0 Admin & Gen Deprec. Allocated (643) 0 Depreciation Expense 10,708 6, ,588 Operating Expenses 34,954 29, ,605 Operating Income (Loss) -$9,658 $2,380 $0 -$7,278 EBID $1,050 $8,617 $0 $10,310 Table 5 shows that the Aviation Division is expected to contribute $25.3M in operating revenues (or 44%) of the total operating revenues ($57.3M) and incur $34.9M (or 54%) of total operating expenses ($64.6M); resulting in a deficiency of revenues over expenses of $9.7M on an accrual basis. On a cash basis, the operating revenues of the Aviation Division are expected to be $1M above budgeted operating expenses (excluding depreciation). The Marine Division is expected to generate operating revenues of $32M (56%) of the total operating revenues and incur operating expenses of $29.7M (46%) of total operating expenses of $64.6M; thereby producing an excess of revenues over expenses of $2.4M on an accrual basis. On a cash basis, operating revenues of the Marine Division are expected to be $2.4M above budgeted operating expenses (excluding depreciation). This positive net operating cash will cover $4.6M in long term debt (bond debt) service (P&I) at 1.94 times, which exceeds the bond indenture requirement of 1.25 times by.69. Administration and General (A&G) expenses are budgeted at $17.6M on an accrual basis $17M excluding depreciation of $643K. Of this, $8.6M (51%) is allocated to the Aviation Division and $8. 3M (49%) is allocated to the Marine Division. The A&G allocated amounts comprise 25% of the Aviation Division operating expense budget and 28% of the Marine Division s operating expense budget including depreciation. 19 P a g e

19 Table 6: Aviation Revenue Summary (In $1,000 s) FY 18 Bdgt FY 17 Est FY 16 Act FY 15 Act FY 14 Act FY 13 Act Aircraft Fees $3,675 $3,639 $3,576 $3,501 $3,332 $3,091 Rental Income 7,015 6,945 6,826 6,436 6,086 5,865 Commissions & Fees 14,606 14,461 14,271 13,756 13,038 12,305 Operating Revenues $25,296 $25,045 $24,673 $23,693 $22,456 $21,261 Passenger Facility Charges 2,260 2,237 3,388 3,206 3,242 3,074 Customer Facility Charges Federal Grants 4,504 14,181 5,001 6,554 12,103 5,378 Total Revenues $32,509 $41,908 $33,524 $33,940 $38,250 $29,739 The FY2018 operating revenue budget for the Aviation Division reflects the assumption that air passenger arrivals will increase, however aviation revenues will decrease due to a reduction in federal grant funding of 68%, and failure to secure an increase in airline fees in FY2017. Table 7: Marine Revenue Summary ($1,000's) FY 18 Bdgt Rental Income $5,300 $6,239 $6,342 $6,122 $5,829 $5,435 Commission & Concession Fees , Marine Fees & Dues 26,275 23,587 23,977 22,730 22,456 20,373 Total $32,031 $30,445 $30,948 $29,919 $28,925 $26,410 *FY2016 and FY2015 include Other Income Categories FY 17 Est FY 16 Act* FY 15 Act* FY 14 Act FY 13 Act For the Marine Division, FY2018 projected revenues of $32M are $1.6M higher ( 5.2 %) than FY2017. The following underlying assumptions were utilized in deriving marine revenue estimates: Marine revenues are indicative of a growth rate of 5.2%, mainly due to the increase of cruise ships to St. Thomas/St John and St. Croix. Increase in docking fees and collection of docking and wharfage fees on the island of St. Croix. Table 8: Payroll Cost Summary ($1,000's) FY 18 Bdgt FY 17 Est FY 16 Act FY 15 Act Salaries & Wages $16,691 $13,438 $14,491 $13,224 Overtime & Other Pay 1,480 1,899 1,585 1,351 Payments to Employees $18,171 $15,337 $16,076 $14,575 FICA, Retirement & Wkrs Comp 4,277 3,972 4,300 4,491 Health, Dental & Life Insurance 4,498 3,841 3,843 3,648 Total Expenses $26,946 $23,150 $24,219 $22, P a g e

20 As summarized in Table 8, the FY2018 payroll expense budget totals $26.9M. It consists of: $18.2M in payments to employees, $4. 3M in payroll taxes and mandatory employer contributions, and $4.5M in employee health insurance costs. FICA is assessed at 7.65% for payments to employees (up to $127K); employer contributions to GERS is assessed at the rate of 20.5% (up to $65K); and workers compensation insurance is assessed at $240 per employee per year. The $26.9M budgeted for FY2018 is $392K (1.5%) more than budgeted in FY2017, and $3.8M (16.4%) more than the actuals projected through September 30, The reason for this increase is largely due to negotiated salary increases, and the addition of the six (6) new positions. In FY2018, there are 374 full-time equivalents (FTE) positions, as follows: FY2018 FTE POSITION SUMMARY Division Count Payroll Costs Aviation 96 $ 3,441,793 Marine 86 $ 4,242,352 Support 192 $ 8,573,964 Total 374 $ 16,258,109 The chart above shows the number of positions and associated payroll costs among the aviation, marine and support divisions. Of the 374 total positions, there are twenty-four (24) vacancies at $1,588,574; six (6) in the Aviation Division at $369,841, one (1) in the Marine Division at $48,852 and seventeen (17) in the support divisions at $1,169,881. New Positions include one position (1) in Aviation, and five (5) in Support funded at $480K in FY2018. Table 9A: Summary of Operating Expenses, Excl. Personnel & Depreciation (In $1,000's) FY 18 Bdgt FY 17 Est FY 16 Act FY 15 Act FY 14 Act Aviation $9,289 $8,710 $7,694 $9,804 $11,387 Marine 7,352 8,029 7,036 6,953 7,394 Admin & General 3,431 3,227 3,392 4,289 4,572 Combined $20,072 $19,966 $18,122 $21,046 $23,353 As presented in Table 9A, operating expenses, excluding payroll and depreciation expense, is budgeted at $20M in FY2018; 1% ($106K) higher when compared to the estimated expenses of $19.9M for FY P a g e

21 Table 9B: Summary of Operating Expenses by Major Line Items (In $1,000's) FY 18 Bdgt FY 17 Est FY 16 Act FY 15 Act FY 14 Act Repairs & Maintenance $2,697 $2,634 $2,610 $3,360 $3,774 Materials, Supplies & Other Services 6,099 5,919 6,102 6,555 7,323 Insurance 2,679 2,679 2,679 3,068 3,826 Utilities 6,156 5,432 5,174 7,591 8,778 Other Operating Expenses 2,438 3,302 3,257 1, Total $20,069 $19,966 $19,822 $21,790 $24,287 Table 9B provides a comparative breakdown of operating expenses by major expense categories. For FY2017, core expenditures will change across the following expenditure categories (See Schedule 4): Maintenance costs are expected to increase by $63K ( 2%). Materials Supplies are expected to increase by $93K ( 7.4%) and Professional and Other Services by $86M ( 1.8%) respectively. Insurance remains the same. Utilities cost is anticipated to increase by $724K ( 13%). Other Operating Expenses is expected to decrease by -$864K ( 30.9%). However, Travel and Other Related Expenses, included here, will decrease by -$2K ( 0.3%). Table 10: FY 2018 Debt Service Summary (In $1,000's) Principal Interest Total Marine Revenue Bonds, Series A,B &C $2,445 $2,111 $4,556 Total Debt Service $2,445 $2,111 $4,556 * Amount $29M, Interest 4.0%, Term 20 years Table 10 summarizes the debt service which includes Marine Bond debt service principal and insurance combined of $2.4M and interest of $2.1 for a total debt service of $4.6M. Capital Budget Summary The FY2018 capital budget is outlined in the FY2017 Capital Budget Project Listing (See Schedule 8). As delineated in Table 11, the capital budget totals $41M of which $14M is for Aviation Division capital and $27M for Marine Division capital. 22 P a g e

22 Table 11: Capital Budget Summary(In $1,000's) Aviation Marine A&G Total Vehicles -Utilities & Light Trucks $0 $840 $0 $840 Office Improvements, Furniture & Equipment $0 $0 $0 $0 Facilities Upgrade & Expansion $14,477 $26,084 $0 $40,561 $14,477 $26,924 $0 $41,401 The Vehicles budget of $840K provides for a security boat at $72K and a pilot boat costing $768K for the marine division. For, no funding was provided for Office Improvements & Equipment due to cost containment measures. The bulk of the capital budget, totaling $40.5M is for major upgrades and expansion to aviation facilities ($14.5M) and marine facilities ($26M). Table 12: Capital Budget Summary by Funding Source ($1,000's) Funding Source Aviation Marine A&G Total Net Operating Revenues** $1,592 $3,322 $0 $4,914 PFC Revenues** 7, $7,925 CFC Revenues** $455 Total Internal Sources $9,972 $3,322 $0 $13,294 Capital Grants 4,504 15,147 0 $19,651 Debt Funded Marine Capital Projects 0 7,834 0 $7,834 Renewal & Replacement** $121 Government Grants $500 Total Funding Sources $14,476 $26,924 $0 $41,400 ** Includes Cash on Hand (from prior years' revenues) Table 12 summarizes the sources of funding for the capital expenditure budget. In total, the Authority s FY2018 capital program is funded by $13.3M from internal sources, $19.7M from capital grants, $7.8.M from bond proceeds, $121K renewal and replacement reserves and $500 from government grants (PFA). The internal sources are comprised of $4.9M from operating revenues and $7.9M in PFC revenues, including $5.7M from PFC (restricted) cash on hand, and $455K from Car Rental Facility Charges. The Aviation Division capital budget is financed by $1.6M from operating revenues; approximately $7.9M from PFC revenues (including $5.7M from PFC cash on hand), and $455K from Car Rental Facility Charges; $4.5M from capital grants. The Marine Division s capital budget is funded by $3. 3M from operating revenues; $15M from capital grants, $7.8M from bond proceeds, $121K from renewal and replacement reserves and $500K from government grants (PFA). 23 P a g e

23 Cash Flow Budget Summary FY 18 Summary Cash Flow Statement (In $1,000's) Sources: Aviation Marine FY18 $ FY17 [1] Bgt. Bgt. Change Operating Cash Received $25,296 $32,031 $57,327 $54,696 $2,631 Cash Used in Operating Activities -23,840-23,177-47,017-44,599-2,418 Net Cash from Operating Activities $1,456 $8,854 $10,310 $10,097 $213 Cash on Hand Unrestricted , Internal Cash Transfer Unrestricted Passenger Facility Charges 7, ,925 4,603 3,322 Customer Facility Charges Renewal & Replacement Fund Internal Sources of Cash $9,986 $8,975 $18,961 $17,216 $1,745 Capital Grant Contribution 4,504 15,147 19,651 15,021 4,630 Government Grants Loan Proceeds 0 7,835 7,835 18,118-10,283 Internal & External Sources of Cash $14,490 $32,457 $46,947 $50,355 -$3,408 Long Term Debt P&I -Existing & New 14 4,542 4,556 5, Subsidy to WICO Capital Acquisition -Revenue Funded 1,592 3,322 4,914 5, Capital Acquisition -PFC Funded 7, ,925 4,603 3,322 Capital Acquisition -CFC Funded Capital Acquisition -Grant Funded 4, ,651 15,021 4,630 Capital Acquisition -Debt Funded 0 7,835 7,835 18,118-10,283 Capital Acquisition -Renewal & Replacement Capital Acquisition -Government Grant Transfers -Renewal & Replacement Fund Total Uses of Cash $14,490 $32,457 $46,947 $50,355 -$3,408 [1] Revised Budget in FY2017 Table 13 summarizes the sources and uses of cash thereby indicating how the operating expense, debt service, capital budgets and cash reserves are going to be financed (paid for) in FY2018. For VIPA, the major budgeted sources of cash are: $10.3M from net operating revenues (after funding the $47M in operating expenses); $156K from Cash on Hand (unrestricted); $7.9M from passenger facilities charges (PFC); $449K from Customer Facility Charges (CFC); $121K from Renewal and Replacement Funds for a total of $19M from internal sources. External sources of cash consist of $19.7M from capital grant contributions, $500K from government grants, and $7.8M from loan proceeds, for a grand total of $47M (internal and external sources of cash). This cash flow will finance: $4.6M in principal and interest on long term debt; a $548 subsidy to WICO; $4.9M in revenue funded capital projects; $7.9M in PFC projects; $455K in CFC projects; $19.7M in federally funded projects; and $7.8M in debt financed marine projects. An additional contribution of $442K is transferred to fund the renewal and replacement fund. END OF SUMMARY STATEMENT 24 P a g e