$25,475,000 SAN DIEGO UNIFIED PORT DISTRICT

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1 NEW ISSUE BOOK-ENTRY ONLY Ratings: See RATINGS herein. In the opinion of Bond Counsel, under existing law and assuming compliance with the tax covenants described herein, and the accuracy of certain representations and certifications made by the District described herein, interest on the Series 2013 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the Code ). Bond Counsel is also of the opinion that interest on the Series 2013 Bonds is not treated as a preference item in calculating the alternative minimum tax imposed under the Code with respect to individuals and corporations. Bond Counsel is further of the opinion that interest on the Series 2013 Bonds is exempt from personal income taxes of the State of California under present state law. See TAX MATTERS regarding certain other tax considerations. $25,475,000 SAN DIEGO UNIFIED PORT DISTRICT refunding revenue bonds 2013 Series A Dated: Date of Delivery Due: As shown on the inside cover The San Diego Unified Port District Refunding Revenue Bonds 2013 Series A (the Series 2013 Bonds ) are being issued by the San Diego Unified Port District (the District ) pursuant to Appendix 1 of the Harbors and Navigation Code of the State of California, as amended (the Port District Act ) and the Indenture, dated as of October 1, 2004, between the District and U.S. Bank National Association, as trustee (the Trustee ), as amended and supplemented, including as amended and supplemented by the Second Supplemental Indenture, dated as of November 1, 2013, between the District and the Trustee (collectively, the Indenture ). The Series 2013 Bonds are being issued to (a) refund the outstanding San Diego Unified Port District Revenue Bonds, 2004 Series B (Non-AMT) (the 2004 Series B Bonds ), and (b) finance costs of issuance, as described herein. See PLAN OF REFUNDING herein. The Series 2013 Bonds are limited obligations of the District payable solely from and secured by a pledge of (a) certain income and revenue received by the District from the operation of the Port of San Diego less all amounts which are required to be used to pay Operation and Maintenance Expenses (as defined herein) (the Net Pledged Revenues ) and (b) other amounts on deposit in certain funds and accounts established under the Indenture. Additional bonds and parity debt may be issued or incurred pursuant to the Indenture from time to time. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS. THE SERIES 2013 BONDS ARE NOT A GENERAL OBLIGATION OF THE DISTRICT, BUT ARE LIMITED OBLIGATIONS OF THE DISTRICT PAYABLE FROM A LIEN ON NET PLEDGED REVENUES, AS DESCRIBED HEREIN. NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE DISTRICT, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION OR PUBLIC AGENCY OF THE STATE OF CALIFORNIA IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE SERIES 2013 BONDS. NONE OF THE PROPERTIES OF THE DISTRICT OTHER THAN THE NET PLEDGED REVENUES ARE SUBJECT TO ANY MORTGAGE OR OTHER LIEN FOR THE BENEFIT OF THE OWNERS OF THE SERIES 2013 BONDS. The Series 2013 Bonds are issuable as fully registered bonds registered in the name of Cede & Co., as registered owner and nominee of The Depository Trust Company ( DTC ). Individual purchases and sales of the Series 2013 Bonds may be made in book-entry form only, in denominations of $5,000 and integral multiples thereof. Purchasers will not receive certificates from the District or the Trustee representing their interest in the Series 2013 Bonds. Interest on the Series 2013 Bonds will be payable on March 1 and September 1, commencing on March 1, So long as the Series 2013 Bonds are held by DTC, the principal of and interest on the Series 2013 Bonds will be payable by wire transfer to DTC, which in turn is required to remit such principal and interest to the DTC participants for subsequent disbursement to the Beneficial Owners (as defined herein) of the Series 2013 Bonds, as more fully described herein. The Series 2013 Bonds are subject to optional redemption prior to maturity, as more fully described herein. The purchase and ownership of the Series 2013 Bonds involve investment risk and may not be suitable for all investors. This cover page is not intended to be a summary of the terms of, or the security for, the Series 2013 Bonds. Investors are advised to read this Official Statement in its entirety to obtain information essential to the making of an informed investment decision. The Series 2013 Bonds are offered, when, as and if issued by the District and received by the Underwriter, subject to the approval of validity by Nixon Peabody LLP, Bond Counsel. Certain matters will be passed upon for the District by Nixon Peabody LLP, Disclosure Counsel, and by the Port Attorney. Certain legal matters will be passed upon for the Underwriter by its counsel Kutak Rock LLP. It is expected that the Series 2013 Bonds in book-entry form will be available for delivery through DTC on or about November 20, CITIGROUP Date of Official Statement: November 6, 2013

2 MATURITY DATES, PRINCIPAL AMOUNTS, INTEREST RATES, YIELDS AND CUSIPS $25,475,000 SAN DIEGO UNIFIED PORT DISTRICT REFUNDING REVENUE BONDS 2013 SERIES A Maturity Date Principal Amount Interest Rate Yield CUSIP 1 03/01/2014 $ 270, % 0.380% BF7 09/01/2020 1,995, BG5 09/01/2021 2,095, BH3 09/01/2022 2,200, BJ9 09/01/2023 2,315, BK6 09/01/2024 2,435, C BL4 09/01/2025 2,560, C BM2 09/01/2026 2,690, C BN0 09/01/2027 2,825, C BP5 09/01/2028 2,975, C BQ3 09/01/2029 3,115, BR1 C Yield to par call date of September 1, CUSIP numbers are provided only for the convenience of the reader. Neither the District nor the Underwriter takes any responsibility for the accuracy of such CUSIP numbers or for any changes to or errors in this list of CUSIP numbers.

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4 SAN DIEGO UNIFIED PORT DISTRICT Board of Port Commissioners Ann Y. Moore, Chair Bob Nelson, Vice Chairman Dan Malcolm, Secretary Robert Valderrama Rafael Catellanos Marshall Merrifield Lou Smith District Staff Wayne Darbeau, President and CEO Randa Coniglio, Executive Vice President-Operations Karen Porteous, Executive Vice President-Administration Brandy Christian, Vice President- Strategy and Business Development John Bolduc, Vice President- Public Safety, Chief Harbor Police Robert DeAngelis, CFO/Treasurer Thomas Russell, Port Attorney Ellen F. Gross, Assistant Port Attorney Robert Monson, Port Auditor PROFESSIONAL SERVICES Bond and Disclosure Counsel Nixon Peabody LLP Financial Advisor Public Financial Management, Inc. Trustee U.S. Bank National Association Verification Agent Grant Thornton LLP Minneapolis, Minnesota ii

5 No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations other than as set forth herein and, if given or made, such other information or representation must not be relied upon as having been authorized by the District. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Series 2013 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the Series 2013 Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts. See INTRODUCTION Forward-Looking Statements herein. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the District since the date hereof. This Official Statement is submitted in connection with the sale of the Series 2013 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. THE SERIES 2013 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED THEREIN, AND HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. THE SERIES 2013 BONDS HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY COMMISSION. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2013 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. iii

6 TABLE OF CONTENTS Page INTRODUCTION...1 General...1 The District and the Port of San Diego...1 Purpose...1 Security and Sources of Payment for the Series 2013 Bonds...1 Forward-Looking Statements...2 Continuing Disclosure...2 Additional Information...2 PLAN OF REFUNDING...3 General...3 Estimated Sources and Uses...4 DESCRIPTION OF THE SERIES 2013 BONDS...4 General...4 DTC...4 Redemption Provisions...5 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS...6 Net Pledged Revenues...6 Allocation of Pledged Revenues...7 Revenue Fund...8 Bond Reserve Fund...10 Rate Covenant...12 Additional Bonds...13 Other Covenants SERIES A BONDS AND SERIES 2013 BONDS DEBT SERVICE REQUIREMENTS AND OTHER OUTSTANDING OBLIGATIONS Series A Bonds and Series 2013 Bonds Debt Service Requirements...15 Subordinate Obligations...15 THE DISTRICT AND THE PORT OF SAN DIEGO...18 Introduction and Overview...18 Management and Administration...19 Employee Relations...23 FINANCIAL INFORMATION...23 General Information...23 Historical Operating Results...23 Management Discussion of District Finances...25 Budgeting Process...29 Pension and Retirement Plans...31 Risk Management and Insurance...32 Operation and Maintenance Reserve...32 South Bay Power Plant...32 Investments...33 Historical and Forecasted Revenue, Operations and Maintenance Expenses and Debt Service Coverage...35 OPERATING INFORMATION...37 Real Estate Operations...37 Maritime Operations...43 Page Recreational Operations...47 Environmental Operations...47 CAPITAL IMPROVEMENT PROGRAM...48 General CIP and CIP Major Projects...48 Environmental Issues related to the CIP and CIP...49 Future Projects...50 CERTAIN INVESTMENT CONSIDERATIONS...50 Ability to Meet Rate Covenant...50 FAA Regulations...50 Dependence on Tourism...51 Security at the Port of San Diego...51 Seismic Risks...52 Limits on Maritime Growth and Development...52 Relationship with Other Governmental Entities...53 Possible Sea-Level Rise...53 Bankruptcy Risks...53 TAX MATTERS...55 Federal Income Taxes...55 State Taxes...55 Original Issue Discount...55 Original Issue Premium...56 Ancillary Tax Matters...56 Changes in Law and Post Issuance Events...56 LITIGATION...57 No Litigation Relating to the Series 2013 Bonds...57 Other Litigation Involving the District...57 RATINGS...57 LEGAL MATTERS...58 FINANCIAL ADVISOR...58 VERIFICATION OF MATHEMATICAL COMPUTATIONS...58 CONTINUING DISCLOSURE...58 UNDERWRITING...59 FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS...59 MISCELLANEOUS...59 AUTHORIZATION...60 iv

7 TABLE OF CONTENTS (continued) APPENDICES Page APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE SAN DIEGO UNIFIED PORT DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, A-1 APPENDIX B SUMMARY OF DOCUMENTS... B-1 APPENDIX C CERTAIN INFORMATION CONCERNING THE COUNTY OF SAN DIEGO... C-1 APPENDIX D PROPOSED FORM OF BOND COUNSEL OPINION... D-1 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT... E-1 APPENDIX F BOOK-ENTRY ONLY SYSTEM... F-1 v

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9 OFFICIAL STATEMENT $25,475,000 SAN DIEGO UNIFIED PORT DISTRICT REFUNDING REVENUE BONDS 2013 SERIES A INTRODUCTION General The purpose of this Official Statement, which includes the cover page, inside cover page, table of contents and appendices, is to provide certain information concerning the sale and delivery by the San Diego Unified Port District (the District ) of $25,475,000 aggregate principal amount of San Diego Unified Port District Refunding Revenue Bonds 2013 Series A (the Series 2013 Bonds ). The Series 2013 Bonds are being issued pursuant to Appendix 1 of the Harbors and Navigation Code of the State of California, as amended (the Port District Act ), and the Indenture, dated as of October 1, 2004, between the District and U.S. Bank National Association, as trustee (the Trustee ), as amended and supplemented from time to time pursuant to its terms, including as amended and supplemented by the Second Supplemental Indenture, dated as of November 1, 2013, between the District and the Trustee (collectively, the Indenture ). All capitalized terms used in this Official Statement, unless otherwise defined herein, have the meanings assigned to such terms in the Indenture. See APPENDIX B SUMMARY OF DOCUMENTS DEFINITIONS OF CERTAIN TERMS. The District and the Port of San Diego The District was created by the California Legislature pursuant to the Port District Act in 1962 as a public corporation to provide for the management of the San Diego Harbor and administer the public tidelands along San Diego Bay through property management. The Port District Act conveyed certain tide and submerged lands within San Diego Bay and oceanfront property in the City of Imperial Beach to the District in order to further develop navigation, commerce, fisheries, and recreation activities. The District s jurisdiction encompasses five member cities along San Diego Bay: Chula Vista, Coronado, Imperial Beach, National City, and San Diego (collectively, the Member Cities ). The District controls 2,403 acres of land and 3,535 acres of water and the improvements and facilities located thereon in the Member Cities (collectively, the Port of San Diego ). The District is involved in four strategic activity areas: real estate, maritime (which includes marine cargo and cruise ship facilities), recreation and environmental. The District owned and operated the San Diego International Airport (the Airport ) until its transfer to the San Diego County Regional Airport Authority (the Airport Authority ) in January See THE DISTRICT AND THE PORT OF SAN DIEGO. Purpose The Series 2013 Bonds are being issued to (a) refund the outstanding San Diego Unified Port District Revenue Bonds, 2004 Series B (Non-AMT) issued in the aggregate principal amount of $26,550,000 (the 2004 Series B Bonds ) and (b) finance costs of issuance, all as further described herein. See PLAN OF REFUNDING and DESCRIPTION OF THE SERIES 2013 BONDS. Security and Sources of Payment for the Series 2013 Bonds The Series 2013 Bonds are secured by a pledge of and lien on Net Pledged Revenues (as defined herein) on a parity with any additional bonds issued on a parity with the Series 2013 Bonds under the terms and provisions of the Indenture and any other parity obligations incurred by the District with respect to the Net Pledged Revenues pursuant to the Indenture, including the San Diego Unified Port District Revenue Bonds, 2004 Series A (AMT) (the 2004 Series A Bonds and together with the 2004 Series B Bonds, the Series 2004 Bonds ) issued in the initial 1

10 aggregate principal amount of $22,980,000 that will be Outstanding at the time of issuance of the Series 2013 Bonds. For purposes of this Official Statement, Bonds means the Series 2013 Bonds, the Series 2004 Bonds and any additional bonds issued pursuant to the Indenture and Parity Debt means any debt secured by a lien on the Net Pledged Revenues on parity with the Bonds. Net Pledged Revenues are available for the equal and proportionate benefit of all of the Bonds and Parity Debt. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS. The Series 2013 Bonds are not a general obligation of the District, but are limited obligations of the District payable solely from and secured by a pledge of (a) Net Pledged Revenues, and (b) other amounts on deposit in certain funds and accounts established under the Indenture. Neither the full faith and credit nor the taxing power of the District, the State of California (the State ) or any political subdivision or public agency of the State is pledged to the payment of the principal of or interest on the Series 2013 Bonds. None of the properties of the District other than Net Pledged Revenues are subject to any mortgage or other lien for the benefit of the owners of the Series 2013 Bonds. Forward-Looking Statements This Official Statement and the appendices hereto contain statements relating to future results that are forward-looking statements as defined in the Private Securities Litigation Reform Act of When used in this Official Statement, the words estimate, anticipate, forecast, project, intend, propose, plan, expect and similar expressions identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. Additionally, the District specifically disclaims any obligation to update or supplement any forward-looking statements contained in this Official Statement. Continuing Disclosure The District will covenant for the benefit of the Holders and Beneficial Owners of the Series 2013 Bonds to provide certain financial information and operating data and to give notice of certain events, to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). See CONTINUING DISCLOSURE and APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT. Additional Information Brief descriptions of the District, the Port of San Diego, the Indenture, the Series 2013 Bonds, and certain other documents are included in this Official Statement and the appendices hereto. Such descriptions do not purport to be comprehensive or definitive. All references herein to such documents and any other documents, statutes, reports or other instruments described herein are qualified in their entirety by reference to each such document, statute, report or other instrument. Information contained herein has been obtained from officers, employees and records of the District and from other sources believed to be reliable. The information herein is subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. This Official Statement is not to be construed as a contract or agreement between the District or the Underwriter and purchasers or Owners of any of the Series 2013 Bonds. [Remainder of page intentionally left blank.] 2

11 PLAN OF REFUNDING General The District will apply a portion of the net proceeds of sale of the Series 2013 Bonds to effect an advance refunding of the 2004 Series B Bonds. Until September 1, 2014, the first optional redemption date for the 2004 Series B Bonds, a portion of the net proceeds of the Series 2013 Bonds will be invested under the terms of an Escrow Agreement dated November 1, 2013 (the Escrow Agreement ) by and between the District and U.S. Bank National Association (in such capacity, the Escrow Agent ). On the redemption date, amounts available under the Escrow Agreement will be applied to the redemption prices of the 2004 Series B Bonds. The sufficiency of amounts and investment earnings on deposit under the Escrow Agreement and to be paid with respect to the 2004 Series B Bonds will be verified by Grant Thornton LLP (the Verification Agent ). The 2004 Series B Bonds consist of the following: Issue Date Maturity Date (September 1) Interest Rate Par Amount CUSIP No. 1 10/28/ % $50, AR2 10/28/ ,095, AS0 10/28/ ,200, AT8 10/28/ ,315, AU5 10/28/ ,435, AV3 10/28/ ,530, AX9 10/28/ , AW1 10/28/ , AY7 10/28/ ,280, AZ4 1 CUSIP numbers are provided only for the convenience of the reader. Neither the District not the Underwriter takes any responsibility for the accuracy of such CUSIP numbers or for any changes to or errors in this list of CUSIP numbers. [Remainder of page intentionally left blank.] 3

12 Estimated Sources and Uses The Series 2013 Bonds are being issued to refund the 2004 Series B Bonds and finance the costs of issuance of the Series 2013 Bonds. The estimated sources and uses of funds in connection with the issuance of the Series 2013 Bonds are set forth in the following table. Series 2013 Sources Bonds Principal Amount of Series 2013 Bonds $25,475, Plus Net Original Issue Premium 2,610, Release from Series 2004 Bonds Reserve 88, Total Sources $28,174, Uses Deposit to Escrow Account for 2004 Series B Bonds $27,858, Costs of Issuance 1 316, Total Uses $28,174, Includes underwriter s discount, printing and rating costs, fees and expenses of the Trustee, Escrow Agent and Verification Agent, legal fees and other costs of issuance. General DESCRIPTION OF THE SERIES 2013 BONDS The Series 2013 Bonds will be issued in denominations of $5,000 or integral multiples thereof and will be issued in fully registered form and, when issued, will be registered in the name of Cede & Co., as registered owner and nominee of The Depository Trust Company ( DTC ). The Series 2013 Bonds will bear interest at the rates and mature on the dates set forth on the inside cover page of this Official Statement. Interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The Series 2013 Bonds will be dated their date of delivery (November 20, 2013), and will bear interest from that date payable semi-annually on March 1 and September 1 of each year, commencing March 1, 2014 (each an Interest Payment Date ). Interest due and payable on the Series 2013 Bonds on any Interest Payment Date will be paid to the person who is the registered owner as of the Record Date, which is the fifteenth day of the calendar month immediately preceding the month in which each Interest Payment Date occurs. Each Series 2013 Bond will bear interest from the Interest Payment Date next preceding the date of authentication thereof unless such date of authentication is an Interest Payment Date, in which event such Series 2013 Bond will bear interest from such date of authentication, or unless such date of authentication is after a Record Date and before the next succeeding Interest Payment Date, in which event such Series 2013 Bond will bear interest from such succeeding Interest Payment Date, or unless such date of authentication is on or before February 15, 2014, in which event such Series 2013 Bond will bear interest from its original date of delivery. See APPENDIX B for a summary of certain provisions of the Indenture, including, without limitation, certain covenants of the District, the rights and duties of the Trustee, the rights and remedies of the Trustee and the Bondholders upon an event of default under the Indenture, provisions relating to amendments of the Indenture and procedures for defeasance of the Series 2013 Bonds. DTC DTC will act as securities depository for the Series 2013 Bonds. Individual purchases may be made in book-entry form only. Purchasers will not receive certificates representing their interest in the Series 2013 Bonds purchased. So long as Cede & Co., as nominee of DTC, is the registered owner of the Series 2013 Bonds, references 4

13 herein to the Bondholders or registered owners means Cede & Co. and will not mean the Beneficial Owners of the Series 2013 Bonds. So long as Cede & Co. is the registered owner of the Series 2013 Bonds, principal of and interest on the Series 2013 Bonds are payable by wire transfer by the Trustee to Cede & Co., as nominee for DTC, which is required, in turn, to remit such amounts to the DTC participants for subsequent disbursement to the Beneficial Owners. See APPENDIX F BOOK-ENTRY ONLY SYSTEM. Redemption Provisions Optional Redemption. The Series 2013 Bonds maturing on or before September 1, 2023 will not be subject to redemption prior to their respective stated maturities. The Series 2013 Bonds maturing on or after September 1, 2024 will be subject to redemption prior to their respective stated maturities, at the option of the District, from any source of available funds, as a whole or in part on any date (and if in part, in such amount and such order of maturity as the District specifies and within a maturity by lot or by such other method as the District may direct and in 2013 Bonds Authorized Denominations), on or after September 1, 2023, at a redemption price equal to 100% of the principal amount of the Series 2013 Bonds called for redemption, together with interest accrued thereon to the date fixed for redemption, without premium. Selection of Series 2013 Bonds for Redemption. The District may select the maturity or maturities of the Series 2013 Bonds to be redeemed in an optional redemption. If less than all of the Series 2013 Bonds of a maturity are called for such redemption, the particular Series 2013 Bonds or portions thereof of such maturity to be redeemed shall be selected for redemption by lot. If the Series 2013 Bonds are not registered in book-entry form, in any redemption of less than all of the Series 2013 Bonds of a maturity, the particular Series 2013 Bonds or portions thereof to be redeemed shall be selected for redemption by lot or such other manner as the Trustee deems appropriate. Notices of Redemption. Each notice of redemption will be mailed by the Trustee, not less than thirty (30) nor more than sixty (60) days prior to the redemption date, to each Owner and the Repository. Notice of redemption to the Owners and the Repository will be given by first class mail. Each notice of redemption will state the date of such notice, the date of issue of the Series 2013 Bonds, the redemption date, the Redemption Price, the place or places of redemption (including the name and appropriate address or addresses of the Trustee), the CUSIP number of the maturity or maturities, and, if less than all of any such maturity, the distinctive certificate numbers of the Series 2013 Bonds of such maturity, to be redeemed and, in the case of Series 2013 Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. Each such notice will also state that on said date there will become due and payable on each of said Series 2013 Bonds the Redemption Price thereof or of said specified portion of the principal amount thereof in the case of a Series 2013 Bond to be redeemed in part only, together with interest accrued thereon to the date fixed for redemption, and that from and after such redemption date interest thereon will cease to accrue, and will require that such Series 2013 Bonds be then surrendered at the address or addresses of the Trustee specified in the redemption notice. Failure by the Trustee to give notice to the Repository or failure of any Owner to receive notice or any defect in any such notice will not affect the sufficiency of the proceedings for redemption. With respect to any notice of optional redemption of Series 2013 Bonds delivered pursuant to the Indenture or any provision of any Supplemental Indenture, unless, upon the giving of such notice, such Series 2013 Bonds will be deemed to have been paid and defeased within the meaning of the Indenture, such notice will state that such redemption will be conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of amounts sufficient to pay the principal of, and premium, if any, and interest on, such Series 2013 Bonds to be redeemed, and that if such amounts are not so received said notice will be of no force and effect and the District will not be required to redeem such Series 2013 Bonds. In the event that such notice of redemption contains such a condition and such amounts are not so received, the redemption will not be made and the Trustee will within a reasonable time thereafter give notice to the Owners to the effect that such amounts were not so received and such redemption was not made, such notice to be given by the Trustee in the manner in which the notice of redemption was given. Effect of Redemption. Once notice of redemption has been given as described above, and moneys for the payment of the Redemption Price of, together with interest accrued to the redemption date on, the Series

14 Bonds (or portions thereof) so called for redemption are being held by the Trustee, on the redemption date designated in such notice, the Series 2013 Bonds so called for redemption will cease to accrue interest, said Series 2013 Bonds (or portions thereof) will cease to be entitled to any benefit or security under the Indenture, and the Owners of said Series 2013 Bonds will have no rights in respect thereof except to receive payment of said Redemption Price and accrued interest to the date fixed for redemption. SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Following is a summary of certain provisions of the Indenture, including, but not limited to, sections of the Indenture detailing the pledge of Net Pledged Revenues, the allocation of Net Pledged Revenues, the Revenue Fund, the Bond Reserve Fund, the rate covenant and the issuance of Additional Bonds. These summaries do not purport to be comprehensive or definitive. See APPENDIX B SUMMARY OF DOCUMENTS for a complete summary of certain of these provisions of the Indenture. Net Pledged Revenues The Series 2013 Bonds are limited obligations of the District payable solely from and secured by a pledge of Net Pledged Revenues and other amounts on deposit in certain funds and accounts under the Indenture. The Indenture generally defines Net Pledged Revenues as meaning, for any period, Pledged Revenues received during such period less Operation and Maintenance Expenses during such period. Pledged Revenues include all revenues earned by the District from or with respect to its ownership, possession, management, supervision, operation and control of the Port of San Diego, as determined in accordance with generally accepted accounting principles; and expressly exclude: (a) interest income on, and any profit realized from the investment of moneys in (i) any Project Fund, or (ii) any capitalized interest subaccount established in connection with a Series of Bonds, to the extent amounts on deposit in such subaccount are required to be paid into the Interest Fund, or (iii) any Bond Reserve Fund if and to the extent there is any deficiency therein; (b) interest income on, and any profit realized from, the investment of the proceeds of any Special Facility Indebtedness; (c) Special Facility Revenues and any interest income or profit realized from the investment thereof (except as is otherwise provided in the Indenture), unless such receipts are designated as Pledged Revenues by a Certificate of the District delivered to the Trustee; (d) car rental transaction fees; (e) any passenger security charge, including income or earnings thereon, unless all or a portion of such passenger security charges are designated as Pledged Revenues by a Certificate of the District delivered to the Trustee; (f) revenues derived from the development of Lane Field, including income or earnings thereon, unless all or a portion of such revenues are designated as Pledged Revenues by a Certificate of the District delivered to the Trustee; (g) grants, including, without limitation, federal and state grants, donations and/or bequests, the use of which is restricted by the grantor or the donor to a purpose inconsistent with the payment of debt service or Operation and Maintenance Expenses; (h) insurance proceeds which are not deemed to be Pledged Revenues in accordance with generally accepted accounting principles; (i) the proceeds of any condemnation award; (j) the proceeds of the sale of land, buildings or equipment; and (k) any money received by or for the account of the District from the levy or collection of taxes upon any property within the jurisdiction of the District. See APPENDIX B SUMMARY OF DOCUMENTS DEFINITIONS OF CERTAIN TERMS. Also see Allocation of Pledged Revenues below. The Series 2013 Bonds are also secured by amounts held in certain funds and accounts established pursuant to the Indenture, as further described herein. The Series 2013 Bonds are limited obligations of the District payable from Net Pledged Revenues and other amounts held in certain funds and accounts established under the Indenture. Neither the full faith and credit nor the taxing power of the District or the State or any political subdivision or public agency of the State is pledged to the payment of the principal of or interest on the Series 2013 Bonds. None of the properties of the District, other than Net Pledged Revenues, are subject to any mortgage or other lien for the benefit of the owners of the Series 2013 Bonds. Net Pledged Revenues are available for the equal and proportionate benefit and security of all Bonds issued pursuant to the Indenture and all Parity Debt incurred in accordance with the Indenture. 6

15 Allocation of Pledged Revenues Pursuant to the Port District Act, all income and revenue from the operation of the Port of San Diego, of whatever kind or nature, and all net income from leases or any other source of income or revenue, is to be deposited in a special fund established and administered by the District and designated as the San Diego Unified Port District Revenue Fund. Pursuant to the Indenture, the District has covenanted and agreed to establish, maintain and hold in trust a separate account designated as the Pledged Revenues Account within the San Diego Unified Port District Revenue Fund, to cause all Pledged Revenues to be deposited as soon as practicable upon receipt in the Pledged Revenues Account and to maintain the Pledged Revenues Account for so long as any Bonds or Parity Debt remains outstanding. Amounts deposited in the Pledged Revenues Account will be applied by the District in the following order: (First) to the payment of Operation and Maintenance Expenses; (Second) to the payment of amounts required to pay principal or purchase price of, and interest on, the Bonds in accordance with the terms of the Indenture and to the payment of amounts required to pay principal or purchase price of, and interest on, Parity Debt in accordance with the terms of such Parity Debt; (Third) to the payment of amounts required to replenish any Bond Reserve Fund established in connection with one or more Series of Bonds or any reserve fund established in connection with Parity Debt; (Fourth) to the payment of amounts required to pay principal or purchase price of, and interest on, Subordinate Obligations or any reserve fund established in connection with Subordinate Obligations; and (Fifth) to the payment of any other lawful expense of the District. The table on the following page provides a graphic presentation of the priority of payment under the Port District Act and the Indenture upon the receipt of revenues of the District. [Remainder of page intentionally left blank.] 7

16 TABLE 1 SAN DIEGO UNIFIED PORT DISTRICT ALLOCATION OF PLEDGED REVENUES Revenues of the District San Diego Unified Port District Revenue Fund (Held by the District) Pledged Revenues Account (Held by the District) Operations and Maintenance Expenses Debt Service on Bonds (Revenue Fund Held by the Trustee) Debt Service on Parity Debt Bond Interest (Interest Fund Held by the Trustee) Parity Debt Interest Bond Principal (Principal Fund Held by the Trustee) Parity Debt Principal Bond Reserve Fund(s) (Held by the Trustee) Reserves for Parity Debt Subordinate Obligations including Subordinate Obligations reserve funds Any lawful purpose of the District 8

17 Revenue Fund On each Pledged Revenues Transfer Date (the 5th Business Day prior to each principal and interest payment date), the District will transfer such amount of Net Pledged Revenues to the Trustee required to pay principal of and interest due on the Bonds on the interest payment date and the principal payment date to which such Pledged Revenues Transfer Date relates. All Net Pledged Revenues received by the Trustee will be held in trust by the Trustee for the benefit of the Owners of the Bonds and will be deposited by the Trustee in a trust fund, designated as the Revenue Fund, which fund the Trustee will establish, maintain and hold in trust. Investment income on amounts held by the Trustee under the Indenture (other than amounts held in the Rebate Fund or for which particular instructions (such as with respect to a Project Fund) are provided in a Supplemental Indenture) will also be deposited in the Revenue Fund. All moneys at any time held in the Revenue Fund will be held in trust for the benefit of the Owners of the Bonds and will be disbursed, allocated and applied solely for the uses and purposes set forth in Indenture. So long as any Bonds are Outstanding, on or prior to the date when principal and interest on the Bonds is due and payable, the Trustee will transfer Net Pledged Revenues from the Revenue Fund and deposit such Net Pledged Revenues into the following respective funds and accounts (each of which the Trustee will establish, maintain and hold in trust for the benefit of the Owners of the Bonds) in the following order of priority, the requirements of each such fund (including the making up of any deficiencies in any such fund resulting from lack of Net Pledged Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any deposit is made to any fund subsequent in priority: (1) Interest Fund. Upon receipt of Net Pledged Revenues on each Pledged Revenues Transfer Date (the 5th Business Day prior to each interest payment date), the Trustee will set aside in the Interest Fund an amount equal to the amount of interest becoming due and payable on the Outstanding Combination Bonds (for periods after the last compounding date with respect to such Combination Bonds) and Current Interest Bonds (except for Bonds constituting Variable Rate Indebtedness) on the next succeeding interest payment date (excluding any interest for which there are moneys deposited in the Interest Fund from the proceeds of any Series of Bonds or other source and reserved as capitalized interest to pay such interest), until the requisite amount of interest on all such Outstanding Combination Bonds and Current Interest Bonds (except for Bonds constituting Variable Rate Indebtedness) is on deposit in such fund. In the event any Bonds constituting Variable Rate Indebtedness are Outstanding, upon receipt of Net Pledged Revenues on each Pledged Revenues Transfer Date, the Trustee will also set aside in the Interest Fund one hundred ten percent (110%) of the aggregate amount of interest, estimated by the Trustee in its reasonable judgment, if the actual amount of interest is not known, becoming due and payable on the Outstanding Variable Rate Indebtedness on the next succeeding interest payment date. No deposit need be made into the Interest Fund on any Pledged Revenues Transfer Date if the amount contained therein is at least equal to the interest to become due and payable on the next succeeding interest payment date upon all of the Bonds issued under the Indenture and then Outstanding. In the event that the Net Pledged Revenues and amounts on deposit in the Bond Reserve Fund or Bond Reserve Funds, if any have been established, are insufficient to make the required deposits so that moneys in the Interest Fund on any interest payment date are equal to the amount of interest due and payable on such interest payment date, then such moneys will be applied pro rata among the Series of Bonds then Outstanding according to the amount of interest then due; provided, however, that amounts on deposit in any Bond Reserve Fund will be applied only to the payment of interest on the Bonds to which such Bond Reserve Fund relates. (2) Principal Fund; Sinking Accounts. Upon receipt of Net Pledged Revenues on each Pledged Revenues Transfer Date (the 5th Business Day prior to each principal payment date), the Trustee will deposit in the Principal Fund such amount of Net Pledged Revenues as will be necessary to pay (i) the aggregate amount of Bond Obligation becoming due and payable on the next succeeding principal payment date on the Outstanding Serial Bonds, plus (ii) the aggregate of the Mandatory Sinking Account Payments to be paid on the next succeeding Mandatory Sinking Account Payment date for the Term Bonds of all Series for which Sinking Accounts have been created for which annual mandatory redemption is required from such Sinking Accounts. 9

18 In the event that the Net Pledged Revenues and amounts on deposit in the Bond Reserve Fund or Bond Reserve Funds, if any have been established, are not sufficient to make the required deposits so that moneys in the Principal Fund on any principal or mandatory redemption date are equal to the amount of Bond Obligation to become due and payable on the Outstanding Serial Bonds of all Series plus the Bond Obligation amount of and redemption premium on the Outstanding Term Bonds required to be redeemed or paid at maturity on such date, then such moneys will be applied on a pro rata basis and in such proportion as said Serial Bonds and said Term Bonds will bear to each other, after first deducting for such purposes from said Term Bonds any of said Term Bonds required to be redeemed annually as have been redeemed or purchased during the preceding twelve-month period ending on such date; provided, however, that amounts on deposit in any Bond Reserve Fund will be applied only to the payment of principal of the Bonds to which such Bond Reserve Fund relates. On each Pledged Revenues Transfer Date, any Net Pledged Revenues remaining in the Revenue Fund after the foregoing transfers described in (1) and (2) above will be applied by the Trustee to satisfy any deficiency in any Bond Reserve Fund and thereafter will be transferred to the District. The District may use and apply such Net Pledged Revenues when received for any lawful purpose of the District, including, but not limited to redemption of Bonds and the purchase of Bonds as and when and at such prices as the District may determine in accordance with the provisions set forth in the Indenture; provided, however, that if any Subordinate Obligations are outstanding, any Net Pledged Revenues remaining in the Revenue Fund after the foregoing transfers described in (1) and (2) above and in this paragraph, will be transferred to the trustee for such Subordinate Obligations. If three (3) Business Days prior to any interest payment date, principal payment date or Mandatory Sinking Account Payment date, the amounts on deposit in the Revenue Fund are insufficient to make the payments due on such interest payment date, principal payment date or Mandatory Sinking Account Payment date, the Trustee will immediately notify the District of such deficiency, by telephone or facsimile, which notice will be confirmed in writing, and will request that the amount of such deficiency be transferred to the Trustee on or prior to such payment date from any available Net Pledged Revenues. Bond Reserve Fund The District may at its sole discretion at the time of issuance of any Series of Bonds or at any time thereafter by Supplemental Indenture provide for the establishment of a Bond Reserve Fund as additional security for a Series of Bonds. Any Bond Reserve Fund so established by the District will be available to secure one or more Series of Bonds as the District determines and specifies in the Supplemental Indenture establishing such Bond Reserve Fund. Any Bond Reserve Fund established by the District will be held by the Trustee and will comply with the requirements set forth in the Indenture. The Indenture requires the establishment and maintenance of a Bond Reserve Fund for the Series 2004 Bonds and the Series 2013 Bonds (the 2004/2013 Bond Reserve Fund ). Following issuance of the Series 2013 Bonds and the defeasance of the 2004 Series B Bonds, all amounts in the 2004/2013 Bond Reserve Fund (including all amounts which may be obtained from letters of credit, surety bonds and insurance policies on deposit in the 2004/2013 Bond Reserve Fund) will be used and withdrawn by the Trustee solely for the purpose of making up any deficiency in the Interest Fund or the Principal Fund related to the 2004 Series A Bonds or Series 2013 Bonds or (together with any other moneys available therefor) for the payment or redemption of all 2004 Series A Bonds or Series 2013 Bonds then Outstanding or for the payment of the final principal and interest payment of the 2004 Series A Bonds or Series 2013 Bonds. Pursuant to the Indenture, following issuance of the Series 2013 Bonds, the Bond Reserve Requirement with respect to the 2004/2013 Bond Reserve Fund, as of any date of calculation, is an amount equal to the least of (a) Maximum Annual Debt Service on the 2004 Series A Bonds and Series 2013 Bonds, (b) one hundred twentyfive percent (125%) of average Annual Debt Service on the 2004 Series A Bonds and Series 2013 Bonds, and (c) ten percent (10%) of the original proceeds of the 2004 Series A Bonds and Series 2013 Bonds. At the time of issuance of the Series 2013 Bonds, the Bond Reserve Requirement with respect to the 2004/2013 Bond Reserve Fund will be equal to $3,378, The Bond Reserve Requirement for any Bond Reserve Fund established for a Series of Bonds issued subsequent to the Series 2013 Bonds will be specified in the Supplemental Indenture establishing the terms and provisions of such Series of Bonds. 10

19 In lieu of making the Bond Reserve Requirement deposit applicable to one or more Series of Bonds in cash or in replacement of moneys then on deposit in any Bond Reserve Fund (which will be transferred by the Trustee to the District), or in substitution of any other letter of credit, insurance policy or surety bond comprising part of the Bond Reserve Requirement relating to one or more Series of Bonds, the District may, at any time and from time to time, deliver to the Trustee an irrevocable letter of credit issued by a financial institution having unsecured debt obligations rated at the time of delivery of such letter of credit in one of the two highest Rating Categories of Moody s and Standard & Poor s, in an amount, which, together with moneys, Investment Securities or surety bonds or insurance policies, then on deposit in such Bond Reserve Fund, will equal the Bond Reserve Requirement relating to the Bonds to which such Bond Reserve Fund relates. Such letter of credit will have a term no less than three (3) years or, if less, the final maturity of the Bonds in connection with which such letter of credit was obtained and will provide by its terms that it may be drawn upon as provided in the Indenture. At least one year prior to the stated expiration of such letter of credit, the District will either (i) deliver a replacement letter of credit, (ii) deliver an extension of the letter of credit for at least one (1) additional year or, if less, the final maturity of the Bonds in connection with which such letter of credit was obtained, or (iii) deliver to the Trustee a surety bond or an insurance policy satisfying the requirements of the Indenture. Upon delivery of such replacement letter of credit, extension of the letter of credit, surety bond or insurance policy, the Trustee will deliver the then-effective letter of credit to or upon the order of the District. If the District fails to deposit a replacement letter of credit, extension of the letter of credit, surety bond or insurance policy with the Trustee, the District will immediately commence to make monthly deposits with the Trustee so that an amount equal to the Bond Reserve Requirement relating to the Bonds to which such Bond Reserve Fund relates will be on deposit in such Bond Reserve Fund no later than the stated expiration date of the letter of credit. If an amount equal to the Bond Reserve Requirement relating to the Bonds to which such Bond Reserve Fund relates as of the date following the expiration of the letter of credit is not on deposit in such Bond Reserve Fund one (1) week prior to the expiration date of the letter of credit (excluding from such determination the letter of credit), the Trustee will draw on the letter of credit to fund the deficiency resulting therefrom in such Bond Reserve Fund. In lieu of making a Bond Reserve Requirement deposit in cash or in replacement of moneys then on deposit in a Bond Reserve Fund (which will be transferred by the Trustee to the District) or in substitution of any letter of credit, insurance policy or surety bond comprising part of a Bond Reserve Requirement for any Bonds, the District may, at any time and from time to time, deliver to the Trustee a surety bond or an insurance policy securing an amount which, together with moneys, Investment Securities, letters of credit or other surety bonds or insurance policies then on deposit in a Bond Reserve Fund, is no less than the Bond Reserve Requirement relating to the Bonds to which such Bond Reserve Fund relates. Such surety bond or insurance policy will be issued by an insurance company whose unsecured debt obligations (or for which obligations secured by such insurance company s insurance policies) are rated at the time of delivery in one of the two highest Rating Categories of Moody s and Standard & Poor s. Such surety bond or insurance policy will have a term of no less than the final maturity of the Bonds in connection with which such surety bond or insurance policy is obtained. In the event that such surety bond or insurance policy for any reason lapses or expires, the District will immediately implement (i) or (iii) of the preceding paragraph or make the required deposits to such Bond Reserve Fund. All amounts in any Bond Reserve Fund (including all amounts which may be obtained from letters of credit, surety bonds and insurance policies on deposit in such Bond Reserve Fund) will be used and withdrawn by the Trustee, as hereinafter provided, solely for the purpose of making up any deficiency in the Interest Fund or the Principal Fund relating to the Bonds to which such Bond Reserve Fund relates, or (together with any other moneys available therefor) for the payment or redemption of all Bonds then Outstanding to which such Bond Reserve Fund relates or, for the payment of the final principal and interest payment of such Bonds. The Trustee will apply amounts held in cash or Investment Securities in any Bond Reserve Fund prior to applying amounts held in the form of letters of credit, surety bonds and insurance policies in any Bond Reserve Fund, and will, on a pro rata basis with respect to the portion of a Bond Reserve Fund held in the form of a letter of credit, surety bond and insurance policy (calculated by reference to the maximum amounts of such letter of credit, surety bond and insurance policy), draw under each letter of credit, surety bond or insurance policy issued with respect to such Bond Reserve Fund, in a timely manner and pursuant to the terms of such letter of credit, surety bond or insurance policy to the extent necessary in order to obtain sufficient funds on or prior to the date such funds are needed to pay the Bond Obligation of, Mandatory Sinking Account Payments with respect to, and interest on the Bonds to which such Bond Reserve Fund relates when due. In the event that the Trustee has notice that any payment of principal of or interest on a Bond has been recovered from a Bondowner pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in 11

20 accordance with the final, nonappealable order of a court having competent jurisdiction, the Trustee, pursuant to and provided that the terms of the letter of credit, surety bond or bond insurance policy, if any, securing the Bonds so provide, will so notify the issuer thereof and draw on such letter of credit, surety bond or policy to the lesser of the extent required or the maximum amount of such letter of credit, surety bond or policy in order to pay to such Bondowners the principal of and interest so recovered. The Trustee will notify the District of any deficiency in any Bond Reserve Fund (i) due to a withdrawal from such Bond Reserve Fund for purposes of making up any deficiency in the Interest Fund or the Principal Fund relating to the Bonds to which such Bond Reserve Fund relates or (ii) resulting from a valuation of Investment Securities held on deposit in such Bond Reserve Fund pursuant to the Indenture and will request that the District replenish such deficiency or repay any and all obligations due and payable under the terms of any Reserve Facility comprising part of any Bond Reserve Requirement. Upon receipt of such notification from the Trustee, the District will transfer to the Trustee for deposit in the applicable Bond Reserve Fund an amount equal to one-twelfth (1/12th) of the aggregate amount of each unreplenished prior withdrawal from such Bond Reserve Fund or decrease resulting from a valuation pursuant to the Indenture and will transfer to each Reserve Facility Provider providing a Reserve Facility satisfying a portion of the Bond Reserve Requirement relating to the Bonds to which such Bond Reserve Fund relates, an amount equal to one-twelfth (1/12th) of the aggregate amount of any unreplenished prior withdrawal on such Reserve Facility, such amount to be transferred on or prior to the first (1st) Business Day of the each month, commencing with the first (1st) Business Day of the month following the District s receipt of notification from the Trustee of withdrawal or decrease resulting from a valuation, as applicable, until the balance on deposit in such Bond Reserve Fund is at least equal to the Bond Reserve Requirement relating to the Series of Bonds to which such Bond Reserve Fund relates. Any amounts in any Bond Reserve Fund in excess of the Bond Reserve Requirement relating to the Bonds to which such Bond Reserve Fund relates will be transferred by the Trustee to the District on the Business Day following September 1 of each year; provided that such amounts will be transferred only from the portion of such Bond Reserve Fund held in the form of cash or Investment Securities. Rate Covenant Pursuant to the Indenture, the District will establish and at all times maintain rentals, rates, fees and charges for the use of the Port of San Diego and for services rendered by the District in connection with the Port of San Diego so that Net Pledged Revenues in each Fiscal Year will be at least equal to one hundred twenty-five percent (125%) of aggregate Annual Debt Service for such Fiscal Year. Pursuant to Section 36 of the Port District Act, the Board of Port Commissioners (the Board ) has full authority to levy rates and charges for use of any of the facilities owned or service furnished or provided by the District. Within one hundred eighty (180) days after the end of each Fiscal Year, the District will compute Net Pledged Revenues and Annual Debt Service for the previous Fiscal Year and will promptly furnish to the Trustee a Certificate of the District setting forth the results of such computation. If Net Pledged Revenues in the previous Fiscal Year are less than one hundred twenty-five percent (125%) of aggregate Annual Debt Service for such Fiscal Year, the District will retain and direct an Independent Consultant to make recommendations as to the revision of the District s business operations and its schedule of rentals, rates, fees and charges for the use of the Port of San Diego and for services rendered by the District in connection with the Port of San Diego (such recommendation to be provided as promptly as possible and in no event later than the last day of the current Fiscal year). After receiving such recommendations, the District will take all lawful measures to revise its schedule of rentals, rates, fees and charges as may be necessary to produce Net Pledged Revenues in an amount equal to one hundred twenty-five percent (125%) of aggregate Annual Debt Service in the Fiscal Year following the Fiscal Year in which such recommendations were received. In the event that Net Pledged Revenues for any Fiscal Year are less than one hundred twenty-five percent (125%) of aggregate Annual Debt Service for such Fiscal Year, but the District promptly takes all lawful measures to revise its schedule of rentals, rates, fees and charges as required by the Indenture, such deficiency in Net Pledged Revenues will not constitute an Event of Default under the Indenture. Nevertheless, if after taking the measures required by the Indenture to revise its schedule of rentals, rates, fees and charges, Net Pledged Revenues (as evidenced by the audited financial statements of the District) in the Fiscal Year following the Fiscal Year in which 12

21 recommendations were received are less than one hundred twenty-five percent (125%) of aggregate Annual Debt Service for such Fiscal Year, such deficiency in Net Pledged Revenues will constitute an Event of Default under the Indenture. See APPENDIX B SUMMARY OF DOCUMENTS THE INDENTURE Events of Default and Remedies of Bondholders. See CERTAIN INVESTMENT CONSIDERATIONS Ability to Meet Rate Covenant for a discussion regarding certain limits on the ability of the District to raise fees charged to its tenants. Additional Bonds The Indenture provides that in addition to the Series 2004 and the Series 2013 Bonds, the District may by Supplemental Indenture issue one or more additional Series of Bonds, payable from and secured by Net Pledged Revenues equally and ratably with the Series 2004 and the Series 2013 Bonds, but only upon compliance by the District with certain conditions set forth in the Indenture, including providing the following documents to the Trustee: (a) continuing. A certificate of the District certifying that no Event of Default has occurred and is then (b) A certificate of the District certifying that, subject to the provisions of the Indenture, in the event a Supplemental Indenture providing for the issuance of such Series of Bonds requires either (i) the establishment of a Bond Reserve Fund to provide additional security for such Series of Bonds or (ii) that the balance on deposit in an existing Bond Reserve Fund be increased, forthwith upon the receipt of the proceeds of the sale of such Series, to an amount at least equal to the Bond Reserve Requirement with respect to such Series of Bonds and all other Bonds secured by such Bond Reserve Fund to be considered Outstanding upon the issuance of such additional Series of Bonds, the Supplemental Indenture providing for the issuance of such additional Series of Bonds requires a deposit of the amount necessary. (c) A Certificate of the District certifying that the aggregate principal amount of Bonds issued under the Indenture will not exceed any limitation imposed by law or by any Supplemental Indenture. (d) (i) a Certificate of the District certifying (on the basis of calculations made no earlier than the date of sale of such Series of Bonds) that the lesser of (x) the amount of Net Pledged Revenues for a period of twelve (12) consecutive months during the eighteen (18) months immediately preceding the date on which such additional Series of Bonds will become Outstanding or (y) the estimated Net Pledged Revenues for the Fiscal Year in which such Series of Bonds are to be issued, was, or will be, as applicable, at least equal, to 1.25 times Maximum Annual Debt Service on all Series of Bonds and Parity Debt then Outstanding and the additional Series of Bonds then proposed to be issued; and (ii) a Certificate of an Independent Consultant (on the basis of calculations made no earlier than the date of sale of such Series of Bonds) certifying that the projected Net Pledged Revenues for each of the first three (3) Fiscal Years immediately following the completion date of the Project being financed from the proceeds of such additional Series of Bonds, as specified in a Certificate of the District delivered to the Independent Consultant, will be at least equal to 1.25 times Maximum Annual Debt Service on all Series of Bonds and Parity Debt then outstanding for each such Fiscal Year, taking into account the issuance of the additional Series of Bonds then proposed to be issued. In the event additional assets or revenues are included within the definition of Pledged Revenues by a Supplemental Indenture, such additional assets or revenues will be included in the calculations in subsection (d)(i) and (ii) above as if such additional assets or revenues had always been included in Pledged Revenues, but only if any rating agency then rating the Bonds, solely as a result, does not lower or withdraw its rating on any of the Bonds. Nothing in the Indenture prevents a Supplemental Indenture providing for the issuance of an additional Series of Bonds from pledging or otherwise providing, in addition to the security given or intended to be given by the Indenture, additional security for the benefit of such additional Series of Bonds or any portion thereof. 13

22 For purposes of subsection (d) above, in estimating Net Pledged Revenues, the District or the Independent Consultant, as applicable, may take into account: (i) reasonable Net Pledged Revenues from District facilities reasonably expected to become available during the period for which the estimates are provided; (ii) any increase in fees, rates, charges, rentals or other sources of Net Pledged Revenues which have been approved by the Board and will be in effect during the period for which the estimates are provided; and (iii) any other increases in Net Pledged Revenues which the District or the Independent Consultant, as applicable, believes to be a reasonable assumption for such period. With respect to Operating and Maintenance Expenses, the District or the Independent Consultant, as applicable, will use such assumptions as the District or the Independent Consultant, as applicable, believes to be reasonable, and taking into account: (i) historical Operation and Maintenance Expenses; (ii) Operation and Maintenance Expenses associated with the new District facilities; and (iii) such other factors, including inflation and changing operations or policies of the Board, as the District or the Independent Consultant, as applicable, believes to be appropriate. The District or the Independent Consultant, as applicable, will include in the certificate or in a separate accompanying report a description of the assumptions used and the calculations made in determining the estimated Net Pledged Revenues and will also set forth the calculations of Maximum Annual Debt Service, which calculations may be based upon information provided by another Independent Consultant. For purposes of preparing the certificates described in subsection (d) above, the District and the Independent Consultant or Independent Consultants, as applicable, may rely upon financial statements prepared by the District which have not been subject to audit by an independent certified public accountant if audited financial statements for the Fiscal Year or period are not available; provided, however, that an Authorized Representative will certify as to the accuracy of such financial statements and that such financial statements were prepared substantially in accordance with generally accepted accounting principles, subject to year-end adjustments. (e) An Opinion of Bond Counsel to the effect that the execution of the Supplemental Indenture providing for the issuance of such Series of Bonds has been duly authorized by the District in accordance with the Indenture and that such Series of Bonds, when duly executed by the District and authenticated and delivered by the Trustee, will be valid and binding limited obligations of the District. See APPENDIX B SUMMARY OF DOCUMENTS THE INDENTURE Issuance of Additional Bonds; Parity Debt; Subordinate Obligations; Special Facilities for additional information on the District s ability to issue Refunding Bonds and Parity Debt. Other Covenants The Indenture contains other covenants that relate to the security for the Series 2013 Bonds, including covenants concerning encumbrances of the Net Pledged Revenues, retention of assets, insurance, eminent domain proceeds, events of default and remedies, defeasance and other matters. See APPENDIX B SUMMARY OF DOCUMENTS THE INDENTURE Covenants of the District for a summary of certain of these provisions. [Remainder of page intentionally left blank.] 14

23 2004 SERIES A BONDS AND SERIES 2013 BONDS DEBT SERVICE REQUIREMENTS AND OTHER OUTSTANDING OBLIGATIONS 2004 Series A Bonds and Series 2013 Bonds Debt Service Requirements The table below sets forth debt service requirements on the District s outstanding 2004 Series A Bonds and Series 2013 Bonds following the issuance of the Series 2013 Bonds. TABLE 2 SAN DIEGO UNIFIED PORT DISTRICT 2004 SERIES A AND SERIES 2013 DEBT SERVICE REQUIREMENTS 1,2 Debt Service on Outstanding 2004 Series A Bonds Series 2013 Bonds Fiscal Year End Principal Requirements Interest Requirements 6/30/2014 $ 149,550 $ 270,000 $ 348,531 $ 768,081 6/30/2015 2,141,800-1,236,888 3,378,688 6/30/2016 2,141,050-1,236,888 3,377,938 6/30/2017 2,140,650-1,236,888 3,377,538 6/30/2018 2,140,400-1,236,888 3,377,288 6/30/2019 2,139,075-1,236,888 3,375,963 6/30/2020 2,093,550-1,236,888 3,330,438 6/30/2021-1,995,000 1,187,013 3,182,013 6/30/2022-2,095,000 1,084,763 3,179,763 6/30/2023-2,200, ,388 3,177,388 6/30/2024-2,315, ,513 3,179,513 6/30/2025-2,435, ,763 3,180,763 6/30/2026-2,560, ,888 3,180,888 6/30/2027-2,690, ,638 3,179,638 6/30/2028-2,825, ,763 3,176,763 6/30/2029-2,975, ,763 3,181,763 6/30/2030-3,115,000 66,194 3,181,194 Total Debt Service Requirements Total $12,946,075 $25,475,000 $14,364,537 $52,785,612 1 Numbers may not total due to rounding to nearest dollar. 2 Debt service calculations are as of the date of delivery of the Series 2013 Bonds. Subordinate Obligations Airport Related Promissory Notes. As part of the transfer of the Airport to the Airport Authority on January 1, 2003, and pursuant to the Memorandum of Understanding dated December 31, 2002, between the District and the Airport Authority (the Airport MOU ), the District issued a $50 million promissory note to the Airport Authority (the Original Airport Note ). The Original Airport Note was unsubordinated and fully negotiable, with an interest rate of the prime rate plus 1%. Monthly payments of interest were required for seven (7) years with the principal amount due and payable on December 31, As a result of a settlement agreement effective June 1, 2004, between the District and the Airport Authority (the Settlement Agreement ), the District amended and restated the Original Airport Note and the District issued the Amended and Restated Subordinated, Fully-Negotiable Promissory Note dated June 1, 2004, made by the District in favor of the Airport Authority in the original principal amount of $50,000,000 (the Airport Note ). The Airport Note is amortized over a period of 25 years, which commenced January 1, 2006, with a fixed rate of 5.5% per annum; the Airport Note remains subordinated to all other bonded indebtedness of the District, including the Bonds. The annual principal and interest payment on the 15

24 Airport Note each year is $3,684,525, and as of September 30, 2013, the outstanding principal amount of the Airport Note is $40,983,976. Lease of Phone and Network Equipment. On April 21, 2009, the District entered into a Master Tax- Exempt Lease/Purchase Agreement with Key Government Finance, Inc. (the Initial KGF Lease/Purchase Agreement ) to lease phone and network equipment for $2,963,838. The Initial KGF Lease/Purchase Agreement is for five years and the annual principal and interest payment each year is $592,768. On August 7, 2009, an additional lease/purchase agreement was signed with Key Government Finance, Inc. (the Second KGF Lease/Purchase Agreement ) for the lease of storage area network equipment over a five-year period. Annual payments under the Second KGF Lease/Purchase Agreement shall not exceed $350,000 for the first year, and $99,730 for years two through five, with an option for a $1 purchase of the equipment upon lease completion, for a total amount including principal and interest not to exceed $748,922. North Embarcadero Visionary Plan. On April 9, 2007, the District entered into a Joint Exercise of Powers Agreement (the JPA ), with the City of San Diego and the Redevelopment Agency of the City of San Diego (the Agency ) acting through the Centre City Development Corporation (the CCDC ) (which, as of June 2012, was renamed Civic San Diego), to design and fund phases of the North Embarcadero Alliance Visionary Plan (the NEVP ) and to exercise the powers described in the JPA. The JPA identified the first phase of the NEVP (the First Phase ) to be Harbor Drive and Esplanade improvements between West Broadway and B Street. It also provided that the District and the Agency equally share the cost for the First Phase design, and that costs for subsequent phases shall be agreed to between the parties to the JPA in the form of an amendment to be approved by the governing body of each party. On February 28, 2011, a First Amendment to the JPA (the First Amendment ) was signed with the City of San Diego and the Agency acting through CCDC. The First Amendment revised the definition of the First Phase to include improvements to West Broadway and extended the boundary of work on Harbor Drive south to the northern edge of Navy Pier and the Esplanade, and established an estimated total cost for the construction of the First Phase of $28,600,000, including hard and soft costs, to be shared equally between the District and the Agency acting through CCDC, subject to certain credits to the District. After certain credits for previous work on Broadway Pier and offsets for future maintenance totaling approximately $5,723,862, the Agency through CCDC will advance the balance of the District s adjusted share estimated at $8,576,138. Despite the dissolution of the Agency, the CCDC has been making cash advances to the District. The First Amendment also revised the scope of the First Phase to include an approximately two-acre public park/plaza to be designed and constructed within a l50-foot setback from North Harbor Drive along Lane Field, to be designed to a quality similar to the public spaces to be constructed as part of the First Phase (the Setback Park/Plaza ). The District has an agreement with the developers of Lane Field to design and construct the Setback Park/Plaza at their sole expense. If, and only if, the developer of the adjacent Lane Field site fails to timely design and commence construction of the Setback Park/Plaza, the District shall design and commence construction of the Setback Park/Plaza, and the District and the Agency shall each divide the actual costs of the Setback Park/Plaza equally. The First Amendment set an estimated cost for the Setback Park/Plaza at approximately $6,000,000, which the District shall advance unless the Agency agrees otherwise in writing, and the District shall cause its construction as provided in the First Phase coastal development permit. The District s commitment for the First Phase, without the Setback Park/Plaza, is $8,576,138 plus interest estimated at $405,450, for an estimated total of $8,981,588. The total District s share on the proposed project budget for the First Phase, without the Setback Park/Plaza, is estimated at $14,705,450, which includes the District share of $14,300,000 and interest estimated at $405,450. Additionally, the Agency acting through CCDC agreed to contribute up to $1,000,000 for the design and construction of the Broadway Pier Surface improvements to provide a visual connection from the NEVP to areas on the Broadway Pier that will be available to the public. The District will repay the Agency s advances using 50% of any and all lease/income payments received by the District from Lane Field. In the event the Lane Field lease is delayed beyond June 13, 2013, the District shall begin annually to repay the Agency advances at the lesser of $850,000 or 50% of revenue received from Lane Field. The District may prepay any advances anytime. The District made the first repayment of $850,000 in August

25 In the event that the District advances the project costs for Setback Park/Plaza, the District shall be entitled to deduct the Agency s share of the project costs for Setback Park/Plaza from the annual payment the District would otherwise have to make, until such time as the Agency s equal share of the project costs for Setback Park/Plaza are repaid in full. If the District advances the funds to design and commence construction of Setback Park/Plaza, but later recoups the costs of such design and construction from a future developer of Lane Field, the District shall repay the Agency for any portion of the project costs for Setback Park/Plaza paid by the Agency to the District, whether that payment was made through a cash payment or through a deduction from funds owing to the Agency from the District. Six months after the completion of the First Phase, the District will establish a separate maintenance reserve (the First Phase Maintenance Reserve ) and deposit each year an amount of $400,000 escalated at 3% representing the incremental maintenance costs, which amount will be increased to reflect the maintenance costs of Setback Park/Plaza. The District shall also deposit to the First Phase Maintenance Reserve annually $150,000 escalated at 3%, beginning six months after completion of the First Phase, representing the current costs of maintenance. Convention Center Support Payments to City of San Diego. In September 1998, the District and the City of San Diego entered into a Support Agreement (the 1998 Support Agreement ) which provides that the District shall make an annual payment of $4,500,000 for 16 years beginning on June 30, 1999, to assist with the City of San Diego s financing of the construction of the San Diego Convention Center (the Convention Center ) Phase II Expansion Project (the Phase II Convention Center Expansion Project ). In September 1998, the District and the City of San Diego entered into the 1998 Convention Center Management Agreement (the 1998 Convention Center Agreement ) which provides that the City of San Diego will manage, operate, maintain and promote the Convention Center, and the District will manage, operate and maintain the parking facility of the Convention Center. The District receives all income from, and bears all expenses of, the operations and maintenance of the parking facility. These existing payments will terminate in July On November 8, 2011, the City of San Diego requested the District contribute $3 million annually for 20 years to assist in financing the proposed San Diego Convention Center Phase III Expansion project ( Phase III Convention Center Expansion Project ). On November 29, 2011 the District agreed to contribute financially to the Phase III Convention Center Expansion Project, provided certain conditions could be met by the City of San Diego. The District found that projected rental income to the District from the Phase III Convention Center Expansion Project resulting from increased demand for hotel rooms on District tideland properties could potentially provide sufficient funding to allow the District to meet the City of San Diego s request for funding and generate additional incremental revenue to the District through increased demand for hotel rooms and parking. The District s findings were based on two studies commissioned by consultants Economic Planning Systems, Inc. and PKF Consulting USA, LLC, which found that the range of potential incremental revenue to the District resulting from the Phase III Convention Center Expansion Project could be $1.1 million to $6.4 million per year, commencing with the first year in which the Phase III Convention Center Expansion Project opened for business. On October 20, 2012 the District and the City of San Diego entered into a Support Agreement ( 2012 Support Agreement ) for the Phase III Convention Center Expansion Project after the conditions stipulated by the District on November 29, 2011 had been satisfied. The 2012 Support Agreement provides for twenty (20) payments due annually on July 15th. The City of San Diego can direct the payments to pay debt service on bonds issued by the Convention Center Facilities District No ( 2012 CCFD ) or to repayment of a secondary bond issuance, which the City of San Diego proposes will be lease revenue bonds. The payments increase each year for five years and stabilize at $3 million per year in years 6 through 20 according to the 2012 Support Agreement, for a total contribution of $60 million. 17

26 Following is a table summarizing the annual payment schedule: Year 1 $1,100,000 Year 2 $2,460,000 Year 3 $3,710,000 Year 4 $3,821,300 Year 5 $3,908,700 Years 6 20 $3,000,000 Under the 2012 Support Agreement, no payments are required from the District unless and until the Phase III Convention Center Expansion Project is constructed and open for business with a final certificate of occupancy permit. Payments by the District are subordinate to all amounts due for all Bonds, Parity Debt, and Subordinate Obligations issued or incurred in accordance with the Indenture and are also payable on a subordinate basis to the Airport Note and the District s advance repayments to Civic San Diego, formerly CCDC, for the First Phase of the NEVP. The District may prepay any or all of the unpaid payments; however, if the District elects to prepay any of the payments, the District is required to pay for any expenses incurred in connection with the prepayment. If the City of San Diego elects to refund any bonds or lease revenue bonds issued by the 2012 CCFD, then the City of San Diego will be required to pay for any expenses incurred in connection with any refunding of either the 2012 CCFD bonds or lease revenue bonds. An amendment to the District s Master Plan that will allow construction of the Phase III Convention Center Expansion Project and 500 additional hotel rooms on tidelands was approved by the California Coastal Commission at its October 11, 2013 meeting. Additionally, the appeal of a judicial validation proceeding to determine the legality of a special tax to be levied by the City of San Diego to fund the majority of the cost of the Phase III Convention Center Expansion Project is expected to be resolved in the spring of If the amendment to the Master Plan is approved, and the special tax is found lawful, the Phase III Convention Center Expansion Project would take approximately 3 years to construct and could open as early as South Bay Cities MOUs. In June 1995, the District entered into Memorandum of Understandings with the cities of Chula Vista, Coronado, Imperial Beach and National City (the South Bay MOUs ). Pursuant to the South Bay MOUs, the District originally agreed to set aside $9 million for each of the seven years beginning July 1, 1994 to be expended for certain District projects, as shown in the District s Capital Improvement Program ( CIP ) for capital projects and improvements to be undertaken at the Port of San Diego, adopted by the Board on April 26, The total unawarded contract cost is periodically adjusted for inflation using the Building Cost Index. As of June 30, 2013, the District had set aside, expended or committed to expend a total amount of $95.6 million under the South Bay MOUs. This includes the initial set aside of $63.3 million, an inflation adjustment of $1.5 million and additional funding from the CIP of $18.8 million. The funds have been and will be expended for certain tidelands capital projects in the cities of Chula Vista, Coronado, Imperial Beach and National City. As of June 30, 2013, a balance of $8.2 million remained to be expended. Any future funding of the District s obligations under the South Bay MOUs will be subordinate to the payment of the Bonds and Parity Debt and do not have a lien on the Net Pledged Revenues. The $9 million set-aside for each year is complete and there are no future funding obligations. An unspent balance of $8.2 million is used for the CIP. Introduction and Overview THE DISTRICT AND THE PORT OF SAN DIEGO The District was created pursuant to the Port District Act adopted by the State Legislature in 1962 to manage the San Diego Harbor (excluding areas occupied by various military installations), operate the Airport, and administer the public tidelands along San Diego Bay through property management. The Port District Act conveyed certain tide and submerged lands within San Diego Bay and, by later amendment, oceanfront property in the City of Imperial Beach to the District in order to further develop navigation, commerce, fisheries, and recreation activities. The District s jurisdiction encompasses the five Member Cities of San Diego Bay: Chula Vista, Coronado, Imperial Beach, National City, and San Diego. The Port of San Diego encompasses 2,403 acres of land and 3,535 acres of water, which includes approximately 33 miles of waterfront property. Pursuant to State legislation enacted in

27 and 2002, the Airport Authority was established as a local entity of regional government to operate the Airport and all operations and obligations of the Airport were transferred from the District to the Airport Authority effective January 1, The District does not administer all of the tidelands area in San Diego Bay (14,951 acres) since various military installations occupy and utilize sizable tideland areas, such as the North Island Naval Air Station, the 32nd Street Naval Station, and the Marine Corps Recruiting Depot. The District and the military plan for and manage these tideland properties cooperatively. The District is authorized by its enabling legislation to levy property taxes within the five Member Cities. From 1963 to 1970, the District imposed a property tax in order to repay debt of the City of San Diego for improvements to the harbor and the Airport that were incurred before the establishment of the District. Since 1970, revenues from District activities have been sufficient to support District operations, pay the debt service on prior general obligation bonded indebtedness, which has been retired, and finance certain capital improvements, thus eliminating any further tax levy requirement. To levy any property taxes today, the District would need to receive the approval of a majority of the voters of the Member Cities for any general tax levy, and a supermajority of the voters of the Member Cities for any special tax levy. The District is involved in four strategic activity areas: real estate; maritime (which includes marine cargo and cruise ship facilities); recreation; and environmental. Only real estate and maritime are revenue-producing. For the fiscal year ended June 30, 2013 ( fiscal year 2013 ), real estate produced 61.1% and maritime produced 24.7% of total operating revenues of the District (unaudited). Real estate revenues are primarily derived from flat-fee ground rentals and rental fees based on a fixed percentage of tenant revenues subject to certain minimum monthly fees for industrial, commercial and recreational facilities, and parking fees. See OPERATING INFORMATION Real Estate Operations herein. Maritime revenues are primarily derived from tariffs, including wharfage, dockage and passenger fees collected from the cargo shipping lines and the cruise ships that berth at the District s facilities. See OPERATING INFORMATION Maritime Operations herein. Management and Administration Board of Port Commissioners. The District is governed by the Board which consists of seven commissioners. Commissioners are appointed to four-year terms by the city councils of the Member Cities. The San Diego City Council appoints three commissioners and the city council of each of the other four Member Cities appoint one commissioner. The commissioners four-year terms typically begin on the first meeting in January of the calendar year in which they are appointed. However, if a commissioner leaves office before their term ends, a new commissioner is appointed by the respective city council to complete such commissioner s term. In such circumstances, a commissioner s term may not begin in January. The city councils have the option of reappointing their commissioners for additional terms. Commissioners receive no salary and the Board annually elects commissioners for the specific positions of chair, vice chair and secretary. The present Commissioners are: Ann Y. Moore - Chairman. Ann Moore was sworn in to the Board of Port Commissioners in January 2011 to represent the City of Chula Vista. She is a senior partner in the law firm of Norton Moore & Adams. Before joining the firm, Moore served as Chula Vista s City Attorney. She has practiced law for more than 20 years and has extensive experience in land use, real estate, redevelopment, environmental, and municipal law. She represents both developers and governmental agencies in processing land use entitlements for large scale residential, commercial, and industrial projects. Her areas of expertise include the California Environmental Quality Act (CEQA), Subdivision Map Act, eminent domain, inverse condemnation, Endangered Species Act, public infrastructure financing, the Brown Act, and Conflict of Interest laws. Moore graduated from San Diego State University with a Public Administration degree and she earned her law degree at the University of San Diego law school. Bob Nelson Vice Chairman. Bob Nelson, Vice Chair of the Board of Port Commissioners and City of San Diego appointee, began his term in January His 40 years of government and political service includes participation as President Clinton s representative on the U.S. Competitiveness Policy Council and serving as chair of the San Diego Convention Center Corporation, the San Diego LGBT Community Center, and City of San Diego 19

28 Revenue Review and Economic Competitiveness Commission. He has also served on the City of San Diego Public Utilities Advisory Commission and in various advisory capacities to the Mayor of San Diego and the San Diego County District Attorney. He chairs the Port of San Diego s Environmental Advisory Committee and Marketing Advisory Committee and is a member of the Maritime Forum. He represents the Port of San Diego as an Advisory Member of the San Diego Association of Governments (SANDAG) Board of Directors. He also serves on the Board of Directors of CleanTECH San Diego and Middle Class Taxpayers Association. Prior to public service, Nelson built one of America s largest independent public relations agencies, now part of Porter-Novelli Group. His clients have included American Water, Anheuser-Busch Companies, the Association of American Railroads, California Teachers Association, The Irvine Company, San Diego-Imperial Counties Labor Council, and International Brotherhood of Electrical Workers. Dan Malcolm - Secretary. Dan Malcolm was sworn in to the Board of Port Commissioners in January 2011 to represent the City of Imperial Beach. President and CEO of Malcolm Properties, he has extensive experience in the field of commercial real estate brokerage, investment, finance and commercial property development. He also maintains a separate law practice specializing in commercial real estate contract, transactional, entitlement and land use law. Commissioner Malcolm has previously served on numerous public and private boards including the Imperial Beach City Council, San Diego Metropolitan Transit Development Board, San Diego County Commercial Association of Realtors, South County Economic Development Council, San Diego Association of Governments and served as Chairman of Sweetwater High School District Bond Oversight Committee. He has also served as Chairman of Sharp Coronado Hospital, as a Director on the master board of Sharp Healthcare and continues to serve on the Coronado Hospital Foundation Board. Commissioner Malcolm holds an undergraduate degree in real estate finance from San Diego State University and was awarded a Juris Doctorate of Law from Thomas Jefferson School of Law. Lou Smith. Lou Smith was sworn in to represent the City of Coronado in January Smith is a career naval officer, beginning in the Navy s Civil Engineer Corps. He completed three tours in Vietnam, supervising construction of combat facilities for the Marines. Later in his naval career, he was sent to Washington, DC where he worked with the Department of Defense and Congress on military base construction projects. Following his Washington assignment, he ran the Navy s Public Works Office in Keflavik, Iceland. Retiring from the Navy in 2000 as a two-star Admiral, Smith was directly responsible for more than 360 major naval bases throughout the world. After retiring, he chose to work in the public sector, serving as Chief Administrative Officer for San Diego City Schools. He had a major role in the execution of Proposition MM, a $1.5 billion school bond. Smith most recently served as Vice President of Facilities for Sharp Healthcare in San Diego. During his tenure there, he was involved in the construction of two new hospitals, each with a construction value of more than $150 million. He retired from Sharp in A registered professional civil engineer, Smith is a Fellow and Past National President of the Society of Military Engineers. His civic experience includes serving on the Board of Directors of the San Diego County Taxpayer s Association, and the Board of Sharp Coronado Hospital. Robert Valderrama. Robert Valderrama was sworn in to represent the City of National City in January 2005 and served as Chairman of the Board of Port Commissioners in He served for two years as a Director on the San Diego County Water Authority Board and served on the agency s Engineering and Operations Public Affairs Special Budget Committee. Valderrama s past appointments within the City of National City include serving on the agency s Planning and Environmental Professional Committees. He has also served on the City of National City s Park and Recreation Commission and as Chairman of the agency s Planning Commission. Active in civic affairs, Valderrama has served as Chairman of the Board of San Diego Construction Council, Inc. He is President of A-D & D Drywall, Inc. and of WestCoast Scaffold, Inc. Rafael Catellanos. Rafael Castellanos was sworn in to the Board of Port Commissioners in April 2013 to represent the City of San Diego. Castellanos is a partner with the law firm Solomon Minton Cardinal Doyal & Smith LLP in San Diego, where he specializes in commercial real estate and business transactional law. His professional affiliations include service as General Counsel to, and a member of, the Board of Directors of MANA de San Diego. He also serves on the Board of Directors of the San Diego La Raza Lawyers Association, currently as its President. Castellanos is a member of the California State Bar Association, the San Diego County Bar Association, and the Mexican American Business and Professional Association. Castellanos graduated from Arizona State University with a Bachelor of Arts degree and he earned a Juris Doctorate from the University of Chicago Law School as a Cornerstone Scholar. 20

29 Marshall Merrifield. Marshall Merrifield was sworn in to the Board of Port Commissioners in April 2013 to represent the City of San Diego. Merrifield serves as President/CEO and majority shareholder for Bluewave Security, which manufactures high-tech equipment for video and door-access surveillance. He previously was President/CEO and majority shareholder for the security company General Lock and Clark Security Products, the largest privately held security hardware business in the United States, until His past business affiliations have involved industries ranging from animation to investment banking. Merrifield cofounded Pacific Ridge School in Carlsbad and has been a Board Member for the Magdalena Ecke Family YMCA in Encinitas and for former San Diego Mayor Jerry Sanders Economic Advisory Council. He serves as a member of the Campaign to End Homelessness leadership team. Merrifield graduated from Princeton University with a Bachelor of Arts in Economics. Management and Administration. District senior staff consists of: President/CEO ( President/CEO ); Port Attorney; Port Auditor; Executive Vice President, Operations; Executive Vice President, Administration; a Chief Financial Officer; a Vice President, Public Safety; a Vice President, Strategy and Business Development; and an Assistant Port Attorney. The President, Port Attorney and Port Auditor serve at the pleasure of the Board. The senior management of the District includes the following individuals: Wayne Darbeau, President/CEO. Wayne Darbeau was appointed President/CEO by the Board of Port Commissioners in December Prior to this appointment, he served as the Port of San Diego s interim President/CEO. Darbeau has been with the organization since 1998 and has held key leadership positions, including Vice President of Administration. He serves as the President of the California Association of Port Authorities and is on the Board of Directors of the American Association of Port Authorities. Darbeau earned a bachelor s degree in economics from the University of Massachusetts, a master s degree in international relations from the University of San Diego and a master s in business administration from the University of Redlands. Randa Coniglio, Executive Vice President Operations. Randa Coniglio was appointed Executive Vice President, Operations in September As Executive Vice President, Operations, she provides corporate oversight over the Engineering/Construction, Real Estate, Environmental & Land Use Management, Government & Civic Relations, Maritime and Marketing & Communications departments. She has been with the Port of San Diego since April 2000, starting out in the Port of San Diego s Real Estate Operations Department. Prior to the Port of San Diego, she spent eight years handling a local portfolio of commercial investment properties for a Japanese firm, and five years in retail leasing and development. Coniglio holds a bachelor s degree in chemistry from the University of California, San Diego. Karen Porteous, Executive Vice President Administration. Karen Porteous was appointed Executive Vice President, Administration in September In this position, she provides corporate oversight over the Human Resources, General Services & Procurement, Office of the District Clerk and Harbor Police departments. She also serves as the Port of San Diego s chief negotiator for employee labor negotiations. Porteous began her career at the Port of San Diego in September 1995 in the Human Resources Department. Prior to her employment at the Port of San Diego, Porteous spent more than 13 years working in the human resources field for private companies including H.J. Heinz Corporation and Raytheon Service Company. She holds a bachelor s degree in business administration from the University of Southern Mississippi. Robert DeAngelis, Chief Financial Officer/Treasurer. Robert DeAngelis was appointed Chief Financial Officer in April In this role, he oversees the Port of San Diego s Financial Services and Accounting and Business Information and Technology Services departments. Prior to joining the Port of San Diego, DeAngelis served as a Senior Vice President at Teleperformance, an international business provider of customer service and technical support. He was previously the CFO for a Teleperformance subsidiary, served as Vice President of Finance for Dexpo.com and worked for the accounting firm KPMG, all in the Philadelphia area. DeAngelis is a Certified Public Accountant and holds a bachelor s degree in accounting from Temple University. Robert Monson, Port Auditor. Robert Monson was appointed Port Auditor by the Board of Port Commissioners in February As Port Auditor, he assists the Board in fulfilling its oversight responsibilities for the integrity of the Port of San Diego s financial statements, the Port of San Diego s compliance with legal and regulatory requirements, and the effectiveness of the Port of San Diego s internal control system. The Port Auditor 21

30 will further enhance the Port of San Diego s accountability and transparency. Monson has been with the Port of San Diego since March 1993, starting out in the Port of San Diego s Audit, Risk Management and Safety Department as an auditor. He has served as the Port of San Diego s senior auditor for the past 12 years. Prior to joining the Port of San Diego, he worked five years in the corporate audit department of Foodmaker, Inc. in San Diego. He earned a bachelor of business administration degree in financial accounting from National University. Monson is a Certified Internal Auditor, Certified Fraud Examiner, and a Certified Government Auditing Professional. He is a member of the Institute of Internal Auditors, the Association of Local Government Auditors, and the Association of Certified Fraud Examiners. Brandy D. Christian, Vice President Strategy and Business Development. Brandy Christian was appointed Vice President, Strategy & Business Development, for the Port of San Diego in December In this position, she oversees the Maritime, Government & Civic Relations and Marketing & Communications Departments. Her core responsibility is executive leadership of the strategic and business planning efforts of the organization. In this role she oversees strategy development, business planning, cruise development, maritime import and export opportunities, marketing, communications and governmental relations. Christian began her career at the Port of San Diego in October 2000 in the Executive Offices as the Public/Tenant Liaison. Prior to joining the Port of San Diego, she was a management consultant with KPMG Consulting (BearingPoint). While there, she consulted with public agencies on information systems implementation and strategic planning. Christian also has experience in government relations, having worked with organizations such as the Los Angeles Area Chamber of Commerce and Fleishman-Hillard Inc. She holds a bachelor s degree in political science from the University of Arizona and a master s degree in public administration from the University of Southern California. Christian is a certified Six Sigma Green Belt and serves as a state-level examiner for the California Malcolm Baldrige Quality Award (CAPE). Chief John A. Bolduc, Vice President Public Safety. Chief John Bolduc was appointed the Vice President of Public Safety in July In this role he oversees the Port of San Diego s Harbor Police Department, Homeland Security and all port security aspects. Bolduc was hired as the Port of San Diego s Chief of Harbor Police in May Prior to that, he served in municipal policing for 23 years in Minnesota. He was the Police Chief for the cities of Brainerd and Mora spanning nearly 13 years. He also served in patrol, investigations, training and tactical operations in the Twin Cities area. Chief Bolduc holds a bachelor s degree from Bemidji State University in Minnesota. He is also a graduate of the FBI National Academy. Thomas A. Russell, Port Attorney. Thomas A. Russell was appointed Port Attorney in September Prior to joining the Port of San Diego, he served for 10 years as General Counsel to the Port of Los Angeles and prior to that worked in private practice. He is a member of the American Association of Port Authorities Law Review Committee, served as chair of the American Bar Association s Subcommittee on Maritime Financing, and holds an AV peer-review rating from Martindale-Hubbell for achieving the highest standards of legal ethics and competence. Russell is a contributing author to the national legal treatises Benedict on Admiralty and Moore s Federal Practice. He earned a bachelor s degree in business administration from the University of California at Berkeley and a law degree from the University of Southern California s Law School. He clerked for Justice Robert Kingsley of the California Court of Appeals and received post-graduate training in dispute resolution at the Harvard Law School. Ellen F. Gross, Assistant Port Attorney. Ellen Gross was appointed Assistant Port Attorney in July She has been an attorney for over 22 years and a public sector attorney for over 15 years. Ellen s expertise as a litigator was honed during her time as a Deputy Public Defender in San Diego County s first Office of the Public Defender in which she was part of the first class of post-bar clerks hired by the office. Ellen went on to private practice specializing in civil rights law and employment law. In 1997, Ellen joined the Office of the City Attorney in the City of Chula Vista. In 2000, she was recruited by the San Diego Unified Port District s Office of the Port Attorney as a Deputy Port Attorney III. Ellen s areas of practice include labor and employment law, litigation, civil rights and law enforcement, municipal law, environmental law, first amendment, and land use. Ellen has extensive knowledge of the District s legal issues and has represented the District in numerous litigation matters administratively including matters before the Regional Water Quality Control Board, in state and federal court, as well as the Fourth District and Ninth Circuit Courts of Appeals. She worked extensively on the Port of San Diego s ongoing anchoring regulations, and its recent vendor/performer ordinance. She has been the Acting Assistant Port Attorney for the past six months. Ellen graduated from U.C. Berkeley earning a degree in History. Ellen obtained 22

31 her Juris Doctor from the University of San Diego where she was lauded for her oral advocacy skills and her commitment to individual civil rights. Employee Relations As of July 1, 2013, the District employed 521 people. 118 of the 521 employees of the District are represented by the California Teamsters, Public, Professional and Medical Employees Union Local 911 ( Teamsters ). The Board approved a three-year agreement with Teamsters at its October 8, 2013 meeting. The approximately 122 police officers are represented by the San Diego Harbor Police Officers Association (the Police Officers Association ). The Board approved a two-year agreement with the Police Officers Association at its October 8, 2013 meeting. The remaining 281 employees of the District are not represented by a union. The employees of the District do not work for the District s tenants, and therefore, any work stoppage by the employees of the District would not have a substantial effect on the collection of Pledged Revenues. See OPERATING INFORMATION Maritime Operations Stevedoring and Cargo Handling herein. General Information FINANCIAL INFORMATION The District maintains its financial records on a fiscal year basis (July 1 through the following June 30). Financial statements are audited annually by a firm of independent auditors. The District s financial statements for the fiscal year ended June 30, 2012 ( fiscal year 2012 ) are attached hereto as APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE SAN DIEGO UNIFIED PORT DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, Historical Operating Results The accounting policies of the District conform to accounting principles generally accepted in the United States of America applicable to state and local government agencies and, as such, the District is accounted for as a proprietary fund. In accordance with the provisions of Governmental Accounting Standards Board ( GASB ) Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Entities that Use Proprietary Fund Accounting, the District has applied all applicable GASB pronouncements. The District has applied Financial Accounting Standards Board ( FASB ) pronouncements and interpretations, Accounting Principles Board (APB) opinions, and Accounting Research Bulletins issued on or before November 30, 1989 that do not conflict with or contradict GASB pronouncements. The District has elected not to apply FASB pronouncements and interpretations issued after November 30, Since the District is comprised of a single enterprise fund, no fund level financial statements are shown. The basic financial statements provide a broad view of the District s operations in a manner similar to a privatesector business. The statements provide both short-term and long-term information about the District s financial position, which assists in assessing the District s economic condition at the end of the fiscal year. The basic financial statements are prepared using the flow of economic resources measurement focus and the accrual basis of accounting, similar to the accounting methods used by most private sector companies. Under the accrual basis of accounting, revenues are generally recognized when earned, and expenses are recognized when incurred. Accordingly, the basic financial statements take into account all revenues and expenses connected with the fiscal year even if cash involved has not been received or paid. GASB Statement No. 34 requires that the basic financial statements prepared in accordance with Generally Accepted Accounting Principles ( GAAP ) be preceded by a narrative introduction and analytical overview of the government s activities in the form of Management Discussion and Analysis ( MD&A ). This information is intended to assist the users of the financial statements in assessing whether the government s finances have improved or deteriorated. The District s MD&A for fiscal year 2012 can be found in APPENDIX A hereto, affixed to its basic financial statements. GASB Statement No. 34 also requires that the balance sheets report assets, liabilities and the difference between them. The entire equity section is combined to report total net assets and displayed in three broad components invested in capital assets net of related debt; restricted for other projects and grants; and unrestricted. 23

32 GASB Statement No. 45 requires the District to measure, recognize and display other post-employment benefits expenses and related liabilities or assets, note disclosures and, if applicable, required supplementary information in the financial reports. The requirements of this Statement No. 45 were effective for the District beginning with its fiscal year ending June 30, GASB Statement No. 49 requires the District to address accounting and financial reporting standards for pollution (including contamination) remediation obligations, which are obligations to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities, such as site assessments and cleanups. This standard requires the District to estimate the components of expected pollution remediation outlays and determine whether the outlays for those components should be accrued as a liability or, if appropriate, capitalized when goods and services are required. The District s Statement of Revenues, Expenses, and Changes in District Equity now categorizes revenues and expenses as either operating or nonoperating based upon definitions provided by GASB Statements No. 33 and 34. Significant sources of the District s revenues, including federal and state capital grants, are reported as nonoperating revenues. The notes to the basic financial statements provide additional information and more detail that is essential to a full understanding of the data provided in the basic financial statements. The notes to the fiscal year 2012 financial statements can be found immediately following the basic financial statements for fiscal year 2012 included as APPENDIX A. The following table summarizes the audited financial results from operations for the District for fiscal year 2012 and the unaudited financial results from operations for fiscal year See APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE SAN DIEGO UNIFIED PORT DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, [Remainder of page intentionally left blank.] 24

33 TABLE 3 SAN DIEGO UNIFIED PORT DISTRICT HISTORICAL OPERATING RESULTS FISCAL YEARS ENDED JUNE Operating revenues: Real estate operations $ 79,782,142 $ 82,604,486 Maritime operations Harbor Police 33,089,666 15,638,610 33,469,190 15,312,590 Other operating revenues 2,225,198 3,883,655 Total operating revenues 130,735, ,269,921 Operating expenses: Direct expenses: Real Estate operations Maritime operations Harbor Police Other operating expenses $ 34,656,936 20,611,614 31,457,754 75,083 $ 33,185,960 20,447,662 33,756,227 1,122,832 Depreciation and amortization 19,096,260 19,003,918 General and administrative expenses 34,599,617 35,951,226 Total operating expenses 140,496, ,467,825 Operating loss (9,761,108) (8,197,904) Nonoperating revenue (expense): Interest income 1,126, ,214 Settlement income 5,000 6,250 Unrealized loss on investments (349,218) (206,298) Interest expense (4,395,595) (4,206,450) Financial assistance other (3,330,000) - Convention Center expansion expense Other nonoperating expenses (4,500,000) (80,175) (4,500,000) (78,471) Other nonoperating revenues 4,007, ,314 Nonoperating expense, net (7,516,102) (7,371,441) Capital grants and contributions 8,338,957 11,443,024 Change in District equity (8,938,253) (4,126,320) District equity, beginning of year 537,333, ,395,006 District equity, end of year $ 528,395,006 $ 524,268, Derived from the District s audited financial statements for the fiscal year Derived from the District s preliminary, unaudited financial statements for the fiscal year Source: San Diego Unified Port District Management Discussion of District Finances Following is a discussion of the District s finances for fiscal years 2012 and All dollar amounts have been rounded to the nearest $100,000. Fiscal Year Total operating revenues of $130.7 million in fiscal year 2012 decreased $0.7 million from $131.4 million in the fiscal year ended June 30, 2011 ( fiscal year 2011 ). Operating expenses of $140.5 million in fiscal year 2012 increased $7.1 million from $133.4 million in fiscal year

34 Approximately 61.0% of the District s total operating revenue was attributable to Real Estate operations, which includes land and building leases, concession fees and parking fees. Maritime operations, which include wharfage, land and building leases, cruise ship passenger fees, dockage fees, and storage space rental, accounted for approximately 25.3% of the District s total operating revenue. Harbor Police accounted for approximately 12.0% of total operating revenues, which consists of services provided to the Airport Authority, citations issued for vehicle code violations, revenue from piers and floats, and operating grant revenue. Other operating revenue accounted for approximately 1.7% of the District s total operating revenue and includes reimbursements for general and administrative costs ( G&A ) associated with the Airport Authority for Harbor Police services, operating grant revenues, permit and license fees, and miscellaneous other operating revenues. Nonoperating revenue includes legal insurance settlements, interest income, reimbursed legal fees, insurance proceeds, gain/loss from disposal of fixed assets, and miscellaneous other revenue. Following are the major factors that influenced the fiscal year 2012 operating revenues and expenses in comparison to fiscal year Real Estate operating revenue of $79.8 million decreased $1.1 million from $80.9 million in fiscal year Fixed rent revenue decreased $3.3 million mainly due to a prior year rental revenue adjustment for the South Bay Power Plant. Offsetting the decrease was an increase in concession revenue of $2.0 million due to stronger performance by tidelands hotels and other visitor-serving businesses. The remaining $0.2 million variance was from all other operating revenue sources. Real Estate operating expenses of $34.7 million, before depreciation and G&A expense allocation, increased $8.1 million from fiscal year The increase was primarily due to the transfer of expenses of $5.3 million for the Municipal Service Agreements ( MSA ) with Member Cities for fire, police, and medical emergency from the Harbor Police; an increase of $1.2 million for the North Embarcadero Port Master Plan effort; an increase of $1.0 million for the Embarcadero Marina Park South revetment replenishment project; an increase of $0.8 million for legal and attorney fees for the South Bay Power Plant; and an increase of $0.6 million for long term monitoring at the Campbell shipyard site. These increases were partially offset by decreases of $0.8 million in all other operating expense categories. Maritime operating revenue of $33.1 million decreased $0.9 million from $34.0 million in fiscal year Cruise ship passenger fees and cruise ship passenger security charges were lower by $1.5 million due to a decrease in cruise ship calls and fewer passengers embarking and disembarking. Dockage revenue decreased $0.4 million as a result of fewer vessel calls compared to fiscal year Storage space rental revenue decreased $0.2 million due to reduced dwell time for vehicle imports and windmill components. These decreases were partially offset by an increase in wharfage of $1.1 million mainly due to an increase in cargo import and export activities. Maritime operating expenses of $20.6 million, before depreciation and G&A expense allocation, increased $1.6 million from $19.0 million in fiscal year The increase was primarily due to an allowance for bad debt of $1.0 million and the transfer of expense of $0.8 million for the MSA for fire, police, and medical emergency from the Harbor Police Department. Pasha Automotive Services ( Pasha ) automotive terminal fees increased $0.3 million primarily due to a higher volume of automotive imports. The increase was partially offset by a decrease in contracted services of $0.7 million for security camera maintenance, watchstanders, and security at the cruise ship terminals as a result of less cruise activity. The remaining $0.2 million variance was in all other expense categories. Harbor Police operating revenue of $15.6 million dollars increased $2.4 million from $13.2 million in the fiscal year The increase was primarily from the services provided to the Airport Authority and receipt of additional grant revenues for the Homeland Security and High Intensity Drug Trafficking Area programs. Harbor Police operating expenses of $31.5 million, before depreciation and G&A expense allocation, decreased $3.9 million from $35.4 million in fiscal year Non-personnel expense decreased primarily due to the transfer of the MSA expenses with Member Cities for fire, police, and medical emergency to real estate and maritime operations. The decrease was partially offset by personnel expense which had a net increase of $1.4 million mainly due to increases in retirement costs, salaries and wages as a result of negotiated salary increases, overtime, and accrual for other post-employment benefits ( OPEB ). 26

35 Other operating revenue decreased $1.0 million primarily due to a decrease in grant revenue. Other operating expenses, before depreciation and G&A expense allocation, decreased $1.8 million from fiscal year The decrease was primarily due to the transfer and allocation of Environmental Services expenses to all other profit centers. In fiscal year 2011, other operating expenses included environmental services and miscellaneous cost centers. Total depreciation and amortization expense of $19.1 million decreased $0.2 million from $19.3 million in fiscal year G&A expenses of $34.6 million increased $3.2 million from $31.4 million in fiscal year This was primarily due to an increase in professional services of $1.8 million for technology strategic planning, implementation of dashboard reporting, waterfront activation for special events, and business development activation. Legal services and legal settlements increased $0.7 million and retiree health benefits (paid) increased $0.6 million due to an increase in retirees as a result of the Early Retirement Incentive Program, which was implemented in fiscal year The remaining $0.1 million variance was in all other expense categories. The District s nonoperating revenues of $4.8 million, excluding capital grants and contributions, decreased $3.9 million from $8.7 million in fiscal year The decrease was primarily due to a prior year gain from disposal of fixed assets of $3.3 million for the settlement of the Anti-Submarine Warfare Training site and a decrease in terminal special facility fees of $1.0 million due to the facility fees ending in fiscal year Total nonoperating expenses of $12.3 million increased by $0.9 million from total nonoperating expenses of $11.4 million in fiscal year 2011 primarily due to financial assistance for the National City Aquatic Center, Coronado Boathouse, and the Imperial Beach Sand Replenishment projects. Capital grants and contributions of $8.3 million increased $5.4 million from $2.9 million in fiscal year Fiscal Year Total operating revenues of $135.3 million in fiscal year 2013 increased $4.6 million from $130.7 million in fiscal year Operating expenses of $143.5 million in fiscal year 2013 increased $3.0 million from $140.5 million in fiscal year Approximately 61.1% of the District s total operating revenue was attributable to real estate operations, which includes land and building leases, concession fees and parking fees. Maritime operations, which include wharfage, land and building leases, cruise ship passenger fees, dockage fees, and storage space rental, accounted for approximately 24.7% of the District s total operating revenue. Harbor Police accounted for approximately 11.3% of total operating revenues, which consists of services provided to the Airport Authority, citations issued for vehicle code violations, revenue from piers and floats, and operating grant revenue. Other operating revenue accounted for approximately 2.9% of the District s total operating revenue and includes reimbursements for G&A costs associated with the Airport Authority for Harbor Police services, operating grant revenues, permit and license fees, and miscellaneous other operating revenues. Following are the major factors that influenced the fiscal year 2013 operating revenues and expenses in comparison to fiscal year Real estate operating revenues of $82.6 million increased $2.8 million from $79.8 million in fiscal year Concession revenue increased $2.1 million due to stronger performance by tidelands hotels and other visitorserving businesses. Parking revenue increased approximately $0.4 million mainly due to an increase in parking rates and visitors. Fixed rent revenue increased $0.2 million due to an unbudgeted one-time lease payment from a tenant. The remaining $0.1 million variance was from all other operating revenue sources. Real estate operating expenses, before depreciation and G&A expense allocations, of $33.2 million decreased $1.5 million from fiscal year 2012 mainly due to varying major maintenance projects and varying phases on development related activities each year. Some of the major activities in fiscal year 2013 include approximately $1.0 million for the Commercial Fisheries Revitalization and the Harbor Island Water Conservation Landscape Improvement efforts and an increase of $0.8 million for the allocated costs of fire, police and medical emergency contracted with the Member Cities. Project expenses which were higher in fiscal year 2012 included significant 27

36 costs for the Embarcadero Marina Park South revetment replenishment project of $1.1 million, long term monitoring at the former Campbell shipyard site of $0.6 million, North Embarcadero Port Master Plan effort of $0.5 million, legal fees and attorney fees for the South Bay Power Plant of $0.5 million, and consulting services for the Goodrich South Campus efforts of $.5 million. The remaining variance was from all other operating expense sources. Maritime operating revenue of $33.5 million increased $0.4 million from $33.1 million in fiscal year Storage space rental revenue increased $1.0 million due to higher inventory from Pasha s auto waterborne and rail units. Wharfage revenue increased $0.4 million due to increase in autos, solar energy storage materials, and machinery & equipment. These increases were partially offset by a decrease in cruise ship passenger fees and cruise ship passenger security charges of $0.5 million due to a decrease in cruise ship calls and fewer passengers embarking and disembarking. Fixed rent revenue is $0.2 million lower due to an unoccupied office building at the National City Distribution Center and from changes in other tenants lease agreements. Concession revenue decreased $0.1 million as a result of a change in a tenant lease that no longer requires minimum annual crane fee. Grant revenue decreased $0.1 million due to the expiration of the American Recovery and Reinvestment Act grant. Maritime operating expenses, before depreciation and G&A expense allocations, of $20.4 million decreased $0.2 million from $20.6 million in fiscal year The decrease was primarily due to an allowance for bad debt of $1.1 million that was recognized in fiscal year 2012 and no such allowance was booked in fiscal year Contracted services for security camera maintenance, watchstanders, and security at the cruise ship terminals decreased $0.7 million as a result of lower cruise activity. Equipment and systems decreased $0.2 million due to repairs and upgrades to security equipment which occurred in fiscal year These decreases were partially offset by a $1.0 million accrual for remediation related activities, an increase in terminal fees of $0.4 million primarily due to a higher volume of automotive imports, an increase of $0.3 million for allocated costs for fire, police, and medical emergency contracted with the Member Cities, and an increase in retirement cost of $0.1 million. Harbor Police operating revenue of $15.3 million decreased $0.3 million from the $15.6 million in fiscal year 2012 primarily from the police services provided to the Airport Authority. The decrease was mainly due to the difference in the billing methodologies used for the two fiscal years, with fiscal year 2012 being higher. Resolution on the billing methodology is being finalized with the Airport Authority. The decrease in fiscal year 2013 was offset by additional revenue resulting from the annual true-up of prior year actual police costs following an audit by the Airport Authority. Harbor Police operating expenses, before depreciation and G&A allocations, of $33.8 million increased $2.3 million from $31.5 million in fiscal year Personnel expense increased $1.4 million mainly due to increase in retirement costs, increase in salaries and wages from the negotiated salary increases, increase in workers compensation expense based on reserves estimated by the carrier, and increase in overtime. Non-personnel expenses and other allocated costs increased by $0.9 million. Other operating revenue increased $2.3 million primarily from operating grant revenues. Other operating expenses, before depreciation and G&A expense allocations, increased $1.0 million from fiscal year 2012 primarily due to an increase in operating grant expenses of $0.9 million. The remaining variance was from various operating expense categories. Total depreciation and amortization expense of $19.0 million decreased $0.1 million from $19.1 million in fiscal year G&A expenses of $36.0 million increased $1.4 million from $34.6 million in fiscal year 2012 primarily due to the following increases: $0.3 million from purchasing grant funded communication systems equipment, $0.2 million in legal services, and a combined $0.2 million from retiree health and group health insurance. Additionally, $0.4 million was recorded in fiscal year 2013 for various contingencies. The remaining variance was from various expense categories. 28

37 Total nonoperating expenses of $8.8 million decreased $3.5 million from total nonoperating expenses of $12.3 million. Fiscal year 2012 included financial assistance for the National City Aquatic Center, Coronado Boathouse, and the Imperial Beach Sand Replenishment projects. Capital grants and contributions of $11.4 million in fiscal year 2013 increased $3.1 million from $8.3 million in fiscal year Budgeting Process Operating Budget. The District s annual operating budget process is closely integrated with the District s strategic plan. In preparing the annual operating budget, resources are allocated based on priorities related to the District s strategic plan as adopted by the Board. The District has the following eight strategic goals: A Port of San Diego that the public understands, trusts, and values A thriving and modern maritime seaport A vibrant waterfront destination where residents and visitors converge A Port of San Diego with a healthy and sustainable bay and its environment A Port of San Diego with a comprehensive vision for Port of San Diego land and water uses integrated to regional plans A Port of San Diego that is a safe place to visit, work, and play A Port of San Diego with an innovative and motivated workforce A financially sustainable Port of San Diego that drives regional job creation and regional economic vitality The budget preparation process is also guided by long-range and financial policies in order to meet the goals of the Board and the senior management team. The long-range and financial policies include: The projected income stream will allow the Port of San Diego to operate without the use of taxes or direct assessments. A balanced budget will be developed, in that revenues exceed expenses before depreciation and before capital expenditures. The Port of San Diego activities authorized in the budget will help stimulate the economy in the San Diego region. Capital investment in the tidelands will provide significant, long-term economic benefits to the region and will provide public improvements and infrastructure that will stimulate private investment in the tidelands bringing new revenues to the Port of San Diego and creating new jobs and opportunities to the region. Financial policies will enable the District to maintain its sound financial condition, so that capital investment in the tidelands may continue. Cash investments made by the District will conform to its Guidelines for Prudent Investments. It is the policy of the District to invest public funds in a manner, which will provide the highest rate of return with the maximum security while meeting the daily cash flow demands of the District. The investment policies and practices of the District are based upon prudent money management and conform to all state and local statutes governing the investment of public funds. In order of priority, investment objectives are: 29

38 Safety of principal Liquidity, and Return on investment The budget is prepared in a manner that facilitates its understanding by citizens, as well as Port officials. The District s annual operating budget preparation involves a collaborative process, with reviews and decisions being made by the entire management team, based on the best interests of the District and its regional stakeholders. Increased control and accountability for performance to the budget has been given to the individual departments. The focus remains on cost control and revenue enhancement. The budget preparation process begins with the establishment of a baseline operating expense budget for the next fiscal year. The baseline operating expense budget is an estimate of what it would cost in the following fiscal year to provide the same level of recurring services as the current fiscal year. It is calculated by removing expenses for non-recurring projects from the current fiscal year budget, and adding appropriate escalation. The escalation takes into account negotiated increases in salaries and wages, and estimated changes in the cost of various benefits, including workers compensation insurance, retirement contributions, and health insurance. The baseline operating expense budget, including escalation, is compared with the available funding, based on the projected revenue budget, and a determination is made as to how much, if any, funding is available for new projects and services. The individual departments submit budget requests to fund their continuing services, and any additional projects and services which are believed to be necessary to support the District s strategic plan. The budget request preparation, and management team review and approval of the proposed budgets are accomplished using the District s financial management information system. The management team, together with the President/CEO, compares the proposed budgets to service level requirements and available resources when making decisions about which services and projects to fund. After the President/CEO has approved a preliminary budget at the staff level, a public budget workshop is conducted for the Board and the public in late April or early May. The public budget workshop is an opportunity for the Board to ask questions and discuss alternatives to the proposed goals, objectives, programs and activities included in the budget. It is also an opportunity for the public to gain an understanding of the budget and to provide comments. Subsequent to the public budget workshop, the preliminary budget is adopted by the Board. Adoption of the preliminary budget, which under the provisions of the Port District Act must occur by June 15 each year, starts the clock on the public comment period. Not less than 30 days later, the Board considers the Final Budget for adoption. Final budget adoption follows the public comment period. At its first meeting following the comment period, the Board adopts the final budget, along with amendments to the Salary Ordinance for personnel changes included in the final budget. Ideally this occurs in June, prior to the start of the new fiscal year. If no final budget is adopted by July 1, a special ordinance is required to appropriate funds for continuing operations. Once adopted, the budget can be amended at any time during the fiscal year by District ordinance. Staff monitors budget results and programs throughout the fiscal year. Changes in plans, fluctuations in estimates, new programs for which no estimate was available before budget adoption, and other unexpected events may require a budget amendment. CIP Budget. The CIP budget process is very closely integrated with the District s strategic planning and annual operating budget processes. Resources are allocated to, and within, the CIP based on priorities related to the District s strategic plan, the eight strategic goals (as described under Operating Budget above) and consistent 30

39 with projected five year cash flow estimates. The CIP budget is submitted to the Board as a separate document. Each year, the CIP budget for the following fiscal year is reviewed and approved by the Board, in coordination with the preparation of the operating budget. See CAPITAL IMPROVEMENT PROGRAM. Pension and Retirement Plans The District s defined benefit pension plan (the Pension Plan ), administered by the San Diego City Employees Retirement System ( SDCERS ), provides retirement and disability benefits, annual cost of living adjustments, and death benefits to plan members and beneficiaries. SDCERS is a multiple-employer public employee retirement system that acts as a common investment and administrative agent for the District, the City of San Diego and the Airport Authority, and is administered by the Retirement Board of Administration (the Retirement Board ). San Diego City Charter, Section 144 and San Diego Municipal Code Sections et seq. assign the authority to establish and amend the benefit provisions of the Pension Plan to the Retirement Board. The Pension Plan is integrated with the federal Social Security program. For fiscal year 2012, the District s annual required contribution ( ARC ) was $12.6 million, which was paid in full at the beginning of fiscal year 2012 on July 1, The ARC was determined as part of the June 30, 2011 actuarial evaluation using the Entry Age Normal method. The actuarial assumptions included (a) 7.5% investment rate of return, (b) projected salary increases of 3.75%, and (c) the assumption that benefits for certain members will increase after retirement. Both (a) and (b) included an inflation component of 3.75%. The actuarial value of assets was determined using techniques that based on averaging or smoothing year-to-year market value returns. Any unfunded actuarially accrued liability would be funded as a level percentage of projected payroll over a closed 30-year period. The most recent actuarial valuation of the Pension Plan, as of June 30, 2012, was performed by Cheiron, Inc. (the Actuary ) and was summarized by the Actuary in its report dated March 2013 (the Actuarial Valuation ). For fiscal year 2013, the ARC was $13.2 million and was paid in full in July 2012, and the ARC for fiscal year 2014 is $13.9 million which was paid in full on July 1, In the Actuarial Valuation, the Actuary concluded that the funded ratio of the Pension Plan as of June 30, 2012 was 72.7%, down from 73.1% in As of June 30, 2012, the Pension Plan had an unfunded actuarial liability (the UAL ) of $104.2 million as compared to a UAL of $95.5 million for June 30, The UAL is the difference between the actuarial value of assets in the Pension Plan ($277.8 million as of June 30, 2012) and the actuarial liabilities of the Pension Plan ($382 million as of June 30, 2012). The $8.7 million increase in the UAL as of June 30, 2012 was mainly attributable to a $5.3 million liability experience loss and a $4.8 million loss resulting from investment experience less than projected. As of June 30, 2012, the actuarial value of assets of the Pension Plan differed from the market value of assets by $6.1 million, because the actuarial value is the product of a smoothing technique used to dampen the effect of market volatility. The actuarial smoothing technique is based on multiple years average of the ratios of market value to book value. The San Diego Municipal Code requires member contributions to be actuarially determined to provide a specific level of benefit. Member contribution rates, as a percentage of salary, vary according to age at entry, benefit tier level, and certain negotiated contracts which provide for the District to pay a portion of the employees contributions. Based upon recommendations made in the Actuarial Valuation, for fiscal year 2013, member contribution rates (weighted average) expressed as a percentage of salary are 10.17% for general members and 13.22% for safety members and the District s contributions, at an actuarially determined rate, expressed as a percentage of covered payroll, are 37.82% for general members and 40.76% for safety members. The contribution requirements of the members of the Pension Plan and the District are established and may be amended by the Retirement Board. Additional information concerning the Pension Plan can be found in Note 7 to the District s audited financial statements and notes attached hereto as APPENDIX A. 31

40 Risk Management and Insurance The Indenture does not specify any minimum amount of insurance coverage. Instead, the Indenture requires the District to maintain insurance or qualified self-insurance against such risks at the Port of San Diego as are usually insured by other similarly situated ports. The District maintains a comprehensive Risk Management Program which includes risk transfer, loss prevention, loss control and claims administration. The District purchases excess liability, marine liability, public official s liability, employment practices liability, police professional liability, fiduciary liability, workers compensation and automobile liability, real and personal property insurance and other miscellaneous insurance coverages. The District s coverages include a variety of self-insured retentions and deductibles. Certain of the District s insurance policies currently include the following limits: real and personal property including flood and terrorism - $596 million; excess general liability insurance - $150 million; marine protection and indemnity - $1 million; public official s liability and employment practices liability - $5 million; police professional liability - $2 million; fiduciary liability - $5 million; automobile liability - $1 million; and public employee dishonesty - $1 million. Total premium for all insurance coverages for fiscal year 2013 was $1,160,740 and for fiscal year 2014 is $1,148,949. With respect to its workers compensation coverage, the District has participated in a loss-sensitive insurance program underwritten by American International Group ( AIG ) which has been in place since July 1, This program requires that the District pay a deductible of $500,000 per claim. The premium for fiscal year 2014 was $343,776. In order to qualify for the high deductible program, AIG required the District to fund an escrow account at policy inception with the Bank of New York in the event the District defaults on any payments required under the deductible. This amount is reviewed and adjusted annually at policy renewal and is currently funded in the amount of $2,963,955. There can be no assurance as to the ability of an insurer to fulfill its obligations under any insurance policy and no assurance can be given as to the adequacy of such insurance to fund necessary repair or replacement of the damaged property. The District cannot predict its ability to continue receiving the existing coverage or deductible amounts. The District only purchases insurance from insurance carriers that carry an A.M. Best financial rating of A- VII or above. District tenants are required to carry commercial general liability insurance coverage, including bodily injury and property damage, on the leased premises and to name the District as an additional insured. Operation and Maintenance Reserve Pursuant to its internal policies, the District sets aside in a designated reserve account an amount equal to 6 months of budgeted operation and maintenance expenses (less any operation and maintenance expenses for services provided to the Airport Authority). Such amounts are used by the District as an operating expense contingency fund. As of June 30, 2013, the District had $51.4 million on deposit in this designated reserve account. South Bay Power Plant Pursuant to the Asset Sale Agreement between the District and San Diego Gas & Electric Company ( SDG&E ), the District acquired the South Bay Power Plant (the Plant ) in April The District acquired the Plant to accelerate the closure, decommissioning, and/or relocation of the Plant. The California Independent System Operator (the Cal ISO ) designated the Plant as a must run facility, which means that the Plant must remain in operation until a replacement plant is constructed or Cal ISO removes the must-run designation. The Plant was leased to Duke Energy South Bay, LLC (the Duke South Bay ) in April In the fiscal year ended June 30, 1999 ( fiscal year 1999 ), pursuant to the Real Property Contribution Agreement that was entered into between the District and SDG&E, SDG&E donated approximately 165 acres of land located beneath and adjacent to the Plant with a fair market value of $24.9 million. The land transaction was recorded as contributed capital and is included in capital assets in the basic financial statements. 32

41 In 2006, Duke South Bay was sold to LS Power Generation, LLC ( LS Power ) and LS Power merged with Dynegy Inc. One of the conditions to the Board s consent to the sale of Duke South Bay is that the Lease Guaranty dated April 1, 1999, the Environmental Remediation Guaranty dated April 22, 1999, and the Guaranty of Contract and Permit Rights Assignment and Property Escrow Agreement dated April 22, 1999, each made by Duke Capital, LLC in favor of the District (collectively, the Duke Guarantees ) shall remain in effect until such time as the District grants its consent for the release of said Duke Guarantees. The Duke Guarantees have remained in effect since the Dynegy transaction. Also in fiscal year 1999, the California State Legislature appropriated $15,000,000 to assist the District in mitigating environmental and community issues associated with the Plant. The District deposited $15,000,000 into a property escrow account (the Property Escrow Account ), which was initially established by the District and Duke South Bay. The escrow funds together with their earnings are to be retained in the Property Escrow Account to be used to decommission, dismantle the Plant, or for the environmental remediation of the Plant site. This amount is reported in the balance sheet as a restricted asset and also reported as a noncurrent liability payable from restricted assets. Costs associated with decommissioning and demolition of the plant in excess of amounts available in the escrow account are the responsibility of Dynegy. Dynegy and SDG&E have allocated responsibilities between themselves for the cost and performance of the environmental remediation of the Plant and site. Pursuant to the Duke Guarantees and other agreements, Dynegy is required to decommission, dismantle, remove the facility and improvements, and return the Plant site free and clear of all structures and improvements. In October 2010, Cal ISO removed the reliability must run designation from the Plant, effective December 31, The District placed the lease and all transaction documents on holdover status through December 31, On February 2, 2013, the above ground superstructure for the Plant was demolished. Further subsurface demolition and remediation are currently being entitled through various regulatory agencies. Dynegy anticipates commencing the subsurface demolition in the upcoming months. Future remediation of the property will require additional entitlements with additional regulatory oversight. Once the property has been fully remediated, the future use will include active and passive parks and industrial pads. As of June 30, 2013, the balance of the Property Escrow Account is $10, after drawdown and income on investments. Pursuant to the Property Escrow Agreement, these funds are to be used for the End of Term Actions as described in the Lease, including decommissioning, demolition and remediation of the Plant facility and site. Investments The District submits updates and revisions to the Board for adoption on an annual basis under its Board of Port Commissioners Policy No. 115, Guidelines for Prudent Investments. The most recent update was adopted by at the July 16, 2013 Board meeting. The Board adopts policy guidelines regarding the investment of District funds, other than Employees Retirement and Deferred Compensation funds, which are separately administered. The highest objective of the District in the investment of its funds is safety of principal, which is achieved through diversification and investment in only the highest quality credits. Market risk is mitigated by structuring the portfolio to meet major cash outflows. The investment policy allows for investment of funds in instruments as permitted by State law with several limitations. The Board has authorized the District Treasurer, pursuant to Section et seq. of the California Government Code, to invest in obligations of the U.S. Treasury and other U.S. Governmental Agencies, bankers acceptances, commercial paper, negotiable certificates of deposit, medium-term notes, repurchase agreements, reverse repurchase agreements and the Local Agency Investment Fund ( LAIF ) administered by the California State Treasurer s office. The District s investments as of June 30, 2013 are shown in the following table. The values reflect the fair market value of the investments, except for LAIF, which, due to its liquidity properties, is shown at its par value. 33

42 TABLE 4 SAN DIEGO UNIFIED PORT DISTRICT INVESTMENTS AS OF JUNE 30, 2013 Total U.S. Government Securities $69,765,651 Certificate of Deposit 2,000,000 Account Registry Service Medium Term Notes 5,365,499 Local Agency Investment Fund 38,000,000 California Investment Trust (CalTRUST) 5,303,101 Total $120,434,251 Source: San Diego Unified Port District. [Remainder of page intentionally left blank.] 34

43 Historical and Forecasted Revenue, Operations and Maintenance Expenses and Debt Service Coverage TABLE 5 SAN DIEGO UNIFIED PORT DISTRICT HISTORICAL REVENUE, OPERATIONS & MAINTENANCE EXPENSES AND DEBT SERVICE COVERAGE (in thousands) DESCRIPTION 2009 Actuals 2010 Actuals 2011 Actuals 2012 Actuals Preliminary Total Revenues $151,030 $135,898 $142,946 $143,864 $148,126 Revenue Exclusions: Special Facility Revenues (2,976) (3,032) (1,016) - - ACH Parking Facility Funding (215) (215) Capital Project Contributions (1,764) (5,175) Donated Revenue (17) (40) - (1,422) (1,272) Federal Asset Forfeiture Proceeds (56) (91) (47) (81) (101) Grant Revenue (6,510) (6,849) (4,935) (6,436) (8,036) Insurance Proceeds (4) - (48) (1) (22) Reimbursed Attorney Fees/Litigation Costs (647) (448) (134) (510) (540) Sale of Surplus Items (Land, Buildings, or Equipment) (67) (37) (89) (57) (64) (Gain) / Loss from disposal of Fixed Assets 1 (3,328) 7 - Pledged Revenues $140,754 $125,401 $133,349 $133,385 $132,702 Total Expenses $154,915 $143,737 $144,836 $140,497 $144,720 Less Depreciation, Amortization, and Other Permitted Exclusions (30,233) (29,942) (36,010) (26,342) (28,731) Expenses Net of Exclusions $124,682 $113,796 $108,826 $114,154 $115,988 Net Pledged Revenues $ 16,073 $ 11,605 $ 24,523 $ 19,231 $ 16,714 Senior Debt Service $ 3,463 $ 3,465 $ 3,465 $ 3,430 $ 3,439 SENIOR DEBT COVERAGE RATIO Calculation in accordance to Indenture. 2 Preliminary and unaudited. Source: San Diego Unified Port District. [Remainder of page intentionally left blank.] 35

44 TABLE 6 SAN DIEGO UNIFIED PORT DISTRICT PROJECTED REVENUE, OPERATIONS & MAINTENANCE EXPENSES AND DEBT SERVICE COVERAGE (in thousands) DESCRIPTION 2014 Projected 2015 Projected 2016 Projected 2017 Projected 2018 Projected Total Revenues 1 $150,416 $151,524 $157,406 $166,668 $173,090 Revenue Exclusions: ACH Parking Facility Funding (215) (219) (219) (219) (219) Capital Project Contributions (1,337) (1,500) (1,500) (1,500) (1,500) Donated Revenue (65) (65) (65) (65) (65) Federal Asset Forfeiture Proceeds (80) (80) (80) (80) (80) Grant Revenue (1,431) (882) (661) (661) (641) Insurance Proceeds (20) (20) (20) (20) (20) Reimbursed Attorney Fees/Litigation Costs (365) (365) (365) (365) (365) Sale of Surplus Items (Land, Buildings, or Equipment) (60) (60) (60) (60) (60) NEVP Capital Project Contribution 2 (6,800) (1,231) Pledged Revenues $140,043 $147,052 $154,436 $163,698 $170,140 Total Expenses Less Depreciation and Amortization 3 $139,879 $135,816 $137,026 $143,045 $149,923 Less Other Permitted Exclusions (16,124) (11,672) (10,517) (11,468) (12,685) Expenses Net of Exclusions $123,755 $124,144 $126,509 $131,577 $137,238 Net Pledged Revenues $ 16,288 $ 22,908 $ 27,927 $32,121 $32,902 Senior Debt Service $ 3,467 $ 3,467 $3,466 $3,466 3,466 SENIOR DEBT COVERAGE RATIO* * Calculation in accordance with Indenture. 1 Revenues for the Real Estate Department are projected to increase, on average, at a 5.2% annual rate throughout the forecast period. Based on current and projected lease terms, concession rent is expected to increase 5% in fiscal year 2015, and 9.2% in fiscal year 2016, and is projected to increase by over 10.6% for fiscal year 2017 primarily due to expiration of rent credits, and by 5.5% in fiscal year Includes National Oceanic and Atmospheric Administration as a new anchor tenant beginning fiscal year Revenues for the Maritime Department are projected to increase, on average, at a 5.5% annual rate throughout the forecast period. Maritime Department revenues include projected new cargos such as containers, roll on/roll off, break bulk and renewal energy components. Wharfage revenues are forecast to increase by approximately 10% in fiscal year 2015; 8% in fiscal year 2016; and 2% in fiscal years 2017 and Based, in part, on historic trends and industry projections, cruise ship passenger fees are expected to remain flat in fiscal year 2014; increase by 32% in fiscal year 2015; increase between 6% and 17% in fiscal year 2016 and fiscal year 2017; and increase by 11% for fiscal year Includes Phase III Convention Center Expansion revenues sufficient to offset the District s 2012 Support Agreement obligations with the assumption the first payment to the City of San Diego of $1.1 million is due in July Represents Civic San Diego s reimbursement to the District for its share of construction costs related to the NEVP First Phase. 3 Projected Total Expenses for fiscal year 2014 reflect the impact of significant strategic cost reductions and are increased by 3% in fiscal year 2015 and 2016 and by 4% in fiscal years 2017 and Source: San Diego Unified Port District; Smith Travel Research, Inc.; PKF Consulting USA, LLC; and Bermello, Ajamil and Partners, Inc. 36

45 OPERATING INFORMATION Real Estate Operations General. Real estate operations of the District are overseen by the Real Estate Department. The Real Estate Department manages the District s commercial real estate, which generally includes District tidelands trust properties used for both maritime and off-terminal maritime uses. As of July 1, 2013, the Real Estate Department had 39 employees. The District s real estate operations generated revenues of approximately $82.6 million in fiscal year This represented approximately 61.1% of total District operating revenues. In comparison, the District s total general operating and maintenance expenses for its real estate activities were approximately $50.9 million (including general and administrative expenses of approximately $18.1 million) for fiscal year 2013, which represented approximately 40.9% of the District s total general operating and maintenance expenses. See Sources of Real Estate Revenues below. Ranging from small vendors to major corporations, District tenants are engaged in a variety of endeavors, including hotels, restaurants, marinas, specialty retail, boatyards, yacht sales, sportfishing, harbor cruises, automobile rentals, public parking facilities, service stations, fuel docks, a convention center, a golf course, a recreational vehicle park, commercial fishing, fish processing, fish markets, shipyards, manufacturing, and the military. The activities of the Real Estate Department span over 33 miles of shoreline. The District has 480 tenancy agreements, plus approximately 330 subtenant agreements. Of the 480 tenancy agreements, 144 are revenue-producing ground leases with terms as long as 66 years, depending on the type of land use. Tidelands use and occupancy permits, easements, and other rental agreements comprise the balance of the agreements. As older leases expire, the Real Estate Department will either re-negotiate a new lease and redeveloped leasehold with the incumbent tenant or issue a request for proposals for a new tenant. Over the last ten years, many older leaseholds have been redeveloped, which is expected to generate additional revenues to the District. As of July 1, 2013, 100% of the District s available assets for lease are either under lease or subject to an option to lease and develop the property. The revenues and expenses of the Real Estate Department tend to be very stable because the majority of the revenue-producing properties are leased under long-term land development leases, with the tenants responsible for all capital and operating costs under the lease. All master lease tenancy agreements are longer than five years. Most of the tenants pay either flat rent or have a minimum ground rent based on a percentage of gross leasehold revenues. In 2004 the Board adopted a substantially revised Board Policy 355, which sets forth procedures for leasing District assets. The underlying premise of Board Policy 355 and its administrative practices is: The Port shall seek market rent when leasing its real estate assets and the Port s leases shall reflect market terms and conditions. The District currently bases annual rent for most flat rent leases on a 9.5% rate of return based on appraised market value, with rents increasing annually in accordance with the Consumer Price Index by at least 2% but no more than 4% annually. Percentage rent tenants pay a percentage of gross revenues with a minimum guaranteed annual rent. Rates of return for land value and percentage rental rates are adopted by the Board. A new benchmark study of percentage rental rates is planned for fiscal year 2014, which will set Board adopted rates for both rent reviews and new lease agreements in the future. Rent reviews for most percentage rent leases are scheduled for every 10 years. When tenants propose a redevelopment, financing, or assignment, the District may adjust rents to market. A few tenants have initial rent reviews starting after a longer period or have increases in percentage rental rates built into the lease. Board Policy 355 also benefits the District by defining real estate leasing policy for redevelopment and new tenant leases. Upon expiration of a ground lease, the lessee s interest in the leasehold improvements reverts to the District and the District has the right to require the tenant to demolish the improvements. Several issues associated with many long term ground leases include the reluctance of tenants to invest new capital and conduct maintenance and replacements on their leaseholds in the last few years of their term, or to obtain financing without enough remaining lease term. Historically revenues would decrease in the final years of a ground lease. By defining a leasing practice for granting extensions, the District has minimized the problem of decreasing revenues faced by most commercial landlords and created a methodology to encourage early redevelopment of leaseholds, resulting in increased revenue and certainty for the District. 37

46 The Real Estate Department seeks to manage and develop the District s properties in a manner consistent with the public role of the District. This approach reflects trade-offs between short-term income production and the District s broader mission of public service and balanced land use strategies. Additional properties may be acquired; however, such acquisitions are made only within the context of the District s primary operating responsibilities and may be subject to the approval of the California State Lands Commission. Chula Vista Bayfront. The Chula Vista Bayfront Master Plan ( CVBMP ) is the result of a decade-long joint planning effort by the District, the City of Chula Vista, Pacifica Companies, LLC ( Pacifica ) and a broad coalition of stakeholders. The CVBMP was collaboratively planned through an extensive public participation program that included over 100 community meetings and resulted in a comprehensive environmental impact report and Port Master Plan Amendment, which was certified by the Board in May An important component of the CVBMP is a land exchange with Pacifica, which was approved by the California State Lands Commission in December In August 2012, the amendments to the Port Master Plan and Local Coastal Program were unanimously approved by the California Coastal Commission. The CVBMP is expected to be implemented jointly by the District and the City of Chula Vista in phases, with the first phase including development of a conference center, hotels, retail, and mixed-use residential development, as well as the creation of public parks and open space, the restoration of habitat areas, the establishment of a new fire station, the relocation of a recreational vehicle park, and all necessary supporting roadways and infrastructure. Development of the CVBMP has the potential to create significant new revenue opportunities for both the District and the City of Chula Vista through ground lease revenues, transient occupancy taxes, development impact fees and sales tax revenue. The District and City of Chula Vista have a longstanding partnership on the CVBMP that will continue with implementation of the CVBMP. The agreement provides for the District and City of Chula Vista to combine their respective revenues for purposes of issuing bonds in the future to build the necessary infrastructure including streets, parks and utilities. Sources of Real Estate Revenues. Real Estate revenues are generally derived from flat fee ground rentals and rental fees based on a fixed percentage of tenant revenues subject to certain minimum monthly fees for industrial, commercial, and recreational facilities, and parking fees. For fiscal year 2013, the Real Estate Department generated revenues of approximately $82.6 million, the majority of which was from rental fees based on a fixed percentage of tenant revenues, as compared to revenues of approximately $79.8 million for fiscal year The following table shows a breakdown of the major sources of revenues for the Real Estate Department for fiscal years 2012 and [Remainder of page intentionally left blank.] 38

47 TABLE 7 SAN DIEGO UNIFIED PORT DISTRICT SOURCES OF REAL ESTATE REVENUES FISCAL YEARS ENDED JUNE 30 Sources Hotels 1 $32,823,843 $33,668,120 Restaurants 2 2,315,797 2,326,070 Marinas, Yacht Clubs 3 8,735,859 9,215,682 Aviation Related 11,563,993 11,052,535 Retail Centers 3,491,221 3,604,188 Parking 7,531,867 8,597,502 Industrial 6,007,780 6,022,682 Other 7,316,104 8,122,084 Total $79,786,464 $82,608,863 1 All hotel leases include restaurants and six hotel leases include marinas. 2 The District has eight direct restaurant agreements, not included are restaurants in hotels, marinas and retail centers. 3 Not included are the marinas under hotel operations or the marina under a restaurant lease. 4 Preliminary, unaudited financial information for fiscal year Source: San Diego Unified Port District. [Remainder of page intentionally left blank.] 39

48 The top ten individual sources of fixed rate tenancies for the Real Estate Department in fiscal year 2013 are presented in the table below. TABLE 8 SAN DIEGO UNIFIED PORT DISTRICT REAL ESTATE DEPARTMENT TEN HIGHEST REVENUE PRODUCING FIXED RENT TENANCIES FISCAL YEAR ENDED JUNE 30, 2013 Lease Tenant Payments San Diego County Regional Airport Authority $10,884,991 Solar Turbines Incorporated 2,025,225 Dynegy South Bay, LLC 2,000,000 The Hertz Corporation 1,432,396 Enterprise Rent-A-Car Company of LA 874,817 Avis Rent-A-Car System, LLC 765,565 Marine Group Boat Works, LLC 692,055 Shelter Island Yachtways, Ltd. Park & Go, Inc. 287, ,372 BW-Budget-SDA, LLC 280,088 Total $19,527,737 Source: San Diego Unified Port District s preliminary, unaudited financial information for the fiscal year 2013 [Remainder of page intentionally left blank.] 40

49 The top ten individual sources of percentage rent tenancies for the Real Estate Department in fiscal year 2013 are presented in the table below. TABLE 9 SAN DIEGO UNIFIED PORT DISTRICT REAL ESTATE DEPARTMENT TEN HIGHEST REVENUE PRODUCING PERCENTAGE RENT TENANCIES FISCAL YEAR ENDED JUNE 30, 2013 Tenant Lease Payments Manchester Resorts, L.P. 1 $ 9,477,813 Pacific Gateway, Ltd. 2 7,152,442 Host San Diego Hotel, LLC 3 4,815,881 One Park Boulevard, LLC 4 3,580,921 Bartell Hotels 5 3,101,337 Seaport Village Operating Co., LLC. 6 2,273,020 FelCor Hotel Asset Company, LLC 7 2,077,196 Host Hotels & Resorts, L.P. 8 1,775,112 Cahuenga Associates II 9 1,118,844 Sunroad Marina Partners, LP 10 1,081,026 Total $36,453,592 1 Doing business as ( DBA ) Manchester Grand Hyatt San Diego 2 DBA San Diego Marriott Hotel and Marina 3 DBA Sheraton San Diego Hotel and Marina 4 DBA Hilton San Diego Bayfront Hotel 5 DBA Humphrey s Half Moon Inn, Holiday Inn Bayside & Best Western Island Palms 6 DBA San Diego Seaport Village 7 DBA Holiday Inn on the Bay 8 DBA Coronado Island Marriott Resort 9 DBA Kona Kai Marina 10 DBA Sunroad Resort Marina Source: San Diego Unified Port District s preliminary, unaudited financial information for the fiscal year 2013 Hotels. The District has 17 ground leases covering 14 hotels located on its waterfront area. The 14 hotels have a combined total of over 7,800 hotel rooms. The 14 hotel ground leases terms range from 30 to 66 years. Rental fees for 13 of the 14 hotel ground leases are based on percentages of total revenues from operations collected by the tenants and subject to a guaranteed minimum monthly rent. The rental for the remaining hotel ground lease was satisfied by the granting of the land upon which the hotel is located to the District. Pursuant to the ground leases, tenants are required to maintain books and records and to make such records available to the District at any reasonable time for audit examination. The District s most recent addition to its portfolio of hotels is the 1,200 room San Diego Hilton Bayfront, located on a 10.2 acre parcel of District land on the waterfront and adjacent to the Convention Center. To allow development of this site as a hotel, the District relocated its General Services Facilities to National City, developed a 2,000-stall public parking facility on the site, and completed extensive remediation of the landside and bay sediments. The San Diego Hilton Bayfront opened in November The lease negotiations included incentives reflected in the current rent, which expire in 2017 and are expected to increase revenues after expiration of the incentives. 41

50 Marinas and Yacht Clubs. The District has leases with tenants who have developed 13 marinas and 4 yacht clubs. In addition, there are 8 marinas that operate under hotel and restaurant leases. The marinas and yacht clubs provide approximately 6,800 slips. Marina lease terms are for up to 40 years and provide for percentage of gross revenue rent payments with guaranteed monthly minimum rental payments. Under most leases the rents are renegotiated at ten year intervals. The marina tenants enter into separate agreements with slip users. Restaurants. The District has ground leases both directly with restaurants and also collects revenues through its leases to hotels, retail shopping centers, and marinas. There are approximately 58 restaurant facilities either operating directly or under subleases. The District has recently approved 6 significant new subleases for major national and regional restaurant facilities in The Headquarters, which is an extensive rehabilitation of the historic Old Police Headquarters near the Convention Center. These long-term leases will eventually provide new revenue to the District with the same structure of a percentage of gross sales against minimum rent for the project. The top three revenue generating restaurants are The Fish Market, C Level Lounge/Island Prime and Anthony s Fish Grotto. Point Loma Seafoods, Bali Hai, and Tom Hamm s Lighthouse have completed significant renovations in the last several years which could increase revenues from restaurant operations. Airport. Chapter 946, Statues of 2001 and Chapter 978, Statutes of 2002, pursuant to which the State Legislature created the Airport Authority and transferred ownership and operation of the Airport to the Airport Authority, requires the Airport Authority to lease the former General Dynamics property from the District for 66 years commencing on January 1, 2003 at a rate of $4.7 million in calendar year 2003, $6.7 million in calendar year 2004, $8.7 million in calendar year 2005 and thereafter at a level rate based on the fair market value of the property as of January 1, 2006 and a market rate of return on that date. Additionally, the Airport Authority leases two parking lots and a taxi holding lot from the District Airport MOU. On August 30, 2013, the District entered into a Memorandum of Understanding with the Airport Authority (the 2013 Airport MOU ) with the intent to clarify the manner and methodology by which the District charges and the Airport pays for the District s police services at the Airport. Cal. Public Utility Code provides: The San Diego Harbor Police Department shall have the exclusive contract for law enforcement services at San Diego International Airport during the time as the airport continues to operate at the Lindbergh Field, and peace officers of the Harbor Police shall remain employees of the port, and The authority shall reimburse the port for the actual and reasonable direct costs, including, but not limited to, an appropriate allocation of general and administrative expenses associated with the provision of that service, incurred by the port to deliver services actually provided to the authority in accordance with the standards and requirements described in this section. The 2013 Airport MOU sets forth specific terms and conditions for Airport police services and provides additional clarity for the calculation and invoice of police services costs. Specialty Retail Centers. Two specialty retail centers located on San Diego Bay include Seaport Village and Ferry Landing Marketplace. Seaport Village is located adjacent to the Convention Center and area hotels in the downtown area and consists of about 90,000 square feet of leasable area on 14 waterfront acres with shopping, dining, entertainment and leisure opportunities. There are 57 shops, four major restaurants and 13 eateries operated under subleases. Seaport Village has an average annual attendance of 4 million visitors. The tenant makes lease payments to the District based on a percentage of its gross revenues against a minimum annual guaranty. For fiscal year 2013, the District received rental revenues of $2,156,103 from Seaport Village. The Seaport Village lease expires in 2018 and the District is currently in discussions with the tenant to redevelop the leasehold. If those negotiations do not result in a redevelopment plan and new lease acceptable to the District, then the District could issue a Request for Proposals to redevelop this key waterfront site. Ferry Landing Marketplace operates a 42,000 square foot tourist oriented shopping center in Coronado with subleases to boutiques, galleries, retail, two full-service restaurants and five fast food operations. For fiscal year 2013, the District received rental revenues of approximately $863,000 from Ferry Landing Marketplace. Parking. Parking revenues are derived from paid parking in metered spaces, surface lots and covered garages located on properties under the District s management. The District s surface lots and parking garages are 42

51 operated by parking management companies for the parking garages at the Convention Center and adjacent to the Hilton San Diego Bayfront Hotel, with surface parking lots on Navy Pier, Lane Field and Scott Street. The parking management companies are paid based on a percentage of gross income generated from the respective parking facilities. The parking facilities and meters provide approximately 6,000 public automobile parking spaces on District tidelands. Parking is made available on an hourly, daily and monthly basis. In fiscal year 2013, parking revenues, including parking meter income, was over $8.0 million. Rental Cars. The District leases approximately 22 contiguous acres on Harbor Island, adjacent to Harbor Drive, to the rental car companies Avis Rent A Car System, Hertz Rent-A-Car and Enterprise Rent-A-Car. Dollar Thrifty Group and Hertz Rent-A-Car also lease a 6.5-acre parcel on Harbor Island under a short-term agreement and Budget Rent A Car leases a 4.2-acre parcel on Pacific Highway. The five rental car companies cumulatively pay approximately $4.1 million annually in rent to the District. The Avis Rent A Car System and Enterprise Rent-A-Car master leases are set to expire in 2017, with options to extend 5 years, but are terminable by the District during the option period. The Hertz Rent-A-Car lease will expire in 2018 with a 5-year option to extend. The Dollar Thrifty Group and Hertz Rent-A-Car short-term agreements will expire at the end of 2014 and the Budget Rent A Car agreement will expire at the end of The Harbor Island rental car properties, together with adjacent District land, are part of a redevelopment area of approximately 40 acres which may be marketed for development within the next five years and represents significant opportunity to create new long term leasehold revenue to the District. The District anticipates that the rental car companies will move their sales operations and some cars to the new rental car facility planned for the Airport at the end of However, the District expects that the rental car companies will continue to lease their current facilities as well. The land in question represents the largest redevelopment opportunity in the City of San Diego and is in a premier location on the bayfront. It is anticipated to be part of a master planning effort in the next few years and has potential to generate more rent than the District is currently receiving upon stabilization, as well as providing additional public access. The District is currently evaluating interim uses. Maritime Operations General. The District s marine business is overseen by the Maritime Department. The Maritime Department has responsibility for business development, operations, maintenance, and development of the District s deepwater maritime cargo and cruise ship facilities. The Maritime Department currently maintains three terminal facilities, the Tenth Avenue Marine Terminal ( TAMT ), the National City Marine Terminal ( NCMT ) and the Cruise Ship Terminal (the Cruise Ship Terminal ), in addition to various anchorages and mooring areas for both commercial and recreational vessels. The current cargo mix at TAMT and NCMT includes dry and liquid bulk cargoes, break bulk, containerized cargoes and automobiles. For fiscal year 2012, approximately 2.9 million metric tons of cargo (including minimum annual guarantee) and over 254,000 cruise ship passengers were handled at the Port of San Diego. For fiscal year 2013, approximately 2.7 million metric tons of cargo (including minimum annual guarantee) and over 208,000 passengers were handled at the Port of San Diego. The maritime operations of the District generated revenues of approximately $33.5 million in fiscal year 2013, as compared to $33.1 million in fiscal year This represented approximately 24.7% of the District s operating revenues in fiscal year 2013 and 25.3% in fiscal year In comparison, the District s total general operating and maintenance expenses for its maritime activities were approximately $29.2 million (including allocated general and administrative expenses of approximately $8.9 million) in fiscal year 2013 and $29.3 million for fiscal year 2012, which represented approximately 23.2% and 24.1% of the District s total general operating and maintenance expenses, respectively. The Maritime Department is responsible for maritime operations and maritime trade development. Operations personnel monitor all vessel activities at TAMT, NCMT and the Cruise Ship Terminal, as well as several mooring areas and commercial piers around San Diego Bay. The Maritime Department is also responsible for budget planning and expenditures involved with the maintenance and repair of all physical assets at the Port of San Diego which serve cargo and cruise ships. Maritime Trade Development staff attracts new business, assures customer satisfaction, and enhances the Port of San Diego s image locally, regionally, nationally and internationally. 43

52 Existing Terminal Facilities. Maritime activities at the Port of San Diego include water dependent services largely oriented towards cargo and passenger ships. The majority of the District s revenue from maritime operations is derived from wharfage, crane rentals, dockage, storage, passenger fees, and demurrage. TAMT, NCMT and the Cruise Ship Terminal are comprised of 231 acres and 15 deep-water cargo berths and two cruise ship berths, respectively. General, break-bulk, liquid-bulk and bulk cargo terminals occupy 96 acres, auto terminals occupy 135 acres and the Cruise Ship Terminal occupies 10 acres. Maritime Department development plans envision phased infrastructure investments to ease terminal congestion and increase efficiency. Tenth Avenue Marine Terminal (TAMT). TAMT is a 96-acre cargo-handling facility which consists of eight berths, 10-1 through 10-8, provides 4,300 lineal feet of berthing with a water depth of up to 42 feet, an on-dock cold storage and handling facility, and approximately 1.0 million square feet of covered storage space. The facility is served by a mobile harbor crane with a lifting capacity of 100 tons. A full-service container terminal was constructed and completed at TAMT in October 2002 for the Dole Fresh Fruit Company, a subsidiary of Dole Food Company, Inc. ( Dole ). Dole has signed a long term lease with the District with options to extend the term through December 31, The lease provides for monthly fixed rental payments as well as dockage, wharfage, and crane usage fees. Refrigerated container operations at TAMT consist of approximately 49,000 containers annually with over 600,000 metric tons. In 2015, Dole anticipates to deploy three new vessels that will call on TAMT, with capacity of 770 forty-foot equivalent containers each. Other cargoes handled at TAMT, and their respective volumes for fiscal year 2012 in metric tons ( m.t. ), include bulk cement (116,000 m.t.), windmill parts (69,000 m.t.), fertilizer (51,000 m.t.), bauxite (45,000 m.t.), solar energy storage materials (30,000 m.t.), spot cargoes including steel, project cargos, yachts (44,000 m.t.), and liquid petroleum products (76,000 m.t.). Market indicators suggest an increased demand for imported bulk aggregates. In addition, the District will become the homeport to the National Oceanic and Atmospheric Administration ( NOAA ) research vessel, Ruben Lasker, during fiscal year For fiscal year 2014, cargo volumes are expected to continue on an upward trend. The recent completion of a $3 million infrastructure improvement project has resulted in additional open storage area, and has the potential to attract additional break bulk and project cargo business to TAMT. Current available capacity at TAMT is indicative of the ability to handle short-term cargo volume without immediate infrastructure investments. The District has also retained a consultant to assist the District in developing and implementing a phased infrastructure investment program that will accommodate expected increased volume in project, breakbulk, bulk and container cargoes. For fiscal year 2013, revenues derived from TAMT are estimated to be approximately $6.2 million, or approximately 4.6% of total District operating revenues. For fiscal year 2012, revenues derived from TAMT were approximately $6.9 million, or 5.3% of total District operating revenues. National City Marine Terminal (NCMT). NCMT is a 135-acre cargo-handling facility which consists of seven berths including 24-1 through 24-5, and 24-11, with a water depth of 35 feet. In October 2003, the District completed construction of Berth 24-5, a 1,025-foot wharf extension, at a cost of approximately $22 million. The facility also includes three transit/storage sheds and warehouses with 325,700 square feet of space. A total of 76 acres of marine-industrial property adjacent to the terminal provides backup area for maritime use. NCMT is the primary west-coast port of entry for vehicles from Mazda, Hyundai/Kia, Honda, Acura, Volkswagen, Audi, Porsche, Isuzu, Mitsubishi Fuso, and Bentley. Pasha is the terminal operator for vehicle import and export. Pasha has a long term operating agreement with the District with options to extend through A 2013 study conducted by consultant Mercator determined that NCMT is the most efficient car processing facility on the U.S. west coast. Pasha reported over 328,000 vehicles were handled through NCMT in fiscal year The new Fiat vehicle operation began in July 2013 and is anticipated to import 40,000 vehicles annually. Pursuant to its operating agreement, Pasha is required to pay the District a portion of the dockage, wharfage, and storage fees charged and collected pursuant to the District s tariff schedule. Berth and the adjacent wharf area support the shipment of lumber by Pro Build Company and Weyerhaeuser Lumber Company, which have shipped an average of 86 million board feet of lumber annually for the last five fiscal years. Cargo volumes and wharfage revenue are expected to increase at NCMT, driven primarily by Pasha s automobile and Hawaii cargo. Regional market indicators also point to an increase in demand for export cargo capacity. For fiscal year 2013, revenues derived from NCMT are estimated to be approximately $12.3 million, or approximately 9.1% of total District operating revenues. For fiscal year 2012, revenues derived from NCMT were approximately $10.7 million, or approximately 8.1% of total District operating revenues. 44

53 Cruise Ship Terminal. The cruise industry has operated at the Port of San Diego for more than 40 years. The Cruise Ship Terminal facilities at the Port of San Diego are comprised of the B Street Pier and the Broadway Pier. Both piers have two 1000-foot berths, a water depth of 35 feet and can accommodate three ships total. Broadway Pier is a 52,000 square feet facility of which 15,000 square feet is dedicated to baggage laydown space. The B Street Pier is a 120,000 square feet main terminal building, plus two supplemental structures for passenger reception and baggage claim, totaling 15,000 square feet. The passenger terminal can accommodate daily ship calls. The B Street Pier serves as the primary cruise facility, with the adjacent 1,000-foot berth at Broadway Pier available as a secondary berth during concurrent calls by three cruise ships or due to operational need. Royal Caribbean, Celebrity Cruises, Holland America, Disney Cruise Line, Seven Seas, Royal Olympic, Carnival Cruise Line, Norwegian Cruise Line, and Princess Cruises have all operated cruise ship operations from the Cruise Ship Terminal. For each homeported vessel call, the District receives a fee for each outbound and each inbound passenger. Passenger fees constitute approximately 41.3% of the revenues derived by the District from its cruise ship operations. See Port Tariffs below. For fiscal year 2012, revenues derived from cruise ship operations at the Port of San Diego were approximately $3.8 million, or approximately 2.9% of total District operating revenues. The cruise industry has seen a decline as a result of the global recession and localized violence in Mexico. The following table shows the total number of cruise vessels that called and the total number of passengers that embarked on such cruise vessels from the Port of San Diego for fiscal years 2009 through 2013 and the number of vessels and passengers expected in fiscal year TABLE 10 SAN DIEGO UNIFIED PORT DISTRICT CRUISE SHIP CALLS AND EMBARKING PASSENGERS Fiscal Year Cruise Ship Calls Embarking Passengers , , , , , , Preliminary and unaudited. Projected. Source: San Diego Unified Port District Operating Performance. The Maritime Department operates as a landlord, leasing or assigning all docks, wharves, transit sheds and terminals to shipping or terminal companies and other private firms for operation of such facilities. The Maritime Department derives revenues from tariffs assessed on shipping activity (primarily wharfage and dockage), passenger fees, security passenger charges and from leases, rentals and utility services. The following table presents a summary of operating revenues for the Maritime Department for the past five fiscal years. [Remainder of page intentionally left blank.] 45

54 TABLE 11 SAN DIEGO UNIFIED PORT DISTRICT MARITIME DEPARTMENT OPERATING REVENUES FISCAL YEAR ENDED JUNE 30 (in thousands) Operating Revenue Berths Wharfage $ 9,840 $ 9,723 $ 9,755 $ 10,867 $11,270 Dockage 2,676 2,553 2,404 1,967 1,938 Passenger Fees Pass. Sec. Charges 4,964 3,078 4,756 3,066 2,422 1,841 1,554 1,174 1, Rental Properties 18,141 15,499 15,585 15,439 16,191 Miscellaneous 1 1,996 2,007 2,026 2,089 1,792 Total Operating Revenue $40,695 $37,604 $34,033 $33,090 $33,469 1 Includes concession, utilities, bunkering, grant revenue, parking, service charges, and environmental surcharge revenues. 2 Preliminary and unaudited. Source: San Diego Unified Port District Property Agreements. The District has property agreements covering waterfront property and facilities managed by the Maritime Department. Under these agreements, the District assigns or leases property and facilities to terminal operators for terms of up to 66 years. The terminal operators are responsible for the operation and maintenance of the property and facilities, but the District retains responsibility for maintaining the structural integrity of the piers, wharves, bulkheads, retaining walls and fender systems and certain buildings. Pursuant to the District s policy, most agreements require terminal operators to pay the District varying percentages of the tariff charges for wharfage, dockage, storage and demurrage collected at the properties and facilities covered by such agreements, and in some cases the payment of fixed rental payments. See Port Tariffs below. These agreements generally provide that if the property or facilities covered thereby are damaged by acts of God such as fire, flood or earthquake, the tenant will replace the property or facilities; provided, the tenant will not be obligated to repair facilities or property damaged in whole except if the loss is covered by insurance required to be obtained by the tenant. See Stevedoring and Cargo Handling below. Also see CERTAIN INVESTMENT CONSIDERATIONS Seismic Risks and Security at the Port of San Diego. Port Tariffs. The District sets tariff charges for wharfage, dockage, pilotage, land usage, passenger fees, storage and demurrage applicable to all ships and cargo using District owned property. The current tariffs are published in the Port of San Diego Tariff No. 1-G. Under the terms of the various operating agreements, the terminal operators, as permittees or lessees are responsible for collecting tariffs and for remitting to the District all or any portion of such tariffs required to be paid to the District. The District charges tariffs on a commodity rate per ton of cargo basis for bulk and break-bulk cargoes. The District and all other California public ports control and determine their own individual tariff structures. However, the ports cooperate in setting tariff rates through membership in the California Association of Port Authorities ( CAPA ). One of CAPA s goals is to establish and maintain reasonable and, as far as practicable, uniform terminal rates, charges, classifications, rules and regulations for the handling and movement of domestic and foreign waterborne cargo. These tariff provisions cover assignment of marine terminal facilities, as well as rates and provisions for vessel dockage, wharfage, storage, demurrage and other miscellaneous terminal charges necessary for the orderly movement of cargo. The goal is to permit California ports to obtain an adequate return on investment in order to facilitate the necessary maintenance, expansion and improvement of marine facilities. CAPA enjoys an exemption from federal antitrust laws which permits this cooperative rate setting. 46

55 In California, marine terminal services and facilities can also be priced through leases, and preferential management and user agreements with water carriers and/or terminal operators. These arrangements generally provide for economic discounts from established tariffs in exchange for term commitments and/or minimum payment guarantees. Most of the District s maritime revenues are generated by such agreements. The District can generally increase its revenues through lease agreement negotiations, by increasing its tariff rates or through increases in cargo volume. However, there are practical, procedural and competitive limitations on the extent to which the District can increase tariffs. See CERTAIN INVESTMENT CONSIDERATIONS Ability to Meet Rate Covenant. Also see Property Agreements above. On July 11, 2013, in accordance with CAPA guidelines, the District approved a 2% increase in wharfage for lumber and forest products and selected vehicles, and a 3% increase on dockage, wharfage, storage and demurrage for all other commodities and passenger fees, effective July 11, 2013, and various increases per fiscal year in wharfage, storage and demurrage. The District estimates that the new tariff rates will increase District tariff revenues by $350,000 per fiscal year. Stevedoring and Cargo Handling. Arranging for stevedoring and cargo handling services is the responsibility of each shipping line. Stevedoring and cargo handling at the Port of San Diego is provided pursuant to a contract between the Pacific Maritime Association (the Association ) and the International Longshore and Warehouse Union ( ILWU ). The Association represents most of the steamship lines, marine terminal operators, car loading bureaus and stevedore companies on the Pacific Coast. The major providers of stevedoring and terminal services at the Port of San Diego are Pasha Maritime Freight, Metropolitan Stevedore Company, Stevedoring Services of America and Marine Terminals Corp. The current contract between the Association and ILWU expires on July 1, There has been no prolonged work stoppage since October In October 2002, after the Association and the ILWU failed to negotiate a new contract, the shipping lines instituted a lock-out of the stevedoring companies, thereby shutting down all West Coast ports, including the Port of San Diego, for 10 days. Work resumed when President Bush ordered the ports to re-open pursuant to the Taft-Hartley Act. Other than the work stoppage in 2002, there has generally been a history of cooperative working relationships between the ILWU and the employer group represented by the Association. Prolonged work slowdowns or stoppages, if they occur, could adversely affect District revenues. Recreational Operations The recreational operations of the District are overseen by the Marketing and Communications Department ( MarCom ). MarCom endeavors to draw residents and visitors to San Diego Bay tidelands. The District s recreational areas include 20 parks, 10 miles of bicycle and walking paths, 7 public beaches, 20 marinas, 6 public boat docks, 4 public boat launch ramps, 3 sport fishing enterprises, 10 playgrounds and 6 public piers. The District also sponsors numerous District-related community events held in and around the San Diego Bay throughout the year. Environmental Operations San Diego Bay is one of the key geographic and environmental features in the San Diego region and is also considered one of the most important bodies of water on the California coast. The San Diego Bay is a major spawning area for fish and a popular feeding, nesting, and resting stop on the Pacific Flyaway for migratory birds. The protection and enhancement of San Diego Bay has been vested in the District. The District s jurisdiction includes over 1,800 acres of tidelands and submerged lands. In recent years, the Board has placed significant importance on the restoration and maintenance of San Diego Bay s ecosystem. The District s Environmental and Land Use Management Department has three goals to address the San Diego Bay s restoration and maintenance: (1) planning to prevent, reduce or eliminate any ongoing contamination; (2) remediating areas of historic contamination; and (3) restoring San Diego Bay s ecosystem through the creation of a habitat to allow the recovery of birds, fish, marine mammals, and other organisms. 47

56 The Environmental and Land Use Management Department implements these goals through several programs: General Site Assessment & Mitigation - Assessing the condition of various tideland sites and coordinating their remediation. This work often is triggered by the redevelopment of property. Examples include the Convention Center Hotel Site and the B.F. Goodrich (formerly Rohr Industries) site. Stormwater Management and Pollution Control - Eliminating pollutants from stormwater and urban runoff entering San Diego Bay through five creeks and rivers and more than 200 storm drains. Green Port - Promoting energy and water conservation, alternative fuels, cleaner air, planning for sea level rise and climate change. Natural Resources Management - Protecting the health of fish and bird populations and assessing ways to expand and improve their available habitat. CAPITAL IMPROVEMENT PROGRAM The District s current CIP is comprised of two five year plans. The District adopted a CIP for the period of July 1, 2009 through June 30, 2013 (the CIP ) with a total approved budget of $112.8 million. The District has adopted a CIP for the period of July 1, 2013 through June 30, 2018 (the CIP ) with a total approved budget of $2.7 million. For the CIP, as of June 30, 2013, the remaining budget was $63.8 million. On July 1, 2013, the remaining budget of $63.8 million was rolled over into the next five year program for the CIP, for a total combined budget going forward of $66.5 million. On May 31, 2011, the District adopted Board Policy 120 ( Board Policy 120 ) which specifies a process for the orderly development or improvement of the capital assets of the District, and to facilitate projects that reflect sound land use and capital improvement planning principles, as well as the strategic development, business and operational goals set by the Board. Under Board Policy 120, the CIP is developed using a long-term land use planning strategy every five years, and annually the program is revisited, reevaluated and revised to ensure that the project selection and priority are consistent with the District s strategic goals and the current business and operational needs in light of changing circumstances. In 2012, there were two CIP workshops/special meetings during which project budgets were reviewed and revised program budgets were approved: April 4, 2012, for the CIP, and June 7, 2012 for the CIP. For both the CIP and the CIP, there are 35 projects identified. Five projects have been largely completed and were removed from the list upon rollover of the CIP into the CIP CIP and CIP Major Projects Below is a summary of major projects for the CIP and the CIP. North Embarcadero Visionary Plan Phase I NEVP Phase 1 will increase and enhance the public s access to San Diego Bay through the construction of an esplanade over 100 feet wide with a pedestrian promenade, shade pavilions, District tenant structures, formal gardens, restrooms, public art, pedestrian amenities and water treatment of urban runoff. TAMT Shore Power - This project will design and construct the Shore Power System at TAMT to comply with California Air Resources Board ( CARB ) rules by January 1, Under the CARB rules, 50% of cargo ships that berth at TAMT must connect to shore power by January 1, America s Cup Harbor Improvements Phase I - North Harbor Drive Realignment - This project will address the substandard parking capacity along the south side of North Harbor Drive between Scott Street and Nimitz Boulevard in accordance with the Port Master Plan Amendment for Shelter Island. The project will reduce existing 48

57 oversized roadway lanes along North Harbor Drive to standard lane widths and demolish the existing frontage road on the south side of North Harbor Drive. The District has requested that the City of San Diego convey the surface property right-of-way of the frontage road to accommodate surface parking lots on the south side of North Harbor Drive and a realignment of the curb adjacent to the site. Improvements would fully signalize the intersection, providing safe controlled circulation for vehicles and pedestrians, new street lights and create a vital link and public access between the parking garage and the view corridor to the San Diego Bay via the newly constructed Marina Green Park. Chula Vista H Street Extension - The H Street extension project will connect the Chula Vista Bayfront to the main streets in western Chula Vista, serving as a central access and focal point for the waterfront redevelopment areas. The project will enhance and encourage public access to the waterfront not only for vehicles, but also for cyclists and pedestrians, benefiting existing businesses and attracting future investment. The H Street Extension project will construct a four-lane major street from the railroad crossing to Marina Parkway. The existing pavement between Bay Boulevard and the railroad will be seal-coated and striped to provide traffic transition. The crosssection of the H Street Extension project includes a 24-foot paved roadway section in each direction, with a 16-foot wide landscaped median, street lighting and temporary Class 2 bike lanes until the Bayfront Class 1 bikeway construction are completed. A 7-foot wide landscaped parkway and 5-foot sidewalk will be provided on each side of the street. Chula Vista Bayfront Master Plan Pre-Design - The CVBMP is a joint master planning process of the District, the City of Chula Vista, and Pacifica to develop a master plan that transforms the Chula Vista waterfront into a world-class destination for local residents and visitors. This preliminary design work is needed to support the future implementation of the CVBMP and includes street, park, landscape and related improvements. Chula Vista Bayfront South Campus Pavement & Foundation Demolition - This project includes the demolition of pavement, building foundations, slabs, and underground utilities on the former BF Goodrich South Campus and within the Pacifica Land Exchange Property. This demolition project supports the Pacifica land exchange. TAMT Crosby Street Pier Modernization and Landside Improvements The pier modernization project provides pier improvements (water, sewer, electrical and telecommunications) to allow berthing of the NOAA vessel. The TAMT on-shore improvement project will provide surface improvements and fencing for the NOAA lot, and modular offices, an ADA ramp and deck vessel will be provided. Tenth Avenue Transit Shed #1, Bay D and Head House 1 Demolition (Phase I) - The demolition encompasses a total area of approximately 1.8 acres (79,300 square feet) of building footprint. The project also includes the placement of asphalt and/or concrete pavement and installation of lighting in the area of the demolished building footprint, which will provide improved cargo handling and storage areas. Environmental Issues related to the CIP and CIP Budgets for the CIP program projects include, to the extent known, the cost of environmental remediation and/or mitigation. Projects on certain tidelands areas require special planning to address past releases of hazardous materials. TAMT is regulated by the City of San Diego Solid Waste Local Enforcement Agency as a closed landfill. CIP projects at the TAMT involving subsurface construction activity require special management of soil and groundwater to ensure proper compliance with regulatory requirements. These CIP projects include the TAMT Shore Power Project, Head House Demolition, and Crosby Street Pier Modernization. NEVP s First Phase construction project involves major earthwork and soil export from a historical industrial area. All soil exported from the project is screened for hazardous materials, and disposed of at local landfills under a voluntary oversight program with the San Diego County Department of Environmental Health. The Chula Vista Bayfront redevelopment is in an area impacted by hazardous substance releases associated with industrial activity. The San Diego Regional Water Quality Control Board has issued a clean-up and abatement order to BF Goodrich requiring them to coordinate management of soil and groundwater affected by site redevelopment at the former South Campus redevelopment area adjacent to BF Goodrich s active North 49

58 Campus manufacturing facility. The District has entered into an agreement with BF Goodrich to jointly monitor subsurface activity and manage contaminated soil and groundwater during South Campus CIP construction activity. South Campus CIP Projects include; Chula Vista South Campus Pavement and Foundation Demolition, Chula Vista Remediation of Newly Acquired Property- Goodrich, Chula Vista H Street Extension, Chula Vista Marina Parkway Realignment, and Chula Vista Off-site Drainage. From time to time, the District may be named as a party to certain investigations and legal actions involving environmental issues associated with properties owned by the District and which have been leased to third parties. It is the District s practice to challenge any investigation or legal action for which the District has been named as a party and to look to the tenants of the contaminated property for any financial support needed to cleanup such property. It is normal practice of the District to include broad indemnity in leases and other agreements, such as temporary use occupancy permits and right of entry agreements. Such indemnity would cover environmental matters. Future Projects As noted above, Board Policy 120 establishes the process by which new/future projects are reviewed and approved for funding. A CIP workshop/special meeting was held on October 9, 2013 in accordance with Board Policy 120, at which time there was a reallocation of existing project funding. Ability to Meet Rate Covenant CERTAIN INVESTMENT CONSIDERATIONS As discussed in SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Rate Covenant, the District will covenant and agree to establish and at all times maintain rentals, rates, fees and charges for the use of the Port of San Diego and for services rendered by the District in connection with the Port of San Diego so that Net Pledged Revenues in each Fiscal Year will be at least equal to one hundred twenty-five percent (125%) of aggregate Annual Debt Service for such Fiscal Year. If Net Pledged Revenues fall below the level necessary to meet the rate covenant, the Indenture requires the District to retain and direct an Independent Consultant to make recommendations as to the revision of the District s business operations and its schedule of rentals, rates, fees and charges for the use of the Port of San Diego and for services rendered by the District in connection with the Port of San Diego, and requires the District, upon receipt of such recommendations, to take all lawful measures to revise the schedule of rentals, rates, fees and charges as may be necessary to meet the rate covenant. If the District complies with the above described requirements, it will not constitute an event of default under the Indenture, provided that such amounts are not less than the debt service due on the Outstanding Bonds for such Fiscal Year and the District does not fail to meet the rate covenant for the Fiscal Year following the Fiscal Year in which such recommendations were received. Pursuant to Section 36 of the Port District Act, the Board has full authority to levy rates and charges for use of any of the facilities owned or service furnished or provided by the District. Increasing the schedule of rentals, rates, fees and charges for the use of the Port of San Diego and for services rendered by the District in connection with the Port of San Diego would be subject to contractual, statutory and regulatory restrictions. There can be no assurance that the District will be able to increase its schedule of rentals, rates, fees and charges within the time allowed. In addition, implementation of an increase in the schedule of rentals, rates, fees and charges for the use of the Port of San Diego could have a detrimental impact on the operation of the Port of San Diego by making the cost of operating at the Port of San Diego unattractive to retailers, shipping lines and others in comparison to other locations, or by reducing the operating efficiency of the Port of San Diego. FAA Regulations The Airport and Airways Improvement Act of 1982, as amended ( AAIA ), provides that all airports that accept grants from the Federal Aviation Administration (the FAA ) must use revenues generated by the airport for the capital or operating costs of the airport, the local airport system, or other local facilities which are owned or operated by the owner or operator of the airport and directly and substantially relate to the air transportation of passengers or property. The policies of the FAA prohibit an airport from making direct or indirect payments that exceed the fair and reasonable value of the respective services and facilities provided to the airport. The District 50

59 provides certain services to the Airport Authority and leases several parcels of land to the Airport Authority. Approximately 19.4% of the District s fiscal year 2013 operating revenues were generated from services provided to and leases with the Airport Authority. If the FAA were to rule that the Airport Authority s payments to the District for the services provided by the District and/or for the lease of the several parcels of land to the Airport Authority violate the policies of the FAA, the Airport Authority would be solely responsible for correcting any such violations. The District is not aware of any challenges by the FAA to the payments being made by the Airport Authority to the District. Dependence on Tourism The District and its tenants play a key role in the growth of tourism in the San Diego-area, which is the second largest economic engine in the region. The District supports the tourism industry with its direct investment in each phase of development of the Convention Center, now ranked as the fifth most sought-after location for conventions in the United States. The success of the Convention Center and its global marketing strategy bring direct revenues to the District through its hotel, restaurants, and attractions, as well as having the impact of raising demand for hotel rooms, meeting facilities, restaurants, and leisure activities for the entire hotel industry on the waterfront. Factors outside of the District s control that could affect the level of tourism in the San Diego region and may therefore impact the District s Net Pledged Revenues, include, but are not limited to, concerns about the safety of, or the availability of, air travel or the effectiveness of security precautions, particularly in the context of international hostilities and potential terrorist attacks; the state of the national, regional and local economies; fuel prices; the cost of airline tickets; as well as drought and other adverse weather conditions. Security at the Port of San Diego As a result of the terrorist attacks of September 11, 2001, the Maritime Transportation Security Act ( MTSA ) was signed into law on November 25, 2002, to require sectors of the maritime industry to implement measures designed to protect the ports and waterways of the U.S. from terrorist attacks. The MTSA requires interagency teamwork within the Department of Homeland Security, including the U.S. Coast Guard, the Transportation Security Administration (the TSA ), the Bureau of Customs and Border Protection, and the Department of Transportation s Maritime Administration, to develop security regulations. The security regulations focus on those sectors of maritime industry that have a higher risk of involvement in a transportation security incident, including various tank vessels, barges, large passenger vessels, cargo vessels, towing vessels, offshore oil and gas platforms, and port facilities that handle certain kinds of dangerous cargo or service the vessels listed above. Such regulations were implemented on July 1, 2003, and final rules became effective in November Such regulations provide for port and vessel owners and operators to assess their vulnerabilities, and to then develop plans that may include implementing vehicle, container and baggage screening procedures, designating security patrols, establishing restricted areas, implementing personnel identification procedures, accessing control measures, and/or installing surveillance equipment. To comply with MTSA regulations and based on the District s comprehensive seaport security initiatives, the District is and will continue to implement certain security measures to be in compliance with MTSA and other federal and State rules and regulations. Such security measures include, the installation of physical security improvements (i.e., improved fencing, lighting, video surveillance equipment) at the marine terminals, the preparation and updating of Facility Security Plans ( FSP ) for each terminal, training District staff in the FSP requirements and contracted security service guards. Although the District anticipates receiving federal grants to cover all of these costs, the District will use its own funds for any costs not paid for from federal grants, including operating and maintenance costs for the physical security improvements. The District has received grants from the TSA in the amount of $2.8 million and has applied to the TSA for an additional $0.3 million of grants. The District decreased its Maritime Department s budgeted security costs by approximately $100,000 for fiscal year 2013 as compared to the actual security costs it incurred in fiscal year 2012 and the District expects to decrease its budgetary security costs by approximately $100,000 for fiscal year In fiscal year 2014, the District will continue to impose a security service charge on the cruise lines utilizing the Cruise Ship Terminal. The District expects the security service charge will cover approximately 100% of the Cruise Ship Terminal s annual budgeted security costs. There can be no assurance that the MTSA requirements will not become stricter or that additional requirements will not cause the District to incur additional security related expenses. 51

60 National and local law enforcement officials have warned that additional terrorist attacks upon key infrastructure and other targets in the United States are possible. The Port of San Diego and the surrounding waterways are particularly visible infrastructure assets that could be the subject of future attempted terrorist attacks. A terrorist attack at the Port of San Diego or the surrounding waterways could have a material adverse effect on the ability of the District to collect revenues. Seismic Risks The Port of San Diego is located in an area considered to be seismically active. The Port of San Diego is located within several seismic fault zones, one of which, the Rose Canyon Fault Zone, passes beneath the Port of San Diego. The nearest adjacent seismic fault zone, the Point Loma Fault Zone, is approximately one mile from the Rose Canyon Fault Zone. A significant earthquake is possible during the period the Series 2013 Bonds will be outstanding. The San Diego area has not experienced a significant earthquake event in over 60 years. The District s three terminals are located on natural bay sediment and hydraulic fills that have a high potential for liquefaction during both a moderate and major seismic event. Berth 24-5 at NCMT and the Dole facility at TAMT have been designed and constructed to current seismic requirements. Many of the District s older structures have not been fully evaluated to determine their ability to survive a seismic event. Facilities of the District could sustain extensive damage in a major seismic event which could include slope failures along the shoreline, pavement displacement, distortions of pavement grades, breaks in utility, drainage and sewage lines, displacement or collapse of buildings, failure of bulkhead walls, rupture of gas and fuel lines. Damage to District facilities could materially adversely affect Net Pledged Revenues. The District no longer purchases earthquake insurance as the cost of the coverage is prohibitive and offers little coverage after deductibles are taken into account. Studies revealed that the likelihood of a seismic event causing damage in excess of the previous deductible was small. Benchmarking with other public agencies on the West Coast revealed that very few purchase earthquake insurance. Costs of repair and reconstruction of District facilities following a moderate to severe seismic event could well exceed available resources and the District would rely on the Federal Emergency Management Agency for repairs to damaged facilities. To date, no earthquakes have caused structural damage to District facilities. In addition, damage or destruction of tenant facilities from a moderate to severe seismic event could materially and adversely affect District tenants ability and willingness to pay rent to the District. Limits on Maritime Growth and Development The District has identified trade development opportunities in specialty cargo markets that could result in substantial trade and cargo growth. The Port of San Diego s proximity to Mexico and the maquiladora centers along the border offer some opportunity to provide a gateway to these industries for both raw materials and finished products. The Port of San Diego benefits from less congestion compared to other southern California mega ports that primarily serve container markets. However, significant investment must be made to improve rail and freeway access to the terminal to sustain medium and long-term cargo growth while limiting impacts on the surrounding communities. Without such investment, medium and long-term growth will be limited. Additionally, there may be a long-term need to identify suitable property available for storing and handling cargo in reasonable proximity to the terminals as expected demand arises. Failure to obtain such property may impede long-term growth and development. The District is committed to maintaining cargo diversity, as well as maintaining the ability to safely and efficiently handle multiple types of cargo. This will require a long-term infrastructure plan that invests in container handling capability, underwater pier upgrades and rail infrastructure improvements on the terminals. These investments are programmed to begin in the short term (within 5 years). Sufficient intermodal infrastructure (truck, rail, and ship) investments, across multiple regional jurisdictions, will also be required to sustain efficient access to the marine terminals and facilitate increased throughput and reduced overall transit times for cargo moving through the Port of San Diego. Lack of investment in such infrastructure will limit long-term growth and development. The Port of San Diego s cargo handling facilities are located adjacent to urban neighborhoods that are likely to experience increased residential densification, resulting in encroachment pressures on deep waterdependent maritime cargo handling and industrial facilities. In addition, regional arterial surface streets that were 52

61 intended to serve freight and act as major traffic thoroughfares have experienced lack of maintenance. Although regional support for cargo handling operations and infrastructure investment in support of this activity is high, these issues may adversely affect maritime growth and development. Relationship with Other Governmental Entities From time to time, the District receives requests to provide financial and other types of assistance to certain cities and communities located in and around the San Diego Harbor. See 2004 SERIES A BONDS AND SERIES 2013 BONDS DEBT SERVICE REQUIREMENTS AND OTHER OUTSTANDING OBLIGATIONS Subordinate Obligations for a discussion on certain agreements made with the Cities of San Diego, Chula Vista, Coronado, Imperial Beach and National City. The District is prohibited pursuant to the Port District Act and State law from subsidizing any projects or uses that are not directly related to the management of the tidelands under its jurisdiction. In the future, the District may receive additional requests for financial and other types of assistance from the cities and communities located in and around the San Diego Harbor, however, the District s ability to agree to these requests will be limited by the Port District Act, State law and the Indenture. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS. Possible Sea-Level Rise The San Diego Bay is located approximately two miles from the Pacific Ocean. The San Diego-area, including the Port of San Diego, may be exposed to rising sea levels as a result of global warming. In May 2009, the California Climate Change Center released a final paper entitled The Impacts of Sea-Level Rise on the California Coast, that was funded by the California Energy Commission, the California Environmental Protection Agency, the Metropolitan Transportation Commission, the California Department of Transportation, and the California Ocean Protection Council. The paper posits that increases in sea level will be a significant impact of climate change over the next century. While noting that impacts are highly site-specific and somewhat speculative, the paper indicated that the San Diego-area, including the Port of San Diego, was not vulnerable to flooding with a 1.4-meter sea level rise. However, the District is unable to predict whether sea-level rise or other impacts of climate change will occur while the Bonds are outstanding, and if any such events occur, whether there will be an adverse impact, material or otherwise, on Net Pledged Revenues. Bankruptcy Risks Payments to Bondholders may be limited by bankruptcy, insolvency or other laws generally affecting creditors rights or by the laws of the State of California relating to judicial foreclosure. The various legal opinions to be delivered concurrently with the delivery of the Series 2013 Bonds (including Bond Counsel s approving legal opinion) will be qualified as to the enforceability of the various legal instruments by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors rights, by the application of equitable principles and by the exercise of judicial discretion in appropriate cases. Bankruptcy of the District. The District may be able to file for bankruptcy relief under Chapter 9 of Title 11 of the United States Code (the Bankruptcy Code ). As a threshold matter, state law limits the filing of bankruptcy proceedings by public entities, such as the District, to specified circumstances. California Government Code section prohibits a local public entity from filing for relief under federal bankruptcy law unless the entity has (a) participated in a neutral evaluation process with interested parties (as defined in the statute) for a specified period, or (b) declared a fiscal emergency, and adopted a resolution by a majority vote of the governing board at a noticed public hearing that includes findings that (1) the financial state of the local public entity jeopardizes the health, safety, or well-being of the residents of the local public entity s jurisdiction or service area absent bankruptcy protections and (2) the local public entity is or will be unable to pay its obligations within the next sixty (60) days. In the event of the District s bankruptcy, debt service payments on Series 2013 Bonds should continue uninterrupted. If the District becomes a debtor in a bankruptcy case, the holders of the Series 2013 Bonds would continue to have a lien on Net Pledged Revenues received by the District or the Trustee after the commencement of the bankruptcy case if such Net Pledged Revenues constitute special revenues within the meaning of the 53

62 Bankruptcy Code. Special revenues are defined to include, among other things, receipts derived from the ownership, operation, or disposition of projects or systems of the debtor municipality that are primarily used or intended to be used primarily to provide transportation, utility, or other services. While the District believes that Net Pledged Revenues should be treated as special revenues, the District cannot guarantee that a bankruptcy court would make such findings. If a bankruptcy court were to hold the pledge of Net Pledged Revenues to be unenforceable under Chapter 9, then the owners of the Series 2013 Bonds would no longer be entitled to any special priority to the Net Pledged Revenues and may be treated as general unsecured creditors as to the Net Pledged Revenues. As a result, there could be delays or reductions in payments on the Series 2013 Bonds. If the District is in bankruptcy, the parties may be prohibited from taking any action to collect any amount from the District, or to enforce any obligation of the District, without first obtaining the bankruptcy court s permission. This prohibition may also prevent the Trustee from making payments to the holders of the Bonds from funds in the Trustee s possession. Under any circumstance, the bankruptcy court may determine that the District is entitled to use Net Pledged Revenues to pay the necessary operating expenses of the District prior to paying debt service on the Bonds, regardless of the provisions of the Indenture. In the event of a District bankruptcy filing, the District may be able to borrow additional money that is secured by a lien on any of its property (including the Net Pledged Revenues), which lien could have priority over the lien of the Indenture, as long as the bankruptcy court determines that the rights of the holders of the Bonds will be adequately protected. The District may be able to cause some of the Net Pledged Revenues to be released to it, free and clear of lien of the Indenture, as long as the bankruptcy court determines that the rights of the holders of the Bonds will be adequately protected. The District may be able, without the consent and over the objection of the Trustee and the holders of the Bonds, to alter the priority, interest rate, principal amount, payment terms, collateral, maturity dates, payment sources, covenants (including tax-related covenants), and other terms or provisions of the Indenture and the Bonds, as long as the bankruptcy court determines that the alterations are fair and equitable. As noted (see FINANCIAL INFORMATION Pension and Retirement Plans ), the District s Pension Plan has an unfunded actuarial liability. In a bankruptcy of the District, the amounts of current and accrued (unpaid) contributions, and/or changes in actuarial rules, could create additional uncertainty as to the District s ability to pay debt service on the Bonds. Further, given that municipal pension systems in California are usually administered pursuant to state constitutional provisions and, as applicable, other state and/or city law, the California Public Employees Retirement System ( CalPERS ) and other State pension systems (collectively, the Pension Systems ) have taken the position, among other possible arguments, that their claims enjoy a higher priority than all other claims, that Pension Systems are instrumentalities of the State of California and have the right to enforce payment by injunction or other proceedings outside of a District bankruptcy case, and that Pension System claims cannot be the subject of adjustment or other impairment under the Bankruptcy Code because that would purportedly constitute a violation of state statutory, constitutional and/or municipal law. The District cannot predict whether these arguments would be made by SDCERS and, if made, would be accepted by a bankruptcy judge in a bankruptcy of the District or, if they were so accepted (in whole or in part), what impact that may have on payments on the Bonds. In addition, this area of law is presently very unsettled because issues of pension underfunding claim priority, pension contribution enforcement, and related bankruptcy plan treatment of such claims (among other pensionrelated matters) are presently the subject of litigation in the Chapter 9 cases of several California municipalities, including Stockton and San Bernardino. There may be delays in payments on the Bonds while the court considers any of the issues outlined above. There may be other possible effects of a bankruptcy of the District that could result in delays or reductions in payments on the Bonds, or result in losses to the holders of the Bonds. Regardless of any specific adverse determinations in a bankruptcy proceeding of the District, the fact of such a bankruptcy proceeding could have an adverse effect on the liquidity and market value of the Bonds. Bankruptcy of Lessees. A bankruptcy filing by any of the District s significant lessees or guarantors, individually or in combination, including of the Airport Authority, Dynegy, Duke Capital, LLC, hotel property owners, restaurant property owners, boatyard/yacht club/marina operators, or rental car services, could affect the 54

63 District s revenues and thereby increase the likelihood of a delay or default in payment of the principal of and interest on the Series 2013 Bonds. Federal bankruptcy law, in Section 365 of the U.S. Bankruptcy Code, requires an entity in bankruptcy to make considered decisions either to keep ( assume ) or jettison ( reject ) its executory contracts (that are as yet incomplete as to both parties performances), and its leases. Section 365 thus requires that a lessee must either (1) assume the lease or the executory contract and fully perform all of its obligations (including curing payment arrears) or (2) reject such lease or executory contract and surrender the property. Pending this decision by a lessee of the District, there is an automatic stay of proceedings to recover the property. If a lessee in bankruptcy proceedings were to take a material amount of time to decide to assume or reject, and ultimately were unable or unwilling to assume the relevant lease or executory contract with the District, there could be delay in the re-letting of any involved property perhaps for an extended period, and possibly significant lost revenue to the District. To the extent that hotel property in the District continues to be owned by a relatively limited number of property owners, there is a greater likelihood that multiple hotels could enter bankruptcy proceedings, and thus the chances are increased that sufficient moneys would not be available to pay principal of and interest on the Series 2013 Bonds on a timely basis. Federal Income Taxes TAX MATTERS The Internal Revenue Code of 1986, as amended (the Code ), imposes certain requirements that must be met subsequent to the issuance and delivery of the Series 2013 Bonds for interest thereon to be and remain excluded from gross income for federal income tax purposes. Noncompliance with such requirements could cause the interest on the Series 2013 Bonds to be included in gross income for federal income tax purposes retroactive to the date of issue of the Series 2013 Bonds. Pursuant to the Indenture and the Tax and Nonarbitrage Certificate executed by the District in connection with the issuance of the Series 2013 Bonds (the Tax Certificate ), the District has covenanted to comply with the applicable requirements of the Code in order to maintain the exclusion of the interest on the Series 2013 Bonds from gross income for federal income tax purposes pursuant to Section 103 of the Code. In addition, the District has made certain representations and certifications in the Indenture and the Tax Certificate. Bond Counsel will not independently verify the accuracy of those representations and certifications. In the opinion of Nixon Peabody LLP, Bond Counsel, under existing law and assuming compliance with the aforementioned covenant, and the accuracy of certain representations and certifications made by the District described above, interest on the Series 2013 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code. Bond Counsel is also of the opinion that such interest is not treated as a preference item in calculating the alternative minimum tax imposed under the Code with respect to individuals and corporations. Interest on the Series 2013 Bonds is, however, included in the adjusted current earnings of certain corporations for purposes of computing the alternative minimum tax imposed on such corporations. State Taxes Bond Counsel is also of the opinion that interest on the Series 2013 Bonds is exempt from personal income taxes of the State of California under present State law. Bond Counsel expresses no opinion as to other state or local tax consequences arising with respect to the Series 2013 Bonds nor as to the taxability of the Series 2013 Bonds or the income therefrom under the laws of any state other than California. Original Issue Discount Bond Counsel is further of the opinion that the difference between the principal amount of the Series 2013 Bonds maturing on September 1, 2029 (the Discount Bonds ) and the initial offering price to the public (excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters or wholesalers) at which price a substantial amount of such Discount Bonds of the same maturity was sold constitutes original issue discount which is excluded from gross income for federal income tax purposes to the same extent as interest on the 55

64 Series 2013 Bonds. Further, such original issue discount accrues actuarially on a constant interest rate basis over the term of each Discount Bond and the basis of each Discount Bond acquired at such initial offering price by an initial purchaser thereof will be increased by the amount of such accrued original issue discount. The accrual of original issue discount may be taken into account as an increase in the amount of tax-exempt income for purposes of determining various other tax consequences of owning the Discount Bonds, even though there will not be a corresponding cash payment. Owners of the Discount Bonds are advised that they should consult with their own advisors with respect to the state and local tax consequences of owning such Discount Bonds. Original Issue Premium The Series 2013 Bonds maturing on March 1, 2014 and on September 1, 2020 through September 1, 2028 (collectively, the Premium Bonds ) are being offered at prices in excess of their principal amounts. An initial purchaser with an initial adjusted basis in a Premium Bond in excess of its principal amount will have amortizable bond premium which is not deductible from gross income for federal income tax purposes. The amount of amortizable bond premium for a taxable year is determined actuarially on a constant interest rate basis over the term of each Premium Bond based on the purchaser s yield to maturity (or, in the case of Premium Bonds callable prior to their maturity, over the period to the call date, based on the purchaser s yield to the call date and giving effect to any call premium). For purposes of determining gain or loss on the sale or other disposition of a Premium Bond, an initial purchaser who acquires such obligation with an amortizable bond premium is required to decrease such purchaser s adjusted basis in such Premium Bond annually by the amount of amortizable bond premium for the taxable year. The amortization of bond premium may be taken into account as a reduction in the amount of taxexempt income for purposes of determining various other tax consequences of owning such Series 2013 Bonds. Owners of the Premium Bonds are advised that they should consult with their own advisors with respect to the state and local tax consequences of owning such Premium Bonds. Ancillary Tax Matters Ownership of the Series 2013 Bonds may result in other federal tax consequences to certain taxpayers, including, without limitation, certain S corporations, foreign corporations with branches in the United States, property and casualty insurance companies, individuals receiving Social Security or Railroad Retirement benefits, and individuals seeking to claim the earned income credit. Ownership of the Series 2013 Bonds may also result in other federal tax consequences to taxpayers who may be deemed to have incurred or continued indebtedness to purchase or to carry the Series 2013 Bonds. Prospective investors are advised to consult their own tax advisors regarding these rules. Interest paid on tax-exempt obligations such as the Series 2013 Bonds is subject to information reporting to the Internal Revenue Service (the IRS ) in a manner similar to interest paid on taxable obligations. In addition, interest on the Series 2013 Bonds may be subject to backup withholding if such interest is paid to a registered owner that (a) fails to provide certain identifying information (such as the registered owner s taxpayer identification number) in the manner required by the IRS, or (b) has been identified by the IRS as being subject to backup withholding. Bond Counsel is not rendering any opinion as to any federal tax matters with respect to the Series 2013 Bonds other than those described in the opinion attached as Appendix D. Prospective investors, particularly those who may be subject to special rules described above, are advised to consult their own tax advisors regarding the federal tax consequences of owning and disposing of the Series 2013 Bonds, as well as any tax consequences arising under the laws of any state or other taxing jurisdiction. Changes in Law and Post Issuance Events Legislative or administrative actions and court decisions, at either the federal or state level, could have an adverse impact on the potential benefits of the exclusion from gross income of the interest on the Series 2013 Bonds for federal or state income tax purposes, and thus on the value or marketability of the Series 2013 Bonds. This could result from changes to federal or state income tax rates, changes in the structure of federal or state income taxes (including replacement with another type of tax), repeal of the exclusion of the interest on Series 2013 Bonds from gross income for federal or state income tax purposes, or otherwise. We note that in 2011, and again in 2012 and 56

65 2013, President Obama released legislative proposals that would limit the extent of the exclusion from gross income of interest on obligations of states and political subdivisions under Section 103 of the Code (including the Series 2013 Bonds) for taxpayers whose income exceeds certain thresholds. It is not possible to predict whether any legislative or administrative actions or court decisions having an adverse impact on the federal or state income tax treatment of holders of the Series 2013 Bonds may occur. Prospective purchasers of the Series 2013 Bonds should consult their own tax advisors regarding the impact of any change in law on the Series 2013 Bonds. Bond Counsel has not undertaken to advise in the future whether any events after the date of issuance and delivery of the Series 2013 Bonds may affect the tax status of interest on the Series 2013 Bonds. Bond Counsel expresses no opinion as to any federal, state or local tax law consequences with respect to the Series 2013 Bonds, or the interest thereon, if any action is taken with respect to the Series 2013 Bonds or the proceeds thereof upon the advice or approval of other counsel. IN ALL EVENTS, ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS IN DETERMINING THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE SERIES 2013 BONDS. No Litigation Relating to the Series 2013 Bonds LITIGATION There is no litigation now pending or, to the best of the District s knowledge, threatened which seeks to restrain or enjoin the sale, execution, issuance or delivery of the Series 2013 Bonds or in any way contests the validity of the Series 2013 Bonds or any proceedings of the District taken with respect to the authorization, sale or issuance of the Series 2013 Bonds, or the pledge or application of any moneys provided for the payment of or security for the Series 2013 Bonds or the use of the Series 2013 Bond proceeds. Other Litigation Involving the District There are a number of litigation matters and other legal proceedings pending against the District, including, but not limited to, lawsuits brought by former employees, tenants, and contractors/service providers, as well as legal proceedings related to alleged employment and labor code violations, inverse condemnation, quiet title, environmental remediation and environmental findings/review under the California Environmental Quality Act. Additionally, currently there are two actions brought against the District alleging wrongful death claims. One of the cases involves an appeal after judgment of nonsuit in the District s favor, and after exhaustion of a self-insurance retention, insurance proceeds will be available if the District is found liable. The other case, involves an employee of one of the District s tenants and alleged chemical exposure during his employment. The District s defense is being funded by the District s historic insurance carriers and the tenant pursuant to indemnification requirements in the tenant s lease. Any exposure should also be covered by insurance and the tenant through indemnification. All the claims and suits are of a nature usually incident to the operation of the Port of San Diego and, in the aggregate, in the opinion of District management, based upon the advice of the Port Attorney, will not have a material adverse effect on the Net Pledged Revenues or financial condition of the District. It should be noted that a significant portion of the claims relating to personal injuries, wrongful death, environmental remediation, inverse condemnation, and property damage are covered by a comprehensive insurance program maintained by the District or by insurance carried by the District s tenants for which the District has been named as an additional insured. Additionally, many agreements with tenants include indemnification clauses whereby the tenant must indemnify, defend and hold harmless the District. RATINGS Standard & Poor s Ratings Services ( S&P ) and Fitch, Inc. ( Fitch ) have assigned ratings of A+ (stable outlook) and A+ (stable outlook) respectively, to the Series 2013 Bonds. Such ratings reflect only the views of such organizations and any desired explanation of the significance of such ratings should be obtained from the rating agency furnishing the same, at the following addresses: Standard & Poor s Ratings Services, 55 Water Street, New York, New York 10041; and Fitch, Inc., One State Street Plaza, New York, NY Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its 57

66 own. There is no assurance such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by the rating agencies, if in the judgment of such rating agencies, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Series 2013 Bonds. A securities rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time. LEGAL MATTERS The validity of the Series 2013 Bonds and certain other legal matters are subject to the approving opinion of Nixon Peabody LLP, Bond Counsel. A complete copy of the proposed form of Bond Counsel s opinion is contained in Appendix D hereto. Certain matters will be passed upon for the District by Nixon Peabody LLP, Disclosure Counsel and by the Port Attorney. Certain legal matters will be passed upon for the Underwriter by Kutak Rock LLP, Underwriter s Counsel. All of the fees of Bond Counsel, Disclosure Counsel and Underwriter s Counsel with regard to the issuance of the Series 2013 Bonds are contingent upon the issuance and delivery of the Series 2013 Bonds. FINANCIAL ADVISOR The District has retained the services of Public Financial Management, Inc., San Francisco, California, as Financial Advisor, in connection with the authorization and delivery of the Series 2013 Bonds. The Financial Advisor is not contractually obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. Fees of the Financial Advisor with regard to the issuance of the Series 2013 Bonds are contingent upon the issuance and delivery of the Series 2013 Bonds. VERIFICATION OF MATHEMATICAL COMPUTATIONS Upon delivery of the Series 2013 Bonds, the arithmetical accuracy of certain computations included in the schedules provided by the Financial Advisor on behalf of the District relating to escrow sufficiency will be verified by Grant Thornton LLP, independent certified public accountants (the Verification Agent ). Such verification shall be based solely upon information and assumptions supplied to the Verification Agent by the Financial Advisor. The Verification Agent has not made a study or evaluation of the information and assumptions on which such computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions or the achievability of the forecasted outcome. CONTINUING DISCLOSURE Pursuant to the Continuing Disclosure Agreement of the District (the Continuing Disclosure Agreement ), the District will covenant for the benefit of owners of the Series 2013 Bonds to provide certain financial information and operating data relating to the District and the Port of San Diego by not later than 285 days after the end of the District s fiscal year in each year, commencing with the fiscal year ending June 30, 2013 (the Annual Report ) and to provide notices of the occurrence of certain Notice Events (as described in the Continuing Disclosure Agreement). The Annual Report and notices of the occurrence of Notice Events will be filed by U.S. Bank National Association, the Dissemination Agent, on behalf of the District with the Municipal Securities Rulemaking Board in the manner prescribed by the Securities and Exchange Commission (the SEC ). These covenants have been made to assist the Underwriter in complying with SEC Rule 15c2-12(b)(5) (the Rule ). For the specific nature of the information to be contained in the Annual Report or the Notice Events, see APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT. A failure by the District to provide any information required thereunder will not constitute an Event of Default under the Indenture. In the last five years, the District has never failed to provide annual reports required by previous undertakings with regard to said Rule. In the last five years, the District has failed to file notice events relating to ratings changes for the insurer of its Series 2004 Bonds. The District has recently filed current ratings for the Series 2004 Bonds and the insurer for the Series 2004 Bonds. 58

67 UNDERWRITING The Series 2013 Bonds are being purchased by Citigroup Global Markets Inc. (the Underwriter ), from the District at a price of $27,937, (which is the par amount of the Series 2013 Bonds, plus a net original issue premium of $2,610,442.35, less an underwriter s discount of $148,047.04), subject to the terms of a bond purchase agreement dated November 6, 2013 (the Bond Purchase Agreement ), between the Underwriter and the District. The Bond Purchase Agreement provides that the Underwriter will purchase all of the Series 2013 Bonds if any are purchased, and that the obligation to make such purchase is subject to certain terms and conditions set forth in the Bond Purchase Agreement, the approval of certain legal matters by counsel, and certain other conditions. The initial public offering prices of the Series 2013 Bonds set forth on the inside front cover hereof may be changed from time to time by the Underwriter. The Underwriter may offer and sell the Series 2013 Bonds to certain dealers and others at prices lower than the public offering prices stated on the cover and the inside of the cover hereof. The Underwriter provided the information contained in this and the following two paragraphs for inclusion in this Official Statement and the District does not assume any responsibility for the accuracy or completeness or such statements of information. The Underwriter has entered into an agreement (the Distribution Agreement ) with TMC Bonds L.L.C. ( TMC ) for the distribution to retail investors of certain municipal securities offerings. In connection with the Distribution Agreement, TMC has established an electronic primary offering application through which certain broker-dealers and municipal securities dealers approved by the Underwriter and TMC (each an Approved Party ) can submit orders for, and receive allocations of, new issue municipal securities for retail investors, and the Underwriter may share with TMC a portion of its underwriting compensation, which TMC may share with each Approved Party, with respect to Bonds that are allocated to such retail orders. Citigroup Financial Products Inc., the Underwriter s parent company, owns a 31.35% equity interest in TheDebtCenter L.L.C., the parent company of TMC. The Underwriter and its affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisor, investment management, principal investment, hedging, financing and brokerage activities. The Underwriter and its affiliates have, from time to time, performed and may in the future perform, various investment banking services for the District for which they received or will receive customary fees and expenses. In the ordinary course of their various business activities, the Underwriter and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and investments of the District. FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS The audited financial statements of the District as of and for the fiscal year ended June 30, 2012 are attached hereto as APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE SAN DIEGO UNIFIED PORT DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, The financial statements referred to in the preceding sentence have been audited by Mayer Hoffman McCann P.C., independent auditors, as stated in their report. The District has not obtained permission from Mayer Hoffman McCann P.C. to include the fiscal year 2012 audited financial statements of the District in this Official Statement. In addition, Mayer Hoffman McCann P.C. has not reviewed this Official Statement. MISCELLANEOUS Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not expressly stated, are set forth as such and not representation of fact. No representation is made that any of the opinions or estimates will be realized. All references to the Port District Act, the Indenture, the Continuing Disclosure Agreement and all agreements with the District s tenants and other parties are made subject to the detailed provisions of such 59

68 documents. Copies of such documents are available for review at the offices of the District which are located at 3165 Pacific Highway, San Diego, California, AUTHORIZATION The District has authorized the distribution of this Official Statement. This Official Statement has been duly executed and delivered by the Chief Financial Officer/Treasurer on behalf of the District. SAN DIEGO UNIFIED PORT DISTRICT By /s/ Robert DeAngelis Chief Financial Officer/Treasurer 60

69 APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE SAN DIEGO UNIFIED PORT DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, 2012

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71 SAN DIEGO UNIFIED PORT DISTRICT Management s Discussion and Analysis and Basic Financial Statements June 30, 2012 (With Independent Auditors Report Thereon)

72 SAN DIEGO UNIFIED PORT DISTRICT Management s Discussion and Analysis and Basic Financial Statements June 30, 2012 Table of Contents Independent Auditors Report Management s Discussion and Analysis Basic Financial Statements: Balance Sheet Statement of Revenues, Expenses, and Changes in District Equity Statement of Cash Flows Notes to Basic Financial Statements Page

73 Board of Port Commissioners San Diego Unified Port District San Diego, California Independent Auditors Report We have audited the accompanying financial statements of the San Diego Unified Port District (the District), as of and for the year ended June 30, 2012, which collectively comprise the District s basic financial statements, as listed in the table of contents. These financial statements are the responsibility of the management of the District. Our responsibility is to express opinions on these financial statements based on our audit. The prior year partial comparative information has been derived from the financial statements of the District for the year ended June 30, 2011 and, in our report dated December 2, 2011, we expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards, issued by the Comptroller General of 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the San Diego Unified Port District as of June 30, 2012 and the respective changes in financial position and cash flows of the District for the year then ended in conformity with accounting principles generally accepted in the United States of America. Accounting principles generally accepted in the United States of America require that the management s discussion and analysis identified in the accompanying table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Page 1