March 2, 2005

March 14, 2005

Port Angeles Boat Haven

“Master Plan” Reconfiguration

Financing Option= s

At the February 28, 2005 meeting the commission discussed the options for fund= ing the Port Angeles Boat Haven (PABH) “Master Plan”. In the financing section of the &#= 8220;Master Plan” and during the discussion of February 28th, the use of Limited = Tax General Obligation (LTGO) debt financing was presented and debated.

In the calculation of the average moorage rate needed to support reconfigurati= on, the analysis presented on September 28, 2005 estimated a preliminary moorage rate of $5.23 using a 4 % return on investment. The presentation was as follows:

Current Moorage Revenues/Rate	$637,000	$3.32/lf/mo
Cost Recovery ($5,000,000/30 years)	$166,667	<= /span>
4 % Return on Inve= stment	$200,000	<= /span>
<= /span>	<= /span>	<= /span>
Pro Forma Revenues=	$1,003,667	$5.23/lf/mo

The 4% return on investment was meant to cover the interest costs of issuing LTGO debt. With probable interest costs matching or exceeding this 4 % estimate, the Port w= ould probably just breakeven (no profit and no loss) on the project after paying= the total borrowing costs.

For this meeting we are presenting an expanded synopsis of the financing options available to the Port for funding the capital expenditures listed in the &#= 8220;Master Plan”.

Equity Financing= of PABH Reconfiguration

One option for financing PABH Reconfiguration is to use existing Port reserves (Equity). The cost of using reserves is normally calculated as an opportunity cost. Opportunity= cost is measured as interest lost because the reserves no longer exist and = no longer earn interest. The int= erest lost, or opportunity cost, would be the interest that could have been earne= d on a long term, 20 or 30 years, investment.&n= bsp; As a note, return on the Port’s current investments is constra= ined to 5 years or less by the Port’s investment policy.=

On Thursday, March 3, 2005, a 20 year U.S. Treasury security carried a yield of 4.75 %; since U.S. Agency securities normally used in the Port’s portfolio typically carry a small premium above U.S. Treasury securities, a= n imputed opportunity cost of 5.00 % seems reasonable, if not low on a 30 years basis

Debt Financing o= f PABH Reconfiguration

A. General Discussion of Debt Financing for PABH Reconfiguration=

Debt financing through bonds are issued for the purpose of collecting large amou= nts of money in a short period for construction projects such as the PABH reconfiguration. This money i= s then paid back with interest over a period of time from current operating revenu= es.

There are several benefits to using debt for such projects instead of using a pay= as you go method:

Construction wh= en needed. The PABH project= is needed now. Waiting until funds are available from current revenues may take several years and c= ause ultimate costs to escalate.

Timing Equity.<= span style=3D'mso-spacerun:yes'> Completing the PABH reconfigu= ration now and paying through bonds later would mean that those gaining the benefit of reconfiguration are the same as those paying for it in moor= age fees. Trying to save now= and building later means that the people enjoying the benefit may not be s= ame ones who paid for it.

Enhanced stability. Repayment sch= edules for long term debt, or bonds, are calculated when the bonds are issued. This means that = the Port knows its future requirements and can plan moorage rates accordin= gly.

Repayment in ch= eaper dollars. As inflation oc= curs, the cost of the PABH reconfiguration debt service becomes less burdens= ome to PABH tenants.

There are some disad= vantages to issuing debt as well:

The cost of cap= ital. Whether the Port issues bo= nds and pays interest, or uses equity financing and incurs opportunity cos= t, the cost of capital adds to the total cost of the PABH reconfiguration= .

Encumbered futu= re revenues. For a 20 year = bond, revenues during that period throughout the Port will have already been committed because of the contemplated bond issue. This may have the effect of limiting other capital projects in the future. If the Port chooses to use eq= uity financing, the current reserves will permanently shrink from $ 8.4 Mil= lion to $ 3.4 Million. There = would be a corresponding reduction in interest revenue in the Port’s f= inancial statements.

Limits on the a= mount of debt. There is a Washington = state statute which limits the amount of Limited Tax General Obligation debt= the Port can issue. An attac= hed calculation shows the Port’s debt capacity to be $7,714,000; if = the Port were to issue $5,000,000 in bonds for the PABH reconfiguration, t= he Port’s debt capacity would be reduced to $2,714,000.

There is no limit, aside from the ability to repay debt service, to the amount of Revenue bonds the Port can issue.

B. Types of Debt Financing

Limited Tax General Obligation Bonds<= /o:p>

Limited Tax General Obligation (LTGO) bonds are sold by the Port where the repaymen= t of the bonds is guaranteed by the “full faith and credit” of the Port. This means that LTGO bo= nds are guaranteed by the Port’s property tax authority as well as moorage fees and any other revenues as far as making debt service payments are concerned. For this reason, f= inding buyers for the bonds is relatively easy and investors are willing to accept= a lower interest rate for the increased security.

In the analysis presented at the February 28, 2005 meeting it was assumed that= the Port would issue LTGO bonds at a rate of 4.00 % for the PABH reconfiguration. This was don= e to lower overall costs and thus reduce the increase in moorage fees necessary = to service dept payments.

Revenue Bonds

Revenue bonds are bonds that the Port sells for construction such as that contempla= ted at PABH. Unlike LTGO bonds th= at are guaranteed repayment from property taxes, Revenue Bond debt is retired by t= he revenue that the PABH generates in the form of higher moorage fees.

Interest rates on Revenue Bonds tend to be higher than LTGO bonds because their repayment in not guaranteed by the general taxing authority of the Port. In addition, Revenue Bonds usually contain a debt covenant that dictates the minimum ratio that the revenue st= ream must maintain, usually 110 % to 150 % of the maximum annual debt service.

If a Revenue Bond approach is used for the PABH reconfiguration project, annual debt service will be higher than that presented on February 28,= 2005 and moorage rate adjustments will likely be higher as well.

C. Internal Cash Flow Criteria

The most limiting criteria in the Port’s assessment of debt issuance opti= ons, is the Port’s ability to assume additional debt service obligations.<= span style=3D'mso-spacerun:yes'> The Port at this time is not in a breakeven position on an annual cash flow basis. Aside from recent cash inflows from property sales, the Port’s overall inflows and outflows of cash are n= egative on a yearly basis. Thus, ther= e is no other underlying internal source of cash flow to fund new bond obligatio= ns other than creating new cash inflows.

The source of cash flow identified in the PABH Master Plan project is increases= in PABH moorage rates. The moora= ge rate recommendations presented at the February 28, 2005 meeting is the mini= mum increase in rates that will allow the Port to pay LTGO debt service. The recommended moorage rates will= not result in any increase in net cash flow to the Port after bond debt service= .