The Port of Oakland is navigating out of a sea of red ink and stabilizing its finances with a back-to-basics strategy that emphasizes traditional lines of business, new management, and streamlined operations.
An expensive foray into the risker field of property management and development during the gogo 1980s exacted a price from the port. In fiscal 1991, for example, the port posted a net loss of $18.2 million, partly because of a $6.8 million write-off related to certain real estate assets. It was the first deficit in the port's 65-year history.
"They went from doing the things they do best -- marine and airport activities -- to real estate. Now, they are full circle back, "said Tom Dowd, professor of port and marine transportation management at the University of Washington. "The trip down land-developer way very near killed them."
In response, the port adopted an extensive internal, reorganization last year to restore its traditional emphasis on maritime and aviation activities, cut expenses, and increase revenues.
That strategy already appears to be paying off. The port reported net income of $6.3 million for the first nine months of fiscal 1992 -- from July to March -- and it projects net income for the year of about $10 million. The port's budget anticipated net annual income of only $300,000.
Among other things, the port expects cost control measures in fiscal 1992 to produce operating expenses that are $4.4 million under budget, according to the preliminary official statement for a $151.7 million bond sale planned for pricing today by the port.
Although the port has steered back into black ink, it faces key long-term challenges. The port operates in an increasingly competitive climate as it battles with neighboring West Coast ports for lucrative Pacific Rim trade.
Resolution of certain problems, primarily timely completion of dredging plans designed to provide adequate channel depths, will play an important role in determining the port's financial stability for years to come.
Occupying 19 miles of San Francisco Bay waterfront, the Port of Oakland once was the busiest harbor for container shipping on the West Coast, flourishing as a trade hub for goods from the Far East.
But a battle over costly plans to dredge deeper shipping channels and fiscal problems stemming from both faulty real estate ventures and the recession, caused Oakland to lose status. During the last two decades, the Port of Oakland slipped to fourth from first place in volume of container cargo among West Coast ports.
Real Estate Projects Prove Disastrous
By contrast, the ports of Los Angeles and Long Beach attracted shippers by touting their enormous consume market, while the ports of Seattle and Tacoma pitched their natural deep-water harbors and their one day's closer sailing time to Pacific Rim countries.
The ports of Los Angeles and Long Beach now boast a 52% share of the West Coast market, up from 42% in 1976, while the ports of Seattle and Tacoma have held a steady share of about 28% over the last decade.
The Port of Oakland's share has fallen in recent years, although it has stabilized at about 16%.
Port observers trace some of Oakland's recent troubles to the late 1980s, when it shifted emphasis to commercial real estate. Attracted by the lure of quick profits and the idea of revitalizing the pier area, the port -- in partnership with private developers -- embarked on an upscale boutique and office project known as the Jack London Water-front development.
But lengthy delays in opening the facility and substantially higher-than-expected retail vacancies led to financial problems and left the port as a general partner with responsibilities for the obligations of the real estate partnership, including a $40 million construction loan.
Reflecting those problems, the port's commercial real estate division in fiscal 1991 produced a net operating loss that decreased the port's net revenues by 10.8%.
"I think we've taken some real hits in real estate that we're working our way out of," said Richard Broderson, chief financial officer of the port. "We want to return to our basic lines of business and attend to our knitting."
The port is now emphasizing traditional transportation activities and back-to-basics leadership. Management upheavals and employee cutbacks reflect this change. Just before the port announced its first loss last year, the Board of Port Commissioners fired those considered primarily responsible for the real estate problems, the executive director and the two top deputies.
Charles A. Roberts, the port's former director of engineering, became executive director last August. A veteran port official, he has pledged to solve the dredging problem and stress shipping and airport activities.
"We are strongly emphasizing our basic mission, which is transportation," he said. "Commercial real estate is now a side venture whenever we feel it is appropriate."
Mr. Roberts said the temporary emphasis on real estate transactions "left behind a lot of problems," but he is upbeat about the port's future. The competing West Coast ports in Southern California and the Pacific Northwest should "watch out," he said, predicting that the Oakland port will be a formidable competitor as it solves its problems.
Mr. Dowd, the University of Washington professor, hailed the port's return to a traditional management style. "One of the strengths that Oakland has had, and missed for a while, is good, common horse-sense management people," he said.
The Oakland port and nearby Oakland International Airport are controlled by the seven-member Board of Port Commissioners.
Mayor Elihu Harris in February proposed a city charter amendment to give Oakland much more control over the port's operations, but he withdrew the proposal because of strong objections from port tenants and customers and some community members. Instead, the mayor created a Task Force on City-Port Relations to study relations between the two entities.
To maintain current business levels and also remain competitive and grow, "the port's maritime capital improvement program is very important," private consultants said in the prospectus for today's planned sale of parity bonds.
Proceeds from the $151.7 million sale will help the port lock in low interest rates by refinancing about $55 million of short-term commercial paper, Mr. Broderson said.
Almost $79 million of bond proceeds will fund capital improvements, with 80% targeted for maritime projects, 15% for aviation, and 5% for real estate. The shipping improvements will include repairs to a wharf and terminal with earthquake damage, roadway extensions, and channel deepening. Improvements to the airport include a new parking lot and parking control system.
In fiscal 1991 the port's maritime division produced 40.1% of its $98 million in total revenues, while the aviation division produced 51.2%
Solid Ratings Despite Financial Troubles
The port last sold bonds two years ago. As of June 1, the port had $366.8 million of bonds outstanding, including $52.1 million of senior lien bonds and $210 million of parity bonds. Growing debt issuance caused the port's interest expense to grow to $24.2 million in fiscal 1991, or double the level only three years earlier.
The increased bond issuance and other factors also caused the port's debt service coverage ratios to decline. The ratio for coverage on all bonds fell from 2.87 in fiscal 1987 to 1.65 in fiscal 1991, but the port now expects that ratio to stabilize and increase slightly through fiscal 1996.
Despite recent financial deterioration, the port has retained generally good standing in the municipal market. Moody's Investors Service has affirmed its A1 rating on the port's senior lien debt, and Standard & Poor's Corp. has done the same for its AA-minus rating.
Mr. Broderson said the port decided to obtain insurance for today's planned bond sale from Municipal Bond Investors Assurance Corp. because "the numbers worked out" to make it economic.
As part of its overall strategy, the port seeks to increase its share of the West Coast container market. A key to growth in this area, according to the port, is a large increase in so-called intermodal rail cargo for shipments elsewhere in the nation. The port believes it has an advantage in this area because it is served by three major railroads.
But charting a course to fiscal stability also means that the port must avoid running aground on a large buildup of silt in the San Francisco Bay.
Industry officials say dredging is critical to the port's competitive position and necessary if it is to accommodate state-of-the-art container ships that require deeper water than older, smaller ships.
Oakland officials estimate that steamship companies divert 14.2 million tons of cargo away from Oakland and into the Los Angeles-Long Beach and Seattle-Tacoma ports each year because of Oakland's shallow channels.
The Port of Oakland received two rulings last week that will pave the way for interim plans to dredge the bay to 38 feet and dispose of the silt at a site near Alcatraz. The Bay Conservation and Development Commission and the Regional Water Quality Control Board approved the port's dredging plans.
"That was key for them," said Peter Bianchini, assistant vice president of Standard & Poor's in San Francisco. "It is not only important from an operational standpoint, it sends a message to shippers that the port will be able to solve its dredging problems."
But efforts to dredge the principal portion of the project to 42 feet may face challenges, particularly because some environmental activists are concerned over disposal options for silt that they say is contaminated.
Nevertheless, Leo Brian, president of the Pacific Merchant Shipping Association, a trade group for ocean carriers, said he is encouraged by a new coalition of port officials, shippers, and labor. Mr. Brian said the group is touting a dumping solution to dispose silt in a large man-made hole near Alameda.
"We're going to turn this dredging problem around," he said. "I'm sure we will find a solution."
Observers predicted the port's return to safer seas will hinge on finding solutions to both the dredging and recent operational problems.
"If one looks at Oakland's future, the next couple years are going to be touchy," said Mr. Dowd. "The port has got to get the dredging problem out of the way."
But he also believes the port will be in good shape "if management stays the same."