Port of Wilmington & Morehead City Feasibility Study

Transcription

1 Port of Wilmington & Morehead City Feasibility Study Presented to: North Carolina State Port Authority October 2012 DRAFT Prepared by: Moffatt & Nichol Executive Summary Page 1

2 Moffatt & Nichol Executive Summary Page 2

3 Notice The Ports of Wilmington & Moorhead City Feasibility Study herein known as the Report has been prepared on the basis of a scope of work agreed with the North Carolina State Port Authority to provide a review and forecast of cargo volume throughput and operating performance at the Port of Wilmington and the Port of Morehead City. Moffatt & Nichol understands that the Authority will use the Report in the bond offering documentation for Port Facilities Senior Lien Revenue Bonds, Series 2010 issue, with the intent of providing independent forecasts for prospective purchasers. The Authority operates two inland terminals which were not reviewed in the Report. The Report represents the consultant s opinion as of the date thereof and was prepared in accordance with generally accepted practices for independent market consulting and with the standards of care practiced by experienced market consultants in performing similar tasks on similar projects and financings. In preparing the Report, Moffatt & Nichol has used data from both internal and third party sources. Moffatt & Nichol can accept no liability for the accuracy of data sourced in good faith from third party sources. Moffatt & Nichol undertakes no obligation to notify recipients of events occurring after the date on the front cover of the Report that might change the content or conclusion of the Report. It should be noted that estimating future supply and demand in port and shipping industry is inherently complex and the industry is currently in a period of significant change due to the impacts of the global recession. The forecasts contained within the report are, therefore, presented on the basis of the assumptions detailed within the Report only. Moffatt & Nichol can also accept no liability for the consequences of this document being used for a purpose other than for which it was commissioned and should not be relied upon for any other project without an independent suitability analysis being undertaken and the prior written authority of Moffatt & Nichol being obtained. Moffatt & Nichol Executive Summary Page 3

4 Table of Contents 1. Executive Summary Introduction Port of Wilmington Port of Morehead City Freight Composition & Market Served Competitive Region Regional Competition & Port Volumes Regional Economic Trends & Trade Implications Agriculture Construction/Housing Manufacturing Sector Consumer Sector Near term Policy Driven Threats & GDP Outlook Commodity Trends & Forecasts Overview POW Containers POW Bulk POW Break Bulk MHC Bulk MHC Break Bulk Summary of General Cargo Forecasts Feasibility of Wood Pellet Export Opportunity Executive Summary Overview Biomass energy overview Wood pellets Global flows of renewable energy Biomass Market Drivers Market Segments European demand Market Segments Business Model Moffatt & Nichol Executive Summary Page 4

5 6.5. Key Markets (Belgium, Denmark, Germany and United Kingdom) Key Markets Summary Belgium Denmark Germany United Kingdom Sources of Supply Key Suppliers US Production US Exporting Ports Investment Evaluation Review of NCSPA Financial Forecasts Revenue Projections Operating & Maintenance Expense Capital Expense Plan of Finance Financial Results Appendix North Carolina Container Demand Cascade Theory Moffatt & Nichol Executive Summary Page 5

6 Table of Figures Figure 1: NCSPA Operated Facilities Figure 2: Port of Wilmington Figure 3: Port of Morehead City Figure 4: North Carolina Competitive Schematic Figure 5: Major Port Facilities in US Southeast Figure 6: Noncontainerized Tonnage in the US Southeast by Port District Figure 7: Indexed Container Volume Growth Figure 8: US Southeast Container Volumes and Port of Wilmington s Share Figure 9: North Carolina s Container Volumes Port of Wilmington s Share of Figure 10: Hogs and Pigs Inventory Figure 11: Broilers Sold Figure 12: US Meat Exports Historical and Future Projections Figure 13: Harvested Acres of Soybeans Figure 14: Harvested Acres of Tobacco Flue cured Figure 15: Location of Wood Using Mills in North Carolina Figure 16: North Carolina's Roundwood Pulpwood Production Figure 17: North Carolina Building Permits Figure 18: Freddie Mac s U.S. Excess Vacant Homes in 1,000s Figure 19: US Long term Construction Spending Trends Figure 20: North Carolina Manufacturing Employment by County Figure 21: North Carolina Population by County Figure 22: North Carolina and US Unemployment Rate Figure 23: North Carolina and US Income per Capita Figure 24: US GDP Growth (YoY%) Forecast Scenarios Figure 25: US and North GDP Growth (YoY %) Figure 26: Port Tonnage by Cargo Type Figure 27: Growth by Cargo Type Figure 28: Container Forecasts for Port of Wilmington Figure 29: Loaded Import & Export Containers Figure 30: Tonnage of Containerized Commodities Figure 31: Port of Wilmington s CKYH Services Figure 32: Forecasted Underlying Demand in North Carolina Figure 33: Container Forecasts 3 Scenarios Figure 34: Vopak Terminals Wilmington, NC Figure 35: Chemical Volumes at Port of Wilmington Moffatt & Nichol Executive Summary Page 6

7 Figure 36: Grain Volumes at Port of Wilmington Figure 37: Woodchip Volumes at Port of Wilmington Figure 38: Cement Volumes at Port of Wilmington Figure 39: DRI Volumes at Port of Wilmington Figure 40: UAN Volumes at Port of Wilmington Figure 41: Metal Product Volumes at Port of Wilmington Figure 42: Forest Product Volumes at Port of Wilmington Figure 43: Break Bulk & Containerized Volumes of Wood Pulp Figure 44: Total Wood Pulp at Port of Wilmington Figure 45: Phosphate Volumes at Morehead City Figure 46: PCS Phosphate Terminal at Morehead City Figure 47: Sulfur Volumes at Morehead City Figure 48: Scrap Steel Volumes at Morehead City Figure 49: Woodchip Volumes at Morehead City Figure 50: Ore, Mica, Schist at Morehead City Figure 51: Rubber Volumes at Morehead City Figure 52: Regional Tire Plants Figure 53: Metal Products (ex Scrap) at Morehead City Figure 54: Forest Products at Morehead City Figure 55: General Cargo Volume Forecasts Figure 56: Close Carbon Cycle Figure 57: Wood Pellet Production Process Figure 58: Main international biomass for energy trade routes Figure 59: Top wood pellet importers Figure 60: Top wood pellet exporters Figure 61: Natural Gas Prices Figure 62: Biomass and Waste Electricity Net Generation Figure 63: Overall Growth in EU27 Market Figure 64: EU27 Market Segments Figure 65: Size and Growth of Selected Markets Figure 66: Germany s renewable energy Figure 67: UK's renewable energy Figure 68: Wood Pellet Supply Chain Moffatt & Nichol Executive Summary Page 7

8 Figure 69: Belgium Figure 70: Historical Energy Consumption (Belgium) Figure 71: Target growth of renewable energy and solid biomass (Belgium) Figure 72: Expected Wood Pellet Import to Belgium Figure 73: Denmark Figure 74: Historical Energy Consumption (Denmark) Figure 75: Target growth of renewable energy (Denmark) Figure 76: Expected Wood Pellet Import to Denmark Figure 77: Germany Figure 78: Historical Energy Consumption (Germany) Figure 79: Solid Biomass Market Growth (Germany) Figure 80: Solid biomass production and consumption (Germany) Figure 81: Target growth of renewable energy (Germany) Figure 82: Expected Wood Pellet Import to Germany Figure 83: United Kingdom Figure 84: Historical Energy Consumption (UK) Figure 85: Target growth of renewable energy Figure 86: Location of UK power plants Figure 87: Expected Wood Pellet Import to UK Figure 88: Global wood pellet consumption outlook Figure 89: Global wood pellet production outlook Figure 90: Historical Energy Consumption (US) Figure 91: Biomass Supply (US) Figure 92: US southern wood pellet production facilities Figure 93: Current and year 2030 state quantities of logging residue available annually at $80 per dry ton Figure 94: State quantities per year of simulated forest thinnings at $20, $40, and $100 per dry ton (roadside) Figure 95: Southern US Pellet Mills Capacity (Estimates) Figure 96: Current & Future Southern Production Capacity vs. Proposed MAGs (Estimates) Figure 97: Historical wood pellet export volumes Figure 98: Non Containerized US Wood Pellet Export Volumes Figure 99: 2010 Top Wood Pellet Exporters Figure 100: 2010 Top Wood Pellet Importers Figure 101: Cash flow over the project life MHC Moffatt & Nichol Executive Summary Page 8

9 Figure 102: Cumulative NPV of net annual cash compared to the required investment MHC Figure 103: Cash flow over the project life POW Figure 104: Cumulative NPV of net annual cash compared to the required investment POW Figure 105: NCSPA Projected Operating Revenues Figure 106: NCSPA Projected Operating Expense Figure 107: NCSPA Capital Project Cash Flows by Type Moffatt & Nichol Executive Summary Page 9

10 List of Tables Table 1: Port of Wilmington s Traditional Commodities by Handling Type Table 2: Morehead City s Traditional Commodities by Handling Type Table 3: Recent Growth Rates in Container Volumes in US Southeast Table 4: North Carolina s Manufacturing Employment by Industry Table 5: 2012's Container Volumes by Carrier Table 6: General Cargo Forecasts by Commodity (Tons) Table 7: Summary for Key Identified Markets Table 8: UK's renewable energy policies Table 9: US southern production capacities Table 10: Annual cash flow estimate for three customers MHC Table 11: Annual cash flow estimate for three customers POW Table 12: Cash flow sensitivity analysis MHC Table 13: Cash flow sensitivity analysis POW Moffatt & Nichol Executive Summary Page 10

11 1. Executive Summary As part of the feasibility assessment of the wood pellet development, Moffatt & Nichol was asked to review market conditions and prepare forecasts of the commodities currently being handled at the State s two deep water ports, Wilmington and Morehead City. These forecasts are used as inputs into the Authority s financial model to estimate future revenues generated from existing operations. Freight Composition & Market Served The Ports handle a variety of cargo types including containers, break bulk, dry and liquid bulk, and Rollon/Roll off (RoRo). The Port of Wilmington handles a mix of containers, and general cargo (bulk and breakbulk), while the Port of Morehead City is exclusively a general cargo Port. The largest volumes of containerized goods include forest products, machinery and parts, frozen/chilled meats and consumer products. General cargo commodities include phosphate/related products (fertilizers, acids), wood pulp, grain, wood chips and rubber. Trade volumes are more closely aligned with the agriculture/manufacturing and construction sectors as opposed to the consumer sector. The majority of the Port s trade volume originates from or is destined to locations within the State of North Carolina, and in particular those counties east of I 95 (the immediate local hinterland). The Ports actively serve the entire State, but the central (Charlotte, Greensboro, Raleigh) and western (Asheville) regions are highly competed for by neighboring state ports including Norfolk, Charleston and Savannah. Sector Outlook There are four primary sectors in North Carolina which drive trade demand through the Ports. These in clued the Agriculture, Manufacturing, Construction and Consumer sectors. A summary of the commodities associated with these sectors, as well as the respective economic, trade and overall outlook is provided in ES1. ES1: North Carolina Commodity and Sector Outlook Summary Source: Moffatt & Nichol Moffatt & Nichol Executive Summary Page 11

12 Agriculture including Forest Products: Meat products: NC is the 2nd largest producer of pigs in the nation; and 4 th largest producer of broilers the producers import grain (animal feed) through Wilmington. They import more when the price of feed (corn/soybeans) is high. This has been the case as more of the nation s production has gone into biofuels. The recent drought is likely to keep prices elevated and should drive demand for imported feeds even higher. Forest products: Have been traditional staple commodities handled by the ports. These include wood pulp shipments, kiln dried lumber, and more recently wood chips. A lot of production occurs within the eastern region softwood forests (most local to the ports) and is home to the likes of International Paper; Domtar and Weyerhaeuser. Manufacturing Manufacturing activity in the state has declined. Employment has dropped 38% since 2001, compared to 29% nationally. Some of the more resilient industries have been food (including meat processing), chemical manufacturing (including pharmaceuticals) and primary metal manufacturing (steel). Traditional industries such as furniture and textiles have been severely reduced. Moffatt & Nichol estimates that manufacturing activity will continue to grow in the high value industries (computers/electronics products & pharmaceuticals) but trade associated with these industries will become increasingly containerized Construction A number of indicators signal that a bottom has been reached in NC s construction sector. These include strong gains in the number of building permits, and lower available inventory and vacancy rates. Construction activity is the primary source of demand for lumber, cement and household related goods including ceramics, tools and even furniture. Consumer North Carolina is projected to become the 7 th most populous state by 2020 up from the current 10 th position, with population growth roughly twice the national 0.9% average. The strong population outlook under pins long term growth in demand from the consumer sector. Nevertheless near term softness will continue to weigh on the consumer. Weakness in employment (NC s unemployment rate of 9.9% is higher than the national 8.2%) and personal income (NC s per capita income is roughly 85% that of the national average). Moffatt & Nichol Executive Summary Page 12

13 Containers Container volumes at the Port of Wilmington have experienced the strongest growth of any cargo type handled at either of the two Ports, averaging 14% annual increases since 2004, which has helped Wilmington to become the fastest growing container Port in the US Southeast (Norfolk, Wilmington, Charleston and Savannah). This is the result incremental volumes from three new main line container services which added Wilmington to their rotations. These services were attracted to the Port following improvement to the infrastructure including channel deepening (2004), new post panamax cranes (2007) and berth lengthening (2012). Despite this strong growth, trade through Wilmington accounts for less than 5% of the region s total throughput, suggesting that that the Port faces stiff competition for not only discretionary markets outside of North Carolina, but for local markets inside the State as well. Moffatt & Nichol estimates that throughput at the Port of Wilmington currently accounts for approximately 25% of North Carolina s total demand of 1.1 million TEU. Future volume growth through Wilmington will likely continue to be determined by the Port s ability to retain existing services, and attract additional new services. Three forecast scenarios have been developed to reflect varying degrees of success: ES2: Container Forecasts 3 Scenarios High: Market share is gained to 29%of North Carolina s total The Port attracts four additional services adding incremental volumes of 25,000 TEU each by , ,000 Base: Market share is maintained The Port attracts two additional services which can add incremental volumes of 25,000 TEU each by Port volume increases to approximately 420,000 TEU. TEU 300, , ,000 High Base Low Low: The Port loses 10% off the base estimate through 2015 (does not get back to 2011 volumes), at which point CKYH pulls one of its services resulting in a loss of 35% of total throughput E Source: Moffatt & Nichol 2015E 2017E 2019E 2021E Moffatt & Nichol Executive Summary Page 13

14 General Cargo General cargo volumes are estimated to continue to rebound in the near term led by higher volumes of imported grain, fertilizer and construction related products. The long term growth outlook is more moderate as many of the larger volume commodities, including phosphate/related products, woodchips, and fertilizers have historically been stable and/or have minimum annual guarantees (MAGs) stipulated in their respective contracts. Moffatt & Nichol estimates that combined general cargo volumes through the Port of Wilmington and Port of Morehead City will total approximately 5.3 million tons by 2022 as presented in Figure ES3. ES3: General Cargo Volume Forecasts Tons (Million) MHC Break Bulk POW Break Bulk MHC Bulk POW Bulk E 2015E 2017E 2019E 2021E Source: NCSPA; Moffatt & Nichol Bulk volumes through Port of Wilmington are estimated to account for the most tonnage led by import volumes of chemicals, UAN, grains and woodchips. The largest volumes of bulk commodities handled at the Port of Morehead City will likely remain phosphate/related products, sulfur and woodchips. Break bulk volumes at Port of Wilmington are estimated to recover some of the loss experienced over the last half of the decade, led be increased volumes of imported lumber and exported wood pulp. Break bulk at Morehead City is estimate to remain essentially flat, with rubber imports accounting for the most volume. Moffatt & Nichol Executive Summary Page 14

15 2. Introduction The Authority operates four cargo handling facilities in the State of North Carolina. These include two inland terminals and two marine port facilities. The inland terminals are the Charlotte Inland Terminal in Charlotte, and the Piedmont Triad Inland Terminal in Greensboro. These inland facilities are centrally located to serve the large population clusters in the State, namely Charlotte in the south and the Greensboro Raleigh Durham region in the central north. Figure 1: NCSPA Operated Facilities Source: Moffatt & Nichol The two marine port facilities, the subject of the Study, are the Port of Morehead City (MHC) in Morehead City and the Port of Wilmington (POW) in Wilmington on the State s Atlantic coast. The ports serve both international and domestically sourced trade volume, and can collectively accommodate a variety of different cargo handling types including containers, dry and liquid bulk, break bulk and roll on roll off (RoRo) commodities. A brief description of the two respective ports, and a summary of the goods handled, and market served is provided below Port of Wilmington The Port of Wilmington is on the eastern bank of the Cape Fear River, 26 miles from the Atlantic Ocean and encompasses approximately 200 total acres excluding an additional 100 developable acres owned by the Authority directly north of the existing facility. The channel is dredged to a level of 42 feet making it capable of accommodating Panamax container vessels. This refers to the largest size ship, in terms of beam and draft, which can currently pass through the Panama Canal. The Port of Wilmington handles a mix of commodity types, including bulk and breakbulk, also known as general cargo, as well as containerized goods. The general cargo volumes are loaded, unloaded and warehoused in the northern half of the property. The northern most piece of the property is leased to Vopak, which handles liquid bulk commodities. Further south is the dry bulk and breakbulk transfer and storage facilities. This includes 1.1 million sq ft of covered and sprinkler storage structures. There are currently approximately 100+ acres of open storage with 80 acres designated as container yard mainly in the southern portion of the property. An additional 25 acres of semi paved storage area is available for development as demand necessitates. Design plans exist to increase total throughput capacity from the current approximate 350,000 TEUs per year to 500,000 TEU per year. Moffatt & Nichol Introduction Page 15

16 Figure 2: Port of Wilmington Source: NCSPA The Port of Wilmington has nine berths with 6,768 ft. of continuous wharf. Berth 8 and Berth 9 are designated for container vessels. There are eight container cranes, including four 100 gauge, three 50 gauge and one 32 foot gauge. The Authority also owns and maintains a fleet of yard handling equipment, including 11 new side picks. There is also one 30 ton mobile crane, one 100 ton gantry crane, and one 150 ton gantry crane. The Port of Wilmington is directly connected to the US Interstate system via US Highways 17, 74, 76 and 421, as well as Interstate 40. Interstates 85 and 95 are also accessible. Moffatt & Nichol Introduction Page 16

17 2.2. Port of Morehead City The Port of Morehead City is a general cargo terminal, which currently handles no container volumes, but is not inhibited to do so, and has the infrastructure to accommodate such volumes if necessary. It encompasses approximately 180 total acres and is located four miles from the Atlantic Ocean along the Beaufort Inland Channel. The Port of Morehead City is connected directly to the Norfolk Southern rail system, as well as the US road system via US Highway 70, and NC Highway 24. There are 5,500 feet of continuous wharf, with 9 berths. Water depth at Berths 1, 2 and 3 is 45, and 35 at Berths 4 through 9. The Port of Morehead City maintains four cranes, including one 40 ton multipurpose bridge crane, two 115 ton gantry cranes, and one 125 ton mobile crane. There is a fleet of 39 lift trucks with up 70,000lb capacities, capable of handling an array of cargo types. Figure 3: Port of Morehead City Source: NCSPA There are nine covered storage structures at the Port of Morehead City totaling approximately 990,000 square feet of space. These buildings contain 530,000 square feet of covered, sprinklered warehouse storage with rail access, 460,000 square feet of transit shed storage with rail access and 30 acres of paved open storage. Two berths are served by a modern shiploader with maximum loadout rate of 3,000 tons per hour of dry bulk cargo. Open storage dry bulk facilities can transfer up to 800 tons per hour, and covered dry bulk facilities with export conveyer systems capable of handling 1,000 tons per hour. Across the Newport River from the Port of Morehead City is Radio Island which is almost entirely owned by the Authority, and is four miles from the sea buoy. On Radio Island there is a liquid storage facility that is currently leased by the Authority to PCS Phosphate until June 30, 2020, with two ten year renewal options. Moffatt & Nichol Introduction Page 17

18 2.3. Freight Composition & Market Served Freight Composition Shipments of general cargo (break bulk, dry and liquid bulk) commodities are handled at both the Port of Wilmington and Morehead City. Shipments of containerized cargo are serviced primarily at the Port of Wilmington. The general cargo commodities handled at the Ports have traditionally been associated with local industrial/manufacturing activity, as presented in Table 1 and Table 2. These include the forest and paper products produced from local timber and paper mills, rubber and steel volumes destined to regional tire and steel plants, and feed and fertilizer products used by local hog and crop producers. Containerized goods are similarly aligned with the manufacturing sector to a large extent. Exported containers of kiln dried lumber (used in furniture manufacturing) and wood pulp (used in absorption and paper goods), both of which are produced locally in North Carolina, account for some of the largest volumes of containers handled at the Port of Wilmington. Exposure to the consumer sector is achieved primarily through the imported, containerized shipments of furniture and other miscellaneous household products; though sizable, the volume of these goods is smaller than that of the manufacturing related products highlighted. Table 1: Port of Wilmington s Traditional Commodities by Handling Type Containers Break Bulk Dry Bulk Liquid Bulk Kiln Dried Lumber Lumber Direct Reduced Iron (DRI) Chemicals Food (Frozen Meat) Metal Products Fertilizers UAN (Fertilizer) Wood Pulp Wood Pulp Feed Grains Petroleum Products Machinery Coal (Not Active) Furniture Miscellaneous Table 2: Morehead City s Traditional Commodities by Handling Type Containers Break Bulk Dry Bulk Liquid Bulk Rubber Phosphate Sulfur Products Metal Products Other Fertilizers NA Air Plane Parts Ore, Mica & Schist Woodchips Aggregate Source: Moffatt & Nichol Moffatt & Nichol Introduction Page 18

19 Market Served The North Carolina Ports local market consists of the State s eastern counties (east of I 95), as denoted in dark green in Figure 4. These counties are home to some of the largest production of exported commodities, including woodchips, wood pulp, phosphates and containerized exports of meat. This same region is also the strongest sources of demands for import goods such as feed grains, fertilizers and other chemicals. Figure 4: North Carolina Competitive Schematic Kiln Dried Lumber Misc. Containers Misc. Containers Furniture Lumber Tools Machinery Woodchips Wood pulp Phosphates Meats Feed grains Fertilizer/Chemical Misc. Containers Norfolk Southern CSX Interstates Source: Moffatt & Nichol The central counties, and large population clusters of the western region (denoted in light green), are markets that the North Carolina Ports actively serve, but which are also aggressively competed for by neighboring state ports. These regions are the State s most economically active, home to roughly 70% of its total population. Central cities such as Charlotte, Greensboro and Raleigh are hub locations for container demand and distribution. Along with the immediate Wilmington market, these cities drive a significant amount demand for the imported containers of furniture, tools and other household commodities received at Port of Wilmington. The western counties are not only sources of containerized import demand, but are also the primary source of containerized exports of kiln dried lumber. The Ports do ship commodities beyond the State boarder including rubber to Virginia, DRI to South Carolina and fertilizers into the Midwest. Nevertheless, the majority of the Ports volume originates from or is destined to locations within North Carolina. Moffatt & Nichol Introduction Page 19

20 3. Competitive Region 3.1. Regional Competition & Port Volumes The US Southeast region is highly competitive, and home to four large port districts, namely Norfolk, VA, North Carolina (MHC & POW), Charleston, SC and Savannah, GA. These facilities compete for cargo both within their immediate hinterland markets, many of which overlap one another, as illustrated in Figure 5, and for discretionary volumes destined to inland regions including the Gulf and Midwest. The local markets of Norfolk (blue) and Charleston (purple) extend well into North Carolina, suggesting that these facilities can similarly serve the State s trade demand. As result of this strong regional competition, the Port of Morehead city and Port of Wilmington s primary markets have historically been within North Carolina. Figure 5: Major Port Facilities in US Southeast Source: Moffatt & Nichol Moffatt & Nichol Competitive Region Page 20

21 Capital Improvements & Port Volumes In order to help protect and develop its business the Authority has implemented a capital improvement plan (CIP) at both the Port of Morehead City and Port of Wilmington. These improvements have in fact resulted in the Authority attracting new shippers and cargo lines which have added incremental volumes to the throughput. At the Port of Morehead City recent improvements include: Woodchip Facility Refurbishment Berth Scour Protection Rail and crane upgrades The resumption of woodchip exports at both Morehead City and Wilmington has allowed the Ports to gain share of total noncontainerized tonnage in the US Southeast as presented in Figure 6. Combined the Ports account for 19% of the region s total volume (excluding energy related) 1 Share has increased, from 16% in 2008, led by incremental increases in export of woodchips and imports of grain. Large volumes of staple commodities such as phosphate exports, sulfur and other chemical imports also provide underlying stability to the tonnage totals at the Ports. Figure 6: Noncontainerized Tonnage in the US Southeast by Port District Tons (Million) % 40% 30% 20% 10% 0 0% Share % 2011 Savannah Norfolk NC Ports Charleston NC's % Source: US Census Bureau; Moffatt & Nichol 1 Harmonized System commodity code 27. Norfolk handles the largest volume by far due to coal exports, which alone would account for 72% of the total tonnage of noncontainerized cargo in the US Southeast, roughly 35 million tons in Moffatt & Nichol Competitive Region Page 21

22 At Port of Wilmington, the main objective of the improvement plan has been to increase the Port s ability to handle larger volumes of containers, a significant source of revenue (30 40%of total) to the Authority. The most influential and capital intensive portions of the plan include: Dredging of channel to 42 feet (in 2004) Purchase of four post panamax cranes (100 gauge) (2007) Strengthening of berth to accommodate larger cranes (2007) Since the implementation of the capital plan in 2004, the Port has been able to attract three additional container liner services 2, which have allowed it to be the fasted growing port in the US Southeast as presented in Table 3. Prior to 2004, the lack of investment and modernization at the Port of Wilmington caused the Port to lose volumes to competing facilities, and underperform the region as a whole. Table 3: Recent Growth Rates in Container Volumes in US Southeast Port Savannah, GA 15.3% 12.9% 24.7% 10.9% 14.7% 15.5% 6.5% 27.0% 4.4% 9.4% 15.4% 4.8% Norfolk, VA 2.6% 4.1% 10.9% 11.3% 10.3% 9.8% 6.8% 10.9% 1.1% 13.4% 16.0% 2.1% Charleston, SC 6.6% 7.0% 3.3% 4.4% 13.7% 7.1% 0.9% 7.1% 5.4% 28.3% 16.7% 4.6% Wilmington, NC 2.2% 7.4% 6.7% 1.1% 12.0% 26.7% 24.2% 18.1% 2.2% 26.2% 17.9% 8.4% Source: Moffatt & Nichol Figure 7: Indexed Container Volume Growth = 100 Savannah Wilmington Norfolk 2004 CIP Charleston Source: Moffatt & Nichol Although the Port of Wilmington has made gains in recent years, the Port s current 276,000 TEU account for less than 5% of the total container trade in the US Southeast as illustrated in Figure 8. Norfolk, Charleston and Savannah have historically, and continue to, handle significantly larger volumes than Wilmington. These competing facilities have benefited from stronger rail connectivity, including double stack capabilities, 2 Further discussion on the Port of Wilmington s container services and commodities is provided in Section 5.1 of the report. Moffatt & Nichol Competitive Region Page 22

23 warehouse/distribution services and container liner schedules. As a result, the neighboring state ports have become the primary gateways for container volumes to/from the local North Carolina market. Figure 8: US Southeast Container Volumes and Port of Wilmington s Share 6,000,000 60% 5,000,000 50% TEU 4,000,000 3,000,000 2,000,000 1,000,000 40% 30% 20% 10% 0% Share % 0 10% Savannah Norfolk Charleston Wilmington Wilmington % Source: Moffatt & Nichol Moffat & Nichol estimates that container volumes through the Port of Wilmington account for approximately 25% of North Carolina s total demand, as presented in Figure 9. Total demand within the state is estimated to be roughly 1.1 million TEU in The Port s share of North Carolina s trade has increased rapidly since 2004, and is reflective of the impact that the CIP has had on the Port s ability to attract the three additional liner services (noted in red), and CKYH s first service to bring in larger vessels. Figure 9: North Carolina s Container Volumes Port of Wilmington s Share of. TEU 1,200,000 1,000, , , , ,000 ICL & Maersk CKYH adds service CKYH adds larger ships 30% 25% 20% 15% 10% 5% 0 0% E Share % NC Demand Wilmington Share % Source: Moffatt & Nichol 3 Fiscal Year (July 2011 June 2012). See the Appendix section of the report for a full explanation of how North Carolina s total demand is estimated. Moffatt & Nichol Competitive Region Page 23

24 4. Regional Economic Trends & Trade Implications There are four broad economic sectors in North Carolina which have historically led, and are estimated to continue driving, demand for goods through the Port of Morehead City and Port of Wilmington. These are: Agriculture including Wood Products Construction and Housing Manufacturing Consumer The historical performance and future outlook of these sectors are discussed in detail in this section of the Study. The outlook for these sectors will help establish the cargo forecasts presented in Section 5.2 and Agriculture North Carolina maintains a robust agriculture industry, and is a leading state in the US for production of livestock (hogs and poultry), crops (soybeans, cotton, sweet potatoes and tobacco) and forest products (timber and woodchips). Livestock The two largest livestock industries in North Carolina are the hogs and poultry (broilers) operations. These industries drive demand for large volumes of containerized exports of frozen/chilled pork and poultry products, and dry bulk imports of grain used for animal feed through the Port of Wilmington. There is a significant concentration of these industries in North Carolina as presented in Figure 10 and Figure 11 with production accounting for a significant shares nation s total output (Hogs: accounts for 14% of national total, ranks 2 nd to Iowa; Broilers: accounts for 10% of national total, ranks 4 th after Georgia, Alabama and Arkansas). Figure 10: Hogs and Pigs Inventory Figure 11: Broilers Sold Source: USDA: 2007 Census of Agriculture Moffatt & Nichol Regional Economic Trends & Trade Implications Page 24

25 The State is home to some of the largest producers of pork and poultry in the US. These include: Smithfield Maxwell Foods Tyson Prestage Farms Perdue These companies have been able to increase production and exports to meet growing global demand for pork and poultry. Exports of meat from the US have risen sharply over the past decade as income growth in developing economies, particularly in Asia, has driven demand for meat higher. Exports of poultry total an estimated 7.4 billion pounds in 2012, as presented in Figure 12. The strong performance at the national level has been reflected in higher volumes of containerized exports at the Port of Wilmington, which have grown by an average 12% annually between 2005 and 2012 according to data provided by the Authority. The future growth of exports via Port of Wilmington will likely be more subdued, based on the USDA s longterm outlook 4 which suggests that exports of pork and poultry from the State will grow by an average 1.4% annually between 2012 and 2021 (assuming that North Carolina maintains its share of national production.) This growth is significantly lower than that achieved in recent years, and is reflective of deceleration of demand from developing economies, as well as increased competition from global producers. Nevertheless, the pork and poultry production industries are staples of the North Carolina economy and will continue to likely act as sources of trade volume for the Port of Wilmington. Figure 12: US Meat Exports Historical and Future Projections Source: USDA 4 USDA Agriculture Long term Projections to 2021; Moffatt & Nichol Regional Economic Trends & Trade Implications Page 25

26 In addition to the containerized export volumes, he pork and poultry industries in North Carolina also support demand for imported dry bulk volumes of grain/feed stock at the Port of Wilmington. Meat producers chose to source their feed either from domestic providers or import them from international providers depending on the price and availability of domestic versus international stock. Generally, when prices are high demand for cheaper imports rises, as has been the case in recent years. Moffatt & Nichol estimates that the price of feed stock will remain high in the near term due to the increased usage of corn and soybeans for renewable energy as well as the current server drought which has dramatically reduced crop production throughout the majority of the country. Import volumes through the Port of Wilmington are likely to remain elevated during the high/volatile price environment. In the long term, as prices stabilize, it would be expected that import volumes would also return to a more normalized level. Moffatt & Nichol Regional Economic Trends & Trade Implications Page 26

27 Crops North Carolina farms produce a wide variety of crop commodities, the largest of which include soybeans, tobacco, cotton and sweet potatoes. The State ranks 16 th in the nation in terms of cash receipts for crops sold (California, Florida and the large grain producing states of the central region traditionally account for the top rankings). The value of North Carolina s crop production has increased by an average 6% annually over the last eight years for which data is available, from $2.0 billion in 2002 to $3.2 billion in This strong growth has been supported by global demand for crop commodities, particularly soybeans. These exported goods are destined primarily to developing economies in Asia and the Middle East. The majority of cop production occurs in the eastern counties of the State, as presented in Figure 13 and Figure 14. However, despite this proximity to the Ports, there is not a significant amount of crop exports being handled at either the Port of Wilmington or the Port of Morehead City. Most of the State s current export volume is being shipped through competing port facilities in neighboring states. Figure 13: Harvested Acres of Soybeans Figure 14: Harvested Acres of Tobacco Flue cured Source: USDA The North Carolina ports do however serve as a gateway for fertilizer imports used by local and Midwestern crop producers. These volumes have been particularly strong through the Port of Wilmington, and are received in containers, dry bulk and/or liquid bulk. 5 Moffatt & Nichol Regional Economic Trends & Trade Implications Page 27

28 The strength of demand for regional crop commodities has been substantiated by the recently construction (January 2012) of a dedicated 4.5 million gallon liquid fertilizer (UAN) import facility at the Port of Wilmington by Gavilon, an international grain and fertilizer distributor. This terminal receives imported liquid UAN for distribution throughout the Mid Atlantic and Midwest regions via rail. Gavilon was purchased by Marubeni Corp, a Japanese commodity trading house, in May 2012, seeking to increase grain exports to China. This type of private investment at the Port underscores the strength of demand for crop commodities globally, and should continue to support import volumes of fertilizer products through the Port of Wilmington. Additionally, demand for local North Carolina crops is likely to remain strong due to the severe drought conditions which devastated production throughout much of the US. North Carolina was not as adversely impacted and should therefore be able to comparatively maintain better production levels in the coming years relative to the larger interior states. Moffatt & Nichol Regional Economic Trends & Trade Implications Page 28

29 Forest Products North Carolina maintains a robust forest product sector, which includes timber, wood pulp and processed lumber industries. The goods produced from these industries are staple export commodities handled at both the Port of Morehead City and Port of Wilmington including kiln dried lumber, wood pulp and woodchips, and The highest concentration of mill activity is located in/near the heavier wooded areas of the western half of the State as illustrated in Figure15. These are the hardwood forests where the majority of containerized exports of kiln dried lumber originate. The eastern/southern forests are primarily softwood forests where the shipments of wood pulp and woodchips originate from. There are four large pulp mills in the eastern half of the State which are sources of export volumes through the ports. These are: International Paper Co; Columbus County Domtar Paper Co; Martin County Weyerhaeuser Co; Craven County Kapstone Kraft Paper; Halifax County Figure 15: Location of Wood Using Mills in North Carolina Source: USDA Demand for wood products has continued to grow over much of the last decade fueled by increased construction, consumption and population growth both in the US and globally. These wood products are used as intermediate production materials in a wide variety of products including furniture, diapers and plywood. The demand for soft wood products, namely woodchips and pulp wood has been particularly strong as evidenced by the State s production volumes through 2009 (the last year for which data is available, but also trough of most recent recession), as presented Figure 16. Production of softwood rose throughout the 2008 Moffatt & Nichol Regional Economic Trends & Trade Implications Page 29

30 2009 economic contraction. The strength of production has been reflected by increased investment and flow of the commodities through North Carolina s Ports. Figure 16: North Carolina's Roundwood Pulpwood Production Source: USDA In July 2011 the woodchip export facility at the Port of Morehead City received a $1.5 million rehabilitation/new operation resulting from a partnership between Cogent Fibre, a wood chip producer/exporter partnered with Industrial Marine Servies, a marine contracting firm. Cogent Fibre is shipping woodchips to Turkey for production of construction related products (plywood/pressboard). Similarly, the Port of Wilmington has recently secured another Turkish client, Yildze Entegre, which has signed a minimum annual guarantee (MAG) contract(through 2017) to export woodchips via the Port of Wilmington. The potential development of a wood pellet export facility at the Port of Morehead city will also seek to leverage the State s natural wood resource. These pellets would be exported to Europe and the UK to meet growing demand for renewable and biomass fuels. Given the Port of Morehead City and Port of Wilmington s proximity to softwood forests, these products should continue to be staple export commodities. The growth of trade through the Ports will likely be determined more so by the Authority s ability to attract new customers/lines of business to add incremental new volumes, as has been the case with recent volume activity, than to global trend growth forecasts. North Carolina s exporters of forest products, including wood pulp, face increasing global competition from nations such as China, Brazil and Indonesia. Therefore, while the long term growth outlook for export volumes of these commodities remains stable, Moffatt & Nichol does not estimate the existing volumes to be a source of strong incremental growth. The exception being, a new business stream and/or client brought to the Ports. Moffatt & Nichol Regional Economic Trends & Trade Implications Page 30

31 4.2. Construction/Housing The construction/housing sector in North Carolina is primary driver of demand for cargo through the Ports of Morehead City and Wilmington. These include import volumes of cement, lumber and steel products, and indirectly of household goods including furniture and tools. Despite continued weakness in this sector, there are signals that a bottom has been reached, and that the sector is in fact rebounding. Increased activity in both nonresidential and residential construction should drive demand for trade volumes of related commodities through the Ports. North Carolina s building activity has slowed dramatically since 2006 levels, from roughly 100,000 per annum to approximately 45,000 as of 2012., as illustrated in Figure 17 which presents the State s level of building permits. The rate at which this decline occurred (blue line) has, for the most part, trended with the national average growth (grey line), with the 2009 trough rates of 40% equal at both the State and national level. Since 2009 there has been stabilization in the growth rates, with strong positive growth estimated for 2012 (based on data through June). Figure 17: North Carolina Building Permits 120, ,000 80,000 60,000 40,000 20,000 60% 40% 20% 0% 20% 40% 0 60% Permits % Change E NC Permits NC % Change US % Change Source: US Census Bureau; Moffatt & Nichol The strongest rebound has occurred within North Carolina s largest cities which show substantial growth over 2011 s level. This observation is based on data provided by the National Home Builders Association (NAHB), which provides year to date growth in building permits by metropolitan area. The data shows growth rates of: Charlotte Gastonia Concord NC SC: 112% Raleigh Cary NC: 65% Durham NC: 136% Wilmington NC: 113% Moffatt & Nichol Regional Economic Trends & Trade Implications Page 31

32 An additional sign of developing strength is evidenced by the level of inventory of homes available for sale as well as the volume of vacant homes. The inventory of existing homes for sale currently stands at 6.4 months, down from the peak 9.4 months in , and suggests that the availability of homes for sale is tightening. Furthermore, the shadow supply of vacant Figure 18: Freddie Mac s U.S. Excess Vacant Homes in 1,000s homes has been significantly reduced, with for rent vacancies down to 8.6% the lowest since the second quarter of 2002 and for sale vacancies have been reduced to 2.1% its lowest since the second quarter of 2006 as presented Figure 18. Collectively, the recent data suggests that the North Carolina and U.S. house value cycles have bottomed, and that a tentative recovery is currently underway. Long term total construction activity should likely increase at an average rate of roughly Source: Freddie Mac 3.0% per annum based on the assumption that there is a return to trend as illustrated in Figure 19. Moffatt & Nichol estimates that trend level growth will likely be achieved by The growth of residential and nonresidential spending has historically moved together, though there was a strong deviation from trend in the early 2000 s as residential construction accelerated at the expense of the nonresidential sector. Following the collapse of the housing sector in the mid to late 2000 s nonresidential construction spending resumed strong growth. Recent spending levels in both the residential and nonresidential sectors appear to be signaling a tepid recovery in construction activity. This should stabilize and eventually lead to higher throughput of construction related materials through the Ports. Figure 19: US Long term Construction Spending Trends = Residential Nonresidential Source: US Census Bureau; Moffatt & Nichol 6 home sales/data Moffatt & Nichol Regional Economic Trends & Trade Implications Page 32

33 4.3. Manufacturing Sector North Carolina s manufacturing sector continues to be a large source of employment and economic output for the State s economy despite a sharp contraction over much of the last decade. In total, the State has lost 38% of its manufacturing related employment since 2001 (compared to the 29% loss nationwide), as presented in Table 3 which lists largest to smallest employment by industry in The health of the State s manufacturing sector is a leading determinant of trade volume through Port of Morehead City and Port of Wilmington, as much of the respective ports throughput is linked to this sector, as noted in Section 2.3. Table 4: North Carolina s Manufacturing Employment by Industry % Change Food manufacturing 51,230 51,242 0% Chemical manufacturing 48,289 41,727 14% Computer and electronic product manufacturing 58,063 33,510 42% Furniture and related product manufacturing 72,318 32,881 55% Fabricated metal product manufacturing 42,188 32,862 22% Plastics and rubber products manufacturing 37,822 29,151 23% Textile mills 92,650 28,866 69% Machinery manufacturing 37,501 28,761 23% Transportation equipment manufacturing 35,029 26,646 24% Electrical equipment and appliance mfg. 38,229 21,252 44% Paper manufacturing 21,922 15,994 27% Wood product manufacturing 28,050 15,383 45% Miscellaneous manufacturing 16,719 14,379 14% Nonmetallic mineral product manufacturing 21,507 12,938 40% Printing and related support activities 17,212 11,408 34% Apparel manufacturing 40,063 11,348 72% Beverage and tobacco product manufacturing 18,187 10,892 40% Primary metal manufacturing 7,735 7,378 5% Textile product mills 17,026 6,662 61% Petroleum and coal products manufacturing 1, % Leather and allied product manufacturing 1, % Total Manufacturing 704, ,719 38% Source: Bureau of Labor Statistics Despite the overall weakness in the employment figures North Carolina, a right to work state, has continued to attract diversified business in the form of newly plant operations some of which include: Ashley Furniture (Furniture) Spirit AeroSystems (Airplane Parts) Horsehead Corporation (Zinc) CMS Food Solutions (Food Safety) A number of other high profile potential plant developments have however, been recently lost to competing states, namely Caterpillar to Georgia and Michelin to South Carolina. In terms of trade, the Ports have benefited from exposure to industries which have fared comparably well. Employment in food manufacturing related industries (the State s largest), which includes the livestock and agriculture related production businesses, has remained relatively unchanged. The stability from these industries is indicative of the strong underlying global demand for food products. Trade associated with these industries should continue to support throughput volumes at both Port of Wilmington and Morehead City. Moffatt & Nichol Regional Economic Trends & Trade Implications Page 33

34 Other industries which have shown better performance over the past decade include the machine, transportation equipment, and computer (and related products) manufacturing. These are high value commodities and therefore the strength of these industries appears more in the real GDP 7 figures (measured in dollars) than in the employment data. Trade associated with these industries is for the most part likely containerized, and therefore would be handled at the Port of Wilmington. The Port will have to compete aggressively for these containerized volumes. The highest concentration of manufacturing activity occurs within the central countries of the State as illustrated in Figure 20. These locations are highly competed for by Charleston and Norfolk which are pushing aggressively to serve this region, as evidenced by the newly established Norfolk to Greensboro Norfolk Southern double stack service, which will connect the Port of Virginia to Greensboro six days a week 8. Production occurring in the eastern counties is mostly related to the agriculture and forest product industries, and is likely more captive to the North Carolina Ports. Moffatt & Nichol estimates that North Carolina s manufacturing sector will continue to provide support for trade volumes through the Port of Morehead City and Port of Wilmington, particularly from the food and wood product manufacturing industries. Figure 20: North Carolina Manufacturing Employment by County Other manufacturing industries, such as metal, chemical and tire manufacturing are collectively not likely to increase at rates much higher than the historical 1.7% 5 average over the long tem. While it appears that the most substantial loss of manufacturing jobs has already occurred, there is not strong evidence to suggest that a significant rebound in manufacturing of traditional industries (furniture and textiles) is likely without significant investment in capital equipment. Growth in high value manufacturing industries, such as chemicals (including pharmaceuticals) and computers show stronger trends. A large portion of trade associated with these industries will most likely be containerized. Source; Bureau of Labor Statistics; Moffatt & Nichol 7 Real GDP figures by State by industry are available at Average real GDP for North Carolina s manufacturing sector Moffatt & Nichol Regional Economic Trends & Trade Implications Page 34

35 4.4. Consumer Sector The long term outlook for North Carolina s consumer sector is strong, supported by population growth projections much greater than the national average. However, near term indicators including unemployment, personal income and household wealth suggest that the State s consumer sector will remain under pressure. Demand from the consumer sector is assumed to be the primary driver of container trade to and from the State. These volumes are highly competed for by regional ports including the Port of Wilmington. According to the US Census Bureau s forecast, North Carolina will become the 7 th most populous state in the US by 2030, up from the current 10 th position. The State s projected average 1.5% annual growth is roughly double that of the national 0.8% average increase. This outlook is consistent with recent trends which, over the past decade show that North Carolina s population grew by 18.5% during the ten year span, compared to the 9.7% increase measured nationwide. Figure 21: North Carolina Population by County North Carolina s most populous counties are located in the central region of the State including Mecklenburg (City of Charlotte), Wake (Raleigh) and Guilford (Greensboro). The Port of Wilmington can actively serve this central region via interstate and potentially rail (should CSX begin service). However, these locations are also competed for by neighboring state ports which are well connected into the region via rail and road. In the long term, population growth within these counties will underpin strong demand for consumer related products within the State. The Port of Wilmington s ability to gain share in these locations will likely be the determining factor to the level of container volumes handled at the Port. Source; US Census Bureau; Moffatt & Nichol In the short term the State s consumer sector has a number of obstacles to overcome, including higher unemployment rates and lower personal income levels. Unemployment in the State remains higher than the national average. According to the most recent statistics (July 2012), the Bureau of Labor Statistics estimates that North Carolina s unemployment rate stood at 9.8% compared to the national 8.9%. A look at the historical data, presented in Figure 22, suggests that following the onset of the 2008 recession, the State has consistently trailed the US as a whole in employment growth. This is most likely due to the high concentrations of construction and manufacturing jobs which were shed, and subsequently slow to recover. In the long term, the State s employment rate is likely to recover, due to increased employment in the service and construction sectors, and begin trending with the national average as it has done historically. Moffatt & Nichol Regional Economic Trends & Trade Implications Page 35

36 Figure 22: North Carolina and US Unemployment Rate 14 Unemployment Rate % US NC 0 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Source: BLS, Moffatt & Nichol North Carolina s consumer sector is also burdened by comparatively lower per capita income as illustrated in Figure 23. At the national level, this figure is running at just over $40,000 per person in the US, where in the State, the average is roughly $35,000 per person. Income per capita can be used as a proxy to determine the relative strength of the consumer, as it is indicative of the purchasing power of the population. While the lower income per capita in the State may not directly translate into lower consumption/trade volumes, as cheaper products are substituted in for more expensive goods, the overall implication is that the North Carolina consumer may have less available disposable income to purchase discretionary goods. Nevertheless, despite these near term hurdles, Moffatt & Nichol estimates that North Carolina s consumer sector will remain a strong source of demand for containerized consumer related goods. The State s accelerated population growth should drive demand for containerized products at a rate above the national trend. Figure 23: North Carolina and US Income per Capita $50,000 Income per Capita $45,000 $40,000 $35,000 $30,000 $25,000 US NC $20, Source: BEA, Moffatt & Nichol Moffatt & Nichol Regional Economic Trends & Trade Implications Page 36

37 4.5. Near term Policy Driven Threats & GDP Outlook US Macro Scenarios Moffatt & Nichol estimates that there a two global macroeconomic events currently being navigated by policy makers and central banks which could impact the US s and North Carolina s economic performance in the coming years. These events are: The European Debt Crisis, and The US Fiscal Cliff Despite Fed Chairman Bernanke s announcement on September 13 and ECB President Draghi s change of stance on supporting Eurozone periphery countries struggling with debt burdens, the economic outlook remains uncertain. One of the key factors is the fiscal cliff, the combination of tax increases and spending cuts that are scheduled to go into effect January 2013 following the resolution of the August 2011 debt ceiling debacle in Congress. The Congressional Budget Office estimates that these cuts will push the US economy from current low growth trend into recession. Economists vary in their predictions of how much GDP could contract. As a result of these uncertainties Moffatt & Nichol estimates that there are three likely growth scenarios for US GDP. These are presented Figure 24 and further discussed below. Figure 24: US GDP Growth (YoY%) Forecast Scenarios 5% 4% 3% Upside: No fiscal cliff in the US, European debt crisis resolved by March 2013 Base: No fiscal cliff in the US, European debt crisis unresolved through % 1% 0% 1% Downside: fiscal cliff in the US, European debt crisis continues unresolved through % E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Upside Base Downside Source: BEA, Moffatt & Nichol Moffatt & Nichol Regional Economic Trends & Trade Implications Page 37

38 1. Base: Moffatt & Nichol expects that if the Eurozone debt crisis is not substantially improved and the combination of tax hikes and spending cuts that comprise the fiscal cliff occurs, US GDP will contract by 1.3% in 2013, with the brunt of the decline occurring in the first half of the year. This estimate factors in QE3 and improvements in Eurozone debt crisis but not full resolution. 2. Upside: If the fiscal cliff is removed, implementation of QE3 is accelerated and the Eurozone debt crisis progresses to the point where it is resolved by March of 2013, then US GDP growth is expected to reach 3.8% in Downside: If the fiscal cliff is removed but there is no significant progress made to resolve the Eurozone debt crisis, GDP growth in 2013 is expected to be 2.2%, which is in line with the current consensus views among economists. Beyond 2013 the actions of central banks will matter more. In the upside scenario where US GDP grows 3.8% in 2013, the Fed will have to quickly withdraw policy support for the economy in order to avoid a spike in inflation. Most likely other central banks which have recently engaged in expansionary monetary policy will also have to begin tightening. This should dampen growth to below 2%. Only the downside scenario would result in higher growth in 2015 due to rebounding from the recession induced by the fiscal cliff. The growth forecasts beyond 2015 are below the trend rate of the last three decades because of lower population growth and lower productivity growth due to low investment growth, particularly infrastructure investment. Figure 25: US and North GDP Growth (YoY %) Moffatt & Nichol estimates that North 8% Carolina s GDP should expand at an average 0.4% above that of the US total 6% growth. This premium is due to the 4% significantly higher population growth 2% forecasted for the State. Over the past US GDP 0% decade North Carolina s real GDP NC GDP growth has increased at an average 1.8% 2% compare to the national 1.4% average; 4% as illustrated in Figure 25. This 6% outperformance was in part led by population growth in the State which was roughly double the national level. Source: BEA; Moffatt & Nichol Moffatt & Nichol Regional Economic Trends & Trade Implications Page 38

39 5. Commodity Trends & Forecasts 5.1. Overview The Port of Wilmington handles both general cargo (bulk, break bulk and RoRo) commodities as well as containers, while the Port of Morehead City is strictly a general cargo facility as noted earlier in Section 2.1. The following observations can be made regarding the tonnage and growth of throughput volume by cargo type at the Ports presented in Figure 26 and Figure 27 respectively: Containers not only account for the most volume at the Ports, but have also been the fastest growing over the past decade. Bulk commodities at Port of Wilmington are the second largest by weight, and have been the fastest growing over the past year thanks to higher import volumes of grain and fertilizer. Bulk commodities at Port of Morehead City have consistently accounted for a large amount of tonnage (phosphate exports) but have not produced significant growth Break Bulk at Port of Wilmington has seen steep declines due to much lower volumes of wood pulp (exports) and lumber (imports) Break Bulk at Morehead City has historically not accounted for comparatively large volume, and has produced little growth Figure 26: Port Tonnage by Cargo Type Figure 27: Growth by Cargo Type 7, Tons (1,000s) 6,000 5,000 4,000 3,000 2,000 1, Index 2003 = Source: NCSPA; Moffatt & Nichol 9 The following sections (5.2 through 5.7) of the report provide a review of the key commodities, by cargo type, driving volume through the Port of Wilmington and Port of Morehead City. The analysis examines the historical volume growth, the sources of demand and production and a qualitative assessment of future volume growth. These factors are used to produce the TEU forecasts presented in Section 5.2 for containers, and the tonnage forecasts presented in Section 5.7 for general cargo which are used as inputs into the financial model. 9 All graphics in Section 5 are sourced to NCSPA and all years are fiscal years (July June) unless otherwise noted Moffatt & Nichol Commodity Trends & Forecasts Page 39

40 5.2. POW Containers Summary Container volumes at the Port of Wilmington have increased significantly since 2004, averaging roughly 14% growth per annum. This strong performance resulted more from the incremental volumes brought by the addition of new services, than to underlying market demand growth. The largest volumes at the Port are more closely associated with the industrial/manufacturing sector as opposed to consumer related imports which are handled more extensively by neighboring state ports. The Port of Wilmington serves the local North Carolina market of which it maintains an estimated market share of 25%. Moffatt & Nichol estimates that the underlying demand in North Carolina will grow by an average 4.2% annually between 2012 and If the Port of Wilmington were to maintain its existing share of this market, it implies that the Port would have to attract two additional services (while maintaining existing services) which can add incremental volumes of 25,000 TEU each by 2022 (Approximately 500 TEU per week or 25% exchange of 2,000 TEU vessel). Based on these assumptions, the Port of Wilmington s existing TEU throughput of 276,133 TEU would grow to roughly 420,000 by 2022 as presented in Figure 28. Figure 28: Container Forecasts for Port of Wilmington TEU 500, , , , ,000 0 Source: Moffatt & Nichol E 2015E 2017E 2019E 2021E Direction & Commodities The current 10 level of exported and imported containers at the Port of Wilmington is roughly equal as illustrated in Figure 29. Historically, import volumes had been the dominant flow, though the growth rate of exports has been roughly double that of the import flows over the past decade (18% exports to 9% imports), with particularly strength over the last few years. This relative outperformance of containerized exports has been the recent trend throughout much of the US Southeast and is indicative of the growing global demand for locally produced goods including forest/wood products, agriculture and frozen meats. Figure 29: Loaded Import & Export Containers Loaded TEU 250, , , ,000 50,000 0 Source: AAPA Exports Imports 10 Based on calendar year data from the AAPA Moffatt & Nichol Commodity Trends & Forecasts Page 40

41 The top containerized commodities, by tonnage, at the Port of Wilmington include: Forest Products (Exports) Food (Exports) Miscellaneous (Import/Export) Synthetic Fibers/Resins (Imports) Equipment Machinery & Parts (Primarily Import) Chemicals (Import/Export) Wood Pulp (Exports) The underlying demand/production for these commodities comes from a number of sources, including the agriculture, manufacturing, and consumer sectors addressed in Section 4 of the report. As discussed, the historical performance, and future outlook for the majority of these sectors suggests long term stability but not high growth. The trade volumes of theses goods have increased, to a large extent, as a result of the new services calling the Port. Export volumes of forest products rose dramatically following the deployment of larger vessels by CKYH in 2005, and the addition of the second service in 2007 as presented in Figure 30. Volumes of chemicals, synthetic fibers and equipment machinery & parts 11 showed substantially inflections in growth following the start of International Container Lines (ICL) and Maersk service in The ability for the Port to continue to grow its containerized cargo volumes depends largely on its ability to attract new services and connect itself to alternative international markets in developing regions including Asia, South and Central America, and the Mediterranean. Figure 30: Tonnage of Containerized Commodities 500,000 Forest Products 400,000 Misc 300,000 Equipment Machiner, Parts Tons 200,000 Wood Pulp 100,000 Food 0 Syn Fibers/Resins Chemicals 11 These are primarily imported volumes of auto parts Moffatt & Nichol Commodity Trends & Forecasts Page 41

42 Services There are currently four main line container services which call the Port of Wilmington: CKYH: AWE 1 (North Asia) CKYH: AWE 3 (North Asia) ICL: (UK & Europe) Maersk: South Atlantic Express (Central America) Three of the four services were added following the completion of the channel dredging/post panamax crane CIP at the Port. This includes the CKYH AWE 3 in 2004 and the ICL and Maersk services in The CKYH services currently account for 69%% of the total container volumes at Port of Wilmington, followed by ICL with 23% and Maersk s 8% as presented in Table 5. Table 5: 2012's Container Volumes by Carrier Carrier TEU % CKYH 188,982 69% ICL 63,158 23% Maersk 21,441 8% Other 2,984 1% CKYH utilizes the largest vessels calling the port, averaging 4,000 4,300 TEU of capacity. This is not surprising given these services run on the highest volume trade route namely North Asia. ICL which serves Europe uses vessels of roughly 2,100 TEU and Maersk, the smallest, averages 1,100 TEU to Central America. New Services Moffatt & Nichol estimates that should the Port of Wilmington be successful in attracting a new service, the most likely type would likely be one that uses smaller vessels (sub 3,000 TEU) and operates on a new and/or developing trade route. These could be North/South routes with Central and South America, or East/West routes with the Mediterranean; Middle East or Africa. The rationale for this outlook is based on several observable trends and assumptions: 1) Ocean line operators have been and will continue to incorporate increasingly larger vessels into their services as they seek to capitalize on the economies of scale offered by these ships. 2) The expansion of the Panama Canal will provide additional impetus, by allowing incrementally larger vessels to call the US East Coast. 3) The ocean carriers will likely seek to consolidate their offered services to a limited number of ports in order to ensure that these largest vessels maintain high utilization, and do not spend significant time idle in dock 4) As ports position themselves (infrastructure) to receive these larger vessels, ocean liner services using mid, and small sized vessels may seek alternative ports of call if berth/stevedoring availability becomes limited. 5) The liner services utilizing smaller vessels tend to be on the comparatively low volume, new and/or developing trade routes A full description of the data which supports the cascade scenario described above is presented in the Appendix (Section 8) of this report. Moffatt & Nichol Commodity Trends & Forecasts Page 42

43 While, Moffatt & Nichol estimated that this potential cascading of services may offer on opportunity for the Port of Wilmington to attract a new service(s), this same scenario poses a significant risk to the Port s existing volumes. Using the same logic developed in items 1 5, it is possible that the CKYH alliance could chose to deploy larger vessels and/or consolidate port rotation on either of its AWE services presented in Figure 31. If Port of Wilmington is dropped from the rotation of this would significantly reduce the total container volumes handled at the Port. As noted, CKYH currently accounts for the majority containers at the Port of Wilmington. Figure 31: Port of Wilmington s CKYH Services AWE 1 AWE 3 Source: COSCO Underlying North Carolina Demand Outlook Total container demand in North Carolina is estimated to increase to roughly 1.6 million TEU by 2022, or an average annual increase of 4.2%, as presented in Figure 32. If the Port of Wilmington were to maintain share near its existing 25% of the State s total demand, this would suggest total throughput of approximately 420,000 TEU by This outlook is derived from baseline real GDP forecast present in Section 4.5. The container volume growth rate implies a multiple of 1.5 times that of real GDP growth, which is significantly lower than the average 3.5 multiple achieved in the State over much of the past decade. This low multiple is reflective of comparatively slower growth in consumer related imports, which had led the growth rate of total container volumes throughout the US, and a heavier balance towards exported container volumes. Future volume growth in North Carolina is expected to rebound as the housing sector continues to stabilize, supporting demand for imported construction and home related goods, and as global demand for meat continues to increase, supporting food exports through the Port. Long term demand for exports of kiln dried lumber and wood pulp is estimated to remain steady, as these are driven by global trends (construction/housing & population growth), however will not likely be a source for sharp upside growth due to growing competition from domestic and international producers. Moffatt & Nichol Commodity Trends & Forecasts Page 43

44 Figure 32: Forecasted Underlying Demand in North Carolina 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , , % 25% 20% 15% 10% 5% 0% E 2015E 2017E 2019E 2021E TEU Wilmington Share % NC Demand Wilmington Share % Source: Moffatt & Nichol Container Forecast Scenarios Based on the observations made in this section (5.1), Moffatt & Nichol has produced the following three forecast scenarios for Port of Wilmington: Figure 33: Container Forecasts 3 Scenarios High: Market share is gained to 29%of North Carolina s total The Port attracts four additional services adding incremental volumes of 25,000 TEU each by 2022 Base: Market share is maintained The Port attracts two additional services which can add incremental volumes of 25,000 TEU each by Port volume increases to approximately 420,000 TEU. TEU 500, , , , , E 2015E 2017E 2019E 2021E High Base Low Low: The Port loses 10% off the base estimate through 2015 (does not get back to 2011 volumes), at which point CKYH pulls one of its services resulting in a loss of 35% of total throughput. Source: Moffatt & Nichol Moffatt & Nichol Commodity Trends & Forecasts Page 44

45 5.3. POW Bulk Chemicals Chemical volumes are handled at the private Vopak North Terminal located adjacent to the Port of Wilmington. Vopak maintains two terminals, a North and South, in Wilmington though the Authority only generates revenue from the North Terminal, as the South is not on port property. Payment is received for dockage, lease and throughput. The North Terminal has a listed capacity of 131,800 cbm or roughly 700,000 tons per annum 12. The flow is predominantly imports comprised mostly of basic chemicals, though smaller shipments of petro goods, vegetable oils, and biofuels are also handled. Growth has historically been strong (averaging 7.7% between 2003 and 2011) as presented in Figure 35. The drop in 2012, according to the Authority, was attributable to temporary conditions of the contracting cycle and a berth deepening project at the terminal which slowed throughput at the terminals. Figure 34: Vopak Terminals Wilmington, NC The outlook for these goods remains positive with the long term agreements in place, the deepening project complete, and stabilization in North Carolina s manufacturing sector. Given the variety of chemicals handled at the terminals, volume growth should remain stable. The capacity of the terminal presents a limitation to the upside potential of the forecasts. While it can likely be expanded, the forecast assumes that the capacity remains fixed in which case the volume growth becomes constrained in 2020 when capacity is reached. Figure 35: Chemical Volumes at Port of Wilmington Source: Moffatt & Nichol Tons 700, , , , , , , Assuming six full turns of tank volumes Moffatt & Nichol Commodity Trends & Forecasts Page 45

46 Grain Bulk grain volumes have been volatile over the past decade. These are imports used primarily as animal feed by the local hog and poultry industries. Importers negotiate price swings in corns and soybeans by either purchasing feed stock from international producers (when domestic prices are high) or by sourcing domestically when prices are low. Figure 36: Grain Volumes at Port of Wilmington In recent years the price of corn and other crop products have been pushed higher, in part because of their 500,000 increased usage for energy production, which has in turn 400,000 driven demand for imported feed through the Port. 300,000 Due to ongoing drought conditions throughout much of 200,000 the US, Moffatt & Nichol estimates that crop prices are likely to remain elevated, thereby continuing the trend 100,000 higher import volumes through POW (The Authority 0 estimates 1.0 million tons in FY 2013, Moffatt & Nichol assumes a more conservative 712,000). Over the longterm, as prices normalize, import volumes through the Port would likely return to a more average volume. Tons 350, , , , , ,000 50, Tons POW could potentially see volumes increase incrementally if the State of North Carolina makes coordinated effort to export locally produced soybeans and other crop products. The majority of North Carolina s agriculture exports are currently shipped through competing port facilities in neighboring states. While these volumes should be viewed as a potential upside to the forecasts, they are not included in the base projections. Woodchips Woodchips have only recently become a major bulk export at the Port, as presented in Figure 37, and are currently supported by a multi year contract with Yildiz Entegre, USA. Figure 37: Woodchip Volumes at Port of Wilmington The contract stipulates a minimum annual guarantee (MAG) of 350,000 tons per annum through Yildiz Entregre is shipping the woodchips to Turkey for production of construction/housing related goods including fiberboard and doors. For forecasting purposes, Moffatt & Nichol maintains roughly the 350,000 ton MAG volume throughout the forecast period ( ). It is assumed that a similar contract will be renewed post This assumption is based on both the underlying strength of Turkey s developing manufacturing sector as well as the proximity to woodchip source material in North Carolina which makes the Port of Wilmington an attractive export gateway. Moffatt & Nichol Commodity Trends & Forecasts Page 46

47 Cement Import volumes of cement at the Port have been averaging roughly 130,000 tons per year over past three years as presented in Figure 38. This volume is significantly lower than the 350,000 tons recorded in 2006 Figure 38: Cement Volumes at Port of Wilmington Tons 400, , , , , , ,000 50, during the height of the construction activity in North Carolina. Moffatt & Nichol estimates that a bottom has been reached in the construction sector and that a rebound in activity will help support higher volumes through the Port in coming years. Long term throughput should settle at a normalized volume of roughly 200,000 tons per annum. There are two identified threats to the volume. The first comes from a new plant being considered by Carolinas Cement Company s Castle Hayne, NC. While the process seems to be moving along at the permitting level, plans have not been finalized and the development faces local opposition. The second is that material is sourced domestically (rail), thereby eliminating some, if not all of the maritime shipments. The Authority however will likely generate revenue on the rail, and therefore this potential shift will likely be revenue neutral. Neither of these threats has been built into the base projection, but should be considered downside risk. Direct Reduced Iron (DRI) DRI imports through the Port of Wilmington are used as inputs into steel production at ArcelorMittal s plant in Georgetown, SC. Volumes have been sporadic due to volatility in demand, which included a complete shutdown of the plant for 18 months, from July 2009: January The plant produces wire rod in coil and primarily serves the construction, automotive, industrial, and converter markets. As long as the plant remains in operation, the Authority estimates roughly 125,000 of DRI will move through the Port. There are however, several considerable threats to this forecast: The Port of Georgetown, SC is properly dredged, and volume is redirected to the adjacent facility. Weak demand for US steel forces another closure The previous contract between ArcelorMittal and the United Steelworkers Union (which covers workers at the Georgetown plant) expired on Figure 39: DRI Volumes at Port of Wilmington Tons 250, , , ,000 50, September 1 st. While the union has decided to continue to work for now, rather than strike, the future for this situation is unknown. In light of these threats Moffatt & Nichol conservatively assumes that DRI throughout at the Port will decline to zero by Moffatt & Nichol Commodity Trends & Forecasts Page 47

48 UAN Volumes of UAN (liquid fertilizer) are handled at Gavilon s new 4.5 million gallon import facility which opened in September Over the past two years, import volumes have risen from 0 to roughly 250,000 tons, suggesting that Gavilon is successfully making use of the new facility. The majority of the import tonnage is shipped via rail to the Midwest. This may hurt demand over the coming year due to the drought. One potential limitation on the volume of UAN through Wilmington would be the capacity of the import facility, which is estimated to be roughly 350,000 tons by the Authority (though this depends heavily on the frequency at which product is received and shipped out, and could likely be increased). Figure 40: UAN Volumes at Port of Wilmington Tons 300, , , , ,000 50, Moffatt & Nichol estimates that Gavilon will seek to generate a return on investment as soon as possible, and therefore will fill capacity by Nevertheless, the regional liquid bulk storage market is competitive with competition from coming from Vopak in Wilmington (does not currently handle liquid fertilizer), and the Odjfell development (under construction) in Charleston. Therefore, Moffatt & Nichol s long term forecast for UAN volumes at the Port of Wilmington assume volumes remain near the capacity of Gavilon s facility. About Gavilon Acquired by Marubeni for $3.6 Billion in May 2012 A commodity management firm specializing in origination, storage and handling, transportation and logistics, marketing and distribution, and risk management. Headquarters: Omaha, Nebraska Within the US Southeast Gavilon maintains fertilizer storage facilities in: Chesapeake, VA Bridgeton, NC Wilmington, NC These are part of a larger service network which includes feed (ingredients) storage and marketing locations. Locations: 300 facilities and regional offices world wide Employees: 2,000 Business Mix (Based on 2 year Average EBITDA) Fertilizer 18% Energy 20% Grain & Ingredie nts, 62% Source: Moffatt & Nichol Commodity Trends & Forecasts Page 48

49 5.4. POW Break Bulk Metal Products (Excluding Scrap) Metal products handled at the Port of Wilmington are a mix of imported and exported commodities. The imported volumes consist primarily of steel products for the CSX s (Class 1 rail road) track replacement program, as well as smaller volumes of steel coil for AP Exhaust Technologies, a manufacturer of a wide range of exhaust system components. CSX s import volumes are relatively stable, averaging roughly 40,000 tons per annum. The exports volumes consist of variety of construction related goods including sheet pile and merchant bar. The export volumes have weakened in recent years, due low demand in primary European export markets. This drop in the export volumes, along with Figure 41: Metal Product Volumes at Port of Wilmington softer import demand, has reduced the total metal product shipments through the Port as presented in Figure ,000 Moffatt & Nichol does not assume that the CSX related imports will likely be a major source of growth, but rather a steadier year to year volume. Export volumes are estimated to remain under pressure as global producers such as China and India continue to develop their steel production capabilities. This will likely continue to drag total metal product tonnage at the Port lower. Tons 150, ,000 50, This assumption may be overly conservative as a rebound in local construction activity could drive demand for imported goods (as it did in 2005 and 2006) and push total throughput at the Port higher. This upside was not build into the projections. Forest Products Import volumes of forest products (dimensional lumber) have fallen dramatically following the collapse of North Carolina s housing construction industry in 2006/2007, as shown in Figure 42. Figure 42: Forest Product Volumes at Port of Wilmington Tons 600, , , , , , Moffatt & Nichol estimates that decline in local construction activity reached a low in 2011, and that 2012 will show increased activity in new home builds in the State. This assumption is based on the first six months of building permit data available which shows a 44% gain over 2011 s figure. Nevertheless, construction activity remains at roughly half the level experienced during the 2003 through 2007 period. Therefore the projections reflect the rebound occurring over a number of years where by 2016 construction activity has reached a more normalized level. This is assumed to translate into import volumes of lumber averaging roughly 250,000 tons per annum. Moffatt & Nichol Commodity Trends & Forecasts Page 49

50 Wood Pulp Shipments of wood pulp have fallen dramatically from peak volumes in the mid 2000s, with the sharpest drop in break bulk volumes. This decline resulted primarily from a change in the product being Figure 44: Total Wood Pulp at Port of Wilmington produced by International Paper, which switched to production of fluff pulp. The fluff pulp, used in 600,000 absorption products, is highly containerized, and 500,000 therefore as the volume of break bulk shipments fell, 400,000 import volumes rose, as presented in Figure ,000 Tons 200, , Figure 43: Break Bulk & Containerized Volumes of Wood Pulp 600, , ,000 Tons 300, , , Breakbulk Containerized Moffatt & Nichol Commodity Trends & Forecasts Page 50

51 5.5. MHC Bulk Phosphate The export tonnages of phosphate products are the largest volumes of trade (import or export) of any commodity handled at the Port of Morehead City, consistently totaling more than 1.0 million tons per annum as presented in Figure 45. These volumes are handled at the dedicated PotashCorp s (PCS) Phosphate terminal at the Port, which maintains a sizable facility at the Port (outlined in Figure 46). The phosphate originates from the PCS mine in Aurora, NC, and is barged south to Morehead City where it is processed into acid 13 and/or fertilizer and loaded onto ocean going vessels. The Aurora mine is the only coastal phosphate mine outside of Florida in the US, making it a uniquely competitive regional operation. The mine encompasses approximately 8,900ha of phosphate bearing reserves and is said to have enough material to fully support operations for 75 years 14. Figure 45: Phosphate Volumes at Morehead City Tons 1,500,000 1,000, ,000 The phosphate is used primarily as input into fertilizers and animal feeds. Therefore the outlook remains stable as global demand for plant and meat will continue to grow as global population increase Despite the stable outlook, Moffatt & Nichol does not foresee substantial upside from the existing 1.3 million tons. Layoffs at the mine and increased global competition could put downward pressure on future export volumes. Figure 46: PCS Phosphate Terminal at Morehead City Source: Moffatt & Nichol PCS recently announced layoffs at the Aurora mine equating to 15% of the total work force. The official news release made no mention of a drop in production levels but rather that Following a review of key operating processes, changes were identified to lower operating costs while maintaining the operational capability of the facility. 15 Additionally there is increased competition from global producers, including China and Morocco/Western Sahara, which will vie for market share. (US accounts for roughly 17% of global production). 13 Phosphoric acid is used by a wide range of industries including food & beverage industry and manufacturing of metal treatment products 14 ( technology.com/projects/aurora/) 15 Moffatt & Nichol Commodity Trends & Forecasts Page 51

52 Sulfur Products Import volumes of liquid sulfur products are used in production of a variety of phosphate based commodities (primarily fertilizers). Import tonnages have historically average roughly 300,000 tons per annum, but fell in 2011 and 2012 due to increased sourcing from domestic suppliers (railed to plant). Figure 47: Sulfur Volumes at Morehead City Tons 500, , , , , These import volumes have historically been stable, and the long term outlook assumes that these sulfur imports continue to account for approximately 200,000 tons of throughput at Morehead City. However, Moffatt & Nichol remains cautious of this projection due to recent abandonment of plans to develop a sulfur melting facility at the Port. PCS was forced to drop its effort in constructing the new facility after strong public opposition arose. Based on discussions with the Authority, Moffatt & Nichol has learned that PCS Phosphate indicated that they will still need to source more sulfur from somewhere, but that it was unclear if they will build a sulfur melting plant a different location and/or continue to import molten sulfur (versus sourcing dry sulfur). The forecasts assume the same volumes of molten sulfur for the foreseeable future, though downside risk is considered. Scrap Steel Scrap steel shipments at Morehead city have predominately been import volumes destined to the Nucor Steel plant located in Hertford County, NC. This plant uses the scrap as an input material into its production of steel plates. While the volume of scrap steel products handled by Morehead City has increased over the past three years, 2012 s level was significantly smaller than the volumes handled in , and is reflective of lower demand environment for US steel products, and increased domestic sourcing. Future volumes of scrap steel are not assumed to show significant increases. According to the Authority, Nucor plans to switch over to DRI (from scrap steel) in the first quarter of calendar year 2014 scrap volumes are likely to drop to zero. There could potentially be some supplements of pig iron though this is not taken into account in the forecasts. Therefore, following 2014, Moffatt & Nichol projects that no scrap steel imports will be handled at the Port of Morehead City, baring a new line of business. Nucor has Figure 48: Scrap Steel Volumes at Morehead City Tons 400, , , , however expressed to the Authority, the desire to have the capability of shipping scrap metal in the future to hedge against price fluctuations of DRI. This is an upside risk not considered in the base forecasts. Moffatt & Nichol Commodity Trends & Forecasts Page 52

53 Woodchips Woodchip exports at Morehead City are supported by the recently established long term contract with Cogent FIbre (beyond the forecast period). This contract has a number of MAGs in place which will ensure the Authority generates revenue off of this business. The 2012 MAG of 125,000 tons was exceeded by actual throughput volume of 208,000 tons as presented in Figure 49. Future MAGs guarantee payment on 450,000 tons of wood chip exports. Cogent Fibre ships the woodchips to Turkey to be manufactured into medium density fiberboard, used in construction/housing. Moffatt & Nichol estimates that long term throughput of woodchip exports at the Port of Morehead City will trend roughly in line with the MAG levels stipulated in the contract. Tons 250, , , ,000 50, Ore, Mica, Schist Figure 49: Woodchip Volumes at Morehead City Import volumes of ore, mica and schist have accounted for relatively small volumes (less than 50,000 tons) over the past three years. Total volumes have historically been higher but the Port has seen throughput decline as a result of lower demand, and volume increasingly being redirected through competing ports. Figure 50: Ore, Mica, Schist at Morehead City Tons 150, ,000 50,000 The Authority has indicated that future throughput will likely fall to zero, as import volumes will be handled by facilities in Chesapeake, VA. Therefore, future projections do not include any import volumes for ore, mica and schist Moffatt & Nichol Commodity Trends & Forecasts Page 53

54 5.6. MHC Break Bulk Rubber Imports of rubber have historically been the dominant break bulk cargo handled at the Port of Morehead City. These volumes are used as manufacturing inputs at regional tire plants including Goodyear s Danville, VA and Fayetteville, NC plants as well as Bridgestone s Wilson, NC Plant. Tonnage has averaged approximately 150,000 per annum over the past decade, but has dropped from peak levels experienced in the mid 2000 s. The lower volumes can be attributed to a number of factors included lower demand domestically, competition from international producers and increased shipment via container. Soft demand forced the Fayetteville plant to shut down for a week in August of While no additional stoppages are planned, weakness may force additional closures in the future. Neverthess, the company has been investing in the plant, an estimated $230 million since , suggesting that operations will likely continue in the near term. The Bridgestone plant in Wilson, NC also apparently invested money in an upgrade.. Also, Bridgestone announce that they were going to expand production at its Aiken County plant as well as build a new plant, also in Aiken County. Michelin is building a new plant in Anderson County, SC, as well as expanding its current plant in Lexington County, SC, while Continental Tire is building a plant in Sumter County SC. Moffatt & Nichol estimates that output from the US tire manufacturing continues to soften, as increased global competition and lower vehicles miles in the US weigh on production demand. It is unclear if Morehead City will Figure 51: Rubber Volumes at Morehead City Tons 300, , , , ,000 50,000 0 Figure 52: Regional Tire Plants Source: Moffatt & Nichol p Norfolk p Morehead City p Wilmington p Charleston p Savannah serve these new plants. The forecasts does not include any additional tonnage associated with them, but it could considered an upside risk to the forecast. Additionally if container shipping becomes more expensive, this could push more volumes of rubber back to break bulk Moffatt & Nichol Commodity Trends & Forecasts Page 54

55 Metal Products (Excluding Scrap) Volumes of metal products handled at the Port of Morehead City have historically been a mix of imports and exports. In recent years however, throughput has been mostly import volumes. The largest customer of Figure 53: Metal Products (ex Scrap) at Morehead City imported demand is Norfolk Southern (Class 1 Rail Road), which imports steel products related to their track 80,000 replacement program. Of the 73,000 total tons handled in 2012, approximately 27,000 tons of this was Norfolk 60,000 Southern volume, according to the Authority. 40,000 Tons Export volumes are primarily steel billets destined to Peru. According to the authority, this business is likely to disappear at the Port, as increased production in Peru limits the need for goods sourced from North Carolina. 20, Therefore, after 2013, Moffatt & Nichol forecasts that the Norfolk Southern demand will be the primary driver of volume through the Port. Long term estimates of 37,000 tons per annum are projected. Forest Products Breakbulk volumes of forest products are predominantly import shipments of lumber used in fencing. Volumes have fallen to just 389 tons in 2012, down from 79,000 tons in 2006 as illustrated in Figure 54. Figure 54: Forest Products at Morehead City Tons 100,000 80,000 60,000 40,000 20, The decline in volume can be attributable to two likely factors, the first being the downturn in regional construction activity, and the second the possible increased production from domestic suppliers. Fencing lumber is a low value commodity compared to other timber products, and as demand dropped for construction lumber, it is possible that some of the local suppliers switched production to fencing lumber in an effort to sell at least a portion of their feedstock. Additionally, as the price of container shipping has declined some volume of lumber which would have traditionally been shipped in breakbulk form were placed in containers. Moffatt & Nichol anticipates that a rebound is regional construction activity will increase demand for shipments of forest products in the coming years. Long term throughput is forecasted to average approximately 40,000 tons per annum. Moffatt & Nichol Commodity Trends & Forecasts Page 55

56 5.7. Summary of General Cargo Forecasts Moffatt & Nichol estimates that combined general cargo volumes through the Port of Wilmington and Port of Morehead City will total approximately 5.3 million tons by 2022 as presented in Figure 55. While the forecasts attempted to reflect the impact of cyclical demand on future throughput estimates (including a return to trend in construction activity by 2016), there is not a great deal of volatility visible in the total level forecasts for general cargo 17. This is due to the relative stable throughputs (historically) of the highest volume commodities including, chemicals and phosphates. Additionally, several of the remaining commodities estimated to contribute significant tonnage, including woodchips, have MAGs stipulated in their contracts, which in most instances were used to forecast the upside potential of the throughput totals. Figure 55: General Cargo Volume Forecasts Tons (Million) MHC Break Bulk POW Break Bulk MHC Bulk POW Bulk E 2015E 2017E 2019E 2021E Source: NCSPA; Moffatt & Nichol Bulk volumes through Port of Wilmington are estimated to account for the most tonnage led by import volumes of chemicals, UAN, grains and woodchips. The largest volumes of bulk commodities handled at the Port of Morehead City will likely remain phosphates, sulfur and woodchips. Break bulk volumes at Port of Wilmington are estimated to recover some of the loss experienced over the last half of the decade, led be increased volumes of imported lumber and exported wood pulp. Break bulk at Morehead City is estimate to remain essentially flat, with rubber imports accounting for the most volume. A full break down of the tonnage forecasts by commodity are presented in Table Forecasts are developed on existing (Fiscal Year 2012) lines of business only; no estimates for new commodities are included. Moffatt & Nichol Commodity Trends & Forecasts Page 56

57 Both the Port of Morehead City and Port of Wilmington have historically handled additional miscellaneous commodities not discussed in Section , and Moffatt & Nichol has grouped projected volumes of these goods into the Other category of the respective Ports. Some of these include: Wilmington Bulk: 150,000 tons of agricultural limestone in 2013, future volumes are uncertain so a ramp up back to 150,000 tons between is included (not necessarily the limestone) Morehead City Bulk: Includes Asphalt which has an existing MAG of 20,000 tons, and other bulk commodities totaling an average 40,000 tons historically. Table 6: General Cargo Forecasts by Commodity (Tons) E 2014E 2015E 2020E 2022E TOTAL GENERAL CARGO 4,409,899 4,959,059 4,798,237 4,675,761 5,229,319 5,288,069 Morehead City Breakbulk Rubber 141, , , , , ,099 Metal Products (ex. Scrap) 72,976 73,378 37,000 37,000 37,000 37,000 Forest Products 389 3,850 10,772 21,156 39,546 42,036 Other (includes Spirit Air) 7,957 10,095 10,389 10,977 11,271 11,271 Total 222, , , , , ,406 Wilmington Breakbulk Metal Products (excl Scrap) 70,455 70,008 69,568 69,135 67,060 66,272 Woodpulp 167, , , , , ,982 Forest Products 14,901 35,626 77, , , ,811 Other 18,783 33,500 33,500 33,500 33,500 33,500 Total 271, , , , , ,565 Morehead City Bulk Phosphate 1,332,089 1,340,796 1,349,560 1,358,381 1,403,359 1,421,764 Sulfur Products 191, , , , , ,402 Scrap Steel Products 123, ,070 66, Ore, Mica, Schist 40, Woodchips 208, , , , , ,500 Fertilizer (ex. Phps.and sulf.) 20,457 27,338 29,079 30,067 33,238 34,591 Other 40,003 40,000 60,000 80,000 80,000 80,000 Total 1,956,796 1,943,965 1,946,695 1,966,238 2,190,853 2,213,257 Wilmington Bulk Chemicals 538, , , , , ,000 Grain 474, , , , , ,585 Cement 88,815 99, , , , ,205 Woodchips 319, , , , , ,000 Direct Reduced Iron 199, , , ,566 68,852 0 UAN 244, , , , , ,000 Fertilizer (ex. UAN) 93, , , , , ,050 Other 0 150,000 5,556 13,889 97, ,000 Total 1,958,672 2,477,432 2,299,281 2,081,471 2,264,018 2,274,840 Source: Moffatt & Nichol Moffatt & Nichol Commodity Trends & Forecasts Page 57

58 6. Feasibility of Wood Pellet Export Opportunity 6.1. Executive Summary The growing world market for wood pellets as an alternative energy source presents a viable business opportunity for the North Carolina Ports Authority. The growing demand for wood pellets in the European Union (EU) and the United Kingdom in particular, combined with the nearby forest resources in North Carolina and the favorable trade lane proximity of NCSPA ports to the EU and UK contribute to the potential of this business opportunity. This chapter examines the outlook for the global market and NCSPA s place in the global market as a basis for evaluating the proposed NCSPA business model for exploiting this opportunity. The evaluation will include a projection of the possible cash flow and capital capacity generated by the NCSPA business model for proposed wood pellet export facility investments at Morehead City (MHC) and the Port of Wilmington (POW). In addition, the risks associated with the proposed business model will be identified and discussed so that appropriate risk mitigation strategies can be developed. The EU is the primary destination for the global flow of wood pellets, making up 75% of world imports in With total pellet consumption in Western Europe expected to grow from 10.8 million metric tons (MMT) in 2010 to 23.8 MMT in 2020 while production grows from 7.7 to 10 MMT, imports will need to grow to meet this demand. This EU and UK demand and projected growth is largely policy driven, with the goal of reducing greenhouse gas (GHG) emissions, and enhancing the security of energy sources. Within the EU market, the UK, while a relatively small share presently is projected to be among the fastest growing markets as significant investment is made in electric energy generation from wood pellets in order to satisfy the UK government s Renewable Obligation energy mandates. Among exporters of wood pellets, Canada leads with 12% of the global market, while the US, with the industry in its infancy, had 4% of the export market in Of this combined 16% North American market share, 81% of the total was destined for the EU. Looking ahead, North American production is expected to increase from 4.8 to 11 MMT between 2010 and 2020, providing a surplus over consumption which is expected to increase from 3.4 to 4.6 MMT over the same period. This surplus will support the growth in EU demand. Examining the wood pellet supply chain for satisfying global demand, NCSPA s ports, and the MHC and POW developments in particular enjoy several advantages. A review of US port choice for wood pellet exports over recent years, the data indicates that proximity to production location is a key determinant. Panama City, Florida, for example, which has been the leading port for wood pellet exports in recent years, has the largest production capacity for which it is the closest port among all exporting ports, by a substantial margin. And all of that capacity is within 150 miles. With the development of the proposed production capacity in North Carolina which represents NCSPA s customers, both MHC and POW will be nearby port choices. In addition, with their Atlantic Coast location, MHC and POW are well positioned to provide economical ocean services to the rapidly growing EU and UK markets described above, certainly more economically than Canada s Pacific Northwest region, the US Gulf, and other export possibilities like Brazil. Equally important, various studies of the forest resources in the catchment area of North Carolina ports have estimated that there are sufficient resources to supply the anticipated production needs of the proposed production capacity of NCSPA s customers. It has been estimated that North Carolina has enough resources for 2.1 million tons of logging residue, 1.2 million tons of forest thinnings and 12 million green tons (annually). The production capacity needed to meet the MHC and POW Minimum Annual Guarantee (MAG) is 2.9 MMT. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 58

59 The NCSPA wood pellet business model for investment in MHC and POW facilities was evaluated further with the development of a cash flow models that incorporates the anticipated terms of operating agreements with its customers, as well as NCSPA estimated investments and operating expenses. The key parameters included in the model included the handling charge and capital recovery charge per ton, and the respective contractual escalation of these rates, the NCSPA operating expense per ton and the anticipated escalation in these expenses, and the MAG for each of three customers. Additional NCSPA revenues from vessel dockage charges were also included. Using these parameters, and assuming the MAGs are met, the annual net cash flow available to meet capital requirements was estimated. These cash flows were discounted at a rate reflective of anticipated borrowing rates increased by NCSPA debt service coverage requirements. This analysis, using the most likely estimates resulted in a net present value of discounted cash flows of approximately $108 million for MHC, as compared to the estimated capital investment requirement of $60 million. The required investment is recovered in approximately 11 years. Several additional scenarios were performed evaluating alternative estimates of the parameters results in a range of NPV from $67 to $131 million. Similarly, the net present value of discounted cash flows is approximately $173 million for POW, as compared to the estimated capital investment requirement of $70 million and the required investment is recovered in approximately 8 years. For POW, sensitivity analysis scenarios of alternative estimates of the parameters resulted in a range of NPV from $107 to $214 million. While the global market outlook, NCSPA market position and NCSPA business model described above indicate the positive potential of this initiative, there are a number of risks that must be considered in evaluating this relatively new and unproven line of business. As indicated above regarding the cash flow projections, they are premised on the NCSPA s customers meeting their MAGs. These MAGs, totaling 2.9 MMT represent a significant volume when compared to the total current production in the southern US of about 3.5 MMT. Considering new production in the pipeline the total is about 7 MMT. Furthermore, none of the production capacity for the anticipated MHC or POW customers has yet been constructed. In addition the ability of the NCSPA customers to satisfy their MAGs is dependent on the security of their contracts with their utility customers in the EU/UK, as well as their ability to produce and deliver product at their contract rates. There have been examples of wood pellet producer failures due to higher transportation costs and production costs than anticipated, resulting in dramatic reductions in port volumes for other US ports. The NCSPA initiative is sensitive to transportation costs, and relies on rail transportation rates being within acceptable bounds. Additionally, wood pellets are a relatively new, and largely policy driven market that could be subject to technological and regulatory change. For example, the UK market is incentivized by the Renewable Obligation mandate and the Renewable Obligation Certificates (ROC) that utilities use to subsidize renewable power. There has been some turmoil in the UK market caused by changes in the value and applicability of the ROC. For example, in July 2012, the value of UK utility Drax shares fell sharply as a result of changes in the ROC. As it turns out, these changes may actually increase the demand for pellets, but it is indicative of the fact that regulatory policy can change. Technological change can also impact regulatory change. The emergence of additional clean energy alternatives such as the increase in natural gas supply in the US in recent years as a result of improved exploration and extraction technology is an example. There have even been a few instances of questions being raised regarding the effectiveness of wood pellet and other biomass alternatives in reducing GHG, which is a prime rationale for the technology. These are examples of the risks that must be faced in investing in the wood pellet initiative. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 59

60 6.2. Overview Biomass energy overview Biomass energy is a renewable energy source based on organic plant based material which can be used directly or converted to other energy products such as biofuel. If managed sustainably, carbon dioxide generated by the harvest and burning of biomass fuel is constantly absorbed by newly replenished crops. With this closed carbon cycle, the use of biomass for energy generation creates no net increase in the levels of atmospheric CO 2. Figure 56: Close Carbon Cycle Source: Biomass Renewable Power Generation the Drax Way The three most common forms of biomass used to generate electricity are: agriculture residues, forestry products and energy crops. Agricultural residues: The by products of food production, such as straw, oat husks, peanut husks, grape flour, cocoa shells, olive cake and many more, can all be used as biomass for energy production. Forestry products and residues: Sustainably produced woody biomass can be sourced from managed forests and forestry residues, such as bark, thinnings, tree tops and branches that are often discarded after trees are felled for timber. Energy crops: These are crops that are planted specifically for the purpose of producing energy. Energy crops include short rotation coppice willow and miscanthus, commonly known as elephant grass. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 60

61 Wood pellets Wood pellets are a type of wood fuel, generally made from compacted sawdust or other wastes from sawmilling and other wood product manufacturers, but also sometimes from sources such as whole tree removal or tree tops and branches leftover after logging, which would otherwise help replenish soil nutrients. Pellets are manufactured in several types and grades as fuels for electric power plants, homes, and other applications. Pellets are extremely dense and can be produced with a low moisture content (below 10%) that allows them to be burned with very high combustion efficiency. Further, their regular geometry and small size allow automatic feeding of the pellet into the furnace with very fine calibration. They can be fed to a burner by auger feeding or by pneumatic conveying. Their high density also permits compact storage and rational transport over long distances. They can be conveniently blown from a tanker to a storage bunker or silo on a customer's premises. Wood pellets are used as feed stock for electric power plants, heating plants, household heating systems and stoves. The production process of the wood pellets begins with the sourcing of raw material. Raw materials for wood pellet production have generally been a byproduct of some other wood processing operations. With recent growth in wood pellet production some mills are using round wood as a raw material for their pellet production process. In the production process raw material goes through a grinding process by running through a chipper and hammer mill or similar devices to create small size particles. To maintain the desired moisture level, initially processed materials go through a dryer. This is followed by the extrusion process to get the material into the pellet form. Post extrusion pellets are cut, cooled and stored for shipping to their final consumer destinations. Figure 57: Wood Pellet Production Process Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 61

62 Global flows of renewable energy According to the Sustainable International Bioenergy Trade report published by IEA, in the long term Europe and Asia are going to be net importers of biomass feedstock (e.g. woodchips, vegetable oils and agricultural residues) and processed bio energy carriers (e.g. ethanol, biodiesel and wood pellets); Europe is sourcing its biomass energy from North America, Eastern South America and South East Asia. These long term production and consumption patterns will lead to trade routes that have Europe as the main destination for international trade of renewable energies (shown in Figure 58). Figure 58: Main international biomass for energy trade routes. Source: Junginger, M. and Faaij, A Sustainable international bioenergy trade: securing an international supply and demand. IEA Bioenergy Task 40 leaflet, Wood pellet trade is a new and growing sector in international trade dominated by EU countries; up until 2012 wood pellets didn t have a dedicated harmonized code and were grouped with wood waste byproducts. According to UN Comtrade, in 2010 European countries accounted for more than 75% of total import of wood pellets 18. Belgium, with 2.19 million metric tons of import was the top importer accounting for 15% of global import of wood pellets, followed by Denmark, Germany and Italy which accounted for 11%, 11% and 10% respectively of global wood pellet imports respectively, shown in Figure HS : Sawdust and wood waste and scrap, whether or not agglomerated in logs, briquettes, pellets or similar forms, accessed 08/08/2012 Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 62

63 Figure 59: Top wood pellet importers 26% 15% Belgium Denmark Germany 11% Italy 4% 5% 9% 9% 10% 11% Sweden Netherlands Austria United Kingdom Other Source: UN Comtrade European counties are also a major exporter of wood pellets. 81% of total global wood pellet export originated in Europe which is mainly delivered to European counties. According to UN Comtrade in 2010 Canada was the largest exporter of wood pellet holding 12% of global market share. In the same year the share US from global export of wood pellet was about 4% ranking it as the 9th largest wood pellet exporter, shown in Figure 60 Figure 60: Top wood pellet exporters Canada Germany Latvia 42% 4% 4% 12% 10% 6% 6% 6% 5% 5% Russian Federation Austria Portugal France Switzerland USA Other Source: UN Comtrade Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 63

64 Biomass Market Drivers The biomass energy market is a policy driven market. The EU s is one of the main policy drivers of the increase in the European demand for biomass. It sets the goal for a 20% reduction of Greenhouse Gases (GHGs) by 2020, compared to 1990 levels, and sourcing 20% of the total European energy consumption from the renewable sources. There are also country specific drivers for the increase in the demand for biomass energy. For instance, the UK s Renewable Obligation mandate requires 15% renewable energy contribution in electricity production by Aside from the reduction of GHGs, biomass and renewable energy policies follow other goals of increasing the energy security and diversifying the sources and suppliers of the energy. From the market perspective the relative price of biomass versus other energy sources is a significant factor affecting the growth of biomass as an energy source. Figure 61 shows historical natural gas prices in Europe and United States. According to Bioenergy a Sustainable and Reliable Energy Source Main Report by the IEA, US$4/GJ (4.22 $/MMbtu) is often regarded as an upper limit if bioenergy is to be widely deployed today in all sectors. While in US the average spot price of natural gas was close to US$4/GJ, European import price was maintained above the US$4/GJ which increases the desirability of biomass as an energy sources in Europe compared to United States. Figure 61: Natural Gas Prices $/MMbtu Aug Dec 08 2 May Sep 11 Henry Hub Sport Price Europe Import Price Upper Limit Source: ycharts.com/indicators/natural_gas_spot_price The difference in governmental policies and prices of other energy sources are creating distinct trends in the usage of biomass in US and European markets. Figure 62 shows the annual growth in the Biomass and Waste Electricity Net Generation by location. In the period the EU has constantly maintained a higher growth rate in biomass and waste electricity generation than North America. In 2010 close to 47% of the world biomass electricity was being generated in Europe where the share of North America is about 26%. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 64

65 Figure 62: Biomass and Waste Electricity Net Generation 14% 50% 12% 45% 10% 40% Growth 8% 6% 4% 2% 0% 35% 30% 25% 20% 15% 10% Share 2% 5% 4% 0% Growth: North America Growth: Europe Growth: World Share: North America from Total Share: Europe from Total Source: EIA Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 65

66 6.3. Market Segments In the EU the dominant demand in market is shifting from heating/cooling to electricity generation European demand Europe is the main target for the wood pellet market, as discussed Section 6.2. While the total energy consumption of EU27 countries is estimated to grow by an annual average rate of 0.6% through 2020, the renewable energy consumption is projected to grow by an average 6.0% per annum. The difference in growth rates leads to an increase in the share of renewable energies of total energy consumption by EU27 countries from 12% in 2010 to 20% in 2020, Figure 63. Figure 63: Overall Growth in EU27 Market Growth 8% 7% 6% 5% 4% 3% 2% 1% 25% 20% 15% 10% 5% Share Grwoth: Total Energy Consumptionin EU 27 Growth: Renewable Consumption in EU27 Share: Renewables from Total 0% 0% Source: National Renewable Energy Action Plans of the European Member States The demand for renewable energy sources is generated by the three sectors of Transportation, Electricity and Heating & Cooling. The transportation sector mainly consumes biofuels and has low potential for becoming a wood pellet consumer, electricity and heating & cooling sectors are potential wood pellet consumers. In 2010 heating & cooling was the largest consumer of renewable energies but by 2020 electricity production is expected to be the largest consumer. Through 2020 electricity production is expected to have the highest growth in demand for renewable energies with a 10 year CAGR of 7.5% followed by transportation (5.1%) and heating & cooling (3.7%), Figure 64. These growth rates will turn the electricity sector into the dominant consumer of renewable energy which is composed of a smaller number of large consumers compared to the heating & cooling sector which is more fragmented, consisting of a large number of small volume consumers. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 66

67 Figure 64: EU27 Market Segments 100% 80% 60% 40% 20% Gross final RES electricity consumption Gross final RES consumption for heating and cooling Final RES consumption in transport 0% Source: National Renewable Energy Action Plans of the European Member States Market Segments Renewable energy market segments vary in maturity in the target counties. While Germany possesses the characteristics of a large and slow growing market, the UK market can be characterized as small/medium size and high growth. Figure 65 shows the market segments, their sizes and their CAGRs for top 3 European importers (Belgium, Denmark and Germany) and UK. In this graph the vertical axis represents the growth rate and the horizontal axis represent the total consumption in Kilo Tonnes of Oil Equivalent (ktoe). Heating & Cooling and Electricity in UK and Germany are market segments that are in the outer edge of the Figure 65. UK s Heating & cooling and electricity segments have relatively high growth rates which indicates an emerging market while on the other hand Germany s market has relatively larger size with slower growth showing a mature and stable market. Figure 65: Size and Growth of Selected Markets CAGR 30% 25% 20% 15% 10% 5% 0% 2, ,000 4,000 6,000 8,000 10,000 12,000 ktoe Electricity Heating and Cooling Transportation Source: National Renewable Energy Action Plans of the European Member States Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 67

68 In the period Germany s market is expected to grow at an annual average rate of 5.5%. The electricity sector is the fastest growing sector in the Germany s market with the CARG of 7.5% followed by Transportation and Heating & Cooling the CAGRs of 5.1% and 3.7% respectively. The German market structure changes between 2010 and 2020; in 2010 the largest segment of the market in Germany was heating & cooling with a share of 44%. The high growth rate of the electricity segment in the German market turns Electricity into the largest market segment with the share of 48% in 2020, Figure 66. Figure 66: Germany s renewable energy ktoe 50,000 40,000 30,000 20,000 10, Final RES consumption in transport Gross final RES consumption for heating and cooling Gross final RES electricity consumption Source: National Renewable Energy Action Plans of the European Member States In 2010 the UK s market was about 20% of the size of Germany s market but it is projected to be 53% of the size Germany s by The average annual growth rate of the UK market is estimated to be 16.9% for the period of 2010 to The expected average annual growth rate in the electricity segment is expected to be equal to 14% which is expected to be outgrown by heating & cooling with an average annual growth rate of 28.2%. Electricity production will remain the dominant sector in the UK s market with the share of 49% in 2020 which would be reduction from 63% in 2010 due to high growth rate of the heating & cooling sector, Figure 67. Figure 67: UK's renewable energy ktoe 50,000 40,000 30,000 20,000 10, Final RES consumption in transport Gross final RES consumption for heating and cooling Gross final RES electricity consumption Source: National Renewable Energy Action Plans of the European Member States Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 68

69 6.4. Business Model A successful wood pellet production business model requires alignment of multiple elements of the wood pellet supply chain. Port storage and handling is one of the interim links on the wood pellet supply chain but the success of the port s business depends both on the demand and production side the chain. The demand for wood pellet is policy driven with the goal of reducing GHG emissions, and enhancing security of energy sources. Because of the young age of wood pellet market, policy drivers of the market are not completely mature and may be subject to change. These changes could affect the demand for wood pellet and consequently the success of all operations in the wood pellet supply chain including port storage and handling. Figure 68: Wood Pellet Supply Chain Field Planting and Management Harvest and Transport Processing Transport Ports storage and handling Ocean freight Ports storage and handling Transport Furnace Suppliers Production Cost Availability of sustainable resource Logistics Transportation Cost Pipeline reliability Alternative gateways End Users Policies Drivers Segments Electricity; CHP/HP Industry Households 6.5. Key Markets (Belgium, Denmark, Germany and United Kingdom) Key Markets Summary Among importers of wood pellets, Belgium leads with 15% of the global market, while the UK, which is expected to be a high growth country, had 4% of the import market in Denmark and Germany were also among top importers of wood pellets in The UK s demand for wood pellets is expected to increase from 0.6 MMT in 2010 to 3.2 MMT in 2020 which would make it the top growing country among selected target countries, Table 7. Table 7: Summary for Key Identified Markets Country 2010 share of total global imports of pellets Current share of energy production by renewables Target share of energy production by renewables (2020) 2010 pellet imports (Million MTs) 2020 Expected pellet imports (Million MTs) Belgium 15% 3% 13% Denmark 11% 20% 28% Germany 11% 12% 20% UK 4% 4% 15% Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 69

70 Source: Multiple Sources; next chapter Belgium Belgium (Figure 69) was the largest importer of wood pellets in 2010 with a total import of 2.2 million metric tons. The country has an area of 30,528 km 2 (about the size of Maryland) with a population of 10.9 M (82 nd in world). Belgium has a slow growing population with growth Figure 69: Belgium 0.061% (191 st in world) with 97% of the population living in urban areas. More than half of their trade is done with Germany, France and the Netherlands (75% with EU). Figure 70 shows the historical growth in total and renewable energy consumption in Belgium. The average 5 year growth in Belgium s total energy consumption was equal to 1.6% where the average annual growth rate of consumption of renewable energies was equal to 14.5%. In the period the renewable share of total energy consumption has increased from 1.4% to 3.2%. The main driver of the historical growth in consumption of renewable energies in Belgium is the Kyoto Protocol in which Belgium has committed to reduce its GHG by 7.5% in compared to the base year of Figure 70: Historical Energy Consumption (Belgium) 30% 4% Growth 25% 20% 15% 10% 5% 0% 5% 3% 3% 2% 2% 1% 1% Share Growth: Total Energy Consumtion Growth: Renewables Share: Renewables from Final 10% 0% Source: IEA BIOENERGY TASK40, Country Report for Belgium Looking forward, the EU s Climate and Energy Package will be the main policy driver of the growth and share increase of the consumption of renewable energies in Belgium. According to the EU Climate and Energy Package, Belgium has to make a 10% reduction of GHGs in 2020 compared to the base year of To achieve this target, the consumption of renewable energies is projected to grow at an average rate of 15.8% and the consumption of solid biomass is projected to growth at an average rate or 13% through During this period solid biomass will remain the dominant source of renewable energy maintaining a share of higher than 50% of renewables. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 70

71 Figure 71: Target growth of renewable energy and solid biomass (Belgium) 30% 80% Growth 25% 20% 15% 10% 5% 70% 60% 50% 40% 30% 20% 10% Share Growth: Renewable Growth: Solid Biomass Share: Solid Biomass from Renewables 0% 0% Source: IEA BIOENERGY TASK40, Country Report for Belgium Netherland, Germany, France and USA are the main exporters of wood pellets to Belgium. With the assumption of no major changes in the domestic production and consumption structure of wood pellets in Belgium, future imports can be forecasted by trending the current volumes aligned with the forecast for growth of renewable energies. Based on the target growth rates mention in Figure 71 and historical import volumes, Belgium s import of wood pellet is expected to reach 5.0 million metric tons by 2020, Figure 72. Figure 72: Expected Wood Pellet Import to Belgium 6,000,000 Other 5,000,000 Spain MTs 4,000,000 3,000,000 Luxembourg Canada United Kingdom 2,000,000 USA 1,000, France Germany Netherlands Total Source: Comtrade Moffatt & Nichol Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 71

72 Denmark Denmark (Figure 73) was the second largest importer of wood pellets in 2010 with a total of 1.7 million metric tons. The country has an area of 43,094 km 2 (134 th in world) with a population of 5.5 M (110 th in world). Denmark has a slow growing population with a growth rate of 0.239% (171 st in world) with 87% of the population living in urban areas. Figure 73: Denmark Figure 74 shows the historical growth in total and renewable energy consumption in Denmark. The average 5 year growth in Denmark s total energy consumption was equal to 1.5% while the 5 year average annual growth rate of consumption of renewable energy was equal to 3.1%. In the period the share of renewables in total energy consumption has increased from 15% to 22%. The main driver of growth in consumption of renewable energies in Denmark is the Kyoto Protocol in which Denmark has committed to reduce its GHG by 21% in compared to the base year of Figure 74: Historical Energy Consumption (Denmark) 12% 25% 10% 8% 20% Growth 6% 4% 2% 0% 15% 10% Share Growth: Total Energy Consumtion Growth: Renewables 2% 4% 5% Share: Renewables from Total 6% 8% 0% Source: Danish Energy Agency statistics Similar to Belgium, EU s Climate and Energy Package will be the main policy driver of the growth and share increase of the consumption of renewable energies in Denmark. According to the EU Climate and Energy Package, Denmark has to make a 20% reduction of GHGs in 2020 compared to the base year of To achieve this target, the consumption of renewable energies is projected to grow at an average rate of 3.4% through During this period the share of renewables in Denmark s total energy consumption will increase to 22% from its current 15%. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 72

73 Figure 75: Target growth of renewable energy (Denmark) Growth 12% 10% 8% 6% 4% 2% 0% 30% 25% 20% 15% 10% 5% Share Growth: Total Energy Consumtion Growth: Renewables Share: Renewables from Total 2% 0% Source: Danish Energy Agency statistics Estonia, Latvia, the Russian Federation and Portugal are the main exporters of wood pellets to Denmark. With the assumption of no major changes in the domestic production and consumption structure of wood pellets in Denmark, future imports can be forecasted by trending the current volumes aligned with the forecast for growth of renewable energies. Based on the target growth rates indicated in Figure 75 and historical import volumes, Denmark s import of wood pellets is expected to reach 2.2 million metric tons by 2020, Figure 76. Figure 76: Expected Wood Pellet Import to Denmark 2,500,000 Other Sweden MTs 2,000,000 1,500,000 1,000, , USA Finland Germany Poland Lithuania Portugal Russian Federation Latvia Estonia Total Source: Comtrade Moffatt & Nichol Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 73

74 Germany Germany (Figure 77) was the third largest importer and second largest exporter of wood pellets in 2010 with a total of 1.6 million metric tons of imports and 1.4 million metric tons of exports. The country has an area of 357,022 km 2 (63 rd in world) with 31% covered with forests. Germany has a population of 81.3 M (16 th in word) and in 2010 it was estimated that 1.2 million were employed by the forest industry. Germany has a shirking population with a negative population growth rate of equal to 0.2% (208 th in world) with 74% of the population living in urban areas. Figure 77: Germany Figure 78 shows the historical growth in total and renewable energy consumption in Germany. The average 5 year growth in Germany s total energy consumption was equal to 0.5% where the 5 year average annual growth rate of consumption of renewable energies was equal to 7.6%. In the period the share of renewable has increased from 5% to 12% of total energy consumption. The main driver of the historical growth in consumption of renewable energies in Germany is the Kyoto Protocol in which Germany has committed to reduce its GHG by 21% in compared to the base year of Figure 78: Historical Energy Consumption (Germany) 20% 14% 15% 12% 10% 10% Growth 5% 8% 6% Share Growth: Total Energy Consumtion Growth: Renewables 0% 4% Share: Renewables from Total 5% 2% 10% 0% Source: Zeitreihen zur Entwicklung der erneuerbaren Energien in Deutschland At an annual average growth rate of 4.8%, over past 5 years solid biomass had a smaller growth compared to the total energy consumption of renewable energies in Germany. While the total consumption of solid Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 74

75 biomass was increasing in Germany, its share of renewables was following a decreasing trend since 2003 from 54% to 35% of renewables, Figure 79. Figure 79: Solid Biomass Market Growth (Germany) 25% 60% Growth 20% 15% 10% 5% 0% 5% 10% 50% 40% 30% 20% 10% Share Growth: Solid biomass Growth: Renewables Share: Solid Biomass from Renewables 15% 0% Source: Zeitreihen zur Entwicklung der erneuerbaren Energien in Deutschland Germany has the highest wood pellet production capacity and production in Europe. In 2010 Germany had 63 plants with the total production capacity of 3.25 million metric tons and production of 1.75 million tons. Compared to 2006 these number show a 100% increase on the number of production facilities (32 in 2006) and 315% increase in production capacity (0.93 million metric tons in 2006) indicating an increase in production capacity of newer facilities, Figure 80. Figure 80: Solid biomass production and consumption (Germany) 1000 MTs Source: IEA BIOENERGY TASK40, Country Report for Germany Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 75

76 Major future drivers of growth of renewable energies in Germany are the EU Climate and Energy Package, Renewable Energy Sources Act (EEG) and the Renewable Heat Sources Act (EE WärmeG). To meet the requirements of these policies Germany is expected to: Increase renewable energy in electricity to 30% renewables by Increase the renewable energy in heat to 14% from current 6.6%; Increase the share of renewables in primary energy consumption to 18% by 2020 from 6.7% in 2007; In the period the average annual growth rate of consumption of renewable energies in Germany is projected to be 5.5% and the expected share of renewables from total energy consumption in 2020 is expected to grow to 20% from its 2011 value of 12%, Figure 81. Figure 81: Target growth of renewable energy (Germany) 10% 25% 9% 8% 20% 7% 6% 15% Growth 5% 4% 10% Share Growth: Renewables Share: Renewables from Total 3% 2% 5% 1% 0% 0% Source: Zeitreihen zur Entwicklung der erneuerbaren Energien in Deutschland About 75% of Germany s wood pellet production is intended for the heating market and the remainder for electric power plants. Over 90% of wood pellets produced for heating is consumed domestically while most of the pellets produced for electric plants are exported due to the fact that wood pellets are not used for cofiring in power plants in Germany. Netherlands, Poland, Czech Republic and Denmark are the main exporters of wood pellets to Germany. With the assumption of no major changes in the production and consumption structure of wood pellets in Germany, future imports can be forecasted by trending the current volumes aligned with the forecast for growth of renewable energies. Based on the target growth rates mention in Figure 81 and historical import volumes, Germany s import of wood pellet is expected to reach 2.9 million metric tons by 2020, Figure 82. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 76

77 Figure 82: Expected Wood Pellet Import to Germany 3,500,000 Other 3,000,000 Russian Federation Ukraine MTs 2,500,000 2,000,000 1,500,000 Belarus Belgium Austria Switzerland France 1,000,000 Denmark 500,000 Czech Rep. Poland Netherlands Total Source: Comtrade Moffatt & Nichol Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 77

78 United Kingdom The UK (Figure 83) is expected to be a high growth European market for wood pellets through In 2010 the UK s total import of wood pellets was only 0.6 million metric tons but it is expected to grow to 3.2 million metric tons by The country has an area of 243,610 km 2 (80 th Figure 83: United Kingdom in world) with a population of 63 M (22 th in word). The UK has a slow growing population with the growth rate of 0.553% (146 th in world) with 80% of the population living in urban areas. Figure 84 shows the historical growth in total and renewable energy consumption in the UK. The average 5 year growth in the UK s total energy consumption was equal to 2.7% while the 5 year average annual growth rate of consumption of renewable energy was equal to 11.1%. In the period the share of renewable energy has increased from 1.3% to 3.7%. The main driver of the historical growth in consumption of renewable energy in the UK is the Kyoto Protocol in which the UK has committed to reduce its GHG by 12.5% in compared to the base year of Figure 84: Historical Energy Consumption (UK) 25% 4% 20% 4% Growth 15% 10% 5% 0% 3% 3% 2% 2% 1% Share Growth: Total Consumption Growth: BioEnergy Share: BioEnergy from Total 5% 1% 10% 0% Source: UK s Department of Energy and Climate Change The EU Climate Change and Energy Package and Renewable Obligations policy (shown in Table 8), are the main policy drivers for future demand of renewable energy in the UK. The EU Climate Change Package requires the UK to reduce is emissions by 35% in 2020 compared to 2005 baseline and Renewable Obligations places a mandatory requirement for UK electricity suppliers to source a percentage of electricity that they supply from eligible renewable sources. The current target is 15%, up to Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 78

79 Table 8: UK's renewable energy policies Incentive Description Regulatory Body Renewable Obligation (RO) Feed in Tariffs (FiTs) Renewable Heat Incentive (RHI) Renewable Heat Premium Payment (RHPP) The RO places a mandatory requirement for UK electricity suppliers to source a percentage of electricity that they supply from eligible renewable sources. The current target is 15%, up to FiTs came into effect on 1 April They make the business case for installing renewable energy more attractive. Under the scheme, if you generate your own renewable power you will be paid for the electricity produced and for the excess exported to the grid. Financial support for the production of renewable heat. Focused on non domestic installations in the first year of operation from September Support for domestic properties installing renewable heat technologies in the first year of the RHI (until October 2011) OFGEM 19 OFGEM OFGEM Energy Savings Trust To achieve its targets the UK is projected to increase the share of renewables in its total energy consumption to 15% by 2020 from 3.7% in In 2020 share of renewables in electricity, heating and transportation is expected to reach 30%, 11% and 10% respectively from their 2011 value of 6%, 1% and 3%, Figure 85. Figure 85: Target growth of renewable energy Growth 25% 20% 15% 10% 5% 16% 14% 12% 10% 8% 6% 4% 2% Share Growth: Renewables Share: Renewables from Total 0% 0% Source: UK s Department of Energy and Climate Change 19 Office of Gas and Electricity Markets Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 79

80 Figure 86, right, shows biomass power plants currently in operation in the UK (they burn approximately one million metric tons of biomass) and Figure 86, left, shows large biomass power plants (up to 300MW) planned and under construction. A common feature is that most of the plants are located on or close to sea ports to facilitate supply, particularly imports. Figure 86: Location of UK power plants Source: IEA BIOENERGY TASK40, Country Report for UK Canada, USA, Portugal and South Africa are the main exporters of wood pellets to the UK. With the assumption of no major changes in the production and consumption structure of wood pellets in the UK, future imports can be forecasted by trending the current volumes aligned with the forecast for growth of renewable energies. Based on the target growth rates mention in Figure 85 and historical import volumes, the UK s import of wood pellets is expected to reach 3.2 million metric tons by 2020, Figure 87 Figure 87: Expected Wood Pellet Import to UK MTs 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , Other Sweden Finland Latvia Netherlands Russian Federation New Zealand South Africa Portugal USA Canada Total Source: Comtrade Moffatt & Nichol Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 80

81 6.6. Sources of Supply Key Suppliers Figure 88 and Figure 89 shows the current and future expected global production and consumption of wood pellets. According to Pöyry European consumption of wood pellet is expected to stay higher than its production while North and South American production capacity is expected to be higher than its consumption. China is expected to remain a selfsufficient market through 2020 and Korea and Japan s wood pellet consumption is expected to exceed their countries production capacity. Western Europe, Japan and Korea will have to rely on import of wood pellets for domestic consumption. The US east coast has an advantage over Brazil and West Coast Canada, from the ocean transportation cost perspective for the export of wood pellets to Europe; the West Coast of North America is advantaged over Brazil and East Coast US from the ocean transportation cost perspective for exporting wood pellet to Japan and South Korea. Figure 88: Global wood pellet consumption outlook Figure 89: Global wood pellet production outlook Source: Pellets Becoming a Global Commodity: Global market, players and trade to 2020 (Pöyry 2011) 20 Pöyry (2011) Pellets Becoming a Global Commodity? Global market, players and trade to Executive summary, Viewpoint report. April 2011 Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 81

82 US Production With an area of 9,826,675, km times the area of EU27 countries combined, USA is the 3 rd largest county in the world with a population of million which is about 62.5% of combined EU27 countries (3 rd in the world). Figure 90 shows the historical growth in total and renewable energy consumption in United States. The average growth in United States total energy consumption over the past five years was equal to 0.4% compared to the average 5.3% increase in the consumption of renewable energies. Between 2003 and 2011 the share of renewable has increase from 5.9% to 8.2%. Increase in the consumption of biofuels is one of the main drivers the growth in consumption of renewable energies. This increase in the consumption of biofuels is response to following policies: State of the Union, 2007: Reduce national gasoline consumption by 20% by 2017 (20 in 10); EPACT: 7.5 billion gallons of ethanol and biodiesel by 2012 Figure 90: Historical Energy Consumption (US) 12% 9% 10% 8% 8% 7% 6% 6% Growth 4% 2% 0% 2% 5% 4% 3% 2% Share Growth: Total Consumption Growth: Renewable Share: Renewable from Total 4% 1% 6% 0% Source: EIA The growth rate in US s biomass energy production, 3.2% CAGR , is expected to be higher than the growth in the total energy consumption, 1.4% CAGR The new production capacity added in US is projected to exceed US s projected consumption of biomass leaving the country with a surplus of biomass (on average 30% of production capacity) which can be used for export, Figure 91. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 82

83 Figure 91: Biomass Supply (US) 10% 60% 8% 50% Growth 6% 4% 2% 0% 2% 40% 30% 20% 10% Share Growth: Total Energy Consumption Growth: Biomass Share: Biomass from Renewable Share: Biomass Suplus from Total Production 4% 0% Source: Electric Power Monthly, EIA According to North America s Wood Pellet Sector 21 report the total production capacity of the Southern US in 2009 was about 1.86 million Metric Tons where 70% of the capacity belonged to facilities within 200 miles of their closest port based on the list of the ports in Table 9. Panama City, Mobile and Norfolk were ports with highest production capacity within their 200 miles radius (Figure 92 and Table 9). Post North America s Wood Pellet Sector study there were new developments in NC s wood pellet production: Enviva, Gaston, 400 KMTs Riverside Pellets (proposed), Franklin, 45 KMTs Enviva, Ahoskie, 350 KMTs GreenWorld, Laurinburg, 109 KMTs proposed to go to 218 Other than GreenWorld, others are closer to competing ports or known to use/will use other ports; 21 USDA 2009 Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 83

84 Figure 92: US southern wood pellet production facilities Source: USDA, North America s Wood Pellet Sector Table 9: US southern production capacities Production Capacity in 1,000 MTs Port Name Shortest Distance Within 150 miles Panama City, FL Gramercy, LA Norfolk, VA Beaumont, TX Mobile, AL Savannah, GA 0 0 Brunswick, GA Morehead City, NC 14 0 Source: USDA, North America s Wood Pellet Sector, Moffatt & Nichol Figure 93 shows the current and 2030 availability of dry tons of logging residues at roadside in different states at the price of $80/dry ton. Georgia has the highest availability, with about 3.5 million metric tons of logging residues, followed by Mississippi and Oregon. North Carolina has 10 th highest availability of logging residues that can be used for production of biomass fuels, with availability 2.1 million metric tons. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 84

85 Figure 93: Current and year 2030 state quantities of logging residue available annually at $80 per dry ton Source: billion tons update Figure 94 shows available forest thinnings per year of at $20, $40, and $100 per dry ton (roadside). At $40 per ton Oregon will the highest availability of forest thinings and North Carolina with estimated availability of about 1.2 million metric tons will have the second highest availability. Figure 94: State quantities per year of simulated forest thinnings at $20, $40, and $100 per dry ton (roadside) Source: billion tons update In addition to logging residues and forest thinings North Carolina s supply of round wood can support the production of wood pellets. An independent study done by NC State University had confirmed the availability of round wood for the proposed International Wood Fuel facility in Sims County. Furthermore, Moffatt & Nichol s estimation based on growth and removal rates from Forest Inventory Assessment data has shown availability of 12 million green metric tons on round wood in North Carolina. Southern production capacity of wood pellets has grown at a very high rate in past 5 years, Figure 95. The 2012 southern production capacity is estimated to be 3.6 million metric tons which is 7.2 times of its 2007 Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 85

86 value published in the USDA report. Currently there is about 3.5 Million MTs of wood pellet production in proposal and planning phase, if realized this pipeline capacity will double the southern production capacity. Figure 95: Southern US Pellet Mills Capacity (Estimates) 8,000 6,000 4,000 2, ,000 MTs Aug Pipeline Source: USDA, North America s Wood Pellet Sector, Biomass Magazine, Southern Environmental Law Center, Moffatt & Nichol Figure 96 compares the Minimum Annual Guarantee in the proposed Morehead City and Wilmington facilities with the current and potential future southern production capacity. The success of the proposed MHC facility depends on the creation of the new production capacity close to the Port. The proposed facility s MAG is 80% of current production capacity and 40% of the current + pipeline production capacity. Compared to Europe wood pellets production and consumption outlook (Figure 88 and Figure 89), the combined MAG will account for 94%, 51% and 27% of total European deficit for 2010, 2015 and 2020 respectively. Figure 96: Current & Future Southern Production Capacity vs. Proposed MAGs (Estimates) MMTs Pipeline & Future Southern Production Capacity Vs. Proposed MAGs (Estimates) Current & Proposed Produciton Capacity Current Produciton Capacity NCSPA Ports MAG Morehead City MAG Wilmington MAG Source: USDA, North America s Wood Pellet Sector, Biomass Magazine, Southern Environmental Law Center, NCSPA, Moffatt & Nichol Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 86

87 US Exporting Ports Wood pellets are a new export market for United States. Up until 2012 wood pellets didn t have its own dedicated Harmonized Code. As shown in Figure 97 historical export volumes don t follow a stable pattern and show a strong dependency to production locations. Panama City, FL was the largest exporter of wood pellet followed by Gramercy, LA and Norfolk, VA as shown in Figure 97 in Figure 97: Historical wood pellet export volumes 600, ,000 Other 400,000 Savannah, GA (Port) Seattle, WA (Port) MTs 300,000 Mobile, AL (Port) 200, ,000 Beaumont, TX (Port) Norfolk, VA (Port) Gramercy, LA (Port) 0 Panama City, FL (Port) Source: USATradeOnline The average FAS (Free Alongside Ship) price for a metric ton of wood pellets and wood chips has risen 15% a year between 2008 and 2011, Figure 98, according to the US Census Bureau s data. Among top exporters Beaumont, TX has the highest price ($236/MT) followed by Panama City ($233.42/MT) and Gramercy, LA ($151.77/MT). Almost all of the export through Norfolk is containerized at $172.71/MT. FAS Price (USD) Figure 98: Non Containerized US Wood Pellet Export Volumes , , , , , ,000 Non container Weight (MTs) Non Container Weight Price per MT Source: USATradeOnline Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 87

88 The US has relatively high export prices compared to other major exporters of wood pellets, Figure 99. According to Comtrade,the average FOB price per ton export from US was $219/MT followed by Austria ($205/MT) and Canada ($197/MT). Low price exporters are Switzerland ($46/MT), France ($92/MT) and Russian Federation ($96/MT), Figure 99. Figure 99: 2010 Top Wood Pellet Exporters 250 2,000,000 Price/MT Canada Germany Latvia Russian Federation Austria Portugal France Switzerland USA 1,600,000 1,200, , ,000 0 Volume (MT) Netweight (MT) FOB Price US FOB Source: Comtrade, USATradeOnline A Comtrade analysis shows that in 2010 average US FOB price was higher than CIF price of all top importers. UK with average import price is close to $200/MT was the closest CIF import price to US export prices. High UK import prices are the result of the UK s high dependency to US and Canadian wood pellet, Figure 100. Figure 100: 2010 Top Wood Pellet Importers 250 2,500, ,000,000 Price/MT ,500,000 1,000, ,000 Volume MT Weight MTs CIF price per MT 0 0 US FOB Belgium Denmark Germany Italy Sweden Netherlands Austria United Kingdom Source: Comtrade, USATradeOnline Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 88

89 6.7. Investment Evaluation The NCSPA wood pellet business model for investment in MHC and POW facilities were evaluated with the development of cash flow models that incorporate the anticipated terms of operating agreements with its customers, as well as NCSPA estimated investments and operating expenses. The key parameters included in the models included the handling charge and capital recovery charge per ton, and the respective contractual escalation of these rates, the NCSPA operating expense per ton and the anticipated escalation in these expenses, and the minimum annual guarantee volume (MAG) for each of three customers. Additional NCSPA revenues from vessel dockage charges were also included. The base case values for handling charges, capital recovery charges, and the escalation of these charges for each of the three anticipated customers both the MHC and POW facilities,, are based on term sheets or draft agreements with each of the customers and similar information provided by NCSPA staff. The total MAG for the three customers at MHC is 1.1 million metric tons per year and 1.8 million metric tons per year for the three POW customers. The MAG weighted handling charge is approximately $6.70 per metric ton escalated at about 1.5% annually. In addition, there is a MAG weighted capital recovery charge of about $4.45 per metric ton. These values were applied over a 31 year project life, reflective of the 21 year term with two five year extensions indicated in the term sheets or draft agreements. Dockage revenue to NCSPA was also estimated on the basis of a vessel of 715 feet LOA, and a loading rate of 1000 MT per hour. Dockage revenue was calculated based on a rate of $11.20 per foot, per 24 hours, as reflected in the current NCSPA tariff, and this rate was escalated at 3% per annum. NCSPA operating expenses were estimated at $2.25 per MT for direct expenses and $1.25 per MT for indirect expense, for each of the three customers, based on the judgment of NCSPA staff. These values were also escalated at 2.5% per annum. Using these parameters, and assuming the MAGs are met, the annual net cash flow available to meet capital requirements was estimated. These cash flows were discounted at a rate reflective of anticipated borrowing rates increased by NCSPA debt service coverage requirements. For the purpose of this analysis a borrowing rate of 5% and a debt service coverage ratio of 1.35 were used, resulting in a discount rate of 6.75%. This analysis, using the base case estimates described above produced the following results for MHC and for POW. For MHC, Figure 101, the net present value of discounted cash flows is approximately $108 million, as compared to the estimated capital investment requirement of $60 million. The required investment is recovered in slightly more than 11 years, Figure 102. For POW, Figure 103, the net present value of discounted cash flows is approximately $173 million, as compared to the estimated capital investment requirement of $70 million, and the investment is recovered in approximately eight years, Figure 104. The cash flow over the project life and the cumulative NPV of net annual cash compared to the required investment is depicted in the following two charts for each of MHC and POW. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 89

90 Figure 101: Cash flow over the project life MHC Millions $20 $18 $16 MHC Cash Flow $14 $12 $10 $8 $6 $4 $2 $ Total Revenue Total Opex Net Cash ex Capex Figure 102: Cumulative NPV of net annual cash compared to the required investment MHC Millions $120 $100 MHC Capital Recovery $80 $60 $40 $20 $ Cumulative NPV Investment Estimate Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 90

91 Figure 103: Cash flow over the project life POW Millions $30 $25 POW Cash Flow $20 $15 $10 $5 $ Total Revenue Total Opex Net Cash ex Capex Figure 104: Cumulative NPV of net annual cash compared to the required investment POW Millions $200 $180 $160 POW Capital Recovery $140 $120 $100 $80 $60 $40 $20 $ Cumulative NPV Investment Estimate Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 91

92 Table 10 and Table 11present the annual cash flow estimates for the consolidation of the three customers at MHC and POW using the base case estimates described above. The year when the investment is recovered on a discounted basis is highlighted. Table 10: Annual cash flow estimate for three customers MHC discount rate 6.75% Year Operating Volume Capacity Revenue Total Net Cash ex Discount Cumulative MAG (KMT) Total Opex Disc Net Cash ending Year (KMT) (KMT) KMT Revenue Capex Factor NPV June 30 $107,807, $ $ $ , $ 2,332,733 $ 700,000 $ 1,632, $ 1,529,493 $ 1,529, , $ 9,420,541 $ 2,870,000 $ 6,550, $ 5,748,326 $ 7,277, ,000 1,850 1,100 1,100 $ 12,890,803 $ 3,677,188 $ 9,213, $ 7,574,020 $ 14,851, ,100 1,850 1,100 1,100 $ 13,052,316 $ 4,146,029 $ 8,906, $ 6,858,437 $ 21,710, ,100 1,850 1,100 1,100 $ 13,180,496 $ 4,249,680 $ 8,930, $ 6,442,460 $ 28,152, ,100 1,850 1,100 1,100 $ 13,310,780 $ 4,355,922 $ 8,954, $ 6,051,338 $ 34,204, ,100 1,850 1,100 1,100 $ 13,443,204 $ 4,464,820 $ 8,978, $ 5,683,594 $ 39,887, ,100 1,850 1,100 1,100 $ 13,577,806 $ 4,576,440 $ 9,001, $ 5,337,838 $ 45,225, ,100 1,850 1,100 1,100 $ 13,714,624 $ 4,690,851 $ 9,023, $ 5,012,764 $ 50,238, ,100 1,850 1,100 1,100 $ 13,853,698 $ 4,808,122 $ 9,045, $ 4,707,143 $ 54,945, ,100 1,850 1,100 1,100 $ 13,995,067 $ 4,928,325 $ 9,066, $ 4,419,819 $ 59,365, ,100 1,850 1,100 1,100 $ 14,138,772 $ 5,051,534 $ 9,087, $ 4,149,706 $ 63,514, ,100 1,850 1,100 1,100 $ 14,284,854 $ 5,177,822 $ 9,107, $ 3,895,780 $ 67,410, ,100 1,850 1,100 1,100 $ 14,433,357 $ 5,307,268 $ 9,126, $ 3,657,079 $ 71,067, ,100 1,850 1,100 1,100 $ 14,584,322 $ 5,439,949 $ 9,144, $ 3,432,699 $ 74,500, ,100 1,850 1,100 1,100 $ 14,737,794 $ 5,575,948 $ 9,161, $ 3,221,787 $ 77,722, ,100 1,850 1,100 1,100 $ 14,893,819 $ 5,715,347 $ 9,178, $ 3,023,545 $ 80,745, ,100 1,850 1,100 1,100 $ 15,052,441 $ 5,858,230 $ 9,194, $ 2,837,217 $ 83,583, ,100 1,850 1,100 1,100 $ 15,213,707 $ 6,004,686 $ 9,209, $ 2,662,096 $ 86,245, ,100 1,850 1,100 1,100 $ 15,377,665 $ 6,154,803 $ 9,222, $ 2,497,515 $ 88,742, ,100 1,850 1,100 1,100 $ 15,544,364 $ 6,308,673 $ 9,235, $ 2,342,847 $ 91,085, ,100 1,850 1,100 1,100 $ 15,713,853 $ 6,466,390 $ 9,247, $ 2,197,501 $ 93,283, ,100 1,850 1,100 1,100 $ 15,886,183 $ 6,628,050 $ 9,258, $ 2,060,925 $ 95,343, ,100 1,850 1,100 1,100 $ 16,061,405 $ 6,793,751 $ 9,267, $ 1,932,594 $ 97,276, ,100 1,850 1,100 1,100 $ 16,239,572 $ 6,963,595 $ 9,275, $ 1,812,018 $ 99,088, ,100 1,850 1,100 1,100 $ 16,420,737 $ 7,137,685 $ 9,283, $ 1,698,736 $ 100,787, ,100 1,850 1,100 1,100 $ 16,604,955 $ 7,316,127 $ 9,288, $ 1,592,312 $ 102,379, ,100 1,850 1,100 1,100 $ 16,792,282 $ 7,499,030 $ 9,293, $ 1,492,337 $ 103,871, ,100 1,850 1,100 1,100 $ 16,982,776 $ 7,686,506 $ 9,296, $ 1,398,428 $ 105,270, ,100 1,850 1,100 1,100 $ 17,176,494 $ 7,878,668 $ 9,297, $ 1,310,222 $ 106,580, ,100 1,850 1,100 1,100 $ 17,373,495 $ 8,075,635 $ 9,297, $ 1,227,379 $ 107,807,951 NPV= $107,807,951 Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 92

93 Table 11: Annual cash flow estimate for three customers POW discount rate 6.75% Year Operating Volume Capacity Revenue Total Net Cash ex Discount Cumulative MAG (KMT) Total Opex Disc Net Cash ending Year (KMT) (KMT) KMT Revenue Capex Factor NPV June 30 $172,866, $ $ $ , $ 5,148,650 $ 1,575,000 $ 3,573, $ 3,347,681 $ 3,347, ,650 1,000 1,000 $ 11,590,184 $ 3,228,750 $ 8,361, $ 7,337,447 $ 10,685, ,800 2,650 1,800 1,800 $ 20,995,086 $ 6,618,938 $ 14,376, $ 11,817,861 $ 22,502, ,800 2,650 1,800 1,800 $ 21,200,259 $ 6,784,411 $ 14,415, $ 11,101,168 $ 33,604, ,800 2,650 1,800 1,800 $ 21,408,798 $ 6,954,021 $ 14,454, $ 10,427,302 $ 44,031, ,800 2,650 1,800 1,800 $ 21,620,759 $ 7,127,872 $ 14,492, $ 9,793,719 $ 53,825, ,800 2,650 1,800 1,800 $ 21,836,205 $ 7,306,069 $ 14,530, $ 9,198,023 $ 63,023, ,800 2,650 1,800 1,800 $ 22,055,195 $ 7,488,720 $ 14,566, $ 8,637,964 $ 71,661, ,800 2,650 1,800 1,800 $ 22,277,793 $ 7,675,938 $ 14,601, $ 8,111,423 $ 79,772, ,800 2,650 1,800 1,800 $ 22,504,062 $ 7,867,837 $ 14,636, $ 7,616,409 $ 87,388, ,800 2,650 1,800 1,800 $ 22,734,068 $ 8,064,533 $ 14,669, $ 7,151,047 $ 94,540, ,800 2,650 1,800 1,800 $ 22,967,876 $ 8,266,146 $ 14,701, $ 6,713,575 $ 101,253, ,800 2,650 1,800 1,800 $ 23,205,555 $ 8,472,800 $ 14,732, $ 6,302,335 $ 107,555, ,800 2,650 1,800 1,800 $ 23,447,173 $ 8,684,620 $ 14,762, $ 5,915,768 $ 113,471, ,800 2,650 1,800 1,800 $ 23,692,800 $ 8,901,735 $ 14,791, $ 5,552,406 $ 119,024, ,800 2,650 1,800 1,800 $ 23,942,509 $ 9,124,278 $ 14,818, $ 5,210,870 $ 124,234, ,800 2,650 1,800 1,800 $ 24,196,373 $ 9,352,385 $ 14,843, $ 4,889,861 $ 129,124, ,800 2,650 1,800 1,800 $ 24,454,465 $ 9,586,195 $ 14,868, $ 4,588,160 $ 133,713, ,800 2,650 1,800 1,800 $ 24,716,863 $ 9,825,850 $ 14,891, $ 4,304,616 $ 138,017, ,800 2,650 1,800 1,800 $ 24,983,643 $ 10,071,496 $ 14,912, $ 4,038,150 $ 142,055, ,800 2,650 1,800 1,800 $ 25,254,885 $ 10,323,284 $ 14,931, $ 3,787,746 $ 145,843, ,800 2,650 1,800 1,800 $ 25,530,669 $ 10,581,366 $ 14,949, $ 3,552,446 $ 149,395, ,800 2,650 1,800 1,800 $ 25,811,079 $ 10,845,900 $ 14,965, $ 3,331,352 $ 152,727, ,800 2,650 1,800 1,800 $ 26,096,197 $ 11,117,047 $ 14,979, $ 3,123,618 $ 155,850, ,800 2,650 1,800 1,800 $ 26,386,110 $ 11,394,973 $ 14,991, $ 2,928,448 $ 158,779, ,800 2,650 1,800 1,800 $ 26,680,905 $ 11,679,848 $ 15,001, $ 2,745,092 $ 161,524, ,800 2,650 1,800 1,800 $ 26,980,672 $ 11,971,844 $ 15,008, $ 2,572,847 $ 164,097, ,800 2,650 1,800 1,800 $ 27,285,500 $ 12,271,140 $ 15,014, $ 2,411,049 $ 166,508, ,800 2,650 1,800 1,800 $ 27,595,484 $ 12,577,919 $ 15,017, $ 2,259,076 $ 168,767, ,800 2,650 1,800 1,800 $ 27,910,719 $ 12,892,367 $ 15,018, $ 2,116,342 $ 170,883, ,800 2,650 1,800 1,800 $ 28,231,300 $ 13,214,676 $ 15,016, $ 1,982,293 $ 172,866,096 NPV= $172,866,096 Several additional scenarios were performed evaluating the sensitivity of the results to alternative estimates of the values used in the model. Evaluations were made of the impact of using varying estimates of operating expenses per ton, volume growth beyond the MAG, and higher borrowing costs resulting in a higher discount rate. As described above for MHC, for the base case assumptions the present value of net cash available for capital expenditures was estimated at $108 million which is greater than the estimated required investment of $60 million. With the assumption of 25% or 50% higher operating expenses, the present value is reduced to $93 million and $77 million respectively. If, however, the operating expenses were to be 10% lower than assumed in the base case the present value would increase to $114 million. All of these results are for the volume equaling the MAG. If volume were to grow beyond MAG, reflecting 2% per annum growth, the results would be improved for each scenario, ranging from $131 million in present value for the 10% lower operating expenses, to $86 million for the 50% higher operating expense scenario (Table 12). The same scenarios were analyzed assuming the borrowing rate was at 6%, and the discount rate was therefore 8.1%. The present value for each scenario with the higher discount rate is lower than previously described for the lower discount rate, ranging from a high of $112 million to a low of $67 million. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 93

94 Similarly for POW, for the base case assumptions the present value of net cash available for capital expenditures was estimated at $173 million which is greater than the estimated required investment of $70 million. With the assumption of 25% or 50% higher operating expenses, the present value is reduced to $148 million and $123 million respectively. If, however, the operating expenses were to be 10% lower than assumed in the base case the present value would increase to $183 million. All of these results are for the volume equaling the MAG. If volume were to grow beyond MAG, reflecting 2% per annum growth, the results would be improved for each scenario, ranging from $214 million in present value for the 10% lower operating expenses, to $141 million for the 50% higher operating expense scenario (Table 13). The same scenarios were analyzed for POW assuming the borrowing rate was at 6%, and the discount rate was therefore 8.1%. The present value for each scenario with the higher discount rate is lower than previously described for the lower discount rate, ranging from a high of $182 million to a low of $107 million. The results for each scenario analyzed in the sensitivity analyses are shown in the following tables which indicate the present value of net cash available for capital expenditures over the project life in millions of dollars for the MHC and POW projects. Table 12: Cash flow sensitivity analysis MHC 6.75% discount rate 8.1% discount rate MAG 2% growth MAG 2% growth opex base $ 108 $ 124 $ 93 $ 106 opex plus 25% $ 93 $ 105 $ 80 $ 90 opex plus 50% $ 77 $ 86 $ 67 $ 75 opex less 10% $ 114 $ 131 $ 98 $ 112 Table 13: Cash flow sensitivity analysis POW 6.75% discount rate 8.1% discount rate MAG 2% growth MAG 2% growth opex base $ 173 $ 202 $ 149 $ 172 opex plus 25% $ 148 $ 171 $ 128 $ 147 opex plus 50% $ 123 $ 141 $ 107 $ 121 opex less 10% $ 183 $ 214 $ 157 $ 182 As these analyses indicate, for every scenario evaluated, the present value of net cash exceeds the estimate of the required capital expenditure for the project of $60 million for MHC and $70 million for POW. Moffatt & Nichol Feasibility of Wood Pellet Export Opportunity Page 94

95 7. Review of NCSPA Financial Forecasts NCSPA has developed a long range financial pro forma model that sets forth a ten year forecast of operating revenues, operating and maintenance expenses, capital project cash flows and results in a projection of debt service coverage over the next ten years. The model uses the cargo demand forecasts prepared by Moffatt & Nichol and described in previous sections of this report. NCPSA further developed unit revenue and expense growth rates based on a review of ten years of actual results for CPI, PPI, and Port and Harbor Operations as reported by the BLS. These growth rates are applied to revenue and cost categories in conjunction with the volume forecasts, as well as efficiency factors reflecting facility utilization, to arrive at revenue and cash expense projections for the forecast period. The results from this model were augmented with the estimated revenue, expense and investment projections for the proposed wood pellet facility at Morehead City discussed in a previous section of this report. Moffatt &Nichol Review Moffatt & Nichol has reviewed the financial forecast prepared by NCSPA for the Wilmington Container Terminal operations, as well as the Ports of Wilmington and Morehead City general cargo operations, as well as the proposed wood pellet facility. For the container operations, Moffatt & Nichol has previously evaluated NCSPA s forecast of container results using an independently developed model. The Moffatt & Nichol model developed very consistent results for revenues and somewhat lower expenses as compared to NCSPA projections. In view of the consistent results for revenues and the fact that the NCSPA results project somewhat higher expenses, it can be concluded that the NCSPA results can be viewed as a relatively conservative estimate of the future financial results for the Wilmington container operations. Moffatt & Nichol also performed a thorough analysis of the methods and assumptions used by NCSPA in the development of the general terminals financial forecast. This included a detailed review of operating revenues, operating expenses and corporate overhead allocations. The assumptions and resulting projections of expenses were found to be reasonable and consistent with past experience and the outlook for cost escalation. Operating revenue evaluation included consideration of the volume forecasts developed in the previous sections of this report, as well as an evaluation of the blended revenue per ton and concluded that the revenue forecast was reasonably conservative. In addition, the projected revenues, expenses and investment for the proposed Morehead City wood pellet facility were evaluated as described in a previous section of this report. In conclusion, Moffatt & Nichol has carefully examined the methods and assumptions used by NCSPA to develop the financial forecast, as well as independently modeling key portions of the operation. In addition, Moffatt & Nichol spent considerable time in discussing the forecast with the key staff of NCSPA responsible for its development. As a result of these analyses and inquires MOFFATT & NICHOL has concluded that the forecasts presented and discussed herein are a reasonable and somewhat conservative basis for estimating the future financial performance of NCSPA. Moffatt & Nichol Review of NCSPA Financial Forecasts Page 95

96 7.1. Revenue Projections Base revenue rates for the container terminal, general terminals and private terminal operations have been calculated from actual experience for commodities currently handled. Base revenue rates were then grown based on the annual PPI increases over the past 10 years obtained from the BLS. Container and general terminal indicators are based on container and general cargo marine price indexes. Lease escalations are typically based on PPI for industrial commodities less fuels. These rates were then applied to total forecast moves (for the container terminal) and total tons at each private facility. Because general terminal commodities can have very different rates of revenue per ton due to market factors and differences in services received, a historical rate analysis was performed for each commodity to ensure terminal revenues are representative of the specific mix forecasted for volume case each year. To complete the projection, leased area revenues were also estimated based on current tenant space. Cash reserve needs were also analyzed. Interest income was forecasted based on this analysis and generally assumed an investment return based on 10 year treasury rates plus a.85% spread. The estimated revenues from the proposed Morehead City wood pellet facility were also included. Operating revenues are projected to increase at a CAGR of 5.1%, or from $44 million in FY 2013 to $70 million in FY 2022, Figure 105. Container terminal revenues are projected to increase at a CAGR of 6.2%, from about $14 million in FY 2013 to $23 million in FY 2022 as volumes and rates increase. In FY 2013, container terminal revenue represents 31% of the total revenue and is projected to grow to 34% of the total in FY Figure 105: NCSPA Projected Operating Revenues North Carolina State Ports Authority Most Likely Case Operating Revenues 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 - FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Container Terminal General Terminals Lease and Other Operations Moffatt & Nichol Review of NCSPA Financial Forecasts Page 96

97 General terminal revenues are projected to increase at a CAGR of 5.6% from FY 2013 to FY 2022, from $19 million to $31 million. In FY 2013, the general terminal revenues represent 43% of the total forecasted revenue, and are projected to increase to 45% of the total in FY Operating & Maintenance Expense Base cost rates for the container terminal, general terminals and private terminal operations have been calculated from actual experience for commodities currently handled. Base cost rates were then grown based on the labor and non labor intensive items based on CPI statistics obtained from the BLS. The Authority has generally based annual payroll adjustments on CPI increases for the South urban region. As goods are often sourced from both local and national vendors, overall CPI was used to adjust prices of nonlabor related items. These rates were then applied to total moves (for the container terminal) and total tons at each facility. The model explicitly considers the impact on operating efficiency as volume grows and approaches terminal capacity. Because general terminal commodities can have very different cost characteristics due to labor handling methodologies and crane hour requirements, a commodity cost driver analysis was performed for each commodity forecasted to ensure terminal costs are representative of the characteristics of the specific mix forecasted for each year. The operating expenses for the proposed wood pellet facility were also estimated and included. Overall, operating and maintenance expenses (not including depreciation) are projected to increase at a CAGR of 4.0%, from $31 million in FY 2013 to $44 million in FY 2022 as operating efficiencies increase. Given realization of economies of scale along with increases in productivity and technology, general administration expenses are projected to increase at a CAGR of 2.8%, from $9 million in FY 2013 to about $12.0 million in FY 2022, Figure 106.This will bring general administration expenses to about 17% of total revenue, which is typical for a mixed container and general terminal facility in the South Atlantic region. Figure 106: NCSPA Projected Operating Expense North Carolina State Ports Authority Most Likely Case Operating Expenses 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 - FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Container Terminal General Terminals Private Terminals General Admin Moffatt & Nichol Review of NCSPA Financial Forecasts Page 97

98 Not including depreciation, base case container terminal expenses are projected to increase at a CAGR of 6.1%, from about $8 million in FY 2013 to $13 million in FY 2022, primarily due to increases in volume. Also consistent with volume increases, general terminal expenses are projected to increase at a CAGR of 3.9%, from about $11 million in FY 2013 to $15 million in FY Lease and terminal operations expenses are projected to increase at a CAGR of 1.1%, primarily due to inflationary factors Capital Expense A ten year capital plan was developed, including the investment for the Morehead City wood pellet facility, which includes all capital improvements needed to meet market demand projected by the financial forecast, as well as maintain the facilities at operational standards. Depreciation has been determined based on scheduled existing asset base plus anticipated capital equipment and improvement schedules. Equipment has been depreciated over a useful life range of 5 to 15 years. All infrastructure improvements have been depreciated using a 15 to 75 year life. Straight line convention was applied. The current capital plan includes $139 million in capital infrastructure and equipment cash flows from FY 2013 through FY Although the model represents construction timings and cash flows necessary to meet the infrastructure requirements of the forecasted demand, the actual schedule is flexible and can be altered if market demand conditions change, Figure 107 Figure 107: NCSPA Capital Project Cash Flows by Type North Carolina State Ports Authority Capital Project Cash Flows by Type $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000, Plan of Finance Input from PFM $5,000,000 $0 Total Prior to FY12 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Waterside Exp Landside Exp Grant Funded Projects Other Capital Projects Capital Equipment & IT Moffatt & Nichol Review of NCSPA Financial Forecasts Page 98

99 7.5. Financial Results 10 Year Wood Pellet Summary Moffatt & Nichol Review of NCSPA Financial Forecasts Page 99

100 8. Appendix 8.1. North Carolina Container Demand To produce an estimate of 1.1 million TEU for North Carolina s total container demand in 2012, Moffatt & Nichol uses several different data sources and approaches to triangulate to a final estimate. The primary data sets include: Loaded Container Volumes: AAPA US Census of Agriculture (CA): US Department of Agriculture Freight Analysis Framework (FAF): Federal Highway Historical PIERs Data: Journal of Commerce (JOC) Administration County Business Pattern (CBP): US Census Bureau US & State Level Real GDP: BEA Approach 1: Moffatt & Nichol has developed a proprietary approach of mapping container shipments throughout the US to the county level. This is achieved by using the FAF data, which provides the volume of cargo shippments by mode, commodity, weight and value, between point of domestic origin and point offoreign destination (for exports, reverse for imports), in conjunction with the CBP and CA data sets which provide the value of production by industry at the county level. Container volumes are controlled to the Port totals reported by the AAPA. Using this approach the total shipment of loaded TEU to/from North Carolina in 2010 (last year for which CBP data is available) equal: 2010 TEU 2011 Growth (+3.4%) 2012E YTD Growth (+1.4%) 2012E Empties (= 30% of Loaded) 2012E Total TEU Import 155,422 Export 622,062 Total 777, , , ,689 1,060,319 Approach 2: Use North Carolina s real GDP as a share of the US real GDP to estimate total container demand: 2011 Real GDP ($ Million) 2012E TEU US 13,108,674 37,427,578 NC 385,092 1,099,506 NC% 2.9% 2.9% Approach 3: Moffatt & Nichol purchased and cleaned the JOC PIERS data from Total loaded demand is reported as approximately 690,000 TEU for the five large business economic areas (BEAs) of Charlotte, Greensboro, Greenville, Wilmington and Raleigh which account for 85% of the State s total demand. Including empty containers this volume would total approximately 895,000 TEU. Scaled up to account for the remaining 15% of demand, total North Carolina demand in 2007 is estimated to be 1,053,000 TEU. If the national growth from 2007 to 2012 is applied to North Carolina s volumes, the result is: 2007 TEU 2012E TEU US 38,158, ,427,578 NC 1,053,000 1,033,000 The 1,033,000 estimate is likely low because NC real GDP has outpaced US real GDP (Section 4.5) Moffatt & Nichol Appendix Page 100

101 8.2. Cascade Theory Ocean line operators have been and will continue to incorporate increasingly larger vessels into their services as they seek to capitalize on the economies of scale offered by these ships. The expansion of the Panama Canal will provide additional impetus by allowing incrementally larger vessels to call the US East Coast (USEC). The ocean carriers will seek to consolidate their offered services to a limited number of ports in order to ensure that these largest vessels maintain higher utilization. Additionally, as ports position themselves (infrastructure) to receive these larger vessels, ocean liner services using mid, and small sized vessels may seek alternative ports of call if berth/stevedoring availability becomes limited. This potential cascading to smaller ports may offer an opportunity for NCSPA to capture an additional (or multiple) new services in this small to mid sized vessel range. Average Vessel Size in 2011 & Percent Increase from 2002 to 2011 Vessel Sizes on the USEC The average vessel size has increased significantly at most ports along the USEC over the past decade as evidenced by the %s identified in the map. The majority of ports now serve average vessels sizes in the 4,000 5,000 TEU range. This is due to the large vessels deployed on the mature East/West trade routes of Asia USEC and Europe USEC The trend of larger vessels is driven by the need to accommodate growing trade volumes while maintaining low operational expenses per TEU. As trade volume continues to grow on the USEC, the average size of the vessels calling will also likely continue to increase. Moffatt & Nichol Appendix Page 101

102 Recent USEC Liner Services The continued transition to larger vessels is evident, nevertheless the utilization of smaller vessels also remain strong as indicated by the increase in the number of services utilizing them. Recently, the number of services utilizing larger vessels (500022, TEU) has grown at the expense mid sized vessels (3000, 4000 TEU). The number of services utilizing smaller vessels (1000, 2000 TEU) has also grown, led by growing trade from new markets particularly in South and Central America, as well as the Caribbean (North/South services). It is these new North/South services which could potentially be squeezed out of the larger ports to accommodate the larger vessels servicing East/West trade routes. Number of Liner Services by Vessel Size Calling USEC Average Vessel Size (TEU) Small Mid Large Grand Total Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Growth 36% 18% 41% 36% 13% 250% 5% 40 # of Services Large Mid Small Q Q Q Q The classifications denote the large size of a range, therefore a 5,000 refers to a range of 4,000 5,000 TEU, 1,000 refers to 0 1,000 TEU Moffatt & Nichol Appendix Page 102

103 Florida ports have the highest concentration of services using smaller vessels; this is not surprising given their proximity to the South/Central America and Caribbean trade lanes. The larger regional ports (NYNJ, Norfolk, Charleston and Savannah) have the highest concentration of services (predominantly East/West) using the larger vessels. Given that a limited number of ports are currently serving the larger vessels, it suggests that service consolidation is already actively underway, and that any future consolidation is likely to occur predominantly to these same four large regional ports. Number of Services by USEC Port by Vessel Size Average Vessel Size (TEU) Small Mid Large Port Baltimore Boston Charleston Chester 1 Fernandina 2 Jacksonville Miami Norfolk NYNJ Palm Beach 1 1 Philadelphia Port Everglades Savannah Tampa Wilmington DE 2 Wilmington NC Moffatt & Nichol Appendix Page 103

104 Rationale of Potential Cascading Opportunities for NCSPA The following discussion establishes the location and rationale for where a cascaded service could potentially originate from that would add incremental volume through NCSPA. This analysis however, does not provide a conclusion as to whether or not NCSPA will successfully attract said cascaded service, and makes no recommendation in regard to future volume growth at POW. Moffatt & Nichol estimates that NCSPA s neighboring Port of Norfolk, and to a lesser extent, Charleston is where a potentially redirected cascade service is most likely to originate from. Savannah offers limited potential and NYNJ and the Florida Ports are not assumed to be likely sources. Where a Likely Cascaded Service is Likely to Originate From NYNJ NYNJ will continue to be the must call port on the USEC given its proximity to local demand centers in the Northeast, and it is unlikely that carriers and cargo owners will deviate away from the Port. Containerized import volumes of fruit from Central and South America destined to the Northeast can be accommodated at dedicated facilities in NYNJ, Philadelphia and Wilmington DE. The more regionally proximate ports of Boston and Baltimore are likely to be the recipient of a cascade service from NYNJ. POW does not presently have intermodal connectivity into the Northeast. Norfolk Norfolk is currently called by a number of services utilizing smaller vessels (1000 & 2000 TEU) The port has naturally deep water and is increasingly receiving vessels of TEU vessels Is regionally located to compete for mid Atlantic and Midwest markets, including the metro DC area, and will therefore remain a desired port of call for most of the larger services. The Port currently serves a large share of North Carolina s existing container trade demand Moffatt & Nichol Appendix Page 104