Annual Report 2009SAN DIEGO UNIFIED PORT DISTRICT

Table of Contents:

Chairman’s Message . . . . . . . . . . . . . . . . . . . 2

President’s Report . . . . . . . . . . . . . . . . . . . . 3

Capital Development Program & Major Maintenance Program . . . . . . . . . . 4

Community . . . . . . . . . . . . . . . . . . . . . . . . . 6

Cruise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Employees . . . . . . . . . . . . . . . . . . . . . . . . . 10

Environmental . . . . . . . . . . . . . . . . . . . . . . 12

Maritime . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Public Art . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Public Safety & Homeland Security . . . . . . 18

Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . 20 Parks History . . . . . . . . . . . . . . . . . . . . 22

Financials . . . . . . . . . . . . . . . . . . . . . . . . . 24

Board of Port Commissioners . . . . . . . . . . . 55

Greenways truly capture the imagination and boldness of the American spirit

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Chairman’s MessageTrust and teamwork are two words that describe my year as Chairman of the Board of Port Commissioners. Trust de!nes the way the Port of San Diego operates – clear and transparent governing of the tidelands of San Diego Bay. Teamwork is how we get things done at the Port. "e Chair of the Board of Port Commissioners

sets the agenda, but it is a team of seven commissioners working with the sta# at the Port, who see that projects get o# the ground and that the Port is accomplishing its mission.

Protecting the working waterfront continued to be at the forefront this year after a failed ballot initiative threatened the future of the Port of San Diego’s Tenth Avenue Marine Terminal. "e November 2008 initiative, which sought to change land use designations for the area so that more visitor serving industries could be built, would have been detrimental to the Port’s marine operations and industrial tenants.

"is !ght will never be over as long as there are people who envision a stadium or other type of use for the marine terminal. Your Board of Port Commissioners is working hard to protect the valuable jobs and industries that make up the working waterfront. At the same time, we continue to promote Tenth Avenue Marine Terminal as a viable alternative to Los Angeles and Long Beach. We’ve got the experience, the lay down area and the customer service.

In addition to promoting maritime activity and acquiring new trade contracts, we were busy this year promoting Port real estate tenants. "e tidelands weren’t immune from the sti$ing economy. Our hotels, restaurants and shops felt the pain. Some tenants experienced such low sales that they were having di%culty paying the rent. To help out these tenants, the Port established a temporary !nancial relief program that allows tenants to defer portions of their lease-required rental payments.

Another program to help Port tenants was a new marketing campaign. "e campaign o#ered special o#ers at Port restaurants, hotels, shops and attractions in an e#ort to attract business.

Despite the economic downturn, the Port of San Diego was successful on several fronts this year: construction began on the Broadway Pier Cruise Ship Terminal, the new Hilton San Diego Bayfront hotel opened (and along with it, a

new public park), the Draft Environmental Impact Report for the demolition of the former Teledyne Ryan site near Lindbergh Field was completed, and the new Pier 32 Marina in National City opened. Additionally, an appealable Coastal Development Permit was issued for the North Embarcadero Visionary Plan’s !rst phase, and the Port was awarded a $3.5 million grant from the Ruocco Fund to build a new waterfront park at the former Harbor Seafood Mart site near Seaport Village.

In the environmental arena, funding was approved for shore power for cruise ships, a program to take old diesel trucks o# the road got underway and several environmental fund projects were completed. Additionally, the Port received a $1 million grant from the U.S. Environmental Protection Agency to restore about 160 acres of coastal wetlands in south San Diego Bay.

"e Port also created a partnership with San Diego Gas & Electric. "e “energy roadmap” created by SDG&E will help guide us on conservation e#orts. Some of these include installing solar panels onto the Port’s Administration building, which we accomplished this year, and we’ll be installing them on the new cruise ship terminal building opening in late 2010.

"ese programs and projects helped the Port balance its responsibilities that were set forth in the Port Act, which was rati!ed by the State Legislature in 1962. According to the Act, the Port is not only expected to build, maintain and operate maritime shipping facilities and promote commerce and navigation, but it is entrusted with managing and regulating the waters and tidelands of San Diego Bay for !shing and recreation.

I’ve had the great pleasure of serving as your Port Chair twice during my 12 years on the Board of Port Commissioners. During this time, I’ve worked with many elected o%cials, union leaders, community representatives and the public to try and do what’s best for the region as a member of this Board. I thank each and every one of you for this opportunity.

Stephen P. CushmanChairman, Board of Port Commissioners

President’s ReportWhen I came to the Port in January 2009, I was fortunate to join an organization that had a solid foundation and a reputation based on good governance. Since the Port’s inception, it has thrived on sound !nancial and business practices— elements that have helped us through a tough 2009.

"e sta# at the Port, the Port tenants, business customers and the community have demonstrated they are all great partners. "ere were, and still are, many challenges for Port leaders during this !nancial downturn, but all of us in the Port community have tackled these challenges with eagerness.

"e Port’s revenues in maritime and real estate were down slightly from last year’s numbers, but toward the end of the year we were beginning to see hopeful and positive signs. New maritime contracts were signed that will bring in additional automobile imports and other cargoes. People were coming to San Diego for conventions and staying in tenant hotels and we were able to move forward with some of our major projects.

"e Port’s operating revenues for !scal year 2009 totaled $134.5 million, compared to $144.1 million in !scal year 2008. Although we were down by about seven percent, the Port fared better than many other ports around the nation. Port of San Diego revenues are public funds and are used for public infrastructure improvements. Examples are the

upcoming North Embarcadero Visionary Plan, which will beautify the waterfront of the Embarcadero area. Other projects will enhance public access, promote maritime, recreation and !sheries, improve the environment, and improve security along the San Diego bayfront.

"e Port leadership team looks forward to guiding this vibrant world class organization through these di%cult times, but I’m optimistic that the clouds will clear. I am con!dent in this: the Port’s future is bright.

I encourage you to take a look at the map inside this annual report. On that map, you’ll be able to see the miles of walkways and paths that are part of the tidelands. All of the Port’s 17 parks are indicated on the map, along with the public boat launch ramps, !shing piers and many other recreational amenities provided to the public by the Port of San Diego. We hope you will have many opportunities for recreation on the tidelands.

I am grateful for the warm welcome I received when I joined the Port team. I look forward to serving you in 2010.

Charles D. WursterPresident & CEOPort of San Diego

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Work on the Pepper Park public boat launch ramp in National City was completed. "e original concrete launch ramp was demolished and replaced with an eight-lane boat launching ramp and two, 10-foot wide boarding $oats. "is was a $1.1 million project that was co-sponsored by the Port and the California Department of Boating and Waterways. State grant funding was also used to help pay for it. "e Port will soon begin a project to remove the public restroom at Pepper Park. It will be replaced with a modern facility that is compliant with the Americans with Disabilities Act.

Projects for 2010 include the installation of shore power equipment at the new Broadway Pier Cruise Ship Terminal and the B Street Cruise Ship Terminal. "e equipment will allow cruise ships to plug into clean power while berthed, so that they don’t have to idle their diesel engines.

Other major projects include the demolition of the former Teledyne Ryan building near San Diego International Airport. "e $15 million project will involve demolishing 58 vacant industrial buildings. "e project also includes removal and disposal of hazardous construction materials.

An environmental remediation project is also scheduled in Chula Vista. "e project will clean up a drainage ditch that used to be part of the former BF Goodrich South Campus. "e area is scheduled to be redeveloped in the future as part of the Chula Vista Bayfront Master Plan.

"e Port will also begin several major maintenance projects. "ese include continued maintenance on the Imperial Beach Pier, repaving parts of Shelter Island and repaving the National City and Tenth Avenue Marine Terminals.

"e Port of San Diego has two programs to help ensure that infrastructure around the tidelands is improved and maintained. "e programs include projects that bene!t public access, the environment, the economy and recreation in the Port’s !ve member cities.

"e Capital Development Program includes projects that are new improvements on the tidelands. Examples include the new cruise ship terminal on Broadway Pier, and a new restroom in Pepper Park in National City.

Major maintenance initiatives include projects that are the complete refurbishment, or reconstruction, of prior Capital Development projects. Examples include pavement reconstruction projects and pier deck and pile replacement. Maintenance of existing infrastructure is becoming increasingly important, requiring signi!cant investments, as the District’s infrastructure ages.

"is past year, the Port began refurbishing 30 of the public restrooms in Port parks and other public areas. Many of the restrooms were built in the 1960s and were in need of modi!cations. "e nearly $2 million project was completed in late summer. Work included replacing plumbing !xtures, electrical components, piping and mechanical equipment.

A $4 million project that transformed the end of Palm Avenue in Imperial Beach was also completed. A park-like plaza was created and the installation of a landmark public artwork, the “Spirit of Imperial Beach” was installed. "e project included a new storm water pump station with a built-in pollution diversion system. Emergency ramps that provide direct access to the beach were also installed.

CAPITAL DEVELOPMENT PROGRAM & MAJOR MAINTENANCE PROGRAM

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As the administrator of the San Diego Bay tidelands, the Port is tasked with promoting recreation along its shorelines. "is means providing open space and su%cient access to the waterfront of San Diego Bay and the oceanfront of Imperial Beach. To heed that call, the Port established 17 public parks along the waterfront. Many of these parks have recreational amenities such as basketball courts, softball !elds, children’s playgrounds and !tness courses.

In addition to the parks, there is the Bayshore Bikeway that nearly encircles the entire bayfront, from Point Loma to Imperial Beach. "ere are !ve public !shing piers, four public boat launching ramps and 26 marinas and yacht clubs with about 7,000 boat slips.

"is year, a one-acre park opened next door to the new Hilton San Diego Bayfront Hotel. Called the San Diego Bayfront Park, it is open to the public for events, picnics and gatherings. Next year, the Port will begin work on Ruocco Park, a new park that will be located north of Seaport Village at the former Harbor Seafood Mart site.

In addition to providing parks and open space, the Port is a community service provider. Programs such as the Financial Assistance Program and Marketing and Fee for Service contribute funds and/or Port services to groups or programs that might need a hand getting started. To qualify for assistance, the group or program must support recreation, !sheries, the

environment or maritime along the tidelands. Past recipients include the Paci!c Life Holiday Bowl, for its annual Big Bay Balloon Parade. "e parade and its associated Holiday Bowl football game bring thousands of visitors to San Diego and to the waterfront. "ese visitors support Port businesses and attractions. Past recipients have included the Alpha Project for the Homeless, the “Gator by the Bay” music festival and the Coronado Chamber Golf Classic. Marketing Fee for Service recipients have included the San Diego Sport!shing Council, the San Diego Film Commission, the San Diego Maritime Museum and the San Diego Regional Economic Development Corporation. "ese organizations help promote business on the tidelands and draw thousands of visitors to the waterfront.

"e Port continued to reach out to the public by o#ering free boat and bus tours of the tidelands. As part of its campaign to educate the community about the importance of the working waterfront, the tours gave an up close and personal look into the intricate operations of several industrial tenants. General Dynamics/NASSCO, Continental Maritime and even the United States Navy participated in the program. "e bus and boat tours are a way the Port lets county residents learn about the many businesses that rely on the Port’s maritime industry to survive. Along with learning about the Port’s business side, the boat tours provided information on the Port’s environmental initiatives.

COMMUN IT Y

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"e Port’s cruise business continues to be an economic force for the region. In !scal year 2009, 224 ships called on the Port of San Diego, bringing nearly 814,000 passengers here. Each home-ported ship that stops here has an economic impact of $2 million on the region. Right now the Port has four seasonally home-ported lines —Holland America, Celebrity, Carnival and Royal Caribbean —which o#er cruise itineraries to the Mexican Riviera, Panama Canal, Hawaii and other destinations.

Although this year’s total number of ships was lower than last year, it was still the Port’s second-best year in the history of its cruise business. In April, about a dozen ships were rerouted to the Port because of the threat of the H1N1 $u virus in Mexico. "is brought the Port, its tenants and area attractions some unexpected but welcome business.

Construction for a new cruise facility on Broadway Pier got underway. "e new building will serve the public as a space for events and gatherings, while providing the functional space to accommodate cruise line operations. "e bright, modern, steel and glass design will include a signature artwork by New York artist Leni Schwendinger. "e !rst 400 feet of the pier will serve as a public special event area. Adjacent to the building, there will be a pedestrian walkway leading to the west side special event and viewing area. Inside, both levels of the building will include more special event space. "e public facility/cruise terminal is expected to be ready for business in December 2010, and will be the Port’s !rst “green” building. It is being designed to obtain a silver-level Leadership in Energy and Environmental Design (LEED) certi!cation, which means it will use less energy and produce less waste.

"e Port will be installing equipment at the new terminal to allow cruise ships to plug into shore power. Providing electrical power to the ships reduces air pollution caused by idling diesel engines.

"is year, Holland America Lines and the Port partnered with the Alpha Project, a local nonpro!t human services organization that provides assistance to more than 2,000 local men, women and children each day. "e “Ship to Shelter” program donates reusable goods from Holland America cruise ships to local shelters to help the homeless. Goods include toiletries, cookware, dishes, silverware and even televisions.

Cruise ship callsFive-year trend comparison (actual numbers)2005 203 2006 2192007 1812008 2972009 224

Cruise Passenger TotalsFive-year trend comparison (actual numbers)2005 567,622 2006 621,4342007 555,0712008 991,5592009 813,822

CRUISE The connection between people + land

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"e Employee Recognition Program is another way the Port fosters continuous growth and demonstrates how the Port values its employees. Each quarter, an employee is selected from a slate of nominees submitted by all District divisions. "e nominees are viewed by their peers as individuals who exemplify the Port’s core values of courage, diversity, fairness, fun, integrity and teamwork. At the end of the year, an employee of the year is selected for a recognition award.

To promote health and wellness, the Port’s Health Bene!ts Committee has initiated a series of healthy living seminars which focus on nutrition and !tness. "ere is an on-site Weight Watchers group and a program that allows employees to purchase organic produce from a local farm as part of a community-supported agriculture program. Additionally, the committee has mapped out local walking routes for employees.

Port employees not only look out for their own well being, but they participate in programs to help the community and the environment. Each year, a large percentage of employees participate in the United Way campaign. Employees hold bake sales, book sales and craft fairs to help raise money for the annual giving campaign. "e San Diego Harbor Police Department sponsors blood drives and participates in the local law enforcement “Teddy Bear” drive during the holidays. "is program provides toys and stu#ed animals to patients at Children’s Hospital.

Port employees are also active in environmental projects. A group of employees began a composting program at the Port, which has diverted tons of food waste from the local land!ll. "ey also participate in bi-annual recyclable electronics events.

A world-class organization is characterized by strong leadership. "e Port of San Diego prides itself as a top-tier organization. Strong leadership and talented, skilled employees keep it running smoothly.

Among the 600-plus employees that work at the Port are Harbor Police o%cers, engineers, architects, trade representatives, electricians, carpenters, mechanics and many others. "ese employees are encouraged to keep learning and improving at their jobs. To help

ensure this, the Port established the Port Learning Center in 2008. "e Learning Center focuses on improving employee performance and e#ectiveness. Classes are open to all employees and subjects range from supervisory training to specialized computer courses.Employees have the opportunity to update their skills and learn management skills to help advance their careers.

EMPLOYEES

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"e Port of San Diego’s environmental department is responsible for several initiatives to improve the air and water around the tidelands. "ese include mitigation for construction projects, as well as stormwater monitoring programs, natural resource management and several others. A new addition to these initiatives is an energy partnership with San Diego Gas & Electric, which will assist the Port with conserving energy.

"e Port entered the second year of the Green Port Program, which was approved by the Board of Port Commissioners in December 2007. "e program focuses on six areas—water, energy, air, waste management, sustainable development and sustainable business practices—and spells out how the Port can minimize its carbon footprint.

Great strides were made to improve the air quality around the tidelands. A program to replace or retro!t older model trucks using the Port’s marine terminals got underway and was embraced by one of the Port’s largest tenants. Pasha Automotive Services, which processes more than 260,000 automobile imports at the National City Marine Terminal, replaced seven car-carrying trucks with assistance from Port funds. Five new trucks for APEX, another terminal trucking customer, were funded with the !rst of the state grant funds available for port trucks and matching Port funds.

"e Board of Port Commissioners approved funding its shore power projects at the B Street Cruise Ship Terminal and the new Broadway Pier Cruise Ship Terminal, currently under construction. "e projects will provide infrastructure so that cruise ships can plug into grid-based power while docked, eliminating the need to run diesel engines. "e shore power system will be installed by December 2010.

"e Voluntary Vessel Speed Reduction Program is another e#ort designed to improve the air quality around the tidelands. In the program, the Port requests cruise and cargo vessel operators to reduce their speed when entering or leaving San Diego Bay. Studies show that when vessel speeds are reduced, there is a signi!cant reduction in air emissions. Vessel speeds are tracked by using data that all vessels transmit to automatic identi!cation receivers. "e program began in April 2009 and by the end of the quarter, 78 percent of the cruise ships and 58 percent of the cargo ships visiting the Port had demonstrated compliance.

"e Port received a $1 million grant from the U.S. Environmental Protection Agency, which will help restore and enhance about 70 acres of coastal wetlands in south San Diego Bay. "e work includes excavating about 50,000 cubic yards of material at the Chula Vista Wildlife Reserve to add tidal channels to increase the water $ow into the salt marsh. Another area, Emory Cove, will have invasive plants removed and native plants added to restore the shoreline.

A project to install arti!cial reef structures o# the shoreline of Bayside Park in Chula Vista was completed this year. "is project received !nancial help from the Port’s environmental fund, which was established in 2006 to !nance environmental projects that go beyond state and federal compliance. "e reef structures provide additional habitat for !sh and other sea life in the bay to protect them from predators, resulting in increased populations of marine species.

Additionally, solar panels were installed on the Port’s Administration Building. "ese panels are providing clean power for more than two percent of the administration building’s energy use. "is percentage will increase as the building becomes more energy e%cient. In 2010, the Port will install solar panels on its General Services building.

ENVIRONMENTAL

Bringing green to the people

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Without a doubt, 2009 was a strenuous year for most of the Port of San Diego’s importers and shippers. Automobiles and building products seemed to bear most of the weight of the weak economy, while shipments of containerized fruit and project cargo such as transformers, generators and wind turbine products declined slightly.

For the past three years, wind turbines were a dominant import cargo at the Port’s Tenth Avenue Marine Terminal. In addition to the regularly scheduled shipments, six ships arrived with components used to build windmill towers. "e towers were trucked to a wind farm in Palm Springs, California.

As the year closed, prospects began improving for auto imports. Pasha Automotive Services, the Port’s auto processing tenant at the National City Marine Terminal, signed a three-year contract with Glovis America to import 50,000 new Hyundai and Kia automobiles through the Port. "e new imports are a promising sign that the global economy is beginning to recover.

Port commissioners and trade development sta# traveled to parts of Europe and Michoacán, Mexico, to seek new cargo business. In addition, they attended the 2009 Asia Breakbulk Cargo Conference. "ese trips are important because they build lasting partnerships with current customers, attract new customers and keep the Port apprised of current trends in cargo movement. As

a result of the overseas trips, the Port may be gaining additional project cargo such as steel and windmill components, and perishables such as mangoes and avocados.

"is year, the Port began its !rst Mediterranean mooring operation for mega yachts. A lease was granted to San Diego Mooring Company to conduct a two-year trial for the vessels, which are generally more than 100 feet long. Mediterranean mooring is de!ned as a vessel docking end-on, as opposed to alongside a pier and is commonly used in European harbors in the Mediterranean Sea. "e !rst mega-yacht to take advantage of the new mooring system was the Princess Mariana. "e 252-foot vessel drew admiring glances from the public with its six decks, helicopter and tender craft that can turn into a swimming pool with underwater lighting.

"e Port of San Diego became the !rst West Coast port to implement a program geared toward protecting marine terminals from trespassers. "e congressionally mandated Transportation Worker Identi!cation Credential (TWIC) evolved from the Maritime Transportation Security Act and the Department of Homeland Security’s e#orts to strengthen port security after the terrorist attacks of September 11, 2001. "e program prohibits anyone without a TWIC identity card from entering a marine terminal without an escort. TWIC card carriers must undergo an extensive background check to be approved for the card.

Maritime RevenueFive-year trend comparison (revenue in millions)

2005 $23.7 2006 $35.32007 $39.42008 $45.92009 $43.7

Maritime Cargo TonnageFive-year trend comparison (metric tons in millions)

2005: 3.3 2006: 3.62007: 3.32008: 3.32009: 2.8

Types of cargoTotal tonnage received during !scal year 2008-2009 (in metric tons)

Dry bulk: 1,264,619 (includes cement, sand and fertilizer)

Vehicles: 394,569Liquid bulk: 153,589 (includes jet, bunker and diesel fuel)

Containers: 604,841Breakbulk: 401,853 (includes bagged cement, bagged fertilizer, lumber, palletized fruit, bagged sand and miscellaneous steel and wind turbine products.)

Vehicle units: 264,710 Container units (TEUS): 96,817

MARITIME

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"is year, the Port’s Public Art Program underwent an extensive review to see what was needed to ensure its sustainability over the next several years and to strengthen the foundation on which it was built. Changes included a recon!guration of the Public Art Committee’s membership to provide a balance of input from member cities, the Board of Port Commissioners, Port tenants and the public. In addition, the Board approved a !xed annual amount to be set aside for the program’s operation and expenses, maintenance of the current art collection and acquisition of future works of art.

In Imperial Beach, a monumental sculpture by the late A. Wasil was dedicated at the foot of Palm Avenue and Seacoast Drive. “"e Spirit of Imperial Beach” is an 18-foot tall artwork of a surfer and his long board. It epitomizes the surf culture of the Port’s only oceanfront city and also pays homage to the popular “Sandcastle Days” event that draws thousands of visitors each July.

Family members of the late entertainer Bob Hope traveled to the Port this summer to help dedicate a sculpture celebrating the beloved entertainer. "e sculpture of Bob Hope was placed in the center of the military tribute artwork, “A Salute to Bob Hope and the Military.” "e artwork includes 15 life-sized bronze !gures representing servicemen and women from the Army, Navy, Air Force, Marines and Coast Guard. A group of World War II veterans raised the $1.5 million for the artwork and the Port dedicated the site at the G Street Mole, which is near other military-themed artworks.

An artistic lighting project for the San Diego-Coronado Bay Bridge moved forward with the receipt of proposals from three artist teams. "e project, sponsored by the Port and the California Department of Transportation, envisions an artistic design that would illuminate the bridge. "e project will include energy-conserving elements and sustainable materials.

Celebrated artist Bernar Venet, whose sculptures are in$uenced by math and theoretical science, loaned the Port of San Diego eight large-scale steel sculptures, which were installed around San Diego Bay. "e Port partnered with Scott White Contemporary Art to bring the renowned exhibit to the waterfront. Venet’s sculptures have been exhibited in major cities in the United States, Asia, Europe, the Middle East and South America. "e Port displayed the Venet exhibit for a year.

A major goal of the Port’s Public Art Program continued to be incorporating public art into development projects. "is year, the Port commissioned New York artist Leni Schwendinger to create the public art component for the new Broadway Pier Cruise Ship Terminal. Schwendinger’s concept consists of an art wall with special lighting that will re$ect the motion of the bay onto the façade of the terminal and on the walkway near the terminal. For the North Embarcadero Visionary Plan, a project that will redevelop a one and a half mile stretch of Harbor Drive along the Embarcadero, the Port commissioned artist Pae White to incorporate public art into a restroom, a shade structure and a ticket kiosk. "ose public buildings may include artistic lettering on the rooftops, along with unique cut-outs that would cast interesting shapes and patterns onto the Embarcadero’s sidewalk.

PUBLIC ART

The Port Tidelands A ribbon of green

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"is year, the Harbor Police Department continued implementing security measures to safeguard San Diego Bay and the harbor from the threat of terrorism. A $3.5 million grant from the Department of Homeland Security was allocated to the Port of San Diego and maritime entities serving its areas. "e grant will enable several bay-wide security projects to move forward, including ones that will develop a !ber optic network to ultimately encircle the entire bay, provide security enhancements for the new cruise ship terminal at Broadway Pier, and replace the older Harbor Police patrol and !re!ghting vessels.

Over the past seven years, the Port has been the recipient of about $30 million in law enforcement and security grants. "at money has helped make the Port safer and more secure than before the terrorists attacks of September 11, 2001. One

project is a state-of-the-art surveillance system that monitors all maritime facilities. "e system is linked to the Joint Harbor Operations Center, a communications center shared by the Port, Coast Guard, Customs & Border Protection and the U.S. Navy. "e system is managed around the clock.

"e Harbor Police not only monitor San Diego Bay and the tidelands, but are under contract with the San Diego County Regional Airport Authority to provide police services to the airport. "ere, the o%cers work closely with the Transportation Security Administration (TSA). "e Harbor Police K-9 unit includes TSA-certi!ed explosives detection dogs. "e unit is often called to assist other regional police agencies with detecting explosives and narcotics.

A new ordinance regulating the parking of oversize vehicles took e#ect this year. "e purpose of the ordinance is to prevent overnight camping in the Shelter Island Shoreline Park and along Shelter Island Drive. Business owners and visitors to the area complained of inadequate parking on Shelter Island because so many of the oversized vehicles were lined up. "e Harbor Police conducted numerous community outreach sessions and handed out $yers to alert vehicle owners of the changes. Oversized vehicles are still allowed on Shelter Island, but have designated parking with speci!c hours.

Six Harbor Police o%cers were honored for saving lives in three separate incidents this year. In August 2008, O%cers Pedro Arce, Eric Mitchell and Raul Munoz pulled an unconscious man from San Diego Bay and performed cardiopulmonary resuscitation (CPR). "ree months later, Sergeant Salvador Colin, along with two U.S. Navy personnel, pulled a man from a burning vehicle on Harbor Drive. In May 2009, Harbor Police O%cers Timothy Terry and Eugene Wheeldon, used an automated external de!brillator on a citizen in cardiac arrest while on his vessel on San Diego Bay. All of the o%cers were publicly honored with life-saving commendations and life-saving “shirt bars” to wear on their uniforms.

PUBLIC SAFETY & HOMELAND SECURITY

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"e Port of San Diego has jurisdiction over some of the most beautiful real estate in California. Waterfront parks, gleaming high-rise hotels, pier-side restaurants and marinas with million-dollar yachts are just a small sample. As close to perfection as they may seem, these venues were not immune to the economic downturn experienced this past year.

San Diego Bay, usually one of the top areas for conventions and vacations, was impacted with vacant hotel rooms, fewer diners in Port tenant restaurants and fewer visitors to Port attractions.

To help alleviate some of the !nancial strain on its tenants, the Port established a temporary !nancial relief program. "e program enabled the tenants most severely impacted by the recession to defer a portion of their lease-required rental payments. In addition, the Port created a vigorous marketing campaign to drive visitors to the waterfront. "e plan concentrated on driving consumers to Port tenants through advertising, promotions and public relations.

"ere was good news on the real estate front. "e Port was awarded a $3.5 million donation by the Lloyd and Ilse Ruocco Foundation to create a 3.3-acre waterfront park at the former Harbor Seafood Mart, just north of Seaport Village. "e Port

held public outreach meetings on the design of the park, which is expected to begin construction in 2010.

Other positive news included the opening of the Hilton San Diego Bayfront Hotel in January 2009. "e 1,200-room property is located next to the San Diego Convention Center and boasts a modern design, public art and a one-acre public waterfront park. More good news was the completion of a $10 million expansion and remodel of the Best Western Island Palms Hotel on Shelter Island. New rooms were added, giving the hotel a total of 174 guest rooms.

An appealable coastal development permit was approved by the Board of Port Commissioners for the !rst phase of the North Embarcadero Visionary Plan. "e project will cover about a mile and a half of waterfront on Harbor Drive in San Diego and include widened sidewalks, landscaping, public art and gathering spaces. "e !rst phase proposes to include the area on Harbor Drive from the former Navy Pier to the B Street Pier and a portion of West Broadway from the railroad tracks, just past Paci!c Highway to the intersection of Harbor Drive. "e project is a collaboration between the Port, Centre City Development Corporation and the City of San Diego.

On Shelter Island, the developers of the Point Loma Marina commercial site completed the !rst phase of a project that will include three buildings, a 50-slip marina, a 16,000 square foot park and a new shoreline promenade. Also in the area, three sport!shing businesses—Fisherman’s Landing, H&M Landing and Point Loma Sport!shing—moved ahead with plans to redevelop their sport!shing landings. "e redevelopment includes improvements to the existing buildings, an enlarged public plaza, and improved access. Completion is scheduled for May 2010. "e three companies are also working with the Port to !nd a solution to the parking issue in the area. A possible remedy is building a parking structure at the former Westy’s lumber site on North Harbor Drive.

In the South Bay, the new, 250-slip Pier 32 Marina opened on the National City waterfront. "e Port is recon!guring some of the land around the National City Marina to add even more visitor-serving uses. Possibilities include a hotel, public park and a commercial site near the new marina.

In Chula Vista, the Port continues to work with the city on a master plan for its bayfront. "e 550-acre development incorporates a land exchange with a private developer, which will add more than 90 acres of natural protected habitat to the bayfront. Also, the decommissioning of the South Bay Power Plan got underway. "e process of decommissioning and dismantling the plant will take approximately !ve years, but will result in additional opportunities for the area.

Real Estate Revenue SourcesTotal revenue for !scal year 2008-2009: $78,536,468

Concessions: $48,157,380 (includes hotel rooms, marina slips, food & beverage, retail)

Fixed rent: $21,408,987 (includes ground rent, including boatyards and shipyards)

Parking: $7,770,734Parking meters: $923,517Grants: $278,131

Miscellaneous: $2,281

Real Estate Revenue TrendFive-year trend comparison (revenue in millions)

2005 $80.92006 $82.42007 $83.62008 $87.12009 $78.5

REAL ESTATE

3 2

22 23

Parks HistoryThe Port of San Diego has 17 public parks and several other public areas with access to the waterfront. Since 1950, thousands of people have enjoyed these spots for picnics, weddings, family reunions and other celebrations, such as birthdays and holiday parties. In addition to the parks and play areas, there are miles of walkways and a bicycle path that encircles nearly the entire tidelands. Port parks include Shelter Island Shoreline Park, Harbor Island Park, Spanish Landing Park, Tuna Harbor Park, Embarcadero Marina Parks North and South, Point Loma Promenade, San Diego Bayfront Park, Cesar E. Chavez Park, Coronado Tidelands Park, Coronado Landing Park , Pepper Park, Chula Vista Bayside Park, Chula Vista Bayfront Park, Chula Vista Marina View Park, Portwood Pier Plaza, and Dunes Park in Imperial Beach. There are also smaller open areas such as Kellogg Beach, Parque del Sol, and Grand Caribe Shoreline Park, all where the public is welcome.

From the Port’s first park on Shelter Island, which dates to 1950, to the most recent addition, the San Diego Bayfront Park, there are plenty of places to enjoy.

California Coastal Trail RouteIn 2008, the first California Coastal Trail insignia in San Diego County was unveiled at Spanish Landing Park. The Port is proud to be included in the 1,200-mile trail that extends along the west coast from Oregon to Mexico.

CA Coastal Trail Route

Port Parks From Sea to Shining Sea

22 23

24 25

Financial StatementsManagement’s Discussion and Analysis and Basic Financial Statements June 30, 2009(With Independent Auditors’ Report Thereon)

Table of Contents

Independent Auditors’ Report . . . . . . . . . . 26

Management’s Discussion and Analysis . . . 27

Basic Financial Statements:Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . 33

Statement of Revenues, Expenses, and Changes in District Equity . . . . . . . . . 34

Statement of Cash Flows . . . . . . . . . . . . . . 35

Notes to Basic Financial Statements. . . . . . 36

25

26 27

"e Board of Port Commissioners San Diego Uni!ed Port District Independent Auditors’ Report

We have audited the accompanying balance sheet of the San Diego Uni!ed Port District (the District) as of June 30, 2009, and the related statements of revenues, expenses, and changes in district equity, and cash $ows for the year then ended. "ese !nancial statements are the responsibility of the District’s management. Our responsibility is to express opinions on these !nancial statements based on our audit. "e prior year partial comparative information has been derived from the !nancial statements of the District for the year ended June 30, 2008, and in our report dated October 31, 2008, we expressed an unquali!ed opinion on those !nancial statements.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to !nancial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. "ose standards require that we plan and perform the audit to obtain reasonable assurance about whether the !nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the !nancial statements. An audit also includes assessing the accounting principles used and signi!cant estimates made by management, as well as evaluating the overall !nancial statement presentation. We believe that our audit provides a reasonable basis for our opinions.

As discussed in note 14 to the basic !nancial statements, the District is subject to various contingent liabilities arising from legal and environmental matters. "e ultimate outcome of these matters cannot presently be determined. Accordingly, no provision for any loss that may result from the resolution of these matters has been made in the accompanying !nancial statements.

In our opinion, the !nancial statements referred to above present fairly, in all material respects, the !nancial position of the District as of June 30, 2009, and the changes in its !nancial position and its cash $ows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As described further in Note 9 to the !nancial statements, the District changed its method of accounting for post-employment bene!ts other than pensions for !scal years ending on or after June 30, 2009.

"e information identi!ed in the accompanying table of contents as management’s discussion and analysis is not a required part of the basic !nancial statements, but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

In accordance with Government Auditing Standards, we have also issued a report dated October 30, 2009 on our consideration of the District’s internal control over !nancial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. "e purpose of that report is to describe the scope of our testing of internal control over !nancial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over !nancial reporting or on compliance. "at report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

Irvine, CaliforniaOctober 30, 2009

Mayer Ho#man McCann P.C.2301 Dupont Drive, Suite 200

Irvine, California 92612 Management’s Discussion and AnalysisJune 30, 2009

"e !nancial management of the San Diego Uni!ed Port District (the “District”) o#ers readers of these basic !nancial statements this narrative overview and analysis of the !nancial activities of the District as of and for the year ended June 30, 2009. "is discussion and analysis is designed to assist the reader in focusing on the signi!cant !nancial issues and activities, and to identify any signi!cant changes in !nancial position. We encourage readers to consider the information presented here in conjunction with the accompanying basic !nancial statements and the accompanying notes to those basic !nancial statements.

Financial Highlights

to $130.0 million for !scal year 2008.

Overview of the Basic Financial Statements"is discussion and analysis is intended to serve as an introduction to the District’s basic !nancial statements, which are comprised of the basic !nancial statements and the notes to the basic !nancial statements. "e statements are organized so the reader can understand the District as a whole and then proceed to provide an increasingly detailed look at speci!c !nancial activities. "ese components are described below.

Basic Financial StatementsSince the District is comprised of a single enterprise fund, no fund level !nancial statements are shown. "e basic !nancial statements provide a broad view of the District’s operations in a manner similar to a private sector business. "e statements provide both short-term and long-term information about the District’s !nancial position, which assist in assessing the District’s economic condition at the end of the !scal year. "e basic !nancial statements are prepared using the $ow of economic resources measurement focus and the full accrual basis of accounting, which basically means they follow methods similar to those used by most private sector companies. "e basic !nancial statements take into account all revenues and expenses connected with the !scal year even if the cash involved has not been received or paid.

"e Balance Sheet presents all of the District’s assets and liabilities with the di#erence between the two reported as “equity.” Increases or decreases in the District’s equity may serve as a useful indicator as to whether the !nancial position of the District is improving or deteriorating over time.

"e Statement of Revenues, Expenses, and Changes in District Equity presents information showing how the District’s equity changed during the two most recent !scal years. All changes in equity are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash $ows. "us, revenues and expenses are reported in this statement for some items that will not result in cash $ows until future !scal periods (e.g., invoices for goods or services received but for which payment has not yet been made).

"e !nal required !nancial statement is the Statement of Cash Flows. "e statement reports cash receipts, cash payments, and net changes in cash resulting from operating, investing, and !nancing activities. It also provides answers to such questions as, “Where did cash come from?”, “What was cash used for?”, and, “What was the change in the cash balance during the reporting period?”

"e basic !nancial statements can be found immediately following this discussion and analysis.

Notes to the Basic Financial Statements"e notes provide additional information and more detail that is essential to a full understanding of the data provided in the basic !nancial statements. "e notes to the basic !nancial statements can be found immediately following the basic !nancial statements.

Financial AnalysisOne of the most important questions asked about the District’s !nances is, “Is the District as a whole better or worse o# as a result of this year’s activities?” Equity, which is the di#erence between assets and liabilities, is one way to measure !nancial health or !nancial position. Increases or decreases in equity are one indicator of whether the District’s !nancial health is improving or deteriorating over time. "e Balance Sheet and the Statement of Revenues, Expenses, and Changes in District Equity report information about the District’s activities in a way that will help answer this question. "ese two statements report the District’s equity and changes in the District’s equity.

28 29

Balance SheetTo begin our analysis, a summary of the District’s Balance Sheet is presented below. "e District’s equity totaled $547.1 million at the end of !scal year 2009, compared to $550.9 million at the end of !scal year 2008. "e largest portion of the District’s equity, 75.7%, is its investment in capital assets net of related debt. "e District uses these capital assets to generate regional economic growth and to provide services and recreational opportunities to citizens; consequently, these assets are not available for future spending.

"e District’s !nancial position at June 30, 2009 and June 30, 2008 is summarized as follows:

Management’s Discussion and AnalysisJune 30, 2009

Assets, Liabilities, and District Equity (Expressed in thousands)

$ Change increase 2009 2008 (decrease) % ChangeCurrent assets $ 153,079 & 173,325 & (20,246) (11.7) % Other noncurrent assets 87,922 & 68,122 & 19,800 & 29.1 % &Capital assets 457,595 & 452,141 & 5,454 & 1.2 % & Total assets $ 698,596 & 693,588 & 5,008 & 0.7 % &Current liabilities $ 31,205 & 26,673 & 4,532 & 17.0 % &Noncurrent liabilities 120,330 & 115,968 & 4,362 & 3.8 % & Total liabilities 151,535 & 142,641 & 8,894 & 6.2 % &Invested in capital assets (net of related debt) 413,928 & 405,708 & 8,220 & 2.0 % &Restricted 29,163 & 29,861 & (698) (2.3) % Unrestricted 103,970 & 115,378 & (11,408) (9.9) % Total District equity 547,061 & 550,947 & (3,886) (0.7) % Total liabilities and District equity $ 698,596 & 693,588 & 5,008 & 0.7 %

Current and noncurrent assets Current assets decreased by $20.2 million compared to prior year while noncurrent assets increased $19.8 million.

Capital Assets"e District’s investment in capital assets as of June 30, 2009 totaled $835.0 million, with accumulated depreciation of $377.4 million, resulting in a net book value of $457.6 million.

Capital Assets(Expressed in thousands)

Balance at Balance at Description June 30, 2008 Increases Decreases June 30, 2009Nondepreciable assets: Land $ 196,266 1,001 - 197,268 Construction-in-progress 18,150 22,867 (16,705) 24,312 Depreciable assets: - Land improvements 7,650 - - 7,650 Buildings and structures 459,904 6,711 - 466,615 Machinery and equipment 46,118 7,252 (701) 52,669 Roads and parking lots 84,162 2,353 - 86,515 Total assets 812,251 40,184 (17,406) 835,029 Accumulated depreciation (360,110) (18,024) 700 (377,434) Capital assets, net $ 452,141 22,160 (16,706) 457,595

Land increased $1.0 million in !scal year 2009. "is was primarily due to capitalizing the costs for land improvements at the South Campus of the former BF Goodrich site in Chula Vista.

"e District invested a total of $22.9 million in Construction-in-progress during !scal year 2009. Some of these projects were completed and capitalized during the !scal year.

Following are amounts expended during !scal year 2009 for some of the major capital projects:

"e $16.7 million decrease in Construction-in-progress was primarily due to projects that were completed and capitalized to the appropriate asset categories during !scal year 2009.

Building and structures had additions totaling $6.7 million for !scal year 2009. "e major additions include $2.3 million for street end improvements at Palm Avenue in Imperial Beach; $1.7 million in improvements to the boat launching facility at Pepper Park; $0.9 million for the replacement of the boilers & chillers at the District’s main administration building; $0.8 million for the public art project a “Cannery Workers Tribute;” $0.3 million for replacement of the viewing platform located at Embarcadero Marina Park North; and, the remaining $0.7 million was for other small projects.

Machinery and equipment increased $7.3 million in !scal year 2009. "e major increases can be attributed to the purchase and installation of security equipment at cargo and cruise terminals for $5.1 million; $0.8 million for upgrading the R/3 integrated business applications module in SAP; $0.5 million for the purchase of a Harbor Police fast response vessel/rigid hull in$atable boat; $0.3 million for the purchase of motive equipment; $0.2 million for the purchase of hand-held and vessel mounted sonar equipment; $0.2 million for the purchase of four lifeguard towers; and, the remaining $0.2 million increase for other small equipment purchases. Machinery and equipment decreased $0.7 million during the !scal year due to assets declared as surplus, which were subsequently retired.

Roads and parking lots increased $2.4 million in !scal year 2009. "is was primarily due to street improvements at the west end of Palm Avenue located in Imperial Beach.

Accumulated depreciation increased $18.0 million mainly due to the depreciation expense recorded for the !scal year. "e $0.7 million decrease in accumulated depreciation is the result of capital assets that were retired during the !scal year.

Revenues, Expenses, and Changes in District EquityWhile the Balance Sheet shows the change in the District’s !nancial position, the Statement of Revenues, Expenses, and Changes in District Equity provides insights as to the nature and source of the change in !nancial position. "e District’s summarized results of operations for the !scal year ended June 30, 2009 are presented on the next page:

Management’s Discussion and AnalysisJune 30, 2009

30 31

Management’s Discussion and AnalysisJune 30, 2009

Total operating revenues of $134.5 million decreased $9.6 million from the prior !scal year of $144.1 million. Operating expenses of $138.7 million increased $8.7 million from the prior !scal year of $130.0 million.

Approximately 58% of the District’s total operating revenue was attributable to Real Estate operations, which includes land and building leases, concession fees, and parking fees. Maritime operations, which includes wharfage, land and building leases, cruise ship passenger fees, dockage fees, and storage space rental, accounted for approximately 30% of the District’s total revenue. Harbor Police accounted for approximately 9% of total operating revenues, which consists of services provided to the San Diego County Regional Airport Authority (SDCRAA), citations issued for vehicle code violations, revenue from piers and $oats, and operating grant revenue. Other operating revenue accounted for approximately 3% of the District’s total operating revenue and includes park usage fees and others.

Non-operating revenue includes legal settlements, interest income, reimbursed legal fees, terminal special facility fees, and miscellaneous other revenue. "e largest non-operating revenues are interest income of $5.5 million and terminal special facility fees of $2.9 million.

Following are the major factors that in$uenced the !scal year 2009 operating revenues and expenses in comparison to !scal year 2008:

Operating Revenues:

Concession and Parking revenues decreased approximately $7.0 million due to the unfavorable economic environment and the transfer of maritime-related leaseholds for harbor excursions to Maritime Operations. Other rental revenue decreased $1.3 million due to the completion of Lane Field option payments for !scal year 2009. Fixed Rent revenue decreased $0.3 million primarily due to a negotiated rent adjustment which occurred in the prior !scal year. "e remaining $0.1 million decrease was from various other revenue sources.

were lower by approximately $3.9 million primarily due to a decrease in cargo import activities such as autos, sand, lumber and other imported goods. Cruise ship passenger fees and cruise ship security charges decreased $1.3 million due to lower cruise ship calls and fewer passengers embarking and disembarking. Dockage revenue decreased $0.5 million as a result of lower vessel calls compared to prior !scal year. "ese decreases were partially o#set by increases in storage space rentals of $1.8 million primarily due to an increase in the number of vehicle imports being stored at the National City Marine Terminal, concession

Revenues, Expenses, and Changes in District Equity(Expressed in thousands)

$ Change increase 2009 2008 (decrease) % ChangeOperating revenues: Real Estate operations $ 78,536 & 87,181 & (8,645) (9.9) % Maritime operations 40,694 & 42,520 & (1,826) (4.3) % Harbor Police operations 12,464 & 12,289 & 175 & 1.4 % & Other 2,816 & 2,140 & 676 & 31.6 % & Total operating revenues 134,510 & 144,130 & (9,620) (6.7) % Operating expenses: Direct expenses Real Estate operations 21,191 & 21,897 & (706) (3.2) % Maritime operations 23,243 & 23,328 & (85) (0.4) % Harbor Police 32,974 & 31,049 & 1,925 & 6.2 % & Other operating expenses 11,732 & 8,442 & 3,290 & 39.0 % & Depreciation and amortization 18,117 & 17,412 & 705 & 4.0 % & General and administrative expenses 31,428 & 27,867 & 3,561 & 12.8 % & Total operating expenses 138,685 & 129,995 & 8,690 & 6.7 % & Income (loss) from operations (4,175) 14,135 & (18,310) (129.5) % Nonoperating revenues 11,172 & 14,794 & (3,622) (24.5) % Nonoperating expenses 16,228 & 10,692 & 5,536 & 51.8 % & Nonoperating income (loss) (5,056) 4,102 & (9,158) (223.3) % Capital contributions 5,347 & 5,425 & (78) (1.4) % Change in District equity (3,884) 23,662 & (27,546) (116.4) % Beginning District equity 550,948 & 527,286 & 23,662 & 4.5 % &Ending District equity $ 547,064 & 550,948 & (3,884) (0.7) %

revenue of $1.3 million due to the transfer of maritime-related leaseholds from the Real Estate Department, and !xed rental revenue of $0.9 million due to retroactive rent adjustments for two large tenants. "e remaining $0.1 million decrease was from all other revenue sources.

!scal year due primarily for police services provided to the San Diego County Regional Airport Authority (SDCRAA) for increased canine patrol services for explosives detection and additional hours of mandatory airport police training.

grant revenues.

Operating Expenses:

allocation, decreased by $0.7 million primarily due to the reclassi!cation of $1.4 million prior year expenses for the Teledyne Ryan building demolition and abatement to a capital project. "is decrease was partly o#set by a $0.5 million increase in personnel expense mostly due to the recording of the Annual Required Contribution (ARC) for Other Post Employment Bene!ts (OPEB) (see Note 9).

million from $23.3 million in the prior !scal year. Pasha automotive terminal operator fees of $2.4 million decreased by $0.7 million due to a lower volume of automotive imports. Personnel expenses had a net increase of approximately $0.7 million mostly due to the recording of the ARC for OPEB and the !lling of previously vacant positions. "e remaining variances were spread across various expense categories.

$2.0 million from $31.0 million in the prior !scal year. Personnel expense had a net increase of approximately $1.5 million mainly due to recording of the ARC for OPEB, negotiated salary increases, increases in retirement costs and health insurance premiums. Motive expense increased by approximately $0.3 million primarily due to extensive repairs and maintenance performed on Harbor Police !re and emergency vessels. Fire, police, emergency and medical services agreements with member cities also increased approximately $0.2 million.

million from $8.4 million in the prior !scal year. Other operating expenses include the Environmental Services and Miscellaneous cost centers. An increase of $3.0 million from the prior !scal year was mainly due to an increase in major maintenance expenses of approximately $1.7 million for repairs to refurbish comfort stations at tideland parks, various pavement repairs, and repairs to the Chula Vista Bayside Park Fishing Pier. Expenses for the Regional Harbor Monitoring Program and Environmental Fund projects increased approximately $0.9 million from the prior !scal year. Personnel expense also had a net increase of $0.4 million mainly due to the recording of the ARC for OPEB, negotiated salary increases, increases in retirement costs and health insurance premiums. Miscellaneous operating expenses increased approximately $0.3 million primarily to due to Port Security Grant Round 8 expenditures.

!scal year primarily due to the recording of the ARC for OPEB of $1.6 million, increases in salaries, retirement costs and group health insurance of approximately $1.4 million, and increases in marketing costs of $0.4 million for advertising.

above analysis.

Non-operating Revenues and Expenses:

!scal year. Interest on investments decreased approximately $2.7 million from the prior !scal year and legal fee reimbursement decreased approximately $2.3 million. Partially o#setting these decreases were increases in unrealized gain/loss on investments (GASB 31) of $1.1 million and legal settlements of $1.1 million.

the prior !scal year primarily due to a payment to SANDAG of $5.3 million for the freeway access improvement project.

"e following charts show the total District revenues and expenses by major categories for !scal year 2009:

Management’s Discussion and AnalysisJune 30, 2009

32 33

Marine Operations 27%

Real Estate Operations 52%

Harbor Police 8%

Capital Grants 4%

Nonoperating Revenue 7%

Miscellaneous/Other 2%

Management’s Discussion and AnalysisJune 30, 2009

FY 2009 Revenues FY 2009 ExpensesConvention Center Expansion 3%

Direct Expenses 57%

Depreciation 12%

General and Administrative 20%

Interest Expense 3%Other 1%

Financial Assistance 4%

Debt Administration"e authority of the District to incur debt is described in Section 29 of the San Diego Uni!ed Port District Act. "e District is authorized, by its enabling legislation, to levy property taxes along with its !ve member cities (San Diego, National City, Chula Vista, Imperial Beach, and Coronado). From 1963 to 1970, the District required a small tax levy to pay debts incurred for improvements accomplished before the formation of the District. Since then, revenues from the principal operational areas have been su%cient to support District operations, service bonded indebtedness, and allow for capital improvements. As a result, no taxes have been levied since 1970.

As part of the airport transfer on January 1, 2003, as described in Note 1(a), the District issued a $50.0 million promissory note to the SDCRAA and a $2.4 million note for the Pond 20 real estate. On January 1, 2003, the District began repayment of the Pond 20 note to the SDCRAA based upon a preliminary appraisal of the fair market value of $2.4 million. "e appraised value of Pond 20 was one of a number of items under dispute between the District and the SDCRAA. On May 20, 2004, a settlement agreement, with an e#ective date of June 1, 2004, was reached between the two entities. With regard to Pond 20, the parties agreed that the value of Pond 20 would be the average of the District’s appraisal of $2.4 million and the SDCRAA’s appraisal of $4.3 million. Accordingly, the note for Pond 20 was increased to $3.3 million. Under the Airport Transfer Agreement, the $50.0 million promissory note was unsubordinated and fully negotiable, had an interest rate of the prime rate plus 1%, with monthly payments of interest only for seven years, with the principal due and payable on December 31, 2009. Under the settlement agreement, the note is now being amortized over a period of 25 years, which commenced January 1, 2006, with a !xed interest rate of 5.5% per annum and is subordinate to all other bonded indebtedness of the District.

On October 28, 2004, the District issued $49.5 million aggregate principal amounts of revenue bonds. "e issuance consisted of $23.0 million and $26.5 million principal amounts for the 2004 Series A Bonds and 2004 Series B Bonds, respectively. "e bonds were sold at a premium of $2.5 million, which netted issuance proceeds of $52.0 million. "e bonds are due serially over 25 years and bear interest rates ranging from 2.00% to 5.25%. "e bonds will be repaid using the Pledged Revenues of the District, as de!ned in Article 1, Section 1.02 of the indenture related to these bonds.

Following is a summary of the District’s outstanding bonds and notes payable:

Requests for Information"is !nancial report is designed to provide a general overview of the District’s !nances for all California citizens, taxpayers, and stakeholders, and the District’s investors and creditors. "is !nancial report seeks to demonstrate the District’s accountability for the money it receives. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the San Diego Uni!ed Port District, O%ce of the District Clerk, P.O. Box 120488, San Diego, California 92112 0488. Or, you may contact the District by phone (619) 686-6203 or by email at publicrecords@portofsandiego.org.

Balance at Balance at Amounts due June 30, 2008 Increases Decreases June 30, 2009 within one yearNotes to SDCRAA: $50.0 Million promissory note $ 47,483,210 & —&& (1,100,014)& 46,383,196 & 1,162,063 & Pond 20 note 1,714,515 & —&& (346,864)& 1,367,651 & 365,519 &Revenue bonds: Series A and B 2004 bonds payable 46,020,000 & —&& (1,255,000)& 44,765,000 & 1,305,000 & Series A and B 2004 bonds premium 1,828,214 & —&& (161,896)& 1,666,319 & —&& Total bonds and notes $ 97,045,940 & —&& (2,863,773)& 94,182,166 & 2,832,582

Basic Financial Statements

Balance SheetJune 30, 2009

Assets

See accompanying notes to basic !nancial statements.

June 30, 2009 June 30, 2008Current assets: Cash and cash equivalents $ 32,280,309& & 37,381,750& & Investments 95,490,470& & 116,995,162& & Accounts receivable, net of allowance 14,530,493& & 15,412,006& & Note receivable 1,000,000& & 1,000,000& & Other current assets 9,778,193& & 2,535,774& & Total current assets 153,079,465& & 173,324,692& &

Noncurrent assets: Cash & investments designated for speci!c capital projects & commitments 22,029,384& & 8,166,968& & Restricted assets: Restricted cash and investments: Convention Center expense rate stabilization 5,500,000& & 5,500,000& & TDY site demolition, and building abatement 22,961,559& & 23,599,529& & Carnival loan 5,349,774& & —&&&& Deposits and other miscellaneous 2,479,412& & 2,586,255& & Escrow accounts So. Bay Power Plant remediation and other miscellaneous 21,132,743& & 20,029,708& & Lease / Purchase Acquisition 1,356,519& & —&&&& Workers’ comp collateral 2,117,531& & 2,116,473& & Series 2004 bonds Debt service reserve funds held by trustee 3,517,210& & 3,543,461& & Deferred costs 850,741& & 944,190& & Total restricted assets 65,265,489& & 58,319,616& & Note receivable, less current portion 500,000& & 1,500,000& & Other noncurrent assets 126,777& & 135,965& & Total other noncurrent assets 87,921,650& & 68,122,549& & Capital assets: Nondepreciable assets: Land 197,267,503& & 196,266,470& & Construction-in-progress 24,311,783& & 18,149,922& & Depreciable assets: Land improvements 7,650,334& & 7,650,334& & Buildings and structures 466,614,635& & 459,903,511& & Machinery and equipment 52,669,442& & 46,118,439& & Roads and parking lots 86,515,099& & 84,162,008& &

Total capital assets 835,028,796& & 812,250,684& & Less accumulated depreciation (377,433,871) & (360,109,702) & Capital assets, net 457,594,925& & 452,140,982& & Total noncurrent assets 545,516,575& & 520,263,531& & Total assets $ 698,596,040! ! 693,588,223!

34 35

Basic Financial Statements

June 30, 2009& & June 30, 2008Operating revenues: Real Estate operations $ 78,536,468 87,180,527& & Maritime operations 40,694,314 42,520,189& & Harbor Police 12,463,742 12,288,513& & Other operating revenues 2,815,735 2,139,694& & Total operating revenues 134,510,258 144,128,923& &

Operating expenses: Direct expenses: Real Estate operation 21,191,259 21,896,833& & Maritime operations 23,243,014 23,327,762& & Harbor Police 32,974,100 31,049,096& & Other operating expenses 11,732,433 8,441,561& & Depreciation and amortization 18,117,495 17,412,168& & General and administrative expenses 31,428,303 27,867,445& & Total operating expenses 138,686,604 129,994,865& & Income/(loss) from operations (4,176,346) 14,134,059& &

Nonoperating revenue (expense): Interest income 5,517,998 8,319,291 Settlement income 1,165,548 35,762 Unrealized gain/(loss) on investments 1,117,440 (18,526) Interest expense (4,701,676) (4,834,213) Financial assistance (5,982,973) (967,924) Convention Center expansion expense (4,500,000) (4,500,000) Other nonoperating income 2,327,381 6,067,778 & & Nonoperating revenue (expense), net (5,056,283) 4,102,168& && & Capital grants and contributions 5,347,250 5,424,533& & Change in District equity (3,885,379) 23,660,759& &District equity, beginning of year 550,946,799 527,286,040& &District equity, end of year $ 547,061,420 550,946,799

June 30, 2009& & June 30, 2008Current liabilities: Accounts payable $ 10,810,281& & 12,734,104& & Accrued liabilities 4,937,538& & 4,423,758& & Current portion of accrued leave 4,100,000& & 3,165,000& & Deposits and other short-term liabilities 2,593,350& & 2,505,576& & Accrued interest payable, series 2004 bonds 730,696& & 740,934& & Notes payable, current portion 2,075,685& & 1,446,878& & Carnival loan 4,652,181& & 401,539& & Bonds payable, current portion 1,305,000& & 1,255,000& & Total current liabilities 31,204,732& & 26,672,789& &

Noncurrent liabilities: Liabilities – payable from restricted assets: South Bay Power Plant remediation 20,735,871& & 19,632,836& &Other long-term liabilities: Notes payable to SDCRAA 46,223,264& & 47,750,847& & Bonds payable 45,126,318& & 46,593,213& & Accrued leave, net of current portion 1,471,389& & 1,991,739& & Deferred Income Other 97,408& & —&&&& Master Tax-Exempt Lease/Purchase Agreement 2,150,298& & —&&&& Net OPEB Obligation 4,525,339& & —&&&& Total other long term liabilities 99,594,016& & 96,335,799& & Total noncurrent liabilities 120,329,887& & 115,968,635& & Total liabilities 151,534,619& & 142,641,424& &Equity: Invested in capital assets, net of related debt 413,928,591& & 405,707,681& & Restricted for other projects and grants 29,163,155& & 29,860,785& & Unrestricted 103,969,674& & 115,378,333& & Total equity 547,061,420& & 550,946,799& & Total liabilities and equity $ 698,596,040! ! 693,588,223

Balance SheetJune 30, 2009

Liabilities and Equity

See accompanying notes to basic !nancial statements.

Statement of Revenues, Expenses, and Changes in District Equity Year ended June 30, 2009

Statement of Cash FlowsYear ended June 30, 2009

Basic Financial Statements

June 30, 2009& & June 30, 2008Cash "ows from operating activities: Payments from customers $ 135,479,545& & 146,434,208& Payments to suppliers (48,269,253) & (43,487,686) Payments to employees (74,235,153) & (65,545,350) Other receipts 879,021& & 2,436,115& & Net cash provided/(used) from operating activities 13,854,160& & 39,837,287& &

Cash "ows from noncapital #nancing activities: Maintenance Fund-Salute to Bob Hope 97,408& & —&&&& Convention Center expansion (4,500,000) & (4,500,000) & Financial assistance to other governments (652,973) & (967,924) & SANDAG Payment - Freeway access Improvement Project (5,330,000) & —&&&& Note payments (350,672) & (1,363,475) & Net cash provided/(used) in noncapital !nancing activities (10,736,237) & (6,831,399) &

Cash "ows from capital and related #nancing activities: Capital expenditures (24,527,293) & (31,155,809) & Proceeds on sale of capital assets 67,248& & 16,898& & Federal/state grants received 5,330,200& & 4,102,534& & Donations for Capital Assets/Public Art 17,050& & —&&&& Terminal Special Facility Fee 2,975,552& & 3,447,272& & Master Tax Lease Purchase (548,103) & —&&&& Payment of bond principal (1,255,000) & (1,215,000) & Interest paid (4,807,902) & (4,966,331) & Carnival Loan 4,250,642& & (108,218) & Net cash provided/(used) in capital and related !nancing activities (18,497,606) & (29,878,654) &

Cash "ows from investing activities: Purchase of short-term investments (168,120,712) & (196,125,980) & Maturity of short-term investments 171,158,031& & 182,003,579& & Payment received on note receivable 1,000,000& & 1,000,000& & Interest received from investment securities 6,240,927& & 8,497,266& & Net cash provided/(used) by investing activities 10,278,246& & (4,625,135) & Net increase/(decrease) in cash and cash equivalents (5,101,437) & (1,497,901) & Cash and cash equivalents, beginning of year 37,381,748& & 38,879,649& & Cash and cash equivalents, end of year $ 32,280,311& & 37,381,748& & Reconciliation of operating income to net cash provided by operating activities: Net income/(loss) from operations $ (4,176,346) & 14,134,059& & Adjustments to reconcile income from operations to net cash provided by operating activities: Depreciation and amortization expense 18,117,495& & 17,412,168& & Bad debt expense 80,489& & (1,380) & Gain/(loss) on disposal of assets (1,122) & (231,015) & Settlement income 1,165,548& & 35,762& & Other nonoperating activities (284,347) & 2,655,320& & Changes in assets and liabilities: —&&&& —&&&& Accounts receivable/notes receivable-tenant 801,023& & 3,171,951& & Other current assets (7,242,419) & (326,826) & Accounts payable (935,587) & 1,709,264& & Accrued liabilities 1,443,940& & 2,111,263& & Other restricted assets (1,357,578) & (23,951) & Other long-term liabilities 6,155,289& & 55,958& & Deposits 87,774& & (865,286) & Net cash provided/(used) from operating activities $ 13,854,160& & 39,837,287& &

See accompanying notes to basic !nancial statements.

36 37

Notes to Basic Financial StatementsJune 30, 2009

(a) Organization"e San Diego Uni!ed Port District (the “District”), an autonomous public agency, was established on December 18, 1962 in accordance with laws of the State of California for the acquisition, construction, operation, maintenance, development, management, and regulation of harbor works and improvements, including rail, water, and air terminal facilities, and tidelands and submerged lands of the Harbor of San Diego and San Diego Bay, and for the promotion of commerce, navigation, !sheries, and recreation. "e District is governed by a seven member Board of Port Commissioners appointed by the District’s !ve member cities (Chula Vista, Coronado, Imperial Beach, National City, and San Diego).

In 2001, the California legislature established the San Diego County Regional Airport Authority (the “SDCRAA”) by enacting the San Diego County Regional Airport Authority Act (the “Airport Authority Act”), California Public Utilities Code Section 170000 et seq. "e Airport Authority Act was amended in 2002 and proposed a phased transfer of all airport operations of the District to SDCRAA. E#ective January 1, 2003, pursuant to the Airport Authority Act and the Memorandum of Understanding (MOU) dated as of December 31, 2002, the District transferred all airport operations and certain related assets and liabilities to the SDCRAA.

(b) Basis of Accounting

"e accounting policies of the District conform to accounting principles generally accepted in the United States of America applicable to state and local government agencies and, as such, the District is accounted for as a proprietary fund. "e accompanying basic !nancial statements have been prepared using the economic resources measurement focus and full accrual basis of accounting. Under the accrual basis of accounting, revenues are generally recognized when earned and expenses are recognized when incurred.

In accordance with the provisions of Governmental Accounting Standards Board (GASB) Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Entities that Use Proprietary Fund Accounting, the District has applied all applicable GASB pronouncements. "e District has applied Financial Accounting Standards Board (FASB) pronouncements and interpretations, Accounting Principles Board (APB) opinions, and Accounting Research Bulletins issued on or before November 30, 1989 that do not con$ict with or contradict GASB pronouncements. "e District has elected not to apply FASB pronouncements and interpretations issued after November 30, 1989.

Implementation of New Accounting Pronouncements: Accounting and Financial Reporting by Employers for Postemployment Bene!ts Other "an

Pensions. "is Statement, issued in 2004, establishes standards for the measurement, recognition and display of other post employment bene!ts expenses and related liabilities or assets, note disclosures and, if applicable, required supplementary information in the !nancial reports. "e requirements of this Statement were e#ective for the District beginning with its !scal year ending June 30, 2009.

Accounting and Financial Reporting for Pollution Remediation Obligations. "is Statement addresses accounting and !nancial reporting standards for pollution (including contamination) remediation obligations, which are obligations to address the current or potential detrimental e#ects of existing pollution by participating in pollution remediation activities, such as site assessments and cleanups. "is standard requires the District to estimate the components of expected pollution remediation outlays and determine whether the outlays for those components should be accrued as a liability or, if appropriate, capitalized when goods and services are acquired.

Pronouncements issued, not yet e$ective:Accounting and Financial Reporting for Intangible Assets. "is Statement, issued July 2007,

will be e#ective for the District with its year ending June 30, 2010. "is Statement provides guidance regarding how to identify, account for and report intangible assets. "e new standard characterizes an intangible asset as an asset that lacks physical substance, is non!nancial in nature and has an initial useful life extending beyond a single reporting period.

Accounting and Financial Reporting for Derivative Instruments. "is Statement, issued June 2008, will be e#ective for the District with its year-ending June 30, 2010. "is Statement addresses the recognition, measurement and disclosure of information regarding derivative instruments entered into by state and local governments. "e objectives, terms and risks of hedging derivative instruments are required disclosures. Disclosures also include a summary of derivative instrument activity that provides an indication of the location of fair value amounts reported on the !nancial statements.

(c) Accounts ReceivableAn allowance for uncollectible accounts receivable has been provided in the amount of $78,871 as of June 30, 2009; the amount is based upon management’s estimate of accounts that will not be collected. Accounts receivable are carried at original invoice amount for !xed rent tenants and at estimated invoice amount for concession (i.e., variable) rent tenants, less an estimate made for doubtful receivables for both !xed rent and concession tenants based on a review of all outstanding amounts. Management determines the allowance for doubtful accounts by evaluating individual tenant receivables and considering a tenant’s !nancial condition, credit history, and current economic conditions.

(d) Cash EquivalentsFor the purpose of the statement of cash $ows, cash equivalents consist of short term, highly liquid investments with original maturities of three months or less.

(e) InvestmentsInvestments are stated at fair value. Valuations are obtained by using quotations obtained from independent published sources.

(f ) Restricted AssetsFunds are set aside as restricted assets and are not available for current expenditures, when constraints placed on their use are legally enforceable due to either:1. Externally imposed requirements by creditors (such as through debt covenants), grantors, contributors, or laws or

regulations of other governments, or,2. Constitutional provisions or enabling legislation.

"e District classi!es assets as restricted when the resources that were received or earned contain an explicit understanding between the resource provider and the District that the funds would be used for a speci!c purpose.

(g) Designated Assets"e District’s management may designate funds, which they do not consider to be available for general operations. At June 30, 2009, management had designated funds for speci!c approved capital projects and other commitments totaling approximately $22.0 million.

(h) Capital AssetsCapital assets are carried at cost (except for property contributed by third parties, which is recorded at fair market value at the date of contribution) less an allowance for accumulated depreciation. Recurring normal maintenance and repair costs are charged to operations, whereas major repairs, improvements, and replacements that extend useful life are capitalized. "e capitalization threshold is $5,000 and depreciation is computed by use of the straight line method over the following estimated useful lives:

Land improvements 30 to 40 yearsRoads and parking lots 10 to 30 yearsBuildings, water borne structures, and other terminals 10 to 50 yearsAutomotive and !eld equipment, furniture, and !xtures 3 to 15 years

(i) Compensated Absences

Employees of the District hired before October 1, 1979 may be paid upon termination or retirement a portion of their accrued unused sick leave bene!ts. Such bene!ts are paid based upon the current rates of compensation. Employees hired on or after October 1, 1979 are not entitled to any reimbursement of earned unused sick leave upon termination or retirement. All employees of the District earn annual leave that is paid upon termination or retirement. Annual leave is accrued and paid at current rates of compensation.

(j) District EquityInvested in capital assets net of related debt consists of capital assets, which are net of accumulated depreciation and further reduced by the outstanding balances of any borrowings used for the acquisition, construction, or improvement of those assets.

Restricted equity represents amounts that are appropriated or are legally segregated for a speci!c purpose. District equity is reported as restricted when there are limitations imposed on its use, either through the enabling legislation adopted by the District or through external restrictions imposed by creditors, grantors, laws or regulations of other governments.

Notes to Basic Financial StatementsJune 30, 2009

38 39

(k) Revenue Classi!cations"e District classi!es revenue as operating revenue or nonoperating revenue, based on the following criteria:

Operating revenues are derived from the revenue sources that constitute the principal ongoing activities of the District’s operations. "e major components of the operating revenue sources are provided as follows:

of tenant revenues subject to certain minimum monthly fees for industrial, commercial, and recreational facilities, and parking fees.

!xed rents, and other marine services subject to District tari#s !led with the Federal Maritime Commission. Wharfage revenue is the charge assessed to both inbound and outbound cargo when crossing over District property. Dockage fees are the charges assessed against a vessel for the right to berth at a wharf or pier of the District.

allocation), citation revenue, and expense reimbursements, which include both grants and cost recovery for service provided. Environmental Services park usage fees are also included in other operating revenue.

principal ongoing activities of the District’s operations. "e major components of the non-operating revenue sources are interest income from cash and investments, reimbursed legal fees/litigation costs, legal settlements, Terminal Special Facility Fees, grant reimbursements for capital projects and donations.

(l) Expense Classi!cations"e District classi!es expenses as operating or non-operating based on the following criteria:

Operating expenses are from expense sources that constitute the principal ongoing activities of the District’s operations. "e major components of the District’s operating expense consist of salaries and bene!ts, contractual services, maintenance, administration, and materials and supplies.

Non-operating expenses are from expense sources that are related to !nancing, investing and other activities that do not constitute the principal ongoing activities of the District’s operations. "e major components of non-operating expense are !nancial assistance and interest expense.

(m) Capital Grants and ContributionsWhen a capital grant agreement is approved and all eligibility requirements have been met, the expenditures are recorded as grants receivable and capital grant revenue. When a capital asset is donated, the contributed capital asset and donated revenue is recorded at fair market value in the period it was received.

(n) Deferred Bond Costs"e 2004 revenue bond issuance costs are deferred and amortized over the term of the bonds using the straight-line method, which approximates the e#ective interest method. In addition, the bonds were issued at a premium and the premium is amortized over the term of the bond using the straight-line method.

(o) Estimates"e preparation of basic !nancial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that a#ect the reported amounts of assets and liabilities; disclose contingent assets and liabilities at the date of the basic !nancial statements; and, disclose reported amounts of revenues and expenses during the reporting period. Actual results could di#er from those estimates.

(p) Reclassi!cationsCertain reclassi!cations have been made to the 2008 !nancial information to conform to the 2009 presentation. "ese reclassi!cations had no impact on net income or District assets or liabilities.

2. Cash and InvestmentsCash and investments as of June 30, 2009 are classi!ed in the accompanying !nancial statements, as follows:

Summary of cash and investments: 2009 2008 Cash and cash equivalents $ 32,280,311 37,381,750 Investments 95,490,468 116,995,164 Restricted cash and investments: Convention Center expense rate stabilization 5,500,000 5,500,000 TDY site demolition, and building abatement 22,961,559 23,599,529 Refundable security deposits 2,176,737 2,303,132 Carnival loan advance 5,349,774 —&&&& Various grants - 16,183 Other 302,675 266,940 Total restricted cash and investments 36,290,745 31,685,784 Designated cash and investments: Designated for capital project commitments 22,029,384 8,166,968 Total designated cash and investments 22,029,384 8,166,968 Total cash and investments $ 186,090,908 194,229,666 Cash and investments as of June 30, 2009 consist of the following: Cash on hand, current $ 6,375 Deposits with !nancial institutions 1,806,586 Investments 184,277,947 $ 186,090,908

Investments Authorized by California Government Code and the District Investment Policy California Government Code § 53600 et seq. and the Board of Port Commissioner’s Policy 115 (BPC 115), “Guidelines for Prudent Investments,” regulate the investment of the Port’s temporarily idle cash. "e table below identi!es only those investments that are authorized by both California Government Code and BPC 115. "e table also identi!es restrictions as to investment terms to maturity and maximum allowable investment percentages; the more restrictive policy requirements are identi!ed. Note that while the maximum allowable term to maturity for various investment classes may be !ve years, BPC 115 limits the portfolio’s weighted average days to maturity to three years. At no time during FY 2009 did the portfolio’s weighted average days to maturity exceed three years.

Maximum Allowable Investment Term to Total Any One IssuerInvestment Types Authorized by California Government Code and BPC 115 Maturity (% of Portfolio) (% of Portfolio)

U.S. Treasury Bills, Notes, Bonds 5 Years No Restriction No Restriction

U.S. Government Agency Obligations 5 Years No Restriction No Restriction

Bankers Acceptances 180 Days 40% FMV 10% FMV

Certi!cates of Deposit - Account Registry Service (CDARS) 5 Years 30% FMV FDIC Limit

Commercial Paper 270 Days 15% FMV 10% FMV

Commercial Paper 31 Days 30% FMV 10% FMV

Negotiable Certi!cates of Deposit 1 Year 30% FMV No Restriction

Medium-term notes - “A” rating 2 Years 30% FMV 5% FMV

Medium-term notes - “AA” rating 3 Years 30% FMV 5% FMV

Repurchase Agreements 1 Year No Restriction No Restriction

Reverse Repurchase Agreements 60 Days 10% FMV No Restriction

Local Agency Investment Fund (LAIF) Not Applicable No Restriction Not Applicable

Shares of Bene!cial Interest – Issued by Management Companies Not Applicable 20% FMV 10% FMV

Shares of Bene!cial Interest – Issued by Joint Powers Authorities ( JPA) 2 Years 30% FMV Not Applicable

Notes to Basic Financial StatementsJune 30, 2009

Notes to Basic Financial StatementsJune 30, 2009

40 41

Disclosures Relating to Interest Rate RiskInterest rate risk is the risk that $uctuations in market interest rates will adversely a#ect the fair value of an investment. In general, an investment with a longer term to maturity has a greater sensitivity to changes in market interest rates than does an investment with a shorter term to maturity.

One of the ways the District manages its exposure to interest rate risk is by purchasing a combination of shorter-term and longer-term investments and by structuring the maturities to coincide with expected capital investment cash out$ows. Investment purchases are further structured so as to mature at fairly regular intervals in order to provide liquidity su%cient for operations.

"e District uses remaining days to maturity, weighted average days to maturity, and duration as methods by which to analyze the portfolio’s overall sensitivity to interest rate risk. "e District intends to hold callable securities until maturity, however, for disclosure purposes, the District used the call date as equivalent to maturity date. Information pertaining to the portfolio’s overall sensitivity to interest rate risk at June 30, 2009 is provided in the following tables:

Port Investments Remaining Days to MaturityInvestment Type Fair Value at June 30, 2009 120 Days or Less 121 to 360 361 to 720 721 to 1,080

U.S. Treasury Securities 6,996,252 3,000,000 3,996,252 - -

Federal agencies (coupon) 90,014,776 19,937,832 44,368,927 20,656,452 5,051,565

Federal agencies (discount) 36,484,692 23,495,288 12,989,404 - -

Medium Term Notes 14,214,881 2,011,068 - - 12,203,813

Certi!cates of Deposit - CDARS 5,000,000 1,000,000 4,000,000 - -

Money Market Fund 21,501,513 21,501,513 - - -

Shares of Bene!cial Interest - JPA 10,065,833 10,065,833 - - -

Totals: $184,277,947 $81,011,534 $65,354,583 $20,656,452 $17,255,378

"e District’s investment portfolio is conservatively managed. Although the District is authorized by Board policy to invest in securities whose fair value would be considered highly sensitive to interest rate risk, the District did not own any speci!c securities considered highly sensitive.

Investment Type Weighted Avg. DTM Duration (Years)

U.S. Treasury Securities 3 0.008

Federal agencies (coupon) 284 0.294

Federal agencies (discount) 26 0.072

Medium Term Notes 59 0.126

Certi!cates of Deposit - CDARS 7 0.019

Money Market Fund 1 0.003

Shares of Bene!cial Interest - JPA 1 0.003

Total Weighted Avg. DTM 381

Portfolio Duration 0.525

Funds invested in the money market fund consist of U.S. Government obligations and repurchase agreements collateralized by U.S. Government obligations.

Funds invested in Shares of Bene!cial Interest issued by joint powers authority include 51% U.S. Government Agencies, 18% Corporate Notes, 15% Commercial Paper, 11% Money Market, 3% Mortgage-Backed Securities/Asset-Backed Securities, and 2% Certi!cates of Deposit as of June 30, 2009. "e risk of investing through this program includes movements in interest rates, which could adversely a#ect the market value, yield and return of the Shares program. If interest rates rise, the values of debt securities generally fall. In general, bond prices vary inversely with interest rates.

Disclosures Relating to Credit RiskCredit risk is the risk that the issuer of an investment will not repay its obligation as promised. Credit quality is measured using a rating assigned by a nationally recognized statistical rating organization (NRSO).

"e information presented below identi!es the minimum credit rating required by California Government Code, the District’s investment policy and the actual rating as of June 30, 2009 for each investment type. Funds held in trustee and !scal agent accounts as of June 30, 2009 met California Government Code minimum credit rating requirements. Credit Rating at Year End Fair Value at Minimum Exempt fromInvestment Type June 30, 2009 Rating Disclosure AAA AA+ to A+ AAAm AAf / S1 Not RatedU.S. Treasury Securities 6,996,252 N/A 6,996,252 - - - - - Federal agencies (coupon) 90,014,776 N/A - 90,014,776 - - - - Federal agencies (discount) 36,484,692 N/A - 36,484,692 - - - - Medium Term Notes 14,214,881 N/A - 12,203,813 2,011,068 - - - Certi!cates of Deposit - CDARS 5,000,000 N/A - - - - - 5,000,000 Money Market Fund 21,501,513 N/A - - - 21,501,513 - - Shares of Bene!cial Interest-JPA 10,065,833 N/A - - - - 10,065,833 - Totals: $184,277,947 N/A $6,996,252 $138,703,281 $2,011,068 $21,501,513 $10,065,833 $5,000,000

Concentration of Credit Risk"e District’s investment policy is consistent with the California Government Code with respect to the categorical limitations placed on the amount that may be invested in any one issuer. "e District’s investment holdings at June 30, 2009, grouped by issuer, are identi!ed in the table below.

Issuer Investment Type Fair Value at June 30, 2009 % of Portfolio

United States of America U.S. Treasury Securities 6,996,252 3.80%

Federal Home Loan Bank Federal agencies securities 63,489,712 34.45%

Federal Home Loan Mortgage Corporation Federal agencies securities 17,107,360 9.28%

Federal National Mortgage Association Federal agencies securities 31,480,519 17.08%

Federal Farm Credit Bank Federal agencies securities 14,421,877 7.83%

General Electric Capital Corp Medium Term Notes 5,026,437 2.73%

Goldman Sachs Group Medium Term Notes 4,021,744 2.18%

Wells Fargo & Company Medium Term Notes 5,166,700 2.80%

Various FDIC-Member Banks Certi!cates of Deposit – CDARS 5,000,000 2.71%

CalTRUST Short-Term Fund Shares of Bene!cial Interest – JPA 10,065,833 5.46%

Wells Fargo Advantage Fund Government Money Market Fund 21,501,513 11.67%

Totals: 184,277,947 100.00%

Custodial Credit RiskCustodial credit risk is the risk that investments held by the transaction counterparty may not be recoverable in the event of the failure of the counterparty !rm. "e District’s adopted investment policy states that, “To protect against potential losses by the collapse of individual securities dealers, all securities owned by the District shall be held in safekeeping by a third party bank trust department acting as agent for the District under the terms of a custody agreement executed by the bank and the District. All securities will be received and delivered using standard delivery-versus-payment procedures.” "e District uses a custodial bank for the receipt and safekeeping of its securities and all securities purchased in !scal year 2009 were received using delivery-versus-payment procedures.

California Government Code requires that !nancial institutions secure local government agency deposits by pledging securities in an undivided collateral pool; the depository holds the collateral. "e market value of the securities held in the collateral pool must be greater than or equal to 110% of the total amount deposited by the public agencies. A !nancial institution may, in accordance with California Government Code, secure the local public agency deposits using !rst trust deed mortgages; however, the market value of the !rst trust deed mortgages collateral must be at least 150% of total amount deposited.

With the exception of inactive time deposits, all securities as of June 30, 2009 were held by a third party bank trust department acting as agent for the District under the terms of a custody agreement.

Investment in CalTRUST Investment Pool"e District is a voluntary participant in the Investment Trust of California (doing business as CalTRUST), a Shares of Bene!cial Interest program. "e Shares program is a Joint Powers of Authority ( JPA) authorized by California Government Code sections 53601 and 53635 created for the purpose of pooling local agency assets for investing. "e District participates in the program’s

Notes to Basic Financial StatementsJune 30, 2009

Notes to Basic Financial StatementsJune 30, 2009

42 43

short-term account which has a target duration of 0 to 2 years. Authorized securities under this account typically include treasuries, agencies, CMOs, MBS, ABS, bankers acceptances, commercial paper, certi!cates of deposit, repurchase agreements backed by 102% government agencies and treasuries, medium term notes and rated money market funds.

"e Shares Program’s investment objectives seek to attain a high level of current income consistent with the preservation of capital. "e program is subject to interest rate and credit risk. "is is primarily due to interest rate movements and to the potential of Share value decline in response to events a#ecting the issuer of any securities or its credit rating. "e Shares program, CalTRUST, is not registered as an investment company under the Investment Company Act of 1940 and, accordingly, is not subject to the provisions of that Act and the rules thereunder, including the protective rules relating to registered money market funds and other types of mutual funds.

Investments in Medium Term Notes and the FDIC’s Temporary Liquidity Guarantee Program"e District’s Medium Term Notes listed in the tables above include $12,203,813 of notes guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the newly created U.S. Government’s Temporary Liquidity Guarantee Program (TLGP) adopted on November 21, 2008. Under the TLGP, the Debt Guarantee Program component allows participating entities to have certain newly-issued senior unsecured debt guaranteed by the FDIC with the full faith and credit of the United States. "e guarantee expires the earlier of the maturity date of the debt or June 30, 2012.

Investments in Certi#cates of Deposit Account Registry Service (CDARS)"e District participates in the CDARS program through Neighborhood National Bank, certi!ed as a Community Development Financial Institution by the U.S. Treasury. Deposits through this program are authorized by California Code Sections 53601.8 and 53635.8, and are 100% FDIC insured.

3. Capital Assets Following is a summary of the capital assets activity for !scal year ended June 30, 2009:

Capital Assets(Expressed in thousands)

Balance at Balance atDescription June 30, 2008 Increases Decreases June 30, 2009Nondepreciable assets: Land $ 196,266 1,001 - 197,268 Construction-in-progress 18,150 22,867 (16,705) 24,312 Depreciable assets: Land improvements 7,650 - - 7,650 Buildings and structures 459,904 6,711 - 466,615 Machinery and equipment 46,118 7,252 (701) 52,669 Roads and parking lots 84,162 2,353 - 86,515 Total assets 812,251 40,184 (17,406) 835,029 Accumulated depreciation (360,110) (18,024) 700 (377,434) Capital assets, net $ 452,141 22,160 (16,706) 457,595

4. Carnival LoanOn October 11, 2005, the District entered into a terminal !nancing and berthing agreement with Carnival Corporation (“Carnival”). Carnival owns and/or operates a number of cruise ship lines, which include Carnival Cruise Lines, Princess Cruises, P&O Cruises, Holland America Line, Cunard Line, Seabourn Cruise Line, and Costa Crociere. Carnival utilizes cruise ship terminals in ports around the world including the District’s cruise ship terminal for embarking and disembarking passengers, shore tours, and provisioning their vessels. "e District’s main cruise ship facility, known as the B Street Pier, is located at the foot of B Street on Harbor Drive. "e District’s Broadway Pier, located at the foot of Broadway on Harbor Drive, is used as an auxiliary pier. Both piers were built in the 1920s and have signi!cant infrastructure needs that a#ect the cruise lines’ ability to move passengers from ship to shore e%ciently.

To maintain and grow its established cruise business, the District and Carnival identi!ed improvements needed for the B Street Pier (fenders, additional tents, gangway platform, and early arrival area). In October 2005, Carnival agreed to loan the District $8.0 million to fund the improvements at a !xed rate of 4.5% per annum. In May 2007, the loan was increased to $12.0 million so that improvements totaling $26 million could be completed on the Broadway Pier (pier deck strengthening, improved vehicle circulation, Customs and Border Protection facilities, passenger facilities, and baggage lay down area). Ultimately the Broadway Pier is planned to continue functioning as the District’s auxiliary pier when the B Street Pier construction is completed. However, that construction may not begin until 2016 or later given the cost of the project.

As of June 30, 2009, the total cash received by the District from Carnival as a loan was $12.0 million. Carnival also consented to the District to assess and collect from all cruise line users of the District cruise ship facilities a Terminal Special Facility Fee equal to a $4.00 per embarking home port cruise passenger and a $4.00 per disembarking home-port passenger. "e Terminal Special Facility Fee serves as a revenue source for the District to repay the loan.

In exchange, the District agreed, with other miscellaneous provisions, to allow Carnival preferential berthing of its ships at two of the District’s four berths through April 2015 or until the loan is paid in full, whichever takes longer. E#ective April 1, 2006, the District assessed against and collected the Terminal Special Facility Fee from all cruise line users of the District cruise ship facilities. "e Terminal Special Facility Fee shall remain in e#ect until the loan is repaid in full to Carnival, including any and all interest, late fees and other charges. However, Carnival announced in September 2009 that the Elation, the homeport ship, would discontinue service from San Diego. "e e#ect on the Terminal Special Facility Fee is not known at this time.

From April 1, 2006 to June 30, 2009, approximately $7.5 million was collected for the Terminal Special Facility Fee and was used to repay a portion of the loan. "e outstanding balance of the loan, including interest, was $4.7 million as of June 30, 2009; a total $7.2 million has been spent on improvements from inception through June 30, 2009 leaving an available cash balance of $5.3 million shown as a restricted asset.

5. Long-Term Debt(a) Summary of Long-Term Liabilities

Below is a summary of long-term liabilities and their activity for the !scal year ended June 30, 2009:

"e District’s required debt service payments for the bonds and notes for !scal years ending June 30 are as follows:

Principal Interest Total Debt Service2010 3,380,685 & 4,789,678 & 8,170,364 &2011 3,512,998 & 4,657,431 & 8,170,429 &2012 3,626,155 & 4,546,464 & 8,172,619 &2013 3,606,946 & 4,348,618 & 7,955,564 &2014 3,580,695 & 4,164,065 & 7,744,760 &2015-2019 17,578,006 & 18,173,432 & 35,751,438 &2020-2024 22,379,395 & 12,970,243 & 35,349,638 &2025-2029 28,971,696 & 6,273,076 & 35,244,773 &2030-2031 8,577,671 & 315,165 & 8,892,836 Total $ 95,214,248 ! 60,238,172 ! 155,452,419

(b) Notes PayableAs part of the transfer of airport operations and the San Diego International Airport (SDIA) to the SDCRAA on January 1, 2003 and pursuant to the MOU, the District issued a $50.0 million promissory note to the SDCRAA. "e note was unsubordinated and fully negotiable, with an interest rate of the prime rate plus 1%. Monthly payments of interest were required for seven years with the principal due and payable on December 31, 2009. "e note was amended as a result of a settlement agreement, e#ective June 1, 2004, between the District and the SDCRAA. "e note is now being amortized over a period of 25 years, which commenced January 1, 2006, with a !xed rate of 5.5% per annum; the note remains subordinated to all other bonded indebtedness of the District.

Balance at Balance at Amounts due June 30, 2008 Increases Decreases June 30, 2009 within one yearNotes: $50.0 Million promissory note - SDCRAA $ 47,483,210 & —&& (1,100,015)& 46,383,195 & 1,162,063 & Pond 20 note - SDCRAA 1,714,515 & —&& (346,864)& 1,367,651 & 365,519 & Master Tax-Exempt Lease/Purchase Agreement —&& 2,698,401 & —&& 2,698,401 & 548,103 &Revenue bonds: Series A and B 2004 bonds payable 46,020,000 & —&& (1,255,000)& 44,765,000 & 1,305,000 & Series A and B 2004 bonds premium 1,828,214 & —&& (161,896)& 1,666,318 & —&& Total bonds and notes 97,045,939 & 2,698,401 & (2,863,775)& 96,880,565 & 3,380,685 &Other noncurrent liabilities: Deferred Income - Bob Hope Memorial —&& 97,408 & —&& 97,408 & —&& OPEB Obligation —&& 6,681,339 & (2,156,000)& 4,525,339 & Accrued leave 5,156,738 & 414,652 & —&& 5,571,389 & 4,100,000 & South Bay Power Plant remediation 19,632,836 & 1,103,035 & 20,735,871 & —&& Total other noncurrent liabilities 24,789,573 & 8,296,434 & (2,156,000)& 30,930,007 & 4,100,000 & Total long-term liabilities $ 121,835,512 & 10,994,835 & (5,019,775)& 127,810,573 & 7,480,685

Notes to Basic Financial StatementsJune 30, 2009

Notes to Basic Financial StatementsJune 30, 2009

44 45

"e Airport Authority Act speci!ed that Pond 20 real estate in the South Bay would remain District property. Pond 20 is a portion of the land acquired as part of the Western Salt Company, Naval Training Center (NTC) acquisition in 1999, which was intended to provide for mitigation for future expansion of the airport. As part of the transfer of the airport to the SDCRAA on January 1, 2003, the District began repayment to the SDCRAA for the fair market value of the property based upon an appraisal of $2.4 million. "e payment schedule was a !xed, ten year payment plan with interest based upon the prime rate plus 1% on January 1, 2003. "e appraised value of Pond 20 was one of a number of items under dispute between the District and the SDCRAA. As a result of the June 1, 2004 settlement agreement, the parties agreed the value of Pond 20 would be the average value of the District’s $2.4 million appraisal and the SDCRAA appraisal of $4.3 million. Accordingly, the note payable to SDCRAA was increased to $3.3 million. "e !xed, ten-year payment plan remained unchanged but the interest rate was set to a !xed rate of 5.25% per annum, e#ective retroactively to January 1, 2003. Because the initial payments made by the District to the SDCRAA were less than the recalculated amortization schedule, in June 2004 the District made a lump-sum payment of principal and interest of $0.2 million to the SDCRAA to ensure repayment of the revised note amount during the agreed upon ten-year amortization period.

"e District entered into a Master Tax-Exempt Lease/Purchase Agreement, with Key Government Finance, Inc. to lease phone and network equipment. "e lease term is for !ve years and the annual principal and interest payment each year is $592,767.50 for a total amount of $2,963,837.50.

(c) Revenue Bonds and Pledge of RevenuesOn October 21, 2004, the District sold $49.5 million (par value) of Series 2004 Revenue Bonds (“Bonds”), which are secured by a pledge and lien on net pledged revenues. As of June 30, 2009, the Bonds’ remaining principal and interest requirement totals $71.8 million.

"e Bonds were issued for a term of 25 years, with the last debt service payment due September 1, 2029. "e proceeds from the sale of the Bonds were used to reimburse the District for certain previous capital expenditures, fund the Bonds’ reserve requirement, and !nance the costs of issuance.

Pledged revenues for the period ending June 30, 2009, totaled $140.8 million, which represents approximately 93.2% of total District revenues and 196.1% of the Bonds’ remaining principal and interest requirements. Net pledged revenues for the period ending June 30, 2009 totaled $14.0 million, which represents 404.9% of the Bonds’ annual principal and interest requirements.

(d) Accrued LeaveDistrict employees earn annual leave, which is recorded by the District at current rates of compensation when earned.

(e) South Bay Power Plant Site Remediation Pursuant to the Asset Sales Agreement between the District and the San Diego Gas & Electric Company (“SDG&E”), the District acquired the South Bay Power Plant (the “Plant”) in April 1999. "e District recognized that it would be in the baywide region’s best interest to acquire the Plant as the means to accelerate the closure, decommissioning, and/or relocation of the Plant. "e California Independent System Operator (“ISO”) has designated the Plant as a “must run” facility, which means that the Plant must remain in operation until a replacement plant is constructed or ISO removes the “must-run” designation. "e Plant was leased to Duke Energy South Bay, LLC (“Duke South Bay”) in April 1999.

In !scal year 1999, pursuant to the Real Property Contribution Agreement that was entered into between the District and SDG&E, SDG&E donated approximately 165 acres of land located beneath and adjacent to the Plant with a fair market value of $24.9 million. "e land transaction was recorded as contributed capital and is included in capital assets in the basic !nancial statements.

In early 2006, Duke Energy Americas, LLC, the parent company of Duke South Bay, requested the District’s approval of its sale of the equity interest in Duke South Bay to LS Power Generation, LLC (“LS Power”). In May 2006, the BPC adopted a resolution granting consent to transfer ownership of Duke South Bay to LS Power Generation LLC subject to conditions expressed in the resolution. One of the conditions required Duke Capital, LLC, the guarantor of Duke South Bay obligations to the District, to acknowledge and agree that the “Duke Guarantees” (the Lease Guaranty dated April 1, 1999; the Environmental Remediation Guaranty dated April 22, 1999; and, the Guaranty of Contract and Permit Rights Assignment and Property Escrow Agreement dated April 22, 1999, each made by Duke Capital, LLC in favor of the District) shall remain in e#ect until such time as the District grants its consent for the release of said Duke Guarantees. Upon completion of the sale to LS Power, the name of the Plant operator entity changed to LSP South Bay, LLC (“LSP South Bay”).

In October 2006, LS Power requested the District’s approval of LS Power’s merger with Dynegy Inc (“Dynegy”). "e

merger, which was consented to by the BPC at the November 2006 Board meeting, included a transfer of control of the equity interests in the Plant’s operating entity, LSP South Bay, along with a number of other power generation assets, from LS Power to Dynegy. "e post-transaction Dynegy is comprised of the combined assets of LS Power (and other LS Power assets) and Dynegy (the new entity retained the name “Dynegy Inc.”). "e Duke Guarantees have remained in e#ect since the Dynegy transaction.

Also in !scal year 1999, the California State Legislature appropriated $15.0 million to assist the District in mitigating environmental and community issues associated with the Plant. "e District deposited $15.0 million into the Property Escrow Account, which was initially established by the District and Duke South Bay. "e escrowed funds together with their earnings are to be retained in the Property Escrow Account until such time as the funds are needed to decommission or dismantle the Plant or for the environmental remediation of the Plant site. At June 30, 2009, the balance in the property escrow account after drawdowns and income on investments is $20.7 million. "is amount is reported in the balance sheet as a restricted asset and also reported as a noncurrent liability payable from restricted assets. All such costs in excess of amounts available in the escrow account are the responsibility of Dynegy, so long as the approval to decommission and dismantle the plant is obtained and a replacement generating plant is constructed during the term of the lease, or of future operators in the event that the lease with Dynegy expires or is terminated. SDG&E remains responsible for the cost and performance of the environmental remediation of the Plant. "e lease terminates three months from the termination by the ISO of the “must run” obligation imposed on the Plant. At the termination of the Lease Agreement, Dynegy is required to decommission, dismantle, and remove the Plant and return the Plant site free and clear of all structures and improvements.

"e District intends to use the site for the highest and best use for the public bene!t after it is returned by Dynegy at the termination of the Lease Agreement.

6. San Diego Convention CenterIn 1985, the District entered into an agreement, which was subsequently amended four times, (collectively, the “Original Agreement”) with the City of San Diego (the “City”) for the management of the San Diego Convention Center (the “Convention Center”). "e Original Agreement provides that the City will manage, operate, maintain, and promote the Convention Center, and the District will manage, operate, and maintain the parking facility of the Convention Center.

In consideration of the District’s investment in constructing the Convention Center and managing, operating, and maintaining the parking facility, the City paid the District $20 ($1 per year). "e City operates and maintains the Convention Center and receives all income from, and bears all expenses of, the Convention Center. "e District receives all income from, and bears all expenses of, the operations and maintenance of the parking facility.

During !scal year 1994, the District entered into a Memorandum of Understanding (“MOU”) with the City regarding a proposed expansion of the Convention Center (the “Expansion Project”). "e MOU provides that the District will assist the City in the annual payment of any debt obligation created to !nance the Expansion Project by contributing up to $4.5 million per year for 20 years, not to exceed total payments of $90.0 million, and will reimburse the City for the costs of the program manager and other consultants and contractors associated with the planning, design, and construction of the Expansion Project, not to exceed $4.5 million per year as part of the annual obligation.

During !scal year 1997, the District incurred expenses of $9.3 million, including a payment to the City of $9.0 million toward the planning and design costs for the Expansion Project and $0.3 million of District costs for the Expansion Project. "e MOU provides that the $9.0 million payment to the City would be applied toward the 19th and the 20th annual payments.

During August 1998, the District entered into a series of additional agreements with the City. "ese agreements include a Support Agreement that supersedes the 1994 MOU, a 1998 Convention Center Management Agreement (the “1998 Agreement”) that supersedes the Original Agreement, and, a Purchase Option and Lease Agreement.

"e Support Agreement provides for a payment of $9.0 million to the City, in lieu of the 17th and 18th annual payments required under the MOU upon the sale of bonds to !nance the construction of the Expansion Project and an annual payment of $4.5 million for 16 years beginning on June 30, 1999. On September 17, 1998, the lease revenue bonds were issued to !nance the construction of the Expansion Project. "e debt obligation for the bonds was structured as the City’s sole legal responsibility. On September 21, 1998, $9.0 million, less the costs incurred by the District for the Expansion Project in the amount of $0.3 million, totaling $8.7 million, was paid to the City in accordance with the terms of the Support Agreement. On June 30, 1999, the District accrued $4.5 million representing the !rst annual payment, which was subsequently paid on July 1, 1999. Each year thereafter, beginning with !scal year 2000, an annual payment of $4.5 million has been made by the District in accordance with the terms of the Support Agreement. As of June 30, 2009, $67.5 million has been paid to the City of San Diego under this agreement. "e annual payments will be completed by June 2014.

Notes to Basic Financial StatementsJune 30, 2009

Notes to Basic Financial StatementsJune 30, 2009

46 47

"e 1998 Agreement contains modi!cations that take into account the debt !nancing on the Expansion Project as well as the authorization for the City to operate the expanded Convention Center. Other terms contained in the Original Agreement remain unchanged in the 1998 Agreement.

Under the Purchase Option and Lease Agreement, beginning on the closing of the bond issuance for the Expansion Project and extending through July 30, 2012, the District is required to maintain reserves in the amount of $5.5 million, which may be drawn upon by the City if the Transient Occupancy Tax (TOT) fails to increase for two consecutive years. If the TOT fails to increase for two consecutive years, the City may request the District to advance monies from the reserves in exchange for a property, which is acceptable to the District with an appraised value of at least $5.5 million. As of June 30, 2009, the District had restricted cash and restricted equity of $5.5 million for the Expansion Project. To date we have not been noti!ed that the City will be drawing upon this money.

7. South Bay CitiesIn June 1995, the Board of Port Commissioners approved a Memorandum of Understanding for each of the District’s South Bay cities of Coronado, Chula Vista, National City, and Imperial Beach (collectively the “South Bay MOU”). "e South Bay MOU provides that the District shall annually set aside as restricted reserves of $9.0 million for each of the seven years beginning July 1, 1994 to be expended for certain District projects, as shown in the Tidelands Capital Development Program (the “CDP”) adopted by the Board of Port Commissioners on April 26, 1994. "e total unawarded contract cost is periodically adjusted for in$ation using the Building Cost Index (BCI). As of June 30, 2009, the District had set aside, expended, or committed to expend a total amount of $95.7 million under the MOU. "is includes the initial set aside of $63.3 million, BCI escalation of $13.3 million and $19.1 million of additional funding from the CDP. As of June 30, 2009, $9.7 million remains unexpended.

(a) Plan Description"e District’s de!ned bene!t pension plan, administered by the City of San Diego’s City Employees’ Retirement System (“SDCERS”), provides retirement and disability bene!ts, annual cost of living adjustments, and death bene!ts to plan members and bene!ciaries. SDCERS is an agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for the City of San Diego, the District, and the SDCRAA and is administered by the Retirement Board of Administration (“Board”). San Diego City Charter, Section 144 and San Diego Municipal Code Sections 24.0100 et seq. assigns to the Board the authority to establish and amend the bene!t provisions of the plans that participate in SDCERS. "e plan is integrated with the Federal Social Security Program. "e Board issues a publicly available !nancial report that includes !nancial statements and required supplementary information for SDCERS. "e !nancial report may be obtained by writing to the San Diego City Employees’ Retirement System, 401 West A Street, Suite 400, San Diego, California 92101, or by calling (619) 525-3600.

(b) Funding Policy"e City’s Municipal Code requires member contributions to be actuarially determined to provide a speci!c level of bene!t. Member contribution rates, as a percentage of compensation, vary according to age at entry, bene!t tier level, and certain negotiated contracts that require the District to pay a portion of the employees’ contributions, which is referred to as the “o#set.” "e weighted average member contribution rates for !scal year 2009, expressed as a percentage of compensation, were 9.7% for general members and 12.49% for safety members.

All or part of the member contribution rate is subject to potential o#set. For employees hired prior to October 1, 2006, the o#set rates, expressed as a percentage of compensation, are 8.8% for Safety employees, 8.5% for management employees, and 7.0% for all other employees. For non-safety employees hired on or after October 1, 2006, the o#set rates are 6.5% for management employees and 5.0% for all others. Employees hired after January 1, 2009, other than Safety, are not eligible to participate in a new de!ned bene!t plan until the completion of 5 years of service. However, they are able to contribute to a 457 Deferred Compensation plan, where the District will match up to 4% of salary in a 401(a) plan.

"e District contributes at an actuarially determined rate. "e rates for !scal years 2008, 2009 and 2010, expressed as a percentage of covered payroll, are as follows:

Actuarial Contribution Rates (Actuarial valuation approved by SDCERS)

FY 08 FY 09 FY 10 General Members 18.10% 17.26% 16.95%Safety Member 21.74% 21.31% 19.23%Weighted total 19.08% 18.37% 17.57%

"e contribution requirements of plan members and the District are established by and may be amended by the Board.

(c) Annual Pension CostFor !scal years ended June 30, 2009 and June 30, 2008, the District recorded a total annual pension cost of $10.6 million and $9.9 million, respectively, for the SDCERS pension plan. "ese amounts represent the payment in full of the District’s annual required contribution (ARC) and the o#set. E#ective June 30, 2007, the annual required contribution was determined as part of an actuarial valuation using the Entry Age Normal funding method. "e District previously used the Projected Unit Credit funding method. "e actuarial assumptions include a 7.75% investment rate of return; projected salary increases of 5%; and, the assumption that bene!ts for certain members will increase after retirement. Both the investment rate of return and the projected salary increases include an in$ation factor of 4%. Additionally, the actuarial valuation of assets will be determined using the Expected Value of Assets, which uses techniques that average or “smooth” year-to-year market value returns for the purpose of reducing the volatility of annual contributions.

Schedule of funding progress for SDCERS (Expressed in thousands) - (Unaudited)

Actuarial UAAL as a Actuarial Actuarial value accrued liability Unfunded AAL Covered percentage ofvaluation date of assets (AAL) (UAAL) Funded ratio payroll covered payrollJune 30, 2006 $203,286 $226,154 ($22,868) 89.9% $33,927 67.4%June 30, 2007 $230,585 $246,538 ($15,953) 93.5% $37,160 42.9%June 30, 2008 $245,580 $267,037 ($21,457) 92.0% $38,635 55.5%

Entry Age Normal (EAN) method used.

"e funded ratio for the actuarial valuation date of June 30, 2008 decreased to 92% using the Expected Value of Assets method. "e UAL for FY 2010 is to be amortized over several di#erent periods. "e amortization of the UAL due to assumption changes was over 30 years, the !scal year ending June 30, 2008 experienced loss was amortized over 15 years, and the outstanding balance of the June 30, 2007 UAL was amortized over 13 years. Finally, there is an additional UAL cost component to ensure that there is no negative amortization in any year.

"ree-year Annual Pension Cost (APC) trend information for SDCERS is presented below.

Annual Percentage Pension Cost of APC Net pension (APC) contributed obligation Fiscal year ended: 2007 $12,267,961 100% — 2008 $9,949,888 100% — 2009 $10,629,779 100% —

In addition to pension bene!ts as described in Note 8, the District provides medical, dental, and life insurance coverage, and an employee assistance program, to all eligible current and retired employees. Employees hired prior to October 1, 2006 are eligible for these bene!ts as retirees if they retire from active employment with at least 5 years of service. Employees hired on or after October 1, 2006 are eligible for these bene!ts as retirees if they retire from active employment with at least 10 years of service. "e accompanying !nancial statements re$ect the implementation of GASB No.45 which requires local governments to start accruing the cost of OPEB incurred for employee service rendered to the District.

Funding policy:

As of June 30, 2009, the District continues on a “pay as you go” basis and elected not to pre-fund its OPEB pending the outcome of the federal legislation relating to healthcare.

To determine the Unfunded Actuarial Accrued Liability (UAAL) and the Annual Required Contribution of the employer (ARC), the District retained Sunlin Consulting, LLP, to prepare the actuarial valuation on the basis of GASB 45. "e UAAL as of July 1, 2008 was $67,828,688 and the ARC for !scal year ending June 30, 2009 was $6,681,339 which the District fully recognized as OPEB expense. Of this amount, $2,156,000 was paid toward the retiree premium and $4,525,339 remains as Net OPEB liability as of June 30, 2009. "e required annual contribution and unfunded liability was determined as part of an actuarial valuation that assumes: (a) 4.45 percent investment rate of return, and (b) Annual cost increase ranging from an initial rate of 10 % to an ultimate rate of 5 % from over a ten year period. "e valuation was performed using the projected unit credit and the UAAL is being amortized over 30 years on a level dollar basis.

Notes to Basic Financial StatementsJune 30, 2009

Notes to Basic Financial StatementsJune 30, 2009

48 49

Projections of bene!ts for !nancial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of bene!ts provided at the time of each valuation and the historical pattern of sharing of bene!t costs between employer and plan members to that point. "e actuarial methods and assumptions used include techniques that are designed to reduce the e#ects of short-term volatility in actuarial accrued liabilities and the actuarial assets, consistent with a long-term perspective of the calculations.

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. "e schedule of funding progress below presents information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for the bene!ts.

Development of Annual Required Contribution (ARC) and Annual net OPEB Liability Cost Actuarial Unfunded UAAL as a % Amortization Annual Imputed Valuation Actuarial Covered of Covered Normal of Accrued Required Retiree Health NET OPEB Date Accrued Liab Payroll Payroll Cost Liab Discount Contribution Ins Payment Liability 7/1/08 67,828,688 43,202,534 157% 2,408,833 3,984,792 287,714 6,681,339 2,156,000 4,525,339

"e District o#ers its employees a deferred compensation plan created in accordance with Internal Revenue Code (IRC) Section 457. "e plan, available to District employees who are eligible for bene!ts, permits them to defer a portion of their salary until future years. "e District, at its discretion, can make employer contributions to the Plan.

"e deferred compensation is not available to employees until termination, retirement, total disability, death, or unforeseeable emergency. Employees may borrow from their account but must repay the borrowed amount with interest.

"e Plan is administered by the District and contracted to an unrelated !nancial institution. Under the terms of an IRC Section 457 deferred compensation plan, all deferred compensation and income attributable to the investment of the deferred compensation amounts held by the !nancial institution, until paid or made available to the employees or bene!ciaries, are held in trust for employees.

As such, employee assets held in IRC Section 457 plans are not the property of the District and are not subject to the claims of the District’s general creditors. In accordance with Governmental Accounting Standards Board Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, which the District has implemented e#ective July 1, 1998, employee assets are not re$ected in the District’s basic !nancial statements.

11. Risk Management"e District maintains a comprehensive Risk Management Program, which includes risk transfer, loss prevention, loss control, and claims administration. "e District purchases excess liability, police professional liability, public o%cials liability, workers’ compensation liability, employment practices liability, property insurance, !duciary liability, crime/public employee dishonesty, marine protection and indemnity, and automobile liability, as well as other miscellaneous insurance coverages. "e District’s coverages include a variety of self-insured retentions or deductibles. "e District’s self-insured retentions or deductibles as of June 30, 2009, were as follows:

Self-Insured Retentions/Deductibles (as of June 30, 2009)

Coverage Self-insured retention/deductibleExcess liability $1,000,000 Police professional liability 500,000 Public o%cials liability 500,000 Workers’ compensation 500,000 Employment practices liability 250,000 Property insurance 100,000 Fiduciary liability 25,000 Crime/public employee dishonesty 10,000 Marine protection and indemnity 5,000 Automobile Liability n/a

"e District does not purchase earthquake insurance. A reserve account was established July 1, 2008, and $300,000 is set aside each !scal year for the exclusive purpose of covering losses that may occur as the result of an earthquake. "e District also plans to rely on federal and state resources to pay for earthquake related losses.

Since July 1, 2004, the District has participated in a loss-sensitive workers’ compensation program and is responsible for the !rst $500,000 of any workers’ compensation claim. "e District is required to fund an escrow account totaling $2.0 million, which is held as security in the unlikely event the District fails to meet its required obligations. "e escrow account is not drawn upon for the deductible payments.

In !scal year 2009, the District accrued $927,633 for workers’ compensation claims liabilities, which include anticipated future expenses on open compensation claims based on estimates provided by the District’s workers’ compensation carrier. Changes in the District’s claims liabilities for the year ended June 30, 2009 were as follows:

Claims Liability Claims Incurred at Beginning During the Period, and Claim Claims Liability Fiscal Year of Period Changes in Estimates Payments at End of PeriodFY 2008 $ 87,790 1,835,501 (576,992) 1,346,298 FY 2009 $ 1,346,298 981,915 (1,205,041) 1,123,172

12. Lease RevenuesA substantial portion of the District’s land and water and some of its facilities, including marine terminal facilities and o%ce and commercial space, are leased to tenants. "e Port Act prohibits transfer of land ownership to the lessee and the leases are accounted for as operating leases. "e majority of lease agreements are not cancelable and permit the District to periodically adjust rents. In addition, many of these leases are secured by letters of credit, which totaled approximately $2.3 million at June 30, 2009. In the normal course of operations, it is expected that all signi!cant expiring leases will be renewed or replaced by similar agreements.

"e District leases its land and facilities on both a !xed (i.e., $at) and variable (i.e., percentage) basis. Percentage rentals are received on the basis of percentages of sales and are protected by stipulated minimums. Such percentage rentals totaled approximately $49.7 million in 2009 and $53.9 million in 2008. Both numbers exclude the minimum annual guarantees for the marine terminal facilities. Rentals received under $at rate leases, including marine terminal facilities, totaled approximately $35.8 million in 2009 and $35.2 million in 2008.

Stipulated minimum rents under non-cancelable operating leases having initial or remaining terms of more than one year are as follows:

Year ending June 30: 2010 $ 60,669,648 2011 59,981,427 2012 59,608,744 2013 59,354,060 2014 58,458,279 "ereafter 1,815,993,925 Total $2,114,066,083

Future rents were determined based on minimum rents stipulated under the leases up to the lease expiration date assuming that options to extend, for some Marine Terminal tenants, will be exercised. However, these rents may increase or decrease based on the periodic lease rental reviews, at which time new rents may be established.

"e amounts in the above table are net of the rent credits for One Park Boulevard (OPB) dba Hilton San Diego Bayfront Hotel. "e 66-year lease commenced January 1, 2006; OPB is obligated to pay the District the greater of minimum rents versus percentage rents on a monthly basis. "e District granted OPB rent credits of up to 60% of rent after construction and 100% of rent during 34 months of construction. Rent credits during construction totaled $8.3 million. "e minimum annual rent to the District after the hotel’s second lease year is $4.5 million before rent credits. "e District will retain 40% of the total rent paid until OPB receives rent credits totaling $46.5 million or when the rent credit expires on December 31, 2016. "e District will receive an increase in percentage rental rates if hotel revenues exceed the projected lease revenues. OPB also leased 894 parking spaces in the adjacent District-owned Convention Center Hotel Public Parking facility.

13. Lease Commitments(a) Administration Building Parking Lot

"e District leases the northeast portion of the property the District uses for its administration building parking lot from CalTrans, the property owner since 1984. "e most recent lease expired on August 31, 2006. Until a new agreement is reached, the District is following the terms of the prior lease and making monthly payments of $1,347 which totals $16,164 annually.

Notes to Basic Financial StatementsJune 30, 2009

Notes to Basic Financial StatementsJune 30, 2009

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(b) San Diego County Regional Airport Authority Employee Parking and Visitor Lot"e SDCRAA is sub-leasing a portion of the former General Dynamics (GD) leasehold to the District for use as an employee and visitor parking lot. "e lease is for 66 years commencing January 1, 2003. "e rent is based on the same square foot rental rate determined for the entire former GD property leased from the District to the SDCRAA. Rental increases are determined by appraisal, review and negotiation. "e District and SDCRAA agreed that the monthly rent would be $12,074 plus a $381 cost recovery for electricity for a total monthly rent of $12,455 or $149,460 annually.

(c) Hybrid VehiclesIn !scal year 2008, the District entered into a lease agreement with Enterprise Fleet Management to lease 10 hybrid vehicles for use by District sta#. "e lease term is for !ve years and the annual amount to be paid each year is $59,233 for a total of $296,165 over !ve years.

Future rent payments under the above operating lease agreements as of June 30, 2009 are as follows:

Year Ending June 30: 2010 $ 224,857 2011 224,857 2012 224,857 2013 165,624 2014 165,624 "ereafter 678,798 Total $ 1,684,617

(d) Phone and Network Equipment and Integration ServicesIn !scal year 2009, the District entered into the Master Tax-Exempt Lease/Purchase Agreement, with Key Government Finance, Inc. to lease phone and network equipment and integration services. "e network equipment installation is expected to be completed and placed in service by March 2010. In accordance with Statement of Financial Accounting Standard No. 13 (FAS 13), this lease met the criteria for a capital lease. "e lease term is for !ve years and the annual amount to be paid each year is $592,767.50 for a total of $2,963,837.50, including principal and interest.

14. Commitments and Contingencies(a) Commitments

As of June 30, 2009, the District had signi!cant commitments for capital expenditures and other matters as described below:i. Capital Development Program (CDP): Beginning in !scal year 1992, the Board of Port Commissioners approved a

!ve year CDP for the development of certain capital outlay projects located either on the San Diego Bay and Imperial Beach tidelands or on the uplands adjacent to these tidelands. Each project in the plan is reviewed and authorized by the Board of Port Commissioners. "e CDP is updated as conditions and circumstances warrant but no less than annually. "e Fiscal Year 2009-2013 CDP was amended and approved by the Board of Port Commissioners on July 7, 2009. As of June 30, 2009, the remaining cost to complete all approved CDP projects was approximately $100.7 million.

In conjunction with the funding requirements for the CDP and for the costs of certain other projects, funds have been designated for the unpaid contractual portion of capital projects that are currently in progress, as well as for the contractual costs of upgrading certain major equipment and facilities. "ese commitments totaled $22.0 million on June 30, 2009 and are classi!ed in the accompanying balance sheet as Cash and Investments Designated for Speci!c Capital Projects and Commitments.

ii. Fire, Police, Emergency Medical and Lifeguard Services: "e District enters into contracts with the !ve member cities for annual !re, police, emergency medical, and lifeguard services that are provided by the cities for the bene!t of the District. "e combined cost for these services was $5.4 million for !scal year 2009. In addition, the District has a contract with the City of Imperial Beach for Tidelands Maintenance Services at a cost of $0.8 million for !scal year 2009.

(b) ContingenciesAs of June 30, 2009, the District was subject to contingencies arising from legal and environmental matters as described below:i. Environmental Matters: "e District owns, in public trust, tidelands and submerged lands adjacent to San Diego

Bay. Most of that land is leased to operators of facilities located on the properties. "e operations of many of those facilities have generated waste discharges either on the land adjacent to San Diego Bay or into the waters of the bay, which threaten the bay environment. Administrative agencies such as the San Diego County Department of Health Services and the California Regional Water Quality Control Board are increasing enforcement e#orts directed at these operations to regulate ongoing activities and to clean up alleged environmental damage from past facility

operations. "ese enforcement e#orts frequently include discussions with the District and consideration of adding the District to the permits, as a responsible party, regulating the operations and cleanup obligations.

In addition, the District’s leases and operating agreements with these tenants typically include provisions requiring the tenant/operators to indemnify the District for any damage to property or losses to the District as a result of the tenant’s operations. Also, the leases and operating agreements typically require the District to be named as an additional insured under certain insurance policies of the tenant/operators. According to the District’s legal counsel, when these types of claims are asserted against the District, the District not only vigorously opposes them but also vigorously seeks contribution and/or indemnity from all tenant/operators or other responsible parties involved, including the tenant/operator’s and any applicable insurers. "e District’s legal counsel can neither predict the net exposure to the District with respect to these matters nor the probability or remoteness of any outcome. However, the District believes that the recoveries discussed above will be su%cient to reduce the District’s !nancial responsibility for any pollution remediation known as of the date of the !nancial statements to amounts not considered to be material to the !nancial statements of the District. "erefore, no liability has been recorded in the District’s basic !nancial statements as of and for the year ended June 30, 2009, for any of these claims.

(a) Contamination at NASSCO and Southwest Marine leasehold vicinity: On February 19, 2004, the California Regional Water Quality Control Board, San Diego Region (“RWQCB”), issued two Investigation Orders (“Orders”) both naming the District, among others, as a party required to submit a technical report showing cause why it should not be named as a discharger in a Cleanup and Abatement Order (“CAO”) for the cleanup of contaminated sediments that allegedly exist in the vicinity of the NASSCO and Southwest Marine leaseholds (the “Site”). "e Orders state that the District is named in the Orders because the District is the “owner” of the lands occupied by facilities, including NASSCO and Southwest Marine, which allegedly discharged or are suspected of discharging waste to San Diego Bay. "e Orders further allege that the District “controls decisions regarding the sites and types of facilities, which occupy lands adjacent to San Diego Bay through leases for the use of these lands” and that the District has “the ability under its lease agreement with facility operators to impose controls, which could prevent or reduce waste discharges to San Diego Bay.” For these reasons, the RWQCB required the District to show cause why it should not be named in the CAOs that will likely be issued for the cleanup of the contaminated sediments. "e District’s report to the RWQCB was !led with the RWQCB on July 15, 2004. A tentative CAO was issued in 2005. In April 2008, a revised tentative CAO and Technical Report to support the CAO were issued by the RWQCB. According to the tentative CAO, the Site, which exists on state tidelands over which the District is the statutorily-mandated trustee, has been contaminated with a variety of pollutants over many years by shipbuilding operations, a power plant, City storm drains and Navy shipyard operations. "e cleanup of the sediments was estimated by the RWQCB to exceed $120 million, although the named dischargers dispute the RWQCB’s !ndings as to the nature, extent, and sources of the contamination as well as the scope of the appropriate remedy. "e District was not named as a discharger in the tentative CAO. However, the District was named as a “secondarily liable” party in the event the dischargers fail to comply with the !nally-adopted CAO. In mid-October 2009, the City of San Diego !led a lawsuit in federal court against the named dischargers and the District seeking contribution for cleanup costs.

"e District denies liability and intends to vigorously contest any alleged liability or claims. Because the !nal CAO has not yet been issued and cleanup levels have not been established for the remediation of these sediments and based on presently available facts, the District is unable at this time to estimate the likelihood of an unfavorable outcome or the range of potential costs.

(b) Former Campbell Shipyard: "is matter involves industrial contamination from shipyard activities, which impacted the land, groundwater and sediments at the site. In 1995, the RWQCB issued a Cleanup and Abatement Order (CAO 95-21) that named Campbell Industries, a former District tenant, and its parent, Marine Construction and Design Company (MARCO). "e cleanup has been completed and the District is now implementing the long-term Monitoring and Reporting Program at an estimated cost of approximately $495,000. "is amount is based on bids received from outside consultants to perform the monitoring obligations, and includes both !scal years 2009/2010 and 2010/2011. Costs for future !scal years are not yet estimated.

(c) Shelter Island Yacht Basin (SIYB): In 1996, the Shelter Island Yacht Basin (SIYB) portion of San Diego Bay was placed on the Clean Water Act section 303(d) list of impaired waters due to elevated levels of dissolved copper in the water column. A Total Maximum Daily Load (TMDL) Study was conducted for the site and found that the majority of the copper was attributed to boat hull paint. "e TMDL requires a 76% overall reduction of residual copper loading to SIYB over a 17-year staged compliance schedule period. "e TMDL identi!ed the District, the SIYB marina owners/operators, persons owning boats moored in SIYB, and SIYB underwater hull cleaners as accountable for the discharges of copper from boat hull antifouling paints to the waters of the SIYB.

"e District has been actively involved in the search for alternative hull coatings, since this level of reduction can most likely be achieved only by using alternative paints. To this end, the USEPA has funded the District to conduct

Notes to Basic Financial StatementsJune 30, 2009

Notes to Basic Financial StatementsJune 30, 2009

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a project to identify these alternative paints. In 2008, the District funded a second study, through the San Diego State University, to identify other possible sources of alternative paints. "e District also funded a third project in 2009 to test alternative paints not evaluated in the USEPA funded project. At the same time, the District and the tenants of the SIYB have been cooperatively developing the SIYB Dissolved Copper TMDL Implementation Plan approach to obtain TMDL compliance and describing the Best Management Practices that may be implemented in order to achieve a reduction. At this time, the District is unable to estimate the likely outcome of these actions or the range of potential costs.

(d) Lockheed Tow Basin: Tenant operations on this site in the 1950s and 1960s included the testing of hull designs and the hydrodynamic testing of aerospace prototypes for underwater performance in a large concrete pool, known as the “tow basin.” "e tow basin pool and the former building on the site that housed the tow basin were coated with paint that contained Polycholorinated Biphenyls (PCBs). Regulatory oversight agencies believe that over the decades of the tow basin’s existence, PCBs from the paint washed into the storm drains, which drained into the San Diego Bay, causing potential sediment contamination. "is potential contamination requires investigation, assessment, and remedial action. "e District !led a cost recovery lawsuit on May 11, 2005, against the former operators at the site, General Dynamics Corporation and Lockheed Martin Corporation, for the investigation and ultimate remediation at the site. "e District may bear liability only on the basis of its landowner status. An interim litigation cost-sharing agreement has been executed among the District, General Dynamics and Lockheed Martin to each share one-third of the current environmental investigation costs. "e District’s insurers are currently responsible for the District’s entire portion of these costs and any other future investigation costs for which the District may be responsible. Site investigation and analysis are continuing. "e current cost estimate of approximately $1,200,000 includes investigation, assessment, removal of contaminated sediment and possible post-remedial monitoring. "ese costs should be directly borne by the District’s insurance carriers. "erefore, no liability has been recorded in the District’s basic !nancial statements as of and for the year ended June 30, 2009.

(e) L Ditch Project – Chula Vista: "is site is an 8-acre regulatory wetland in the midst of a proposed residential

commercial development area. Regulatory oversight agencies have required the removal of chromium and other metal contamination in the unlined, tidally in$uenced drainage ditch known as the “L Ditch.” "e contamination drained into the ditch from the adjacent District leasehold, which was relinquished to the District by a former tenant in 2001. "e ditch is considered a wetland area which will be destroyed as a part of the remedial action. "e wetland loss will be mitigated elsewhere as a part of the Chula Vista Bayfront development. "e District has entered into an agreement with the former tenant of the adjacent property which drains into the ditch to pay for half of the cost to remediate the ditch, and the entire cost of the wetlands mitigation and new drainage requirements for the upgradient District property. "e estimated cost for !scal year 2009 is $4,072,110.81. Costs for future years are not yet estimated. In accordance with GASB 49, the District capitalizes the costs as these costs are incurred.

(f ) Teledyne Ryan Industries (TDY) Project: On November 18, 2003, the SDCRAA !led suit in San Diego Superior Court against the District. "e lawsuit challenged the adequacy of the District’s environmental review under the California Environmental Quality Act (CEQA) for the proposed public parking project on the former Teledyne Ryan (TDY Industries) property. "e litigation grew to encompass other issues around the separation of the San Diego International Airport (SDIA) from the District. A settlement agreement, which became e#ective June 1, 2004, resolved all of the issues raised in the litigation. "e following major terms of the settlement agreement are still ongoing:

per year commencing January 1, 2005 and ending December 31, 2068.

to recover clean-up costs and environmental damages from TDY Industries. Pursuant to the settlement, TDY Industries must pay all costs of environmental clean-up and remediation of the site.

and entry of judgment on March 29, 2004 in Superior Court in the amount of $21.3 million (verdict). Of this amount, $9.8 million represents an award of damages to the District for demolition of the existing improvements and abatement costs on the TDY Industries site. "e District agreed to contribute this sum, plus accrued interest, for the demolition and abatement of the improvements. "e accrued interest on $9.8 million from the date of the special verdict through January 25, 2006, which was the date the funds were received, was $1.8 million. "is accrued interest amount was included in the verdict and was received from TDY Industries. Since then, the District has continued to calculate and accrue interest earnings on the funds. Interest earnings are calculated using the District’s yield to maturity on its investment portfolio and are compounded monthly. "e additional

interest earnings from January 25, 2006 to June 30, 2009 totaled $1.7 million for a total cumulative balance of $13.3 million. Should this amount be insu%cient for demolition and abatement, the District and SDCRAA agree to share the net remaining demolition and abatement costs equally. As of June 30, 2009, the Port has restricted $23.0 million in cash assets for the TDY site demolition, which exceeds the amount of the initial award plus accrued interest. In accordance with GASB 49, the District capitalizes the demolition and abatement costs as these costs are incurred.

ii. "e District has been named as a defendant in a lawsuit !led by property owner SLPR, LLC in February 2006. "e

complaint alleges that dredging in the San Diego Bay performed by the District and the Army Corps of Engineers compromised the integrity of the “rip-rap” barrier and pool wall located on the plainti# ’s Coronado bay front property. Two neighboring property owners joined the lawsuit in late 2007, making similar claims. Each property owner is claiming damages of $60,000 to $1.0 million, depending on costs to repair alleged damage to their property. "e District denies liability and intends to vigorously contest any liability or claims. A trial date has been set in June 2010. Based on presently available facts at this stage in the litigation, the District is unable at this time to estimate the likelihood of an unfavorable outcome or the range of potential loss.

iii. On July 19, 2008, the Harbor Police Department was involved in a shooting incident that resulted in the death of a swimmer during a confrontation with o%cers. A lawsuit was !led by the decedent’s parents demanding $20 million dollars and named as defendants the District and the Harbor Police o%cer who shot the decedent. Several months ago, the plainti# parents !led a motion to add the other Harbor Police o%cer involved in the shooting as a defendant as well as additional claims against all defendants. "ere has been no ruling on this motion. "e parties have commenced discovery which includes document production, depositions, and the designation of expert witnesses. At this time it remains di%cult to ascertain whether a resolution of this action will have a material e#ect on the basic !nancial position of the District.

iv. On July 12, 2005, Traylor Brothers, Inc. was awarded a contract to construct an engineered cap for the purpose of complying with Regional Water Quality Control Board Clean up and Abatement Order No. 95-21 (Order) as mentioned in Note 15 i (b) above. "e Order requires the Port to mitigate speci!c constituents of concern in the sediments of the 9.2-acre former Campbell waterside leasehold. "e scope of work for the project includes demolition and removal of debris and shipways, repair and reconstruction of a portion of an existing seawall, dredging near the Tenth Avenue Marine Terminal to maintain navigation water depth, construction of a 7.7 acre engineered cap, construction of 1.5 acres of eelgrass habitat cap, construction of a rock berm around the habitat cap, construction of rock revetment behind the seawall for seismic upgrade of the seawall, and retro!tting of the existing mole pier. Traylor Brothers’ bid of approximately $16.0 million, which also included some dredging at the National City Marine Terminal, was the low bid for this public works project. Approved change orders to date total approximately $2.0 million bringing the revised contract amount to approximately $18.0 million.

Traylor Brothers performed the dredging and capping operation and completed all contract work as of November 30, 2007. However, on or about June 10, 2008, Traylor Brothers !led and served its lawsuit against the District for additional work performed on the project. Traylor Brothers claims that engineering speci!cations for the design and building of the remediation cap were vague and incorrect. "e !rm contends that bid documents were also not clear and that the work could not be performed within the engineered speci!cations presented. "e District has !led initial responses. In the meantime, a series of mediation sessions were conducted in an e#ort to resolve the matter without extensive litigation. "e District intends to vigorously defend this matter. Traylor Brothers’ total claim to date exceeds $13 Million, plus possible accrued interest. "e District may have some exposure, but the amount is unpredictable since expert analysis is preliminary. "e District’s defense has recently been accepted by an insurance carrier on an additional insured endorsement. "e insurer (USF&G) has !led an action for declaratory relief contending that it has no obligations to defend and indemnify the District in this matter. "e District has !led a cross complaint against the insurer for bad faith and the matter is currently scheduled for conferences in the United States District Court.

v. "e District has certi!ed claims against it and is named as a defendant in certain other legal actions arising from transactions conducted in the ordinary course of business. "e District’s legal counsel has indicated that it is not currently possible to estimate the amount or range of potential loss to the District related to these cases. However, the District does not believe that the resolution of these actions will have a material e#ect on the basic !nancial position of the District. "erefore, no liability has been recorded in the District’s basic !nancial statements as of and for the year ended June 30, 2009 for these claims.

Notes to Basic Financial StatementsJune 30, 2009

Notes to Basic Financial StatementsJune 30, 2009

BOARD OF PORT COMMISSIONERS 2009

Mike NajeraStephen P. Cushman

Robert “Dukie” Valderrama

Scott Peters Lee Burdick Robert “Rocky” Spane

Michael B. Bixler

Commissioners

Stephen P. Cushman ChairSan Diego

Robert “Dukie” ValderramaVice ChairNational City

Scott PetersSecretarySan Diego

Michael B. BixlerImperial Beach

Lee BurdickSan Diego

Mike NajeraChula Vista

Robert “Rocky” SpaneCoronado

Principal Administrators

Charles D. WursterPresident/CEO

Duane E. BennettPort Attorney

Ellen Corey BornExecutive Vice President

Wayne DarbeauVice President, Administration

Dirk MathiasenVice President, Operations

Jeffrey McEnteeChief Financial Officer/Treasurer

Brandy ChristianDirector, Strategic Management Services

Randa ConiglioAssistant Vice President, Operations

Pedro CruzDirector, General Services

Leonard FaborDirector, Maritime Operations

Paul FanferaAssistant Vice President, Business & Technology

John HelmerDirector, Land Use Planning

Steve KirkpatrickChief Engineer

Mary Ann LinerDistrict Clerk

Irene McCormackAssistant Vice President,Government Relations & Communications

E. David MerkDirector, Environmental Services

James R. PophamAssistant Vice President,Industry & Trade Relations

Karen G. PorteousAssistant Vice President,Administrative Services

Ronald PowellDirector, Communications & Community Services

Jeanette SalesDirector, Financial Services

Kirk SanfilippoChief of Harbor Police

Robert SchuckDirector, Human Resources

Adolfo SeguraDirector, Information Technology

Vilma Sevilla,Director, Audit, Risk Management & Safety

Brian StupDirector, Engineering/Construction

Dave ThompsonDirector, Procurement Services

Rita A. VandergawDirector, Marketing

Karen WeymannDirector, Real Estate

Yvonne WiseDirector, Public Art

Member Cities

Cheryl CoxMayor of Chula Vista

Casey TanakaMayor of Coronado

Jim JanneyMayor of Imperial Beach

Ron MorrisonMayor of National City

Jerry SandersMayor of San Diego

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