$44,880,000 PORT OF BELLINGHAM, WASHINGTON $28,680,000 Revenue Bonds, 2010B (Taxable Build America Bonds Direct Payment to Issuer)

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1 NEW ISSUE BOOK-ENTRY ONLY Moody s Rating: A2 See OTHER MATTERS Rating herein In the opinion of Bond Counsel, assuming compliance with certain covenants of the Port, interest on the 2010A Bonds is excludable from gross income for federal income tax purposes under existing law, except for interest on any 2010A Bond for any period during which such 2010A Bond is held by a substantial user of the facilities financed by such 2010A Bonds, or a related person to such substantial user, within the meaning of Section 147(a) of the Internal Revenue Code of 1986, as amended. Interest on the 2010A Bonds is not an item of tax preference for purposes of the federal minimum tax imposed on individuals and corporations and is not included in adjusted current earnings for the purpose of computing the federal alternative minimum tax imposed on certain corporations. In the opinion of Bond Counsel, interest on the 2010A Bonds is not excludable from gross income for federal income tax purposes. See TAX MATTERS herein. $16,200,000 Revenue Bonds, 2010A (Private Activity Non-AMT) $44,880,000 PORT OF BELLINGHAM, WASHINGTON $28,680,000 Revenue Bonds, 2010B (Taxable Build America Bonds Direct Payment to Issuer) Dated: As of the Delivery Date Due: December 1, as shown on Inside Cover The, Washington (the Port ) Revenue Bonds, 2010A (Private Activity Non-AMT) (the 2010A Bonds ) and Revenue Bonds, 2010B (Taxable Build America Bonds - Direct Payment to Issuer) (the 2010B Bonds and, collectively with the 2010A Bonds, the Bonds ) will be issued in fully registered form only and, when issued, will be registered in the name of CEDE & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the Bonds. Individual purchases of interests in the Bonds will be made in book-entry form only, in the principal amount of $5,000 or any integral multiple thereof within a series and maturity. Purchasers of such interests will not receive certificates representing their interests in the Bonds. Principal and interest are payable directly to DTC by the fiscal agent of the State of Washington (the State ), as paying agent and registrar (the Registrar ) (currently, The Bank of New York Mellon in New York, New York). Interest on the Bonds is payable semiannually on each June 1 and December 1, commencing June 1, 2011 to the maturity or earlier redemption of the Bonds. Upon receipt of payments of principal and interest, DTC will in turn remit such principal and interest to the DTC Participants for subsequent disbursement to the purchasers of beneficial interests in the Bonds, as described under the heading DESCRIPTION OF THE BONDS Form, Denomination and Registration herein. Maturity Dates, Principal Amounts, Interest Rates, Yields and CUSIP Numbers Located on Inside Cover The Bonds are subject to redemption prior to their stated dates of maturity as described herein. See DESCRIPTION OF THE BONDS Optional Redemption and Mandatory Redemption. The Bonds are being issued to provide funds (a) to construct, improve, expand, and equip marina and airport facilities of the Port, (b) to add funds the Reserve Account and (c) to pay costs of issuance for the Bonds. See PURPOSE AND USE OF PROCEEDS. The Bonds are revenue obligations of the Port payable solely from and secured by a pledge of Gross Revenues of the Port (as defined herein), subject to the payment of the expenses of operation, maintenance, and administration of the Port. The Bonds are issued on a parity of lien with the Port s outstanding Revenue Refunding Bonds, 2005 Series A (Non-AMT) and Series B (AMT), Revenue Refunding Bonds, 2008, and any additional parity bonds issued in the future under the conditions described herein. The Bonds do not in any manner or to any extent constitute general obligations of the Port, the State of Washington (the State ) or any other political subdivision of the State. Neither the full faith and credit of the Port nor the taxing power of the Port, the State or any other political subdivision of the State is pledged to the payment of the Bonds. The Bonds are not qualified tax-exempt obligations within the meaning of Section 265(b)(3)(B) of the Code. The Bonds are offered by the Underwriter, when, as and if issued, subject to the approving legal opinion of K&L Gates LLP, Seattle, Washington, Bond Counsel and Disclosure Counsel to the Port. It is anticipated that the Bonds will be available for delivery through the facilities of DTC by Fast Automated Securities Transfer, on or about November 16, Dated: November 2, 2010

2 No dealer, broker, salesperson or other person has been authorized by the Port to give any information or to make any representations other than those contained in this Official Statement in the connection with the offering of the Bonds, and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of any offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information set forth herein has been obtained from the Port and other sources which are believed to be reliable, but the information is not guaranteed as to accuracy or completeness. 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 Port since the date hereof. The achievement of certain results or other expectations contained in forward-looking statements in this Official Statement involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Port does not plan to issue any updates or revisions to those forward-looking statements if or when their expectations or events, conditions or circumstances on which such statements are based occur. 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 CUSIP numbers are included on the front cover of this Official Statement for convenience of the holders and potential holders of the Bonds. No assurance can be given that the CUSIP numbers for the Bonds will remain the same after the date of issuance and delivery of the Bonds. In connection with this offering, the Underwriter may over-allot or effect transactions that stabilize or maintain the market price of the Bonds at levels above those which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. -i-

3 MATURITY SCHEDULES, INTEREST RATES, YIELDS AND CUSIP NUMBERS Due (December 1) PORT OF BELLINGHAM, WASHINGTON $16,200,000 Revenue Bonds, 2010A (Private Activity Non-AMT) Principal Amount Interest Rate Yield CUSIP No.* 2011 $1,145, % 1.00% GR ,220, GS ,245, GT ,285, GU ,320, GV (1) 870, GW (1) 500, HD ,410, GX ,465, GY ,510, GZ ,560, HA (1) 1,110, HB (1) 500, (2) HE ,060, (2) HC8 $28,680,000 Revenue Bonds, 2010B (Taxable Build America Bonds Direct Payment to Issuer) Due (December 1) Principal Amount Interest Rate Price CUSIP No.* 2011 $435, % 100% HM , HN , HP , HQ , HR , HS3 $1,015, % Term Bonds due December 1, 100% Yield; CUSIP No HU8 $1,075, % Term Bonds due December 1, 100% Yield; CUSIP No HW4 $9,170, % Term Bonds due December 1, 6.50% Yield; CUSIP No JB8 $14,625, % Term Bonds due December 1, Yield; CUSIP No JG7 (1) Bifurcated maturity. (2) Priced to the par call date of December 1, *Copyright 2010 CUSIP Global Services. The CUSIP numbers are included for convenience of the holders and potential holders of the Bonds. CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services (CGS) is managed on behalf of the American Bankers Association by Standard & Poor s. No assurance can be given that the CUSIP numbers for the Bonds will remain the same after the date of issuance and delivery of the Bonds. -i-

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5 1801 Roeder Avenue P.O. Box 1677 Bellingham, Washington Phone: (360) Fax: (360) * Port Commission Term Expires Jim Jorgensen, President... December 31, 2011 Michael McAuley, Vice-President... December 31, 2013 Scott Walker, Secretary... December 31, 2013 Port Staff Charles Sheldon... Executive Director Fred J. Seeger... Director of Facilities Robert J. Fix... Chief Financial Officer Tamara Sobjack... Controller Art Choat... Director of Aviation Dan Stahl... Director of Marinas and Marine Terminals Mike Stoner... Director of Environmental Programs Lydia Bennett... Director of Real Estate Bond Counsel and Disclosure Counsel K&L Gates LLP Seattle, Washington Registrar The Bank of New York Mellon New York, New York Independent Consultants Ricondo & Associates, Inc. Cincinnati, Ohio * The Port s website is not part of this Official Statement, and investors should not rely on information presented in the Port s website in determining whether to purchase the Bonds. This inactive textual reference to the Port s website is not a hyperlink and does not incorporate the Port s website by reference. -iii-

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7 TABLE OF CONTENTS Page INTRODUCTION... 1 DESCRIPTION OF THE BONDS... 1 Principal Amount, Date, Interest Rates and Maturities... 1 Form, Denomination and Registration... 1 Paying Agent and Registrar... 2 Designation of 2010B Bonds as Build America Bonds... 2 Optional Redemption... 2 Mandatory Redemption... 3 Selection of Bonds for Redemption... 4 Notice of Redemption... 5 Purchase of Bonds... 5 Defeasance... 5 PURPOSE AND USE OF PROCEEDS... 5 Purpose of the Bonds... 5 Sources and Uses of Bond Proceeds... 6 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS... 6 Pledge of Revenues... 6 Rate Covenant... 6 Flow of Funds... 7 Debt Service Account... 7 Reserve Account... 7 Future Parity Bonds... 8 Other Covenants... 9 DEBT SERVICE REQUIREMENTS Description of Outstanding Parity Bonds Parity Bond Debt Service Requirements TAXING AUTHORITY THE PORT Port Powers Operations Organization Pensions Budgeting, Disbursements, and Accounting Investments Risk Management Auditing of Port Finances PORT FACILITIES AND SERVICES General Business Activity Marinas Division Commercial Real Estate Division Aviation Division The PFC Program PFC Application and Approval Process; Use of Excess PFC Revenues Collection and Segregation of PFCs by Airlines Termination of Authority to Impose PFCs Report of the Independent Consultant Marine Terminals Division Cargo Shipping Facilities Marine Terminals Division Passenger Facilities Bellingham Waterfront Acquisition Site Page PORT FINANCIAL AND OTHER INFORMATION Management Discussion of Recent Financial Results PORT CAPITAL PLANNING Capital Budget General Demand for Air Travel Airline Bankruptcy Levels of Marine Terminals Activity Airline Agreements Additional Indebtedness; Capital Program Economic Activity in the Air Trade Area Assumptions in the Report of the Independent Consultant Laws and Regulation Limitation of Remedies Seismic and Other Considerations Forward Looking Statements INITIATIVES AND REFERENDA DEMOGRAPHIC AND ECONOMIC INFORMATION TAX MATTERS A Bonds B Bonds ERISA CONSIDERATIONS OTHER MATTERS Legal Opinions Limitation on Remedies Litigation Enforceability Continuing Disclosure Undertaking Ratings Underwriting Conflicts of Interest Official Statement APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E APPENDIX F REPORT OF THE INDEPENDENT CONSULTANT AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDING DECEMBER 31, 2009 DEMOGRAPHIC AND ECONOMIC INFORMATION BOOK-ENTRY ONLY SYSTEM FORMS OF BOND COUNSEL OPINIONS FORM OF BOND RESOLUTION -v-

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9 OFFICIAL STATEMENT PORT OF BELLINGHAM, WASHINGTON $16,200,000* Revenue Bonds, 2010A (Private Activity Non-AMT) $28,680,000* Revenue Bonds, 2010B (Taxable Build America Bonds Direct Payment to Issuer) INTRODUCTION The purpose of this Official Statement, which includes the cover page, inside cover page, table of contents and appendices, is to provide information concerning the issuance by the, Washington (the Port ) of its Revenue Bonds, 2010A (Private Activity Non-AMT) (the 2010A Bonds ) and Revenue Bonds, 2010B (Taxable Build America Bonds Direct Payment to Issuer) (the 2010B Bonds and, collectively with the 2010A Bonds, the Bonds ). The fiscal agency of the State of Washington, currently The Bank of New York Mellon, is the registrar, authenticating agent and paying agent (the Registrar ) for the Bonds. The Port is issuing the Bonds pursuant to Title 53 of the Revised Code of Washington ( RCW ) and pursuant to Resolution No. 1288, adopted by the Port Commission on November 2, 2010 (the Bond Resolution ). Capitalized terms used in this Official Statement but not defined have the meanings set forth in the Bond Resolution, a copy of which is included in this Official Statement as Appendix F. Brief descriptions of the Bonds, the Port, Port facilities (the Facilities ) and certain statutes, agreements, reports and other instruments are included in this Official Statement. Such descriptions do not purport to be comprehensive or definitive. All references to the statutes, agreements, reports or other instruments described herein are qualified in their entirety by reference to each such document, statute, report or other instrument. 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 Port since the date of this Official Statement. Principal Amount, Date, Interest Rates and Maturities DESCRIPTION OF THE BONDS Bonds will be issued in two series in the total aggregate principal amount of $44,880,000 and will be dated and bear interest from their date of issuance and delivery. The Bonds of each series will mature on the dates and in the principal amounts and will bear interest (payable semiannually on June 1 and December 1, first interest payable June 1, 2011) until the maturity of the Bonds at the rates set forth on the inside cover of this Official Statement. Interest on the Bonds will be computed on the basis of a 360-day year consisting of twelve 30-day months. Form, Denomination and Registration The Bonds are being issued in fully registered form in denominations of $5,000 and integral multiples thereof within a series and maturity and when issued will be registered in the name of Cede & Co., as registered owner and nominee of The Depository Trust Company, New York, New York ( DTC ). DTC is to act as securities depository for the Bonds. Individual purchases may be made only in book-entry form. Purchasers will not receive certificates representing their interest in the Bonds. Except as provided in the Bond Resolution, so long as Cede & Co. (or such other name as may be requested by an authorized representative of DTC) is the registered owner of the Bonds, as nominee of DTC, references herein to Owners, Bondholders or Registered Owners mean Cede & Co. and not the Beneficial Owners of the Bonds. In this Official Statement, the term Beneficial Owner means the person for whom its DTC Participant acquires an interest in the Bonds. So long as Cede & Co. is the registered owner of the Bonds, the principal of and interest on the Bonds will be payable by wire transfer to Cede & Co. (or such other name as may be requested by an authorized representative of DTC), as nominee for DTC which, in turn, is to remit such amounts to the Direct Participants for subsequent disbursement to the Beneficial Owners. See APPENDIX D BOOK-ENTRY ONLY SYSTEM. -1-

10 Paying Agent and Registrar Principal and interest on the Bonds are payable directly to DTC by the State s fiscal agent, currently The Bank of New York Mellon in New York, New York, as registrar, authenticating agent and paying agent. In order to meet payment requirements for interest on and principal of the Bonds as the same becomes due and payable, the Port will remit money from the Revenue Bond Fund (the Bond Fund ) to the Registrar. The Registrar will make principal and interest payments to CEDE & Co. which, in turn, will disburse such principal and interest payments to its participants (the DTC Participants ) in accordance with DTC policies. Payments by such DTC Participants to the Beneficial Owners of the Bonds will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such DTC Participants and not of DTC, the Registrar or the Port. For so long as any Bonds are held in fully immobilized form, DTC, its nominee or a successor depository will be deemed to be the Registered Owner for all purposes under the Bond Resolution and all references to Registered Owners will mean DTC or its nominee or a successor depository and will not mean the Beneficial Owners. Neither the Port nor the Registrar has any responsibility or obligation to DTC Participants or to the persons for whom the DTC Participants act as nominees with respect to the Bonds regarding the accuracy of any records maintained by DTC or DTC Participants of any amount in respect of principal of or interest on the Bonds, or any notice that is permitted or required to be given to Registered Owners under the Bond Resolution (except such notice as is required to be given by the Registrar to DTC or its nominee or a successor depository). Beneficial ownership interests in the Bonds will be subject to transfer and exchange pursuant to the operational arrangements of DTC in effect from time to time. See Appendix D for additional information. As indicated therein, the information in Appendix D has been provided by DTC. The Port makes no representation as to the accuracy or completeness thereof. Beneficial Owners of the Bonds should confirm its contents with DTC or DTC Participants For so long as all Bonds are in fully immobilized form, payments of principal and interest thereon shall be made as provided in accordance with the operational arrangements of DTC referred to in the Letter of Representations. In the event that the Bonds are no longer in fully immobilized form, interest on the Bonds shall be paid by check or draft mailed to the Registered Owners at the addresses for such Registered Owners appearing on the Bond Register on the 15th day of the month preceding the interest payment date, and principal of the Bonds shall be payable upon presentation and surrender of such Bonds by the Registered Owners at the principal office of the Registrar. Designation of 2010B Bonds as Build America Bonds The Port has made irrevocable elections to have Section 54AA of the Internal Revenue Code of 1986, as amended (the Code ), apply to the 2010B Bonds so that the 2010B Bonds are treated as Build America Bonds, and further to have Subsection 54AA(g) of the Code apply to the 2010B Bonds so that the 2010B Bonds are treated as qualified bonds with respect to which the Port will be allowed a credit payable by the U.S. Treasury to the Port pursuant to Section 6431 of the Code in an amount equal to 35 percent of the interest payable on the 2010B Bonds on each interest payment date. As a result of these elections, interest on the 2010B Bonds is not excludable from gross income of owners of the 2010B Bonds for federal income tax purposes under Section 103 of the Code, and owners of the 2010B Bonds will not be allowed any federal tax credits as a result of ownership or receipt of interest payments on the 2010B Bonds. See TAX MATTERS 2010B Bonds. The obligation of the U.S. Treasury under Section 6431 of the Code to make direct payments to the Port in respect of interest payments on the 2010B Bonds does not constitute a full faith and credit guarantee of the 2010B Bonds by the United States of America Optional Redemption Optional Redemption of the 2010A Bonds. The 2010A Bonds maturing on and prior to December 1, 2020 are not subject to optional redemption in advance of their scheduled maturity. The 2010A Bonds maturing on and after December 1, 2021 are subject to redemption at the option of the Port on and after December 1, 2020 in whole or in part (and if in part, with maturities to be selected by the Port) on any date at a price of par plus accrued interest to the date of redemption. The 2010A Bonds are not subject to extraordinary optional redemption. -2-

11 Optional Redemption of the 2010B Bonds. The 2010B Bonds maturing on and prior to December 1, 2020 are not subject to optional redemption in advance of their scheduled maturity. The 2010B Bonds maturing on and after December 1, 2025 are subject to redemption at the option of the Port on and after December 1, 2020 in whole or in part (and if in part, with maturities to be selected by the Port) on any date at a price of par plus accrued interest to the date of redemption. The 2010B Bonds are subject to extraordinary optional redemption. Extraordinary Optional Redemption of the 2010B Bonds. Prior to the call date described under Optional Redemption of the 2010B Bonds, the 2010B Bonds will be subject to extraordinary optional redemption prior to their respective stated maturity dates, at the option of the Port upon the occurrence of a Tax Law Change (as defined below), from any source of available funds, as a whole or in part, and if in part by lot within a maturity, in authorized denominations on any date at a redemption price equal to the sum of the present value of the remaining scheduled payments of principal and interest to the maturity date of the 2010B Bonds to be redeemed, not including any portion of those payments of interest accrued and unpaid as of the date on which the 2010B Bonds are to be redeemed, discounted to the date on which the 2010B Bonds are to be redeemed, on a semiannual basis, assuming a 360-day year consisting of twelve 30- day months, at the Comparable Treasury Yield (defined below) plus 100 basis points. Tax Law Change means legislation has been enacted by the Congress of the United States or passed by either House of the Congress, or a decision has been rendered by a court of the United States, or an order, ruling, regulation (final, temporary or proposed) or official statement has been made by or on behalf of the U.S. Department of the Treasury ( Treasury ), the Internal Revenue Service or other governmental agency of appropriate jurisdiction, the effect of which, as reasonably determined by the Port, would be to suspend, reduce or terminate the timely payment from the Treasury to the Port with respect to the 2010B Bonds, or to state or local government issuers generally with respect to obligations of the general character of the 2010B Bonds, pursuant to Sections 54AA or 6431 of the Code, of an amount equal to at least 35 percent of the interest due thereon on each interest payment date ( Subsidy Payments ); provided, that such suspension, reduction or termination of the Subsidy Payments is not due to a failure by the Port to comply with the requirements under the Code to receive such Subsidy Payments. Comparable Treasury Yield means the yield which represents the weekly average yield to maturity for the preceding week appearing in the most recently published statistical release designated H.15(519) Selected Interest Rates under the heading Treasury Constant Maturities, or any successor publication selected by the Independent Banking Institution that is published weekly by the Board of Governors of the Federal Reserve System and that establishes yields on actively traded United States Treasury securities adjusted to constant maturity, for the maturity corresponding to the remaining term to maturity of the 2010B Bond being redeemed. The Comparable Treasury Yield will be determined as of the third business day immediately preceding the applicable date fixed for redemption. If the H.15(519) statistical release sets forth a weekly average yield for United States Treasury securities that have a constant maturity that is the same as the remaining term to maturity of the 2010B Bond being redeemed, then the Comparable Treasury Yield will be equal to such weekly average yield. In all other cases, the Comparable Treasury Yield will be calculated by interpolation on a straight-line basis, between the weekly average yields on the United States Treasury securities that have a constant maturity (a) closest to and greater than the remaining term to maturity of the 2010B Bond being redeemed; and (b) closest to and less than the remaining term to maturity of the 2010B Bond being redeemed. Any weekly average yields calculated by interpolation will be rounded to the nearest 1/100th of 1%, with any figure of 1/200th of 1% or above being rounded upward. Mandatory Redemption 2010B Bonds. The 2010B Bonds maturing on December 1, 2018 shall be redeemed prior to maturity (or paid at maturity), not later than December 1 in the years as shown below (to the extent such 2010B Bonds have not been previously redeemed or purchased) and in the principal amounts set forth below, without premium, together with the interest accrued to the date fixed for redemption. * Final Maturity. Redemption Years Amounts 2017 $ 500, * 515,000-3-

12 The 2010B Bonds maturing on December 1, 2020 shall be redeemed prior to maturity (or paid at maturity), not later than December 1 in the years as shown below (to the extent such 2010B Bonds have not been previously redeemed or purchased) and in the principal amounts set forth below, without premium, together with the interest accrued to the date fixed for redemption: * Final Maturity. Redemption Years Amounts 2019 $ 530, * 545,000 The 2010B Bonds maturing on December 1, 2025 shall be redeemed prior to maturity (or paid at maturity), not later than December 1 in the years as shown below (to the extent such 2010B Bonds have not been previously redeemed or purchased) and in the principal amounts set forth below, without premium, together with the interest accrued to the date fixed for redemption: * Final Maturity. Redemption Years Amounts 2021 $ 565, ,205, ,370, ,465, * 2,565,000 The 2010B Bonds maturing on December 1, 2030 shall be redeemed prior to maturity (or paid at maturity), not later than December 1 in the years as shown below (to the extent such 2010B Bonds have not been previously redeemed or purchased) and in the principal amounts set forth below, without premium, together with the interest accrued to the date fixed for redemption: * Final Maturity. Redemption Years Amounts 2026 $ 2,670, ,790, ,920, ,055, * 3,190,000 To the extent the Port redeems (other than in satisfaction of the mandatory sinking fund requirements) or purchases for cancellation any Bonds that are subject to mandatory redemption, the Port may reduce the mandatory sinking fund requirements of such Bonds of the same maturity, in like aggregate principal amount for the year specified by the Port. Selection of Bonds for Redemption For as long as the Bonds are held in book-entry only form, the selection of particular Bonds within a series and maturity to be redeemed will be made in accordance with the operational arrangements then in effect at DTC. If the Bonds are no longer held in uncertificated form, the selection of such Bonds to be redeemed and the surrender and reissuance thereof, as applicable, shall be made as provided in the Bond Resolution. If the Port redeems at any one time fewer than all of the Bonds of a series having the same maturity date, the particular Bonds or portions of Bonds of such series and maturity to be redeemed shall be selected by lot (or in such manner determined by the Registrar) in increments of $5,000. In the case of a Bond of a denomination greater than $5,000, the Port and the Registrar will treat each Bond as representing such number of separate Bonds each of the denomination of $5,000 as is obtained by dividing the actual principal amount of such Bond by $5,000. In the event that only a portion of the principal sum of a Bond is redeemed, upon surrender of such Bond at the principal office of the Registrar there shall be issued to the Registered Owner, without charge therefor, for the then unredeemed balance of the principal sum thereof, at the option of the Registered Owner, a Bond or Bonds of like series, maturity and interest rate in any of the denominations authorized in the Bond Resolution. -4-

13 Notice of Redemption When the Port determines to redeem any Bonds, notice of such redemption (which may be conditional) will be given at least 20 days, but not more than 60 days, prior to the redemption date by first class mail, postage prepaid, to the Registered Owner of any Bond to be redeemed at the address of the registered owner appearing in the Bond Register; provided, however, that for so long as the Bonds are held in fully immobilized form by DTC and are registered in the name of CEDE & CO. or its registered assigns, all notices will be given only in accordance with DTC s operational arrangements. The Port will not provide notice of redemption to any Beneficial Owners of Bonds. Purchase of Bonds The Port has reserved the right to purchase, at anytime, any of the Bonds offered to it at any price deemed reasonable by the Port. Defeasance In the event that money and/or Government Obligations, as now or hereafter defined as such in chapter RCW, maturing at such time or times and bearing interest to be earned thereon in amounts (together with such money, if necessary) sufficient to redeem and retire part or all of any Bonds in accordance with their terms, are hereafter irrevocably set aside in a special account and pledged to effect such redemption and retirement, then no further payments need be made into the bond fund or any account therein for the payment of the principal of and interest on the Bonds so provided for and such Bonds shall then cease to be entitled to any lien, benefit or security of the Bond Resolution, except the right to receive the funds so set aside and pledged, and such Bonds shall no longer be deemed to be outstanding under the Bond Resolution. As currently defined in chapter RCW, Government Obligations mean (a) direct obligations of or obligations, the principal and interest on which are unconditionally guaranteed by the United States of America and bank certificates of deposit secured by such obligations; (b) bonds, debentures, notes, participation certificates or other obligations issued by the Banks for Cooperatives, the Federal Intermediate Credit Bank, the Federal Home Loan Bank System, the Exportimport Bank of the United States, federal land banks or the Federal National Mortgage Association; (c) public housing bonds and project notes fully secured by contracts with the United States; and (d) obligations of financial institutions insured by the Federal Deposit Insurance Corporation to the extent insured or guaranteed as permitted under any other provision of State law. Defeasance of any 2010B Bond may result in a reissuance thereof, in which event a holder will recognize taxable gain or loss equal to the difference between the amount realized from the sale, exchange or retirement (less any accrued qualified stated interest which will be taxable as such) and the holder s adjusted tax basis in the 2010B Bond. See TAX MATTERS 2010B Bonds. Purpose of the Bonds PURPOSE AND USE OF PROCEEDS The Bonds are being issued to provide funds (a) to construct, improve, expand, and equip marina and airport facilities of the Port (the Projects ), (b) to fund the Reserve Account, and (c) to pay costs of issuance for the Bonds. The largest component of the Projects is a substantial terminal expansion to the Bellingham International Airport (the Airport Projects ) See PORT FACILITIES AND SERVICES Marinas Division and Aviation Division for a description of the Projects. -5-

14 Sources and Uses of Bond Proceeds Proceeds of the Bonds are expected to be used, together with other funds of the Port, as follows: 2010A Bonds 2010B Bonds Total Sources Principal Amount $ 16,200, $ 28,680, $ 44,880, Net Original Issue Premium/(Discount) 311, (526,925.20) (215,047.45) Reserve Account Balance 840, ,488, ,328, Total $ 17,352, $ 29,641, $ 46,993, Uses Project Fund Deposit $ 15,125, $ 25,691, $ 40,816, Reserve Account Deposit 2,071, ,666, ,738, Additional Funds , , Costs of Issuance (1) 156, , , Total $ 17,352, $ 29,641, $ 46, (1) Represents costs of issuing the Bonds, including Underwriters discount, legal fees and the Independent Consultant, printing costs and rating agency costs. Pledge of Revenues SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Bonds are revenue obligations of the Port payable solely from and secured solely by the Bond Fund. The Bond Fund shall be held separate and apart from all other funds and accounts of the Port and shall be a trust fund for the owners, from time to time, of Parity Bonds (as defined herein). The payments pledged to the Bond Fund represent a prior lien and charge upon the Gross Revenue of the Port superior to all other charges of any kind or nature whatsoever, except costs of administration of the Port and maintenance and operation of the Facilities, except that the amounts so pledged are of an equal lien to the lien and charge of the Port s Revenue Refunding Bonds, 2005 Series A (Non-AMT) and Series B (AMT) (the 2005 Bonds ) and the Port s Revenue Refunding Bonds, 2008 (the 2008 Bonds, and together with the 2005 Bonds, the Outstanding Parity Bonds ), and any lien and charge that may hereafter be made to pay and secure the principal of and interest on any revenue bonds issued in the future and meeting the requirements of the Bond Resolution (the Future Parity Bonds ). The Outstanding Parity Bonds, the Bonds and any Future Parity Bonds are referred to herein as Parity Bonds. Gross Revenues of the Port include, with certain exceptions as provided in the Bond Resolution, all income and revenue derived by the Port from time to time from any source whatsoever. See Appendix F for a copy of the Bond Resolution. The Bonds do not in any manner or to any extent constitute general obligations of the Port, the State of or any other political subdivision of the State. Neither the full faith and credit of the Port nor the taxing power of the Port, the State or any other political subdivision of the State is pledged to the payment of the Bonds. All of the Port s Gross Revenues are pledged to the repayment of all outstanding Parity Bonds. However, certain revenues received by the Port, e.g., passenger facility charges (PFCs ) may be used only for Federal Aviation Agency ( FAA ) approved projects, including debt service on bonds issued to pay for those projects. The Airport Projects are FAA approved and, therefore, the Port s PFC collections are expected to be used to pay the debt service on the Bonds allocable to the Airport Projects. See Aviation Division Passenger Facility Charges. Rate Covenant The Port has covenanted in the Bond Resolution to all times establish, maintain and collect rentals, tariffs, rates and charges in the operation of all of its business for as long as any Parity Bonds are outstanding that will produce Net Revenue in an amount at least equal to the Rate Covenant. The Rate Covenant means Net Revenue in an amount equal to at least 1.25 times the then actual, current Annual Debt Service Requirement. -6-

15 Flow of Funds There has been established in the office of the Treasurer of the Port a special fund of the Port known as the Port of Bellingham Revenue Fund (the Revenue Fund ). The Gross Revenue shall be deposited in the Revenue Fund as collected. The Revenue Fund shall be held separate and apart from all other funds and accounts of the Port, and the Gross Revenue deposited therein shall be used only for the following purposes and in the following order of priority: First: To pay necessary costs of administration of the business of the Port and of maintenance and operation of the Facilities not paid from other sources; Second: To make all payments required to be made into the Debt Service Account to pay the interest on any Parity Bonds; Third: To make all payments, including sinking fund payments, required to be made into the Debt Service Account to pay the principal of any Parity Bonds; Fourth: To make all payments required to be made into the Reserve Account to secure the payment of any Parity Bonds and repayments to any provider of a policy of Qualified Insurance; Fifth: Sixth: To make all payments required to be made into any other revenue bond redemption fund and debt service account or reserve account created therein to pay and secure the payment of the principal of and interest on any revenue bonds or other revenue obligations of the Port having a lien upon the Gross Revenue and the money in the Revenue Fund junior and inferior to the lien thereon for the payment of principal of and interest on any Parity Bonds; and To retire by redemption or purchase in the open market any outstanding revenue bonds or other revenue obligations of the Port as authorized in the various resolutions of the Port Commission authorizing their issuance or to make necessary additions, betterment s, improvements and repairs to or extension and replacements of the Facilities, or any other lawful Port purposes. Debt Service Account A Debt Service Account has been created in the Bond Fund for the purpose of paying the principal of, premium, if any, and interest on Parity Bonds. In the Bond Resolution the Port has irrevocably obligated itself for as long as any Parity Bonds remain outstanding to set aside and pay into the Debt Service Account from Gross Revenues or money in the Revenue Fund, at least 15 days prior to the respective dates that the same become due: (1) such amounts as are required to pay the interest scheduled to become due on outstanding Parity Bonds; and (2) such amounts with respect to outstanding Parity Bonds as are required (i) to pay maturing principal, (ii) to make required sinking fund payments, and (iii) to redeem outstanding Parity Bonds in accordance with any mandatory redemption provisions. Reserve Account A Reserve Account has been created in the Bond Fund for the purpose of securing the payment of the principal and interest on all Parity Bonds payable out of the Bond Fund. The Port has covenanted and agreed in the Bond Resolution that on the date of issuance of the Bonds it will (1) deposit into the Reserve Account proceeds of the Bonds or (2) cause to be delivered Qualified Insurance in an amount that, together with money in such account, shall equal the Reserve Account Requirement. The Reserve Account Requirement, with respect to all Parity Bonds, is defined in the Bond Resolution as an amount equal to the least of (i) the maximum annual principal and interest requirements on outstanding Parity Bonds, (ii) 125% of the average annual principal and interest requirements on outstanding Parity Bonds, or (iii) 10% of the stated principal amount of each issue of Parity Bonds secured by the Reserve Account. The balance in the Reserve Account as of July 1, 2010 was $2,328,738. The Port expects to deposit proceeds of each series of the Bonds into the Reserve Account at closing to satisfy the Reserve Account Requirement for the Bonds and the Outstanding Parity Bonds ($5,738,015.14). The Reserve Account Requirement shall be maintained while the Parity Bonds are outstanding by deposits of cash and/or qualified investments, a Qualified Letter of Credit or Qualified Insurance, or a combination of the foregoing. If the balance on hand in the Reserve Account is sufficient to satisfy the Reserve Account Requirement, interest earnings -7-

16 shall be applied as follows. Whenever there is a sufficient amount in the Bond Fund and the Reserve Account to pay the principal of, premium, if any, and interest on all Outstanding Parity Bonds, the money in the Reserve Account may be used to pay such principal and interest. So long as the money left remaining on deposit in the Reserve Account is equal to the Reserve Account Requirement, money in the Reserve Account may be transferred to the fund or account of the Port. The Port also may transfer out of the Reserve Account any money required to prevent any Bonds from becoming arbitrage bonds under the Code. If a deficiency in the Bond Fund shall occur, such deficiency shall be made up from the Reserve Account by the withdrawal of cash therefrom for that purpose and by the sale or redemption of obligations held in the Reserve Account, in such amounts as will provide cash in the Reserve Account sufficient to make up any such deficiency with respect to the Bonds, and if a deficiency still exists immediately prior to an interest payment date and after the transfer of cash from the Reserve Account to the Bond Fund, the Port shall then draw from any Qualified Letter of Credit or Qualified Insurance then credited to the Reserve Account for the Bonds in sufficient amount to make up the deficiency. Such draw shall be made at such times and under such conditions as the agreement for such Qualified Letter of Credit or such Qualified Insurance shall provide. Reimbursement may be made to the issuer of any Qualified Letter of Credit or Qualified Insurance in accordance with the reimbursement agreement related thereto, and after making necessary provision for the payments required to be made in paragraphs First through Third of the subheading Flow of Funds above. Any deficiency created in the Reserve Account by reason of any such withdrawal shall be made up within one year from Qualified Insurance or a Qualified Letter of Credit or out of Net Revenues (or out of any other moneys on hand legally available for such purpose), in 12 equal monthly installments, after first making necessary provision for all payments required to be made into the Bond Fund within such year. The Port has further covenanted and agreed that in the event it issues any Future Parity Bonds that it will provide in the resolution authorizing the issuance of the same that it will make a deposit into the Reserve Account out of proceeds of such Future Parity Bonds or Gross Revenue (or out of any other funds on hand legally available for such purpose) or from Qualified Insurance or Qualified Letter of Credit in an amount that, with the money otherwise required to be deposited therein, will be equal to the then applicable Reserve Account Requirement. See Future Parity Bonds below. Future Parity Bonds The Port has covenanted in the Bond Resolution that for as long as any of Bonds remain outstanding that it will not issue any bonds having a greater or equal priority lien upon the Gross Revenue to pay or secure the payment of the principal of and interest on such bonds than the priority of lien created on such Gross Revenue to pay or secure the payment of the principal of and interest on Parity Bonds, except that the Port reserves the right to issue Future Parity Bonds under the conditions described in subsections (a) and (b). (a) The Port reserves the right to issue Future Parity Bonds for First, the purpose of providing funds to acquire, construct, maintain, install, repair or replace any equipment, additions, betterments, or improvements to the Facilities of the Port for which it is authorized by law to issue revenue bonds, or Second, the purpose of refunding by exchange, call or purchase, at or prior to their maturity, any outstanding revenue bonds or other revenue obligations of the Port. In the resolution authorizing the issuance of Future Parity Bonds, the Port must pledge that payments will be made by the Port out of the Gross Revenue and into the Debt Service Account and Reserve Account (or to any sinking funds created in said accounts for the payment of Term Bonds) to pay and secure the payment of the principal of and interest on such Future Parity Bonds on a parity with the payments required in the Bond Resolution to be made out of such Gross Revenue into such Fund and Account to pay and secure the payment of the principal of and interest on any Parity Bonds then outstanding, upon compliance with the following conditions: (1) No Deficiency. At the time of the issuance of any Future Parity Bonds there is no deficiency in the Debt Service Account and the Reserve Account. Bonds will: (2) Future Parity Bond Resolution. Each resolution authorizing the issuance of Future Parity -8-

17 (A) contain a covenant that the Port will make a deposit into the Reserve Account out of proceeds of such Future Parity Bonds or Gross Revenue (or out of any other funds on hand legally available for such purpose) or from Qualified Insurance or Qualified Letter of Credit in an amount that, with the money otherwise required to be deposited therein, will be equal to the then applicable Reserve Account Requirement, (B) contain a covenant that the Port will at all times establish, maintain and collect rentals, tariffs, rates and charges in the operation of all of its business for as long as any Parity Bonds and any Future Parity Bonds being issued are outstanding that will produce Net Revenue in an amount equal to the Rate Covenant described under Rate Covenant above, (C) make applicable to the Future Parity Bonds being issued all of the other covenants herein contained that are applicable to Parity Bonds then outstanding (excluding therefrom any covenants that cease to be effective when an outstanding series of Parity Bonds is no longer outstanding), and (D) require mandatory sinking fund payments from the Revenue Fund sufficient to retire all Term Bonds on or prior to their fixed maturities. (3) Compliance with Parity Bond Revenue Requirement. The Port must demonstrate compliance with the Parity Bond Revenue Requirement (as defined below), either based on the certificate of a Professional Consultant if required or based on the certificate of the Designated Port Representative. The Parity Bond Revenue Requirement means either (A) Adjusted Net Revenue, as certified by a Professional Consultant, will be at least 1.25 times the respective Annual Debt Service Requirement for all outstanding Parity Bonds for each year following the issuance of the Future Parity Bonds, or (B) Net Revenues for the Base Period, based upon the audited financial statements of the Port and certified by the Designated Port Representative to be at least 1.25 times the respective Annual Debt Service Requirement for all outstanding Parity Bonds for each following the issuance of the proposed Future Parity Bonds. The Base Period means a period of any 12 consecutive months out of the 30 months immediately preceding the date of delivery of an issue of Future Parity Bonds. If a certificate of a Professional Consultant is provided, the Professional Consultant shall base the certification upon, and the certificate shall have attached thereto, financial statements of the Port audited by the State Examiner (unless such an audit is not available for a twelve-month period within the preceding thirty months) and certified by the Designated Port Representative, showing income and expenses for the period upon which the same is based. (b) Refunding. The Port has reserved the right to issue Future Parity Bonds for the purpose of refunding by exchange or purchasing or calling and retiring at or prior to their maturity any part or all of the then outstanding Parity Bonds if the issuance of such refunding Future Parity Bonds does not require a greater amount to be paid out of the Gross Revenue for principal of and interest on such refunding Future Parity Bonds over their life than is required to be paid out of such Gross Revenue for the principal of and interest on the Parity Bonds being refunded over their life, and if the conditions required in subsections (a)(1) and (a)(2) above are satisfied. Subordinate Lien Obligations. The Port has reserved the right to issue Special Revenue Bonds, or revenue bonds or other revenue obligations which are a charge upon the Net Revenue junior or inferior to the payments required by the Bond Resolution to be made out of Gross Revenue into the Debt Service Account and Reserve Account. Refunding of Maturing Obligations. The Port has further reserved the right to issue revenue bonds to refund maturing bonds or other revenue obligations for the payment of which money is not otherwise available provided that the refunding bonds to be issued shall have the same lien upon Gross Revenue as the bonds or other obligations to be refunded. Other Covenants The Port has made the following covenants in the Bond Resolution: Payment of Bonds. The Port will duly and punctually pay or cause to be paid out of the Bond Fund the principal of and interest on the Bonds at the times and places as the Bond Resolution and in said Bonds provided and will at all times -9-

18 faithfully perform and observe any and all covenants, undertakings and provisions contained in the Bond Resolution and in the Bonds. Maintenance of Facilities. The Port will at all times keep and maintain all of the Facilities in good repair, working order and condition, and will at all times operate the same and the business or businesses in connection therewith in an efficient manner and at a reasonable cost. Disposition of Facilities. In the event any Facility or part thereof which contributes in some measure to the Gross Revenue is sold by the Port or is condemned pursuant to the power of eminent domain, the Port will apply the net proceeds of such sale or condemnation to capital expenditures for Facilities which will contribute in some measure to the Gross Revenue or to the retirement of Parity Bonds then outstanding. Property Insurance. The Port will keep all Facilities insured, if such insurance is obtainable at reasonable rates and upon reasonable conditions, against such risks, in such amounts, and with such deductibles as the Commission shall deem necessary for the protection of the Port and of the owners of Parity Bonds then outstanding. Liability Insurance. The Port will at all times keep or arrange to keep in full force and effect policies of public liabilities and property damage insurance which will protect the Port against anyone claiming damages of any kind or nature, if such insurance is obtainable at reasonable rates and upon reasonable conditions, in such amounts and with such deductibles as the Commission of the Port shall deem necessary for the protection of the Port and of the owners of the Parity Bonds then outstanding. Books and Accounts. The Port will keep and maintain proper books of account and accurate records of all of its revenue, including tax receipts, received from any source whatsoever, and of all costs of administration and maintenance and operation of all of its business that are in accordance with proper and legal accounting procedure. Description of Outstanding Parity Bonds DEBT SERVICE REQUIREMENTS At time of issuance of the Bonds, the Port will have the following Parity Bonds outstanding: Series Designation Authorizing Resolution Original Principal Amount Outstanding Principal Amount Final Maturity Dates 2005A 1211 $ 11,440,000 $ 5,065,000 07/01/ B ,510, ,000 07/01/ ,865,000 7,170,000 01/01/2019 Total $ 13,815,000 $12,960,

19 Parity Bond Debt Service Requirements The following table summarizes the annual debt service requirements for the Outstanding Parity Bonds and the Bonds: -11- Outstanding Parity Bonds (1) 2010A Bonds 2010B Bonds (2) Year Principal Interest Total Principal Interest Principal Interest Total Debt Service (3) 2011 $ 1,435,000 $ 544,190 $ 1,979,190 1,145, $ 435,000 $ 1,841,699 $5,956, ,645, ,310 2,135,310 1,220, , ,000 1,762,159 6,083, , ,133 1,347,133 1,245, , ,000 1,752,832 5,296, , ,733 1,349,733 1,285, , ,000 1,741,904 5,295, ,960, ,538 2,310,538 1,320, , ,000 1,729,872 6,250, ,055, ,075 2,312,075 1,370, , ,000 1,715,904 6,252, ,170, ,738 2,328,738 1,410, , ,000 1,700,420 6,262, ,000 54, ,800 1,465, , ,000 1,676,420 4,868, ,000 18, ,500 1,510, , ,000 1,651,700 4,858, ,560, , ,000 1,624,670 3,904, ,610, , ,000 1,596,875 3,891, ,060,000 55,650 1,205,000 1,561,563 3,882, ,370,000 1,486,250 3,856, ,465,000 1,338,125 3,803, ,565,000 1,184,063 3,749, ,670,000 1,023,750 3,693, ,790, ,850 3,626, ,920, ,550 3,561, ,055, ,150 3,492, ,190, ,300 3,413,300 Total (3) $ 12,960,000 $ 2,691,015 $ 15,651,015 16,200,000 3,941,438 $ 28,680,000 $ 27,527,055 $ 91,999,509 (1) Includes debt service on the Port s outstanding 2005 Bonds and 2008 Bonds. As of November 16, (2) Reflects total amount of debt service on the 2010B Bonds; amount shown is not net of the subsidy payments expected to be received with respect to the 2010B Bonds. See DESCRIPTION OF THE BONDS Designated 2010B Bonds as Build America Bonds. (3) Totals may not foot due to rounding.

20 TAXING AUTHORITY The Port has statutory authority to levy property taxes for general purposes of the Port, including the establishment of a capital improvement fund for future capital improvements and the repayment of voted and nonvoted general obligation bonds of the Port (a Tax Levy ), to finance certain industrial development activities (an Industrial Development Levy ), and to fund special projects (a Dredging Levy ). Revenues from the Tax Levy may not be used to pay debt service on any revenue bonds, including the Bonds. The Tax Levy. The Port may impose, without a vote of the electors of the Port District, a Tax Levy to fund general purposes of the Port and to pay debt service on its general obligation bonds. The proceeds of a Tax Levy may not be used to pay debt service on any of the Port s revenue bonds, but may be used to fund maintenance and operation expenses. The Tax Levy is subject to the 101 percent levy limitation discussed below, except when unlimited tax general obligation bonds have been approved by the voters. The Port Commission determines the actual amount of the Port s Tax Levy each year as part of the Port s budgeting process, which includes a funding plan for the Port s capital improvement program. Statutory Tax Limitations. Although port districts are exempt from constitutional levy limitations, their levies are limited by statute to $0.45 per thousand dollars of assessed value for general port purposes, including the establishment of a capital improvement fund for future capital improvements. A levy for the payment of the principal of and interest on general obligation bonded indebtedness of a port district can be in excess of any levy made by a port district under the $0.45 per $1,000 of assessed value limitation. Taxes are subject to the provisions of the statute limiting increases in the dollar amount of annual property tax levies (chapter RCW). Pursuant to chapter RCW, the Port s tax levy must be set so the regular property taxes payable in the following year do not exceed the limit factor multiplied by the amount of regular property taxes lawfully levied for the Port in the highest of the three most recent years in which taxes were levied plus an additional dollar amount calculated by multiplying the increase in assessed value in the Port resulting from new construction and any increase in the assessed value of state-assessed property by the regular property tax levy rate of the Port for the preceding year. As a result of Initiative 747, the limit factor is the lesser of 101 percent or inflation, or if inflation is less than 1%, the Port may nonetheless levy the full 101 percent based on a finding of substantial need by the Port Commission and an approving vote of the Port Commission. The limit factor is effective only for taxes collected the following year. RCW provides for setting the property tax levy amount at the level that would be allowed if the property tax levy for taxes due in prior years beginning in 1986 had been set at the full amount allowed under chapter RCW. This allows certain taxing districts, such as the Port, to bank levy capacity, taxing at a lower rate while reserving the right to tax at the maximum rate allowed by law. When the Port levies at a rate less than the maximum rate while still preserving the ability to levy at a rate up to the maximum in the future if the need were justified, it allows the Port to tax at a lower level in the years when the maximum levy is not required, but return to the maximum level in years of need. As of December 31, 2009, the Port has approximately $1,000,000 of banked levy capacity. The Industrial Development Levy. For industrial development districts created by a Port, an additional $0.45 per $1,000 assessed valuation of taxable property may be levied for 12 years only. The Port may levy this tax for six years without the approval of the voters. If the Port intends to levy this tax for one or more years after the first six of the 12 years, the Port must publish notice of intent to impose such a levy not later than June 1 of the year in which the first levy of the seventh through twelfth-year period is to be made. If at least eight percent of voters who voted in the last gubernatorial election protest the levy within a 90-day period, a special election must be held in order to impose the levy. An Industrial Development Levy of $0.45 per $1,000 is not subject to the 101 percent limitation in the first year of the levy (thereafter it would be included in the tax base subject to the 101 percent limitation). The Port has imposed an Industrial Development Levy for the full twelve years allowed. The Dredging Levy. For dredging, canal construction, leveling or filling, upon approval of the majority of voters within the Port, an additional $0.45 per $1,000 assessed value of taxable property may be levied. The Dredging Levy is not subject to the 101 percent limitation. The Port has not imposed a Dredging Levy. -12-

21 THE PORT Port Powers Under State law, port districts are municipal corporations authorized to construct, acquire, maintain and operate systems of piers, wharves, warehouses, elevators, bunkers, oil tanks and cold storage plants, together with rail, water and terminal facilities. Creation of industrial development districts and ownership and operation of airport terminal facilities are within the scope and power of port districts. Port districts have authority to engage in economic development and promote tourism. Port districts also have the powers of eminent domain and ad valorem taxation upon the real and personal property within the port district. Operations The Port was established in 1920 under provisions of the RCW et seq and is authorized by statutes of the State to provide for the development and maintenance of harbors terminals, and airports, to promote tourism and to foster economic activity in Whatcom County (the County ). The Port may acquire land for sale and lease for industrial or commercial purposes and may create industrial development districts. The Port is independent from other local and state governments and operates within a boundary, which is coterminous with the boundary of the County, located in the northwest corner of the State. Organization The Port is administered by a three-member Commission (the Port Commission ) whose members are elected, in countywide elections, to four-year terms. The Port Commission establishes Port policies. The Port Commission delegates authority to an Executive Director and administrative staff to conduct the operations of the Port Port Commission Commissioners Term Expires Jim Jorgensen, President December 31, 2011 Michael McAuley, Vice President December 31, 2013 Scott L. Walker, Secretary December 31, 2013 The following are brief resumes of each Port Commissioner and key staff members. Jim Jorgensen. Mr. Jorgensen was elected to the Port Commission in He chose this community role because he wanted to be involved in the diverse operations of the Port and in communicating the Port s role with the Community. Mr. Jorgensen has lived in the County for more than 40 years. In 1994, he retired after 30 years of teaching science at Blaine High School. Mr. Jorgensen owned and operated Jim s Salmon Charter in Blaine for 40 years ago. Scott L. Walker. Mr. Walker was elected to the Port Commission in He is retired, having employed by the Atlantic Richfield Company for over 28 years in environmental, health, and safety administration positions, including assignments in Montana, Alaska, and Washington. He is a past president of the Washington/Oregon occupational health professionals' organization, has been active in the local Chamber transportation committee, and has been on a Western Washington University scholarship drive committee for many years. Mr. Walker is currently Vice President of the Washington Public Ports Association (WPPA). Michael McAuley. Mr. McAuley was elected to the Port Commission in He currently provides green building services to the community and has served as a U.S. Marine. A graduate of Evergreen State college he also earned a M.S. degree from Western Washington University Environmental College where he published a thesis on growth management. Mr. McAuley has also served on the Mayor s Neighborhood Advisory Committee. Charles Sheldon, Executive Director. Mr. Sheldon became the Port s Executive Director in October, As Executive Director, Mr. Sheldon manages the day-to-day activities of the Port. He performs his duties under the direction of the Port Commission and is responsible for implementing policies established by the Port Commission. Prior to joining the Port, Mr. Sheldon worked at the Port of Seattle starting in 1990 and served as director of the capital improvement program at the Seatac Airport, where he directed capital improvements, including 42 major projects. -13-

22 From 1992 to 1998, Mr. Sheldon led the Port s Southwest Harbor Project, which included the $275 million expansion of Terminal 5. In September 2002, Mr. Sheldon became managing director of the Seaport Division. Prior to joining the Port of Seattle, Mr. Sheldon worked for the Port Department of the Port Authority of New York and New Jersey. He also spent many years in the fishing industry on the East Coast as a deckhand, mate and skipper. Mr. Sheldon holds a bachelor s degree in American studies and regional planning from Yale University and a master s degree in resources management from the University of Massachusetts. Fred Seeger, Director of Facilities. Mr. Seeger became the Port s Director of Facilities in June 2009 as well as the Interim Executive Director until October As Director of Facilities, Mr. Seeger is responsible for the engineering, contract administration, construction, and maintenance of Port facilities. He held various management positions in private sector organizations responsible for engineering and construction of commercial and industrial capital projects. Mr. Seeger is a registered Professional Engineer and has his Master of Science degree in Civil Engineering from Purdue University. Robert J. Fix, Chief Financial Officer. Mr. Fix was appointed as the Port's Chief Financial Officer ( CFO ) in July In this role, he oversees Economic Development, Risk Management and Accounting and Information Technology. Prior to joining the Port, Mr. Fix worked in the hospitality industry in a CFO capacity. Mr. Fix has 17 years experience in this industry and served as the Chairman of the Board for the Washington State Hotel and Lodging Association. He received his Bachelors Degree from the School of Business and Economics at Washington State University. Tamara Sobjack, Controller. Ms. Sobjack has been employed by the Port since 2001 in the accounting department. Prior to joining the Port, she worked in public accounting preparing tax returns and conducting audits. Ms. Sobjack is a licensed Certified Public Accountant in Washington and holds a Bachelor of Arts in Accounting degree from Western Washington University. Art Choat, Director of Aviation. Mr. Choat was appointed Director of Aviation in 2002, and also serves in the capacity of Corporate Security Officer. He has been employed by the Port since 1982, and has served in the capacity of Director of Marinas and Director of Strategic Planning. He is an active member of the Aviation Committee of the Washington Public Ports Association and the American Association of Airport Executives. Mr. Choat has a Bachelor of Business Administration degree with a minor in Accounting from Western Washington University. Dan Stahl, Director of Marinas and Marine Terminals. Mr. Stahl is responsible for the operation and development of all Port owned marine facilities. Prior to joining the Port, he held various management positions in both private and public sector organizations with similar responsibilities. Mr. Stahl received his undergraduate degree in Marine Transportation from the Maine Maritime Academy, and a Master of Science degree in Ocean Engineering from the Massachusetts Institute of Technology. Mike Stoner, Director of Environmental Programs. Since 1995, Mr. Stoner s primary responsibilities at the Port have included remediation of over 20 state-listed Model Toxics Control Act sites and performance of compliance audits at the Port s facilities and approximately 250 tenant operations. Mr. Stoner s work has focused on the cleanup of contaminated soil, groundwater and marine sediment, habitat restoration and commercial property redevelopment. A current priority is the redevelopment of 220 acres of inactive industrial waterfront property for mixed use, including new public access and residential in-fill. Prior to joining the Port, he served for seven years in the Region 10 Superfund Branch of the United States Environmental Protection Agency. Mr. Stone has a Master of Science in Soils from the University of Washington, and has been a Certified Professional Soil Scientist since Lydia Bennett, Director of Real Estate. Ms. Bennett is responsible for the asset management of the Port s 1600 acres of real estate spread throughout County. Ms. Bennett has made a career of various positions in commercial real estate, including having worked for a number of developers and as a principal of a commercial brokerage, management and consulting firm. She holds a degree in Economics from Western Washington University, the Certified Commercial Investment Manager ( CCIM ) designation from the CCIM Institute and is a national instructor for that organization, and the Certified Property Manager designation from the Institute of Real Estate Management. Sylvia Goodwin, Director of Planning and Development. Ms. Goodwin has been the Planning and Development Director since She is responsible for long range planning for Port properties and coordination with regulatory agencies regarding development regulations and permit issues. She obtained a degree in Urban Planning -14-

23 from University of Washington and is a member of the American Institute of Certified Planners. Prior to coming to the Port, she served as Planning Manager for Whatcom County, Community and Economic Development Director for the City of Blaine. As of August 1, 2010, the Port employed approximately 90 regular employees who perform management, maintenance, security and custodial services. In addition, the Port hires approximately four part-time employees annually. Unions represent approximately 50% of all Port employees. While three of the four Port union contracts have expired, there has been no work stoppage or strike activity. All contracts are expected to be resolved without strike or work stoppage. Number of Employees Contract Expiration Date Union Function International Longshoremen & Warehousemen s Union (ILWU) 16 Maintenance/Clerical 12/31/09 International Association of Firefighters 13 Airport operations 12/31/09 Inland Boatman s Union of the Pacific ILWU Clerical Ferry ticketing Administrative 12/31/09 12/31/11 * Contract negotiations for both ILWU, Maintenance and the Inland Boatman s Union are currently in progress. The parties are actively negotiating and we expect to have a contract in place for both groups before the end of the calendar year. IAFF negotiations are now using the services of a mediator from the Public Employment Relations Commission. Pensions Substantially all full-time and qualifying part-time employees participate in one of the following statewide local government retirement systems administered by the State Department of Retirement Systems, under cost-sharing, multiple-employer public employee retirement systems. Port employees are covered by the Public Employees Retirement System ( PERS ). Contributions to this system by both employee and employer are based upon gross wages covered by plan benefits. PERS includes three plans: Plans I and II are defined benefit plans and Plan III is a combination defined benefit/defined contribution plan. PERS participants who joined the system by September 30, 1977 are Plan I members. Those who joined thereafter are enrolled in Plan II unless they exercise an option to transfer their membership to Plan III. Plan III became effective March 1, Retirement benefits are financed from both employee and employer contributions and investment earnings. Retirement benefits under Plans I and II are vested after completion of five years of eligible service. Plan III members are vested after ten years of eligible service. Participants enrolled in Plan II may elect to transfer to Plan III, during the specified transfer window period that occurs in January of each year. Once employees transfer to Plan III, they may not return to Plan II membership. In addition, new PERS eligible employees after September 1, 2002 who do not specify a plan choice will transfer automatically to Plan III. Retirement benefits are financed from both employee and employer contributions and investment earnings and are vested after completion of five or ten years of eligible service, depending on the employee s plan choice. For the year ending December 31, 2009, the Port s contribution to Plan I was $18,420, to Plan II $254,318, and to Plan III $81,483, representing its full liability under the system. PERS 1, 2, and 3 Funding Policy: Each biennium, the state Pension Funding Council adopts Plan I employer contribution rates, Plan 2 employer and employee contribution rates, and Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by statute at 6% for state agencies and local government unit employees, and at 7.5% for state government elected officials. The employer and employee contribution rates for Plan 2 and the employer contribution rate for Plan 3 are developed by the Office of the State Actuary to fully fund Plan 2 and the defined benefit portion of Plan 3. All employers are required to contribute at the level established by the Legislature. Under PERS Plan 3, employer contributions finance the defined benefit portion of the plan, and member contributions finance the defined contribution portion. The Employee Retirement Benefits Board sets Plan 3 employee contribution rates. Six rate options are available ranging from 5 to 15%; two of the options are graduated rates dependent on the employee's age. -15-

24 The required contribution rates expressed as a percentage of current-year covered payroll, as of September 1, 2010, are in the table below. All contribution rates remain subject to change by the State Legislature. PERS Plan Contributions (1) 9/1/2010-6/30/2011(2) 7/1/2011-6/30/2012(3) 7/1/2012 6/30/2013(3) Employer(4) 5.31% 8.61% 9.30% Employee PERS I 6.00% 6.00% 6.00% Employee PERS II 3.90% 4.59% 4.59% (1) PERS III Members pay a variable from 5.0% minimum to 15.0% maximum based on rate selected by the PERS 3 member. (2) Rates shown for are based on the 2007 Actuarial Valuation by the Washington Office of the State Actuary, and reflect current plan provisions. (3) Rates shown for are based on the 2009 Actuarial Valuation by the Washington Office of the State Actuary, and reflect current plan provisions. (4) The employer rates include the employer administrative expense fee currently set at 0.16%. OPEB Benefits. The Governmental Accounting Standards Board ( GASB ) has issued a new standard concerning Accounting and Financial Reporting by Employers for Post-Employment Benefits Other than Pensions (GASB 45). In addition to pensions, many State and local governmental employers provide other post-employment benefits ( OPEB ) as a part of total compensation to attract and retain the services of qualified employees. OPEB includes post employment health care as well as other forms of post-employment benefits when provided separately from a pension plan. The new standard provides for the measurement, recognition and display of OPEB expenses/expenditures, related liabilities (assets), note disclosures, and, if applicable, required supplementary information in the financial reports. This pronouncement was effective for the Port for the fiscal year beginning after December 31, The Port does not currently offer post-employment benefits to its employees. Budgeting, Disbursements, and Accounting The Port operates its accounting system on an accrual basis. The system is maintained in accordance with methods prescribed by the Washington State Auditor and by governmental accounting standards. The financial records are subject to annual audit by the State Auditor s office. The last audit covered the year State law prescribes procedures for the preparation of annual budgets by the Port. Final budgets must be adopted and filed in December for the following calendar year. In September of each year, a proposed budget is prepared by each department and submitted to the Chief Financial Officer. The proposed budget is reviewed by the Executive Director and submitted to the Commission for adoption. After adoption, the budget is filed with the County for the purpose of specifying the amounts to be raised by taxation. The budget includes the Tax Levy, which must be certified to the County Council in December of each year. Terminal charges are billed to shippers and steamship lines as services are provided (rates for those services are published in the Port Terminal Tariff, unless a separate agreement has been negotiated by the parties). Rental charges are billed to tenants monthly in advance. All Port charges are payable upon submission of invoices. State law requires that all funds be deposited with the Treasurer of the Port within 24 hours of collection. Budgetary control is maintained at the department level. Monthly financial statements by department are produced comparing actual results to budgeted figures. These statements are analyzed and distributed to the Port Commission, senior management and department heads. Any adjustments to the budgeted amounts in aggregate are approved by the Port Commission. Since 1995, the Port has annually received a Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association. Investments -16-

25 The Port s investments are categorized to give an indication of the risk assumed at year-end. Category 1 includes investments insured or registered, or securities held by the Port or by its agent in the Port s name. Category 2 includes investments uninsured and unregistered, with securities held by the counterparty s trust department or agent in the Port s name. Category 3 includes uninsured and unregistered, with securities held by the counterparty in the Port s name or held by the counterparty s trust department or agent by not in the Port s name. The Port s longer term investments are subject to the Port s investment policy. As of September 30, 2010 the Port s portfolio included a market value of $14,526,787. Risk Management The Port maintains commercial insurance coverage against most normal hazards. General liability coverage is in effect to a limit of $1 million with a $25,000 deductible. Excess liability coverage is in effect with a limit of $50 million. A Public Officials and Employees Liability Policy provides $5 million of coverage. The Port maintains a separate policy for airport liability with a limit of $100 million combined bodily injury, property damage and extended coverage for war, hi-jacking and other perils. The Port also maintains a separate crime policy with a limit of $1 million with a deductible of $10,000. Commercial property coverage is at full replacement cost with a loss limit of $364 million with a deductible of $25,000 is in effect. Earthquake coverage has a separate limit of $50 million with the Port self-insuring (as a deductible) five percent of the property value for each location. In addition, the Port maintains standard business automobile, hull and machinery, and boiler and machinery coverage. Settlement claims have not exceeded insurance coverage for any of the past three fiscal years. Auditing of Port Finances The State Auditor is required to examine the affairs of port districts, and the Port has exercised the option of being audited annually. The examination must include, among other things, the financial condition and results of operations of the Port, whether the laws and constitution of the State are being complied with, and the methods and accuracy of the accounts and reports of the Port. Reports of the Auditor s examinations are required to be filed in the Office of the State Auditor and in the finance and administration department of the Port. The State Auditor has prescribed a uniform system of accounting to be used by port districts within the State. The system is similar to that of a commercial enterprise. Separate funds are maintained for specific projects in accordance with bond covenants, tax levies and commitments for grants. Revenues and expenses are accounted for on the accrual basis. Accounting functions are computerized, providing timely detailed information. Revenues and expenses are allocated to individual profit centers to evaluate profitability by division. Monthly finance reports are prepared for management. The financial statements of the Port for the year ended December 31, 2009 are attached as Appendix B. General Business Activity PORT FACILITIES AND SERVICES The Port has four major business activities: marinas, commercial real estate, which encompasses several industrial parks and other leased property, aviation (consisting of Bellingham International Airport) and marine terminals. During 2009, marinas accounted for 30% percent, leased real estate accounted for 34% percent, aviation accounted for 25% percent and marine terminals accounted for 9% percent of Port operating revenues. Brief descriptions of each of the Port s operating divisions are provided on the following pages. -17-

26 Marinas Division The sheltered marinas provide more than 2,046 commercial and pleasure craft with moorage facilities offering fullservice amenities and essentials, including nearby shopping, restaurants, and an abundance of recreational activities. Key to the demand for marina facilities, is the proximity to the nearby San Juan Islands and Canadian Gulf Islands providing recreational boaters with a variety of attractive destinations. The Port has experienced overall occupancy rates of 87%-94% between 2006 and 2010 and, depending on slip size, have 325 boats on waiting lists. During 2009, marina revenues totaled approximately $5.9 million. Goals for marina operations include the planning and construction of a new downtown marina, the continued expansion of in-water marinas, and construction of dry land storage and launching ramps for smaller boats. The following is a summary of the facilities at each of the Port s marinas and demand for moorage facilities. Squalicum Harbor Marina. The Port owns 327 acres in and around Squalicum Harbor of which 200 acres serve as the moorage basin. Squalicum Harbor is homeport to over 1,417 commercial and pleasure boats. The harbor, last expanded in 1997, includes approximately 52,000 lineal feet of protected moorage and provides a full-service marina for all boaters. Facilities and services include more than 1,300 feet of visitor space available for transient visitors, shipyard chandleries, radar shops, marine surveyors, cold storage facility, marine electricians, engine repair shops and a fuel dock. Other amenities include seven restaurants, public meeting rooms and public laundromats, showers and restrooms. A portion of the proceeds will be used to upgrade the Squalicum Harbor Marina. Proceeds will be used to complete the second and final phase to replace the Gate 3 moorage system. This project will remove and dispose of the existing concrete and timber floats as well as the timber piling. Dredging will remove approximately 25,000 cubic yards of silt from the marina floor, establishing appropriate water depth for the vessels proposed. The existing float system covering 40,140 SF will be replaced with a new concrete float and piling system covering 35,950 SF. The new alignment will increase the lineal feet of moorage by 545 ft while reducing the overall coverage and number of piling installed. The slip mix will also be updated to better meet current and future demand of the marina. The project is scheduled to bid in early April 2011 with an anticipated project start in early May 2011 and completion in March of There are five charter boat operations at the Squalicum Harbor, offering more than 170 power and sailboats. The harbor is adjacent to the U.S. Coast Guard s search and rescue facility. A public boat launch, promenades and park settings are available to the public. Blaine Harbor Marina. Blaine Harbor currently has moorage for 629 pleasure and commercial boats. Moorage expansion was last completed in early 2000 with the addition of just over 300 slips and 700 feet of visitor moorage to the marina. The Blaine waterfront complex includes a full-service harbor. Services include a shipyard, chandlery, fueling station, small boat and engine repair, and a 2-lane public boat launch with restroom facilities. A recently completed master plan for the area indicates a demand for significantly increased service facilities. -18-

27 Existing Whatcom County Moorage Facilities (As of July 2010) No. on Waiting List Wet Moorage Berths Wet Moorage Occupancy Dry Storage Berths Dry Storage Occupancy Number Visitor Berths Moorage Facility Squalicum Harbor (1) 302 1,400 97% 0 N/A 1,556 lineal ft Blaine Harbor (1) % 0 N/A 720 lineal ft Hilton Harbor Marina % 0 Pt. Roberts Marina % 0 N/A 10 Semiahmoo Marina % 0 N/A 1 Birch Bay Marina (2) % 0 N/A 1 Sandy Point Marina (2) % 0 N/A 1 Total 383 3, (1) Port owned facilities. (2) Private residential communities. Moorage facilities only made available through purchase of residence. Source: Existing Moorage at Port Marinas (As of July 2010) Type of Boat Squalicum Blaine Total Pleasure/charter boats 1, ,818 Commercial vessels Source: Moorage Rates and Tariffs. In 1995, the Port Commission established a moorage rate formula. This formula is intended to cover the costs of operating, maintenance, overhead, and capital maintenance costs, plus the cost of financing marina improvements. The formula is applied to marina customers based on the previous year costs. (1) All rates are per lineal foot. Source: Historical Monthly Moorage Rates All slips Year Rate (1) increase % of 2010 $ % Projected Moorage Rates. The Port Commission may consider for approval a graduated rate plan for future moorage rates for recreational boats over 26 feet long, while keeping the moorage rates for recreational boats less than 27 feet long and commercial vessels at the 2010 rate. The following table shows the projected monthly rates per foot for each -19-

28 rate group under the proposed graduated rate plan. The Port Commission may choose not to approve the rate plan shown here. Projected Monthly Moorage Rates (1) Budget 2011 Budget 2012 Budget 2013 Budget 2014 Budget 2015 Rate Groups Recreational Groups Up to 26 $ 6.92 $ 6.92 $ 6.92 $ 6.92 $ $ 6.92 $ 6.92 $ 6.99 $ 7.06 $ $ 6.92 $ 6.99 $ 7.06 $ 7.13 $ $ 6.99 $ 7.13 $ 7.27 $ 7.42 $ $ 7.06 $ 7.27 $ 7.49 $ 7.79 $ 8.27 >57 $ 7.61 $ 8.22 $ 8.71 $ 9.15 $ 9.25 Boathouses $ 7.61 $ 8.22 $ 8.71 $ 9.15 $ 9.34 Active Commercial Fishing (ACF) $ 6.92 $ 6.92 $ 6.92 $ 6.92 $ 6.92 (1) All rates are per lineal foot, applied to the slip or the boat, whichever is longer. Source:. Commercial Real Estate Division Property Development and Leases. The Port owns approximately 1,600 acres of land and improvements of which [950] acres are currently undeveloped. The Port s Real Estate Division manages approximately 175 tenants with 220 leases or other agreements for mixed uses varying from large manufacturing facilities to single-office suites to land leases to permits and licenses. Leases range in length from temporary month-to-month terms to a state-mandated maximum of 80 years. Industrial properties total approximately 260 acres and are located at the Bellingham International Airport (the Airport ), Fairhaven, Squalicum waterfront, and in Sumas, Washington; there are also retail, commercial, and office properties in the portfolio. Other large holdings are located along the shorelines of Bellingham Bay in Bellingham and along Drayton Harbor in Blaine, Washington. Changes in Port Tenants. In recent years, the Port has experienced approximately six percent vacancy in Port-owned facilities. The list that follows indicates the Port s 10 largest tenants for the fiscal year In 2008, the Port signed new agreements with Pacific Cataract Laser Institute for 1.9 acres of industrial land and a new boatyard agreement with Seaview North boatyards. The Port engages in lease renewal negotiations with tenants beginning several months before the lease expires. Lease documents provide for month to month rent during negotiations, and the Port generally expects current tenants to renew their leases. In part due to limited inventory and high occupancy levels, the Real Estate Division revenues have grown at approximately eleven percent per year for the past five years with 2009 revenues of 6.7 million. The Port Commission generally builds new facilities only when a lease agreement is in place. -20-

29 10 Largest Property Leases (1) Tenant Name Type of Activity 2009 Lease Payment Lease Expires Renewal Option To: Stork Craft Mfg USA Product Warehouse 720, Olympic Coordination Center Homeland Security 583, Puglia Engineering, Inc. Shipyard 524, none Woodstone Corporation Cooking equip Mfg 446, US Customs and Border Homeland Security 432, Aluminum Chambered Boats Boat Mfg 295, Seaview Boatyards Shipyard North and Fairhaven 243, None Bellingham Cold Storage LFS, Inc. Bellwether Harbor Investments Cold Storage Warehousing Marine Supplier Hotel & Office Building 218, , ,333 Total of 10 largest leases $3,847,964 Total Property Lease Revenue Received by Port $7,404,189 Percent of Total Property Lease Revenue from by 10 Largest Leases 52% (1) This table represents the Port s largest property tenants, in terms of annual lease payment, as of December 31, Source:. Projected Operating Revenues. The Port estimates that operating revenues in its Real Estate Division will decline in 2011 by approximately $700 thousand as a result of the expiration of a short-term lease with the Department of Homeland Security, related to activities associated with the 2010 Winter Olympics in nearby Vancouver. From 2011 through 2016, operating revenues are projected to increase at a 0.5 percent compounded annual growth rate, largely reflecting the escalator clauses in various leases. The Port also projects increases in operating expenses at a compounded annual rate of 2.5% between 2011 and These projections are based on various assumptions, descriptions of which are available in APPENDIX A Report of the Independent Consultant. Foreign Trade Zones. Enabled by the US Foreign Trade Zone Act of 1934, the Port oversees three general purpose foreign trade zone sites in the County, located in the City of Sumas, the City of Blaine and centered around the Airport. Foreign Trade Zones ( FTZs ) are sites where manufacturing, warehousing and product manipulation operations can qualify for deferred or reduced United States federal duties and/or taxes. Given its proximity to Canada and its natural deep-water harbor, the Port has a number of attributes and advantages to offer FTZ's as a means of increasing trade. Aviation Division General. Bellingham International Airport is a Federal Aviation Authority Part 139 commercial air service airport with daily through and/or connecting flights to destinations throughout the United States and other countries. The Airport is located approximately 100 miles north of the City of Seattle and 40 miles south of Vancouver, Canada. Service at the Airport has historically been provided by leisure and regional/commuter carriers. In 2009, Alaska Airlines initiated mainline service at the Airport. Allegiant and Alaska Air Group (which owns Horizon Air) accounted for 97.3% of Airport enplanements in For more information on how changes in general air travel demand might affect future performance, see CERTAIN INVESTOR CONSIDERATIONS General Demand for Air Travel. Alaska Air Group offers 41 weekly flights to Seattle. Alaska Airlines offers four flights per week between Bellingham and Las Vegas, NV flying a Boeing aircraft, and has announced plans to introduce service to Hawaii in January 2011 using the same aircraft type. Allegiant Air, flying 150 passenger MD80 aircraft, is making between 34 and 50 (depending on the season), flights per week between Bellingham and Las Vegas, Nevada; Reno, Nevada; Palm Springs, California; San Diego, California; Los Angeles, California; Long Beach, California; Oakland, California; and Phoenix, Arizona. Allegiant recently acquired two Boeing 757 aircraft and has announced that it will acquire four additional Boeing 757 aircraft over the next two years. West Isle Air offers scheduled and on-demand commuter flights to

30 Eastbound and Friday Harbor, Washington, using Cessna Stationair aircraft. Charter airlines offer additional flights primarily to Utah and Nevada destinations. The Airport is a US Port of Entry which primarily serves as port of entry for general aviation and corporate aircraft, however customs agents are available to clear commercial flights as well. Trade related services at the Airport include a growing air cargo service, a foreign trade zone, and customs brokerage. Facilities include a 6,700-foot precision-instrumented runway. A major Runway rehabilitation and parallel Taxiway reconstruction project was completed in September This project, including planning and construction management, had a total cost of $29 million. The project was funded 95% by the FAA and 5% by the Port of Bellingham. In addition, the Airport provides a 16.5-hour control tower and weather service, hangars, domestic and international terminal for air carrier use and U.S. Customs and Immigration Service. Since 1990, the Federal Aviation Authority has issued grants in excess of $75 million for acquisition of Airport property, extension of the primary runway, building a new control tower, and multiple pavement management projects. The general aviation center and fixed base operation facilities are available for a variety of corporate and general aviation users. The General Aviation Terminal has a corporate meeting room, and pilot lounge with a flight plan terminal. General aviation facilities include one main fixed base facility, two aircraft maintenance facilities, ten corporate hangars and seven T-hangar units (90 total hangars), as well as 69 aircraft tie-down spaces. Two private companies provide fixed based operating services including fueling. Aviation 100LL gasoline and Jet A fuel are both available at the Airport. The existing fuel farm, owned by the Port, has a storage capacity of 75,000 gallons, with an additional 25,000 gallon tank being installed in the Fall of Allegiant air will be adding an additional 50,000 gallons of Jet A tanks in the by the end of 2011, for a total fuel farm capacity for Jet A fuel of 150,000 gallons. Passenger Activity at the Airport. The Port served approximately 650,000 total enplaning and deplaning Airport passengers in Currently, the Airport has facilities for commercial passengers, air cargo, general aviation and maintenance on a site of approximately 1,200 acres. By percentage year over year, BLI is the fastest growing airport on the West Coast of the U.S. Passengers using the airport in 2009 increased 18% from Passenger counts are up over 215% from A Canadian Point of Origin Analysis estimates 46% of the airport s booking originate in Canada. The following table illustrates the growth in enplanements at the Airport from 2005 through Between 2005 and 2009, the number of enplaned passengers at the Airport increased at a compounded annual growth rate of 33 percent per year. Bellingham International Airport Activity Passengers Enplaned 329, , , , ,212 Deplaned 320, , , , ,051 Total Passengers 649, , , , ,263 Freight (pounds) Enplaned 1,392,409 1,419,317 1,820,480 1,264,856 1,816,386 Deplaned 710, , , , ,994 Total Freight 2,102,617 2,085,892 2,496,279 1,740,399 2,477,380 Source:. -22-

31 Bellingham International Airport Landings and Takeoffs Carrier Type Air Carrier (over 60 passengers) 6,390 6,112 4,640 4, Air Taxi (under 60 passengers) 13,066 14,851 17,780 14,051 15,471 Itinerant General 32,272 32,020 34,328 38,974 42,950 Military ,090 1,214 Local General 14,709 11,247 16,304 15,345 23,926 Military Total 67,192 64,850 74,276 74,065 84,933 Source:. The following table illustrates the projected passenger enplanements at the Airport from 2010 through The projected results are based upon various assumptions that affect Airport activity. For a description of certain assumptions, see APPENDIX A Report of the Independent Consultant. Changes in these assumptions could have material effects on the projected Airport passenger activity. Bellingham International Airport Activity (Projected) (1) Enplaned Passengers 545, , , , ,300 (1) Projected using departing seats/load factor approach. Source: Ricondo & Associates, September Economic Base for Air Transportation. The Airport serves an Air Trade Area that includes Whatcom County, Skagit County, Island County and San Juan County in the State of Washington, as well as five geographic regions in Southern British Columbia: Fraser Valley Regional District, the cities of Langley, Surrey and White Rock, and Langley District Municipality. Between 2000 and 2009, the Air Trade Area experienced a 2.3% compounded annual growth rate. The Port serves as a regional trade center, but any significant change in trade relations and economic conditions with Canada would have an impact on demand at the Airport. Regulation. The Port operates the Airport pursuant to an airport operating certificate issued annually by the Federal Aviation Administration (the FAA ) after an on-site review. In addition to this operating certificate, the Airport is required to obtain other permits and/or authorizations from the FAA and from other regulatory agencies and is bound by contractual agreements included as a condition to receiving grants under the FAA s grant programs. Federal law also governs certain aspects of rate-setting and restricts grants of exclusive rights to conduct an aeronautical activity at an airport that receives or has received federal grants and other property. All long-term facility planning is subject to the FAA s approval; the Airport s financial statements are subject to periodic audits by the FAA; the Port s use of Airport revenues is subject to review by the FAA; and the Port s use of PFC revenue and grant proceeds is also subject to approval, audit and review. The Port is also required to comply with the provisions of the federal Aviation and Transportation Security Act (the Aviation Security Act ), with other federal security statutes and with the regulations of the TSA. Security is regulated by the FAA and by the TSA. The Port is also regulated by the federal Environmental Protection Agency and by the Washington Department of Ecology in connection with various environmental matters, including the handling of deicing materials and airline fuels and lubricants, protection of wetlands and other natural habitats, disposing of stormwater and construction wastewater runoff and noise abatement programs. The Port s handling of noise, including restrictions and abatement programs, is also subject to the requirements of federal and State statutes and regulations. Federal statutes and FAA regulations require that an airport maintain a rate structure that is as self-sustaining as possible and generally (with certain exceptions) limit the use of all revenue (including local taxes on aviation fuel and other airport-related receipts) generated by an airport receiving federal financial assistance to purposes related to the -23-

32 airport. Federal statutes also provide that without air carrier approval, an airport may not include in its rate base debt service allocable to projects not yet completed and in service. Federal statutes include provisions addressing the requirements that airline rates and charges set by airports receiving federal assistance be reasonable and authorizes the Secretary of Transportation to review rates and charges complaints brought by air carriers. Operating Revenues. The Aviation Division derives its operating revenues from airline and non-airline customers. Airline revenues for aircraft landings and terminal rental space are based on recovery of all associated costs. As such, a decline in costs results in a decline in revenue. Non-airline revenues derive from the fees, space rentals and concession payments from non-airline customers. These revenues fluctuate based on passenger activity and other factors. Airport operating revenues for 2008 and 2009 are shown in the following table. Aviation Division Operating Revenue 2008 and 2009 Operating Revenue Airline Revenues Landing fees 346, ,731 Terminal space rental 726, ,714 Other airline revenues (1) 240, ,667 Total airline revenues 1,313,044 1,295,112 Non-airline Operating Revenues Parking 2,357,098 3,263,620 Rental cars (2) 264, ,680 Terminal concessions (3) 12,021 4,946 Other (4) 179, ,011 Total non-airline revenues 2,812,850 3,705,257 Total Aviation Division Operating Revenue 4,125,894 5,000,369 Note: Totals may not foot due to rounding. (1) Includes ramp apron and loading bridge rental, badge fees, ramp permit fees and Fuel System Land revenue (ground rent). (2) Rental car revenue includes revenue from concession and leased space but does not include customer facility charges ( CFCs ). (3) Includes revenues from food and beverage, news and gift, duty-free, other concessions and non-airline terminal rental revenue. (4) Includes ground transportation fees, employee parking, utility revenues and miscellaneous other revenues. Source: Airline Agreements. The airport has Airport Lease Agreements with three Part 121 air carriers, Horizon Airline, Alaska Airlines, and Allegiant Airlines. With the exception of various Exclusive Use areas, these three leases are identical to each other. All are for a period of one year, with automatic renewals for subsequent one year periods. These leases require the airlines to report monthly their activity for passengers and freight, and all airlines pay according to the applicable airport tariff, which from time to time may change. All leases must pay for their defined exclusive area use and all are subject to the 80/20 non-exclusive rental charges for the operation of the terminal building. All leases are subject to rental adjustments each January 1 st. All air carriers must have liability insurance for aircraft related loss in the amount of $125,000,000 per occurrence and $1,000,000 per passenger seat. Other Airport Business Agreements. The Aviation Division s non-airline revenues include revenues from public parking, rental car and employee parking fees; terminal concession agreements; ground transportation, rental car and other concession fees; and revenues from airfield, terminal and other commercial property leases. -24-

33 Public Parking. The Airport operates a parking lot, located adjacent to the terminal, consisting of 1,400 short-term and long-term parking spaces and 140 overflow spaces for public parking and for use by employees and rental car companies. Currently under construction is the airport s Phase 4 A parking lot, which will expand the paved parking by 289 stalls. This work is scheduled to be completed by the end of In the Spring of 2011, Phase 4 B parking will bid and constructed. Phase 4 B, will add an additional 517 stalls for a total Phase 4 parking lot project of 806 parking stalls. Completion of Phase 4 parking will bring the total paved parking stalls at the airport to 2,206 stalls. Rental Cars. The airport has four (4) rental car operators Avis, Hertz, Budget, and Enterprise. As with the Airport Leases of the air carriers, all of the leases with rental car operators are identical, with the only exception being how many rental car parking stalls each company chooses to have. All operators have an exclusive use area in the baggage claim area of approximately 115 square feet, and all pay the same rental rate. They also participate on a triple-net basis for the leased premises common area maintenance charges. Pursuant to RCW (7) (the CFC Act ), the Port is authorized, at rates determined by the Port, to impose a customer facility charge ( CFC ) upon customers of rental car companies accessing the Airport. The Port has not imposed or collected any CFCs. All rental car operators, in addition to the base rent, pay and eight percent (8%) of their total monthly fees received from mileage and time charges on automobile rentals. All operators pay a monthly fee for the use of the vehicle wash facility. Passenger Terminal Concession Agreements. The airport has only one lessee whose business activity is that of a snack and beverage stand, and gift shop. This lessee has operated at the airport since The lease is currently on a holdover status, pending negotiations for space in the soon to be constructed Phase 1 Terminal Expansion Project. The new lease will move the tenant from a base monthly rental to a percentage of Gross Receipts rental. Space in the new Gate Holding Area of Phase 1 will also include a cocktail lounge. Additionally, there will be a location in the new Gate Holding Area for additional businesses. Miscellaneous Business Arrangements and Revenues. The Airport has agreements with a variety of ground transportation companies, under which the Port receives per-trip fees and permit fees, and lease agreements and other arrangements with other on-site and off-site tenants. These other agreements include a land lease plus a percentage of revenue for shuttle service on airport property; standard land leases for other aeronautical and non-aeronautical tenants at the Airport, and agreements for aviation fees, such as fuel flowage fees. It is anticipated during FY the airport will establish an advertising program for interested parties inside the terminal building. It is estimated such a program would generate as much as $200,000 annually. Airport Improvement Program Grants. The FAA Airport Improvement Program ( AIP ) provides federal discretionary and entitlement grants for eligible airport projects. These grants are distributed to airport operators on a reimbursement basis. The Port has received approximately $40.9 million in AIP grants associated with the planned capital projects. See APPENDIX A Report of the Independent Consultant. The PFC Program General Overview. PFCs are fees collected from enplaned paying passengers to finance eligible, approved airportrelated project costs, subject to FAA regulation. Airport operators are required to apply to the FAA for approval before imposing or using PFCs. The Port has FAA approval to impose a PFC of $4.50 per paying enplaned passenger, the maximum allowable under current law. Since the Port implemented its PFC program in 1993, it has obtained FAA authorizations, pursuant to 11 PFC application approvals, together with amendments thereto, to impose and use approximately $38,486,466 of PFCs for various projects including the Airport Projects financed with a portion of the proceeds of the Bonds. The Port began collecting a PFC of $4.50 per paying enplaned passenger on October 1, 2010, the maximum allowable under current law. For large, medium, and small hub airports, approval of a PFC greater than $3.00 results in a total reduction of up to 75 percent in passenger-based entitlement grants under the federal Airport Improvement Program. Bellingham International Airport is a Primary Non-Hub airport and its entitlement grants are not affected by the collection of a PFC of $4.50 per paying enplaned passenger. On August 11, 2010, the FAA approved application C-00-BLI. The application was for the imposition and use of PFCs for the commercial terminal expansion. The application was approved for $30,250,000 of project costs and included a $4.50 collection level. The Port will be applying for financing costs to accompany the $30,250,000 of project costs. Upon completion of the projects which are currently funded with PFCs, the Port will use all PFC revenues to pay debt service. -25-

34 The Port has FAA approval to impose a PFC of $4.50 per paying enplaned passenger, the maximum allowable under current law. PFCs are imposed by the Port and collected and remitted to the Port (net of a handling fee retained by the collecting carriers and described below, currently equal to $0.11 for each PFC collected) by the airlines from eligible passengers enplaning at the airport. The annual amount of PFCs collected by the Port depends upon the PFC level, the number of eligible passenger enplanements at the Airport, the amount of the airline handling fee, and the timely remittance of PFCs by the airlines. The PFC Act. The PFC Act permits a public agency that controls a commercial service airport to charge each paying passenger enplaning at the airport a PFC. The proceeds from PFCs are to be used to finance approved eligible airportrelated projects, including paying debt service on indebtedness incurred to carry out the projects. Eligible airportrelated projects include airport development or planning, terminal development, airport noise compatibility measures and construction of gates and related areas at which passengers board or exit aircraft. PFCs are collected on behalf of airports by air carriers, certain foreign air carriers and their agents ( collecting carriers ). PFCs are charged to paying passengers enplaning at the Airport. PFCs may not be collected, therefore, from a passenger enplaning at the airport if the passenger did not pay for the ticket (for example, if the passenger obtained the ticket with a frequent flier award coupon without monetary payment) or from passengers flying on an essential airservice route are also not subject to the PFC. In addition, public agencies may request that a class of air carrier not be required to collect PFCs if that class constitutes one percent or less of the total number of passengers enplaned annually at the airport. The Port has not requested any such exemption from the FAA. Without approval of the FAA, but with written notice to the collecting carriers and to the FAA, the level of the PFCs charged or the total amount of approved PFC revenue may be decreased or the total amount of PFC revenue to be collected may be increased by an amount not exceeding 25 percent of the approved amount of PFC revenue. Increases in excess of 25 percent may not be instituted without the approval of the FAA. Any change will be effective as of the first day of a month that is at least 60 days after the date the collecting carriers are notified of the change. The PFC Act and the PFC Regulations are subject to amendment and to repeal. Legislation is currently pending, for example, in the U.S. Congress that would permit public agencies to elect to charge PFCs above the current $4.50 maximum rate. On May 21, 2009, the U.S. House of Representatives passed H.R The bill would increase the maximum PFC level to $7.00. On March 22, 2010, the U.S. Senate passed its comparable H.R. 1586, which did not include any provision increasing the PFC level above $4.50. H.R would, however, create a pilot program under which six airports would control the PFC rate charged (with no maximum level). The House and Senate bills will need to be reconciled in conference committee and a consolidated version of the bill passed in both the House and Senate before the bill will become law. Based on the differences between the House and Senate bills it is uncertain whether the final bill, if passed, would in fact increase the PFC level. The projections included in Appendix A are based on a PFC at the $4.50 level, and do not assume any increase in the PFC above this level. PFC Application and Approval Process; Use of Excess PFC Revenues Airline and Public Notice. The PFC Regulations specify the procedures for a public agency to obtain approval to impose a PFC and use PFC revenue on a project. The PFC Regulations also establish the procedures for the FAA s review and approval of applications and amendments, and establish requirements for use of excess PFC revenue. In addition to providing public notice and an opportunity for comment, a public agency must provide written notice to air carriers and foreign air carriers having a significant business interest at the airport where the PFC is proposed, before filing an application for PFC authority with the FAA. With certain exceptions, the public agency is required to convene a meeting to present proposed projects to air carriers and foreign air carriers operating at the airport, within 30 to 45 days of this notice. Within 30 days following the meeting, each carrier must provide the public agency with a written certification of its agreement or disagreement with the proposed project. FAA Application. A public agency may apply for PFC authority at any commercial service airport it controls. A public agency may use PFC revenue only for approved projects. The application must include, among other things, a summary of substantive comments by carriers or the public disagreeing with a project and, and the public agency s reasons for continuing despite of such disagreements. After reviewing the application and public comments received from any Federal Register notice, the FAA is required to issue a final decision approving or disapproving the application, in whole or in part, within 120 days after the FAA received the application. -26-

35 Amendments with FAA Approval. A public agency may file a request to the FAA to amend the FAA s decision with respect to an approved PFC. An amendment may increase or decrease the level of PFC the public agency may collect from each passenger, increase or decrease the total approved PFC revenue, change the scope of an approved project, delete an approved project, or establish or change a class of carriers. The PFC Regulations require the FAA to approve, partially approve or disapprove the amendment request and notify the public agency of the decision within 30 days of receipt of the request. Changes Without FAA Approval. Without approval of the FAA, but with written notice to the collecting carriers and to the FAA, the level of the PFCs charged or the total amount of approved PFC revenue may be decreased or the total amount of PFC revenue to be collected may be increased by an amount not exceeding 25 percent of the approved amount of PFC revenue. Increases in excess of 25 percent may not be instituted without the approval of the FAA. Any change will be effective as of the first day of a month that is at least 60 days after the date the collecting carriers are notified of the change. FAA approval is not required in connection with the refinancing of debt issued to finance approved PFC-eligible projects. The public agency is required to notify the FAA of the reduction in the PFC amount that will result from debt savings so that the approved amount can be adjusted accordingly. Use of Excess PFC Revenues. If the PFC revenue remitted to the public agency, plus interest earned thereon, exceeds the allowable cost of the project, the public agency must use the excess funds for approved projects or to retire outstanding PFC-financed bonds. When the authority to impose a PFC has expired or has been terminated, accumulated PFC revenue is required to be used for approved projects or retirement of outstanding PFC-financed bonds. Collection and Segregation of PFCs by Airlines The PFC Regulations require that collecting carriers establish and maintain a financial management system to account for PFC collections. PFCs collected by collecting carriers are required by the PFC Regulations to be remitted to the Port on a monthly basis. collecting carriers must account for PFC revenue separately. PFC revenue may be commingled with the carrier s other sources of revenue except for Covered Air Carriers as described below. PFC revenues held by a collecting carrier or its agent after collection at the Airport must be held in trust for the beneficial interest of the Port. The PFC Regulations provide that, a collecting carrier holds neither a legal nor an equitable interest in the PFC Revenue except for any handling fee collected or interest earned collected on unremitted proceeds. The PFC Act was amended to provide that a collecting carrier operating at the Airport that is the subject of a bankruptcy proceeding after December 12, 2003 (a Covered Air Carrier ) may not commingle PFCs with its other revenue and must maintain a separate segregated account with revenue equal to its average monthly PFC collections. If a Covered Air Carrier fails to segregate its PFCs, the PFC Act provides that the trust fund status of the PFCs is not lost because of any inability to identify and trace them in the Covered Air Carrier s commingled accounts. In addition, a Covered Air Carrier may not grant a security interest in its PFCs to any third party. All collecting carriers are required to disclose in their financial statements both the existence and the amount of its PFCs as trust funds, in which it holds no pledgeable interest. See CERTAIN INVESTMENT CONSIDERATIONS Airline Bankruptcy. Under the PFC Regulations, the FAA may periodically audit and review the collection and remittance by the collecting carriers of PFC revenue, to ensure collecting carriers are in compliance with the requirements of the PFC Act and PFC Regulations. Termination of Authority to Impose PFCs General. The FAA may terminate the Port s authority to impose PFCs, subject to informal and formal procedural safeguards set forth in the PFC Regulations, if the FAA determines that (i) the Port is in violation of certain provisions of the Noise Act relating to airport noise and access restrictions, (ii) PFC collections and investment income thereon are not being used for Approved Projects in accordance with the FAA s approvals or with the PFC Act and the PFC Regulations, (iii) implementation of the Approved Projects does not commence within the required time periods or (iv) the Port is otherwise in violation of the PFC Act, the PFC Regulations or the PFC approvals. The Port has not received notice of any informal or formal proceeding to terminate the Port s authority to impose PFCs. -27-

36 Informal Resolution Process. Pursuant to the provisions of the PFC Act, the PFC Regulations provide for an informal process for resolution of possible violations of the PFC Act, PFC Regulations or PFC approvals. Under the PFC Regulations, the FAA is required to undertake informal resolution with the public agency or any other affected party if, after review, the FAA cannot determine that PFC revenue is being used for the approved projects in accordance with the terms of the FAA s approval to impose a PFC for those projects or with the PFC Act. Under the PFC Regulations, the FAA must undertake an informal resolution process if the Administrator cannot determine that PFC revenue is being used for approved projects in accordance with the terms of the approval and the PFC Act. The FAA may not begin proceedings to terminate authority to impose a PFC until the Administrator determines that informal resolution is unsuccessful. A public agency may also request that the FAA agree in the PFC approval to a specific, informal resolution process that the FAA will follow if it suspects the public agency has committed such a violation. Formal Termination Process. The formal termination process prescribed in the PFC Regulations is to be initiated upon the FAA s filing of a notice, followed by a 60-day period of not less than 60 days during which the Port may submit further comments and take corrective action. The PFC Regulations provide that if corrective action is not taken as prescribed in the notice, the FAA is required to hold a public hearing at least 30 days after notifying the Port and publishing a notice of the hearing in the Federal Register. After the public hearing, the Port would have 10 days after receiving notice of the FAA s decision to advise the FAA in writing that it will complete any corrective action prescribed in the FAA s decision within 30 days or to provide the FAA with a list of collecting carriers, after which the FAA would notify the collecting carriers to terminate or to modify the PFC accordingly. Under the PFC Regulations, if the FAA determines that revenue derived from a PFC is excessive or is not being used as approved, the FAA may reduce the amount of airport grant funds otherwise payable to the Port. Noise Act Violations. The Port s authority to impose PFCs may be terminated as a whole if the Port violates the provisions of the Noise Act. Although the procedures described above do not apply to alleged violations of the Noise Act, there are procedural safeguards to ensure that the Port s authority to impose PFCs at the airport will not be summarily terminated because of violations of the Noise Act. In general, the Port can prevent termination of its PFC authority by suspending the effectiveness of any noise or access restriction in question, until the legal sufficiency of the restriction, and its impact on the Port s authority to impose PFCs at the airport, has been determined. Rate of PFC Collections. If the number of enplaned passengers at the Airport is significantly below the projections included in Appendix A, if the handling fee retained by the collecting carriers is increased, or if the PFC Act is amended to decrease the PFC that may be imposed or collected, actual PFC Revenues will fall short of projections and could have an adverse effect on the Port s ability to timely pay the principal of and interest on the First Lien PFC Bonds. Alternatively, if the number of annual passenger enplanements is higher than projected or if the PFC level is increased above the currently authorized $4.50 level, the Port will collect PFCs faster than projected. Under these circumstances, the Port will have the manage its PFC program to balance its expenditures with its new collecting rate so that sufficient PFCs are available in later years to pay the principal of and interest on the Bonds. Expiration of PFC Authority. The Port and the FAA estimate that the Port s current authority to collect PFCs, based on approved projects, will expire on August 31, 2027, prior to the final maturity of the Bonds. Although the Port expects to obtain new PFC approvals before its current authority expires, the Port can provide no assurance of such approval. Parking revenues and PFCs will be the used to make bond and interest payments for the construction of the terminal expansion project. See PORT FACILITIES AND SERVICES Aviation herein The following table shows historical PFC revenues for the years 2005 through Passenger Facility Charges Rate Total PFC Revenues 1,261,559 1,186, , , ,011 Source: -28-

37 Report of the Independent Consultant Ricondo & Associates, Inc., Cincinnati, Ohio (the Independent Consultant ), with assistance from BST Associates and Partners for Economic Solutions, have prepared their Report of the Independent Consultant (the Report ) dated as of October, 2010 (the Independent Consultant s Report ), which is included in Appendix A. The Independent Consultant reviewed the Port s aviation activity projections for the Airport, the cargo volume projections for the Marina, and the financial projections for the Port and its various divisions in preparing the Report and developing the findings and conclusions contained therein. The Independent Consultant s Report notes that it is the opinion of Ricondo & Associates, Inc., based on their respective reviews, that the Port s projections and underlying assumptions provide a reasonable basis from which to prepare the financial projections reflected in the report. The Independent Consultant s Report should be read in its entirety for an understanding of the findings, underlying assumptions and projections. As noted in the Report, any projection is subject to uncertainties. Inevitably, some assumptions used to develop projections will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between projections and actual results, and those differences may be material. See Appendix A. Marine Terminals Division Cargo Shipping Facilities Bellingham Shipping Terminal. Located approximately midway between Vancouver, British Columbia and Seattle, Bellingham Shipping Terminal ( BST ) is a year-round facility. Channel depth is 30 feet (9.25 meters), berthing space 1,345 feet (411.5 meters), outer berth depth 33 feet (10 meters), and average tidal range is 8 feet (2.5 meters). The terminal has 48,000 square yards (40,000-sq. meters) of open storage, and 9,240 square yards (7,700-sq. meters) of covered storage. BST has 13 acres (6 hectares) of blacktopped, fenced and patrolled back-up land. A rail spur connects BST to Burlington Northern mainline, which is immediately adjacent to the site. A rail barge transfer span and several types of mobile cargo handling vehicles equip the terminal. BST handles break bulk and neo-bulk cargoes. Demand for Cargo Shipping Facilities. The Port shipping facility experienced a major reduction in activity when in 2001, Georgia Pacific closed its adjacent pulp and chemical manufacturing facilities. These two facilities provided the local based cargo volumes to justify steamship lines calling on this Bellingham terminal. The shipping facility was further impacted when Alcoa discontinued shipping large volumes of aluminum ingots to overseas markets instead moving toward higher domestic shipments. Without these local based products the shipping terminal has recently been utilized for lay berthing of ships, ship side repairs, and for the discharge of project cargoes. Project cargoes are oversized and shaped cargo that requires special cargo handling. Although the Port expects that the Whatcom Waterway will remain available for deep draft shipping the Port is not anticipating that any long term contracts for cargo handling will be signed in the near term. The Port facilities including the warehouse facilities are available for uses other than cargo loading Revenues Handling/Storage (1) 0 $ 0 $ 0 $ 6,573 $ 0 Dockage/Wharfage 593, , , , ,135 Land Leases 28,136 37,624 71,200 66,792 91,734 Total Revenues 622, ,908 $363,545 $262,815 $235,869 (1) The Port did not collect handling or storage fees in 2004, 2005, or Source:. -29-

38 Marine Terminals Division Passenger Facilities The commitment to tourism started at the Port with the relocation of the Alaska Marine Highway System from Seattle to Bellingham. After building the Bellingham Cruise Terminal, the Port created a multi-modal facility for the traveling public. The historic Pacific American Fisheries building adjacent to the cruise terminal was renovated to serve as the Bellingham station site for the resumption of the Vancouver, BC - Seattle Amtrak service run. This facility connects the marine traffic between Alaska and British Columbia with Bellingham for rail and bus facilities. Fairhaven Station serves as the local station for both Amtrak and Greyhound. Amtrak reported that approximately 64,000 passengers boarded/alighted in Bellingham in 2008 and The Port s cruise facilities are currently utilized by the Alaska Marine Highway System on a weekly schedule to southeast Alaska. In addition, it serves as the home for seasonal daily passenger service to Victoria and to the San Juan Islands. Multiple charter vessels and whale watching tour boats utilize the terminal as a homeport. In 2009, the Port concluded a new lease with the Alaska Marine Highway System. The new lease establishes a base lease increase from $100,000 per year to $517,000 per year, with adjustments to $532,510 for the third year, followed by 3 percent annual increases for the remaining years. The operating lease payment was also adjusted upward to $259,000 per year, increasing by 3 percent each remaining year. The Port is actively involved with the Chamber of Commerce as well as the Bellingham Convention and Visitor s Bureau in the stimulation of economic activity through tourism. Bellingham Cruise Terminal Passenger Activity Embarking Passengers Year Small Vessels Alaska Ferry Total Embarking Passengers Embarking Vehicles (Alaska Ferry) ,376 12,749 20,125 5, ,734 12,734 24,468 5, ,009 14,200 29,209 5, ,052 15,394 34,446 5, ,597 15,107 29,704 5,761 Disembarking Passengers Year Small Vessels Alaska Ferry Total Disembarking Passengers Disembarking Vehicles (Alaska Ferry) ,595 10,595 4, N/A 10,931 10,931 4, N/A 12,612 12,612 5, N/A 13,493 13,493 5, N/A 12,745 12,745 4,783 Source:. Bellingham Waterfront Acquisition Site In January 2005, the Port acquired 137-acres of waterfront property from Georgia Pacific West and Georgia-Pacific Corporation (together, Georgia Pacific ) and has since partnered with the Washington State Department of Ecology, City of Bellingham, Western Washington University, The Waterfront Futures Group, Waterfront Advisory Group, Tourism Commission, Economic Development Council, and the Bellingham Chamber of Commerce to clean up and redevelop this industrial property to create a new mixed-use commercial extension of downtown Bellingham. The property qualifies as a Washington State Innovation Zone. The Port will provide cleanup management under agreements with the Department of Ecology and has prepaid 50 percent of the cost of $80 million (2010 dollars) estimated for cleanup of the property and Whatcom Waterway. The Port s costs are expected to be offset with MTCA (Model Toxic Control Act) funding (50%). The portion of cleanup costs that are not covered by state grants, estimated at approximately $40 million, are protected by an environmental insurance policy. The Port and Georgia Pacific have purchased environmental liability and cost containment insurance to protect against any higher-than-expected -30-

39 remediation costs. The insurance policy limit includes 50% of costs up to $52 million and 100 percent of cost overruns above $52 million for a total limit of $77 million. The Port will also pay for the cleanup costs of the treatment lagoon, estimated at $45 million, which is also expected to be off-set by 50% matching grants under MTCA. The costs identified above are estimates, although they have been developed by the Port with the assistance of a number of consulting firms. Actual costs may be higher (or lower) than anticipated. Redevelopment of the waterfront is expected to include promenades, public waterfront access, institutional facilities, marine-related businesses, retail, offices, light industry, and residences. Western Washington University s Huxley College of the Environment is expected to be an anchor tenant of the waterfront property. In the process, shoreline habitat is expected to be restored along Bellingham Bay and a new Clean Ocean Marina is expected to be built. Redevelopment of the waterfront is anticipated to occur in a number of phases over approximately 30 years. Management Discussion of Recent Financial Results PORT FINANCIAL AND OTHER INFORMATION Based on actual results through December 31, 2009, operating revenues for 2009 totaled $19.7 million compared to $17.8 million in The increase in operating revenues between 2008 and 2009 is largely due to a 21 percent increase in airline landing fees, parking fees and other revenues related to the increase in air travel at the Bellingham International Airport. The Port expects that air traffic will continue to grow in future years. Cash flow available for debt service at December 31, 2009 was $11,195,889, which provided a revenue bond debt service coverage ratio of 3.6 times. At year-end outstanding long-term principal and interest debt payable in 2009 totaled $28,476,744 of which $13,310,000 has been issued as general obligation bonds supported by ad valorem property taxes. -31-

40 Historical Income Statement (Fiscal Years Ended December 31) Operating Revenues Airport $ 5,000,369 $ 4,125,894 $ 3,034,031 $ 2,312,815 $ 1,898,146 Marina 5,919,053 5,715,907 5,449,474 5,096,321 4,889,497 Marine terminal 1,690,971 1,447,376 1,400,545 1,289,428 1,186,886 Commercial real estate 6,684,189 6,074,690 5,529,300 5,340,382 4,774,467 Other 453, , , , ,866 Total Operating Revenues $19,748,320 $17,848,075 $15,889,471 $14,439,494 $13,047,862 Tax Revenues Ad valorem tax revenues $7,422,884 $ 7,193,603 $ 6,930,465 $ 6,402,947 $ 5,546,281 Less: GO Bond debt service (1,059,284) (1,296,283) (1,394,370) (1,392,241) (1,192,215) Net Tax Revenues $ 6,363,600 $ 5,897,320 $ 5,536,095 $ 5,010,706 $ 4,354,066 Operating Expenses (1) General operations $8,205,046 $ 9,029,102 $ 8,011,177 $ 7,156,988 $ 6,540,452 Maintenance 2,388,539 2,078,925 1,936,474 1,735,328 1,783,171 General and administrative 2,333,404 2,244,594 2,062,339 2,019,582 1,477,980 Total Operating Expenses $12,926,989 $13,352,621 $12,009,990 $10,911,898 $ 9,801,603 Income (Loss) from Operations $13,184,931 $10,392,774 $ 9,415,576 $ 8,538,302 $ 7,600,325 Other Revenues (Expenses) (2) Interest income $365,204 $874,466 $ 1,073,867 $ 867,944 $ 689,791 Operating grants 1,160,890 2,550,084 1,483, , ,201 Operating grant expenses (2,216,288) (4,496,639) (1,747,202) (1,124,763) (973,165) Other non-operating revenues 268, ,482 2,462, ,313 25,251,211 Other non-operating expenses (1,566,856) (1,774,753) (2,359,489) (1,623,557) (710,057) Total Nonoperating Revenues (Expenses) $(1,989,042) $(2,310,360) $ 913,033 $ (767,141) $24,916,981 Net Revenue Available for Revenue Bond Debt Service $11,195,889 $ 8,082,414 $10,328,609 $ 7,771,161 $ 32,517,306 Annual Revenue Bond Debt Service $ 3,125,275 $ 2,978,342 $ 3,177,216 $ 3,179,583 $ 3,129,950 Balance Available for Other Purposes $ 8,070,614 $ 5,104,072 $ 7,151,393 $ 4,591,578 $ 29,387,356 Debt Service Coverage (1) Excludes depreciation. (2) Excludes environmental expense and capital contributions. Source:. -32-

41 COMPARATIVE STATEMENT OF NET ASSETS (Fiscal Year Ending December 31) ASSETS CURRENT ASSETS: Cash and cash equivalents $12,986,378 $12,827,716 $5,742,256 $ 3,332,664 $ (278,867) Investments 12,296,908 7,157,019 13,902,510 10,652,999 13,260,924 Taxes receivable 307, , , , ,688 Accounts receivable, net 588, , , ,492 1,482,793 Interest receivable 77, , , , ,956 Due from other governmental units 1,422,645 1,025,975 1,410, , ,388 Other receivables 618, , , , ,531 Inventory Prepayments and other current assets 19,629,656 20,535,797 21,355,143 21,980,876 22,232,304 Total Current Assets $47,927,478 $42,794,291 $43,607,967 $ 37,589,466 $ 37,527,717 NONCURRENT ASSETS: Restricted Cash and cash equivalents $ 2,828,681 $ 3,593,326 $ 2,973,190 $ 3,203,344 $ 3,477,025 Capital Assets: Depreciable buildings, property & equip. $196,768,561 $203,688,694 $208,534,628 $209,889,157 $210,480,059 Construction work in progress $31,110,326 $20,740,375 $9,057,548 $ 9,379,141 $ 10,590,145 Intangible assets 440, , ,144 1,482,832 1,976,233 Deferred compensation 54,552 71,146 80,435 80,435 85,818 Unamortized bond discount ,322 Environmental Insurance Receivable 19,326,842 16,459,386 14,294,165 13,551,247 7,468,762 Total Noncurrent Assets $250,529,228 $245,213,508 $235,853,110 $237,586,156 $234,655,364 TOTAL ASSETS $298,456,706 $288,007,799 $279,461,077 $275,175,622 $272,183,081 LIABILITIES CURRENT LIABILITIES: Accounts Payable $ 1,347,329 $ 1,533,242 $1,655,667 $ 1,259,060 $ 1,660,814 Accrued interest payable 402, , , , ,547 Other current payable 1,220,929 1,304,856 1,258, ,675 7,671,542 Current portion of long-term obligations 6,755,370 5,876,963 9,338,942 6,801,449 3,161,106 Total Current Liabilities $9,726,287 $ 9,301,483 $12,909,928 $ 9,472,382 $ 13,276,009 NONCURRENT LIABILITIES: Noncurrent portion of long-term obligations: General obligation bonds $13,310,000 $14,585,000 $15,000,000 $ 15,630,000 $ 11,330,000 Net Revenue bonds 13,178,468 14,153,525 16,235,561 18,339,981 20,916,396 Environmental Remediation 80,901,621 70,534,676 96,868,597 95,393,842 89,494,217 Other Obligations 1,988,276 1,913,590 2,008,407 1,147,888 1,129,847 Total Noncurrent Liabilities $109,378,365 $101,186,791 $130,112,565 $130,511, ,870,460 TOTAL LIABILITIES $119,104,652 $110,488,274 $143,022,493 $139,984,093 $136,146,469 NET ASSETS: Contributed capital $197,408,376 $191,697,489 $40,404,494 $ 39,456,523 $ 38,904,127 Unrestricted Net Assets (18,056,322) (14,177,964) 96,034,090 95,735,006 97,132,485 Total Net Assets 179,352, ,519, ,438, ,191, ,036,612 TOTAL LIABILITIES AND NET $298,456,706 $288,007,799 $279,461,077 $275,175,622 $272,183,081 ASSETS (1) The Port s payment of environmental cleanup from its acquisition of the Georgia-Pacific pulp facility. See PORT FACILITIES AND SERVICES Bellingham Waterfront Site. Source:. -33-

42 PORT CAPITAL PLANNING Capital Budget The capital budget totals $85 million. Of this total, the Port is anticipating receiving approximately $18 million in federal and state grants. It is anticipated that 100 percent of the capital budget will be funded through cash flow from these grants, port operating income, non-operating income and cash reserves. The five-year capital budget includes a wide array of projects intended to reserve and enhance the Port s physical assets. The airport is experiencing a significant growth in air traffic. In response to the growth, the Port will complete the expansion of the parking lot, construct a new Aircraft Rescue & Firefighting Facility, and expand the commercial passenger terminal. The Port is also in the process of developing the site previously used by the Washington Air National Guard, which was acquired in The Marina s capital budget includes $ million to rebuild the large Gate 3 area of the Squalicum marina. With this upgrade the Port will have rebuilt almost 100 percent of the marina s infrastructure since Recovery of this capital investment is included in the calculation of the projected moorage rates for the marinas. The Commercial Real Estate division s capital budget mainly includes the maintenance of current facilities. Projects include Harbor Center light replacement and parking lot landscape upgrades and the re-roofing of several buildings. A major rebuild of a shipyard pier is scheduled for Two buildings are also scheduled for demolition. These improvements are in addition to the annual tenant improvements, site plans, appraisals and other routine maintenance work scheduled. Within the Marine Terminals division the Port expects to spend $6.2 million over the next five years in capitalized maintenance to preserve the quality of the existing asset base at these sites. Specifically, the berthing system at the Shipping Terminal will be significantly improved, including extensive repairs to the integrated system: replacing a number of fender piles, cross-bracings, chocks and bullrails, as well as inspecting the integrity of the cleats and replacing or repairing them as necessary. These improvements will keep the pier in good working order for continued cargo activities. Capital Expenditure Budget (1) Aviation 17,330,500 10,890,998 8,885, , ,000 Marinas 9,397,896 3,314, ,937 1,288, ,652 Commercial Real Estate 1,357, ,815 7,518, ,082 95,000 Marine Terminals 1,324, ,000 1,566,023 10,000 2,834,414 Facilities & Admin. 8,000 75, , Planning and Exec 60, BWAS 750,000 50, , ,500 50,000 Public Priority Programs 2,136,881 2,809,616 1,670,000 6,370,600 1,435,000 Total Capital Budget $32,365,206 $18,399,337 $20,987,501 $8,986,733 $4,851,066 (1) Capital budget amounts are shown as net amounts after receipt of expected grants. The Port s 2011 capital budget anticipates grant revenues of $18,485,985 for the period from various federal and state agencies as noted in the Port s detailed budget. CERTAIN INVESTMENT CONSIDERATIONS The purchase of the Bonds involves investment risk. Prospective purchasers of the Bonds should consider carefully all of the information set forth in this Official Statement, including its appendices, evaluate the investment considerations and merits of an investment in the Bonds and confer with their own tax and financial advisors when considering a purchase of the Bonds. -34-

43 The Bonds are secured solely by a pledge of Net Revenues. The Port s ability to derive Net Revenues from operation of the Port in amounts sufficient to pay debt service on the Bonds and the Port s other revenue obligations depends on many factors, some of which are not subject to the control of the Port. Factors subject to the Port s control, to some degree, include the contractual terms the Port establishes with its tenants including airlines and container terminal operators, as well as the contractual terms the Port establishes with banks and other entities providing liquidity or credit enhancement for Port obligations. In addition, the Port determines, subject to the requirements of its bond resolutions, whether and when to issue additional indebtedness either senior to, on a parity with or subordinate to the Bonds. There are many factors outside of the Port s control that can affect activity levels in the Port s operating divisions. Some known factors include the level of economic activity both within and outside of the area served by the Port, general demand for air travel, the financial condition of the airline and shipping industries, regulation of the Port and Airport and Marine terminals operations, global health, security and other geopolitical concerns, and natural disasters. The following section discusses some of the factors affecting Net Revenues. The following discussion cannot, however, describe all of the factors that could affect Net Revenues. In addition to these known factors, other factors could affect the Port s ability to derive Net Revenues sufficient to pay debt service on the Parity Bonds and the Port s other revenue obligations. For further discussion of the factors affecting Port operations and revenues pledged to pay Parity Bonds and other obligations, see the Report of the Independent Consultant in Appendix A. General Demand for Air Travel As described in the Report of the Independent Consultant, the level of air traffic at the airport is influenced by the general demand for air travel. The report notes that air travel demand is directly correlated to consumer income and business profits; that air travel is, therefore, affected by national and global economic conditions; and that national and global economic conditions are subject to economic cycles, including periodic recessions. As described in the Report of the Independent Consultant, a number of factors, including fuel costs and the threat of terrorism, influence the health of the airline industry. Airline bankruptcies, liquidations or major restructuring of airlines serving the airport could occur. Airlines serving the airport could merge or consolidate, reducing the diversity of airlines serving the airport. The Port cannot provide any assurance regarding economic conditions or the financial condition of the airline industry or any particular airline, or regarding any resulting impact on air traffic at the airport. Airline Bankruptcy A number of airlines serving the Airport have filed for bankruptcy in recent years, and some airlines have ceased operations at the Airport. Additional bankruptcies, liquidations or major restructuring of airlines serving the Airport could occur. In the event of a bankruptcy, the PFC Act, as amended in December 2003, provides certain statutory protections to eligible public agencies imposing PFCs, with respect to PFC collections. It is unclear, however, whether the Port would be able to recover the full amount of PFC trust funds collected or accrued with respect to a Covered Air Carrier in the event of a liquidation or cessation of business, and whether the Port would experience significant delay in connection with such recovery. The PFC Act requires an airline that files for bankruptcy protection, or that has an involuntary bankruptcy proceeding commenced against it, to segregate PFC revenue in a separate account for the benefit of the eligible public agencies entitled to such revenue. The PFC Regulations require segregation of PFC revenue in an account for the benefit of all entitled public agencies, and do not require a further segregation of PFC revenue to be remitted specifically to the Port. Prior to the amendments made to the PFC Act allowing PFCs collected by airlines to constitute a trust fund, at least one bankruptcy court indicated that PFC revenues held by an airline in bankruptcy would not be treated as a trust fund and would instead by subject to the general claims of the unsecured creditors of such airline. Although the amended PFC Act should provide some protection for eligible public agencies in connection with PFC revenues collected by an airline in bankruptcy, the Port can provide no assurance as to the approach bankruptcy courts will follow in the future. -35-

44 The Port also cannot predict whether a Covered Air Carrier that files for bankruptcy would have properly accounted for PFCs owed to the Port or whether the bankruptcy estate would have sufficient moneys to pay the Port in full for PFCs owed by such carrier. See THE PFC PROGRAM Collection and Segregation of PFCs by Airlines. Levels of Marine Terminals Activity The level of activity through the Port s marine terminals is also subject to a number of factors. Most of the Port s terminal income is derived from leases with its container terminal operators, rather than from container throughput. Although each of these leases is a long-term lease, there is no assurance that the terminal operators will be able to perform under their current leases as rent payments increase or that they will extend the terms of their current leases on the same or more favorable terms. If a terminal operator were to seek bankruptcy protection, the leases could be assumed or rejected in such proceedings. The Port s ability to collect lease revenue, to evict a nonpaying tenant and to relet the premises could be adversely affected by bankruptcy proceedings. Commercial Boating Trends The Port serves as the homeport for 128 commercial fishing vessels. The National Marine Fisheries Service reports that the number of unique fishing vessels unloading in Whatcom County has declined from 6,993 in 1990 to 2,032 in The remaining boats are longer and engage in multiple fisheries with a variety of gears. Reduced harvests, changes in regulatory policies, further development of individual quotas, and changes in fuel costs could negatively impact the size of the commercial fishing fleet in Bellingham. Changes in the commercial fishing fleet could impact the Port s financial projections. Competition With Other Marinas Marina development in northeast Puget Sound could impact Port revenues. Three potential developments have been identified that could occur in Whatcom County over the next ten years, including the Port s proposed Downtown Marina. In Skagit County, the Swinomish Tribe has been considering several marina projects which could impact the demand for Port moorage facilities. Other private investors are also planning to develop moorage facilities in Skagit County. Plans to produce additional moorage space are also being considered in Island and San Juan counties. Completion of these facilities may have a material effect on the Port s financial projections. See APPENDIX A Report of the Independent Consultant. Airline Agreements The Port has covenanted to establish, maintain and collect rentals, tariffs, rates, fees and charges in the operation of all its business that will produce Net Revenues in each fiscal year at least equal to the Rate Covenant required under the Bond Resolution. A key factor in the Port s ability to generate revenues is the payments to be made by the airlines under the Airline Agreement and pursuant either to future airline agreements or resolutions of the Port imposing rates and charges at the airport (a rate resolution ). Additional Indebtedness; Capital Program The Bond Resolution provides that the Port may issue bonds having a lien and charge upon Net Revenues senior to or equal to that of the Parity Bonds under certain circumstances. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS. The Port also is permitted to issue revenue bonds with a lien subordinate to that of the Parity Bonds. The Port has reserved the right to establish other lien levels for future debt and currently is not legally required to achieve a particular level of debt service coverage to secure such future liens. The Port s ability to generate adequate Net Revenues to provide sufficient liquidity to meet all of its debt service obligations when due, and provide adequate coverage to address unanticipated decreases in Net Revenues, depends in part on the amount and type of indebtedness it incurs. The estimated costs of and projected schedule for completion of the projects described under the heading CAPITAL PLANNING are subject to a number of uncertainties. The ability of the Port to complete capital projects may be adversely affected by various factors including estimating errors, design and engineering errors, changes in scope, delays in contract award or execution, material or labor shortages, unforeseen site conditions, adverse weather conditions or casualty events, labor disputes, inflation, environmental issues, contractor defaults, and litigation. -36-

45 In addition, certain funding sources are assumed to be available to pay or finance costs of capital projects. For example, the projections in the Report of the Independent Consultant are based on the assumption that federal and other funding will be available for various capital projects. No assurance can be given that funding will be available. Economic Activity in the Air Trade Area As described in the Report of the Independent Consultant, the level of air traffic at the airport is influenced by the level of economic activity in the area served by the airport. This is an important factor affecting air traffic, as most of the airport s passenger activity is O&D activity. The Report of the Independent Consultant reviews a number of indicators of the level of economic activity projected in the area served by the airport, including population growth, disposable personal income levels, employment rates, and the strength and diversity of the economic base. The Port cannot provide any assurance that population, income and employment levels will grow at historical levels, or regarding the strength and diversity of the economic base. Assumptions in the Report of the Independent Consultant The Report of the Independent Consultant should be read in its entirety for an understanding of all of these assumptions. See INTRODUCTION Report of the Independent Consultant. Inevitably, some assumptions used to develop projections will not be realized and unanticipated events will occur. Therefore, actual results achieved during the projection period will vary from the projections and the variations may be material. The projection period does not extend through the maturity of the Bonds. See APPENDIX A Report of the Independent Consultant. Laws and Regulation As noted under the heading AVIATION DIVISION Regulation, the Port operates the airport pursuant to an airport operating certificate issued annually by the FAA. In addition to this operating certificate, the airport is required to obtain other permits and/or authorizations from the FAA and from other regulatory agencies and is bound by contractual agreements included as a condition to receiving grants under the FAA s grant programs. Limitations apply to the Port s use of PFCs and CFCs. Federal law also governs certain aspects of rate-setting and restricts grants of exclusive rights to conduct an aeronautical activity at an airport that receives or has received federal grants and other property. The Port is required to comply with the provisions of federal security statutes including the Aviation Security Act, and with the regulations of the TSA. Failure by the Port (or by its contractors or tenants) to comply with, or violations of, statutory and regulatory requirements could result in the loss of grant and PFC and CFC funds and other consequences. The Port and its contactors and tenants are subject to other federal, state and local laws and regulations. The Port is regulated by the federal Environmental Protection Agency and the Washington Department of Ecology in connection with various environmental matters. The Port s handling of noise, including restrictions and abatement programs, is also subject to the requirements of federal and State statutes and regulations. These statutory and regulatory requirements are subject to change and could become more stringent and costly for the Port and its customers and tenants. For example, statutory or regulatory requirements limiting emissions or otherwise addressing climate change could be implemented or increased. The Port cannot predict whether future restrictions or limitations on the Port will be imposed, whether future legislation or regulations will affect funding for capital projects or whether such restrictions or legislation or regulations will adversely affect Net Revenues. Limitation of Remedies Under the terms of the Bond Resolution, payments of debt service on Bonds are required to be made only as they become due and the occurrence of a default does not grant a right to accelerate payment of the Bonds. In the event of multiple defaults in payment of principal or interest on the Bonds, the Bond owners could be required to bring a separate action for each such payment not made. Remedies for defaults are limited to such actions that may be taken at law or in equity. No mortgage or security interest has been granted or lien created in any real property of the Port to secure the payment of any of the Port s bonds including the Bonds. Leases with tenants, including airlines, are subject to bankruptcy proceedings, leading to possible rejection of the leases or delays in enforcement. -37-

46 Various State laws, constitutional provisions, and federal laws and regulations apply to the obligations created by the issuance of the Bonds. There can be no assurance that there will not be any change in, interpretation of, or addition to the applicable laws and provisions will not be changed, interpreted, or supplemented in a manner that would have a material adverse effect, directly or indirectly, on the affairs of the Port. In the event of a default in the payment of principal of or interest on the Bonds, the remedies available to the owners of the Bonds upon a default are in many respects dependent upon judicial action, which is often subject to discretion and delay under existing constitutional law, statutory law, and judicial decisions, including the federal Bankruptcy Code. Bond Counsel s opinion as to enforceability to be delivered simultaneously with delivery of the Bonds will be qualified by certain limitations, including limitations imposed by bankruptcy, reorganization, insolvency, and equity principles. See the proposed forms of bond counsel opinions included in Appendix D. Seismic and Other Considerations The airport is in an area of seismic activity, with frequent small earthquakes and occasionally moderate and larger earthquakes. The Port can give no assurance regarding the effect of an earthquake or other natural disaster or that proceeds of insurance carried by the Port would be sufficient, if available, to rebuild and reopen Port facilities or that Port facilities could or would be rebuilt and reopened in a timely manner following a major earthquake or other natural disaster. Forward Looking Statements Certain statements contained in this Official Statement, including the projections and other forward looking statements included in Appendix A and other appendices, reflect not historical facts but forecasts and forward looking statements. No assurance can be given that the future results discussed herein will be achieved, and actual results may differ materially from the forecasts described herein. In this respect, the words estimate, project, forecast, anticipate, expect, intend, and believe and similar expressions are intended to identify forward looking statements. All projections, forecasts, assumptions and other forward looking statements are expressly qualified in their entirety by the cautionary statements set forth in this official statement. INITIATIVES AND REFERENDA Under the State Constitution, the voters of the State have the ability to initiate legislation and to modify existing laws through the powers of initiative and referendum. An initiative measure is submitted to the voters (if an initiative to the people) or to the Legislature (if an initiative to the Legislature) if the Secretary of State certifies the receipt of a petition signed by at least eight percent of the number of voters registered and voting for the office of governor at the preceding regular gubernatorial election. Certified initiatives to the people are placed on the ballot for the next State-wide general election. Certified initiatives to the Legislature are submitted to the Legislature at its regular session each January. Once an initiative to the Legislature has been submitted, the Legislature must take one of the following three actions: (i) adopt the initiative as proposed, in which case the initiative becomes law without a vote of the people; (ii) reject or refuse to act on the proposed initiative, in which case the initiative must be placed on the ballot at the next State general election; or (iii) approve an amended version of the proposed initiative, in which case both the amended version and the original initiative must be placed on the next State general election ballot. A bill passed by the Legislature is referred to the people for final approval or rejection if the Secretary of State certifies the receipt of a petition signed by at least four percent of the number of voters registered and voting for the office of governor at the preceding regular gubernatorial election. Certain actions of the Legislature necessary for the immediate preservation of the public peace, health or safety and the support of State government or its existing institutions are exempt from the referendum process. Proposed initiatives to the people must be filed within ten months prior to the next State general election, and the petition signatures must be filed not less than four months before such general election. Proposed initiatives to the Legislature must be filed within ten months prior to the next regular session of the Legislature, and the petition signatures must be filed not less than ten days before such regular session of the Legislature. A referendum measure -38-

47 may be filed any time after the Governor has signed the act that the sponsor wants referred to the ballot. Petition signatures must be filed within 90 days after the final adjournment of the legislative session at which the act was passed. An initiative or referendum approved by a majority of voters may not be amended or repealed by the Legislature within a period of two years following enactment, except by a vote of two-thirds of all the members elected to each house of the Legislature. After two years, the law is subject to amendment or repeal by the Legislature in the same manner as other laws. In recent years there have been a number of initiatives filed in Washington, including initiatives targeting fees and taxes imposed by local jurisdictions or subjecting local jurisdictions to additional requirements. The Port cannot predict whether this trend will continue, whether any filed initiatives will receive the requisite signatures to be certified to the ballot, whether such initiatives will be approved by the voters, whether, if challenged, such initiatives will be upheld by the courts, and whether any future initiative could have a material adverse impact on the Port s revenues or operations. DEMOGRAPHIC AND ECONOMIC INFORMATION Certain demographic and economic information regarding the area within the boundaries of the Port is set forth in Appendix C. 2010A Bonds TAX MATTERS In the opinion of Bond Counsel, interest on the 2010A Bonds is excludable from gross income for federal income tax purposes, except for interest on any 2010A Bond for any period during which such 2010A Bond is held by a substantial user of the facilities financed or refinanced by the 2010A Bonds, or by a related person within the meaning of Section 147(a) of the Code. Furthermore, interest on the 2010A Bonds is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations and is not included in adjusted current earnings for the purpose of computing the federal alternative minimum tax imposed on certain corporations. Federal income tax law contains a number of requirements that apply to the 2010A Bonds, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the use of proceeds of the 2010A Bonds and the facilities financed or refinanced with proceeds of the 2010A Bonds and certain other matters. The Port has covenanted to comply with all applicable requirements. Bond Counsel s opinion is subject to the condition that the Port complies with the above-referenced covenants and, in addition, will rely on representations by the Port and their advisors with respect to matters solely within the knowledge of the Port and their advisors, respectively, which Bond Counsel has not independently verified. If the Port fails to comply with such covenants or if the foregoing representations are determined to be inaccurate or incomplete, interest on the 2010A Bonds could be included in gross income for federal income tax purposes retroactively to the date of issuance of the 2010A Bonds, regardless of the date on which the event causing taxability occurs. Except as expressly stated above, Bond Counsel expresses no opinion regarding any other federal or state income tax consequences of acquiring, carrying, owning or disposing of the 2010A Bonds. Owners of the 2010A Bonds should consult their tax advisors regarding the applicability of any other tax consequences of owning the 2010A Bonds, which may include original issue discount, original issue premium, purchase at a market discount or at a premium, taxation upon sale, redemption or other disposition, and various withholding requirements. Prospective purchasers of the 2010A Bonds should be aware that ownership of the 2010A Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, certain S corporations with excess net passive income, foreign corporations subject to the branch profits tax, life insurance companies and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry or have paid or incurred certain expenses allocable to the 2010A Bonds. Bond Counsel expresses no opinion regarding any collateral tax consequences. Prospective purchasers of the 2010A Bonds should consult their tax advisors regarding collateral federal income tax consequences. -39-

48 Payments of interest on tax-exempt obligations such as the 2010A Bonds, are in many cases required to be reported to the IRS. Additionally, backup withholding may apply to any such payments made to any owner who is not an exempt recipient and who fails to provide certain identifying information. Individuals generally are not exempt recipients, whereas corporations and certain other entities generally are exempt recipients. Bond Counsel s opinion is not a guarantee of result and is not binding on the IRS; rather, the opinion represents Bond Counsel s legal judgment based on its review of existing law and in reliance on the representations made to Bond Counsel and compliance with covenants of the Issuer and Borrower. The IRS has established an ongoing program to audit tax-exempt obligations to determine whether interest on such obligations is includable in gross income for federal income tax purposes. Bond Counsel cannot predict whether the IRS will commence an audit of the 2010A Bonds. Owners of the 2010A Bonds are advised that, if the IRS does audit the 2010A Bonds, under current IRS procedures, at least during the early stages of an audit, the IRS will treat the Port as the taxpayer, and the owners of the 2010A Bonds may have limited rights to participate in the audit. The commencement of an audit could adversely affect the market value and liquidity of the 2010A Bonds until the audit is concluded, regardless of the ultimate outcome. Qualified Tax-Exempt Obligations. The 2010A Bonds are not qualified tax-exempt obligations within the meaning of Section 265(b)(3)(B) of the Code. 2010B Bonds This advice was written to support the promotion or marketing of the 2010B Bonds. This advice is not intended or written by K&L Gates LLP to be used, and may not be used, by any person or entity for the purpose of avoiding any penalties that may be imposed on any person or entity under the U.S. Internal Revenue Code. Prospective purchasers of the 2010B Bonds should seek advice based on their particular circumstances from an independent tax advisor. The following discussion describes aspects of the principal U.S. federal tax treatment of U.S. persons that are beneficial owners ( Owners ) of 2010B Bonds. This summary is based on the Code, published revenue rulings, administrative and judicial decisions, and existing and proposed Treasury regulations (all as of the date hereof and all of which are subject to change, possibly with retroactive effect). This summary discusses only 2010B Bonds held as capital assets within the meaning of Section 1221 of the Code. It does not discuss all of the tax consequences that may be relevant to an Owner in light of its particular circumstances or to Owners subject to special rules, such as certain financial institutions, insurance companies, tax-exempt organizations, foreign taxpayers, taxpayers who may be subject to the alternative minimum tax or personal holding company provisions of the Code, dealers in securities or foreign currencies, Owners holding the 2010B Bonds as part of a hedging transaction, straddle, conversion transaction, or other integrated transaction, or Owners whose functional currency (as defined in Section 985 of the Code) is not the U.S. dollar. Except as stated herein, this summary describes no federal, state or local tax consequences resulting from the ownership of, receipt of interest on, or disposition of, the 2010B Bonds. ACCORDINGLY, INVESTORS WHO ARE OR MAY BE DESCRIBED WITHIN THIS PARAGRAPH SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO SUCH INVESTORS, AS WELL AS TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY, OF PURCHASING, HOLDING, OWNING AND DISPOSING OF THE 2010B BONDS, INCLUDING THE ADVISABILITY OF MAKING ANY OF THE ELECTIONS DESCRIBED BELOW, BEFORE DETERMINING WHETHER TO PURCHASE THE 2010B BONDS. For purposes of this discussion, a U.S. person means an individual who, for U.S. federal income tax purposes, is (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate, the income of which is subject to U.S. federal income taxation regardless of its source of income, or (iv) a trust, if either: (A) a United States court is able to exercise primary supervision over the administration of the trust, and one or more United States persons have the authority to control all substantial decisions of the trust or (B) a trust has a valid election in effect to be treated as a United States person under the applicable treasury regulations. The term also includes nonresident alien individuals, foreign corporations, foreign partnerships, and foreign estates and trusts ( Foreign Owners ) to the extent that their ownership of the 2010B Bonds is effectively connected with the conduct of a trade or business within the United States, as well as certain former citizens and residents of the United States who, under certain circumstances, are taxed on -40-

49 income from U.S. sources as if they were citizens or residents. It should also be noted that certain single member entities are disregarded for U.S. federal income tax purposes. Such Foreign Owners and Owners who are single member non-corporate entities, should consult with their own tax advisors to determine the U.S. federal, state, local, and other tax consequences that may be relevant to them. In General. The Port will make irrevocable elections to have the 2010B Bonds treated as Build America Bonds within the meaning of section 54AA(d) of the of the Code that are qualified bonds within the meaning of section 54AA(d) of the Code. As a result of these elections, interest on the 2010B Bonds is not excludable from the gross income of the Owners for federal income tax purposes. Owners of the 2010B Bonds will not be entitled to any tax credits as a result either of ownership of the 2010B Bonds or of receipt of any interest payments on the 2010B Bonds. In addition, a 2010B Bond held by an individual who, at the time of death, is a U.S. person is subject to U.S. federal estate tax. Payments of Interest. Interest, including additional amounts of cash and interest, if any, paid on the 2010B Bonds will generally be taxable to Owners as ordinary interest income at the time it accrues or is received, in accordance with the Owner s method of accounting for U.S. federal income tax purposes. Owners who are cash-method taxpayers will be required to include interest in income upon receipt of such interest income; whereas Owners who are accrual-method taxpayers will be required to include interest as it accrues, without regard to when interest payments are actually received. Disposition or Retirement. Upon the sale, exchange or other disposition of a 2010B Bond, or upon the retirement of a 2010B Bonds (including by redemption), an Owner will recognize capital gain or loss equal to the difference, if any, between the amount realized upon the disposition or retirement (reduced by any amounts attributable to accrued but unpaid interest, which will be taxable as such) and the Owner s adjusted tax basis in the 2010B Bonds. Any such gain or loss will be United States source gain or loss for foreign tax credit purposes. If the Port defeases any 2010B Bonds, such 2010B Bond may be deemed to be retired and reissued for federal income tax purposes as a result of the defeasance. In such event, the Owner of a 2010B Bond would recognize a gain or loss on the 2010B Bonds at the time of defeasance. The Code contains a number of provisions relating to the taxation of securities such as the 2010B Bonds (including, but not limited to the tax treatment of and accounting of interest, premium, original issue discount and market discount thereon, gain from the sale, exchange of other disposition thereof and withholding tax on income therefrom) that may affect the taxation of certain owners, depending on their particular tax situations. The federal tax discussion set forth above is included for general information only and may not be applicable depending upon an owner s particular situation. Investors should consult their own tax advisors concerning the tax implications of holding and disposing of the 2010B Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not U.S. persons. ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended ( ERISA ), imposes certain requirements on employee plans subject to Title I of ERISA ( ERISA Plans ), and on those persons who are fiduciaries with respect to ERISA Plans. Investments by ERISA Plans are subject to ERISA s general fiduciary requirements under Title I, Part 4 of ERISA, including, but not limited to, the requirements of investment prudence and diversification and the requirement that an ERISA Plan s investments be made in accordance with the documents governing the Plan. Section 406 of ERISA and Section 4975 of the Code prohibit certain transactions involving the assets of an ERISA Plan (as well as those plans that are not subject to Title I of ERISA but are subject to Section 4975 of the Code, such as individual retirement accounts (together with ERISA Plans, Plans )) and certain persons (referred to as parties in interest or disqualified persons (each a Party in Interest )) having certain relationships to such Plans, unless a statutory or administrative exemption is applicable to the transaction. A Party in Interest who engages in a prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code. The fiduciary of a Plan that proposes to purchase and hold any 2010B Bonds should consider, among other things, whether such purchase and holding may involve (i) the direct or indirect extension of credit to a Party in Interest, (ii) the -41-

50 sale or exchange of any property between a Plan and a Party in Interest and (iii) the transfer to, or use by or for the benefit of, a Party in Interest, of any Plan assets within the meaning of 29 CFR Sec as modified by ERISA Section 3(42). Depending on the identity of the Plan fiduciary making the decision to acquire or hold 2010B Bonds on behalf of a Plan and other factors, U.S. Department of Labor Prohibited Transaction Class Exemption ( PTCE ) 75-1 (relating to certain broker-dealer transactions), PTCE (relating to transactions effected by independent qualified professional asset managers ), PTCE 90-1 (relating to investments by insurance company pooled separate accounts), PTCE (relating to investments by bank collective investment funds), PTCE (relating to investments by an insurance company general account), or PTCE (relating to transactions directed by certain in-house asset managers ) (collectively, the Class Exemptions ) could provide an exemption from the prohibited transaction provisions of ERISA and Section 4975 of the Code. In addition, Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code generally provide for a statutory exemption from the prohibitions of Section 406(a) of ERISA and Section 4975 of the Code for certain transactions between Plans and persons who are Parties in interest solely by reason of providing services to such Plans or that are affiliated with such service providers, provided generally that such persons are not fiduciaries (or affiliates of such fiduciaries) with respect to the plan assets of any Plan involved in the transaction and that certain other conditions are satisfied. By its acceptance of a 2010B Bond, each purchaser will be deemed to have represented and warranted that either (i) no plan assets of any Plan have been used to purchase such 2010B Bond, or (ii) the Underwriter is not a Party in Interest with respect to the plan assets of any Plan used to purchase such 2010B Bond, or (iii) the purchase and holding of such 2010B Bonds is exempt from the prohibited transaction restrictions of ERISA and Section 4975 of the Code pursuant to a statutory exemption or an administrative class exemption. Each Plan fiduciary (and each fiduciary for a governmental or church plan subject to the rules similar to those imposed on Plans under ERISA) should consult with its legal advisor concerning an investment in any of the 2010B Bonds. Legal Opinions OTHER MATTERS The Bonds will be issued with the approving legal opinions of K&L Gates LLP, Bond Counsel, Seattle, Washington. See Appendix E for the forms of such opinions. K&L Gates LLP will also be deliver on opinion in its capacity as Disclosure Counsel to the Port. Bond Counsel will be compensated only upon the issuance and sale of the Bonds. Limitation on Remedies The enforceability of the Bond Resolution is subject to applicable bankruptcy laws, equitable principles affecting the enforcement of creditors rights generally, the police powers of the State and the Port, the exercise of judicial authority by state or federal courts and the exercise by the United States of the powers delegated to it by the federal constitution. All legal opinions with respect to the enforceability of the Bonds will be expressly subject to a qualification that enforceability thereof may be limited by bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium or other similar laws affecting the rights of creditors generally, and by general principles of equity. Prospective investors concerned with the impact of any bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium or other similar laws should consult with their own independent counsel before purchasing any Bonds. Litigation As of the date of this Official Statement, there is no litigation pending, or to the knowledge of the Port, threatened, challenging the authority of the Port to issue the Bonds or seeking to enjoin issuance of the Bonds. The Port is a defendant in various legal actions and claims that arise during the normal course of business, some of which are covered by insurance. Although certain lawsuits and claims are significant in amount, the final dispositions are not determinable and, in the opinion of Port management, the final outcome of these matters, taken individually or in the aggregate, will not have a material adverse effect on the financial position of the Port. In most cases, the Port has provided reserves for these matters that, in the opinion of Port management, are adequate. -42-

51 Enforceability The provisions of the Bonds and the Bond Resolution constitute contracts between the Port and the owner or owners of the Bonds, and such provisions are enforceable by the registered owner or owners in a court of competent jurisdiction in the State by mandamus or other appropriate remedy, subject to judicial discretion and the valid exercise of sovereign police power of the State and may be limited by laws affecting the rights of creditors. Continuing Disclosure Undertaking General. In accordance with Section (b)(5) of Securities and Exchange Commission (the Commission ) Rule 15c2-12 under the Securities Exchange Act of 1934, as the same may be amended from time to time (the Rule ), the Port has agreed in the Bond Resolution to provide or cause to be provided to the Municipal Securities Rulemaking Board ( MSRB ) in accordance with the Rule, the following annual financial information and operating data for the prior fiscal year (commencing in 2011 for the fiscal year ended December 31, 2010): 1. Annual financial statements showing ending fund balances for the Port prepared in accordance with generally accepted accounting principles applicable to government entities (and modified as may be required by the Washington State Auditor pursuant to RCW (or any successor statute) and generally of the type included in the official statement for the Bonds under the heading Historical Income Statement; 2. The principal balance of outstanding general obligation bonds of the Port; 3. Current occupancy of the Port s marinas, as generally included in the official statement for the Bonds under the table entitled Existing Whatcom County Moorage Facilities; 4. Current information generally of the sort included in the official statement for the Bonds under the tables entitled Bellingham International Airport Activity, Historical and Projected Moorage Rates, and Largest Property Leases. Items 2 through 4 shall be required only to the extent that such information is not included in the information provided pursuant to item 1 above. Such annual financial information and operating data described above shall be provided on or before seven months after the end of the Port s fiscal year. The Port s fiscal year currently ends December 31. The Port may adjust such fiscal year by providing written notice of the change of fiscal year to the MSRB, if any. In lieu of providing such annual financial information and operating data, the Port may cross-reference to other documents provided to the MSRB, or filed with the SEC and, if such document is a final official statement within the meaning of the Rule, available from the MSRB. If not provided as part of the annual financial information discussed above, the Port shall provide the Port s audited annual financial statement prepared in accordance with generally accepted accounting principles (and modified as may be required by the Washington State Auditor pursuant to RCW (or any successor statute)), when and if available, to the MSRB. Material Events. The Port agrees to provide or cause to be provided, in a timely manner, to the MSRB notice of the occurrence of any of the following events with respect to the Bonds, if material: Principal and interest payment delinquencies; Nonpayment related defaults; Unscheduled draws on debt service reserves reflecting financial difficulties; Unscheduled draws on credit enhancements reflecting financial difficulties; Substitution of credit or liquidity providers, or their failure to perform; Adverse tax opinions or events affecting the tax-exempt status of the Bonds; Modifications to rights of owners of the Bonds; -43-

52 Optional, contingent or unscheduled Bond calls other than scheduled sinking fund redemptions for which notice is given pursuant to Exchange Act Release ; Defeasances; Release, substitution or sale of property securing the repayment of the Bonds; and Rating changes. Solely for purposes of disclosure, and not intending to modify the undertaking, the Port advises that there is no property securing repayment of the Bonds. Notification Upon Failure to Provide Financial Data. The Port has agreed in the Bond Resolution to provide or cause to be provided, in a timely manner, to the MSRB notice of its failure to provide the annual financial information described above in this section under the subheading General on or prior to the date set forth above in such subsection. EMMA; Format for Filings with the MSRB. Until otherwise designated by the MSRB or the Securities and Exchange Commission, any information or notices submitted to the MSRB in compliance with the Rule are to be submitted through the MSRB s Electronic Municipal Market Access system ( EMMA ), currently located at (which is not incorporated into this Official Statement by reference). All notices, financial information and operating data required by this undertaking to be provided to the MSRB must be in an electronic format as prescribed by the MSRB. All documents provided to the MSRB pursuant to this undertaking must be accompanied by identifying information as prescribed by the MSRB. Termination/Modification. The Port s obligations to provide annual financial information and notices of material events shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. The continuing disclosure requirement, and any related provision, shall be null and void if the Port (1) obtains an opinion of nationally recognized bond counsel to the effect that those portions of the Rule which require continuing disclosure, are invalid, have been repealed retroactively or otherwise do not apply to the Bonds and (2) notifies the MSRB of such opinion and the cancellation of this requirement. The continuing disclosure requirement may be amended, without the consent of the Bond owners, with an opinion of nationally recognized bond counsel in accordance with the Rule. In the event of any such amendment, the Port shall describe such amendment in the next annual report, and shall include, a narrative explanation of the reason for the amendment and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Port. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a material event described above under the subheading Material Events, and (ii) the annual report for the year in which the change is made shall present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. Bond Owner s Remedies Related to Continuing Disclosure Undertaking. The right of any Bondowner or Beneficial Owner of Bonds to enforce provisions of the Port s continuing disclosure undertaking is limited to a right to obtain specific enforcement of the Port s obligations related thereto, and any failure by the Port to comply with the provisions of the undertaking will not be an Event of Default with respect to the Bonds under the Bond Resolution. For purposes of this section, Beneficial Owner means any person who has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds, including persons holding Bonds through nominees or depositories. Compliance with Existing Undertakings. The Port is currently in compliance with its continuing disclosure undertakings relating to prior bonds subject to the Rule. -44-

53 Ratings The Bonds have been assigned an underlying rating of A2 by Moody s Investors Service ( Moody s ). Certain information was supplied by the Port to Moody s to be considered in evaluating the Bonds. Such rating expresses only the view of the Moody s and is not a recommendation to buy, sell or hold the Bonds. An explanation of the significance of these ratings may be obtained from Moody s. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by Moody s, if, in their judgment, circumstances so warrant. Any downward revision or withdrawal of these ratings may have an adverse effect on the market price of the Bonds. Underwriting The Bonds are being purchased by Seattle-Northwest Securities Corporation, the Underwriter. The purchase contract provides that the Underwriter will purchase all of the 2010A Bonds, if any are purchased, at a price of percent of the par value of the 2010A Bonds. The 2010A Bonds will be reoffered at an average price of percent of the par value of the 2010A Bonds. Furthermore, the purchase contract provides that the Underwriter will purchase all of the 2010B Bonds, if any are purchased, at a price of percent of the par value of the 2010B Bonds. The 2010B Bonds will be reoffered at an average price of percent of the par value of the 2010B Bonds. After the initial public offering, the public offering prices may be varied from time to time Conflicts of Interest Some or all of the fees of the Underwriter and Bond Counsel are contingent upon the issuance and sale of the Bonds. Furthermore, Bond Counsel from time to time serves as counsel to the Underwriter with respect to issuers other than the Port and transactions other than the issuance of the Bonds. None of the Port Commissioners or other officers of the Port have interests in the issuance of the Bonds that are prohibited by applicable law. Official Statement At the time of delivery of the Bonds, one or more officials of the Port will furnish a certificate stating that to the best of his or her knowledge, this Official Statement, other than information about DTC (in each case provided by DTC, as the case may be, as of its date and as of the date of delivery of the Bonds does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein, in light of the circumstances in which they were made, not misleading. The preparation, execution and distribution of this Official Statement has been authorized by the Port. PORT OF BELLINGHAM, WASHINGTON By: /s/ Rob Fix Rob Fix, Chief Financial Officer -45-

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55 APPENDIX A REPORT OF THE INDEPENDENT CONSULTANT

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57 APPENDIX A, Washington Revenue Bonds, 2010A (Tax-Exempt) Revenue Bonds, 2010B (Private Activity Non-AMT) Revenue Bonds, 2010C (Taxable Build America Bonds Direct Payment to Issuer) REPORT OF THE INDEPENDENT CONSULTANT Ricondo & Associates, Inc. 105 East Fourth Street, Suite 1700 Cincinnati, OH (telephone) (facsimile) A-1

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59 October 22, 2010 Mr. Rob Fix Chief Financial Officer 1801 Roeder Avenue Bellingham, WA RE:, Washington Revenue Bonds, 2010A (Tax-Exempt) Revenue Bonds, 2010B (Private Activity Non-AMT) Revenue Bonds, 2010C (Taxable Build America Bonds Direct Payment to Issuer) Appendix A: Report of the Independent Consultant Dear Mr. Fix: This report sets forth findings, assumptions, and projections of the air traffic and financial analysis performed by Ricondo & Associates, Inc. (R&A), in conjunction with the planned issuance by the (Port), Washington of its Revenue Bonds, 2010A (2010A Bonds), its Revenue Bonds, 2010B (2010B Bonds), and its Revenue Bonds, 2010C (2010C Bonds). The 2010A Bonds, the 2010B Bonds, and the 2010C Bonds are collectively referred to in this report as the 2010 Bonds. The Port is a special purpose municipal corporation organized under the State of Washington Law (primarily R.C.W. Title 53 Port Districts). The Port is independent from other local or state governments and operates within district boundaries, which are co-terminus with Whatcom County, Washington. It is administered by a three-member Bellingham Port Commission (Port Commission) elected to four-year terms by voters within the Port. The Port Commission has authorized the issuance of the 2010 Bonds which, together with investment earnings, will finance a portion of capital improvements to the Aviation (commercial terminal expansion) and Marinas (dredging and replacing piling/floats) facilities of the Port (collectively, the 2010 Project). This report is intended for inclusion in the Official Statement for the 2010 Bonds as Appendix A: Report of the Independent Consultant. This report includes an overview of the Port and its governance and a general description of the Port s Aviation, Marinas, Marine Terminals, and Real Estate operating divisions (Chapter I), examines the underlying economic base of Bellingham International Airport s (Airport s) Air Trade Area (as defined in this report), which directly relates to the demand for air transportation (Chapter II); historical and projected air traffic activity at the Airport (Chapter III); a description of existing Airport facilities, planned capital development, and historical and projected Aviation Division financials (Chapter IV); Marine facilities (Marinas Division and Marine Terminals Division) and historical and projected revenues and expenses (Chapter V); Real Estate Division facilities and 105 EAST FOURTH STREET, SUITE 1700, CINCINNATI, OH TEL (513) FAX (513) A-3

60 Mr. Rob Fix October 22, 2010 historical and projected revenues and expenses (Chapter VI); and Port financial analysis, including projected debt service coverage. On the basis of the assumptions and analyses described in this report, R&A is of the opinion that Port Net Revenues (as defined herein) will be adequate to meet the Port s rate covenant for the Port, as set forth in Resolution No., during the projection period 2011 through FY Additional findings of these analyses include the following: Economic Base Population Trends. The Air Trade Area has a substantial population base with approximately 1,280,798 residents in The Air Trade Area population forecast for the period 2009 to 2015 reflects a compounded annual growth rate (CAGR) of 2.5 percent per year, a rate that is higher than the forecasted CAGR for both the State of Washington (1.3 percent) and the U.S. (1.0 percent). Age Distribution and Educational Attainment. Market research has shown that people between the ages of 35 and 54 tend to travel the most and that individuals with a college degree are more likely to travel by air. In 2010, Air Trade Area residents between the ages of 35 and 54 comprise 28.4 percent of the population, a level that is commensurate with the population in this age category in both the State of Washington and the U.S. Approximately 39.2 percent of the Air Trade Area population over the age of 25 holds a bachelor s degree or higher advanced degree (e.g., graduate or professional degree). This percentage is significantly higher than that of the U.S. (35.8 percent) and is nearly equal to the level in the State of Washington (40.5 percent). High Average Household Income Levels. Ranked on the key measure of average household income, the Air Trade Area outperforms both the State of Washington and the U.S. In 2010, the Air Trade Area s estimated average household income of $74,655 is 4.8 percent higher than that of the U.S. ($71,270) and 0.6 percent higher than that of the State of Washington ($74,221). Forecasts for 2015 show that this trend is expected to continue as the Air Trade Area will reach an average household income level of $86,254, compared to $85,892 in the State of Washington and $80,539 in the U.S. Employment Growth Trends. Between 1999 and 2009, the Air Trade Area labor force grew at a CAGR of approximately 1.7 percent higher than the labor force CAGR in both the State of Washington (1.4 percent) and in the U.S. (1.0 percent). In absolute terms, the labor force in the Air Trade Area increased by approximately 32,000 workers between 1999 and A-4

61 Mr. Rob Fix October 22, 2010 Unemployment. 1 In August 2010 (latest data available), the unemployment rate for the Air Trade Area was 8.3 percent (non-seasonally adjusted); this is lower than the rate for the State of Washington where the unemployment rate was 8.9 percent (seasonally adjusted). The unemployment rate for the U.S. was 9.6 percent in August 2010 (seasonally adjusted). Economic Outlook. Although the Air Trade Area is well-positioned with a broad and diverse economic base, it still remains affected by overall economic conditions in the U.S. In the wake of the December 2007-June 2009 recession, the U.S. economy is experiencing weaknesses in housing construction, consumer spending and business investment, as well as relatively high unemployment rates and low GDP growth. Recent surveys of leading economists by Blue Chip Economic Indicators and the National Association for Business Economics indicate consensus for modest real GDP growth and moderate economic recovery by the end of Similarly, the Business Council of British Columbia projects that British Columbia s economic growth will be subdued in 2010 as the province feels the effects of weak economic growth in the U.S. and Europe. Conclusion. Based on the strength of key socioeconomic factors summarized above, the economic base of the Air Trade Area, as defined in this report, is broad and diversified and will continue to support long term growth in demand for air transportation services at the Airport. Air Traffic The role of the Airport has changed dramatically in the last decade. The Airport has experienced expanded commercial service which lowered fares, resulting in an increase of local demand as well as increased demand from Canada. The Airport provides a low-cost alternative for Canadian travelers traveling to U.S. destinations. The Airport s passenger traffic has more than quintupled since 2003, reaching 329,392 passengers in 2009, primarily due to new flights from Alaska and low-cost carrier Allegiant Air. Whereas the terminal s capacity is approximately 9,000 passengers a month, the Airport accommodated nearly 41,500 passengers in July As a result of this significant growth, the Port Commission recently approved the terminal expansion that will triple the size of the terminal space with a capacity greater than 500,000 passengers a year. The Airport is currently on track to accommodate approximately 400,000 passengers this year and should continue to grow with Alaska initiating flights from the Airport to Honolulu in January In addition, it is expected that Allegiant Air will soon announce plans to serve Hawaii from the Airport either late this year or early next year. 1 Unemployment data for the Air Trade Area do not include data for Southern British Columbia. A-5

62 Mr. Rob Fix October 22, 2010 As of September 2010, the Airport had passenger service provided by 11 U.S. carriers. Scheduled service at the Airport is provided by three of the nation s 15 major U.S. passenger airlines 2. Major passenger airlines currently providing scheduled service at the Airport include Alaska, Allegiant, and Horizon. Additionally the following eight carriers provide charter/unscheduled service to the Airport: Bellingham Air Taxi, Casino Express, Harbor Air, Island Air, Northwestern Sky Ferry, Rite Brothers, Sun Country, and West Isle Air. As a tourism and leisure travel dominated market, air carrier service at the Airport experiences daily fluctuations and daily service is typically not provided to all markets. Daily nonstop service is provided to the Airport s largest origin-destination (O&D) market; Las Vegas (Allegiant and Alaska). Allegiant provides three weekly flights to Long Beach and Oakland; and two weekly flights to Los Angeles, Phoenix, Palm Springs, and San Diego. Alaska Carriers, which include Alaska mainline service and Horizon, offer 41 weekly flights to Seattle. Total passenger airline enplanements are projected to increase from 329,392 in 2009 to 395,300 in 2010, an increase of 20.0 percent. Actual 2010 YTD enplanements have increased 29.1 percent compared to the same period in Strong growth in enplanements is expected in 2011 with a 25.3 percent year-over-year growth. Beyond 2011, total airline enplanements are projected to increase from 495,200 in 2011 to 565,700 in 2016, representing a CAGR of 2.7 percent during this period. Based on these projected growth rates, enplaned passengers at the Airport are projected to increase from 329,392 in 2009 to 565,700 in 2016, a CAGR of 8.0 percent during this period. Marinas The owns and operates two marinas (Blaine Harbor and Squalicum Harbor). The marinas provide 2,046 moorage slips for permanent recreational and commercial tenants. In addition, these marinas offer 2,350 lineal feet of guest moorage space. The marinas have experienced strong occupancy levels, ranging from 87 percent to 94 percent between 2006 and However, occupancy levels could be higher. The Port is currently facing constraints at Gate 3 in Squalicum Harbor, including slips that are too short or narrow to meet market demand and the area beneath these slips is too shallow. This project area includes 244 slips but currently has only 139 tenants (43 percent occupancy rate). The Port is planning on dredging this area and providing new slips that address the 2 As defined by the U.S. DOT, major U.S. airlines are airlines with gross operating revenues during any calendar year of more than $1 billion. (US DOT issue date November 13, 2009 and effective January 1, 2010). A-6

63 Mr. Rob Fix October 22, 2010 market demand. This project, which is included in this bond issue, is expected to cost approximately $10.1 million and be completed by Demand by commercial fishing vessels has likely stabilized at current levels or could decline further due to a decline in harvest and competition from other marinas. Demand by recreational boats has been strong in the marinas as evidenced by several factors. First, the Port maintains a waitlist of approximately 325 boats. Second, Whatcom County has increased its share of boats in Northeast Puget Sound from 30.9 percent in 1990 to 34.0 percent in 2009, a gain of 3.1 percent. Third, the annual growth rate in recreational boats is higher than the population rate, particularly for longer boats. BST Associates reviewed the Port s projections of revenue, expenses, and net revenues for the marinas for the period 2010 through 2015 and finds these estimates to be reasonable. BST Associates also projected revenue, expenses, and net revenues for the marinas for 2016 based upon the projected growth rates in 2014 and BST Associates projects that the marinas will achieve gradual improvements in occupancy. In addition, the Port is considering a plan to modify moorage rates. The net impact of these changes would be a projected increase in net income from the harbors from $3.7 million in 2010 to $4.6 million in 2016, or at a CAGR of 3.9 percent. Marine Terminals The Port also owns a marine shipping terminal and facilities serving ferry, bus, and rail operations (Bellingham Shipping Terminal, Bellingham Cruise Terminal, and Fairhaven Station). The Bellingham Shipping Terminal receives most of its revenue from dockage of tugs and vessels. The Port is evaluating ways to achieve higher levels of utilization. The Bellingham Cruise Terminal is the southern terminus for the Alaska Marine Highway System (AMHS), which connects Alaskan communities with the lower mainland. The Alaska State Ferry began operating out of the 's Cruise Terminal in 1989 under a 20-year agreement. The Port and State of Alaska have agreed upon a new contract (commenced in late 2009) that increases the lease payment and includes a 3 percent inflation factor. BST Associates reviewed the Port s projection of revenue, expenses and net revenue for the marine terminals for the period 2010 through 2015 and finds these estimates to be reasonable. BST Associates also projected revenue, expenses and net revenue for the marine terminals for 2016 based upon the projected growth rates in 2014 and The net income from the marine terminals is expected to range from $600,000 to $700,000 between 2011 and A-7

64 Mr. Rob Fix October 22, 2010 Real Estate The Port s Real Estate Division is responsible for managing the commercial real estate portfolio, which comprises a total of 810,000 square feet of office, commercial and industrial building space in seven distinct geographical districts. In 2009 the Port s Real Estate Division generated $5.8 million in revenue, or 31.2percent of the Port s total operating revenues. The Port recorded a vacancy rate of 6 percent r As of April 2010, the vacancy rates in Whatcom County were 6.1 percent for commercial properties, 7.2 percent for office properties, and 6.7 percent for industrial properties. The 10 largest tenants within the portfolio represented 66 percent of the Real Estate Division s 2009 revenue. The lease expiration dates for these 10 tenants range from 2010 to Revenues for the Real Estate Division are projected to increase at a 0.5 percent compounded average annual rate from 2011 through The Real Estate Division is projected to provide between $3.5 and $3.7 million of net revenues to the Port s overall financial operations between 2011 and Financial Analyses The Series 2010 Project is feasible in terms of providing facilities at a cost that will retain low levels of rates and charges to the users of the Port facilities. Debt Service Coverage is projected to be greater than the required 1.25x in each of the projected years. As shown in this report, for the period FY 2011 to FY 2016, the Debt Service Coverage ratio is projected to range from as high as 6.24 times in 2014 to a low of 1.96 times in Debt Service Coverage assumes proceeds from the sale of Port property in 2014 ($19.1 million). The Debt Service Coverage calculated excluding the revenue from the sale of Port property reduces the ratio to 2.03x from 6.24x in A-8

65 Mr. Rob Fix October 22, 2010 Except as defined otherwise, the capitalized terms used in this report are as defined in Resolution No. and/or the Official Statement for the 2010 Bonds. The techniques used in this report are consistent with industry practices for similar studies in connection with revenue bond sales. While R&A believes the approach and assumptions utilized are reasonable, some assumptions regarding future trends and events may not materialize. Achievement of projections described in this report, therefore, is dependent upon the occurrence of future events, and variations may be material. Sincerely, RICONDO & ASSOCIATES, INC. A-9

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67 TABLE OF CONTENTS I. Introduction... A Background... A Report Summary... A-16 II. Economic Base for Air Transportation... A Summary... A Air Trade Area... A Demographic Profile... A Income... A Employment... A Major Industry Sectors... A Economic Outlook... A-40 III. Air Traffic... A Role of the Airport... A Airlines Serving the Airport... A Historical Passenger Activity... A Historical Air Service... A Historical Aircraft Operations and Landed Weight... A Factors Affecting Aviation Demand and the Airline Industry... A Projections of Aviation Demand... A-57 IV. Aviation Division Financial Analysis... A Existing Airport Facilities... A Aviation Division Capital Projects... A Aviation Division Operating Expenses... A Aviation Division Revenues... A-70 V. Marine Facilities... A Harbors... A Harbor Utilization and Demand... A Competitive Facilities... A Other Marine Facilities... A Capital Improvement Plan... A Financial Trends and Projections... A-91 VI. Real Estate... A The Port s Commercial Real Estate Portfolio... A Whatcom County Commercial Real Estate Market... A Real Estate Division Financial Operations... A-100 VII. Port Financial Analysis... A Port Financial Structure... A Requirements Under the Bond Resolution... A Capital Fund Sources... A Bonds... A Future Revenue Bonds... A Debt Service... A Debt Service Coverage... A-112 Report of the Independent Consultant A-11 October 22, 2010

68 LIST OF TABLES Table No. II-1 Summary of Key Economic Indicators... A-20 II-2 Historical & Projected Population... A-24 II-3 Age Distribution (2010)... A-26 II-4 Educational Attainment (2010)... A-27 II-5 Income Trends ( )... A-28 II-6 Households with Income of $75,000 and Above ( )... A-30 II-7 Civilian Labor force and Unemployment Rates ( )... A-31 II-8 Major Private-Sector Employers in the Air Trade Area... A-32 II-9 Employment Trends by Major Industry Division ( )... A-34 III-1 Airlines Serving the Airport... A-42 III-2 Passenger Air Carrier Base... A-44 III-3 Historical Enplaned Passengers... A-45 III-4 Historical Enplaned Passengers by Airline... A-48 III-5 Primary Domestic O&D Passenger Markets... A-49 III-6 Nonstop Markets... A-50 III-7 Historical Aircraft Operations... A-52 III-8 Historical Landed Weight by Airline... A-54 III-9 Historical & Projected Enplanements... A-59 III-10 Historical & Projected Aircraft Operations... A-62 III-11 Historical & Projected Landed Weight... A-64 IV-1 Aviation Division Capital Program... A-67 IV-2 Aviation Division Operating Expenses (Port Authority Projection through 2015)... A-71 IV-3 Aviation Division Operating Revenues (Port Authority Projections through 2015)... A-74 IV-4 Passenger Airline Cost Per Enplaned Passenger... A-75 V-1 Blaine Harbor Slip Distribution... A-77 V-2 Squalicum Harbor Slip Distribution... A-78 V-3 Home City of Squalicum Harbor and Blaine Harbor Moorage Tenants... A-80 V-4 Whatcom County Registered Boat Trends... A-82 V-5 Whatcom County Share of Registered Boats 21 feet and Longer... A-84 V-6 Bellingham Shipping Terminal Specifications... A-86 V-7 Marine Facility Capital Improvement Plan... A-90 V-8 Financial Performance Harbors Terminal... A-92 V-9 Historical Trends Occupancy... A-93 V-10 Moorage Rates Monthly Rate per Foot... A-93 V-11 Financial Performance Marine Terminal... A-95 V-12 Financial Performance Harbors and Marine Terminal... A-96 VI Largest Property Leases Real Estate Division... A-101 VI-2 Real Estate Division Income Statement... A-102 VII-1 Port Revenue and Expenses ( )... A-108 VII-2 Estimated Sources and Uses of Funds 2010 Bonds... A-110 VII-3 Revenue Bond Debt Service & PFC Revenue... A-111 Report of the Independent Consultant A-12 October 22, 2010

69 LIST OF EXHIBITS Exhibit No. II-1 Air Trade Area and Alternative Facilities... A-23 III-1 Historical Monthly Averages of Jet Fuel and Crude Oil Prices... A-59 III-2 Historical and Projected Enplaned Passengers... A-61 IV-1 Existing Airport Facilities... A-66 V-1 Map of Blaine Harbor... A-78 V-2 Map of Squalicum Harbor... A-79 V-3 Waitlist & Transfer List Trends... A-81 V-4 Whatcom County Fish Landing Trends... A-83 V-5 Bellingham Shipping Terminal... A-87 V-6 AMHS Trends of embarking and disembarking passengers and vehicles... A-88 V-7 Bellingham Cruise Terminal and Fairhaven Station... A-89 Report of the Independent Consultant A-13 October 22, 2010

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71 I. Introduction 1.1 Background The (Port) is a special purpose municipal corporation organized under the State of Washington Law (primarily R.C.W. Title 53 Port Districts). Created by a vote of the people of Whatcom County in 1920, the Port is authorized by statute of the State of Washington to provide for the development and maintenance of harbors and marine terminals, the development and maintenance of aviation facilities, to promote tourism, and to foster economic activity in the County. The Port may acquire land for sale or lease for industrial or commercial purposes and may create industrial development districts. The Port is independent from other local or state governments and operates within district boundaries, which are co-terminus with Whatcom County. It is administered by a three-member Bellingham Port Commission (Port Commission) elected to four-year terms by voters within the Port. The Port Commission establishes Port policies and delegates authority to an Executive Director and administrative staff to conduct the operations of the Port. The majority of Port revenues are generated from operations including Aviation, Marinas, Marine Terminals, and Real Estate. In 2009, Aviation accounted for 25.3 percent, Marinas accounted for 30.0 percent, Marine Terminals accounted for 8.6 percent, and Real Estate accounted for 33.8 percent of Port operating revenues. The Port is custodian to approximately 1,600 acres of land and 1,086,800 square feet of buildings including Blaine Marina and Squalicum Marina, Bellingham International Airport (Airport), Bellingham Cruise Terminal, Bellingham Shipping Terminal, Fairhaven Transportation Center, Fairhaven Marine Industrial Park, Sumas Industrial Park, the Airport Industrial Park, and the Bellingham Waterfront Acquisition Site (BWAS) Overview of Aviation Division Operations The Port operates the Airport, a Federal Aviation Administration (FAA) Part 139 commercial air service airport and the third largest commercial service facility in the State of Washington. The Airport is also the hub for general aviation activities in Northwest Washington. The Airport is located approximately three miles northwest of the City of Bellingham, is approximately 100 miles north of Seattle, and is approximately 40 miles south of Vancouver, British Columbia. Facilities include a 6,700-foot precision-instrumented air carrier runway, 17-hour control tower and weather service, hangars, domestic and international terminal for air carrier use, and U.S. Customs and Immigration Service. The general aviation facilities include one main fixed base facility, two aircraft maintenance facilities, 10 corporate hangars, seven T-hangar units (90 total hangars), and 90 aircraft tie-down spaces. The Airport s automobile parking lot, located adjacent to the terminal, consists of 1,800 short-term and long-term parking spaces (including 400 overflow spaces) and 140 rental car parking spaces. The Airport is provided scheduled service by Alaska Air Lines (Alaska), Allegiant Air, and Horizon Air (owned by Alaska). Alaska provides scheduled service six days a week to Las Vegas using B aircraft, while Horizon Air provides daily scheduled service to Seattle using Bombardier Q- 400 aircraft (formerly known as the de Havilland Dash 8). Allegiant Air provides scheduled service to Las Vegas (daily), Long Beach (three days a week), Los Angeles (two days a week), Oakland (three days a week), Palm Springs (two days a week), Phoenix (via Phoenix-Mesa Gateway Airport two days a week), and San Diego (two days a week) using MD-80 aircraft. The Airport s passenger traffic has more than quintupled since 2003, reaching 329,392 passengers in 2009, primarily due to new flights from Alaska and low-cost carrier Allegiant Air. Whereas the Report of the Independent Consultant A-15 October 22, 2010

72 terminal s capacity is approximately 9,000 passengers a month, the Airport accommodated nearly 41,500 passengers in July As a result of this significant growth, the Port Commission recently approved a terminal expansion project that will triple the size of the terminal space with a capacity greater than 500,000 passengers a year. The Airport is currently on track to accommodate approximately 400,000 passengers in 2010 and should continue to grow with Alaska initiating flights from the Airport to Honolulu in January In addition, it is expected that Allegiant Air will soon announce plans to serve Hawaii from the Airport either late this year or early next year Overview of Marinas Division Operations Serving the needs of commercial and pleasure boaters is an integral part of the Port s stewardship of the County s waterfronts. The sheltered marinas are home to more than 3,500 commercial and pleasure craft with moorage facilities offering full-service amenities. Key to the strong demand for marina facilities is the proximity to the nearby San Juan Islands and Canadian Gulf Islands. The Port owns 327 acres in and around Squalicum Harbor, of which 200 acres serve as the moorage basin. Squalicum Harbor operates near full capacity for its existing 1,400 wet moorage berths (97 percent as of April 2010). This harbor, last expanded in 1997, has over 56,000 lineal feet of protected moorage. Blaine Harbor, last expanded in 2000, currently has wet moorage for 629 pleasure and commercial craft, and is also operating at 97 percent capacity (as of April 2010) Overview of Marine Terminals Division Operations The downturn in local break bulk shipping that began in 2001 has continued through 2010 year-todate. Recently, the primary revenue source for the Bellingham Shipping Terminal has been from dockage utilized for berthing for ships (Horizon Lines, among others) and tugs (Foss Maritime) and Top-side repair. Overall, the shipping terminal has been well maintained and continues to remain available to handle break bulk cargo. The Port s passenger facilities are currently utilized by the Alaska Marine Highway System on a weekly schedule to southeast Alaska. In addition, it serves as the home for seasonal daily passenger service to Victoria and to the San Juan Islands, multiple charter vessels, and whale watching tour boats Overview of Real Estate Division Operations The Port owns approximately 1,600 acres of land and improvements, of which 950 acres are currently undeveloped. The Port s Real Estate Division manages approximately 175 tenants with 220 lease or other agreements for mixed uses varying from large manufacturing facilities to singleoffice suites to land leases to permits and licenses. The Port s real estate properties are currently approximately 94 percent occupied. High demand for commercial real estate continues within the County, and the Port s long-term plan is to increase the supply of industrial and mixed-use facilities within the Port. The Port Commission has taken a conservative approach to development and generally only builds when a lease agreement is in place. 1.2 Report Summary This Report of the Airport Consultant is organized as follows: Chapter I Introduction. Provides an overview of the Port and its governance and a general description of the Port s Aviation, Marinas, Marine Terminals, and Real Estate operating divisions. Chapter II Economic Base for Air Transportation. Provides a description of the general economy of the Air Trade Area and relevant economic and demographic trends. Chapter III Air Traffic. Presents historical and projected aviation activity at the Airport. Report of the Independent Consultant A-16 October 22, 2010

73 Chapter IV Aviation Division Financial Analysis. Presents a description of existing Airport facilities; a discussion of the Aviation Division capital improvement program; a review of historical and projected Aviation Division operating expenses; a review of historical and projected airline and nonairline revenues; and a projection of the airline cost per enplanement at the Airport. Chapter V Marine Facilities. A description of existing marine facilities; a discussion of historical and projected marina space demand, including factors affecting marina space demand; and a review of the Marinas and Marine Terminals divisions capital improvement plan, operating revenues and expenses, and financial projections. Chapter VI Real Estate. A description of existing facilities; a discussion of historical and projected facility demand, including factors affecting facility demand; and a review of the Real Estate Division s capital improvement plan, operating revenues and expenses, and financial projections. Chapter VII Port Financial Analysis. A description of the financial framework of the Port; an overview of bond resolution requirements, including requirements for the Series 2010 Bonds; a summary of sources of funding for the Series 2010 Projects and the associated financing plan; and financial projections including debt service requirements, the application of Gross Revenue, and the Port s ability to meet debt service coverage requirements. Report of the Independent Consultant A-17 October 22, 2010

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75 II. Economic Base for Air Transportation The demand for air transportation at a particular airport is, to a large degree, a function of the demographic and economic characteristics of the airport s air trade area (i.e., the geographical area served by an airport). This chapter profiles the Bellingham regional economy, including current conditions and trends. 1 In particular, the following discussion focuses on economic factors that will affect future demand for air passengers at the Airport. Except where noted otherwise, for the purposes of this Chapter, the Air Trade Area includes Whatcom County, Skagit County, Island County, and San Juan County in the State of Washington, as well as five geographic regions in Southern British Columbia: Fraser Valley Regional District, the cities of Langley, Surrey and White Rock, and Langley District Municipality Summary Table II-1 provides an overview of the economic indicators presented and discussed in this chapter. A summary of key socioeconomic trends in the Air Trade Area includes the following: Population Trends. The Air Trade Area has a substantial population base with approximately 1,280,798 residents in Population in the Air Trade Area increased at a compounded annual growth rate (CAGR) of 2.3 percent between 2000 and 2009, compared with 1.3 percent in the State of Washington and 0.9 percent in the U.S. The Air Trade Area population forecast for the period 2009 to 2015 reflects a CAGR of 2.5 percent per year, a rate that is higher than the forecasted CAGR for both the State of Washington (1.3 percent) and the U.S. (1.0 percent) This chapter has been prepared by Partners for Economic Solutions, a consulting firm based in Washington, D.C. that specializes in regional economic analysis. Because they share a border with Whatcom County, the five geographic regions that comprise Southern British Columbia were selected for inclusion in this analysis. See Table II-2. Woods & Poole Economics, Inc. is a data vendor located in Washington, D.C. that specializes in long-term economic and demographic projections for the U.S., 50 states, 3,091 counties and the District of Columbia. Its database contains approximately 900 variables for every county in the United States including population and employment by industry. Its demographic projections are revised annually to reflect both new computational techniques and new data sources. Woods & Poole s clients include the U.S. Department of Defense, the National Institute of Health, the U.S. Census Bureau, and numerous counties and municipalities. Strategic Projections is based in Toronto, Canada and specializes in demographic projections and economic research. It provides regularly updated forecasts at the national, provincial and metropolitan area level in Canada for use in policy analysis, industry and market research, and economic development strategies. Strategic Projections clients include the Province of British Columbia, the Ministry of Transportation, the Canada Tourism Council, and Macquarie North America Ltd. Report of the Independent Consultant A-19 October 22, 2010

76 Table II-1 Summary of Key Economic Indicators Air Trade Area State of Washington United States Note: Highest/best values or rates in each row are shown in bold and underlined font. Population Growth 1/ % 1.3% 0.9% % 1.3% 1.0% Per Capita Personal Income 2010 $27,385 $28,691 $26, $31,917 $33,252 $30,241 Average Household Income 2010 $74,655 $74,221 $71, $86,254 $85,892 $80,539 Growth In Civilian Labor Force 1/2/ % 1.0% 1.1% % 1.5% 0.6% % 1.4% 1.0% Unemployment Rate 3/ % 4.7% 4.2% % 5.5% 5.1% % 8.9% 9.3% August % 8.9% 9.6% Growth in Nonagricultural Employment Sectors, / Services 2.8% 2.6% 1.8% Trade 1.5% -0.4% -0.7% Manufacturing -0.4% 1.4% -2.5% Government 3.6% 1.7% 1.2% Finance/Insurance/Real Estate 3.6% 1.0% -0.3% Transportation/Utilities 3.3% 1.3% 0.3% Construction 0.2% 0.4% -1.8% Notes: 1/ Compounded annual growth rate. 2/ Labor force data for the Air Trade Area do not include Southern British Columbia. 3/ Unemployment data for the Air Trade Area do not include Southern British Columbia. Sources: Various sources indicated on Tables II-2 through II-9 of this chapter. Prepared by: Partners for Economic Solutions, September Report of the Independent Consultant A-20 October 22, 2010

77 Age Distribution and Educational Attainment. Market research has shown that people between the ages of 35 and 54 tend to travel the most and that individuals with a college degree are more likely to travel by air. In 2010, Air Trade Area residents between the ages of 35 and 54 comprise 28.4 percent of the population, a level that is commensurate with the population in this age category in both the State of Washington and the U.S. 4 Approximately 39.2 percent of the Air Trade Area population over the age of 25 holds a bachelor s degree or higher advanced degree (e.g., graduate or professional degree). This percentage is significantly higher than that of the U.S. (35.8 percent) and is nearly equal to the level in the State of Washington (40.5 percent). 5 High Average Household Income Levels. Ranked on the key measure of average household income, the Air Trade Area outperforms both the State of Washington and the U.S. In 2010, the Air Trade Area s estimated average household income of $74,655 is 4.8 percent higher than that of the U.S. ($71,270) and 0.6 percent higher than that of the State of Washington ($74,221). Forecasts for 2015 show that this trend is expected to continue as the Air Trade Area will reach an average household income level of $86,254, compared to $85,892 in the State of Washington and $80,539 in the U.S. 6 Employment Growth Trends. Between 1999 and 2009, the Air Trade Area labor force grew at a CAGR of approximately 1.7 percent higher than the labor force CAGR in both the State of Washington (1.4 percent) and in the U.S. (1.0 percent). In absolute terms, the labor force in the Air Trade Area increased by approximately 32,000 workers between 1999 and Unemployment. In August 2010 (latest data available), the unemployment rate for the Air Trade Area was 8.3 percent (non-seasonally adjusted); this is lower than the rate for the State of Washington where the unemployment rate was 8.9 percent (seasonally adjusted). The unemployment rate for the U.S. was 9.6 percent in August 2010 (seasonally adjusted). 7 Economic Outlook. Although the Air Trade Area is well-positioned with a broad and diverse economic base, it still remains affected by overall economic conditions in the U.S. In the wake of the December 2007-June 2009 recession, the U.S. economy is experiencing weaknesses in housing construction, consumer spending and business investment, as well as relatively high unemployment rates and low GDP growth. Recent surveys of leading economists by Blue Chip Economic Indicators and the National Association for Business Economics indicate consensus for modest real GDP growth and moderate economic recovery by the end of Similarly, the Business Council of British Columbia projects that British See Table II-3. ESRI, headquartered in Redlands, CA, is a leading demographic data vendor that provides current-year estimates and five-year projections of more than 2,000 data variables data including population, age, education and income. ESRI s clients include the United States Army Corps of Engineers, the National Oceanic and Atmosphere Administration (NOAA), the U.S. Department of Homeland Security, and other public agencies at the national, state, and local level. See Table II-4. Educational attainment data for the Air Trade Area do not include data for Southern British Columbia. See Table II-5. See Table II-7. Unemployment data for the Air Trade Area do not include data for Southern British Columbia. Monthly unemployment data published for the Air Trade Area are not seasonally adjusted. Report of the Independent Consultant A-21 October 22, 2010

78 Columbia s economic growth will be subdued in 2010 and 2011 as the province feels the effects of weak economic growth in the U.S. and Europe. Based on the strength of key socioeconomic factors summarized above, the economic base of the Air Trade Area, as defined in this report, is broad and diversified and will continue to support long term growth in demand for air transportation services at the Airport. 2.2 Air Trade Area The Air Trade Area consists of two Metropolitan Statistical Areas (MSA) that contain two State of Washington counties: Bellingham WA MSA (Whatcom County) and Mount Vernon-Anacortes WA MSA (Skagit County). The Air Trade Area also includes the Oak Harbor WA Micropolitan Statistical Area (Island County), as well as San Juan County in Washington. In addition, the Air Trade Area encompasses five geographic regions in Southern British Columbia that include Fraser Valley Regional District, the cities of Langley, Surrey and White Rock, and Langley District Municipality. Exhibit II-1 depicts the Air Trade Area's geographical location in the State of Washington and Southern British Columbia in Canada. Exhibit II-1 also illustrates the location of the Airport relative to alternative commercial service airports: Vancouver International Airport (located approximately 40 miles north of the Airport), and Seattle-Tacoma International Airport (located approximately 100 miles south of the Airport). 2.3 Demographic Profile Data for population growth, age distribution, and educational attainment for the Air Trade Area are discussed below and are presented in Tables II-2 through II-4 which follow. Parallel data for the State of Washington and the U.S. are also shown to provide a basis of comparison for trends in the Air Trade Area Population Growth Actual and projected population growth in a region is a key indicator for assessing demand for air travel. Data in Table II-2 show that the Air Trade Area had a population of more than 1.0 million in 2000; by 2009 the population increased to more than 1.2 million. The Air Trade Area added more than 238,000 to its population between 2000 and 2009 (approximately 26,000 per year), reflecting a CAGR of 2.3 percent higher than the CAGR for the both the U.S. population (0.9 percent) and the State of Washington (1.3 percent). The Air Trade Area population forecast for the period 2009 to 2015 reflects a CAGR of 2.5 percent per year, a rate that is higher than the forecasted CAGR for both the U.S. (1.0 percent) and the State of Washington (1.3 percent). It is expected that an increase in new residents in the Air Trade Area (approximately 207,000 between 2009 and 2015, and approximately 182,000 between 2015 and 2020) will generate additional demand for air service at the Airport during the projection period Age Distribution According to survey data from the Travel Industry Association (TIA), air travel frequency in the United States varies by age group, and people between the ages of 35 and 54 tend to travel the most. TIA data show that people between the ages of 35 and 54 account for 46 percent of air trips, while Report of the Independent Consultant A-22 October 22, 2010

79 CANADA Vancouver International Airport Surrey FRASER VALLEY REGIONAL DISTRICT Langley City White Rock LANGLEY DISTRICT MUNICIPALITY WHATCOM SAN JUAN Bellingham International Airport SKAGIT ISLAND WASHINGTON Mileage from Bellingham International Airport Seattle/Tacoma International Airport miles south Vancouver International Airport...40 miles north Seattle/Tacoma International Airport Source: Map Resources, Prepared by: Ricondo & Associates, Inc., October Exhibit II-1 Not to scale north Air Trade Area and Alternative Facilities Report of the Independent Consultant October 22, 2010 A-23

80 Table II-2 Historical & Projected Population Area Historical Projected Compounded Annual Growth Rate Whatcom County 167, , , , % 2.1% 1.9% Skagit County 103, , , , % 1.9% 1.7% Island County 71,847 82,508 89,120 94, % 1.3% 1.2% San Juan County 14,147 15,614 17,544 19, % 2.0% 1.8% Southern British Columbia 1/ 684, ,274 1,019,009 1,159, % 2.8% 2.6% Air Trade Area 1,041,856 1,280,798 1,488,558 1,671, % 2.5% 2.3% State of Washington 5,911,104 6,635,921 7,164,952 7,619, % 1.3% 1.2% United States 282,171, ,050, ,421, ,343, % 1.0% 1.0% Note: 1/ Southern British Columbia is defined as Fraser Valley Regional District, the cities of Surrey, Langley and White Rock, and Langley District Municipality. Sources: Woods & Poole Economic, Inc., November 2009; Strategic Projections, September Prepared by: Partners for Economic Solutions, September Report of the Independent Consultant October 22, 2010 A-24

81 persons between the ages of 18 and 34 account for 26 percent of air trips, and persons 55 years and older account for 27 percent of air trips. 8 Data in Table II-3 show that in 2010, Air Trade Area residents between the ages of 35 and 54 comprise approximately 28.4 percent of the population, compared with 28.6 percent of the population of the State of Washington and 28.0 percent of the population of the United States. The population in the age category that travels most frequently is an important source of demand for air service at the Airport and is represented in the Air Trade Area on a level commensurate with the population in both the State of Washington and the U.S Education 9 Educational attainment of residents can also be a key indicator of an area s demand for air service, as evidenced by a 2007 study by Arbitron, Inc. that found that individuals with a college degree are more likely to travel by air. 10 The Air Trade Area is home to a large number of highly educated adults. According to 2010 data shown in Table II-4, approximately 39.2 percent of the Air Trade Area 11 population over the age of 25, hold a bachelor s degree or higher advanced degree (e.g., graduate or professional degree). Although this percentage is significantly higher than that of the U.S. overall (35.8 percent), it is slightly less than the percentage in the State of Washington where 40.5 percent of the population over the age of 25 has a post-secondary degree. 2.4 Income Another key indicator regarding demand for air travel is personal income, the sum of wages and salaries, other labor income, proprietors income, rental income of persons, dividend income, personal interest income, and transfer payments less personal contributions for government social insurance. Personal income indicates the general level of affluence of local residents, which corresponds to an area s ability to afford air travel, as well as an area s attractiveness to business and leisure travelers. Data in Table II-5 show that the Air Trade Area s estimated per capita income of $27,385 in 2010 was 2.4 percent higher, and 4.6 percent lower, than that of the U.S. and the State of Washington, respectively. Per capita income for the Air Trade Area is estimated to increase to $31,917 in This increase represents a CAGR of 3.1 percent between 2010 and 2015 a level that is comparable to projected per capita income growth in both the State of Washington and the U.S. Ranked on the key measure of average household income, the Air Trade Area outperforms both the State of Washington and the U.S. as a whole. In 2010, the Air Trade Area s estimated average household income of $74,655 is 4.8 percent higher than that of the U.S. ($71,270) and 0.6 percent higher than that of the State of Washington ($74,221). Forecasts for 2015 show that this trend is Domestic Travel Market Report, Travel Industry Association. Educational attainment data for the Air Trade Area do not include data for Southern British Columbia. Arbitron, Inc., The Arbitron Airport Television Study: Getting TV Commercials Out of the House and in Front of Affluent Consumers, June Data for educational attainment do not include data for Southern British Columbia. Report of the Independent Consultant A-25 October 22, 2010

82 Table II-3 Age Distribution (2010) State of By Age Group: Air Trade Area Washington United States 19 and Under 25.3% 26.4% 27.0% % 6.9% 6.9% % 13.9% 13.3% % 13.4% 13.4% % 15.2% 14.6% % 12.2% 11.7% 65 and Above 13.4% 12.0% 13.1% Total 100.0% 100.0% 100.0% Source: ESRI, June 2010; Strategic Projections, September Prepared by: Partners for Economic Solutions, September Report of the Independent Consultant A-26 October 22, 2010

83 Table II-4 Educational Attainment (2010) Air Trade Area 1/ State of Washington United States Population 25 years and over 280,505 4,503, ,370,648 Less than 9th Grade 9th - 12th Grade, No Diploma High School Graduate Some College, No Degree Post-Secondary Degree Associate Degree Bachelor s Degree Graduate/Professional Degree 3.8% 4.3% 6.3% 6.1% 6.4% 8.5% 25.9% 24.7% 29.6% 25.0% 24.0% 19.9% 39.2% 40.5% 35.8% 10.3% 9.8% 7.7% 18.8% 19.8% 17.7% 10.1% 10.9% 10.4% Total 100% 100% 100% Note: 1/ Educational attainment data for the Air Trade Area do not include data for Southern British Columbia. Source: ESRI, June Prepared by: Partners for Economic Solutions, September Report of the Independent Consultant A-27 October 22, 2010

84 Table II-5 Income Trends ( ) State of Air Trade Area Washington United States Per Capita Income 2010 estimate $27,385 $28,691 $26, forecast $31,917 $33,252 $30,241 CAGR % 3.0% 2.5% Average Household Income 2010 estimate $74,655 $74,221 $71, forecast $86,254 $85,892 $80,539 CAGR % 3.0% 2.5% Note: 1/ CAGR = Compounded annual growth rate. Source: ESRI, June 2010; Strategic Projections, September Prepared by: Partners for Economic Solutions, September Report of the Independent Consultant A-28 October 22, 2010

85 expected to continue as the Air Trade Area will reach an average household income level of $86,254, compared to $85,892 in the State of Washington and $80,539 in the U.S. The percentage of higher income households (defined as those earning $75,000 or more annually) within the Air Trade Area is another key indicator of potential demand for air transportation services. In 2010, an estimated 62,800 Air Trade Area households had an income of $75,000 or more. According to the Travel Industry Association, 62 percent of airplane trips are taken by travelers with an annual household income of $75,000 or more. 12 Data in Table II-6 show that between 2010 and 2015, the number of households with income greater than $75,000 in the Air Trade Area is projected to increase by approximately 18, Employment Labor Force Trends and Unemployment Rates 13 Table II-7 shows that between 1999 and 2009, the Air Trade Area labor force grew at a CAGR of 1.7 percent higher than the labor force CAGR in both the State of Washington (1.4 percent) and in the U.S. (1.0 percent). In absolute terms, the labor force in the Air Trade Area increased by approximately 32,000 workers between 1999 and Although the seasonally adjusted annual unemployment rate in the Air Trade Area exceeded that of the U.S. from 1999 through 2006, it was lower than the national unemployment rate from 2007 through The Air Trade Area s unemployment rate was higher than the State of Washington s from 1999 through 2001, equal to the State s in 2002 and 2004, and lower than the State s in 2003, and from 2005 through In August 2010 (latest data available), the unemployment rate for the Air Trade Area was 8.3 percent (non-seasonally adjusted); 14 this is lower than the rate for the State of Washington where the unemployment rate was 8.9 percent (seasonally adjusted). The unemployment rate for the U.S. was 9.6 percent in August 2010 (seasonally adjusted) Major Employers in the Air Trade Area Table II-8 shows the diversity of the major private sector employers in the Air Trade Area with 250 employees or more. The wide range of industries represented include retail, food products, forest products, banking, insurance, medical instrument manufacturing, printing, publishing, engineering services, etc. Air Trade Area employers with more than 4,000 employees include the grocery store chain Haggen Inc., based in Bellingham, and IDEX Health & Science, a precision instrument manufacturer based in Oak Harbor (Island County). Firms with 1,000 to 3,999 employees include two grocery store chains (The Markets LLC and Save On Foods), Sterling Life Insurance Co., and NCO Customer Management Ltd., a call center based in Surrey, BC. Companies listed in Table II-8 depend on convenient and cost-effective air passenger service for the continued health and expansion of their business enterprises. The Airport s role in providing an affordable option for air passenger service makes it an important resource for employers in the Air Trade Area Domestic Travel Market Report, Travel Industry Association. Labor force and unemployment data for the Air Trade Area do not include Southern British Columbia. Monthly unemployment data published for the Air Trade Area are not seasonally adjusted. Report of the Independent Consultant A-29 October 22, 2010

86 Table II-6 Households with Income of $75,000 and Above ( ) Change CAGR Location (Estimate) (Forecast) Air Trade Area 62,817 81,536 18, % State of Washington 976,756 1,261, , % United States 38,414,036 47,329,796 8,915, % Note: 1/ CAGR = Compounded annual growth rate Source: ESRI, June 2010; Strategic Projections, September Prepared by: Partners for Economic Solutions, September Report of the Independent Consultant A-30 October 22, 2010

87 Table II-7 Civilian Labor Force and Unemployment Rates ( ) Civilian Labor Force Unemployment Rates Air Trade State of United Air Trade State of United Year Area Washington States Year Area Washington States ,490 3,075, ,368, % 4.7% 4.2% ,410 3,045, ,583, % 5.2% 4.0% ,430 3,015, ,734, % 6.4% 4.7% ,640 3,109, ,863, % 7.3% 5.8% ,800 3,160, ,510, % 7.4% 6.0% ,730 3,224, ,401, % 6.3% 5.5% ,960 3,270, ,320, % 5.5% 5.1% ,030 3,334, ,428, % 4.9% 4.6% ,440 3,408, ,124, % 4.5% 4.6% ,330 3,476, ,287, % 5.4% 5.8% ,610 3,529, ,142, % 8.9% 9.3% August ,230 3,543, ,110,000 August % 8.9% 9.6% Compounded Annual Growth Rate % 1.4% 1.0% 10.5% Unemployment Rates 9.5% 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% 2.5% August 2010 Air Trade Area State of Washington United States Notes: 1/ Data for the Air Trade Area do not include Southern British Columbia. 2/ August 2010 data for the Air Trade Area are not seasonally adjusted. Sources: State of Washington Employment Security Department, Labor Market and Economic Analysis; U.S. Dept. of Labor, Bureau of Labor Statistics, September Prepared by: Partners for Economic Solutions, September Report of the Independent Consultant A-31 October 22, 2010

88 Table II-8 Major Private-Sector Employers in the Air Trade Area Employer Product or Service 4,000 Employees or More Haggen Inc. IDEX Health & Science Grocery Stores Medical Instruments Manufacturer 1,000 to 3,999 Employees Markets LLC NCO Customer Management Ltd. Save On Foods Sterling Life Insurance Co. Grocery Stores Call Center Grocery Stores Insurance 500 to 999 Employees Alcoa Intalco Works Arco BP Refinery Insurance Corporation of British Columbia Maberry Packing Marriott Homes Price Smart Foods S & R Sawmills Ltd. Safeway Sakuma Brothers Farms Inc. Skagit Valley Resort Teal-Jones Group Terasen Gas The Real Canadian Superstore Townsend Farms Wal-mart Aluminum Manufacturer Oil Refinery Insurance Food Products & Manufacturers Home Builder Retail Forest Products Grocery Stores Plant/Tree Nursery Leisure & Hospitality Forest Products Utility Retail Food Products & Manufacturers Retail 250 to 499 Employees Alpha Technologies Inc. Anvil Corp BC Biomedical Laboratories Ltd. Beachcomber Hot Tub Group Buy Low Foods Ltd. Canadian Tire Ch2m Hill Clark's Berry Farm Costco Draper Valley Farms Inc. Enfield Farms Inc. Finning Canada Fraser Downs Heath Tecna Inc. Home Depot Hulbert Farms Inc. Janicki Industries Lowe's Nichols Brothers Boat Builders Nooksack River Casino Olive Garden Italian Restaurant Pacific Newspaper Group Peoples Bancorp Powertek Electric Premier Agendas Inc. Premier Graphics Roche Harbor Resort Rona Silver Reef Casino Skagit Gardens Swinomish Casino & Bingo Target Telus Tesoro Refinery Tim Hortons Washington Banking Co. Washington Bulb Co. Whatcom Security Agency Inc. Home Theater Systems Engineering Services Medical Diagnostic Laboratory Retail Retail Automotive Electrical Engineers Food Products & Manufacturers Retail Food Products & Manufacturers Food Products & Manufacturers Construction Equipment Distributor Racetrack and Casino Aerospace Retail Food Products & Manufacturers Machine Shop Retail Boat Manufacturer Casino Retail Publishing Bank Electric Contractor Printing Printing Leisure & Hospitality Retail Casino Plant/Tree Nursery Casino Retail Telecommunications Oil Refinery Retail Bank Seed & Bulb Supplier Security Guard & Patrol Service Sources: InfoUsa, September 2010; Employment Lands Strategy, City of Surrey, November Prepared by: Partners for Economic Solutions, September Report of the Independent Consultant A-32 October 22, 2010

89 2.6 Major Industry Sectors An analysis of non-agricultural employment trends by major industry sectors, presented in Table II-9, indicates the sources of jobs in the Air Trade Area s economy. In this table, employment trends in the Air Trade Area are compared to data for the State of Washington and the U.S. in 2005 and Non-agricultural employment in the Air Trade Area increased from approximately 468,400 workers in 2005 to more than 511,400 workers in This increase represents a 2.2 percent CAGR during this period. In contrast, employment showed a CAGR of 1.6 percent in the State of Washington, and a CAGR of 0.5 percent in the U.S. between 2005 and Measured by percentages, employment in the transportation/utilities and construction sectors in the Air Trade Area in 2009 were generally consistent with those in the State of Washington and the U.S. However, the Air Trade Area had a relatively higher proportion of manufacturing employment and trade employment compared to the State of Washington and U.S. Jobs in the manufacturing sector in the Air Trade Area made up 9.3 percent of employment in 2009, compared to 7.8 percent in the State of Washington, and 7.6 percent in the U.S. The Air Trade Area s jobs in the trade sector made up 17.3 percent of employment in 2009, compared to 13.6 percent in the State of Washington, and 14.1 percent in the U.S. Finance/insurance/real estate, government, and services jobs in the Air Trade Area made up a relatively lower percentage of employment in 2009 in comparison to the State of Washington and U.S. Finance/insurance/real estate jobs in the Air Trade Area made up 7.4 percent of employment, compared to 8.3 percent in the State of Washington, and 8.7 percent in the U.S. The Air Trade Area s government jobs made up 12.1 percent of employment, compared to 16.5 percent in the State of Washington, and 14.3 percent in the U.S. Jobs in the services sector made up 42.7 percent of employment in the Air Trade Area, compared to 42.8 percent in the State of Washington, and 44.8 percent in the U.S. Data in Table II-9 indicate that the Air Trade Area has a diversified employment base that is expected to provide the region with a foundation for recovery in the wake of the economic recession of December 2007-June Brief profiles of the Air Trade Area s major industries, in ascending order of 2009 employment, are provided below Transportation/Utilities Transportation/utilities employment in the Air Trade Area accounted for approximately 19,890 employees in 2009, or 3.9 percent of total nonagricultural employment. This is higher than both the state level (3.1 percent) and national level (3.6 percent) and illustrates the importance of the transportation/utilities sector to the Air Trade Area s economy. In 2005, there were 17,449 employees in the Air Trade Area with jobs in this sector (see Table II-9). To facilitate border crossing, residents of the Air Trade Area, both in Southern British Columbia and the State of Washington, are eligible to join the NEXUS program. NEXUS is a joint venture by the Canada Border Services Agency (CBSA) and U.S. Customs and Border Protection (CBP) that is designed to expedite the border clearance process for low-risk, pre-approved travelers into Canada and the United States. Approved applicants are issued a membership card that allows them to cross the border in both directions in specialized lanes in order to avoid lengthy queues. The Air Trade Report of the Independent Consultant A-33 October 22, 2010

90 Table II-9 Employment Trends by Major Industry Division ( ) Air Trade Area State of Washington United States Industry CAGR CAGR CAGR Services 195, , % 1,509,801 1,671, % 72,886,590 78,423, % Trade 83,446 88, % 540, , % 25,368,811 24,652, % Manufacturing 48,211 47, % 288, , % 14,819,268 13,373, % Government 53,853 62, % 601, , % 23,849,000 25,034, % Fin/Ins/Real Estate 32,790 37, % 311, , % 15,369,181 15,177, % Transportation/Utilities 17,449 19, % 113, , % 6,176,835 6,256, % Construction 1/ 36,940 37, % 302, , % 12,845,637 11,952, % Total 468, , % 3,667,993 3,905, % 171,315, ,871, % Percent of 2009 Non-Agricultural Employment by Industry Services 44.8% 42.8% 42.7% Trade 14.1% 13.6% 17.3% Government 14.3% 16.5% 12.1% Manufacturing 7.6% 7.8% 9.3% Fin/Ins/Real Estate 8.7% 8.3% 7.4% Construction 6.8% 7.9% 7.3% Transportation/Utilities 3.6% 3.1% 3.9% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% United States State of Washington Air Trade Area Notes: 1/ Includes mining and forestry employment. 2/ CAGR = Compounded Annual Growth Rate. Source: Woods & Poole Economics Inc., November 2009; Strategic Projections, September Prepared by: Partners for Economic Solutions, September Report of the Independent Consultant A-34 October 22, 2010

91 Area has two border crossings with NEXUS privileges at Peace Arch/Douglas and Pacific Highway. Both of these border crossings are located approximately 35 driving miles north of the Airport. The Air Trade Area is supported by a comprehensive network that facilitates transportation access throughout the region. This extensive transportation network includes the following components: Bellingham International Airport. The Airport is operated by the and is located approximately three miles northwest of the City of Bellingham and 20 driving miles south of the Canadian border. In 2009, traffic at the Airport was approximately 329,000 enplaned passengers. 15 Air Trade Area Seaports. The operates major transportation terminals including Bellingham International Airport, Fairhaven Transportation Station (with Amtrak service) and the Bellingham Cruise Terminal. More than 250 businesses operate on approximately 1,600 acres of Port property throughout Whatcom County. The operations of the Port and its tenants generate over 4,000 direct local jobs. 16 The Fraser Surrey Docks, located on the Fraser River in Surrey, is a multi-purpose marine terminal that handles 300 and 400 deep-sea vessels annually. The 130-acre site includes seven berths and 330,000 square feet of warehouse space. 17 Ground, Rail, and Ferry Transportation. The Air Trade Area s transportation network in the State of Washington includes: bus service (Whatcom Transportation Authority, Skagit Transit, Island Transit); Amtrak passenger train service (Blaine, Bellingham, Mt. Vernon); BNSF Railways freight rail service (Blaine, Bellingham, Anacortes, Sedro-Woolley, Mt. Vernon); the Alaska State Ferry (Bellingham) and the Washington State Ferry system (Anacortes, Clinton, Coupeville, Friday Harbor, Lopez, Orcas, Shaw). Connections to the Airport are provided by bus, shuttle service (Airporter Shuttle, Quick Shuttle) and several local taxicab companies. In Southern British Columbia, the Air Trade Area s transportation network includes: bus service from BC Transit in partnership with Central Fraser Valley Transit System and the Chilliwack/Agassiz-Harrison Transit System; SkyTrain light rail service from BC Transit (Surrey); Amtrak passenger train service (Surrey); and freight rail service by the Canadian National Railway, Canadian Pacific Railway, Burlington Northern Santa Fe Railway (BNSF), and Southern Rail of British Columbia. Major Highways. In the State of Washington, Interstate 5 (I-5) is the principal north-south route in the Air Trade Area and passes through its major cities (Mt. Vernon, Burlington, Bellingham, and Blaine) before reaching the Canadian border. Highway 20, commonly known as the North Cascades Highway, is the Air Trade Area s principal east-west route. It runs east from Anacortes across the Cascade Mountains, ending in Newport, WA near Washington s border with Idaho. In Southern British Columbia, the main north-south route Bellingham International Airport 2009 Passenger Estimates, Passenger Retention Analysis, Forecast Inc., September Fast Facts About the, Port Commission Approves $26 million Airport Runway Contract, Press Release,, September 20, 2010, accessed September 29, About Us, Fraser Surrey Docks, accessed October 9, Report of the Independent Consultant A-35 October 22, 2010

92 in the Air Trade Area is British Columbia Highway 99 which connects with I-5 at the U.S. border and then extends north to Vancouver and then to the Squamish-Lillooet Regional District. Highway 1 is the Air Trade Area s principal east-west route in Southern British Columbia and passes through the Fraser Valley Regional District, the cities of Langley, Surrey, and Langley District Municipality Construction The construction industry employed 37,257 workers in the Air Trade Area in 2009, accounting for 7.3 percent of total non-agricultural employment (see Table II-9). This percentage is lower than in the State of Washington (7.9 percent) and higher than in the U.S., where construction jobs accounted for 6.8 percent of non-agricultural employment in Development projects for public facilities are providing support to the construction industry in the Air Trade Area. Examples of current projects include: Bellingham International Airport Runway and Taxiway Improvements. This $29 million project has improved both the runway and the taxiways and will allow the Airport to accommodate Boeing 757s. Completed on September 20, 2010, the project involved a three week, 24-hour-day construction and paving operation to distribute 174,000 tons of asphalt onto the runway and taxiways. 18 I-5 Improvement Projects. The Washington State Department of Transportation is currently constructing or finalizing plans to construct approximately $102 million in improvements to I-5, State Route 542, State Route 530, State Route 20, and State Route 11 in Whatcom and Skagit Counties. These projects include offramp reconstruction, repaving, safety improvements, road realignment, bridge construction, interchange improvements, and roadway widening. 19 Chilliwack General Hospital Redevelopment. Located in Fraser Valley Regional District, the hospital s $34 million (U.S. dollars) redevelopment will expand facilities for diagnostic, emergency, and ambulatory care. Construction started in late 2008 and is estimated to be completed in Surrey Memorial Hospital Outpatient Facility. This $231 million (U.S. dollars) project will improve access to health care with a new 190,000 square-foot facility. The building will meet LEED Gold standards for Leadership in Energy and Environmental Design. The project broke ground in September 2008 and is projected for completion in Spring Runway Expected to Open September 22, Press Release,, September 20, 2010, accessed September 29, Project Index, Washington State Department of Transportation, accessed October 1, Chilliwack Hospital Redevelopment, accessed October 1, Surrey Memorial Expansion Poised To Benefit From Construction Slump, Vancouver Sun, January 14, 2010, / /story.html, accessed October 1, Report of the Independent Consultant A-36 October 22, 2010

93 RCMP E Division Headquarters Relocation Project. Located in Surrey, this $941 million (U.S. dollars) facility will provide space for 2,700 employees from 25 Metro Vancouver locations. The development program includes an office building with seven floors, vehicle maintenance and storage buildings, and a forensics lab. The project is registered to meet LEED Gold standards for Leadership in Energy and Environmental Design. Construction started in May 2010 and is scheduled for completion in Finance The financial sector comprises financial, insurance and real estate services. The financial sector generates the second highest amount of travel spending, including demand for air travel services, of any industry sector according to the National Business Travel Association. 23 Employment in the financial sector in the Air Trade Area increased at a CAGR of 3.6 percent between 2005 and 2009, compared with a CAGR of 1.0 percent for the State of Washington and a compounded annual decrease of 0.3 percent for the United States (see Table II-9). In 2009, the financial sector in the Air Trade Area employed approximately 37,800 workers, representing 7.4 percent of the total nonagricultural workforce. This percentage is lower than in both the State of Washington and the United States where financial jobs accounted for 8.3 percent and 8.7 percent of nonagricultural employment in 2009, respectively. Over the past few years, the State of Washington s banking sector has faced significant challenges. In September 2008, Washington Mutual Bank, one of the State of Washington s largest employers, was placed into the receivership of the Federal Deposit Insurance Corporation which sold the bank to JPMorgan Chase. 24 As the integration of Washington Mutual into JPMorgan Chase has progressed, phased layoffs have totaled approximately 6,000 employees statewide. 25 According to FDIC s database of failed banks, since 2008 there have been 13 banks in the State of Washington that have been closed by the State of Washington s Department of Financial Institutions. 26 Acting as the receiver, the FDIC entered into agreements with other banking institutions to assume the deposits and purchase the assets of the closed banks. 27 These bank mergers resulted in the movement of customer accounts to the acquiring banks and in uninterrupted access to account funds during the merger process Manufacturing The manufacturing sector generates the highest amount of travel spending, including demand for air travel services, of any industry sector according to the National Business Travel Association. 28 In RCMP E Division Headquarters Relocation Project Fact Sheet; accessed October 1, Business Travel Report, September 15, 2009, National Business Travel Association, www2.nbta.org /Lists/.../Business%20Travel%20Report% pdf, accessed September 30, JPMorgan Chase Acquires Banking Operations of Washington Mutual, Press Release, Federal Deposit Insurance Corporation, September 25, 2008, accessed September 27, Layoff aftershocks hit WaMu neighborhood, March 30, 2009, The Seattle Times. Failed Bank List, accessed September 27, Chapter 3 - Purchase and Assumptions Transactions, Resolutions Handbook, Federal Deposit Insurance, Corporation, accessed September 27, Business Travel Report, September 15, 2009, National Business Travel Association, www2.nbta.org /Lists/.../Business%20Travel%20Report% pdf, accessed September 30, Report of the Independent Consultant A-37 October 22, 2010

94 2009, the manufacturing sector in the Air Trade Area employed approximately 47,400 workers, representing 9.3 percent of the total nonagricultural workforce (see Table II-9). This percentage is higher than in both the State of Washington and the U.S. where manufacturing jobs accounted for 7.8 percent and 7.6 percent of nonagricultural employment in 2009, respectively. The diversity of the Air Trade Area s economy extends to the manufacturing sector where businesses range from medical equipment, forest products, and food products, to fabricated metal, machinery, chemicals, boats, and marine equipment Government Data in Table II-9 show that government employment accounted for approximately 62,000 jobs in the Air Trade Area in 2009, representing 12.1 percent of total non-agricultural employment. This is significantly lower than the level of government employment in both the State of Washington (16.5 percent) and the U.S. (14.1 percent). The government sector in the Air Trade Area includes federal, state, provincial, county, and municipal employees. In 2009, the federal government employed approximately 3,000 civilians within the Air Trade Area across a variety of functions and agencies. Federal military employment in the Air Trade Area totaled approximately 9,700 in Major non-federal government employers within the State of Washington portion of Air Trade Area include Whatcom County, the City of Bellingham, Bellingham School District, and Ferndale School District. In the portion of the Air Trade Area located in Southern British Columbia, major government employers include the Canada Revenue Agency, Canada Post, the Royal Canadian Mounted Police, the City of Surrey, and Surrey School District Trade Approximately 88,500 workers were employed in wholesale and retail trade in the Air Trade Area in 2009, accounting for approximately 17.3 percent of non-agricultural employment (see Table II-9). In the State of Washington and the U.S., trade jobs accounted for approximately 13.6 percent and approximately 14.1 percent, respectively, of non-agricultural employment in As data in Table II-8 show, retail stores are a major employer in the Air Trade Area. Of the 88,500 trade workers in the Air Trade Area in 2009, approximately 76 percent were employed in retail establishments, while 24 percent worked in wholesale trade Services In 2009, 218,442 workers in the Air Trade Area were employed in the services sector. This accounted for 44.8 percent of total nonagricultural employment, the highest level among all of the Air Trade Area s employment sectors, and higher than in both the State of Washington and the U.S., where services accounted for 42.8 percent and 42.7 percent of nonagricultural employment, respectively. Employment in this sector totaled 195,762 in 2005 (see Table II-9). As the largest job sector in the Air Trade Area, the services industry employs workers in a wide range of subsectors that vary greatly in size. In 2009, 18 percent of the Air Trade Area s services workers were employed in leisure and hospitality, 26 percent were employed in health care and Whatcom, Skagit, Island and San Juan County Business Lists, InfoUSA, September 2010; British Columbia Manufacturing, accessed September 25, Report of the Independent Consultant A-38 October 22, 2010

95 percent were employed in professional, scientific and technical services. Other services sector categories include: education (12 percent of services workers); administrative and support services (8 percent); entertainment and recreation (five percent); information technology (three percent); management of enterprises (one percent); and other services (15 percent) Higher Education Employment in the education subsector is an important source of jobs in the Air Trade Area. In 2009, employment at educational institutions accounted for 12 percent of jobs in the services sector. Numerous public and private colleges and universities are located on both sides of the border in the Air Trade Area. These include: Western Washington University (Bellingham): Bellingham Technical College; Whatcom Community College; Northwest Indian College (Bellingham); Simon Fraser University (Surrey, BC); Kwantlen Polytechnic University (Langley and Surrey, BC); Trinity Western University (Langley, BC); and University of the Fraser Valley (Fraser Valley Regional District). 30 These institutions generate air travel demand through academic meetings and conferences, visiting professorships, study-abroad programs, and individual student and faculty travel Recreation and Tourism Tourism in the Air Trade Area provides a significant source of demand for air travel and employs many workers in the leisure and hospitality subsector. An overview of the Air Trade Area s recreational and visitor attractions is provided below. Visitors to the Air Trade Area can enjoy a diverse number of attractions and historic sites such as Clayburn Village and Trethewey House (Abbottsford, BC), Chilliwack Heritage Park, and Fort Langley National Historic Site, a Hudson s Bay trading post that was constructed in Other attractions include the San Juan Island National Historical Park, Bellingham Railway Museum, and the Peace Arch in Blaine (Whatcom County) which is located on I-5 at the international border and commemorates nearly 200 years of harmony between Canada and the U.S. There are numerous small towns and villages throughout the Air Trade Area that offer visitors quaint shopping districts with galleries, restaurants and entertainment such as Abbottsford, Chilliwack, and White Rock in British Columbia, as well as Bellingham, Roche Harbor (on San Juan Island), and Coupeville, Greenbank, and Oak Harbor (on Whidbey Island). The Air Trade Area has numerous golfing options that include a total of 62 public and private courses with 34 in Whatcom, Skagit, Island, and San Juan counties, and 28 courses in Southern British Columbia. Easy access to ski resorts is another Air Trade Area amenity. Mount Baker Ski Area is located approximately 38 miles east of the Airport, while the Whistler Blackcomb ski resort is located approximately 130 miles north of the Airport. The Air Trade Area offers travelers a scenic natural environment including North Cascades National Park in the State of Washington, and Chilliwack Lake Park, Manning Park and Bridal Veil Falls Park in Southern British Columbia. There are abundant recreational opportunities throughout the Air 30 College Navigator, National Center for Education Statistics, U.S. Department of Education, collegenavigator/, accessed September 28, 2010; Association of Universities Canada, index_e.html, accessed September 28, Report of the Independent Consultant A-39 October 22, 2010

96 Trade Area including hiking, pack trips and sea kayaking tours. Nature cruises through the San Juan Islands are popular with visitors and allow them to view orca whales, porpoises, harbor seals and other wildlife. 2.7 Economic Outlook In the wake of the December 2007-June 2009 recession, the U.S. economy is experiencing weaknesses in housing construction, consumer spending and business investment, as well as relatively high unemployment rates and low GDP growth. 31 The most recently published surveys of leading economists by Blue Chip Economic Indicators and the National Association for Business Economics (NABE) indicate consensus for a modest rebound in national real GDP growth by the end of Both forecast panels also project that an annual unemployment rate of 9.6 percent in the U.S. in The Blue Chip Economic Indicators forecast expects moderate economic recovery in 2010 with annual GDP growth of 2.7 percent. NABE is more optimistic, forecasting a rate of 3.2 percent in annual GDP growth in Similar to forecasts from NABE and Blue Chip Economic Indicators, a recent report from the Business Council of British Columbia projects that British Columbia s economic growth will be subdued in 2010 as the province feels the effects of weak economic growth in the U.S. and Europe. In 2010, the Business Council of British Columbia forecasts moderate economic growth for the province of 3.5 percent. 33 While job creation is expected to occur in some sectors, this employment growth is not expected to be sufficient to produce a rapid fall in the province s unemployment rate which was 7.3 percent (seasonally adjusted) in August 2010 (latest data available Building Permits - States and Metro Areas, National Association of Homebuilders, reference_list.aspx?sectionid=130, accessed October 1, 2010; Table 2.1. Personal Income and Its Disposition, Bureau of Economic Analysis, accessed October 1, 2010; Table Contributions to Percent Change in Real Private Fixed Investment by Type and Table 5.6.6B. Change in Real Private Inventories by Industry, Chained Dollars, Bureau of Economic Analysis, TableView.asp, accessed October 1, 2010; Labor Force Statistics from the Current Population Survey, Bureau of Labor Statistics, accessed October 1, 2010; Table Percent Change From Preceding Period in Real Gross Domestic Product, Bureau of Economic Analysis, nipaweb/tableview.asp, accessed October 1, Blue Chip Economic Indicators, Vol. 35, No. 9, September 10, 2010, Aspen Publishers; NABE Outlook, May 2010, National Association for Business Economics. Mid-Year Economic Update, July 2010, Business Council of British Columbia. Labour Force Characteristics By Province, Statistics Canada, accessed October 1, Report of the Independent Consultant A-40 October 22, 2010

97 III. Air Traffic This chapter describes historical and projected aviation activities at the Airport and discusses key factors affecting trends in these activities. Specifically, this chapter addresses the airlines serving the Airport, historical aviation activity, factors affecting aviation demand, and projected activity at the Airport. 3.1 Role of the Airport The role of the Airport has changed dramatically in the last decade. The Airport has experienced expanded commercial service which lowered fares, resulting in an increase of local demand as well as increased demand from Canada. The Airport provides a low-cost alternative for Canadian travelers traveling to U.S. destinations. The Airport s passenger traffic has more than quintupled since 2003, reaching 329,392 passengers in 2009, primarily due to new flights from Alaska and low-cost carrier Allegiant Air. Whereas the terminal s capacity is approximately 9,000 passengers a month, the Airport accommodated nearly 41,500 passengers in July As a result of this significant growth, the Port Commission recently approved the terminal expansion that will triple the size of the terminal space with a capacity greater than 500,000 passengers a year. The Airport is currently on track to accommodate approximately 400,000 passengers this year and should continue to grow with Alaska initiating flights from the Airport to Honolulu in January In addition, it is expected that Allegiant Air will soon announce plans to serve Hawaii from the Airport either late this year or early next year. Historically, commercial passenger service at the Airport was provided by regional/commuter carriers. Regional/commuter carriers offered service to hub airports connecting passengers to their destinations and charter/unscheduled carriers provided the occasional service to selected low-volume destinations. As stated earlier, commercial service expansion started in 2003 and has continued through As a result, the Airport has become an attractive alternative located between two major airports, Seattle-Tacoma International (approximately 100 miles south of the Airport) and Vancouver International Airport (approximately 40 miles north of the Airport). General aviation activity (including air taxi) has been the majority of total operations at the Airport. There are 10 U.S. airports providing general aviation facilities located within a 50-mile radius of the Airport. Of these facilities, only two have the facilities (runway length and navigational aids) to accommodate business jets. The Airport will continue to serve the Northwest Washington general aviation community and be a primary airport for the corporate aviation sector of the region. 3.2 Airlines Serving the Airport As of September 2010, the Airport had passenger service provided by 11 U.S. carriers. Scheduled service at the Airport is provided by three of the nation s 15 major U.S. passenger airlines 1. Major passenger airlines currently providing scheduled service at the Airport include Alaska, Allegiant, and Horizon. Additionally the following eight carriers provide charter/unscheduled service to the Airport: Bellingham Air Taxi, Casino Express, Harbor Air, Island Air, Northwestern Sky Ferry, Rite Brothers, Sun Country, and West Isle Air. Table III-1 lists the airlines serving the Airport as of 1 As defined by the U.S. DOT, major U.S. airlines are airlines with gross operating revenues during any calendar year of more than $1 billion. (US DOT issue date November 13, 2009 and effective January 1, 2010). Report of the Independent Consultant A-41 October 22, 2010

98 Table III-1 Airlines Serving the Airport 1/ Scheduled Carrier (3) Charter/Unscheduled Carrier (8) All-Cargo Airlines (2) Alaska 2/ Bellingham Air Taxi FedEx Allegiant 2/ Casino Express AmeriFlight Horizon 2/ Harbor Air Island Air Northwestern Sky Ferry Rite Brothers Sun Country West Isle Air Notes: 1/ Includes charter, seasonal, and Part 135 passenger carriers providing (or have provided) service YTD 2010 (Jan - Aug). 2/ Scheduled passenger carriers as of September Source:, September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant A-42 October 22, 2010

99 September All-cargo carriers AmeriFlight and FedEx provide feeder cargo service to the Airport with Beechcraft and Cessna Caravans aircraft. Table III-2 presents the historical air carrier base at the Airport since Specific points concerning the Airport s historical air carrier base are presented below: Horizon, an Alaska Carrier, has served the Airport each of the last 10 years including each year since it initiated service at the Airport in Horizon provides daily nonstop service to Seattle. The Bombardier Q-400 (formerly known as the de Havilland Dash 8) has been the primary aircraft operated by Horizon at the Airport. Casino Express, a charter/unscheduled passenger carrier, has operated at the Airport each of the past 10 years. Casino Express has provided service to different markets in the past years, but has primarily provided charter service to Elko, Nevada and Wendover, Utah. Casino Express operates Boeing 737 aircraft at the Airport. West Isle Air is a commuter carrier that has operated at the Airport for each of the last 10 years including each year since it initiated service at the Airport in West Isle Air provides service to Eastbound and Friday Harbor, Washington. West Isle Air operates the Cessna Stationair aircraft. Leisure carrier Allegiant initiated service at the Airport in 2002 with nonstop service to Las Vegas. Since 2002, Allegiant has continued to expand its operations at the Airport. The carrier has added destinations primarily along the west coast and in the southwest U.S. (discussed later in this chapter). Allegiant operates McDonnell Douglas MD-80 aircraft at the Airport. Allegiant recently acquired two Boeing 757 aircraft and has announced that it will acquire four additional Boeing 757 aircraft over the next two years. Alaska started operations at the Airport in 2009 with service to Las Vegas. Alaska operates the Boeing 737 on this route. Alaska has announced plans to introduce service to Hawaii in January 2011 using the same aircraft type. Other scheduled passenger carriers, namely SkyWest and Skybus, previously provided service at the Airport. SkyWest was a regional/commuter carrier for United in 2000 and From 2006 to 2008, SkyWest provided regional commuter service for Delta. Skybus operated at the Airport in 2007 and Skybus ceased all operations in April Historical Passenger Activity This section presents historical trends in enplaned passengers at the Airport and the major factors influencing these trends, as well as historical market shares of enplanements by airline Enplaned Passengers The Airport is classified by the FAA as a nonhub primary airport based on its percentage of nationwide enplanements. 2 Table III-3 presents historical enplanements for the Airport between 1999 and As shown, passenger activity at the Airport decreased from 1999 to 2003 at CAGR of 7.4 percent. From 2003 to 2009, the Airport experienced a significant increase in enplanements when compared to the nation and the FAA s Northwest Mountain Region. From 2003 to 2009, Airport enplanements increased from 68,448 to 329,392 or a CAGR of 29.9 percent. Over the same 2 As defined by the FAA, a nonhub primary airport enplanes more than 10,000 but less than 0.05 percent annual of nationwide enplanements during a calendar year. This percentage range of nationwide enplanements equates to 10,000 to 348,150 passengers in CY 2009, the latest calendar year for determining airport hub size. Report of the Independent Consultant A-43 October 22, 2010

100 Table III-2 Passenger Air Carrier Base Airline / Number of Air Carriers Casino Express (Xtra Airways) Horizon Island Air Rite Bros Aviation West Isle Air Allegiant Sun Country (Minnesota Airlines) Northwestern Sky Ferry Alaska Air Bellingham Air Taxi Harbor Air Carriers No Longer Serving the Airport Sky West (Delta) Skybus SkyQuest Charters Planet SkyWest (United) Sun West Int'l/Sierra Pacific Airlines Notes: 1/ Includes charter, seasonal, and Part 135 passenger carriers providing (or have provided) service YTD 2010 (Jan - Aug). Source:, September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant October 22, 2010 A-44

101 Table III-3 Historical Enplaned Passengers Calendar Year Airport Enplaned Passengers Annual Growth Rate U.S. Enplaned Passengers 1/ Annual Growth Rate Airport Share of U.S. ANM Enplaned Annual Passengers 2/ Growth Rate Airport Share of ANM , ,525, % 56,522, % , % 704,848, % 0.016% 57,090, % 0.200% ,867 (17.6%) 693,148,020 (1.7%) 0.014% 56,349,274 (1.3%) 0.167% ,829 (23.5%) 627,651,689 (9.4%) 0.011% 51,983,741 (7.7%) 0.138% ,448 (4.7%) 643,225, % 0.011% 53,387, % 0.128% , % 690,968, % 0.012% 57,352, % 0.148% , % 733,406, % 0.014% 60,896, % 0.169% , % 732,886,752 (0.1%) 0.019% 63,436, % 0.217% , % 756,525, % 0.032% 66,185, % 0.361% , % 746,909,759 (1.3%) 0.038% 67,660, % 0.415% , % 689,323,986 3/ (7.7%) 0.048% 63,323,628 3/ (6.4%) 0.520% YTD (Jan - Aug) , , % Compounded Annual Growth Rate % 0.2% 1.1% (7.4%) (1.2%) (1.4%) % 1.2% 2.9% Note: 1/ FAA Terminal Area Forecast Data. 2/ Included the FAA's Northwest Mountain Region (Colorado, Idaho, Montana,Oregon, Utah, Washington, and Wyoming) 3/ Forecast by the FAA. Sources: (Airport activity); FAA (U.S. activity), September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant October 22, 2010 A-45

102 period, enplanements for the nation and Northwest Region increased at 1.2 and 2.9 percent respectively. Specific details concerning enplaned passengers at the Airport between 2000 and 2010 year-to-date (YTD) are discussed below: Enplaned passengers increased 22.4 percent in 2000 from 1999 levels, primarily due to expanded service by Casino Express, a charter carrier. Horizon s enplaned passenger increased 8.7 percent from 1999 to From 2001 through 2003, enplaned passengers at the Airport decreased each year. In late 2001, United Express ceased service at the Airport due to the events of September 11. In 2001, United Express accounted for 20,489 enplanements or 21.8 percent of total Airport enplanements. Overall, the effects of September 11 and the economic slowdown resulted in enplaned passengers decreasing 17.6 percent in 2001 from 2000 levels. During the same period, Casino Express enplanements decreased from 17,836 to 650. This decrease in passengers, at the Airport extended through 2002, in which annual enplanements were 23.5 percent below 2001 levels, primarily due the exit of United Express. In 2003, Airport enplanements decreased 4.7 percent from 2002 levels Enplaned passengers at the Airport increased 23.6 percent in 2004 from 2003 levels. This significant growth was attributed to Allegiant which introduced four weekly flights to Las Vegas in August Enplanements continued to increase from 84,625 in 2004 to 103,212 in The increase was due to a full year of Allegiant service to Las Vegas and increased enplanements by Horizon Total Airport enplanements increased from 137,716 passengers in 2006 to 280,461 in 2008, a CAGR of 42.7 percent. In 2006, Allegiant continued to expand service at the Airport with additional flights to Las Vegas. Airport enplanements increased 73.7 percent in 2007 from 2006 levels. In 2007, low cost carrier Skybus initiated service at the Airport and enplaned 23,401 passengers as Allegiant expanded service. Allegiant continued to add service to Las Vegas, Reno, and Palm Springs. Delta Connection initiated service at the Airport in 2006 with regional jet service to Denver. In 2006, Delta Connection enplaned 15,356 or 11.2 percent of total Airport enplanements. Delta Connection continued to operate at the Airport until 2008, when the service was discontinued. From 2007 to 2008, Airport enplanements increased 17.3 percent. This increase was the result of Allegiant s continued expansion with additional flights to Las Vegas, Reno, and Palm Springs. In 2008, Allegiant introduced new service to Phoenix, San Diego, and San Francisco Enplanements at the Airport increased 17.4 percent in 2009, their highest passenger level on record to date. Allegiant continued to expand its current service and introduced new service in Las Vegas, Palm Springs, Phoenix, and San Diego experienced additional service and new service was introduced to Los Angeles and Oakland. San Francisco service was discontinued as a result of new service to Oakland, and Reno service was reduced. Horizon, an Alaska Carrier, continued to service Seattle. In addition to the Seattle service, new mainline service by Alaska to Las Vegas was initiated in YTD (Jan Aug). YTD enplanements at the Airport have increased 29.1 percent in 2010 compared to the same period in The new and expanded service that was introduced in 2009 has been maintained in According to the Official Airline Guide (OAG), scheduled departing seats in the last four months of 2010 total approximately Report of the Independent Consultant A-46 October 22, 2010

103 130,100. Over the same period in 2009, the Airport had 123,775 departing seats by scheduled carriers Enplaned Passengers by Airline Service at the Airport has historically been provided by leisure and regional/commuter carriers. In 2009, Alaska initiated mainline service at the Airport. Table III-4 presents the historical share of enplanements by airline/airline grouping at the Airport between 2005 and As shown, enplanements are spread over a number of carriers, but the majority of enplanements are provided by two carriers. Specific points regarding airline market shares of enplanements at the Airport are discussed below: Allegiant, the largest carrier based on enplanements, enplaned 65.0 percent of total Airport passengers in In 2008, Allegiant became the largest carrier based on enplanements. Allegiant s market share of total Airport enplanements has increased from 27.6 percent in 2005 to 65.0 percent in Alaska Carriers (includes Alaska mainline service and Horizon) had the highest share of enplaned passengers at the Airport from 2005 through From 2005 to 2009, Alaska Carriers market share of enplaned passengers decreased from 66.2 percent to 32.4 percent. From 2005 through 2009, Alaska Carriers and Allegiant combined market share of Airport enplanements have ranged from 77.0 percent in 2007 to 97.3 percent in In 2007, Delta Carriers and Skybus accounted for 9.2 and 9.8 percent of Airport enplanements, respectively. Both carriers discontinued service in Other Carriers (excluding Alaska Carriers and Allegiant) accounted for 2.6 percent of Airport enplanements in Casino Express enplanements have ranged from 1.1 to 2.4 percent of total Airport enplanements between 2005 and Over the same period, West Isle Air enplanements have ranged from 0.7 percent to 1.6 percent. 3.4 Historical Air Service An important airport characteristic is the distribution of its origin-destination (O&D) markets, which is a function of air travel demands and available services and facilities. This is particularly true for the Airport, as it serves primarily O&D passengers. Table III-5 presents historical data on the Airport s primary O&D markets. As shown, the Airport served primarily short- and medium-haul markets in the periods depicted, with an average stage length (i.e., passenger trip distance) of 932 miles in The Airport s average stage length during these periods reflect the Airport s geographical location and strong local demand for the West Coast market, as well as other Southwest and Rocky Mountain markets (i.e., Boise, Denver, Phoenix, Palm Springs, and Spokane). Annual O&D passenger levels at the Airport were approximately 628,330 total passengers in Between 2004 and 2009, total O&D passengers for the Las Vegas market increased by nearly 10 times. This increase is attributed to new service by Allegiant. Over the same period, total O&D passengers also increased significantly in the Los Angeles, Oakland, Palm Springs, Phoenix, and San Diego due to Allegiant s increased service at the Airport. As a tourism and leisure travel dominated market, air carrier service at the Airport experiences daily fluctuations and daily service is typically not provided to all markets. Table III-6 presents the Airport s weekly scheduled nonstop markets as of September 26 through October 2, Daily nonstop service is provided to the Airport s largest O&D markets; Las Vegas (Allegiant and Alaska). Report of the Independent Consultant A-47 October 22, 2010

104 Table III-4 Historical Enplaned Passengers by Airline Rank in 2009 Airline Enplaned Passengers Share Enplaned Passengers Share Enplaned Passengers Share Enplaned Passengers Share Enplaned Passengers Share 1 Allegiant 28, % 43, % 85, % 169, % 213, % 2 Alaska Carriers 1/ 68, % 72, % 99, % 96, % 106, % 3 Casino Express 2, % 2, % 5, % 4, % 3, % 4 West Isle Air 1, % 2, % 2, % 3, % 2, % 5 Sun Country - 0.0% - 0.0% - 0.0% - 0.0% 1, % 6 Northwestern Sky Ferry - 0.0% - 0.0% - 0.0% 1, % 1, % 7 Island Air 1, % 1, % % % % 8 Rite Bros Aviation % % % % % 9 Skybus - 0.0% - 0.0% 23, % % - 0.0% 10 Delta Carriers 2/ - 0.0% 15, % 22, % 4, % - 0.0% Other 1, % % - 0.0% - 0.0% - 0.0% Airport Total 103, % 137, % 239, % 280, % 329, % Note: 1/ Includes data for Alaska and Horizon. 2/ Includes data for SkyWest. Source:, September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant October 22, 2010 A-48

105 Table III-5 Primary Domestic O&D Passenger Markets Rank Market Stage Length 1/ Total Domestic O&D Passengers Average One-Way Fare Yield Per Coupon Mile Rank Market Nonstop Stage Service 2/ Length 1/ Total Domestic O&D Passengers Average One-Way Fare Yield Per Coupon Mile 1 Las Vegas MH 25,660 $102 $ Las Vegas MH 255,290 $85 $ Seattle SH 11,320 $82 $ Phoenix 3/ MH 54,190 $102 $ Phoenix MH 6,710 $132 $ Palm Springs MH 49,140 $95 $ Sacramento MH 5,770 $124 $ San Diego MH 45,120 $88 $ San Diego MH 5,760 $147 $ Oakland MH 41,200 $69 $ Los Angeles MH 5,710 $148 $ Los Angeles MH 40,690 $89 $ Oakland MH 5,660 $117 $ Reno MH 12,990 $60 $ Santa Ana MH 5,430 $153 $ Seattle SH 12,170 $66 $ Portland, OR SH 4,520 $137 $ San Francisco MH 7,040 $101 $ San Jose MH 4,470 $121 $ Santa Ana MH 6,950 $133 $ Friday Harbor SH 3,920 $20 $ Sacramento MH 5,870 $148 $ Anchorage MH 3,780 $182 $ Spokane SH 5,330 $104 $ Denver MH 3,510 $148 $ Portland, OR SH 5,270 $125 $ San Francisco MH 3,360 $125 $ Anchorage MH 4,620 $199 $ Spokane SH 3,090 $123 $ Denver MH 4,370 $152 $ Ontario MH 2,730 $149 $ San Jose MH 3,910 $124 $ Reno MH 2,580 $108 $ Chicago 4/ MH 3,300 $205 $ Burbank MH 2,270 $131 $ Boise MH 2,880 $113 $ Eastsound SH 2,050 $20 $ Burbank MH 2,710 $136 $ Palm Springs MH 1,960 $141 $ Ontario MH 2,590 $156 $0.148 Other Markets 44,150 Other Markets 62,700 Total 154,410 Total 628,330 Airport 5/ 961 $139 $0.138 Airport 5/ 932 $102 $0.099 United States $138 $0.120 United States $152 $0.132 Notes: 1/ (SH) Short Haul = 0 to 600 miles (MH) Medium Haul = 601 to 1,800 miles (LH) Long Haul = over 1,800 miles 2/ Nonstop markets as of the week September 26 - October 2, / Includes Sky Harbor International (PHX) and Williams Gateway (AZA) Airports. 4/ Includes Midway (MDW) and O'Hare (ORD) Airports. 5/ Average calculated for all of the Airport's O&D markets. Source: Official Airline Guide (OAG), O&D Survey of Airline Passenger Traffic, U.S. DOT; September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant October 22, 2010 A-49

106 Table III-6 Nonstop Markets Market Weekly Nonstop Flights Number of Airlines Airline(s) Las Vegas 34 2 Allegiant - 28, Alaska - 6 Los Angeles 2 1 Allegiant Long Beach 3 1 Allegiant Oakland 3 1 Allegiant Phoenix 2 1 Allegiant Palm Springs 2 1 Allegiant San Diego 2 1 Allegiant Seattle 41 1 Alaska (Horizon) Total 89 Source: Official Airline Guide, Inc. (Week of September 26 - October 2, 2010). Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant A-50 October 22, 2010

107 Allegiant provides three weekly flights to Long Beach and Oakland and two weekly flights to Los Angeles, Phoenix, Palm Springs, and San Diego. Alaska Carriers offer 41 weekly flights to Seattle. 3.5 Historical Aircraft Operations and Landed Weight This section presents historical aircraft operations (takeoffs or landings) by major user category at the Airport, as well as historical landed weight by passenger airlines Aircraft Operations Table III-7 presents historical aircraft operations at the Airport by major user category between 2004 and Total aircraft operations at the Airport have decreased from 81,621 in 2004 to 67,192 in 2009, a compounded annual decrease of 3.8 percent. Specific points concerning trends in operational activity by major user category at the Airport are discussed below: Mainline. Mainline operations are based on aircraft with more than 99 seats. This category includes scheduled and charter/unscheduled carriers. From 2004 to 2009, operations have increased from 160 to 3,344, a CAGR of 83.7 percent. During this period Allegiant has continued to expand service operating their MD-80 aircraft and Alaska s mainline operations are provided by the Boeing 737 series aircraft, which began in Regionals/Commuters. Regionals/commuters are passenger air carriers having the majority of its scheduled and/or nonscheduled service using aircraft with 99 seats or less. Regional/commuter activity decreased from 8,604 operations in 2004 to 5,998 in 2009 (a compounded annual decrease of 6.6 percent). From 2004 through 2008, regional/commuter operations average approximately 8,000 per year. Regional/commuter operations decreased in 2009 to 5,998 as Horizon reduced regional/commuter operations and Alaska expanded mainline service, as noted earlier. In 2008, Alaska Carriers operated 4,158 flights (all regional/commuter) and by 2009 Alaska Carriers operated 3,902 flights (5.2 percent mainline and 94.8 percent regional/commuter). Delta Carriers operated 234 flights in 2008 and none in 2009, contributing to the decline in All-Cargo. This category includes activity by all-cargo operations by AmeriFlight and FedEx feeder aircraft. Operations by all-cargo carriers have increased from 2,670 in 2004 to 2,684 in 2009; this increase represents a CAGR of 0.1 percent. All-cargo operations have remained stable and have averaged 2,680 operations over the past five years. General Aviation. Activity by this user decreased from 2004 through 2009, experiencing a compounded annual decrease of 6.0 percent during this period. As fixed based aircraft have remained consistent over the past five years, the decrease in activity can be partial attributed to the increase cost of operating aircraft (i.e. fuel cost increases) and the economic downturn in the past years. General aviation operations in 2010 YTD (Jan-Jul) decreased to 26,574 from 28,227 over the same period in This represents a decrease of 5.9 percent. Other Air Taxi. This category includes activity by for-hire charters, fixed base operators, and other miscellaneous operators. Operations have increased from 4,964 in 2004 to 7,430 in 2009; this increase represents a CAGR of 8.4 percent. Military. Military activity at the Airport has decreased from 1,485 operations in 2004 to 755 in 2009; this represents an average annual decrease of 12.7 percent. In 2008, military operations declined to 610 operations from 1,224 operations in 2007, a decrease of 50.2 percent. In 2009, military operations increased to 755 or 23.8 percent from 2008 levels. Military activity in this category has more than doubled in 2010 YTD (Jan Jul) compared to the same period in Nearby Naval Air Station Whidbey Island uses the Airport to train Report of the Independent Consultant A-51 October 22, 2010

108 Table III-7 Historical Aircraft Operations Year Mainline 1/ Regional / Commuters 2/ Airline Total All-Cargo General Aviation Air Taxi 3/ Military Total ,444 8,604 2,670 63,898 4,964 1,485 81, ,614 8,092 2,690 66,876 5,587 1,688 84, ,000 8,644 2,670 54,319 7,001 1,431 74, ,168 7,924 10,092 2,712 50,632 9,616 1,224 74, ,500 7,916 10,416 2,662 43,277 7, , ,344 5,998 9,342 2,684 46,981 7, ,192 YTD (Jan -Aug) ,278 5,798 8,076 1,710 33,793 3, , ,042 5,338 8,380 1,728 31,801 4,082 1,084 47,075 Compounded Annual Growth Rate % -6.6% 1.7% 0.1% -6.0% 8.4% -12.7% -3.8% YTD % -7.9% 3.8% 1.1% -5.9% 6.4% 111.3% -1.8% Note: 1/ Includes scheduled and charter operations on aircraft greater than 99 seats. 2/ Includes scheduled and charter operations by aircraft equal to or less than 99 seats. 3/ Includes air taxi operations not reporting passengers or landings to the Port. Source: FAA Air Traffic Activity Data System (ATADS),, September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant October 22, 2010 A-52

109 pilots. Units deployed overseas have recently returned to Whidbey and as a result continued training has led to the recent increase in military activity Landed Weight by Airline Table III-8 presents the historical share of landed weight by passenger airlines at the Airport between 2005 and As shown, Alaska Carriers and Allegiant, currently the largest carriers in terms of enplaned passengers, also had the highest shares of landed weight at the Airport with a combined share of 92.7 percent in Allegiant was the largest carrier with 57.9 percent of total Airport landed weight in Alaska Carriers share of landed weight has decreased from 61.6 percent in 2005 to 34.8 percent in 2009; however, Alaska Carrier s landed weight in pounds increased from 88,320 thousand pounds in 2005 to 128,775 thousand pounds in 2009, an increase of 45.8 percent during this period. All-Cargo carriers, AmeriFlight and FedEx, landed weight has remained fairly stable from 2005 to 2009 ranging from 16,214 thousand pounds to 16,597 thousand pounds. In 2009, All-Cargo carriers landed weight represented 4.4 percent of total Airport landed weight or 16,364 thousand pounds. All other airlines operating at the Airport each accounted for less than 3.0 percent of the Airport s total annual landed weight in Factors Affecting Aviation Demand and the Airline Industry This section discusses qualitative factors that could influence future aviation activity at the Airport National Economy Air travel demand is directly correlated to consumer income and business profits. As consumer income and business profits increase, so does demand for air travel. In 2008, the combination of declines in construction activity, losses in housing-related securities, rising oil prices and a falling stock market eventually tipped the economy into recession. The nation s non-seasonally adjusted unemployment rate rose from 5.4 percent in January 2008 to 10.6 percent in January 2010, the highest rate since March The nation s non-seasonally adjusted unemployment rate was 9.6 percent in August U.S. GDP remained positive or slightly negative for the first three quarters of 2008, before entering a sharp decline of 5.4 percent in the fourth quarter of U.S. GDP continued to decrease through the second quarter of 2009, followed by an increase of 2.2 percent, 5.6 percent, and 3.0 percent from the third quarter of 2009 to the first quarter of The rise in real GDP in recent quarters reflects stronger consumer spending compared to previous quarters. According to the latest projection from the Congressional Budget Office (CBO), U.S. GDP is projected to grow by 1.7 percent in 2010, by 3.5 percent in 2011, and by an average of 4.7 percent in 2012 and If the economic downturn continues or worsens (e.g., double-dip recession), aviation demand nationwide will be negatively impacted State of the Airline Industry Following the restructuring years after the events of September 11, the airline industry finally gained ground in 2007 with virtually every U.S. airline posting profits. In 2007, the major airlines had managed to restrain capacity in a growing economy. In 2008 and through the first half of 2009, the combination of record high fuel prices, weakening economic conditions, and a weak dollar resulted in the worst financial environment for U.S. network and low-cost carriers since the September 11 th terrorist attacks. In 2008, many of the domestic network competitors announced significant capacity reductions, increases in fuel surcharges, fares and fees, and other measures to address the challenges. 3 Source: Congressional Budget Office, The Budget and Economic Outlook: An Update, available online at last accessed in April Report of the Independent Consultant A-53 October 22, 2010

110 Table III-8 Historical Landed Weight by Airline (000's pounds) Rank in 2009 Airline Landed Weight Share Landed Weight Share Landed Weight Share Landed Weight Share Landed Weight Share 1 Allegiant 30, % 41, % 94, % 172, % 214, % 2 Alaska Carriers 1/ 88, % 95, % 92, % 127, % 128, % 3 AmeriFlight 10, % 10, % 10, % 10, % 10, % 4 FedEx 6, % 6, % 6, % 6, % 6, % 5 Casino Express 2, % 3, % 5, % 4, % 3, % 6 West Isle Air 2, % 3, % 5, % 5, % 3, % 7 Sun Country - 0.0% - 0.0% - 0.0% - 0.0% 1, % 8 Northwestern Sky Ferry - 0.0% - 0.0% % 1, % 1, % 9 Island Air 1, % 1, % 1, % % % 10 Rite Bros Aviation % % - 0.0% % % 11 Skybus - 0.0% - 0.0% 48, % % - 0.0% 12 Delta Carriers 2/ - 0.0% 18, % 31, % 5, % - 0.0% Other 1, % % - 0.0% - 0.0% - 0.0% Airport Total 143, % 180, % 296, % 334, % 370, % Note: 1/ Includes data for Alaska and Horizon. 2/ Includes data for SkyWest. Source:, September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant October 22, 2010 A-54

111 In the aftermath of the events of September 11, the U.S. airline industry saw a material adverse shift in the demand for air travel. The result was five years of reported industry operating losses, totaling more than $28 billion dollars (excluding extraordinary charges and gains). Whereas the capacity reductions following the events of September 11 were the direct results of terror threats targeting the traveling public, the industry reductions starting in late 2008 and continuing through the first half of 2009 were primarily driven by significant increases in fuel costs over a span of two and a half years, a weak dollar exacerbating the impact of increased fuel costs for U.S. airlines, and the contraction of the U.S. economy. After nearly $10 billion losses in 2009, the International Air Transport Association (IATA) predicts a $2.5 billion profit for the global industry in Globally, passenger traffic is forecast to rise 7.1 percent in Even though recovery is uneven across different regions, North American airlines profits are projected by the Air Transport Association (ATA) to be $1.9 billion in Cost of Aviation Fuel The price of fuel is the most significant force affecting the airline industry today. The average price of jet fuel was $0.82 per gallon in 2000 compared to $3.07 per gallon in 2008, an increase of 275 percent. The average price of jet fuel decreased to $1.90 per gallon in 2009; however, this cost still represents an increase of 132 percent from 2000 prices. The average price of jet fuel was $2.20 per gallon in March According to the ATA, every one-cent increase in the price per gallon of jet fuel increases annual airline operating expenses by approximately $190 million to $200 million. According to the ATA, U.S. airline fuel expense increased from $16.4 billion in 2000 to $32.3 billion in 2009, a CAGR of 7.8 percent during this period. The most significant annual increase in U.S. fuel expense during this period occurred in 2008, when fuel expenses increased from $41.9 billion in 2007 to $57.8 billion in 2008, a 37.9 percent increase. On July 11, 2008, oil prices rose to a new record of $147 per barrel following concerns over Iranian missile testing. During the remaining months of 2008 oil prices declined from their July peak and closed out the year at an average of approximately $40 per barrel (December 2008). Exhibit III-1 shows the monthly averages of jet fuel and crude oil prices from January 2007 through June Exhibit III-1 Historical Monthly Averages of Jet Fuel and Crude Oil Prices $160 $140 $120 Average Crude Oil Prices Average Jet Fuel Prices $4.50 $4.00 $3.50 Crude Oil Price/Gallon $100 $80 $60 $40 $3.00 $2.50 $2.00 $1.50 $1.00 Jet Fule Price/Gallon $20 $0.50 $0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 $0.00 Month - Year Source: Air Transport Association (ATA), May Prepared by: Ricondo & Associates, Inc., May Report of the Independent Consultant A-55 October 22, 2010

112 In 1999, jet fuel accounted for nearly 10 percent of an airline's operating expenses and, historically, fuel expense was the second highest operating expense for an airline behind labor. More recently, jet fuel surpassed labor as an airline s largest operating expense, according to the ATA. In 2008, fuel comprised approximately 30.6 percent of an airline s total operating costs while labor represented approximately 20.3 percent of the total. As oil prices fell in the first quarter of 2009, fuel expenses retreated and labor once again became the airlines largest operating expense representing 25.8 percent of total operating expenses while fuel was at 21.3 percent. In the first quarter of 2010, fuel comprised approximately 23.5 percent of an airline s total operating costs while labor represented approximately 25.4 percent of the total. Despite the decreases in jet fuel prices between August 2008 and December 2008, the airlines still followed through on plans to curtail capacity in the weak economy. If jet fuel prices approach or surpass their mid-2008 peak, aviation demand nationwide may be negatively impacted due to higher ticket prices or potential route reductions the airlines would be required to charge to remain profitable Threat of Terrorism As has been the case since the events of September 11, the recurrence of terrorism incidents against either domestic or world aviation during the Projection Period remains a risk to achieving the activity projections contained herein. Any terrorist incident aimed at aviation would have an immediate and significant adverse impact on the demand for aviation services Other Factors Affecting the Airport Due to the location of the Airport, Southern British Columbia s economy and trade relations with the U.S. are factors affecting aviation demand at the Airport. Passenger traffic at the Airport has been influenced by the U.S. dollar (USD) and Canadian dollar (CAD) exchange rate that has been favorable to the CAD. Between January 1, 2004 and December 31, 2009, the value of the USD declined against the CAD at an annual rate of 10.6 percent. In 2004, the average exchange rate for the USD was CAD$1.30; in 2009, the average exchange rate for the USD was CAD$ This decline in the value of the USD compared to the CAD has provided air carriers operating out of the Airport with a price advantage compared to similar flights operating out of airports in Canada such as Vancouver International Airport. Any significant change in trade relations and economic conditions in Canada would have an impact on demand at the Airport. Located along the Canadian border, the Port benefits from a diverse economy and serves as a regional trade center, with retail activity drawing demand from northern Washington and British Columbia. Most of this trade passes through the Cascade Gateway, the set of four border crossings at or near the northern end of the I-5 corridor. The Cascade Gateway includes the third busiest passenger vehicle crossing along the U.S.-Canada border, and the fourth busiest commercial crossing. Over 21,000 cars and over 2,500 trucks cross through the Cascade Gateway every day, carrying over $40 million (USD) in daily trade. 5 In 2009, U.S. and Canadian exports at Pacific Highway alone exceeded $12.3 billion. 6 According to Port staff, and based on parking lot observations and discussions with the airlines serving the Airport, approximately 50 to 55 percent of passenger traffic at the Airport is Canadian. As discussed earlier in Chapter II (Economic Base for Air Transportation), residents of the Air Trade Area, both in Southern British Columbia and the State of Washington, are eligible to join the Historical exchange rates, OANDA Services, accessed October 9, Whatcom Council of Governments. U.S. Department of Transportation, Bureau of Transportation Statistics. Report of the Independent Consultant A-56 October 22, 2010

113 NEXUS program to facilitate border crossing. The Air Trade Area has two border crossings with NEXUS privileges at the Cascade Gateway, each border crossing approximately 35 driving miles north of the Airport. Data from the 2008 International Mobility and Trade Corridor Project Passenger Intercept Survey indicates that regional cross-border travelers cross frequently. According to this survey, approximately 24 percent of all travelers cross the U.S.-Canada border at least once a week. 3.7 Projections of Aviation Demand Projections of aviation demand were analyzed on the basis of local socioeconomic and demographic factors, the Airport s historical shares of U.S. enplanements, and anticipated trends in air carrier usage of the Airport. The resultant projections were based on a number of underlying assumptions, including: Most components of activity at the Airport have remained stable or have increased in the recent economic slowdown. As a result, long-term activity at the Airport will increase as a result of population growth, tourism demand, and continued strong economic conditions in the Air Trade Area. The importance of the Air Trade Area s tourism industry is expected to continue through the projection period. Tourist traffic will continue to be a key component of Airport activity. Low-fare, seasonal, and charter service will continue to be an important component of air service at the Airport, providing continued increases in passenger air travel demand during the projection period. High fuel prices are likely to have an adverse impact on airline profitability, as well as hamper the recovery plans and cost-cutting efforts of certain airlines. Higher fuel prices may cause changes in air service at the Airport. Airline consolidation/mergers, excluding Allegiant, which may occur during the projection period, are not likely to negatively impact passenger activity levels at the Airport. New airline alliances, should they develop, will be restricted to code sharing and joint frequent flyer programs, and will not reduce airline competition at the Airport. Allegiant will continue to operate, base crew, and plans to expand service at the Airport due to the following: - Allegiant has been approved to install a second fuel tank (25,000 gallon) and expand the existing fuel farm. Installation of the second tank is scheduled to be completed in October 2010 and the fuel farm expansion in Allegiant s approved plans to construct a maintenance and onboard food service facility. - Allegiant s announcement of adding Boeing 757 aircraft to their fleet. Allegiant currently has four flight crews stationed at the Airport, and expects to grow to as many as seven flight crews stationed at the Airport by mid-2011.for these analyses, and similar to the FAA's nationwide projections, it is assumed that there will not be terrorist incidents against either domestic or world aviation during the projection period. Relations, trade, and exchange rates between the U.S. and Canada will remain stable. Economic disturbances will occur during the projection period causing year-to-year traffic variations; however, a long-term increase in nationwide traffic is expected to occur. Report of the Independent Consultant A-57 October 22, 2010

114 Many of the factors influencing aviation demand cannot necessarily or readily be quantified; and any projection is subject to uncertainties. As a result, the projection process should not be viewed as precise. Actual future numbers of enplaned passengers, aircraft operations, or landed weight at the Airport may differ from the projections presented herein because events and circumstances do not occur as expected, and those differences may be material Enplanement Projections The following methodologies were used to project enplanements at the Airport: Market Share Approach. In this methodology, judgments were made as to how and to what extent the Airport s rate of growth would differ from that projected for the nation by the FAA. On a macro scale, the U.S. projection provides a growth base reflecting how industry traffic in general is anticipated to grow in the future. The growth rate used for the Airport can be reflected as an increase or decrease in its future share of the market. By holding the Airport s 2009 market share constant over the projection period and using the FAA s enplanement forecast this approach would project approximately 392,900 annual enplanements in Socioeconomic Regression Approach. Statistical linear regression modeling was used in this methodology, with local socioeconomic factors as the independent variable and enplaned passengers as the dependent variable. Socioeconomic factors utilized in these analyses included population, income, per capita income, and employment. Of interest in the analyses, among other factors, was how well each socioeconomic variable explained the annual variations in enplaned passengers at the Airport (i.e., the model s coefficient of determination). Depending on the socioeconomic factor, this approach projected annual enplanements ranging from 387,400 (employment) to 518,700 (population) in Departing Seats/Load Factor Approach (Preferred). In addition to the other two approaches, a departing seats/load factor approach was utilized. In this approach, airline schedule information provided from Official Airline Guide, Inc. (OAG) was analyzed, as well as service announcements, along with certain assumptions in future aircraft load factors were made to project future activity for the Airport through the projection period. Table III-9 presents historical and projected enplanements for the Airport s mainline and regional/commuters. As shown, total passenger airline enplanements are projected to increase from 329,392 in 2009 to 395,300 in 2010, an increase of 20.0 percent. Actual 2010 YTD enplanements have increased 29.1 percent compared to the same period in Beyond 2011, total airline enplanements are projected to increase from 495,200 in 2011 to 565,700 in 2016, representing a CAGR of 2.7 percent during this period. Overall, passenger airline enplanements at the Airport are projected to increase by a CAGR of 6.2 percent from 2010 to After consideration of the different projection methodologies described above, passenger enplanements at the Airport through 2016 were projected using the departing seats/load factor approach. In particular, the following factors and assumptions were used to project passenger enplanement at the Airport: 2010 Enplanements. Based on actual Airport enplanements and analysis of scheduled seats by carrier at the Airport for the last four months of 2010 it is estimated that total available scheduled seats at the Airport will exceed 430,000 departing seats in Enplanements. Report of the Independent Consultant A-58 October 22, 2010

115 Table III-9 Historical & Projected Enplanements Year Mainline Carriers Regional/ Commuter Carriers Total Annual Growth Rate Historical ,823 90,227 93, ,020 94, , % ,578 90,289 93,867 (17.6%) ,183 69,646 71,829 (23.5%) ,556 65,892 68,448 (4.7%) ,214 72,411 84, % ,829 72, , % ,701 92, , % , , , % , , , % ,609 98, , % YTD (Jan -Aug) ,237 63, , ,580 76, , % Projected , , , % , , , % , , , % , , , % , , , % , , , % , , , % Compounded Annual Growth Rates % 0.9% 13.5% % 7.1% 20.0% YTD % 22.0% 29.1% % 0.7% 25.3% % 1.7% 8.0% % 0.8% 6.2% % 0.8% 2.7% Sources: (historical); Ricondo & Associates, Inc. (projected), September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant A-59 October 22, 2010

116 - Alaska scheduled approximately 25,900 departing seats in the first quarter of 2011 compared to 4,700 seats over the same period in 2010, an increase of percent. - Horizon scheduled approximately 10,800 departing seats in the first quarter of 2011 comparable to the same period in It is projected that Horizon will not add significant seats to the market over the projection period. Increases in regional/commuter enplanements, mainly driven by Horizon, will be attributed to increased load factors and an incremental increase in aircraft size. - Based on discussions with OAG, scheduled airline seat data can be considered reliable from three to six months in the future. Allegiant scheduled seats published more than three months in advanced are likely to be system placeholders and adjusted to actual schedules are finalized 90 days prior. This is common among low cost and leisure carriers reporting schedules to OAG. While any carrier can deviate from scheduled service at any time, significant schedule adjustments (i.e. new service, expanded service, and discontinued service) are likely to be announced prior to the change. As a result, projected Allegiant departing seats for 2011 were based on actual departing seats flown and scheduled departing seats for the last quarter of Allegiant averaged approximately 24,000 seats per month in It is assumed that this level of service will be maintained through 2011 with the addition of new daily service to Hawaii starting in June It is projected the Hawaii service will add over 39,000 available departing seats in Given the addition of scheduled seats at the Airport, it is likely that aircraft load factors will decrease from their recent peaks. As such, it was assumed that the annual load factor at the Airport will decrease to approximately percent for 2011 (August 2010, passenger aircraft load factors have averaged approximately 90 percent for the first eight months of the year). Based on this assumption and the estimated annual seats, annual enplanements for 2011 are projected to increase by approximately 25.3 percent over 2010 levels, or to 495,200 enplanements Enplanements. The quality of scheduled data represented for future months farther out than six months tends to be understated, as airlines are still in the planning/design process for intermediate and future schedules. During this timeframe, airlines are still determining where to fly, frequencies, flight times, aircraft assignments, and routes. As a result, assumptions were made regarding the level of scheduled aircraft seats and aircraft load factors at the Airport between 2012 and Enplanements are projected to increase from 495,200 in 2011 to 526,600 in 2012, representing an increase of 6.3 percent. This increase is a result of a full year of Hawaii service resulting in approximately 600,000 departing seats. From , it was assumed that mainline scheduled aircraft seats at the Airport would continue to increase modestly through 2016 at a CAGR of approximately 1 percent over the estimated 600,000 seats for In addition, regional/commuter scheduled aircraft seats are projected to remain stable over the projection period with enplanement growth based on a year over year 0.5 percent increase in load factor. It is also assumed that over time, the Airport s average annual load factors would increase back to the 90 percent levels currently being experienced. As a result, airline enplanements are projected to increase from 526,600 in 2012 to 565,700 in 2016, representing a CAGR of 1.8 percent during this period. Exhibit III-2 illustrates the historical and preferred projection (Departing Seats/Load Factor Approach) enplanement levels. Report of the Independent Consultant A-60 October 22, 2010

117 Exhibit III-2 Historical and Projected Enplaned Passengers 600, , ,000 Enplanements 300, ,000 Historical Preferred Projections 100, Year Source: (historical); Ricondo & Associates, Inc. (projected), September Prepared by: Ricondo & Associates, Inc., September It is expected that the current mix of leisure carriers and Alaska Carriers will continue operating at the Airport. As shown, mainline and regional/commuter enplanements are expected to increase at a CAGR of 3.2 and 0.8 percent, respectively, between 2011 and It is anticipated that mainline carriers will continue to enplane the majority of passengers at the Airport. Between 2010 and 2016, the enplanement share of mainline carriers at the Airport is projected to increase from approximately 73 percent in 2010 to approximately 80 percent in Operations Projections Table III-10 presents historical and projected aircraft operations for passenger airline, all-cargo, general aviation, other air taxi, and military activity. As shown, total aircraft activity at the Airport is projected to increase from 67,192 operations in 2009 to 69,390 in This increase represents a CAGR of 0.9 percent during this period, compared to 0.8 percent growth projected nationwide by the FAA. Passenger airline activity at the Airport is projected to increase from 9,342 operations in 2009 to 11,660 in This increase represents a CAGR of 2.9 percent during this period, compared to 1.6 percent projected nationwide for air carriers and air taxis combined by the FAA. In general, the passenger airline projections were developed based on historical relationships between enplaned passengers, load factors, and average seating capacities of aircraft utilized at the Airport. Specifically, average seats for the mainline are projected to increase from approximately 150 seats in 2009 to approximately 175 seats in 2016 based on the addition of Allegiant s Boeing 757 services, while percentage load factors remain in the upper 80s. Average seats for the regionals/commuters are projected to increase from approximately 50 seats in 2009 to approximately 51 seats in 2016, while percentage load factors remain relatively stable in the mid-70s. Similar to nationwide trends, it Report of the Independent Consultant A-61 October 22, 2010

118 Table III-10 Historical & Projected Aircraft Operations Year Mainline 1/ Regional / Commuters 2/ Airline Total All-Cargo General Aviation Air Taxi 3/ Military Total Historical ,444 8,604 2,670 63,898 4,964 1,485 81, ,614 8,092 2,690 66,876 5,587 1,688 84, ,000 8,644 2,670 54,319 7,001 1,431 74, ,168 7,924 10,092 2,712 50,632 9,616 1,224 74, ,500 7,916 10,416 2,662 43,277 7, , ,344 5,998 9,342 2,684 46,981 7, ,192 Projected ,100 5,950 10,050 2,440 43,730 6,690 1,290 64, ,760 5,980 10,740 2,680 44,070 7,500 1,290 66, ,180 6,060 11,240 2,680 44,410 7,580 1,290 67, ,260 6,080 11,340 2,680 44,760 7,660 1,290 67, ,340 6,100 11,440 2,680 45,120 7,740 1,290 68, ,420 6,140 11,560 2,680 45,490 7,820 1,290 68, ,500 6,160 11,660 2,680 45,860 7,900 1,290 69,390 Compounded Annual Growth Rates % -6.6% 1.7% 0.1% -6.0% 8.4% -12.7% -3.8% % -0.8% 7.6% -9.1% -6.9% -10.0% 70.9% -4.5% % 0.5% 6.9% 9.8% 0.8% 12.1% 0.0% 3.2% % 0.4% 3.2% 0.0% -0.3% 0.9% 8.0% 0.5% % 0.6% 2.5% 1.6% 0.8% 2.8% 0.0% 1.3% % 0.6% 1.7% 0.0% 0.8% 1.0% 0.0% 0.9% Note: 1/ Includes scheduled and charter operations on aircraft greater than 99 seats. 2/ Includes scheduled and charter operations by aircraft less than 99 seats. 3/ Includes air taxi operations not reporting passengers or landings to the Port. Source: FAA Air Traffic Activity Data System (ATADS) (historical), (historical); Ricondo & Associates, Inc. (projected), September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant October 22, 2010 A-62

119 is expected that some shifting from the 50-seat regional jet to the 70/90-seat regional jet will occur during the projection period. All-Cargo activity at the Airport is projected to remain stable. It is projected that All-Cargo operations will remain at 2,680 from 2011 through This represents the average operations experienced at the Airport over the past six years. The decrease in 2010 is due to a three week runway closure at the Airport. General aviation activity at the Airport is projected to decrease moderately from operations in 2009 to 45,860 in This decrease represents compounded annual decrease of 0.3 percent during this period. As a result, operations are projected to decrease from 46,981 in 2009 to 43,730 in From 2010 to 2016, general aviation operations are projected to increase from 43,730 to 45,860. This increase represents a CAGR of 0.8 percent during this period, comparable to 0.8 percent projected nationwide by the FAA Activity by Other Air Taxi is projected to increase moderately from 7,430 operations in 2009 to 7,900 in This increase represents a CAGR of 0.9 percent during this period, comparable to 0.8 percent projected for air taxi activity nationwide by the FAA. Future military activity at the Airport will be influenced by U.S. Department of Defense policy, which largely dictates the level of military activity at an airport. Military activity at the Airport is projected to remain constant at approximately 1,290 operations each year during the projection period, comparable to its activity level projected in Airline and All Cargo Landed Weight Projections Table III-11 presents historical and projected airline carrier landed weight at the Airport. As shown, passenger airline landed weight is projected to increase from 370,521 thousand pounds in 2009 to 544,206 thousand pounds in This increase represents a CAGR of 5.6 percent during this period. In general, the increases in landed weight for both carrier groupings are expected as a result of anticipated use of larger aircraft and/or increased operations at the Airport during the projection period. Report of the Independent Consultant A-63 October 22, 2010

120 Table III-11 Historical & Projected Landed Weight (000's pounds) Fiscal Year Mainline Regional / Commuters All-Cargo Total Historical ,842 95,026 16, , ,076 93,762 16, , , ,100 16, , , ,978 16, , , ,688 16, , , ,669 16, ,521 Projected , ,711 14, , , ,313 16, , , ,912 16, , , ,314 16, , , ,716 16, , , ,517 16, , , ,920 16, ,206 Compounded Annual Growth Rates % 4.7% 0.0% 24.8% % -0.8% -12.3% 13.7% % 0.5% 14.1% 14.9% % 0.4% 0.0% 5.6% % 0.6% 2.2% 4.4% % 0.6% 0.0% 2.4% Sources: (historical); Ricondo & Associates, Inc. (projected), September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant A-64 October 22, 2010

121 IV. Aviation Division Financial Analysis This chapter presents a review of existing Airport facilities; the aviation-related 2010 Project and other planned capital improvements at the Airport; and projections of Aviation Division Operating Expenses, Aviation Division Gross Revenues (comprised of nonairline revenues and airline revenues), and the resultant airline cost per enplaned passenger. 4.1 Existing Airport Facilities The Airport encompasses approximately 1,200 acres and is located approximately three miles northwest of the City of Bellingham. Airport operations are supported by the following facilities: Airfield. The Airport operates a single north-south runway designated Runway It measures 6,700 feet long by 150-feet wide. Runway is equipped with a precision instrument approach, high-intensity runway edge lighting, and precision and no-precision instrument runway markings. Terminal. The current passenger terminal building was built in two phases. The first phase building was constructed in 1980, and then subsequently expanded in 1987 due to increased passenger traffic and the arrival of a second air carrier. In 1985, a separate International Terminal was built south of the passenger terminal, with a covered walkway connector between the two buildings. The main passenger terminal encompasses approximately 26,000 square feet, with three floor levels. Passenger processing occurs on the ground floor, office space occupies the majority of the second-floor level, and a small basement area is used for storage. Automobile Parking. The Airport s automobile parking lot, located adjacent to the main passenger terminal, consists of 1,800 short-term and long-term parking spaces (including 400 overflow spaces), as well as 140 rental car parking spaces. Additional terminal automobile parking is under construction east of the existing terminal. Once opened, the additional parking will provide an additional 800 long-term parking spaces. Support Facilities. In addition to the facilities listed above, an Airport Traffic Control Tower operates from 7:00 am through 23:30 pm with weather service and U.S. Customs and Immigration Service. Airport Rescue Fire Fighting service units and maintenance buildings are located on the southeastern portion of the airfield. The general aviation facilities include one main fixed base facility, two aircraft maintenance facilities, 10 corporate hangars, seven T-hangar units (90 total hangars), and 69 aircraft tie-down spaces. Two private companies, Bellingham Aviation Services and Bellingham Fuel Service, provide fixed base operating services including fueling. Exhibit IV-1 presents the existing facilities at the Airport along with significant capital program construction projects. 4.2 Aviation Division Capital Projects The Aviation Division s planned capital projects are presented in Table IV-1. As shown in Table IV-1, total Aviation Division capital projects total approximately $111.1 million. This amount includes the costs through 2010 and annual projected costs through 2015 for the future and current capital projects. The Port has received Airport Improvement Program (AIP) grant funding from the FAA which offsets the project costs. AIP grant funds are also shown in Table IV-1 and described in Section Report of the Independent Consultant A-65 October 22, 2010

122 Report of the Independent Consultant A-66 October 22, 2010

123 Table IV-1 Aviation Division Capital Program Capital Program Project Budgets Category Budget through 2010 and / Airfield $59,071,025 Terminal 34,681,400 Parking 8,696,024 Rental Car 2,500,000 Safety & Security 5,613,317 Planning 500,000 Total Capital Program $111,061,766 Grants-to-Date for Aviation Division Capital Program Projects Category Grants through 2010 and Airfield $55,467,227 Terminal 332,500 Parking 0 Rental Car 0 Safety & Security 4,941,851 Planning 475,000 Total Capital Program $61,216,578 Note: 1/ Budget includes costs for projects through 2010 and annual costs for years 2011, 2012, 2013, 2014 and Source: (2011 Strategic Budget -Draft 1), October Prepared by: Ricondo & Associates, Inc., October Report of the Independent Consultant A-67 October 22, 2010

124 The Port s planned capital projects identified in the Port s strategic budgeting process include the following: Airfield Projects. Airfield projects include planning, design, and construction of runway, taxiway, and apron pavement rehabilitation in addition to miscellaneous other airport related projects. The most significant project included in the airfield capital projects is the rehabilitation of Runway In early 2009, pavement surveys determined Runway was nearing failure. A Runway/Taxiway rehabilitation was planned to meet Airplane Design Group (ADG) IV specifications which includes such aircraft as the Boeing 757 and 767. This resulted in strengthening the runway to support aircraft greater than 360,000 pounds and widening of the taxiway to 75 feet. Construction began in April 2010, with multiple taxiway closings as well as nighttime closures after the last commercial flight of the day arrived. On September 1, 2010 the airport completely closed for a three-week period to perform the runway rehabilitation. The runway was reopened the morning of September 22, Airfield projects account for approximately $59.1 million in Aviation Division capital project costs. The Port has been awarded approximately $55.5 million in grants to fund the airfield capital projects. Terminal Projects. The planned capital projects related to the terminal total approximately $34.7 million, which includes $31.6 million of Airport Commercial Terminal Expansion (ACTE) project costs the aviation-related 2010 Project. The ACTE program will triple the size of the terminal space, increasing the capacity to greater than 500,000 passengers per year. Grants have been awarded for approximately $332,500 of planned terminal capital projects. The ACTE expands the existing airport commercial terminal from 29,000 square feet to approximately 90,000 square feet. The project will be constructed in two phases over a 24 to 30 month period. Phase One includes the construction of 20,000 square feet and Phase Two includes the remaining 70,000 and integrates the existing terminal with the final terminal. Construction bidding for Phase One began in September and ground breaking is anticipated in November The Phase One facility will be commissioned by June The design of Phase Two will occur during the construction of Phase One. The construction of Phase Two will be bid in spring of 2011 with a construction schedule of 15 to 18 months. As discussed above, the total ACTE costs are approximately $30 million broken down to approximately $7 million and $22 million for Phase One and Phase Two respectively The Port Commission awarded a bid on the first phase of the terminal project at their regular scheduled meeting on October 19, The second phase of the ACTE is expected to be bid in February 2011 and awarded in April Parking Projects. Planned parking projects total approximately $8.7 million. The projects include the Phases II, III, and IV of the Pay Parking Lot construction. The additional parking will meet parking demand not currently accommodated with current parking facilities. Rental Car Projects. The projects associated with rental car facilities and operations include $2.5 million to fund the construction of a rental car parking lot in 2012 and relocate the rental car companies to the lot. Report of the Independent Consultant A-68 October 22, 2010

125 Safety & Security Projects. The Aviation Division safety and security projects are predominantly composed of projects related to the Aircraft Rescue and Fire Fighting station and equipment. The planned safety and security project total $5.6 million, of which approximately $4.9 million of AIP grants have been awarded. Planning Projects. The Port s capital projects include $500,000 for a Master Plan update for which the Port has received $475,000 in AIP grant authority to offset the costs Airport Improvement Program Grants The FAA AIP provides federal discretionary and entitlement grants for eligible airport projects. AIP grants are distributed to airport operators on a reimbursement basis. The Port receives annual AIP entitlement grants based on (1) levels of funding authorized and appropriated by Congress for the program and (2) the number of passengers and amount of cargo at the Airport. The Port also receives AIP discretionary grants for specific projects pursuant to grant applications for such funding and FAA discretionary grant awards, which are a function of the amounts authorized and appropriated by Congress and the FAA s prioritization of competing projects. As shown in Table IV-1, the Port has received approximately $61.2 million in AIP grants associated with the planned capital projects Passenger Facility Charge Revenues The Port is currently imposing Passenger Facility Charges (PFCs) and using PFCs revenues on a variety of projects at the Airport. Two approved applications are nearing the end of collection authority and the Port will be transitioning to imposing PFCs and using PFC revenue on a recently approved application. One of the two applications nearing completion is application C-00-BLI. The application was approved in May 2009 and included a variety of airfield, terminal, safety, and security related projects totaling $1.6 million. The second application, U-00-BLI, was for a single project; terminal rehabilitation plans and specifications, totaling $875,000. Both applications were approved at the $4.50 per eligible enplaned passenger level. The Port is in the process of completing the collection of PFCs associated with the aforementioned applications. On August 11, 2010 the FAA approved application C-00-BLI. The application was for impose and use of PFCs for the commercial terminal expansion. The application was approved for $30,250,000 of project costs and included a $4.50 collection level. The Port will be applying for financing costs to accompany the $30,250,000 of project costs. Upon completion of the projects which are currently funded with PFCs, the Port will use PFC revenues to pay PFC-eligible debt service associated with the ACTE. Airport industry groups have requested that the federal PFC Statute be changed to increase the PFC program s maximum PFC level from its current level of $4.50 per eligible enplaned passenger. The AIP reauthorization, a portion of the spending bill that funds the FAA, is currently being reviewed in Congress. The proposed AIP reauthorizations include regulations for the PFC program. The version of the bill in the House of Representatives (H.R. 915) was passed on May 21, 2009 and includes an increase of the PFC collection limitation from $4.50 to $7.00. The Senate version of the bill (S. 1451) that was reported out of the Senate Committee on Commerce, Science and Transportation on September 29, 2009 did not increase the PFC collection limitation from the existing $4.50 level. The Senate approved S on March 22, The House and Senate bills will need to be reconciled Report of the Independent Consultant A-69 October 22, 2010

126 and the consolidated version of the bill must be passed by the Senate and the House to become effective. The financial projections and the financing plan reflected in this report and in the accompanying tables assume the Port s current $4.50 PFC level is in place for the entire Projection Period. If federal PFC regulations are changed and the maximum PFC level is increased, the Port intends to apply to the FAA for authorization to collect the higher PFC level at the Airport. An increase to the PFC level would be expected to decrease the period of time required to reach the Port s total approved collection authority, as would an increase in the number of enplaning passengers at the Airport Series 2010 Bond Proceeds The Series 2010 bonds will fund $30,607,500 of project costs for the commercial terminal expansion and 10,202,500 of Marina Division projects. 4.3 Aviation Division Operating Expenses Table IV-2 presents Aviation Division Operating Expenses for actual 2009 and projected for 2010 through Aviation Division Operating Expenses were approximately $3.3 million in 2009 and are projected by the Port to increase to approximately $5.4 million in The projected increase in Operating Expenses between 2009 and 2016 represents a CAGR of 7.4 percent Operating Expense Projections The Port s projections of Operating Expense are based on a combination of the approved 2010 budgeted amounts and 2010 year-to-date projects for 2010, assumed increases in costs as a result of inflation, projected activity levels, the completion of planned expansion or construction of facilities, and other assumptions about Airport operations. For its Operating Expense projections for the period 2010 through 2016, the Port assumed: The Port s projections of Operating Expense generally incorporate an assumed base growth rate of approximately 3.0 percent. Most of the projections are based on using 2010 as the base from which growth rates are applied. The estimates for 2010 are generally based on projection year-to-date expenditures. The Port s Operating Expense projections include incremental costs related to the expanded terminal and parking facilities. The Port prepared the Operating Expense projections for the Aviation Division that are presented in Table IV-2. Ricondo & Associates, Inc. reviewed the Port s financial projections and performed a sensitivity projection which resulted in similar projected expenses. Therefore, Ricondo & Associates found the methodologies and underlying assumptions incorporated in the projection and the resulting amounts are reasonable for the purposes of this Report. 4.4 Aviation Division Revenues Aviation Division revenues are comprised of nonairline revenues and airline revenues. Nonairline revenues include all Aviation Division revenues with the exception of airline passenger fees, commercial airline space and land rentals, and airline landing fees. In 2009, nonairline revenues accounted for 84 percent of the Aviation Division revenues. Gross Revenue projections for the period 2010 through 2016 were provided by the Port and were reviewed by Ricondo & Associates, Inc. The Port s revenue projections were generally based on Report of the Independent Consultant A-70 October 22, 2010

127 Table IV-2 Aviation Division Operating Expenses (Port Authority Projections through 2015) Actual Budget Projected FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Category Personnel $1,179,896 $1,533,165 $1,497,051 $1,541,963 $1,588,222 $1,635,868 $1,684,942 $1,735,488 Outsourced Services 800, ,510 1,153,536 1,188,143 1,223,785 1,260,501 1,298,315 1,337,263 Repair & Maintenance 412, , , , , , , ,184 General & Administrative 299, , , , , , , ,254 Utilities 233, , , , , , , ,019 Materials, Supplies, and Equipment 154, , , , , , , ,845 Security 92,628 97, , , , , , ,334 Other 133,537 82, , , , , , ,319 Total O&M Expenses $3,306,351 $3,944,338 $4,623,331 $4,762,034 $4,904,891 $5,052,038 $5,203,599 $5,359,707 Source: ( ); Ricondo & Associates, Inc. (2016) September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant October 22, 2010 A-71

128 airline activity projections, allowances for inflation, and revenues associated with new facilities. Ricondo & Associates reviewed the revenue projects and performed a sensitivity projection which resulted in totals values similar to the Port s projections. Therefore, Ricondo & Associates found the methodologies and underlying assumptions incorporated in the projection and resulting amount reasonable for the purposes of this Report Aviation Division Revenues Table IV-3 presents Aviation Division revenues for actual 2009 and projected 2010 through As shown, revenues were approximately $5.2 million in 2009 and are projected by the Port to increase to approximately $8.1 million in The projected increase in revenues between 2009 and 2016 represents a CAGR of 6.6 percent. The largest source of nonairline revenue is automobile parking, which in 2009 was $3.3 million or 63 percent of the total revenue in The parking revenue is projected to increase to $8.1 million in The largest increase occurs in 2011 after completion of the long term parking lot east of the terminal facility. The additional parking will meet demand not currently accommodating in today s parking. In 2009, concession fees contributed 260,680 in revenue to the Port. Concession fees are projected to increase to 292,385 in 2016, a CAGR of 1.0 percent. The remaining nonairline revenue is comprised of fuel flowage fees, external revenue transfer, triple Net/CAM charges, aircraft tie down fees, and transient landing/parking, all of which are shown in Table IV Aviation Division Airline Revenues Airline Landing Fee Revenue Revenues from airline Landing Fees accounted for approximately $378,731 million in The landing fee at the Airport is $1 for every 1,000 pounds of landed weight. As defined in the Airline Agreement, the landing fee revenue allows the Port to recover Airfield direct and allocated indirect costs for the airline use of airfield facilities. The Port s projection assumes an increase in landing fee revenue from 334,183 in 2010 to 436,832 in 2011, based on an assumed increase in charter flights. The Airfield landing fee is collected for all passenger and cargo airlines, yielding a landing fee rate expressed in dollars and cents per 1,000 pounds of landed weight. As shown in Table IV-4, the Port projects the Airfield Revenue Requirement to increase from approximately $50.8 million in 2009 to approximately $82.5 million in 2016, representing a CAGR of approximately 7.2 percent. The projected increase in the Airfield Revenue Requirement is primarily attributable to increases in debt service and operating expenses allocated to the airfield Airline Terminal Rental Revenue As defined in the Airline Agreement, 20 percent of the terminal operating costs are allocated equally among signatory carriers and collected through space/land rentals. The remaining 80 percent of airline terminal rental revenue is collected through Airline passenger fees distributed among the airlines based on the percent of total enplanements they operate. Report of the Independent Consultant A-72 October 22, 2010

129 Table IV-3 Aviation Division Operating Revenues (Port Authority Projections through 2015) Actual Budget Projected FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Category Airline Passenger Fees $251,667 $240,000 $240,000 $240,000 $247,200 $254,616 $262,254 $270,121 Concession Fees 260, , , , , , , ,385 External Rev. Transfer, Misc., Triple Net/CAM 229, , , , , , , ,996 Space and Land Rental - General Aviation 462, , , , , , , ,237 Space and Land Rental - Commercial 207, , , , , , , ,053 Fuel Flowage Fees 50,769 42,034 33,073 34,065 35,087 36,140 37,224 38,341 Airline Landing Fees 378, , , , , , , ,408 Parking Fees 3,263,620 3,156,064 5,049,702 5,201,193 5,357,229 5,517,946 5,683,484 5,853,988 Aircraft Tie-down Fees 28,721 29,230 28,354 29,205 30,081 30,983 31,913 32,871 Transient Landing and Park 22,764 22,103 29,170 30,045 30,946 31,875 32,831 33,816 Total Revenue $5,156,328 $4,964,133 $7,007,247 $7,210,264 $7,426,573 $7,649,369 $7,878,850 $8,115,215 Source: ( ); Ricondo & Associates, Inc. (2016) September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant October 22, 2010 A-73

130 4.4.3 Airline Cost Per Enplanement Table IV-4 presents actual 2009 and projected 2010 through 2016 airline payments for airline passenger fees, commercial airline space and land rental, and airline landing fees. As shown, total passenger airline payments were approximately $838,040 in The Port projects a decrease in airline revenue in 2010 with an increase in 2012 and thereafter. The decrease in 2010 activity can be attributed to the closure of Runway for approximately three weeks in September 2010 for rehabilitation work. The increase in fees is based on a projected increase in airline charter flights. Airline revenue is projected to increase to $1.1 million in 2010, representing a CAGR of 3.6 percent. On a per-enplaned passenger basis, passenger airline payments are projected to decrease from $2.04 budgeted in 2010 to $1.78 in 2012, and then increase moderately to $1.87 in The Port s financial projections reflected in this report incorporate the first draft of the 2011 Strategic Budget. If actual passenger numbers are less than those reflected in the Port s funding assumption, the Port may decide to modify the timing and priority of capital projects (in addition to reducing Operating Expenses, steps the Port has undertaken in the past and would likely be undertake again if projected activity does not materialize) in an attempt to mitigate increases to airline payments per enplaned passenger, one of many factors that airlines evaluate when making air service decisions at an airport. Report of the Independent Consultant A-74 October 22, 2010

131 Table IV-4 Passenger Airline Cost Per Enplaned Passenger Actual Budget Projected FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Category Airline Passenger Fees $251,667 $240,000 $240,000 $240,000 $247,200 $254,616 $262,254 $270,121 Space and Land Rental - Commercial 207, , , , , , , ,053 Airline Landing Fees 378, , , , , , , ,408 Total Airline Revenues $838,040 $822,123 $932,210 $952,976 $981,566 $1,011,012 $1,041,342 $1,072,582 CAGR 2009 to % Less Cargo Airline Landing Fee $16,364 $14,348 $16,365 $16,365 $16,365 $16,365 $16,365 $16,365 Passenger Airline Revenue $821,676 $807,775 $915,845 $936,611 $965,201 $994,647 $1,024,977 $1,056,217 Total Enplaned Passengers 329, , , , , , , ,700 Passenger Airline Cost Per Enplaned Passenger $2.49 $2.04 $1.85 $1.78 $1.80 $1.82 $1.84 $1.87 Source: (2009 and 2010); Ricondo & Associates, Inc. ( ) September Prepared by: Ricondo & Associates, Inc., September Report of the Independent Consultant October 22, 2010 A-75

132 [THIS PAGE INTENTIONALLY LEFT BLANK] Report of the Independent Consultant A-76 October 22, 2010

133 V. Marine Facilities This chapter describes the historical and projected activities at the s Marine Facilities and discusses key factors affecting activity levels and financial performance. The Marine Facilities discussed in this section consist of two main operational groups, as follows: Marinas (Squalicum Harbor and Blaine Harbor). This section provides (1) a description of the marinas, (2) an evaluation of the tenant base, (3) a review of historical trends in activity, and (4) a 7-year projection of the commercial and recreational fleet. Marine Terminals (Bellingham Shipping Terminal, the Bellingham Cruise Terminal and the Fairhaven Multi-modal center for ferry, rail and bus operations). This section provides (1) a description of these operations and (2) an assessment of leases and business trends. Projections of marina operations were prepared by BST Associates; financial projections from 2010 through 2015 were prepared by the Port and reviewed by BST Associates; projections for 2016 were prepared by BST Associates. Since most of the Marine Facilities net operating income (NOI) comes from the marina (more than 85 percent of the Seaport s NOI is expected to accrue from the marinas from 2010 through 2016), this line of business is evaluated in greater detail than other lines of business. 5.1 Marinas This section presents a review of historical trends and projections for the Port s marinas Description of Facilities Blaine Harbor As shown in Table V-1, Blaine Harbor has 629 slips for pleasure and commercial boats, ranging in length from 26 feet to 114 feet. In 2001, the completed an expansion project at Blaine Harbor, which enlarged the moorage basin and added over 300 slips. The expansion and improvement project cost approximately $12 million. The 300 slips were fully leased within five years, or at a rate of approximately 60 slips per year. As shown in Table V-1, most of the slips (47 percent) are less than 37 feet long (including 16 of the boat houses). Table V-1 Blaine Harbor Slip Distribution Slip Length # Slips % Up to % % % % % > % Boathouses % Total % Source:, September Prepared by: BST Associates, September Report of the Independent Consultant A-77 October 22, 2010

134 Blaine Harbor also has approximately 850 feet of visitor moorage located on Gate 2. See Exhibit V-1 for an aerial map of Blaine Harbor. Blaine s proximity to the U.S. Canadian border and to the Canadian Gulf Islands makes it a preferred location for Puget Sound, Canadian and out of state boaters. Exhibit V-1 Map of Blaine Harbor Source:, September Prepared by: BST Associates, September Squalicum Harbor Existing Configuration Squalicum Harbor is one of the largest marinas on the west coast, offering 1,417 slips, including 1,320 slips for pleasure and commercial boats and 97 privately owned boathouses. These slips range in length from 26 feet to 110 feet. As shown in Table V-2, most of the slips (57 percent) are less than 37 feet long. In addition, there are approximately 1,500 lineal feet of guest moorage. Table V-2 Squalicum Harbor Slip Distribution Number of Slips Before Project After Project Slip Length # Slips % Total # Slips % Total Net Change Up to % % (4) % % (70) % % % % (69) % % 60 > % % (4) Boathouses % % - Total 1, % 1, % (38) Source:, September Prepared by: BST Associates, September Report of the Independent Consultant A-78 October 22, 2010

135 Squalicum Harbor is popular with local and visiting boaters because of the amenities that are offered. In addition to moorage facilities, Squalicum Harbor provides restrooms, shower facilities, laundry and pump-out and like boater amenities. In addition, there are numerous firms offering goods and services for the commercial and recreational fleet, such as boatyard services, marine wiring, electronics, engine repair and replacement, canvas work and upholstery, outboard sales and service, and marine chandleries among other services. Squalicum Harbor offers proximity to boaters that live in Bellingham (the largest City in Whatcom County) as well as proximity to the San Juan Islands, an important sailing destination for area boaters. Proposed Configuration The Port has been planning on improving a portion of the slips in Gate 3 for several years. This project area consists of 244 slips located in Gate 3 (sections include F-west, F-east, G-west and G- east) for two reasons. First, the area needs to be dredged from its current depth of 7 to 8 feet to 12 feet mean lower low water (mllw). Second, many of the slips in this area are either too short or too narrow to meet the needs of the existing and future tenant base. As a result of the constraints to depth and width of the slips, the project area currently has only 139 occupied slips, which equates to an occupancy rate of around 57 percent. Table V-2 illustrates the effect of the reconfiguration on slip distribution. The total number of slips will decline from 1,417 (50,367 lineal feet of moorage) before the project to 1,379 slips (49,520 lineal feet of moorage) after the project, which amounts to a decrease of 38 slips (856 lineal feet of moorage). The slip distribution after the project will result in an increase in slips in the foot range (+49 slips) and foot range (+60 slips) and a loss of slips in the smallest slips (-4 slips in the 26 foot range), foot range (-70 slips), foot range (-69 slips) and over 56 foot range (- 4 slips). See Exhibit V-2 for an aerial map of Squalicum Harbor. Exhibit V-2 Map of Squalicum Harbor Source:, September Prepared by: BST Associates, September Report of the Independent Consultant A-79 October 22, 2010

136 5.2 Harbor Utilization and Demand This section reviews recent trends affecting the historical and future utilization of the harbors Description of Tenants As shown in Table V-3, approximately 84 percent of Squalicum Harbor s existing tenants live in Whatcom County. The remaining tenants come from Northeast Puget Sound (5 percent) 1, other areas of Washington State (5 percent) and out of state, including 3 percent from Oregon, California and other U.S. states as well as 1 percent from Canada. Table V-3 Home City of Squalicum Harbor and Blaine Harbor Moorage Tenants Number of Tenants* Market Share Area Squalicum Blaine Total Squalicum Blaine Total Washington State Whatcom County 1, , % 50.1% 73.1% NE Puget Sound WA % 4.0% 4.9% Other WA % 7.3% 6.1% subtotal 1, , % 61.3% 84.1% Other U.S. Oregon % 0.7% 0.9% California % 1.5% 0.7% Other % 5.6% 3.9% subtotal % 7.8% 5.5% Foreign Countries Canada - BC % 30.5% 10.2% Canada - Other % 0.4% 0.2% subtotal % 30.9% 10.4% Total 1, , % 100.0% 100.0% Note: There are 10 tenants with an unknown address. Source:, September Prepared by: BST Associates, September Approximately 50 percent of Blaine Harbor tenants come from Whatcom County. In addition, 4 percent come from Northeast Puget Sound and 6 percent from other counties in Washington State. The remaining tenants come from Canada (31 percent), or other areas of the U.S. (8 percent). 1 Northeast Puget Sound is defined to include Whatcom, Skagit, Island and San Juan Counties. Report of the Independent Consultant A-80 October 22, 2010

137 5.2.2 Waitlist & Transfer List Trends Exhibit V-3 illustrates the trends of the waitlist for slips at harbors. As can be seen, the waitlist increased from around 140 boats in early 2005 to a peak of nearly 450 boats in late through mid It has since declined to around 325 boats in the 1990s. The waitlist was shorter in 2005 because the slips added at Blaine Harbor were still being absorbed. Exhibit V-3 Waitlist & Transfer List Trends Number of Boats >56 ft ft ft ft ft Up to 26 feet Source:, September Prepared by: BST Associates, September Approximately 50 percent of the boats are only on the waitlist for Squalicum Harbor, 32 percent only on the wait list for Blaine Harbor and 17 percent are on the wait list for either harbor. The number of boats on the waitlist has changed somewhat over time depending on the length of the boat: Up to 26 feet the list declined from a high of 40 in 2007 and now are near zero, From 27 to 30 feet reached a peak of 82 in 2008 and declined to 67 boats in 2009, From 31 to 36 feet reached a peak of 122 in 2007/2008 and declined to 99 boats in 2009, From 37 to 44 feet reached a peak of 113 in 2008 and declined to 67 boats in 2009, From 45 to 56 feet reached a peak of 84 boats in 2008 and declined to 79 boats in 2009, Over 56 feet reached a peak of 15 in 2008 and remained at this level in The size and consistency of the waitlist underscores the regional demand for additional moorage in Whatcom County. Report of the Independent Consultant A-81 October 22, 2010

138 5.2.3 Recreational Boating Trends & Forecast Whatcom County has experienced a sustained increase in the number of recreational boats since Boats are easily trailered up to 26 feet in length. Boats longer than 26 feet typically require wet moorage. As a result, this analysis focuses on longer boats Registered Boat Trends The trend in growth for boats less than 30 feet in length is substantially less than for boats 30 feet and longer. The number of boats between 21 and 30 feet grew by an average of 1.8 percent per year between 1990 and 2009 in Whatcom County, while boats 31 feet and longer grew by an average of 4.3 percent per year. As a comparison, the population rate in Whatcom County increased at 2.2 percent per year between 1990 and As shown in Table V-4, the rate of growth has increased as the length of the boat has increased: The number of boats between 31 and 40 feet in length grew at 3.5 percent per year, The number of boats between 41 and 50 feet in length grew at 6.8 percent per year, The number of boats between 51 and 60 feet in length grew at 9.0 percent per year, and, The number of boats over 60 feet in length grew at 11.6 percent per year. Table V-4 Whatcom County Registered Boat Trends Boat Length Year 21' to 30' 31' to 40' 41' to 50' 51' to 60' Over 60' Total Over 20 Feet , , , , , , , , , , , , , , , ,199 Compound Annual Growth Rates % 4.3% 8.3% 10.5% 11.6% 2.5% % 2.7% 5.1% 7.4% 11.5% 2.5% % 3.5% 6.8% 9.0% 11.6% 2.5% Source: Washington State Department of Licensing, September Prepared by: BST Associates, September The number of registered boats over 30 feet in Whatcom County grew at a faster rate (2.5 percent per year) than the population growth rate (2.2 percent per year). The number of registered boats in Whatcom County has been modestly impacted by the economic recession. The number of boats 21 feet and longer declined slightly in 2008 and 2009 relative to the peak in Report of the Independent Consultant A-82 October 22, 2010

139 5.2.4 Commercial Boating Trends & Forecast There are 128 commercial fishing boats homeported at the harbors, including 42 at Blaine Harbor and 86 at Squalicum Harbor. These vessels, which include draggers, gillnetters, purse seiners and trawlers, fish locally and along the West Coast from Northern California to the Canadian border and in Alaska. Over the years, the fleet has declined in numbers. The National Marine Fisheries Service reports that the number of unique fishing vessels unloading fish in Whatcom County has declined from 6,993 in 1990 to 2,032 in The remaining boats are longer and engage in multiple fisheries with a variety of gears. As shown in Exhibit V-4, the landings at Whatcom County (in Blaine and Bellingham) have declined over time from 54 million pounds in 1990 to 18.0 million pounds in However, the value of the catch has remained relatively consistent between $20 million and $30 million for most of this period. The landed weight of higher valued species (salmon, crab and shellfish) has remained constant or increased slightly while landings of lower valued species (groundfish) has experienced a significant decline. Exhibit V-4 Whatcom County Fish Landing Trends Million pounds Million $ Million pounds of landed weightlwt lbs Poly. (Million pounds of landed weightlwt lbs) Million dollars of revenue Linear (Million dollars of revenue) Source: National Marine Fisheries Service, September Prepared by: BST Associates, September The size of the commercial fleet fishing in Bellingham could stay at about the same level as today. Alternatively, it could decline due to following factors. The overall number of fishing vessels could decline due to reduced harvests, changes in regulatory policies and further development of individual quotas. Increased fuel costs could cause some owners to keep their vessels in Alaska. Finally, the s rates for commercial fishing boats are higher than competing ports, which could cause a shift from Bellingham to alternative locations (in the PNW or in Alaska). Regarding this last issue, the Port is considering maintaining moorage rates at the current level for commercial boats. This issue is described in greater detail below. Report of the Independent Consultant A-83 October 22, 2010

140 5.3 Competitive Facilities The market region in which the s harbors compete consists of Whatcom, Skagit, San Juan and Island counties, which are referred to below as Northeast Puget Sound Market Share As shown in Table V-5, Whatcom County has increased its share of boats in NE Puget Sound from 30.9 percent in 1990 to 34.0 percent in 2009, a gain of 3.1 percentage points. Table V-5 Whatcom County Share of Registered Boats 21 feet and Longer Year NE Puget Sound Washington State % 5.0% % 5.0% % 5.1% % 5.5% % 5.6% % 5.5% % 5.3% % 5.4% Source: Washington State Department of Licensing, September Prepared by: BST Associates, September In addition, Whatcom County has increased its share of boats in Washington State from 5.0 percent in 1990 to 5.4 percent in The increased share in Whatcom County illustrates the attractiveness of this area to boaters because it offers close proximity to desired sailing destinations. In addition, pressures on waterfront real estate prices have negatively impacted development of moorage in Central Puget Sound. We expect that Whatcom County will continue to increase its share of recreational boats, as additional facilities are provided Competition This section describes competitive facilities in NE Puget Sound Whatcom County There are three potential marina developments that could occur in Whatcom County within the next ten years. The is planning to clean up and convert a lagoon at the Georgia-Pacific site into a 350-slip marina. The new Downtown Marina is focusing on moorage for boats 40 feet in length or longer. Preliminary plans suggest that this marina could be constructed in There is an undeveloped portion of the basin at Semiahmoo resort that could be developed for around 225+/- additional slips. Preliminary plans call for most of the slips to be between 50 and 60 feet in length, with the remainder between 65 and 125 feet in length. It is uncertain when/if this project will be constructed. The Lummi Nation is considering a new marina at Gooseberry Point to serve tribal fishing boats and regional pleasure boats. This plan would provide a sheltered moorage area for up to 120 boats by Report of the Independent Consultant A-84 October 22, 2010

141 constructing artificial islands offshore, instead of a traditional breakwater. Besides providing calm water for pleasure boats and the tribal fishing fleet, the islands would provide habitat for birds and fish while protecting shoreline property from winter storm surges, according to the plans. The initial cost estimate is $21 million. It is uncertain when/if this project will be constructed. In addition, there have been discussions in the past about reconfiguring the Point Roberts Marina. However, it is also unknown whether this project will move forward Skagit County The Swinomish Tribe has been considering a Marina Project along the Swinomish Channel for more than 20 years. The planned project is very large (preliminary plans call for a 1,216-slip marina) and if commenced would be phased in over a number of years. The project is planned to stimulate economic development but the return on investment may not meet the tribe s requirements at today s moorage rates. It is uncertain when/if this project will be developed. There are also a few small scale marinas being considered in Anacortes. The Swinomish Tribe is also considering a small marina located just east of the Tribe s Northern Lights Casino. The docks at the marina are designed using an anchor and pulley system to allow flexibility in accommodating approximately 40 (or so) large yachts. Twin Bridges Marina, located across the Swinomish Channel from Northern Lights Casino, has been developing up to 10 or 12 very large boat houses (up to 100 feet in length). In addition, private investors are planning a 40+/- slip marina near Lovric s Landing in Anacortes. Marina reconfigurations are also being considered at Cap Sante Marina in Anacortes and the La Conner Marina. This would result in a net loss of slips Island County The Port of South Whidbey Island is considering redeveloping/expanding the marina at Langley. Preliminary plans would be for up to 200 boats, a marine fueling facility, accommodation for kayaks, canoes and small watercraft, a float plane dock and related facilities. The expansion project will likely be delayed until funding can be obtained. The City of Oak Harbor has completed a Master Plan for the Oak Harbor Marina. The reconfiguration would result in approximately the same number of slips by infilling water area in the basin. The net result would be a marina of approximately 350 slips but with a shift in distribution toward longer slips. It is unknown whether this project will be undertaken San Juan County The Port of Friday Harbor is considering reconfiguration of its slips. Private marinas (Rosario Resort, among others) are also considering marina expansions Demand Forecast The demand forecast in the North Puget Sound market (Whatcom, Skagit, San Juan and Island Counties) is for between 1,800 slips (low estimate) and 2,700 slips (high estimate). The low forecast assumes that the primary market area will continue to provide the current share of total slips in Washington State. The high forecast estimate assumes that the primary market area will increase its market share. It will be difficult for wet moorage to keep up with the demand. As a result, more extensive use of dry storage facilities is being considered by public and private facility owners. In our opinion, the long-term demand for moorage is strong enough to require all of these planned expansions. Report of the Independent Consultant A-85 October 22, 2010

142 5.4 Other Marine Facilities The s other marine facilities include marine cargo operations at the Bellingham Shipping Terminal (BST) and ferry, bus and rail activities at the Bellingham Cruise Terminal (BCT) and Fairhaven Station Marine Cargo Terminal The Bellingham Shipping Terminal (BST) includes 2 warehouses, 10 acres of lay-down area and almost 1,360 linear feet of pier with a water depth of 32 feet. As shown in Table V-6, BST has two large warehouses (40,600 sq. ft. and 42,900 sq. ft.). The Port is planning improved rail access to the terminal. 2 Table V-6 Bellingham Shipping Terminal - Specifications Description Water Depth Berthing Space Outer Berth Depth (two berths) Inner Barge Berth length Inner Barge Berth depth Average Tidal Range Open Storage Covered Storage Back-up land (black-topped, fenced, patrolled) Specification 32 feet 1,360 feet 30.5 feet 550 feet 26 feet 8 feet Approx. 10 acres 85,000 square feet 17 acres Source: Washington State Department of Licensing, September Prepared by: BST Associates, September The Bellingham Shipping Terminal has been used since the early 1900s for cargo shipping and warehousing activities. However, active cargo operations were curtailed in 2000 due to the impact of market conditions on the primary local shippers, which primarily included the Georgia Pacific pulp mill and the Intalco aluminum smelter, among others. The primary vessel activity during the last ten years has been lay-berth moorage for carrier vessels and moorage for tugs and barges. It is expected that BST will continue to serve water dependent uses. Potential future uses include operation of appropriate institutional users (e.g., Coast Guard etc.), cargo shipping, or other deep draft navigation uses, including lay berthage. A major goal of the Port s is to keep Bellingham Shipping Terminal full and active, while pursuing long term leases with appropriate industrial and commercial tenants 3. See Table V-6 and Exhibit V-5. 2 Source: 2010 Strategic Budget, page 2 3 Source: 2010 Strategic Budget, page 50 Report of the Independent Consultant A-86 October 22, 2010

143 Exhibit V-5 Bellingham Shipping Terminal Source:, September Prepared by: BST Associates, September Ferry, Bus, Rail Bellingham Cruise Terminal The Bellingham Cruise Terminal in Fairhaven is the southern terminus for the Alaska Marine Highway System (AMHS). Twice a week, on Tuesdays (summer only) and Fridays (year-round), the Alaska ferries depart from Bellingham taking passengers and vehicles to Alaska. The AMHS operates a fleet of nine state-owned ferries that provide scheduled service throughout Southeast and Southwest Alaska, and south to Prince Rupert, British Columbia and Bellingham, Washington. As shown in Exhibit V-6, the number of passengers has declined from around 18,000 embarkations in 1994 to approximately 13,000 in The number of embarking vehicles has increased slightly between 1994 and The AMHS system connects communities with each other, with regional centers, and with the continental road system. AMHS service is divided into two major systems: southeast (from Bellingham north to Skagway) and southwest (from Cordova west to Unalaska). The Alaska State Ferry began operating out of the 's Cruise Terminal in 1989 under a 20-year agreement. A new lease, which was concluded in 2009, established a new base lease for the Alaska Marine Highway System, increasing from $100,000 per year to $517,000 per year with adjustments to $532,510 for the third year, followed by 3 percent annual increases for the remaining years. The operating lease payment was also adjusted upward from $109,000 per year to $259,000 per year, increasing by 3 percent each remaining year. The Port also has leases at BCT with several businesses, including Aluminum Chambered Boats, Avis Rent A Car System, Inc., Inside Passage Gifts, the Vessel Zodiac Corporation, and Victoria / San Juan Cruises, among others. Report of the Independent Consultant A-87 October 22, 2010

144 Exhibit V-6 AMHS Trends of embarking and disembarking passengers and vehicles 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 Embarking Passengers Disembarking Passengers Embarking Vehicles Disembarking Vehicles 4,000 2,000 Source: State of Alaska AMHS traffic reports, September Prepared by: BST Associates, September Fairhaven Station The Port owns and operates a multimodal transportation center in Fairhaven, called Fairhaven Station. The station serves Amtrak train service (connecting Bellingham to Seattle and Vancouver, British Columbia), the Greyhound Bus Line Terminal and Whatcom Transportation Authority bus services. The building, which was renovated in 1994, also houses several businesses, including: Astoria Pacific Seafoods, Madrona Bay LLC, RETEC, Stewart & King Partnership, The Coffee Junction, Third Eye Systems, LLC and Yellow Cab. Amtrak reports that approximately 64,000 passengers boarded/alighted in Bellingham in 2008 and See Exhibit V-7 for an aerial view of Bellingham Cruise Terminal and Fairhaven Station. 4 Source: Amtrak Fact Sheet, Fiscal Year 2008 and 2009 Report of the Independent Consultant A-88 October 22, 2010

145 Exhibit V-7 Bellingham Cruise Terminal and Fairhaven Station Source:, September Prepared by: BST Associates, September Capital Improvement Plan This section summarizes the Port s capital improvement plan (CIP) for marine facilities for the period 2010 through See Table V Marinas Squalicum Harbor projects include: As discussed above, the Gate 3 improvements consist of reconstruction of Gate 3 (floats F- west, F-east, G-west and G-east) and dredging of the moorage area beneath these slips. This project, which is expected to cost $10 million, is included in this bond issue. Other projects in Squalicum Harbor consisting of a variety of improvements such as provision of new walkways, improved dinghy racks, repair of dock boxes, repairs to boat launch floats, remodel commercial restrooms, sewage pumpout improvements, painting and siding the gatehouse, replace B/L floats, improvements to the sawtooth dock and safety repairs to web lockers, among other harbor improvements. These improvements are expected to cost $9.7 million. These improvements are not included in this bond issue and will be funded by port revenues and grants. Blaine Harbor projects include: improvements to sewage pumpouts, security system, boat launch (silt removal, and replace floats and piling), seal/restripe parking lot, perform bathymetric survey of Blaine Harbor, silt removal at Gate 1, improve sawtooth dock (condition survey and fender repair), targeted safety/environmental repairs and other improvements. These improvements, which are expected to cost $1.2 million, are not included in this bond issue and will be funded by port revenues and grants. Report of the Independent Consultant A-89 October 22, 2010