The Ketchikan City Council will convene for a special meeting Wednesday evening at the Ted Ferry Civic Center to hear City of Ketchikan staff present a financial and qualitative analysis of the two proposals for the management and redevelopment of the Port of Ketchikan, as well as the option of the city retaining management of the port.
Ketchikan Port Solutions and Survey Point Holdings are the two proponents competing for a port management contract. Those two companies were shortlisted for further consideration by the City Council in a June meeting.
Since that time, KPS and SPH representatives have given multiple presentations to the public, as well as to council members and city staff. More recently, in response to a public outcry for more transparency, the full proposals of both companies were posted for public perusal on the City of Ketchikan website at https://www.ktn-ak.us/.
Posted on the website along with the proposals is the seven-page financial analysis of the proposals completed by the financial company Piper Sandler & Co. The analysis compares the proposals to each other, as well as to the “status quo” option of the city rejecting both offers and continuing to operate the port without engaging in a contract with a port management company.
One critical area in which the two proposers differ markedly, according to the Piper Sandler analysis, is in their plans for increasing cruise ship passenger fees.
KPS proposes to raise the city's current $7 per-passenger fee to $9 initially, escalating it to $15 by 2029, $17.67 in 2040 and $20.51 in 2050 before then raising it annually according to inflation rates of about 1.5%.
The KPS “Best and Final Offers” document, also posted on the city’s website, lists points of the company’s proposed “Annual Lease Payments and Revenue Sharing” plan as follows:
● Take over the city’s Berth 3 improvements bond debt payments.
● Take over the city’s Berth 4 lease payments.
● Allotting the city a share of cruise ship passenger fees of 50 cents per passenger under a 20-year concession contract or $1.25 per passenger under a 30-year term contract.
SPH proposes to immediately raise the $7 per-passenger fee to $17, splitting off $7 of that to be paid to the city for the entire term of the contract, with $10 retained by SPH. The $17 fee would escalate 2.34% annually to $22.75 in 2040 and $26.95 in 2050.
The City of Ketchikan also receives cruise passenger revenue from the Alaska state Commercial Passenger Vessel excise tax fund. The state charges $34.50 for each passenger on a vessel carrying 250 or more berths and mooring in Alaska waters. The revenues are distributed to the first seven Alaska ports of call at a rate of $5 per passenger. The City of Ketchikan and the Ketchikan Gateway Borough split that revenue 50/50.
The SPH “Best and Final Offers” document, also posted on the city’s website, lists points of the company’s proposed revenue sharing plan as follows:
● Takeover of the city’s Berth 3 improvements bond debt payments.
● Assume all future payments during the life of the contract for the Berth 4 lease.
● Continue to collect and remit to the city the $7 cruise passenger fees.
● Pay to the city an annual lease amount of $500,000, increasing by Consumer Price Index rates over the life of the contract.
Although Piper Sandler analysts wrote that “the SPH proposal has the potential to deliver significantly more financial benefit to the city,” they later wrote that “we question the viability of more than doubling the current passenger charge with new facilities coming online at Ward Cove and have concerns about the impacts to the city should a $17 plus passenger fee prove to be unacceptable to the market.”
A second potential issue that Piper Sandler identified with SPH planning to keep the $10 portion of the per passenger fee is that SPH could be found in violation of the Tonnage clause of the U.S. Constitution. In a 2018 court ruling on a case addressing the City of Juneau’s use of passenger fee revenue, the court decided that the monies received from passenger fees must only be used on projects that directly benefit the cruise vessels.
Piper Sander asserted that while both the proponents’ passenger fee rates could be at risk of being challenged under the Tonnage clause, the SPH $10 fee portion would be more likely to be successfully challenged because it has the “appearance of inuring to the benefit of the private operator and not a capital expense benefiting the cruise lines.”
Another big difference between the two companies’ proposals is the schedule of payments to the City of Ketchikan.
KPS is offering, for a 20-year contract, a $10 million up-front payment to the city, then six more annual payments of $5 million. For a 30-year contract, they are offering $15 million up front, then six more annual $5 million payments.
KPS also is proposing a minimum annual guarantee of passenger fees of $400,000, growing at the Consumer Price Index rate.
Piper Sandler wrote that the minimum annual guarantee approach offered by KPS “represents a very small percentage of passenger revenue proposed by SPH but over a 20-year lease term it is on average 75%” of the SPH projected revenue. That means the city would be exposed to the first 25% of risk in case of low visitor numbers, but after that, would be insulated from any further declines in passenger volume.
SPH is offering no up-front payment.
“All of the economic benefit to the city will come from passenger fees and terminal operations,” Piper Sandler wrote, adding that “nearly all the economic benefit comes with some level of operating risk to the city.”
The SPH offer of a $500,000 annual lease payment would rely on the future operating success of the terminals, Piper Sandler wrote.
Piper Sandler also noted that the SPH proposal was “vague in several key areas,” including the proposed equity contribution, the proposed facility capital improvements and future capital investments.
“Overall,” Piper Sandler wrote, “we feel that the proposal requires the city to have a great deal of trust in the ability of the two parties to work out the complicated business details of the concession.”
KPS, in contrast, “was very detailed with regard to the capital improvements to be implemented immediately which would include improvement to Berth III and cathodic protection of Berths I-III as well as the timing of those improvements,” Piper Sandler noted.
One potential problematic issue for both proposers that Piper Sandler touched on was that the “leverage factor percentages” are too high when the city’s 2016 bond debt for the Berth 3 improvements is taken into account.
That debt first was taken on by the city in 2006 to complete Berth 3 renovations as well as the promenade, restroom facility and widened roadway behind Tongass Trading Co., City Finance Director Bob Newell said in an interview via phone Monday. That $38 million bond was re-funded in 2016, he added.
If either proponent took over management of the port, that debt would be transferred to that company, negatively altering its debt-to-asset ratio — or its leverage factor percentage.
Additionally, there are potentially problematic tax issues related to both companies’ plans to address that debt.
“Ultimately both parties will need to effectively address the 2016 Bonds which may require additional upfront equity to address tax law issues and any project leverage factor concerns,” Piper Sandler wrote.
In a table included in the analysis, the total estimated “net present value” of cash flow to be expected in 20-year or 30-year leases is compared to the “status quo” option of the city continuing to manage the port.
The values in the chart show SPH bringing in a 35% higher return to the city over a 20-year contract and 7% higher over a 30-year contract than the city would earn on its own. The KPS proposal would bring in an 11% lower return over a 20-year contract and a 25% lower return over a 30-year contract.
Under the chart, however, Piper Sandler again warned that with the SPH proposal to immediately substantially raise passenger fees was potentially problematic and that “the viability of the overall project could be at risk.”
In the conclusion of its analysis, Piper Sandler stated that “if the city is bottom line focused and can tolerate the business risk associated with cruise ship terminal operations, then continuing to operate the Berth I-IV facilities as you have historically should result in the best return to city, assuming passenger counts normalize and remain stable into the future.”
Addressing the business risk factor, however, Piper Sandler wrote that “the benefits of working with the private sector in a concession type arrangement are risk transfer from the city to the private partner and expertise offered by the private partner that is not a core or inherent at the city. Expertise and risk transference includes the areas of facility operation, project development, project construction and marketing/sales.”
Piper Sandler added, “We believe that, in addition to the monetary elements of the proposals, the city should also consider these factors when making its partner selection. These factors could translate to lower cost or improved operating revenue which could be shared with the city.
“However, bottom line revenue to the city is unlikely to be improved from the status quo due to a variety of factors including revenue sharing and cost of private sector debt and equity capital.”
Piper Sandler concluded, “we believe that both proponents are well qualified to execute the project improvements and operate the cruise terminals in Ketchikan.”
The City of Ketchikan staff presentation regarding the port proposals is scheduled to start at 6 p.m., Wednesday at the Ted Ferry Civic Center. There is time scheduled at the start of the meeting for public comment.
A maximum of 50 attendees will be allowed and chairs will be set six feet apart. Attendees will be asked to sign in at the door, and pens will be sanitized between users. Other surfaces also will be properly sanitized. Paper masks also will be available for use by attendees, and masks will be mandatory when six feet of distancing between people is not possible.
The meeting can be viewed live via the KPU cable television service, on the City of Ketchikan YouTube channel, on the City of Ketchikan’s Facebook page and also on the City of Ketchikan website at http://www.ktn-ak.us/current-agendas-and-minutes.