Opportunities in Non-Container Trade and the Expanding Cruise Industry

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1 Opportunities in Non-Container Trade and the Expanding Cruise Industry AAPA Commissioners Seminar Steven Cernak, Port Director Port of Galveston San Francisco, CA May 18, 2005

2 The Port Industry Is a highly competitive industry Requires large amounts of Capital Investment in its Facilities for both the Port and its Customers Is subject to Market and Industry Shifts Is subject to Fluctuations in Trade and Trade Policy Ports themselves have limited control over these business factors

3 How Does the Port of Galveston Operate? The Port operates as an Enterprise Utility: The properties belonging to the City of Galveston are set apart and designated as a separate utility of the City known as the "Galveston Wharves. The Port is Financially Independent from the City: The Galveston Wharves, and the income and revenue there from, shall be fully managed, controlled, maintained and operated by a Board of Trustees to be known as "Board of Trustees of the Galveston Wharves. The Board of Trustees have complete management and control of the Port of Galveston and the income and revenue thereof.

4 How Does the Galveston Wharves Operate? The Board of Trustees has the power to contract for all essential purposes. These provisions are set forth in the Galveston City Charter and also under Chapter 54 of The Texas Transportation Code.

5 Financial Considerations As an Enterprise Utility, the Port had limited ability to issue new debt to support project development. Existing Bonds had very restrictive covenants that pledged all future earnings towards the repayment of that debt. Debt Service coverage was mandated at 150%.

6 Financial Considerations The Port had an opportunity to capture a unique market opportunity, but had to find a way to capture the increased revenue while ensuring that existing bondholders were protected. The solution was found in the creation of the Galveston Port Facilities Corporation, a 501c3 Corporation created under the Texas Transportation Code.

7 Financial Considerations This Solution Provided the ability to: Capture Increased Market Share Develop a true Public-Private Partnership Develop a long-term Partnership with Carnival Corporation and Royal Caribbean International Secure Long-Term Operating Agreements Be Recognized by the National Council for Public Private Partnerships in using this approach in redevelopment by awarding the Port, Carnival Corporation and Royal Caribbean International their 2004 Industry Award

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9 Cruise Homeport Opportunities As a homeport the marketing approach is two fold: 1. To promote the port to the cruise line and how the port meets their needs. 2. To promote the port as a friendly and attractive cruise passenger departure point.

10 Cruise Planning: Strategic, Marketing and Operational Objectives Regarding operations, Identify: 1. Demographics and population density the cruise lines can draw passengers from. 2. Port proximity to airlift and open sea. 3. Terminal facilities to accommodate check-in, luggage lay-down, proper federal agency clearance areas, adequate space for provision staging.

11 Cruise Itinerary Planning: Strategic, Marketing and Operational Objectives Regarding passengers, Identify: 1. Available transportation to and from airlift 2. Tourist amenities located near terminal 3. Comfortable efficient facilities for passengers 4. Adequate parking facilities 5. Friendly community supportive of cruise business

12 Choosing Home Ports vs. Ports-of-Call vs. Destination Port 1. Determining how a port fits into a targeted cruise line s operations is a key element for a home port marketing strategy to the lines. 2. Zeroing in on the line s current business will help you understand how your port can fit into their goals. 3. Be prepared to prove your port will fill their beds or be a unique destination on the itinerary.

13 Responding to the Changing Expectations of the Cruise Passengers Understanding that each cruise product in your port has a different identity and customer base, helps home ports react to passenger demands.

14 Challenges of Responding to the Changing Cruise Industry 1. Not unlike destinations, home ports need infrastructure to accommodate bigger vessels and handle larger numbers of passengers. 2. Financial burdens of facility expansion. 3. Increased security measures 4. Home ports need to provide adequate staging areas for luggage and provisions trucks, garbage handling and other support activities.

15 Challenges of Responding to the Changing Cruise Industry (Cont d) 5. Home ports need adequate water supply to service vessel. 6. As a pioneer in the popularity of drive market ports, parking and shuttle buses were a critical part of Galveston s infrastructure. 7. Securing long term contracts to support financing. 8. Working with state legislators on local issues that impact cruise business.

16 Economic Impacts of Cruise Home Ports Direct Economic Impact 1. Jobs Meet & Greet services, taxis, longshoremen, line handlers, tug boats, pilots, police and security personnel, construction, etc. 2. Suppliers-Local produce suppliers, local florists, local liquor suppliers, IT services, copier/fax repairs services, garbage collection, fuel suppliers, etc. 3. Crew members- Act like temporary residents, eating, shopping, using city services, medical facilities and other community facilities.

17 Economic Impacts of Cruise Home Ports Indirect Economic Impact Includes: Pre and Post cruise hotel nights, parking, city transportation, local shopping, post office, new business creation, restaurants, etc.

18 Be Careful of What you Ask For Total Ship Calls Total Revenue Passengers Total Ship Calls Total Revenue Passengers 1,050,000 1,000, , , , , , , , , , , , , , , , , , ,000 50,000 0 Year Ending

19 Year Tampa New Orleans Houston Galveston Revenue Passengers Gulf Ports Passengers Year Tampa New Orleans Houston Galveston

20 Working with the Community 1. Community Involvement - Established a cruise committee of interested citizens 2. Worked with CVB on promotion and helping with cruise line executives when in town. 3. Provide assistance, if possible, to the local community to communicate with the cruise lines to try to get home port information on board the ships for the passengers (brochures, TV) 4. Work with local newspapers, TV stations etc. to stimulate interest and educate community on benefits of having cruise line in town.

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22 Other Opportunities Expansion of an existing Bulk Terminal BP LNG Project Development of a new Ro-Ro Terminal Expansion of Refrigerated Warehousing New Shipyard Lease Tourist Area Expansion Piers Redevelopment

23 Houston Ship ChannelHouston Ship Channel Texas City Refinery BP LNG Facility Texas City Channel Pelican Island Galveston Texas City Channel Pelican Island Galveston Remote Location Surrounded by USACE dredge materials site Easily accessible for marine traffic Accessible to consumer markets Allows Galveston to be part of the regional clean energy solution

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25 BP LNG Project As an Enterprise Utility of the City, this project puts a non-performing property under the Port s control to productive financial use, while allowing the Port to diversify its revenue sources and increase operating revenues by at least $2.5 million dollars per year if FERC approval is granted.

26 BP LNG Project Secondary Financial Benefits included, based on a projected $200 million assessed valuation of infrastructure improvements at the site, potential annual payments as follows: GISD - $3 million City of Galveston - $1 million Galveston County - $1.2 million Galveston College - $400,000

27 BP LNG Project Increased employment opportunities, including: Approximately 450 jobs during construction Approximately 80 direct and indirect jobs during operations.

28 BP LNG Project In summary: This project provided significant economic benefit to the Port as it continues to meet its challenge of being economically viable in a highly competitive environment, while providing economic benefit to the Galveston Community.

29 In Summary Recognize the Opportunity Understand the Market Know your Competition Properly Locate the Project Be Aware of Financial Considerations Protect the Investment Understand the Politics of a Given Project