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Panama Expansion May Help Competing Ports Topple L.A. From Its No. 1 Position

LOS ANGELES — In American ports, the expansion of the Panama Canal is the elephant in the room.

East Coast and southern U.S. ports see the Panamanian expansion, allowing it to handle larger ships by the middle of the decade, as their chance to woo business away from the Port of Los Angeles.

West Coast ports see it as a potential threat to their traffic, if East Coast ports can undercut what they charge shipping companies.

Right now, the Los Angeles port has by far the largest container ship traffic volume in the United States.

Combined, the Los Angeles port and neighboring Port of Long Beach hold the distinction of being the fifth largest port in the world, according to a Fitch Ratings report.

In a May 1 ratings report, Fitch analysts affirmed its AA rating and stable outlook on the Port of Los Angeles’ $840 million of outstanding debt.

The port is a Los Angeles city department, located in the San Pedro section of the city.

Port industry experts have been saying for several years that the Panama Canal expansion is a game-changer, because when it is complete, ships hailing from booming Indian and Chinese ports might keep going past Southern California to other ports of call.

“We are taking the Panama Canal threat very seriously,” said Phillip Sanfield, a port spokesman. “We also take Canada, Mexico and the Pacific Northwest seriously.”

The Port of Los Angeles, however, is in a good place compared to where it was several years ago when environmental lobbying groups virtually shut down port expansion using the California Environmental Quality Act.

“In 2008, we embarked on a clean truck program that took quite a substantial amount of dollars,” said Karl K.Y. Pan, chief financial officer for the Port of Los Angeles. “We spent $50 million in 2009, which was the height of the recession. We were committed to making sure we removed a substantial amount of NOx [nitrogen oxide] out of the atmosphere.”

The port is committed to spending both operating and capital dollars in appropriate ways, according to Pan.

Sanfield, the port spokesman, said: “As we upgrade our terminals, there are a laundry list of environmental upgrades and regulations we enforce that are sometimes stronger than the state regulations — whether it’s amping (connecting docked ships to cleaner land-based power) or the operation of the cranes. We are at the leading edge when it comes to zero emission.”

The port has 500 environmentally conscious trucks, he added.

The strategy of growing green has paid off for the ports, even if it was developed under pressure from environmental activist groups.

“We were at the point that we could not do anything here because of the community and the environmental lawsuits,” Sanfield said. “We were stopped in our tracks. We have shown the community and the environmental groups we can do this and have been able to move forward on a number of projects and have a number in the hopper.”

Today, Pan said, the Port of Los Angeles is focused on accomplishing the goals laid out in that five-year plan. However, it also plans to issue debt slowly to keep its debt ratio low.

The port is developing facilities for China Shipping and terminal operator Trapac, Pan said. “We are also working on the alternative maritime tower for the cruise terminal,” he added.

The Port of Los Angeles’ capital expenditures program is modestly sized and flexible, according to Fitch analysts.

“POLA has a moderate and flexible $1.4 billion CAPex program with future debt requirements that will not materially dilute coverage,” according to Fitch analysts.

“The port’s terminal facilities are modern and contiguous, and have excellent access to intermodal transportation facilities, including on-dock rail, near-dock rail, and direct connections to the national rail network through the Alameda Corridor, and the Southern California system of freeways.”

Sanfield said POLA just came out with a strategic plan. “Top of the to-do list is maintaining and expanding our infrastructure,” he said. “In San Pedro, we already have the largest and most powerful infrastructure in North America.”

Through the strategic plan, he said, the port aims to build on that infrastructure by doing any dredging that is necessary and working with the rail lines to improve their infrastructure.

“We have 100 trains a day coming out of the Los Angeles-Long Beach ports versus the four in New York and New Jersey,” Sanfield said.

It helps that fuel costs have not abated much since they spiked four years ago.

Those costs have even resulted in some Asian companies, which make goods aimed at American consumers, making the decision to move manufacturing operations to Southern California, said Bill Allen, chairman of the Los Angeles County Economic Development Corp.

The twin ports’ harbor is accessible to the largest container ships, making the Southern California facilities attractive for companies producing goods aimed at American customers.

Port officials plan to be slow and steady as they move forward on projects, spending cash when they can and bonding at a rate that keeps their debt ratio low.

“Right now we have a $300 million commercial paper program,” Pan said. “We expect to finance a portion of that with cash and then see how cash flow is to see if it makes sense to issue commercial paper or long-term bonds.”

All the renovations are sourced solely through the port, because it is a “landlord port,” Pan said.

“The amount of borrowing versus the amount we put out of our own pocket-cash flow is about 50-50,” he said.

The port has $360 million in cash on had to fund projects, according to Pan.

The port’s annual gross revenue is about $400 million, and on an operating income basis generates about $190 million, he said.

“We try to keep at least one year’s worth of operating expense on hand,” Pan said. “Operating expenses for the past two years have been $215 million.”

Port officials try to maintain cash reserves at $235 million; Pan said currently the figure is $366 million.

During the boom, container traffic at the port was doubling annually.

“It reached its highest level in 2006 and 2007,” he said. “We measure volumes by TEUs, which means each 40-foot container on the road equals two TEUs.”

TEU stands for a Twenty-foot Equivalent Unit.

In 2007, the port reached 225 million TEUs; now that number is at 190 million, he said.

Looking forward, Pan said, the port does not expect to reach double-digit growth again in terms of TEU volume, which has affected how it aligns capital projects to cash flow.

Fitch lauded the Port of Los Angeles for having strong debt-service coverage levels and an internal policy to manage leverage in order to maintain a minimum of 2 times net revenue coverage.

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