Demise of power-purchase deal is final blow for HC&S

Two heavy body blows and maybe a near knockout punch.

That’s what Hawaii’s only remaining sugar plantation took before its owner decided last week to throw in the towel and close the 36,000-acre Hawaiian Commercial & Sugar Co. farm on Maui by year’s end.

The body blows — low sugar production and prices — were nothing new in the sugar farming industry. But the other punch was an unusual one with a stinging impact.

Alexander & Baldwin Inc., the kamaaina owner of HC&S, said its main reasons for ending 146 years of sugar cane farming and shuttering the plantation with 675 employees was two bad years of low sugar production and prices that put a roughly $33 million dent in net income last year and had little prospect of being turned around.

But the company also lost a lucrative deal late last year to supply Maui Electric Co. with power that would have provided HC&S with $19 million in projected revenue this year and next year, according to documents filed with the state Public Utilities Commission.

HC&S generates electricity by burning the fiber known as bagasse left over from processed cane, as well as coal, in a boiler to power its sugar mill and irrigation pumps. A smaller hydroelectric system on the farm also provides power. Historically, HC&S sold extra power to Maui Electric on terms that significantly helped the agricultural operation.

For instance, Maui Electric used to pay HC&S $1.8 million a year just for its commitment to provide power.

However, Maui Electric, which once relied on HC&S for about 10 percent of its electricity supply, sought in recent years to amend the power-purchase agreement in part due to its effort to move electrical generation toward more renewable sources and reduce use of dirtier sources such as coal.

HC&S, which ships raw sugar to California on a company-owned ship, would fill the ship with coal for the return trip to Hawaii. In 2014 the company burned 57,100 tons of coal, according to A&B’s most recent annual financial report.

Efforts to amend the power-purchase agreement resulted in HC&S reducing its power supply to Maui Electric at the beginning of last year to 8 megawatts from 12 megawatts. Then in October, Maui Electric stopped buying power altogether from HC&S except in emergencies under another amendment the PUC approved in September.

A loss of millions

According to the amendment request, Maui Electric is expected to pay HC&S $323,936 this year instead of $19.5 million under the prior agreement. Next year the expected payment is $94,736 instead of $19.4 million.

A&B declined to confirm the cuts described in the Maui Electric filing but said the loss of power sales, taken together with challenging sugar production volume and anticipated prices near 30-year lows, made prospects for continued losses high.

“Many of the same forces that have driven other Hawaii sugar operations out of business, most of them decades ago, have finally caught up with HC&S,” A&B said in a regulatory filing Thursday.

The decision to quit farming sugar cane was costly. About 645 employees will be laid off. HC&S also bought around $60 million in goods and services a year from local vendors. And A&B expects a $58 million to $76 million negative hit to its net income this year from severance benefit payments, closing costs that include removing facilities, and a $5 million to $15 million operating loss from sugar production.

At one time Hawaii was home to more than 150 sugar cane plantations, which flourished in the late 1800s under a duty-free agreement between the Hawaiian kingdom and the United States. Later, growers relied on Hawaii’s tropical climate to produce more sugar per acre than most other sugar-producing areas in the world. That advantage, though, was offset somewhat by the cost to ship sugar to the mainland and higher labor costs.

In 1933, 254,563 acres were planted in sugar cane in Hawaii, according to the state Department of Agriculture. Raw sugar production here peaked in 1966 at 1.2 million pounds.

A&B was one of the industry’s dominant players. Among sugar plantations the firm owned or operated were Kahuku Plantation Co. on Oahu, McBryde Sugar on Kauai and HC&S on Maui.

As operating costs rose and competition increased from lower-cost producers, many Hawaii plantations folded. The first to exit typically were smaller farms and farms on the windward side of islands where less sun produced less cane sugar.

A&B closed its Kahuku Plantation in 1971.

In the 1990s a wave of closures swept the islands, including Oahu Sugar, Hilo Sugar, Hamakua Sugar, Kau Sugar, Waialua Sugar and McBryde. Pioneer Mill was the second-to-last sugar plantation on Maui until it closed in 1999.

By 2002 there were just two Hawaii sugar plantations, Gay & Robinson on Kauai and HC&S. The Kauai farm closed in 2009.

HC&S outlasted the rest for a combination of reasons.

For one, HC&S was the biggest. It also had contiguous land that allowed for better use of irrigation, processing and other systems. And the land was owned instead of leased.

Like other plantations, HC&S used technology to reduce labor. The company’s workforce of 675 is down from 776 in 2008, 1,300 in 1985 and 3,390 in 1949.

A&B invested considerably in the operation, computerizing factory operations and installing drip irrigation in the 1980s. The company also created higher-value products such as Maui Brand Sugar and initially was the sole supplier of turbinado sugar for Sugar in the Raw.

Another advantage was that A&B had profits from other divisions — real estate and a quarry and road construction business, the latter of which replaced former subsidiary Matson Inc. — to absorb HC&S losses.

The good fight

Being alone, however, made it harder for HC&S because industry partners that used to share research, marketing and transportation costs were gone.

“They fought the good fight. They fought the dying fight,” said Walter Dods, the former CEO of First Hawaiian Bank who retired from A&B’s board two years ago.

Dods, whose paternal grandfather was the bookkeeper for Kohala Sugar, recalled that HC&S explored a variety of ventures to improve the economics of maintaining the farm, including producing lumber from bagasse, alternative crops and feed.

“They tried everything,” he said, recalling that there were many discussions and close decisions in past years over quitting sugar cane. “It was inevitable.”

Chris Benjamin, A&B’s president and CEO, said sugar cane farming has high fixed costs that don’t go down when production goes down, so low sugar prices plus low production equals big financial losses.

“It’s a very unusual business in that it’s highly sensitive to production volumes,” he said. “You’ve got a lot of fixed costs, so production volume and revenue is extremely important.”

The yearly sugar production goal for HC&S had been 225,000 tons, which was last achieved in 1999. Benjamin said the “magic number” to generate more revenue than costs is around 200,000 tons. Last year production totaled 136,000 tons, and the operating loss for A&B’s agribusiness division, mainly HC&S, was $30 million.

The year before, production was 162,100 tons, and the operating loss was $12 million.

In 2008 and 2009 HC&S encountered similar trouble with comparable production volumes and losses. However, Benjamin said that drop was largely due to the company not adhering to good farm practices including fertilizing and how land was prepared for planting. An unprecedented drought made things worse.

After a hard look at the business in 2009, A&B concluded that big enough improvements could be made. Annual production rose to between 170,000 and 190,000 tons over the next four years. Also, an unusual spike in sugar prices — from around 20 cents to as much as 40 cents per pound — happened at the same time as the result of world market dynamics and elements of the North American Free Trade Act.

Since 2013, however, prices fell back to about 24 cents, and Benjamin said there are no expectations of another rise.

“Farmers are price takers, not price makers,” said Ryan Westin, an executive vice president of the American Sugar Alliance.

Westin said the price of sugar has been frozen, except for the spike, for more than 30 years, unlike other commodities and goods.

HC&S has earned profits at the low sugar prices, but bad weather hurt production in the last two years. Rick Volner, the plantation’s general manager, said rainfall on the farm over the last two years was 50 to 80 percent higher than normal, with a few spots having 100 percent more rain.

Rain during harvest months of March through November slows heavy equipment from getting into fields and taking cane out, while the cane needs more cleaning before processing. The extra time and work reduce production.

Warren Watanabe, executive director of the Maui County Farm Bureau, said the rain wiped out vegetable crops of some farmers and kept others from planting.

Benjamin said he doesn’t expect the recent weather patterns to change. And on top of the production outlook, low prices and lost power sales, changing regulatory restrictions and growing community opposition to historical practices such as burning cane added to HC&S’ headaches and resulted in the decision to shut down.

“We just don’t see signs of improvement,” Benjamin said.