Juan Pittman, Managing Director Jessica Soltz Rudd, Senior Director

American Association of Port Authorities Commissioners Seminar Introduction to Seaport Financing May 18, 2011 Juan Pittman, Managing Director Jessica Soltz Rudd, Senior Director

Agenda I. Municipal Bond Overview II. III. IV. The Financing Process Various Team Members Roles Underwriting and Securities Process V. Best Practices Appendix PAGE 2

SECTION I Municipal Bond Overview

The Need to Borrow & Viable Funding Options The competitive, capital intensive nature of seaports frequently results in financial demands beyond available annual cash flow that are sometimes best met through leveraging. Various capital funding options, include: Federal & State grants Direct loans Third party financings PPPs Commercial Paper short-term (1-2 years), variable-rate debt instruments that usually have some type of external support (Letter of Credit) Bond a long-term debt instrument obligating the borrower to repay over a fixed period of time. Bonds maturities are typically anywhere from 1 to 30 years. PAGE 4

Purposes of Public Borrowing Meet essential capital and infrastructure needs Maintain health and safety standards Preserve quality of life and community interests Pay for long-term assets over useful life cost/benefit allocation Cash flow borrowings Financing Purpose New Money Large scale capital projects Bridge the gap on timing between expenditures and revenues Refunding Refinance old debt with new bonds at a lower all-in borrowing cost (economic refunding Refinance old debt with new bonds to restructure debt service payments that satisfy a new need and / or eliminate / replace covenants imposed on old bonds (may or may not be an economic refunding) PAGE 5

What Makes Municipal Bonds Unique? Interest on qualified municipal securities is exempt from federal income taxation Sixteenth Amendment to the U.S. Constitution created national income tax Since 1913, most municipal bonds have enjoyed exemption from taxation under doctrine of reciprocal tax immunity Tax-exemption periodically comes under threat, particularly in times of federal budget deficits: 1968 first attempt to curb private use of tax-exempt bonds by defining public purpose and limiting private use to 25% with exemptions for Seaports and other quasi-public enterprises 1986 sweeping restrictions implemented including arbitrage rebate, Alternative Minimum Tax (AMT), reduction of private use to 10%, state by state volume caps for qualified private activity bonds, restriction to one advance refunding Periodic flat tax proposals and specific targeted types of issuance (stadiums, convention centers) 2010 Proposed legislation to discontinue tax-exempts and permanently institute taxable Build America Bond system Interest on federally tax-exempt bonds issued by governmental entities in a specific state are also (generally) exempt from that state s income tax Most seaport bonds are generally subject to AMT treatment More costly than traditional bonds (non-amt) Public Hearing requirement, limits on refundings and other restrictions PAGE 6

Growth in Municipal Debt Issuance Has Been Dramatic Annual Volume of Fixed Rate Municipal Bonds Issued in Billions $500.00 $450.00 $400.00 $350.00 $300.00 $250.00 $200.00 $432.00 $150.00 $100.00 $50.00 2010: 27% BAB 63% Tax Exempt 10% Other $0.00 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 PAGE 7

Historical Cost of Funds Bond Buyer 25-Year Revenue Bond Index: 1979 - Present 15.00 13.00 11.00 9.00 Current RBI: 5.41% 7.00 5.00 3.00 Historical Low: 4.38% (3/15/07) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 PAGE 8

Primary Financing Vehicle: The General Seaport Revenue Bond Bondholder security is comprised of revenues generated by various activities at the seaport Strength of pledge is the diversity of seaport revenues, including: Rentals Lease revenues Royalties TEU or truck relate fees Fuel fees Miscellaneous Typical Rate Covenant is 125% for Senior lien bonds and 110% for Subordinate lien bonds Additional Bonds Test typically considers historical or prospective performance PAGE 9

SECTION II The Financing Process

Overview of the Financing Process Debt Issuance can be complex and lengthy Regulatory environment Sarbanes-Oxley Act implications Post-issuance management increasingly important Documents Drafted Issuer Decides to Issue Bonds Working Group Selected Preliminary Plan of Finance Determined Rating Agency Presentation Finalize Documents and Finance Plan Marketing Pricing and Post Sale Credit Enhancer Solicitation* *Includes CP LOC Weeks PAGE 11

Potential Financing Team Members Potential Financing Team Members Financing Advisor Issuer s Counsel Disclosure Counsel Underwriters Counsel Credit Enhancer / Liquidity Provider Feasibility Consultant Appraiser Bond Counsel Issuer s Counsel Rating Agencies Post- Issuance Consultants & Advisors Issuer Budget Finance Legal Analysis Treasurer / Asset Manager Impacted Agency Department PAGE 12

Principal Legal Documents and Responsible Parties Ordinances / Resolutions Feasibility Report Preliminary Official Statement Bond Purchase Agreement Final Official Statement Bond Counsel Issuer s Counsel Feasibility Consultant Seaport Staff Financial Advisor Disclosure Counsel Seaport Staff Financial Advisor Senior Manager Underwriter s Counsel Seaport Staff Financial Advisor Disclosure Counsel Senior Manager IF NECESSARY PAGE 13

SECTION III Various Team Members Roles

The Financial Advisor s Role Navigate the Intricacies of the Financial Marketplace Debt planning phase: Support assembling the financing team Advise management regarding debt structures, develop documents, assess financial metrics Assist in devising rating agency and market strategy Support underwriters in market/pricing and then evaluate process Ongoing assistance: Advise management in developing and implementing financial targets, capital planning, modeling, lease negotiations, etc. PAGE 15

Developing & Achieving Financial Targets Is Critical to Obtaining A Strong Rating and Investor Interest First steps: Evaluate: operational performance, balance sheet, operating statement, and debt profile Understand long-term operational and capital needs Develop operational & financial targets Assess performance quarterly and reevaluate annually During financing process: Opt for financing structure that minimizes risk and maximizes return Evaluate targets in relation to feasibility of projects Know industry comps & what distinguishes your seaport and why Clearly communicate with industry players Annually: Release required compliance Communicate with stakeholders Update website, including investor relations section PAGE 16

Basis Points 400 350 300 250 200 150 100 50 The Importance of A Strong Rating: Credit Spreads Spreads to AAA MMD (Years 1-30) Basis Points 400 350 300 250 200 150 100 50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Basis Points April 2007 April 2009 400 350 300 250 200 150 100 50 April 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 AA A BBB PAGE 17

Most Bond Insurers Are No Longer Viable Insurer THEN September 2007 Ratings (M/S/F) Writing New Seaport Business? Ambac Aaa/AAA/AAA YES Assured Guaranty Aaa/AAA/AAA YES CIFG Aaa/AAA/AAA YES FGIC Aaa/AAA/AAA YES FSA Aaa/AAA/AAA YES MBIA Aaa/AAA/AAA YES XL Capital Aaa/AAA/AAA YES Radian Aaa/AAA/AAA YES ACA Aaa/AAA/AAA YES Insurer NOW May 2011 Ratings (M/S/F) Writing New Seaport Business? Ambac Caa2/R/NR NO CIFG NR/NR/NR NO FGIC NR/NR/NR NO Assured Guaranty Municipal (FSA) XL Capital (Syncora) Aa3/AA+/NR Ca/R/NR YES NO Radian Ba1/BB-/NR NO ACA NR/NR/NR NO NPFG Baa1/BBB/N R NO BHAC Aa1/AA+/NR NO PAGE 18

Recent Financings (CY2010) Spread to MMD for Select Tax-Exempt Transactions Basis Points 200 180 160 140 120 100 80 60 40 20 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 POLB (2010A) POLB (2010B) VPA ASPA PoSF (Non AMT) HI Harbor (Non AMT) HI Harbor (AMT, unins.) HI Harbor (AMT, AGC ins.) NCPA DE RIV PA (unins.) DE RIV PA (AGC ins.) SCPA PAGE 19

Recent Financings Select 2010 Port Transactions Final Maturity Sale Date Issuer Par Amount ($m) Underlying Ratings (M/S/F) Tax Status Insurance Final Maturity Yield Spread to MMD (bps)* 1/22/10 1/22/10 Port Commission of San Francisco Port Commission of San Francisco 14.220 A1/A-/A Non-AMT -- 3/1/40 5.25 +118 22.430 A1/A-/A Taxable -- 3/1/30 7.408 +380 2/25/10 Nort Carolina Ports Authority 43.935 A3/NR/BBB+ Non-AMT -- 2/1/40 5.20 +103 3/31/10 City of Long Beach - PoLB 200.835 Aa2/AA/AA Non-AMT -- 5/15/25 4.22 +72 4/21/10 Virginia Port Authority 68.630 Aa3/A+/NR Non-AMT -- 7/1/40 4.75 +64 4/29/10 City of Long Beach - PoLB 158.085 Aa2/AA/AA Non-AMT -- 5/15/27 4.20 +64 7/8/10 Delaware River Port Authority 308.375 A3/A-/NR Non-AMT AGM (partial) 1/1/40 4.89 (ins.)/ 5.09 (unins.) +90 / +120 10/21/10 11/17/10 11/17/10 City of Long Beach Carnival Cruise Terminal Project South Carolina State Ports Auth. State of Hawaii - Harbor System 30.000 NR/BBB+/NR Taxable -- 11/1/30 7.282 +475 170.000 A1/A+/NR Non-AMT -- 7/1/40 5.55 +93 164.275 A2/A+/A+ Non-AMT -- 71/40 5.80 +118 11/17/10 State of Hawaii - Harbor System 37.115 A2/A+/A+ AMT AGM (partial) 7/1/21 5.14 (unins.) +194 12/9/10 Florida Ports Financing Committee 106.045 NR/BBB+/BBB+ Non-AMT -- 10/1/40 6.25 +164 PAGE 20

US Seaport Ratings: Solidly Investment Grade Baa3 3% Moody s Moody's S & S & P Baa1 15% Baa2 3% B2 3% Aa2 13% Aa3 13% BBB- 12% CCC+ 6% AA+ 6% AA 12% A3 13% A2 27% A1 10% Fitch BBB 28% B+ 6% A 6% AA- 24% BBB+ 6% BBB- 6% BB+ 6% AA 19% A- 6% AA- 13% A 25% A+ 19% PAGE 21

The Rating Agencies Seaport Industry Outlooks Fitch Ratings: Stable Outlook Fitch expects that 2011 is likely to bring a continuation of the slow but measured recovery that began in 2010. Essential nature of port infrastructure to the global economy Increased restraint from U.S. consumers Prerecession levels not expected until 2012 at the earliest Use of leases with MAGS for downside protection 2011 Outlook: Global Transportation Infrastructure; January 20, 2011 Moody s: Negative Outlook Downside risk remains despite early signs of recovery Cargo declines stabilized in early 2010; Fiscal year results will still be negative U.S. Ports operating in a highly competitive environment, complicated by evolving trade dynamics Shipping sector outlook stable, but profitability still more than a year away Weakened financial metrics pressure credit profiles Financing risks U.S. Port Sector Outlook; June 2010 Standard & Poor s: Individual Credit Outlooks S&P has not provided a seaport industry credit outlook, rather the agency continues to provide an outlook for each individual credit To date: most seaport credits have a Stable Outlook PAGE 22

Key Credit-Relevant Trends Price of fuel Decreased trade with Japan Increased competition/increased access Panama Canal expansion Cost of improved intermodal connectivity Profitability of the shipping lines and port operators How to best plan for growth: The correlation between US GDP & container traffic has changed PAGE 23

GDP and Container Traffic Continue to Move in Step Year over year change Total US TEUs 25% 20% 15% 10% 5% 0% 5% 10% 15% 20% 25% 8% 6% 4% 2% 0% 2% 4% 6% 8% Year over year change GDP GDP (Constant 2005 Dollars) TEUs Sources: Bureau of Transportation Statistics, Bureau of Economic Analysis PAGE 24

SECTION IV Underwriting and Securities Process

The Underwriting Process Who are the Participants? Underwriters Develop marketing strategy Coordinate input from sales professionals Help finalize bond sales/structure Establish price/yield levels on the bonds Sales Professionals: Institutional and Retail Help coordinate marketing strategy Obtain input from investors regarding bond structure Solicit orders for the bonds Internal Credit/Research Staff Write credit report and assist institutional sales force Bond Investors: Institutional and Retail Submit orders for new issues Buy and sell bonds in secondary market Traders Maintain secondary market trading liquidity for investors Buy and sell securities for a firm s account PAGE 26

Investment Banks Assist Issuers in Accessing the Capital Markets Underwriting is the intermediation of risk between issuer and investor Other non-financial examples of underwriting are Insurance What is Underwriting? Intermediation of risk between Issuer and Investor Issuer (Borrower) Bonds Underwriter Bonds Investor (Lender) Bond Proceeds Public Finance Underwriting Sales & Trading Bond Proceeds Lowest Cost of Funds on Easiest Terms Highest Return with Strongest Security PAGE 27

Distribution of Debt Securities Market Segmentation Types of Investors (Maturity Range): Bank trust departments (1-10 yrs) Investment advisors (5-10 yrs) Intermediate bond funds (5-15 yrs) Insurance companies (P&C) and corporations (1-20 yrs) Long-term bond funds (20-30 yrs) Retail/Individuals (1-30 yrs) Investor Maturity Preferences Bank Trust Departments Retail/Individuals Intermediate Bond Funds Long-Term Bond Funds Investment Advisors Insurance Companies and Corporations 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 PAGE 28

Factors Affecting a Pricing Current Yield Curve (as of May 5, 2011) Market Psychology Economic Indicators Market Technicals Bond Structure The Yield Curve Yields (%) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 PAGE 29

SECTION V Best Practices

Debt Financing Best Practices Stay abreast of industry issues and proactively plan Develop a multi-year capital plan Establish internal operational and financial targets Frequently evaluate performance & reevaluate targets Create a debt management plan Proactively manage relationship with the rating agencies and market participants Construct strong deal-related documents that support continuing disclosure PAGE 31

521 MADISON AVENUE, SEVENTH FLOOR NEW YORK, NY 10022 TEL: 212 355-4050 FAX: 212 355-3756 www.frascallc.com Juan Pittman jpittman@frascallc.com 3455 Peachtree Road NE Fifth Floor Atlanta, GA 30325 404 995-7023 1455 Pennsylvania Ave NW Suite 400 Washington, DC 2004 202 349-3676 Jessica Soltz Rudd jsoltzrudd@frascallc.com 21 Orinda Way Suite C, #113 Orinda, CA 94563 925 386-0148

APPENDIX A The Working Group

The Working Group Team Member Bond Counsel In-House Counsel and/or Issuer s Counsel Description Represents the Bondholders and their interests. Responsible for rendering certain unqualified opinions relating to: The organizational and legal existence of the issuer, including its power and authority to issue and sell bonds Whether the ordinance has been duly adopted and is valid, binding and enforceable Whether the bonds are duly authorized, executed and delivered, and are valid binding and enforceable Whether the lien on revenues is valid and whether there is a first lien and security interest Whether the bonds are exempt from federal and state taxation Represents the County and is responsible for drafting sections of the POS/OS and for its general completeness and accuracy. Also responsible for coordinating with the County on all matters relating to bond issuance. Responsible For: Ordinance(s) Authorizing Resolutions Bond Counsel Opinion POS/OS sections relating to: the Ordinance (including Security provisions) the Bonds, Tax Matters, Legality, Enforceability of Remedies, Summaries of the Ordinance [and Use Agreements] Bond Purchase Contract TEFRA Hearing No Litigation Certificate POS/OS sections related to: Litigation, Leases, [Summary of Use/Lease] County certificates PAGE 34

The Working Group Team Member Financial Advisor Management Team (Underwriters) Description Specialist firm working for the Issuer to determine the financial feasibility of undertaking a capital project, evaluating and helping secure various forms of non-debt funding, structuring debt issues and preparing the Issuer to enter the bond market. Advises on terms and pricing of Bonds. Also responsible for preparing materials for rating agency and insurer presentations/solicitations and advising on the reinvestment of bond proceeds. Group of firms that price, market and sell the Bonds to investors, recommending the optimal timing and amortization schedule/terms. Led by a Senior ( Bookrunning Manager) who has principal responsibility for pricing the Bonds. Responsible For: Schedule Modeling, Bond structuring and Financial Analyses POS/OS sections relating to: the Seaport, the County, the Project, the shipping Industry, Investment Risks Advising on fees, pricing, marketing and distribution of Bonds Rating agency/insurer coordination Investment of proceeds Review all documents Bond structuring Insurance procurement Pricing, sale, distribution of Bonds PAGE 35

The Working Group Team Member Underwriters Counsel Feasibility Consultant Independent Accountant Bond Trustee Description Hired by the Management Team to serve as its legal counsel and to draft certain documents relating to the underwriting, sale and pricing of the Bonds. It spearheads the due diligence efforts and also opines on the completeness and accuracy of disclosure in the POS/OS. A forecasting firm specializing in the operation of Seaports whose Report, appended to the POS/OS, evaluates the demand for service at the Seaport, projects traffic, and evaluates the ability of the Seaport to generate sufficient net revenues to repay the Bonds. The independent accounting firm used by the Issuer to audit its annual financial statements Represents the Bondholders in ensuring that financial covenants are adhered to. Holds certain funds (principal, interest, reserve funds) and ensures that money is available for payment. Responsible For: 10(b)5 opinion Bond Purchase Contract Blue Sky Survey/Legal Investment Memo Agreement Among Underwriters Report of the Seaport Consultant Most recent Audited Financial Statements Consent Letter Variety of custodial receipts and certificates PAGE 36

APPENDIX B Principal Bond Documents

Principal Bond Documents Document General/ Supplemental Ordinances Feasibility Report Preliminary Official Statement Final Official Statement Description Legal documents outlining the legal relationship between the Trustee and the Issuer. It contains: Security Provisions Flow of Funds Rate Covenant Additional Bonds Test Parity Debt Events of Default Definitions Eligible Securities for Investment Appendix to the POS/OS that discusses the airport, its service area and its ability to generate net revenues sufficient to pay the bonds based on a short term traffic forecast. Disclosure document provided to potential investors in advance of pricing and sale. Details about coupons, yields, principal amounts, maturities and call features are all left blank. Final offering document to investors with all blank information filled in. Author(s) Bond Counsel Feasibility Consultant Airport Staff Financial Advisor Financial Advisor Senior Manager PAGE 38

Principal Bond Documents Document Bond Purchase Contract Agreement Among Underwriters Blue Sky/Legal Investment Memorandum IRS Form 80-38 Insurance Policy Surety Policy and Tax Certificate Rating Letters Description Contract which sets the terms and conditions under which the Issuer will agree to sell and the Senior Manager on behalf of the Underwriters will agree to purchase the Bonds Document setting forth the legal and financial relationship among members of the Underwriting Team (the Syndicate ) Memoranda which surveys the securities laws in each state and lists where the sale of bonds to the public, to broker dealers and to institutional accounts is permissible without registration or filing. Includes a summary of special considerations in various states Tax form outlining the disposition of bond proceeds Self explanatory Written confirmation of ratings assigned to the transaction by each rating agency providing a rating Author(s) Bond Counsel or Underwriters Counsel Underwriters Counsel Underwriters Counsel Bond Counsel Bond Insurer and its Counsel Rating Agencies PAGE 39