Authority approves $865M lease of APM Portsmouth terminal

NORFOLK

The Virginia Port Authority board on Thursday unanimously approved a 20-year lease of APM Terminals' state-of-the-art container facility in Portsmouth, ending three years of competition and putting all of the port's major terminals under one flag.

The agreement could cost the Port Authority more than $1.1 billion, including inflation adjustments, over the life of the deal.

"This is in my estimation a grand slam home run for all the parties involved," said Jerry Bridges, executive director of the Port Authority. "This is one of the biggest transactions in the history of the port of Virginia."

Eric Sisco, president of APM Terminals Americas, said he has been authorized by his board to conclude the negotiations and execute the agreement. The signing of the lease is scheduled for Wednesday.

The Port Authority is scheduled to take control July 6, said Joe Harris, an authority spokesman.

Opened in September 2007, APM's Portsmouth facility cost roughly $500 million to build and is considered one of the most technologically advanced marine terminals in the world.

"We think that, we know, that container handling costs will be reduced at APM," Bridges said. "We think that it provides optimal use of and growth plans for all the facilities in Hampton Roads."

The base rent for the facility is valued at $865 million in today's dollars but could end up costing the authority more than $1.1 billion, after adjustments for inflation.

The Port Authority will pay APM Terminals about $40 million a year. By the end of the lease in 2030, base-rent payments, compounded by the inflation factor, could increase to more than $70 million a year.

APM also will receive a bonus payment for container volumes of more than 500,000 a year.

The APM terminal has a capacity of about 825,000 containers a year, Bridges said. Further expansion could increase its capacity to about 1.5 million containers.

Port officials do not expect to have any trouble paying the rent based on revenue from shipments currently moving through APM combined with the container traffic that will be transferred from Portsmouth Marine Terminal - a total of roughly 500,000 containers a year, said Rodney Oliver, the Port Authority's deputy executive director and chief financial officer.

"We hope to fill that terminal up in pretty short order," Harris said of APM. "The plan is to put that facility to good use and max it out as quickly as we can."

APM Terminals' current traffic generates about $25 million a year on a volume of roughly 230,000 containers, Bridges said.

That means the 3-year-old terminal is only operating at a little over a quarter of its capacity.

APM opened just before the onset of the recession slashed the consumer demand that drives container traffic. It also faced stiff competition from Virginia International Terminals Inc., which operates the port authority's terminals. As of December 2009, VIT had locked up 10-year contracts with shipping lines accounting for roughly 90 percent of the Port Authority's cargo.

Other provisions of the deal include:

-- "Option rent" of $3 million a year paid to APM, also adjusted for inflation, giving the Port Authority the option of developing another 46 acres at the APM facility, building another berth and doubling its rail capacity. If APM were to refuse the new development, the Port Authority would get all of its option-rent payments back; otherwise, the payments would continue.

-- APM's right to refuse to allow its facility to be sublet or operated by a third party - a potential factor in any public-private partnership deal the Port Authority might enter.

-- No financial obligation on the part of the state in the event of a default.

Industry experts offered differing takes on the Port Authority's lease of APM.

Ted Prince, a freight-transportation consultant with Richmond-based T. Prince & Associates LLC, said the deal really comes down to the fact that "before there was competition, and now there's not."

The Port of New York/New Jersey has terminals that compete with one another, he said.

"Lines are just getting unbelievable deals there," Prince said. "I don't understand how the loss of competition is going to help the port."

But Ron Sucik, with RSE Consulting in Naperville, Ill., said it makes sense to shift container traffic to the port's most efficient terminal.

"The short answer is it's probably good for everybody," Sucik said.

Robert McCabe, (757) 446-2327, robert.mccabe@pilotonline.com