SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 000-00565
(Exact name of registrant as specified in its charter)
822 Bishop Street
Post Office Box 3440, Honolulu, Hawaii 96801
(Address of principal executive offices and zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Number of shares of Common Stock outstanding at February 11, 2010:
Aggregate market value of Common Stock held by non-affiliates at June 30, 2009:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Documents Incorporated By Reference
Portions of Registrant’s Proxy Statement dated March 11, 2010 (Part III of Form 10-K)
TABLE OF CONTENTS
ALEXANDER & BALDWIN, INC.
Annual Report for the Fiscal Year
Ended December 31, 2009
ITEMS 1 & 2. BUSINESS AND PROPERTIES
Alexander & Baldwin, Inc. (“A&B”) is a multi-industry corporation with its primary operations centered in Hawaii. It was founded in 1870 and incorporated in 1900. Ocean transportation operations, related shoreside operations in Hawaii, and intermodal, truck brokerage and logistics services are conducted by a wholly-owned subsidiary, Matson Navigation Company, Inc. (“Matson”), and two Matson subsidiaries. Property development and agribusiness operations are conducted by A&B and certain other subsidiaries of A&B.
The business industries of A&B are generally as follows:
For information about the revenue, operating profits and identifiable assets of A&B’s industry segments for the three years ended December 31, 2009, see Note 13 (“Industry Segments”) to A&B’s financial statements in Item 8 of Part II below.
DESCRIPTION OF BUSINESS AND PROPERTIES
(1) Freight Services
Matson’s Hawaii Service offers containership freight services between the ports of Long Beach, Oakland, Seattle, and the major ports in Hawaii on the islands of Oahu, Kauai, Maui and Hawaii. Roll-on/roll-off service is provided between California and the major ports in Hawaii. Matson is the principal carrier of ocean cargo between the U.S. Pacific Coast and Hawaii. Principal westbound cargoes carried by Matson to Hawaii include dry containers of mixed commodities, refrigerated commodities, building materials, packaged foods, household goods and automobiles. Principal eastbound cargoes carried by Matson from Hawaii include automobiles, household goods, refrigerated containers of fresh pineapple, livestock and dry containers of mixed commodities. The majority of Matson’s Hawaii Service revenue is derived from the westbound carriage of containerized freight and automobiles.
Matson’s Guam Service provides weekly containership freight services between the U.S. Pacific Coast and Guam. Additional freight destined to and from the Commonwealth of the Marianas Islands, the Republic of Palau and the island of Yap in the Federated States of Micronesia is transferred at Guam to and from connecting carriers for delivery to and from those locations.
Matson’s Micronesia Service offers container and conventional freight service between the U.S. Pacific Coast and the islands of Kwajalein, Ebeye and Majuro in the Republic of the Marshall Islands and the islands of Pohnpei, Chuuk and Kosrae in the Federated States of Micronesia. Cargo is transferred at Guam to a Matson-operated ship that provides consistent, reliable bi-weekly service to and from those islands. Matson also carries cargo originating in Asia to these islands by receiving cargo transferred from other carriers in Guam.
Matson’s China Service is part of an integrated Hawaii/Guam/China service. This service employs five Matson containerships in a weekly service that carries cargo from the U.S. Pacific Coast to Honolulu, then to Guam. The vessels continue to China, where they are loaded with cargo to be discharged in Long Beach. These ships also carry cargo destined to and originating from Guam, the Commonwealth of Northern Marianas, the Republic of Palau and the Republic of the Marshall Islands.
See “Rate Regulation” below for a discussion of Matson’s freight rates.
Matson’s fleet consists of 10 containerships, excluding one containership time-chartered from a third party that serves Micronesia; three combination container/roll-on/roll-off ships; one roll-on/roll-off barge and two container barges equipped with cranes that serve the neighbor islands of Hawaii; and one container barge equipped with cranes that is available for charter. The 17 Matson-owned vessels in the fleet represent an investment of approximately $1.2 billion expended over the past 30 years. The majority of vessels in the Matson fleet have been acquired with the assistance of withdrawals from a Capital Construction Fund (“CCF”) established under Section 607 of the Merchant Marine Act, 1936, as amended.
Vessels owned by Matson are described on page 4.
As a complement to its fleet, Matson owns approximately 23,500 containers, 14,300 container chassis and generators, 900 auto-frames and miscellaneous other equipment. Capital expenditures incurred by Matson in 2009 for vessels, equipment and systems totaled approximately $10 million.
Matson Terminals, Inc. (“Matson Terminals”), a wholly-owned subsidiary of Matson, provides container stevedoring, container equipment maintenance and other terminal services for Matson and other ocean carriers at its 105-acre marine terminal in Honolulu. Matson Terminals owns and operates seven cranes at the terminal, which handled approximately 335,400 lifts in 2009 (compared with 373,900 lifts in 2008). The number of lifts decreased primarily due to the further softening of the construction and tourism industries in 2009. The terminal can accommodate three vessels at one time. Matson Terminals’ lease with the State of Hawaii runs through September 2016. Matson Terminals also provides container stevedoring and other terminal services to Matson and for other vessels operators on the islands of Hawaii, Maui and Kauai. Capital expenditures incurred by Matson Terminals in 2009 for terminals and equipment totaled approximately $2 million.
SSA Terminals, LLC (“SSAT”), a joint venture of Matson Ventures, Inc., a wholly-owned subsidiary of Matson, and SSA Ventures, Inc. (“SSA”), provides terminal and stevedoring services at U.S. Pacific Coast terminal facilities to Matson and numerous international carriers, which include Mediterranean Shipping Company (“MSC”), Hapag Lloyd, OOCL, NYK Line and Maersk. SSAT operates six terminals: two in Seattle, one of which is operated by SSA Terminals (Seattle), LLC, a joint venture with China Shipping Terminals (USA) LLC (“China Shipping”) where ownership is split SSAT 66.7% and China Shipping 33.3%, two in Oakland, one of which is operated by SSA Terminals (Oakland), LLC, a joint venture with NYK Terminals (Oakland), Inc. (“NYK”) where ownership is split SSAT 80% and NYK 20%, and two in Long Beach, one of which is operated by SSA Terminals (Long Beach), LLC, a joint venture with ownership divided equally between SSAT and Terminal Investment Limited, an affiliate of MSC.
(4) Logistics and Other Services
Matson Integrated Logistics, Inc. (“Matson Integrated Logistics”), a wholly-owned subsidiary of Matson, is a transportation intermediary that provides rail, highway, air and other third-party logistics services for North American customers and international ocean carrier customers, including Matson. Through volume purchases of rail, motor carrier, air and ocean transportation services, augmented by such services as shipment tracking and tracing and single-vendor invoicing, Matson Integrated Logistics is able to reduce transportation costs for its customers. Matson Integrated Logistics is headquartered in Concord, California, operates six regional operating centers, has sales offices in over 40 cities nationwide, and operates through a network of agents throughout the U.S. Mainland.
Matson Global Distribution Services, Inc. (“Matson Global”) is a wholly-owned subsidiary of Matson Integrated Logistics that principally provides warehousing and distribution services. With the acquisition of a regional warehouse company in Northern California in 2008, Matson Global’s service menu was expanded to include operating a Foreign Trade Zone. Through Matson Global, Matson Integrated Logistics provides customers with a full suite of domestic and international transportation services.
Matson’s Hawaii Service and Guam Service have one major containership competitor, Horizon Lines, Inc., that serves Long Beach, Oakland, Tacoma, Honolulu and Guam. The Hawaii Service also has one additional liner competitor, Pasha Hawaii Transport Lines, LLC, that operates a pure car carrier ship, specializing in the carriage of automobiles and large pieces of rolling stock such as trucks and buses.
Other competitors in the Hawaii Service include two common carrier barge services, unregulated proprietary and contract carriers of bulk cargoes, and air cargo service providers. Although air freight competition is intense for time-sensitive and perishable cargoes, inroads by such competition in terms of cargo volume are limited by the amount of cargo space available in passenger aircraft and by generally higher air freight rates. Over the years, additional barge competitors periodically have entered and left the U.S.-Hawaii trades, mostly from the Pacific Northwest.
Matson vessels are operated on schedules that make available to shippers and consignees regular day-of-the-week sailings from the U.S. Pacific Coast and day-of-the-week arrivals in Hawaii. Matson generally offers an average of three to four sailings per week, though this amount may be adjusted according to seasonal demand and market conditions. Matson provides over 160 sailings per year, which is greater than all of its domestic ocean competitors combined. One westbound sailing each week continues on to Guam and China, so the number of eastbound sailings from Hawaii to the U.S. Mainland averages two to three per week with the potential for additional sailings. This service is attractive to customers because more frequent arrivals permit customers to reduce inventory costs. Matson also competes by offering a more comprehensive service to customers, supported by the scope of its equipment, its efficiency and experience in handling containerized cargo, and competitive pricing.
The carriage of cargo between the U.S. Pacific Coast and Hawaii on foreign-built or foreign-documented vessels is prohibited by Section 27 of the Merchant Marine Act, 1920, commonly referred to as the Jones Act. However, foreign-flag vessels carrying cargo to Hawaii from non-U.S. locations provide indirect competition for Matson’s Hawaii Service. Asia, Australia, New Zealand, Mexico and South Pacific islands have direct foreign-flag services to Hawaii.
MATSON NAVIGATION COMPANY, INC.
Matson is a member of Maritime Cabotage Task Force, which supports the retention of the Jones Act and other cabotage laws that regulate the transport of goods between U.S. ports. Repeal of the Jones Act would allow foreign-flag vessel operators, which do not have to abide by U.S. laws and regulations, to sail between U.S. ports in direct competition with Matson and other U.S. operators, which must comply with such laws and regulations. The Task Force seeks to inform elected officials and the public about the economic, national security, commercial, safety and environmental benefits of the Jones Act and similar cabotage laws.
Matson has operated its China Long Beach Express Service since February 2006. Matson provides weekly containership service between the ports of Xiamen, Ningbo and Shanghai and the port of Long Beach. Enroute to China, the ships stop at Honolulu, then Guam, carrying cargo destined to those areas. From Honolulu, connecting service is provided to other ports in Hawaii. From Guam, connecting service is provided to other Pacific islands. The ships then continue from Guam to the ports of Xiamen, added in 2009, Ningbo and Shanghai, and return directly to Long Beach. Major competitors in the China Service include well-known international carriers such as Maersk, COSCO, Evergreen, Hanjin, APL, China Shipping, Hyundai and NYK Line. Matson competes by offering the fastest and most reliable freight availability from Shanghai to Long Beach, providing fixed Sunday arrivals in Long Beach and next-day cargo availability, offering a dedicated Long Beach terminal providing fast truck turn times, an off-dock container yard and one-stop intermodal connections, using its newest and most fuel efficient U.S. flag ships and providing state-of-the-art technology and world-class customer service. Matson operates offices in Xiamen, Ningbo and Shanghai, and has contracted with terminal operators in those locations.
Matson Integrated Logistics competes with thousands of local, regional, national and international companies that provide transportation and third-party logistics services. The industry is highly fragmented and, therefore, competition varies by geography and areas of service. At a national level, Matson Integrated Logistics competes most directly with C.H. Robinson Worldwide and the Hub Group. Competition is differentiated by the depth, scale and scope of customer relationships; vendor relationships and rates; network capacity; and real-time visibility into the movement of customers’ goods and other technology solutions. Additionally, while Matson Integrated Logistics primarily provides surface transportation brokerage, it also competes to a lesser degree with other forms of transportation for the movement of cargo, including air services.
(6) Labor Relations
The absence of strikes and the availability of labor through hiring halls are important to the maintenance of profitable operations by Matson. In the last 38 years, only once-in 2002, when International Longshore and Warehouse Union (“ILWU”) workers were locked out for ten days on the U.S. Pacific Coast-has Matson’s operations been disrupted significantly by labor disputes. See “Employees and Labor Relations” below for a description of labor agreements to which Matson and Matson Terminals are parties and information about certain unfunded liabilities for multiemployer pension plans to which Matson and Matson Terminals contribute.
(7) Rate Regulation
Matson is subject to the jurisdiction of the Surface Transportation Board with respect to its domestic rates. A rate in the noncontiguous domestic trade is presumed reasonable and will not be subject to investigation if the aggregate of increases and decreases is not more than 7.5 percent above, or more than 10 percent below, the rate in effect one year before the effective date of the proposed rate, subject to increase or decrease by the percentage change in the U.S. Producer Price Index (“zone of reasonableness”). Matson raised its rates in its Hawaii service, effective January 4, 2009, by $120 per westbound container and $60 per eastbound container and its terminal handling charges by $175 per westbound container and $90 per eastbound container. Matson raised its rates in its Guam service, effective February 1, 2009, by $120 per westbound and eastbound container and its terminal handling charges by $175 per westbound and eastbound container. Increases in bunker fuel prices and other energy-related costs caused Matson to raise its fuel-related surcharge from 15 percent to 16.5 percent in its Hawaii service and from 16.5 percent to 18 percent in its Guam service, effective May 24, 2009; to 20 percent in its Hawaii service and to 21.5 percent in its Guam service, effective June 21, 2009; to 28 percent in its Hawaii service and to 29.5 percent in its Guam service, effective July 5, 2009. As a result of subsequent declines in bunker fuel prices, Matson decreased its fuel-related surcharge to 24 percent in its Hawaii service and to 25.5 percent in its Guam service, effective October 4, 2009. Matson raised its rates in its Hawaii service, effective January 3, 2010, by $120 per westbound container and $60 per eastbound container and its terminal handling charges by $125 per westbound container and $60 per eastbound container. Matson raised its rates in its Guam service, effective January 31, 2010, by $120 per westbound and eastbound container and its West Coast terminal handling charge by $125 for westbound and eastbound containers. As a result of increasing bunker fuel prices and other fuel-related costs since its last fuel surcharge adjustment, Matson increased its fuel-related surcharge to 27.5 percent in its Hawaii service and to 29.0 percent in its Guam service, effective February 7, 2010. Matson’s China Service is subject to the jurisdiction of the Federal Maritime Commission (“FMC”). No such zone of reasonableness applies under FMC regulation.
B. Real Estate
As of December 31, 2009, A&B and its subsidiaries, including A&B Properties, Inc., owned approximately 88,925 acres, consisting of approximately 88,475 acres in Hawaii and approximately 450 acres on the U.S. Mainland, as follows:
As described more fully in the table below, the bulk of this acreage currently is used for agricultural, pasture, watershed and conservation purposes. A portion of these lands is used or planned for development or other urban uses. An additional 2,915 acres on Maui, Kauai and Oahu are leased from third parties, and are not included in the tables. The tables do not include acreage under joint venture development.
A&B and its subsidiaries are actively involved in the entire spectrum of real estate development and ownership, including planning, zoning, financing, constructing, purchasing, managing and leasing, selling and exchanging, and investing in real property.
(2) Planning and Zoning
The entitlement process for development of property in Hawaii is complex, time-consuming and costly, involving numerous State and County regulatory approvals. For example, conversion of an agriculturally-zoned parcel to residential zoning usually requires the following approvals:
The entitlement process is complicated by the conditions, restrictions and exactions that are placed on these approvals, including, among others, the construction of infrastructure improvements, payment of impact fees, restrictions on the permitted uses of the land, provision of affordable housing and mandatory fee sale of portions of the project.
A&B actively works with regulatory agencies, commissions and legislative bodies at various levels of government to obtain zoning reclassification of land to its highest and best use. A&B designates a parcel as “fully entitled” or “fully zoned” when all of the above-mentioned land use approvals described above have been obtained.
(3) Residential Projects
A&B is pursuing a number of residential projects in Hawaii, including:
(a) Wailea. In October 2003, A&B acquired 270 acres of fully-zoned, undeveloped residential and commercial land at the Wailea Resort on Maui, planned for up to 1,200 homes, for $67.1 million. A&B was the original developer of the Wailea Resort, beginning in the 1970s and continuing until A&B sold the Resort to the Shinwa Golf Group in 1989.
From 2004 to 2007, A&B sold 29 single-family homesites at Wailea’s Golf Vistas subdivision and four bulk parcels: MF-4 (10.5 acres), MF-15 (9.4 acres), MF-5 (8.4 acres) and MF-9 (30.2 acres), a three-acre business parcel within the 10.4-acre MF-11 parcel and a 4.6-acre portion of the 15.6-acre B I & II parcel. The joint venture development of Kai Malu on the 25-acre MF-8 parcel is described below. Construction was completed on 12 single-family lots at MF-11 (7.4 net acres) and nine half-acre estate lots at MF-19 (6.7 acres) in 2008 and 2009, respectively. The economic downturn has adversely affected Maui’s resort market in a significant manner, as reflected in no closings at A&B’s projects in 2009. However, in anticipation of future market recovery, A&B continues its planning, design and permitting activities, including the 13-acre MF-7 parcel, planned for 75 multi-family units; the 13-acre SF-8 parcel, to meet affordable housing requirements for various Wailea projects; and the 13.7-acre MF-10 parcel, planned for a 65,000-square-foot commercial center, nine single-family lots fronting the Blue Course, and a 36-unit condominium project.
(b) Kai Malu at Wailea. In April 2004, A&B entered into a joint venture with Armstrong Builders, Ltd. for development of the 25-acre MF-8 parcel at Wailea into 150 duplex units, averaging 1,800 square feet per unit. Sales commenced in 2006, with 135 units closed as of December 31, 2008 and no closings in 2009. One unit closed in February 2010 and six of the remaining 14 units have been leased.
(c) Haliimaile Subdivision. A&B’s application to rezone 63 acres and amend the community plan for the development of a 150- to 200-lot residential subdivision in Haliimaile (Upcountry, Maui) was approved by the Maui County Council in September 2005. In 2006, onsite infrastructure design work was submitted to County agencies, but design approval has been deferred until an acceptable water source can be confirmed. A&B continues to work with the County and is also evaluating the feasibility of a private water system to serve this project and other lands in the vicinity.
(d) Kane Street Development. Aina ‘O Kane is planned to consist of 103 residential condominium units in five four-story buildings, with 20,000 square-feet of ground-floor commercial space, in Kahului. Construction plans continue to be processed with the County, but the timing of development will require improved market conditions.
(e) Kahului Town Center. The redevelopment plan for the 19-acre Kahului Shopping Center block reflects the creation of a traditional “town center,” consisting of approximately 440 residential condominium units, as well as approximately 240,000 square feet of retail/office space. In 2008, construction plans for offsite and onsite civil improvements and Phase I vertical improvements (86,000 square feet of commercial space) were submitted to the County. In April 2009, condominium public reports were approved for the initial phase of development. Based on limited market demand, the timing of this project has been delayed. Work continues on securing permits and approvals to position this project for development when market conditions improve.
(f) Kukui`ula. In April 2002, A&B entered into a joint venture with DMB Communities II (“DMBC”), an affiliate of DMB Associates, Inc., an Arizona-based developer of master-planned communities, for the development of Kukui`ula, a 1,000-acre master planned resort residential community located in Poipu, Kauai, planned for approximately 1,000 to 1,200 high-end residential units. In 2004, A&B exercised its option to contribute to the joint venture up to 40 percent of the project’s future capital requirements. In May 2009, A&B entered into an amended agreement with DMBC to increase A&B’s ownership participation in Kukui`ula in exchange for more favorable participation in rights to future cash and profit distributions, while DMBC’s future contributions would be limited to $35 million. Construction is now complete on the project’s two major roadways, subdivision improvements for parcels Y (88 lots), M1/M4 (35 lots) and M2/M3 (55 lots). The first eight holes of the golf course, driving range and putting green are complete. Construction of 83,200 square feet of the project’s commercial center, Kukui`ula Village, was completed, and the center opened for business in August 2009. Construction of the community clubhouse, spa and golf clubhouse commenced in September 2008, October 2009 and December 2009, respectively. The entire golf course and all of the other aforementioned amenities are expected to be substantially completed by the end of 2010. A total of 80 lots had closed as of December 31, 2008, with no closings in 2009. Marketing efforts are expected to resume in the second half of 2010 as the project’s amenities near completion. The capital contributed by A&B to the joint venture, including the value of land initially contributed, was $138 million as of December 31, 2009. DMBC has contributed $161 million, which includes $15 million of its amended $35 million future contribution limit.
(g) Port Allen. This project covers 17 acres in Port Allen, and is planned for 75 condominium units and 58 single-family homes. In 2008, construction was completed on the 58 homes, and the remaining two homes closed in 2009. The construction of the condominium units has been deferred pending market recovery.
(h) Keola La`i. In 2008, A&B completed construction of a 42-story condominium project near downtown Honolulu, consisting of 352 residential units, averaging 970 square feet, and four commercial units, with 337 residential units and two commercial units closed to date. Sales activity slowed in 2009 due to market conditions, with seven closings in 2009. One unit closed in February 2010 and 11 of the remaining 14 units have been leased.
(i) Waiawa. In August 2006, A&B entered into a joint venture agreement with an affiliate of Gentry Investment Properties, for the development of a 1,000-acre master-planned primary residential community (530 residential-zoned acres) in Central Oahu. Although the master development agreement for the Waiawa lands between Kamehameha Schools and Gentry was terminated, the A&B/Gentry venture has fee simple ownership of, or the right to acquire at no cost, approximately 58 acres of developable land, in addition to 125 acres of gulch land required for the major project land bridge and road leading to the project. The venture and A&B will continue to evaluate their options for the development of this master-planned community.
Big Island of Hawaii:
(j) Ka Milo at Mauna Lani. In April 2004, A&B entered into a joint venture with Brookfield Homes Hawaii Inc. to acquire and develop a 30.5-acre residential parcel in the Mauna Lani Resort on the island of Hawaii. The project was originally planned for 37 single-family units and 100 duplex townhomes. A total of 27 units were constructed in 2007 and 2008 and, as of year-end 2009, 20 units had closed, with eight closings in 2009, plus one closing in February 2010. In December 2009, the project’s construction loan, with a year-end balance of $15.8 million, matured (for further information, see Note 12 (“Commitments, Guarantees and Contingencies”) to A&B’s financial statements in Item 8 of Part II below). The venture is negotiating with the lender to refinance the loan. Due to market conditions, the Company recorded an impairment loss of approximately $2.5 million in December 2009. A new business plan is being evaluated by the venture for the future construction of the remaining units.
(k) Santa Barbara Ranch. In November 2007, A&B entered into a joint venture with Vintage Communities, LLC, a residential developer headquartered in Newport Beach, California, for the planned development of a 1,040-acre exclusive large-lot subdivision, located 12 miles north of the City of Santa Barbara. In 2008, due to worsening economic conditions, A&B suspended further investment in the project and recognized a $3.0 million impairment. A&B continues to evaluate alternatives to maximize the value of venture assets that served as collateral for the repayment of A&B’s investment.
(4) Commercial Properties
An important source of property revenue is the lease rental income A&B receives from its portfolio of commercial income properties, consisting of approximately 8.3 million leasable square feet of commercial building space as of December 31, 2009.
(a) Hawaii Properties
A&B’s Hawaii commercial properties portfolio consists of retail, office and industrial properties, comprising approximately 1.3 million square feet of leasable space as of December 31, 2009. Most of the commercial properties are located on Maui and Oahu, with smaller holdings in the area of Port Allen, on Kauai. The average occupancy for the Hawaii portfolio was 95 percent in 2009, versus 98 percent in 2008. In 2009, A&B sold the 130,600-square-foot Pacific Guardian Tower office building, 85,200-square-foot Hawaii Business Park industrial facility on Oahu and several leased fee parcels on Maui. Also in 2009, A&B acquired two properties on Oahu—the 158,400-square-foot Waipio Industrial property and 113,800-square-foot Waipio Shopping Center. A&B’s joint venture with DMB Kukui’ula Village LLC completed construction on the 83,600-square-foot Kukui`ula Village commercial center, which opened for business in August 2009. Joint venture developments are not included in the following table. A&B sold the 180,300-square-foot Mililani Shopping Center on Oahu and the 14,800 square-foot building Kele Center on Maui in January and February 2010, respectively.
The primary Hawaii commercial properties owned as of year-end 2009 are as follows:
Maui Business Park II. In 2008, A&B received final zoning approval for 179 acres in Kahului, Maui, representing the second phase of its Maui Business Park project, from agriculture to light industrial. The zoning change approval is subject to various conditions, such as providing land for affordable housing and a wastewater treatment plant. In 2008, design and engineering of the infrastructure commenced and subdivision applications were filed with the County. In 2009, the County granted preliminary approval of several subdivision applications, preliminary design of project infrastructure was completed, and construction drawings for a water system were submitted for approvals. Construction plan and subdivision approvals are anticipated for portions of the project in 2010.
(b) U.S. Mainland Properties
On the U.S. Mainland, A&B owns a portfolio of commercial properties, acquired primarily by way of tax-deferred exchanges under Internal Revenue Code Section 1031. In 2009, A&B completed the sales of the 120,800 square-foot Southbank II office building in Phoenix, Arizona, the 126,000 square-foot San Jose Avenue Warehouse in City of Industry, California and the 104,600 square-foot Village at Indian Wells retail center in Indian Wells, California. In February 2009, A&B transferred Savannah Logistics Park Building B (324,800 square feet) from development to its leased portfolio, for a combined 1.0-million-square-foot logistics/industrial facility in Savannah, Georgia. In 2009, A&B acquired Activity Distribution Center, a 252,300-square-foot industrial facility in San Diego, California, Northpoint Properties, a 119,400-square-foot industrial property in Fullerton, California, and Firestone Avenue Building, a 28,100 square-foot flex-office building in La Mirada, California. In January 2010, A&B completed the acquisition of the 216,400-square-foot Meadows on the Parkway Shopping Center in Boulder, Colorado.
As of year-end 2009, A&B’s mainland portfolio included 7.0 million square feet of leasable area, as follows:
A&B’s mainland commercial properties’ occupancy rate decreased to 85 percent in 2009, compared to 95 percent in 2008, reflecting the difficult leasing environment in certain mainland markets as well as the placement of Savannah Logistics Park Building B into service in March 2009.
A&B’s mainland joint venture commercial developments are summarized below:
(i)Crossroads Plaza. In June 2004, A&B entered into a joint venture with Intertex Hasley, LLC, for the development of a 56,000-square-foot mixed-use neighborhood retail center on 6.5 acres in Valencia, California. The property was acquired in August 2004. The sale of a pad site building closed in 2007, and construction of the center was completed in 2008. The property was 85 percent occupied as of year-end 2009.
(ii)Centre Pointe Marketplace. In April 2005, A&B entered into a joint venture with Intertex Centre Pointe Marketplace, LLC for the development of a 105,700-square-foot retail center on a 10.2-acre parcel in Valencia, California. The sale of several pad site buildings closed in 2007. Vertical construction was substantially completed in 2008, with five of seven buildings closed in 2008, one building closed in 2009, and the remaining building expected to be sold in 2010.
(iii)Bridgeport Marketplace. In July 2005, A&B entered into a joint venture with Intertex Bridgeport Marketplace, LLC for the development of a 27.8-acre parcel in Valencia, California. The parcel was subdivided into a 5-acre parcel for a public park, a 7.3-acre parcel sold to a church in 2007, and a 15.5-acre parcel for the development of a 127,000-square-foot retail center. Construction of the center was completed in 2009 and is 95 percent leased.
(iv)Bakersfield. In November 2006, A&B entered into a joint venture with Intertex P&G Retail, LLC, for the planned development of a 575,000-square-foot retail center on a 57.3-acre commercial parcel in Bakersfield, California. The parcel was acquired in November 2006. Development plans remain on hold due to current economic conditions.
(v)Palmdale Trade & Commerce Center. In December 2007, A&B entered into a joint venture with Intertex Palmdale Trade & Commerce Center LLC, for the planned development of a 315,000-square-foot mixed-use commercial office and light industrial condominium complex on 18.2 acres in Palmdale, California, located 60 miles northeast of Los Angeles and 25 miles northeast of Valencia. The parcel was contributed to the venture in 2008. Development plans remain on hold due to current market conditions.
A&B has been engaged in the production of cane sugar in Hawaii since 1870, and the production of coffee in Hawaii since 1987. A&B’s current agribusiness and related operations consist of: (1) a sugar plantation on the island of Maui, operated by its Hawaiian Commercial & Sugar Company (“HC&S”) division, (2) a coffee plantation on the island of Kauai, operated by its Kauai Coffee Company, Inc. (“Kauai Coffee”) subsidiary, and (3) its Kahului Trucking & Storage, Inc. (“KT&S”) and Kauai Commercial Company, Incorporated (“KCC”) subsidiaries, which provide several types of trucking services, including sugar and molasses hauling on Maui, mobile equipment maintenance and repair services on Maui, Kauai, and the Big Island, and self-service storage facilities on Maui and Kauai.
HC&S is Hawaii’s largest producer of raw sugar, producing approximately 126,800 tons of raw sugar in 2009, or about 72 percent of the raw sugar produced in Hawaii for the year (compared with 145,200 tons, or about 75 percent, in 2008). The primary reason for the decline in sugar production was the unprecedented drought conditions affecting the island of Maui in 2007 and 2008. In 2008, HC&S had the lowest East Maui water deliveries on record since A&B first began recording deliveries in 1925, and 2007-2008 marked two consecutive years of the lowest rainfall recorded. The two-year crop harvested in 2009 suffered from lack of water throughout its lifecycle, which significantly reduced crop yields. HC&S harvested 15,028 acres of sugar cane in 2009 (compared with 16,961 in 2008). This reduction in harvest acres was designed to improve future-year yields by increasing the average age of the crop. Yields averaged 8.4 tons of sugar per acre in 2009 (compared with 8.6 in 2008). As a by-product of sugar production, HC&S also produced approximately 41,700 tons of molasses in 2009 (compared with 52,200 in 2008).
In 2009, approximately 34,300 tons of sugar (compared with 27,500 tons in 2008) were processed by HC&S into specialty food-grade sugars under HC&S’s Maui Brand® trademark or repackaged by distributors under their own labels. A multi-phase expansion of the production facilities for these sugars was completed in early 2008, with the ramp up of volumes continuing in 2009.
During 2009, Kauai Coffee had approximately 3,000 acres of coffee trees under cultivation. The 2009 harvest yielded approximately 2.6 million pounds of green coffee, compared with 3.0 million pounds in 2008. The preliminary mix of green coffee indicates an average quality distribution for the crop.
HC&S and McBryde Sugar Company, Limited (“McBryde”), a subsidiary of A&B and the parent company of Kauai Coffee, produce electricity for internal use and for sale to the local electric utility companies. HC&S’s power is produced by burning bagasse (the residual fiber of the sugar cane plant), by hydroelectric power generation and, when necessary, by burning fossil fuels. McBryde produces power solely by hydroelectric generation. The price for the power sold by HC&S and McBryde is equal to the utility companies’ “avoided cost” of not producing such power themselves. In addition, HC&S receives a capacity payment to provide a guaranteed power generation capacity to the local utility. See “Energy” below for power production and sales data.
(2) Marketing of Sugar and Coffee
Approximately 73 percent of the bulk raw sugar produced by HC&S in 2009 was purchased by C&H Sugar Company, Inc. (“C&H”). C&H processes the raw cane sugar at its refinery at Crockett, California and markets the refined products primarily in the western and central United States.
The remaining 27 percent of the raw sugar was used by HC&S to produce specialty food-grade sugars, which are sold by HC&S to food and beverage producers and to retail stores under its Maui Brand® label, and to distributors that repackage the sugars under their own labels. HC&S’s largest food-grade sugar customers are Cumberland Packing Corp. and Sugar Foods Corporation, which repackage HC&S’s turbinado sugar for their “Sugar in the Raw” product line.
Hawaiian Sugar & Transportation Cooperative (“HS&TC”), a sugar grower cooperative in Hawaii (of which HC&S currently is the only member), has a supply contract with C&H ending in December 2012. This supply contract, entered into in October 2009, replaced a prior contract that was due to expire on December 31, 2009. Pursuant to the supply contract, the cooperative sells raw sugar to C&H at a price equal to the New York No. 16 Contract settlement price, less a discount and less costs of sugar vessel discharge and stevedoring. This price, after deducting the marketing, operating, distribution, transportation and interest costs of HS&TC, reflects the gross revenue to the Hawaii sugar growers, including HC&S. Throughout most of 2009, HS&TC consisted of two members, HC&S and the Gay & Robinson plantation on Kauai (“G&R”). In November 2009, G&R ceased operations and its membership in the cooperative ended concurrently. Various implications of G&R’s withdrawal from the cooperative are discussed in Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operation”) of Part II below.
Most of Kauai Coffee’s crop is being marketed on the U.S. Mainland as green bean coffee. In addition to the sale of green bean coffee, Kauai Coffee produces and sells roasted, packaged coffee under the Kauai Coffee® trademark. Kauai Coffee’s customers include specialty and commodity brokers, hotels, and large regional roasters.
(3) Sugar Competition and Legislation
Hawaii sugar growers have traditionally produced more sugar per acre than most other major producing areas of the world, but that advantage is offset by Hawaii’s high labor costs and the distance to the U.S. Mainland market. Hawaiian refined sugar is marketed primarily west of Chicago. This is also the largest beet sugar growing and processing area and, as a result, the only market area in the United States that produces more sugar than it consumes. Sugar from sugar beets is the greatest source of competition in the refined sugar market for the Hawaiian sugar industry.
The U.S. Congress historically has sought, through legislation, to assure a reliable domestic supply of sugar at stable and reasonable prices. The current legislation is the Food Conservation and Energy Act of 2008, which expires on December 31, 2012 (“2008 Farm Bill”). The two main elements of U.S. sugar policy are the tariff-rate quota (“TRQ”) import system and the price support loan program. The TRQ system limits imports from countries other than Canada and Mexico by allowing only a quota amount to enter the U.S. after payment of a relatively low tariff. A higher, over-quota tariff is imposed for imported quantities above the quota amount. Also, a new but limited sucrose ethanol program was added in 2008, which allows sugar to be diverted into ethanol when the market is deemed to be oversupplied.
The 2008 Farm Bill reauthorized the sugar price support loan program, which supports the U.S. price of sugar by providing for commodity-secured loans to producers. A loan rate (support price) of 18.25 cents per pound (“c/lb”) for raw cane sugar is in effect for the 2009 crop. The loan rate increases to 18.50 c/lb for the 2010 crop and to 18.75 c/lb for the 2012 and 2013 crops (the last year of the bill). The U.S. rates are adjusted by region to reflect the cost of transportation. The 2009 crop loan rate in Hawaii is 15.88 c/lb.
In 2005, the U.S. approved a trade pact with Central America and the Dominican Republic, known as the Central America-Dominican Republic-United States Free Trade Agreement. In 2006, the first year of the agreement, additional sugar market access for participating countries amounted to about 1.2 percent of current U.S. sugar consumption (107,000 metric tons), which will grow to about 1.7 percent (151,000 metric tons) in its fifteenth year.
Implementation of the North American Free Trade Agreement (NAFTA) began in 1994. This agreement removed most barriers to trade and investment among the U.S., Canada and Mexico. Under NAFTA, all non-tariff barriers to agricultural trade between the U.S. and Mexico were eliminated. In addition, many tariffs were eliminated immediately or phased out. Starting in 2008, Mexico can ship an unlimited quantity of sugar duty-free to the U.S. each year.
U.S. raw sugar prices remained relatively stable and flat for over thirty years. The full implementation of NAFTA in 2008, which unified the U.S. and Mexican sugar markets, increased price volatility. In 2009, a tight NAFTA supply/demand outlook and a soaring world raw sugar market combined to push U.S. raw sugar prices to 29-year highs. A chronological chart of the average U.S. domestic raw sugar prices, based on the average daily New York No. 14 Contract settlement price for domestic raw sugar, is shown below (not adjusted for inflation):
(4) Coffee Competition and Prices
Kauai Coffee competes with coffee growers located worldwide, including in Hawaii. The market for specialty coffee in the United States is highly competitive. Relative to other Hawaii growers, Kauai Coffee produces a large amount of green coffee beans each year, with its crop divided among specialty, midrange and commodity grades. It has been successful at selling its specialty and midgrade coffees at a premium to world commodity market prices. Kauai Coffee sells its specialty and midgrade green beans primarily to long-term, repeat customers, though there is strong competition and pricing and other terms are subject to annual renegotiations. These grades are also utilized in Kauai Coffee’s wholesale and direct retail roasted programs. Kauai Coffee also produces commodity-grade green beans, whose prices are more closely tied to world commodity market prices.
Kauai Coffee’s green bean coffee total production volume, volume by grade and unit costs vary each year depending upon growing and harvesting conditions. The unit cost per pound impacts the profitability of green bean sales as well as the cost of goods for Kauai Coffee’s wholesale roasted and retail programs.
(5) Land Designations and Water
The HC&S sugar plantation, the largest in Hawaii, consists of approximately 43,300 acres, including a small portion of leased lands. Approximately 34,700 acres are under cultivation, and the balance is leased to third parties, is not suitable for cane cultivation, or is used for plantation purposes such as roads, reservoirs, ditches and plant sites.
On Kauai, approximately 3,000 acres are cultivated by Kauai Coffee.
The Hawaii Legislature, in 2005, passed Important Agricultural Lands (“IAL”) legislation to fulfill the State constitutional mandate to protect agricultural lands, promote diversified agriculture, increase the State’s agricultural self-sufficiency, and assure the availability of agriculturally suitable lands. In 2008, the Legislature passed a package of incentives, which is necessary to trigger the IAL system of land designation. In 2009, A&B received approval from the State Land Use Commission for the designation of over 27,000 acres on Maui and over 3,700 acres on Kauai as IAL. These designations were the result of voluntary petitions filed by A&B.
It is crucial for HC&S and Kauai Coffee to have access to reliable sources of water supply and efficient irrigation systems. A&B’s plantations conserve water by using “drip” irrigation systems that distribute water to the roots through small holes in plastic tubes. All but a small area of the cultivated cane land farmed by HC&S is drip irrigated. All of Kauai Coffee’s fields are drip irrigated.
A&B owns 16,000 acres of watershed lands in East Maui, which supply a portion of the irrigation water used by HC&S. A&B also held four water licenses to another 30,000 acres owned by the State of Hawaii in East Maui, which over the years have supplied approximately two-thirds of the irrigation water used by HC&S. The last of these water license agreements expired in 1986, and all four agreements were then extended as revocable permits that were renewed annually. In 2001, a request was made to the State Board of Land and Natural Resources (the “BLNR”) to replace these revocable permits with a long-term water lease. Pending the conclusion by the BLNR of this contested case hearing on the request for the long-term lease, the BLNR has renewed the existing permits on a holdover basis. A&B also holds rights to an irrigation system in West Maui, which provides approximately one-sixth of the irrigation water used by HC&S. For information regarding legal proceedings involving A&B’s irrigation systems, see “Legal Proceedings” below.
D. Employees and Labor Relations
As of December 31, 2009, A&B and its subsidiaries had approximately 2,110 regular full-time employees. About 924 regular full-time employees were engaged in the agribusiness segment, 1,076 were engaged in the transportation segment, 44 were engaged in the real estate segment, and the remaining were in administration. Approximately 49 percent were covered by collective bargaining agreements with unions.
At December 31, 2009, the active Matson fleet employed seagoing personnel in 196 billets. Each billet corresponds to a position on a ship that typically is filled by two or more employees because seagoing personnel rotate between active sea duty and time ashore. Approximately 24 percent of Matson’s regular full-time employees and all of the seagoing employees were covered by collective bargaining agreements.
Historically, collective bargaining with longshore and seagoing unions has been complex and difficult. However, Matson and Matson Terminals consider their relations with those unions, other unions and their non-union employees generally to be satisfactory.
Matson’s seagoing employees are represented by six unions, three representing unlicensed crew members and three representing licensed crew members. Matson negotiates directly with these unions. Matson’s agreements with the Seafarer’s International Union, the Sailors Union of the Pacific and the Marine Firemen’s Union were renewed in mid-2008 through June 2013 without service interruption. Contracts that Matson has with the American Radio Association were renewed in mid-2009 through August 15, 2013 after a one-day job action in the Port of Seattle. Contracts that Matson has with the Masters, Mates & Pilots (“MM&P”) and the Marine Engineers Beneficial Association (“MEBA”) for ships built prior to 2003 were renewed in mid-2009 through August 15, 2013. Contracts that Matson has with MM&P and the MEBA for ships built after 2003 expire on August 15, 2013 and include provisions for a wage reopener, which was negotiated in mid-2009 to cover the remaining contract period.
SSAT, the previously-described joint venture of Matson and SSA, provides stevedoring and terminal services for Matson vessels calling at U.S. Pacific Coast ports. Matson, SSA and SSAT are members of the Pacific Maritime Association (“PMA”) which, on behalf of its members, negotiates collective bargaining agreements with the ILWU on the U.S. Pacific Coast. A new six-year PMA/ILWU Master Contract, which covers all Pacific Coast longshore labor, was negotiated in 2008 without significant disruption and will expire on July 1, 2014. Matson Terminals provides stevedoring and terminal services to Matson and other vessel operators calling at Honolulu and on the islands of Hawaii, Maui and Kauai. Matson Terminals is a member of the Hawaii Stevedore Industry Committee, which negotiates with the ILWU in Hawaii on behalf of its members. The ILWU contracts in Hawaii expired on June 30, 2008 and Matson has signed new six-year agreements with each of the ILWU units. The new contracts will expire on June 30, 2014.
During 2009, Matson maintained its collective bargaining agreement with ILWU clerical workers at Honolulu and Oakland, which are in effect through June 2014. The bargaining agreement with ILWU clerical workers in Long Beach will be negotiated during 2010 as it will expire in June 2010.
During 2009, Matson contributed to multiemployer pension plans for vessel crews. If Matson were to withdraw from or significantly reduce its obligation to contribute to one of the plans, Matson would review and evaluate data, actuarial assumptions, calculations and other factors used in determining its withdrawal liability, if any. In the event that any third parties materially disagree with Matson’s determination, Matson would pursue the various means available to it under federal law for the adjustment or removal of its withdrawal liability. Matson Terminals participates in a multiemployer pension plan for its Hawaii ILWU non-clerical employees. For a discussion of withdrawal liabilities under the Hawaii longshore and seagoing plans, see Note 9 (“Employee Benefit Plans”) to A&B’s financial statements in Item 8 of Part II below.
Bargaining unit employees of HC&S are covered by two collective bargaining agreements with the ILWU. The agreements with the HC&S production unit employees and clerical bargaining unit employees covering approximately 640 workers, expired on January 31, 2010, were extended through February 2010, and are being renegotiated. The bargaining unit employees at KT&S also are covered by two collective bargaining agreements with the ILWU. The bulk sugar employees agreement expires on June 30, 2014, and the agreement with all other employees expires on March 31, 2010, with renegotiations expected to begin in spring of 2010. There are two collective bargaining agreements with KCC employees represented by the ILWU. These agreements expire on April 30, 2010, with renegotiations expected to begin in spring of 2010. There is a collective bargaining agreement with the ILWU for the production unit employees of Kauai Coffee. This contract was renegotiated and will expire on January 31, 2011.
Matson and Matson Terminals purchase residual fuel oil, lubricants, gasoline and diesel fuel for their operations. Residual fuel oil is by far Matson’s largest energy-related expense. In 2009, Matson vessels purchased approximately 1.8 million barrels of residual fuel oil (compared with 2.0 million barrels in 2008).
Residual fuel oil prices paid by Matson in 2009 started at $44.50 per barrel and ended the year at $78.62. The low for the year was the price of $35.69 per barrel in April, the high was the price of $105.55 in June. Sufficient fuel for Matson’s requirements is expected to be available in 2010.
As has been the practice with sugar plantations throughout Hawaii, HC&S uses bagasse, the residual fiber of the sugar cane plant, as a fuel to generate steam for the production of most of the electrical power for sugar milling and irrigation pumping operations. In addition to bagasse, HC&S uses coal, diesel, fuel oil, and recycled motor oil to generate power during factory shutdown periods when bagasse is not being produced. HC&S also generates a limited amount of hydroelectric power. To the extent it is not used in A&B’s factory and farming operations, HC&S sells electricity. In 2009, HC&S produced and sold, respectively, approximately 188,000 MWH and 72,800 MWH of electric power (compared with 211,000 MWH produced and 91,300 MWH sold in 2008). The decrease in power sold was due to increased power used for irrigation pumps to improve soil moisture levels and yields, and also to a mechanical failure in the HC&S power plant that reduced production capacity. HC&S’s use of oil in 2009 of 28,800 barrels was 8 percent greater than the 26,600 barrels used in 2008. The increase was due to additional supplies of low-cost, recycled motor and vegetable oils. Coal used for power generation was 89,300 short tons, about 7,100 tons less than that used in 2008. Less coal was required primarily because of the reduced volume of power production and sales, as mentioned above.
In 2009, McBryde produced approximately 30,800 MWH of hydroelectric power (compared with approximately 32,000 MWH in 2008). To the extent it is not used in A&B’s coffee operations, McBryde sells electricity to Kauai Island Utility Cooperative. Power sales in 2009 amounted to approximately 22,800 MWH (compared with 23,700 MWH in 2008).
In the third quarter of 2008, HC&S was notified that the Hawaii Public Utilities Commission (“PUC”) had issued a decision that provides for a new methodology of calculating avoided energy costs, which resulted in a reduction in the avoided energy cost payable to energy producers, beginning in August 2008. The decision affects A&B’s power sales on Maui, but not on Kauai. Despite efforts to gain an exemption from or modification to the decision, HC&S remains subject to the new methodology and received approximately $4.0 million lower power revenue in 2009 than it would have under the former methodology. A&B is currently pursuing efforts to modify the mechanism through which its energy rate is calculated, although the final outcome of these efforts cannot yet be determined.
F. Available Information
A&B files reports with the Securities and Exchange Commission (the “SEC”). The reports and other information filed include: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports and information filed under the Securities Exchange Act of 1934 (the “Exchange Act”).
The public may read and copy any materials A&B files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding A&B and other issuers that file electronically with the SEC. The address of that website is www.sec.gov.
A&B makes available, free of charge on or through its Internet website, A&B’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. The address of A&B’s Internet website is www.alexanderbaldwin.com.
ITEM 1A. RISK FACTORS
The business of A&B and its subsidiaries (collectively, the “Company”) faces numerous risks, including those set forth below or those described elsewhere in this Form 10-K or in the Company’s filings with the SEC. The risks described below are not the only risks that the Company faces, nor are they necessarily listed in order of significance. Other risks and uncertainties may also impair its business operations. Any of these risks may have a material adverse effect on the Company’s business, liquidity, financial condition, results of operations and cash flows. All forward-looking statements made by the Company or on the Company’s behalf are qualified by the risks described below.
Changes in U.S., global, or regional economic conditions that result in a further decrease in consumer confidence or market demand for the Company’s services and products in Hawaii, the U.S. Mainland, Guam or Asia may adversely affect the Company’s financial position, results of operations, liquidity, or cash flows.
A continuation or further weakening of the U.S., Guam, Asian or global economies may adversely impact the level of freight volumes, freight rates, and real estate leasing and development activity. Within the U.S., a continuation or further weakening of economic drivers in Hawaii, which include tourism, military spending, construction starts, personal income growth, and employment, and/or the further weakening of consumer confidence, market demand or the economy in the U.S. Mainland, may further reduce the demand for goods to and from Hawaii and Asia, travel to Hawaii and domestic transportation of goods, adversely affecting inland and ocean transportation volumes and/or rates, the sale of Hawaii real estate to mainland buyers, and the real estate leasing and development markets. In addition, continued overcapacity in the global ocean transportation market may adversely affect freight volumes and/or rates in the Company’s China service. Additionally, a change in the cost of goods or currency exchange rates may cause these adverse effects as well.
The Company may face new or increased competition.
The Company’s transportation segment may face new competition by established or start-up shipping operators that enter the Company’s markets. The entry of a new competitor or the addition of ships or capacity by existing competition on any of the Company’s routes could result in a significant increase in available shipping capacity that could have an adverse effect on volumes and/or rates. See also discussion under “Business and Properties - Transportation - Competition” above.
For the Company’s real estate segments, there are numerous other developers, managers and owners of commercial and residential real estate and undeveloped land that compete or may compete with the Company for management and leasing revenues, land for development, properties for acquisition and disposition, and for tenants and purchasers for properties. Increased vacancies or lack of development opportunities may lead to a deterioration in results from the Company’s real estate business.
The Company’s significant operating agreements and leases could be replaced on less favorable terms or may not be replaced.
The significant operating agreements and leases of the Company in its various businesses expire at various points in the future and may not be replaced or could be replaced on less favorable terms, thereby adversely affecting future revenue generation.
The reduction in availability of mortgage financing and the volatility and reduction in liquidity in the financial markets may adversely affect the Company’s real estate business.
During 2008 and 2009, the financial industry continued to experience significant instability due to, among other things, declining property values and increasing defaults on loans. This has led to tightened credit requirements, reduced liquidity and increased credit risk premiums for virtually all borrowers. Fewer loan products and tighter loan qualifications will make it more difficult for borrowers to finance the purchase of units in the Company’s residential projects. The tightening of credit in the commercial markets may adversely affect the Company’s ability to secure construction and/or other financing for the Company’s residential and commercial projects, working capital requirements, and/or investment needs. The absence of financing for buyers of commercial properties will make it significantly more difficult for the Company to sell commercial properties and will negatively impact the sales prices and other terms of such sales. Additionally, continuation or worsening of the liquidity crisis may impact the Company in other ways, including the credit or solvency of customers, vendors, or joint venture partners, and the ability of partners to fund their equity obligations to the joint venture.
A future downgrade in the Company’s credit rating or disruptions on the credit markets could restrict its ability to access the debt capital markets and/or increase the cost of debt.
In June 2009, the Company’s Standard and Poor’s credit rating was changed from A- with a Stable outlook to BBB+ with a Negative outlook. Further changes in the Company’s credit ratings may ultimately have an adverse impact on the Company’s ability to access debt in the private or public market and also may increase its borrowing costs. If the Company’s credit ratings fall below investment grade, its access to the debt capital markets may become restricted. Furthermore, the tightening in the credit markets and the constrained liquidity in the financial markets resulting from recent turmoil in the financial industry may adversely affect the Company’s ability to access the debt capital markets or to renew its committed lines of credit in the future and/or increase the Company’s cost of capital. Because the Company relies on its ability to draw on its revolving credit facilities to support its operations, when required, continued volatility in the credit and financial markets that prevents the Company from accessing funds (for example, a lender that does not fulfill its lending obligation), could have an adverse effect on the Company’s financial condition and cash flows. Additionally, the Company’s credit agreements generally include an increase in borrowing rates if the Company’s ratings are downgraded, and renegotiation of the Company’s primary revolving credit line upon its expiration in 2011 could be affected negatively by ratings downgrades.
Failure to comply with certain restrictive financial covenants contained in the Company’s credit facilities could preclude the payment of dividends, impose restrictions on the Company’s business segments, capital resources or other activities or otherwise adversely affect the Company.
The Company’s credit facilities contain certain restrictive financial covenants, the most restrictive of which include the maintenance of minimum shareholders’ equity levels, a maximum ratio of debt to earnings before interest, depreciation, amortization, and taxes, and the maintenance of a minimum unencumbered property investment value. If the Company does not maintain the required covenants, and that breach of covenants is not cured timely or waived by the lenders, resulting in default, the Company’s access to credit may be limited or terminated, dividends may be suspended, and the lenders could declare any outstanding amounts due and payable.
The Company is subject to potential insolvency of insurance carriers.
The Company purchases a variety of insurance products to transfer financial risk. Accordingly, the Company is subject to the risk that one or more of the insurers may become insolvent and would be unable to pay one or more claims that may be made in the future.
An increase in fuel prices, or changes in the Company’s ability to collect fuel surcharges, may adversely affect the Company’s profits.
Fuel is a significant operating expense for the Company’s shipping and agribusiness operations. The price and supply of fuel is unpredictable and fluctuates based on events beyond the Company’s control. Increases in the price of fuel may adversely affect the Company’s results of operations based on market and competitive conditions. Increases in fuel costs also can lead to other expense increases, through, for example, increased costs of energy, petroleum-based raw materials and purchased transportation services. In the Company’s ocean transportation and logistics services segments, the Company is able to utilize fuel surcharges to partially recover increases in fuel expense, although increases in the fuel surcharge may adversely affect the Company’s competitive position and may not correspond exactly with the timing of increases in fuel expense. Changes in the Company’s ability to collect fuel surcharges may adversely affect its results of operations. Increases in energy costs for the Company’s leased real estate portfolio are typically recovered from lessees, although the Company’s share of energy costs increases as a result of lower occupancies and higher operating cost reimbursements impact the ability to increase underlying rents. Rising fuel prices may also increase the cost of construction, including delivery costs to Hawaii, and the cost of materials that are petroleum-based, thus affecting the Company’s development projects. Finally, rising fuel prices will impact the cost of producing and transporting sugar.
Noncompliance with, or changes to, federal, state or local law or regulations, including passage of climate change legislation or regulation, may adversely affect the Company’s business.
The Company is subject to federal, state and local laws and regulations, including government rate regulations, land use regulations, government administration of the U.S. sugar program, environmental regulations including those relating to air quality initiatives at port locations, and cabotage laws. Noncompliance with, or changes to, the laws and regulations governing the Company’s business could impose significant additional costs on the Company and adversely affect the Company’s financial condition and results of operations. For example, if the Jones Act and the regulations promulgated thereunder were repealed, amended, or otherwise modified, non-U.S. competitors with significantly lower costs may consequently enter any of the Jones Act routes or the Company’s business may be significantly altered, all of which may have an adverse effect on the Company’s shipping business. In addition, changes in environmental laws impacting the shipping business, including passage of climate change legislation or other regulatory initiatives that restrict emissions of greenhouse gasses, may require costly vessel modifications, the use of higher-priced fuel and changes in operating practices that may not all be able to be recovered through increased payments from customers. The real estate segments are subject to numerous federal, state and local laws and regulations, which, if changed, may adversely affect the Company’s business. The agribusiness segment is subject to the federal government’s administration of the U.S. sugar program, such as the 2008 Farm Bill, and the Hawaii Public Utilities Commission’s regulation of avoided energy cost rates paid to the Company in connection with it sale of electric power. Further changes to these laws and regulations could adversely affect the Company. Pending climate change legislation, such as limiting and reducing greenhouse gas emissions through a “cap and trade” system of allowances and credits, if enacted, may have an adverse effect on the Company’s business.
Work stoppages or other labor disruptions by the unionized employees of the Company or other companies in related industries may adversely affect the Company’s operations.
As of December 31, 2009, the Company had approximately 2,110 regular full-time employees, of which approximately 49 percent were covered by collective bargaining agreements with unions. The Company’s transportation, real estate and agribusiness segments may be adversely affected by actions taken by employees of the Company or other companies in related industries against efforts by management to control labor costs, restrain wage increases or modify work practices. Strikes and disruptions may occur as a result of the failure of the Company or other companies in its industry to negotiate collective bargaining agreements with such unions successfully. For example, in its real estate sales segment, the Company may be unable to complete construction of its projects if building materials or labor is unavailable due to labor disruptions in the relevant trade groups.
The loss of or damage to key vendor and customer relationships may adversely affect the Company’s business.
The Company’s business is dependent on its relationships with key vendors, customers and tenants. The ocean transportation business relies on its relationships with freight forwarders, large retailers and consumer goods and automobile manufacturers, as well as other larger customers. Relationships with railroads and shipping companies are important in the Company’s intermodal business. For agribusiness, HC&S’s relationship with C&H Sugar Company, Inc. is critical. The loss of or damage to any of these key relationships may affect the Company’s business adversely.
Interruption or failure of the Company’s information technology and communications systems could impair the Company’s ability to operate and adversely affect its business.
The Company is highly dependent on information technology systems. For example, in the ocean transportation segment, these dependencies include accounting, billing, disbursement, cargo booking and tracking, vessel scheduling and stowage, equipment tracking, customer service, banking, payroll and employee communication systems. All information technology and communication systems are subject to reliability issues, integration and compatibility concerns, and security-threatening intrusions. The Company may experience failures caused by the occurrence of a natural disaster, or other unanticipated problems at the Company’s facilities. Any failure of the Company’s systems could result in interruptions in its service or production, reductions in its revenue and profits and damage to its reputation.
The Company is susceptible to weather and natural disasters.
The Company’s transportation operations are vulnerable to disruption as a result of weather and natural disasters such as bad weather at sea, hurricanes, typhoons, tsunamis, floods and earthquakes. Such events will interfere with the Company’s ability to provide on-time scheduled service, resulting in increased expenses and potential loss of business associated with such events. In addition, severe weather and natural disasters can result in interference with the Company’s terminal operations, and may cause serious damage to its vessels, loss or damage to containers, cargo and other equipment, and loss of life or physical injury to its employees, all of which could have an adverse effect on the Company’s business.
For the real estate segments, the occurrence of natural disasters, such as hurricanes, earthquakes, tsunamis, floods, fires, tornados and unusually heavy or prolonged rain, could damage its real estate holdings, resulting in substantial repair or replacement costs to the extent not covered by insurance, a reduction in property values, or a loss of revenue, and could have an adverse effect on its ability to develop, lease and sell properties. The occurrence of natural disasters could also cause increases in property insurance rates and deductibles, which could reduce demand for, or increase the cost of owning or developing, the Company’s properties.
For the agribusiness segment, drought, greater than normal rainfall, hurricanes, earthquakes, tsunamis, floods, fires, other natural disasters or agricultural pestilence may have an adverse effect on the sugar and coffee planting, harvesting and production, and the agribusiness segment’s facilities, including dams and reservoirs.
Heightened security measures, war, actual or threatened terrorist attacks, efforts to combat terrorism and other acts of violence may adversely impact the Company’s operations and profitability.
War, terrorist attacks and other acts of violence may cause consumer confidence and spending to decrease, or may affect the ability or willingness of tourists to travel to Hawaii, thereby adversely affecting Hawaii’s economy and the Company. Additionally, future terrorist attacks could increase the volatility in the U.S. and worldwide financial markets. Acts of war or terrorism may be directed at the Company’s shipping operations or real estate holdings, or may cause the U.S. government to take control of Matson’s vessels for military operation. Heightened security measures are likely to slow the movement and increase the cost of freight through U.S. or foreign ports, across borders or on U.S. or foreign railroads or highways and could adversely affect the Company’s business and results of operations.
Loss of the Company’s key personnel could adversely affect its business.
The Company’s future success will depend, in significant part, upon the continued services of its key personnel, including its senior management and skilled employees. The loss of the services of key personnel could adversely affect its future operating results because of such employee’s experience and knowledge of its business and customer relationships. If key employees depart, the Company may have to incur significant costs to replace them, and the Company’s ability to execute its business model could be impaired if it cannot replace them in a timely manner. The Company does not expect to maintain key person insurance on any of its key personnel.
The Company is involved in joint ventures and is subject to risks associated with joint venture relationships.
The Company is involved in joint venture relationships, and may initiate future joint venture projects. A joint venture involves certain risks such as:
In connection with its real estate joint ventures, the Company is sometimes asked to guarantee completion of a joint venture’s construction and development of a project, or to indemnify a third party serving as surety for a joint venture’s bonds for such completion. If the Company were to become obligated to perform under such arrangement, the Company may be adversely affected.
The Company is subject to, and may in the future be subject to, disputes, legal or other proceedings, or government inquiries or investigations, that could have an adverse effect on the Company.
The nature of the Company’s business exposes it to the potential for disputes, legal or other proceedings, or government inquiries or investigations, relating to antitrust matters, labor and employment matters, personal injury and property damage, environmental matters, construction litigation, and other matters, as discussed in the other risk factors disclosed in this section or in other Company filings with the SEC. For example, Matson is a common carrier, whose tariffs, rates, rules and practices in dealing with its customers are governed by extensive and complex foreign, federal, state and local regulations, which may be the subject of disputes or administrative and/or judicial proceedings. These disputes, individually or collectively, could harm the Company’s business by distracting its management from the operation of its business. If these disputes develop into proceedings, these proceedings, individually or collectively, could involve or result in significant expenditures or losses by the Company, or result in significant changes to Matson’s tariffs, rates, rules and practices in dealing with its customers, all of which could have an adverse effect on the Company’s future operating results, including profitability, cash flows, and financial condition. As a real estate developer, the Company may face warranty and construction defect claims, as described below in the “Real Estate” section of this “Risk Factors” item. For a description of significant legal proceedings involving the Company, including proceedings involving the Company’s irrigation systems on Maui, and a grand jury subpoena served on Matson on April 21, 2008 and the status of the subsequently filed and dismissed civil lawsuits purporting to be class actions in which the Company and Matson are named as defendants, and which allege violations of the antitrust laws and seek treble damages and injunctive relief, see “Legal Proceedings” below.
Earnings on pension assets, or a change in pension law or key assumptions, may adversely affect the Company’s financial performance.
The amount of the Company’s employee pension and postretirement benefit costs and obligations are calculated on assumptions used in the relevant actuarial calculations. Adverse changes in any of these assumptions due to economic or other factors, changes in discount rates, higher health care costs, or lower actual or expected returns on plan assets, may adversely affect the Company’s operating results, cash flows, and financial condition. In addition, a change in federal law, including changes to the Employee Retirement Income Security Act and Pension Benefit Guaranty Corporation premiums, may adversely affect the Company’s single-employer and multiemployer pension plans and plan funding. These factors, as well as a continued decline in the fair value of pension plan assets, may put upward pressure on the cost of providing pension and medical benefits and may increase future pension expense and required funding contributions. Although the Company has actively sought to control increases in these costs, there can be no assurance that it will be successful in limiting future cost and expense increases, and continued upward pressure in costs and expenses could further reduce the profitability of the Company’s businesses.
The Company may have exposure under its multiemployer plans in which it participates that extends beyond its funding obligation with respect to the Company’s employees.
The Company contributes to various multiemployer pension plans. In the event of a partial or complete withdrawal by the Company from any plan that is underfunded, the Company would be liable for a proportionate share of such plan’s unfunded vested benefits. Based on the limited information available from plan administrators, which the Company cannot independently validate, the Company believes that its portion of the contingent liability in the case of a full withdrawal or termination may be material to its financial position and results of operations. In the event that any other contributing employer withdraws from any plan that is underfunded, and such employer (or any member in its controlled group) cannot satisfy its obligations under the plan at the time of withdrawal, then the Company, along with the other remaining contributing employers, would be liable for its proportionate share of such plan’s unfunded vested benefits. In addition, if a multiemployer plan fails to satisfy the minimum funding requirements, the Internal Revenue Service will impose certain penalties and taxes.
The Company is required to evaluate its internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of investor confidence in the Company’s financial reports and have an adverse effect on the Company’s stock price.
Section 404 of the Sarbanes-Oxley Act requires that publicly reporting companies cause their managements to perform annual assessments of the effectiveness of their internal controls over financial reporting. Although the Company has concluded that its internal controls over financial reporting were effective as of December 31, 2009, there can be no assurances that the Company will reach the same conclusion at the end of future years. If the Company is unable to assert that its internal control over financial reporting is effective, or if the Company’s auditors are unable to express an opinion on the effectiveness of the Company’s internal controls, the Company could lose investor confidence in the accuracy and completeness of its financial reports, which would have an adverse effect on the Company’s stock price.
The Company is subject to risks associated with conducting business in a foreign shipping market.
The Company, through Matson’s Hawaii/Guam/China service, is subject to risks associated with conducting business in a foreign shipping market, which include:
Any of these risks has the potential to adversely affect the Company’s operating results.
Compliance with environmental laws and regulations may adversely affect the Company’s business.
The Company’s vessel operations are subject to various federal, state and local environmental laws and regulations, including, but not limited to, the Oil Pollution Act of 1990, the Comprehensive Environmental Response Compensation & Liability Act of 1980, the Clean Water Act, the Invasive Species Act and the Clean Air Act. Continued compliance with these laws and regulations may result in additional costs and changes in operating procedures that may adversely affect the Company’s business.
Acquisitions may have an adverse effect on the Company’s business.
The Company’s growth strategy includes expansion through acquisitions. Acquisitions may result in difficulties in assimilating acquired companies, and may result in the diversion of the Company’s capital and its management’s attention from other business issues and opportunities. The Company may not be able to integrate companies that it acquires successfully, including their personnel, financial systems, distribution, operations and general operating procedures. The Company may also encounter challenges in achieving appropriate internal control over financial reporting in connection with the integration of an acquired company. The Company may pay a premium for an acquisition, resulting in goodwill that may later be determined to be impaired, adversely affecting the Company’s financial condition and results of operations.
The Company’s logistics services are dependent upon third parties for equipment, capacity and services essential to operate the Company’s logistics business, and if the Company fails to secure sufficient third party services, its business could be adversely affected.
The Company’s logistics services are dependent upon rail, truck and ocean transportation services provided by independent third parties. If the Company cannot secure sufficient transportation equipment, capacity or services from these third parties at a reasonable rate to meet its customers’ needs and schedules, customers may seek to have their transportation and logistics needs met by other third parties on a temporary or permanent basis. As a result, the Company’s business, consolidated results of operations and financial condition could be adversely affected.
The loss of several of the Company’s major customers could have an adverse effect on the revenue and business of the Company’s logistics business.
The Company’s logistics business derives a significant portion of its revenues from its largest customers. For 2009, the Company’s logistics business’s largest ten customers accounted for approximately 33 percent of the business’s revenue. A reduction in or termination of the Company’s logistics services by several of the logistics business’s largest customers could have an adverse effect on the Company’s revenue and business.
The Company is subject to risks associated with real estate construction and development.
The Company’s development projects are subject to risks relating to the Company’s ability to complete its projects on time and on budget. Factors that may result in a development project exceeding budget or being prevented from completion include:
Any of these risks has the potential to adversely affect the Company’s operating results.
A decline in leasing rental income could adversely affect the Company.
The Company owns a portfolio of commercial income properties. Factors that may adversely affect the portfolio’s profitability include:
Governmental entities have adopted or may adopt regulatory requirements that may restrict the Company’s development activity.
The Company is subject to extensive and complex laws and regulations that affect the land development process, including laws and regulations related to zoning and permitted land uses. Government entities have adopted or may approve regulations or laws that could negatively impact the availability of land and development opportunities within those areas. For example, in December 2007, Maui County adopted an ordinance requiring verification of water source availability and sustainability for all developments prior to submission of subdivision construction plans. This requirement adds further process delays and burdens the developer with identifying and developing new water sources. It is possible that increasingly stringent requirements will be imposed on developers in the future that could adversely affect the Company’s ability to develop projects in the affected markets or could require that the Company satisfy additional administrative and regulatory requirements, which could delay development progress or increase the development costs of the Company. Any such delays or costs could have an adverse effect on the Company’s revenues and earnings.
Real estate development projects are subject to warranty and construction defect claims in the ordinary course of business that can be significant.
As a developer, the Company is subject to warranty and construction defect claims arising in the ordinary course of business. The amounts payable under these claims, both in legal fees and remedying any construction defects, can be significant and exceed the profits made from the project. As a consequence, the Company may maintain liability insurance, obtain indemnities and certificates of insurance from contractors generally covering claims related to workmanship and materials, and create warranty and other reserves for projects based on historical experience and qualitative risks associated with the type of project built. Because of the uncertainties inherent to these matters, the Company cannot provide any assurance that its insurance coverage, contractor arrangements and reserves will be adequate to address some or all of the Company’s warranty and construction defect claims in the future. For example, contractual indemnities may be difficult to enforce, the Company may be responsible for applicable self-insured retentions, and certain claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered and the availability of liability insurance for construction defects could be limited and/or costly. Accordingly, the Company cannot provide any assurance that such coverage will be adequate or available at all, or available at an acceptable cost.
The lack of water for agricultural irrigation could adversely affect the Company.
It is crucial for the Company’s agribusiness segment to have access to reliable sources of water for the irrigation of sugar cane and coffee. As further described in “Legal Proceedings” below, there are administrative hearing processes challenging the Company’s ability to divert water from streams in Maui. In addition, the Company’s access to water is subject to weather patterns that cannot be reliably predicted. If the Company is not permitted to divert stream waters for its use or there is insufficient rainfall, it would have an adverse effect on the Company’s sugar operations, including possible cessation of operations.
A decline in raw sugar or coffee prices will adversely affect the Company’s business.
The business and results of operations of the Company’s agribusiness segment are substantially affected by market factors, particularly the domestic prices for raw cane sugar. These market factors are influenced by a variety of forces, including prices of competing crops and suppliers, weather conditions, and United States farm and trade policies. If the price for sugar or coffee were to decline, the Company’s agribusiness segment would be adversely affected. See also discussion under “Business and Properties - Agribusiness - Competition and Sugar Legislation” above.
The Company is subject to risks associated with raw sugar and coffee production.
The Company’s production of raw sugar and coffee is subject to numerous risks that could adversely affect the volume and quality of sugar or coffee produced, including:
Any of these risks has the potential to adversely affect the Company’s future agribusiness operating results.
A reorganization or termination of the Company’s sugar business could result in impairment losses and restructuring costs.
If the Company’s sugar business continues to generate operating losses or negative cash flows, the Company may reorganize or terminate its sugar operations. The reorganization or termination of sugar operations may result in an impairment loss and restructuring costs that would adversely affect the Company’s financial performance.
The Company’s power sales contract may not be favorably modified and may adversely affect the Company’s Agribusiness segment.
As mentioned under “Business and Properties - Energy” above, HC&S was notified that the PUC had issued a decision that provides for a new methodology of calculating avoided energy cost, which resulted in a reduction in the avoided energy cost payable to energy producers, beginning in August 2008. If no changes were to occur to the decision or the terms of HC&S’s power sales contract with MECO, this decision will continue to adversely affect HC&S’s power revenue and profitability. The Company is currently pursuing efforts to modify the mechanism through which its energy rate is calculated, although the final outcome of these efforts cannot yet be determined. The inability to favorably address this matter may adversely affect the Company’s agribusiness operations.
The foregoing should not be construed as an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by the Company or on its behalf.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 3. LEGAL PROCEEDINGS
See “Business and Properties - Transportation - Rate Regulation” above for a discussion of rate and other regulatory matters in which Matson is routinely involved.
A&B owns 16,000 acres of watershed lands in East Maui that supply a significant portion of the irrigation water used by HC&S. A&B also held four water licenses to another 30,000 acres owned by the State of Hawaii in East Maui, which over the years has supplied approximately two-thirds of the irrigation water used by HC&S. The last of these water license agreements expired in 1986, and all four agreements were then extended as revocable permits that were renewed annually. In 2001, a request was made to the State Board of Land and Natural Resources (the “BLNR”) to replace these revocable permits with a long-term water lease. Pending the conclusion by the BLNR of this contested case hearing on the request for the long-term lease, the BLNR has renewed the existing permits on a holdover basis. If the Company is not permitted to divert stream waters from State lands in East Maui for its use, it would have a material adverse effect on the Company’s sugar-growing operations.
In addition, on May 24, 2001, petitions were filed by a third party, requesting that the Commission on Water Resource Management of the State of Hawaii (“Water Commission”) amend interim instream flow standards (“IIFS”) in 27 East Maui streams that feed the Company’s irrigation system. On September 25, 2008, the Water Commission took action on eight of the petitions, resulting in some quantity of water being returned to the streams rather than being utilized for irrigation purposes. While the loss of the water as a result of the Water Commission’s action on the eight petitions may not significantly impair the Company’s sugar-growing operations, similar losses of water on the remaining 19 streams would have a material adverse effect on the Company’s sugar-growing operations. In December 2009, the Water Commission conducted deliberations on the amendment of IIFS for the remaining 19 East Maui streams, deferring action for at least a three month period. The Company, at this time, is unable to determine what action the Water Commission will take with respect to all 27 streams.
On June 25, 2004, two organizations filed with the Water Commission a petition to amend IIFS for four streams in West Maui to increase the amount of water to be returned to these streams. The West Maui irrigation system provides approximately one-sixth of the irrigation water used by HC&S. The Water Commission’s deliberations on whether to amend the current IIFS for the West Maui streams are currently ongoing, and an adverse decision could result in some quantity of water being returned to the streams, rather than being utilized for irrigation purposes, which may have a material adverse effect on the Company’s sugar-growing operations. A decision by the Water Commission is not expected until mid-2010.
On December 10, 2007, the Shipbuilders Council of America, Inc. and Pasha Hawaii Transport Lines LLC filed a complaint against the U.S. Department of Homeland Security, the U.S. Coast Guard and the National Vessel Documentation Center in the U.S. District Court for the Eastern District of Virginia. The complaint sought review of a certificate of documentation with a coastwise endorsement issued by the National Vessel Documentation Center after concluding that Matson’s C9 vessel Mokihana had not been rebuilt abroad. Matson intervened in the action. On December 4, 2009, the court granted summary judgment in favor of the government and Matson, and dismissed the plaintiffs’ complaint with prejudice. The time to seek appellate review of this matter has expired.
On April 21, 2008, Matson was served with a grand jury subpoena from the U.S. District Court for the Middle District of Florida for documents and information relating to water carriage in connection with the Department of Justice’s investigation into the pricing and other competitive practices of carriers operating in the domestic trades. Matson understands that while the investigation currently is focused on the Puerto Rico trade, it also includes pricing and other competitive practices in connection with all domestic trades, including the Alaska, Hawaii and Guam trades. Matson does not operate vessels in the Puerto Rico and Alaska trades. It does operate vessels in the Hawaii and Guam trades. Matson has cooperated, and will continue to cooperate, fully with the Department of Justice. If the Department of Justice believes that any violations have occurred on the part of Matson or the Company, it could seek civil or criminal sanctions, including monetary fines. The Company is unable to predict, at this time, the outcome or financial impact, if any, of this investigation.
The Company and Matson were named as defendants in a consolidated civil lawsuit purporting to be a class action in the U.S. District Court for the Western District of Washington in Seattle. The lawsuit alleged violations of the antitrust laws and also named as a defendant Horizon Lines, Inc., another domestic shipping carrier operating in the Hawaii and Guam trades. On August 18, 2009, the court granted the defendants’ motion to dismiss the complaint. The court granted the plaintiffs leave to amend the complaint by May 10, 2010 to allege claims consistent with the court’s order. If the plaintiffs file an amended complaint, the Company and Matson will continue to vigorously defend themselves in this lawsuit. The Company is unable to predict, at this time, the outcome or financial impact, if any, of this lawsuit if an amended complaint is filed.
A&B and its subsidiaries are parties to, or may be contingently liable in connection with, other legal actions arising in the normal conduct of their businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a material adverse effect on A&B’s results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
EXECUTIVE OFFICERS OF THE REGISTRANT
For the information about executive officers of A&B required to be included in this Part I, see section B (“Executive Officers”) in Item 10 of Part III below, which is incorporated herein by reference.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
A&B common stock is listed on the New York Stock Exchange and trades under the symbol “ALEX.” As of February 12, 2010, there were 3,199 shareholders of record of A&B common stock. In addition, Cede & Co., which appears as a single record holder, represents the holdings of thousands of beneficial owners of A&B common stock.
A summary of daily stock transactions is listed in the New York Stock Exchange section of major newspapers. Trading volume averaged 292,309 shares a day in 2009 compared with 441,867 shares a day in 2008 and 264,577 shares a day in 2007.
The quarterly intra-day high and low sales prices and end of quarter closing prices, as reported by the New York Stock Exchange, and cash dividends paid per share of common stock, for 2009 and 2008, were as follows:
Although A&B expects to continue paying quarterly cash dividends on its common stock, the declaration and payment of dividends in the future are subject to the discretion of the Board of Directors and will depend upon A&B’s financial condition, results of operations, cash requirements and other factors deemed relevant by the Board of Directors. A&B has paid cash dividends each year since 1903. The most recent increase in the dividend rate was effective the second quarter of 2008 when the quarterly dividend rate was increased from 29 cents per share to 31.5 cents per share. In 2009, dividend payments to shareholders totaled $52 million. The following dividend schedule for 2010 has been set, subject to final approval by the Board of Directors:
Matson is subject to restrictions on the transfer of net assets to A&B under certain debt agreements; however, these restrictions have not had any effect on the Company’s shareholder dividend policy, and the Company does not anticipate that these restrictions will have any impact in the future. At December 31, 2009, the amount of net assets of Matson that may not be transferred to the Company was approximately $286 million.
A&B common stock is included in the Dow Jones U.S. Transportation Average, the Russell 1000 Index, the Russell 3000 Index, the Dow Jones U.S. Composite Average, and the S&P MidCap 400.
The Company has share ownership guidelines for non-employee Directors. At present, all Directors own A&B stock, and it is expected that each Director will meet the guidelines within the specified five-year period. Stock ownership guidelines also are in place for senior executives of the Company, and all such executives currently meet, or are expected to meet (within the specified five-year period), the required stock ownership guidelines.
Securities authorized for issuance under equity compensation plans as of December 31, 2009, included:
On December 10, 2009, A&B’s Board of Directors authorized A&B to repurchase up to two million shares of its common stock beginning January 1, 2010. The authorization, which replaced a previous authorization expiring December 31, 2009, will expire on December 31, 2011.
The Company did not repurchase any of its common stock in 2009. During 2008, the Company repurchased 1,476,449 shares of its common stock for approximately $59 million, or an average of $40.33 per share. During 2007, the Company repurchased 671,728 shares of its common stock for $33 million, or an average price of $48.62 per share.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data should be read in conjunction with Item 8, “Financial Statements and Supplementary Data,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (dollars and shares in millions, except per-share amounts):
SELECTED FINANCIAL DATA (CONTINUED)
SELECTED FINANCIAL DATA (CONTINUED)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Company, from time to time, may make or may have made certain forward-looking statements, whether orally or in writing, such as forecasts and projections of the Company’s future performance or statements of management’s plans and objectives. These statements are “forward-looking” statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be contained in, among other things, SEC filings, such as the Forms 10-K, 10-Q and 8-K, the Annual Report to Shareholders, press releases made by the Company, the Company’s Internet Web sites (including Web sites of its subsidiaries), and oral statements made by the officers of the Company. Except for historical information contained in these written or oral communications, such communications contain forward-looking statements. These include, for example, all references to 2010 or future years. New risk factors emerge from time to time and it is not possible for the Company to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements cannot be relied upon as a guarantee of future results and involve a number of risks and uncertainties that could cause actual results to differ materially from those projected in the statements, including, but not limited to the factors that are described in Part I, Item 1A under the caption of “Risk Factors” of this Form 10-K, which section is incorporated herein by reference. The Company is not required, and undertakes no obligation, to revise or update forward-looking statements or any factors that may affect actual results, whether as a result of new information, future events, or circumstances occurring after the date of this report.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a discussion of the Company’s financial condition, results of operations, liquidity and certain other factors that may affect its future results from the perspective of management. The discussion that follows is intended to provide information that will assist in understanding the changes in the Company’s financial statements from year to year, the primary factors that accounted for those changes, and how certain accounting principles, policies and estimates affect the Company’s financial statements. MD&A is provided as a supplement to, and should be read in conjunction with, the consolidated financial statements and the accompanying notes to the financial statements. MD&A is presented in the following sections:
Alexander & Baldwin, Inc. (“A&B”), founded in 1870, is a multi-industry corporation headquartered in Honolulu that operates in five segments in three industries—Transportation, Real Estate, and Agribusiness.
Transportation: The Transportation Industry consists of Ocean Transportation and Logistics Services segments. The Ocean Transportation segment, which is conducted through Matson Navigation Company, Inc. (“Matson”), a wholly-owned subsidiary of A&B, is an asset-based business that derives its revenue primarily through the carriage of containerized freight between various U.S. Pacific Coast, Hawaii, Guam, China and other Pacific island ports. Additionally, the Ocean Transportation segment has a 35 percent interest in an entity that provides terminal and stevedoring services at U.S. Pacific Coast facilities.
The Logistics Services segment, which is conducted through Matson Integrated Logistics, Inc. (“MIL”), a wholly-owned subsidiary of Matson, is a non-asset based business that is a provider of domestic and international rail intermodal service (“Intermodal”), long-haul and regional highway brokerage, specialized hauling, flat-bed and project work, less-than-truckload, expedited/air freight services, and warehousing and distribution services (collectively “Highway”). Warehousing and distribution services are provided by Matson Global Distribution Services, Inc. (“MGDS”), a wholly-owned subsidiary of MIL. MGDS’s operations also include Pacific American Services, LLC (“PACAM”), a San Francisco bay-area regional warehousing, packaging, and distribution company acquired in the third quarter of 2008.
The Transportation Industry accounted for 78 percent, 54 percent, and 49 percent of the revenue, operating profit, and identifiable assets, respectively, in 2009 on a consolidated basis before discontinued operations.
Real Estate: The Real Estate Industry consists of two segments, both of which have operations in Hawaii and on the U.S. Mainland. The Real Estate Sales segment generates its revenues through the development and sale of land and commercial and residential properties. The Real Estate Leasing segment owns, operates, and manages retail, office, and industrial properties. Real estate activities are conducted through A&B Properties, Inc. and various other wholly-owned subsidiaries of A&B.
The Real Estate Industry accounted for 15 percent, 69 percent, and 44 percent of the revenue, operating profit, and identifiable assets, respectively, in 2009 on a consolidated basis before discontinued operations.
Agribusiness: Agribusiness, a division of A&B, contains one segment and produces and transports bulk raw sugar, specialty food grade sugars, and molasses; produces, markets, and distributes green coffee, roasted coffee, and specialty food-grade sugars; provides general trucking services, mobile equipment maintenance, and repair services; and generates and sells, to the extent not used in the Company’s Agribusiness operations, electricity.
In the fourth quarter of 2009, the Company became the sole member in Hawaiian Sugar & Transportation Cooperative (“HS&TC”), a cooperative that provides raw sugar marketing and transportation services to its members, and therefore, the Company consolidated HS&TC beginning December 1, 2009 in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 related to consolidation.
The Agribusiness Industry accounted for 7 percent of revenue and identifiable assets in 2009 on a consolidated basis before discontinued operations.
CRITICAL ACCOUNTING ESTIMATES
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, upon which the MD&A is based, requires that management exercise judgment when making estimates and assumptions about future events that may affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty and actual results will, inevitably, differ from those critical accounting estimates. These differences could be material.
The Company considers an accounting estimate to be critical if: (i)(a) the accounting estimate requires the Company to make assumptions that are difficult or subjective about matters that were highly uncertain at the time that the accounting estimate was made, (b) changes in the estimate are reasonably likely to occur in periods subsequent to the period in which the estimate was made, or (c) use of different estimates by the Company could have been used, and (ii) changes in those assumptions or estimates would have had a material impact on the financial condition or results of operations of the Company. The critical accounting estimates inherent in the preparation of the Company’s financial statements are described below.
Impairment of Long-Lived Assets: The Company’s long-lived assets are reviewed for possible impairment when events or circumstances indicate that the carrying value may not be recoverable. In such an evaluation, the estimated future undiscounted cash flows generated by the asset are compared with the amount recorded for the asset to determine if its carrying value is not recoverable. If this review determines that the recorded value will not be recovered, the amount recorded for the asset is reduced to estimated fair value. The Company has evaluated certain long-lived assets for impairment; however, no impairment charges were recorded as a result of this process. These asset impairment loss analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among others, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets, and thus, the accounting estimates may change from period to period. If management uses different assumptions or if different conditions occur in future periods, the Company’s financial condition or its future operating results could be materially impacted.
Impairment of Investments: The Company’s investments in unconsolidated affiliates are reviewed for impairment whenever there is evidence that fair value may be below carrying cost. An investment is written down to fair value if fair value is below carrying cost and the impairment is other-than-temporary. In evaluating the fair value of an investment, the Company reviews discounted projected cash flows associated with the investment and other relevant information. In evaluating whether an impairment is other-than-temporary, the Company considers all available information, including the length of time and extent of the impairment, the financial condition and near-term prospects of the affiliate, the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and projected industry and economic trends, among others.
In determining the fair value of an investment and assessing whether any identified impairment is other-than-temporary, significant estimates and considerable judgments are involved. These estimates and judgments are based, in part, on the Company’s current and future evaluation of economic conditions in general, as well as a joint venture’s current and future plans. These impairment calculations are highly subjective because they also require management to make assumptions and apply judgments to, among others, estimates of the timing and amount of future cash flows, probabilities related to various cash flow scenarios, and appropriate discount rates. Changes in these and other assumptions could affect the projected operational results of the unconsolidated affiliates, and accordingly, may require valuation adjustments to the Company’s investments that may materially impact the Company’s financial condition or its future operating results. For example, if the current market conditions continue to deteriorate or a joint venture’s plans change, additional impairment charges may be required in future periods, and those charges could be material.
In 2009, the Company evaluated certain investments in unconsolidated affiliates for impairment. As a result of this process, the Company recorded an impairment loss of approximately $2.5 million related to its Ka Milo joint venture investment. Continued weakness in the real estate sector or difficulty in obtaining or renewing project-level financing may affect the value or feasibility of certain development projects owned by the Company or by its joint ventures and could lead to additional impairment charges in the future.
Legal Contingencies: The Company’s results of operations could be affected by significant litigation adverse to the Company, including, but not limited to, liability claims, antitrust claims, and claims related to coastwise trading matters. The Company records accruals for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Management makes adjustments to these accruals to reflect the impact and status of negotiations, settlements, rulings, advice of counsel and other information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from those estimates. In making determinations of likely outcomes of litigation matters, the Company considers many factors. These factors include, but are not limited to, the nature of specific claims including unasserted claims, the Company’s experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute resolution mechanisms and the matter’s current status. A detailed discussion of significant litigation matters is contained in Note 12 to the Consolidated Financial Statements.
Allowance for Doubtful Accounts: Receivables are recorded net of an allowance for doubtful accounts. The Company estimates future write-offs based on delinquencies, credit ratings, aging trends, and historical experience. The Company believes the allowance for doubtful accounts is adequate to cover anticipated losses; however, significant deterioration in any of the aforementioned factors or in general economic conditions could change these expectations, and accordingly, the Company’s financial condition and/or its future operating results could be materially impacted.
Revenue Recognition for Certain Long-term Real Estate Developments: As discussed in Note 1 to the Consolidated Financial Statements, revenues from real estate sales are generally recognized when sales are closed and title, risk and rewards passes to the buyer. For certain real estate sales, the Company and its joint venture partners account for revenues on long-term real estate development projects that have material continuing post-closing involvement, such as Kukui`ula, using the percentage-of-completion method. Following this method, the amount of revenue recognized is based on the percentage of development costs that have been incurred through the reporting period in relation to total expected development cost associated with the subject property. Accordingly, if material changes to total expected development costs or revenues occur, the Company’s financial condition and/or its future operating results could be materially impacted.
Self-Insured Liabilities: The Company is self-insured for certain losses related to, including, but not limited to, employee health, workers’ compensation, general liability, real and personal property, and real estate construction warranty and defect claims. Where feasible, the Company obtains third-party insurance coverage to limit its exposure to these claims. When estimating its self-insured liabilities, the Company considers a number of factors, including historical claims experience, demographic factors, current trends, and analyses provided by independent third-parties. Periodically, management reviews its assumptions and the analyses provided by independent third-parties to determine the adequacy of the Company’s self-insured liabilities. The Company’s self-insured liabilities contain uncertainties because management is required to apply judgment and make long-term assumptions to estimate the ultimate cost to settle reported claims and claims incurred, but not reported, as of the balance sheet date. If management uses different assumptions or if different conditions occur in future periods, the Company’s financial condition and/or its future operating results could be materially impacted.
Goodwill & Intangible Assets: The Company reviews goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable and also reviews goodwill for impairment annually. In estimating the fair value of a reporting unit, the Company uses a combination of a discounted cash flow model and fair value based on market multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”). The discounted cash flow approach requires the Company to use a number of assumptions, including market factors specific to the business, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a discount rate that considers the relative risk of achieving the cash flows and the time value of money. Although the assumptions used by the Company in its discounted cash flow model are consistent with the assumptions the Company used to generate its internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows from the reporting unit and the relative risk of achieving those cash flows. When using market multiples of EBITDA, the Company must make judgments about the comparability of those multiples in closed and proposed transactions. Accordingly, changes in assumptions and estimates, including, but not limited to, changes driven by external factors, such as industry and economic trends, and those driven by internal factors, such as changes in the Company’s business strategy and its internal forecasts, could have a material adverse effect on the Company’s business, financial condition and results of operations.
Pension and Post-Retirement Estimates: The estimation of the Company’s pension and post-retirement expenses and liabilities requires that the Company make various assumptions. These assumptions include the following key factors:
Actual results that differ from the assumptions made with respect to the above factors could materially affect the Company’s financial condition and/or its future operating results. The effects of changing assumptions are included in unamortized net gains and losses, which directly affect accumulated other comprehensive income. Additionally, these unamortized gains and losses are amortized and reclassified to income (loss) over future periods.
The 2009 net periodic cost and obligations for qualified pension and post-retirement plans were determined using a discount rate of 6.25 percent. For the Company’s non-qualified benefit plans, the 2009 net periodic cost was determined using a discount rate of 6.00 percent and the December 31, 2009 obligation was determined using a discount rate of 5.00 percent. The discount rate used for determining the year-end benefit plan obligation was generally calculated using a weighting of expected benefit payments and rates associated with high-quality U.S. corporate bonds for each year of expected payment to derive a single estimated rate at which the benefits could be effectively settled at December 31, 2009, rounded to the nearest quarter percent.
The estimated return on plan assets of 8.5 percent was based on historical trends combined with long-term expectations, the mix of plan assets, asset class returns, and long-term inflation assumptions. One-, three-, and five-year pension returns were 16.8 percent, (3.7) percent, and 3.0 percent, respectively. The Company’s long-term rate of return (since inception in 1989) was 8.3 percent.
For 2009, the Company’s post-retirement obligations were measured using an initial 9 percent health care cost trend rate, decreasing by 1 percent annually until the ultimate rate of 5 percent is reached in 2014.
Lowering the expected long-term rate of return on the Company’s qualified plan assets by one-half of one percent would have increased pre-tax pension expense for 2009 by approximately $1.2 million. Lowering the discount rate assumption by one-half of one percentage point would have increased pre-tax pension expense by $2.1 million. Additional information about the Company’s benefit plans is included in Note 9 to the Consolidated Financial Statements.
As of December 31, 2009, the market value of the Company’s defined benefit plans totaled approximately $260 million, compared with $244 million as of December 31, 2008. The recorded net pension liability was approximately $62 million as of December 31, 2009 and approximately $70 million as of December 31, 2008. The Company expects to make contributions totaling $0.5 million to certain of its defined benefit pension plans in 2010. There were no contributions required in 2009 and 2008.
Income Taxes: The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are applied in the calculation of tax credits, tax benefits and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to the Company’s tax provision in a subsequent period.
In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertain tax positions taken or expected to be taken with respect to the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could materially affect the Company’s financial condition and/or its future operating results.
Recent Accounting Pronouncements: See Note 1 to the Consolidated Financial Statements for a full description of the impact of recently issued accounting standards, which is incorporated herein by reference, including the expected dates of adoption and estimated effects on the Company’s results of operations and financial condition.
CONSOLIDATED RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results of operations of Alexander & Baldwin, Inc. and its subsidiaries (collectively, the “Company”) should be read in conjunction with the consolidated financial statements and related notes thereto. Amounts in this narrative are rounded to millions, but per-share calculations and percentages were calculated based on thousands. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may be slightly different than the more accurate amounts included herein.
2009 vs. 2008
Operating Revenue for 2009 decreased 25 percent, or $475 million, to $1,405 million. Real estate sales revenue decreased 93 percent in 2009 (after subtracting revenue from discontinued operations) due principally to sales at the Company’s Keola La’i condominium project in 2008. Ocean transportation revenue decreased 13 percent, principally due to lower Hawaii volumes, lower China yields and lower fuel surcharge revenues, partially offset by improved Hawaii service yields and cargo mix. Logistics services revenue decreased 26 percent, principally due to lower volumes and yields, partially offset by revenue from MGDS’s warehousing and distribution business, which acquired Pacific American Services, LLC (“PACAM”), a San Francisco bay-area regional warehousing, packaging and distribution company, in August 2008. Agribusiness revenue decreased 18 percent, primarily due to lower power sales volume and pricing and lower bulk raw sugar sales volume. Real estate leasing revenue increased 6 percent in 2009 (after subtracting leasing revenue from assets classified as discontinued operations), primarily due to a positive effect from the timing of property acquisitions and dispositions, partially offset by lower mainland occupancy and rents. The reasons for business- and segment-specific year-to-year fluctuations in revenue growth are further described below in the Analysis of Operating Revenue and Profit by Segment.
Because of the recurring nature of property sales, the Company views changes in real estate sales and real estate leasing revenues on a year-over-year basis before the reclassification of revenue to discontinued operations to be more meaningful in assessing segment performance. Additionally, due to the timing of sales for development properties and the mix of properties sold, management believes performance is more appropriately assessed over a multi-year period. Furthermore, year-over-year comparisons of revenue are not complete without the consideration of results from the Company’s investment in its real estate joint ventures, which are not included in consolidated operating revenue, but are included in segment operating profit. The Analysis of Operating Revenue and Profit by Segment that follows, provides additional information on changes in real estate sales revenue and operating profit before reclassifications to discontinued operations.
Operating Costs and Expenses for 2009 decreased by 21 percent, or $368 million, to $1,363 million. Real estate sales and leasing costs decreased by 74 percent, primarily related to cost of sales for condominiums sold at Keola La’i in 2008, partially offset by higher depreciation expenses on commercial properties. Logistics services cost decreased 27 percent due primarily to lower volumes. Ocean transportation costs decreased 10 percent, primarily due to lower volume-related expenses, partially offset by higher contractual stevedoring rates and higher vessel repair costs. Selling, General and Administrative costs (“SG&A”), decreased 6 percent due principally to cost reduction initiatives, including workforce and benefit reductions, as well as lower performance-based compensation. Agribusiness costs decreased 2 percent due principally to personnel cost savings and lower volume of sugar sold. These cost decreases were partially offset by a $24 million year-over-year increase in non-cash pension expense, which is embedded in the segment figures and general and administrative expenses, was principally due to plan asset losses in 2008. The reasons for changes in business- and segment-specific year-to-year fluctuations in operating costs, which affect segment operating profit, are more fully described below in the Analysis of Operating Revenue and Profit by Segment.
Income Taxes were lower in 2009 compared with 2008 on an absolute basis due principally to lower income. The effective tax rate in 2009 was higher than the rate in 2008 principally due to an adjustment to prior year taxes, non-deductible expenses that had a greater impact on the effective rate as a result of lower income relative to 2008, the recognition of certain tax benefits in 2008 as a result of certain statute of limitations expirations, and newly enacted tax legislation which unfavorably affected the effective rate.
Other Income and Expense in 2009 decreased $14 million in 2009 compared with 2008, due primarily to $9 million in lower real estate joint venture income, an $8 million gain on a fire insurance settlement recognized in 2008, and $1 million in higher interest expense in 2009 resulting from lower capitalized interest and a higher weighted-average interest rate, partially offset by a $5 million gain recorded upon consolidation of HS&TC (as further described in Note 3 to the Consolidated Financial Statements).
2008 vs. 2007
Operating Revenue for 2008 increased 14 percent, or $229 million over 2007 results, to $1,880 million. Real estate sales revenue increased more than ninefold in 2008 (after subtracting revenue from discontinued operations) due principally to sales at the Company’s Keola La’i condominium project. Real estate leasing revenue increased 10 percent in 2008 (after subtracting leasing revenue from assets classified as discontinued operations), primarily due to the favorable effect from the timing of acquisitions and dispositions, partially offset by lower mainland occupancy. Ocean transportation revenue increased 2 percent, principally due to higher fuel surcharge revenues, improved Hawaii service yields and cargo mix, and higher China service yields, partially offset by lower volumes. Logistics services revenue increased 1 percent, principally due to the commencement of MGDS’s warehousing operations, the acquisition of PACAM, and higher rates, principally fuel surcharges. Agribusiness revenue decreased modestly, primarily due to lower bulk raw sugar sales volumes.
Operating Costs and Expenses for 2008 increased by 15 percent, or $229 million, to $1,731 million. Real estate sales and leasing costs more than quadrupled, primarily related to cost of sales for condominiums sold at Keola La’i, and to a lesser extent higher depreciation expenses on commercial properties. Ocean transportation costs increased 5 percent, primarily due to higher vessel and terminal handling costs, partially offset by lower operations overhead costs, principally lower westbound container repositioning costs. Agribusiness costs increased 11 percent due principally to higher crop production costs. These increases were partially offset by lower consolidated SG&A, which decreased 1 percent due principally to lower performance-based compensation.
Other Income and Expense in 2008 is comprised of equity in earnings of real estate joint ventures, interest revenue and interest expense. Equity in income of real estate affiliates was $14 million lower in 2008 due principally to $12.1 million higher earnings from the Company’s Kai Malu joint venture project in 2007. Interest expense of $24 million in 2008 was $5 million higher than 2007 due to higher average debt balances. Impairment losses related to the Company’s investments totaled approximately $3 million and interest income in 2008 was $2 million lower than 2007 due to lower average rates and lower average invested balances. These decreases in 2008 were partially offset by an $8 million gain recognized in 2008 for an insurance settlement related to a 2005 casualty loss.
Income Taxes were lower in 2008 compared with 2007 on an absolute and percentage basis due to lower income and a reduction in the effective income tax rate. The lower effective income tax rate in 2008 was principally due to the recognition of $2 million in unrecognized tax benefits as a result of the expiration of certain statute of limitations, tax credits related to renewable energy and investments, and a decrease in certain non-deductible expenses.
ANALYSIS OF OPERATING REVENUE AND PROFIT BY SEGMENT
Additional detailed information related to the operations and financial performance of the Company’s Industry Segments is included in Part II Item 6 and Note 13 to the Consolidated Financial Statements. The following information should be read in relation to the information contained in those sections.
Ocean Transportation; 2009 compared with 2008