Young Brothers lays out dwindling-cash predicament

Hawaii interisland shipping lifeline Young Brothers LLC expects to run out of cash by the end of July if it can’t get $25 million from the state or other financing.

The company conveyed this new description of distress to the state Public Utilities Commission on Friday after a plea earlier last week for PUC relief and state rescue cash.

Public comments also have been flowing to the PUC in recent days, conveying support for the company as well as opposition to service cuts and criticism of a state bailout.

In the supplemental filing, Hawaii’s only regulated interisland ocean cargo carrier said it will need to increase customer rates and partially suspend certain kinds of cargo for some ports even if it obtains $25 million from the state’s share of federal COVID-19 aid.

Another detail in the new filing is that Young Brothers, which received no COVID-19 federal aid, is exploring potential bank and other debt financing that could help what the company has described as an “extremely dire” financial condition after its parent, Seattle- based Saltchuk Resources Inc., decided to quit covering losses of its Hawaii subsidiary.

“Developing this contingency plan for Young Brothers involved some incredibly difficult decisions,” Jay Ana, Young Brothers president, said in a statement Friday separate from the PUC filing. “Ultimately, the people of Hawaii should know that our top priority is finding real solutions to ensure uninterrupted service to all of the communities we serve.”

Young Brothers announced May 26 that it needs $25 million from the state or it could cease cargo service with its tug-and-barge system, which for smaller islands such as Molokai and Lanai represents a sole critical means for supplying everyday goods.

The company at that time did not provide a potential timetable for its worst-case scenario.

Young Brothers said its new financial projection clearly demonstrates an urgent need for immediate relief.

However, the company anticipates only an initial brief dip into negative cash territory during the last week of July while maintaining a positive bank balance that week and through three subsequent weeks until the week of Aug. 28 where a roughly $30,000 negative balance is projected.

Young Brothers previously reported losses of about $11 million in 2018 and $10 million last year. This year it was expecting to lose $12.3 million before the pandemic arose.

Obtaining $25 million, Young Brothers said, would offset expected losses this year that have been exacerbated by a 30% drop in cargo related to COVID-19.

Some customers, however, have raised questions about a state rescue.

One customer, who didn’t want to be identified out of concern that critical comments could affect business, noted in an interview that Saltchuk claims annual revenue of nearly $2.75 billion.

“If anybody has the resources to weather this storm, it’s Saltchuk Resources,” the customer said.

Another issue, raised after Young Brothers petitioned the PUC in September for a 34% average rate increase to generate $27 million, is that the company is including pension costs and something associated with accelerated depreciation expense in profit-loss calculations out of line with historical practice.

Tamara Lester sent a letter to the PUC on Saturday suggesting that Young Brothers has been an inefficient service provider because the regulated monopoly is entitled to a reasonable rate of return under PUC rules.

”This shows that cost cutting should have been done long before (the) current situation to address losses,” Lester said. “YB is using COVID-19 as an excuse to be bailed out.”

Robert Stephenson, president and CEO of the Molokai Chamber of Commerce, expressed appreciation for Young Brothers’ service, which he said is critical for the Molokai community. But he said the company has caused some of its business volume decline by accepting only “essential” cargo in the midst of the pandemic.

“Easing these self-imposed restrictions could help alleviate some drop in cargo volumes and in turn increase revenues to help offset YB’s financial losses,” he said in a letter to the PUC.

Joe Adams, president of Windward Boats Inc. on Oahu, echoed that view in an email noting that Young Brothers quit carrying boats, motors and trailers to neighbor islands a couple of months ago and hasn’t relented despite Hawaii COVID-19 cases dropping to a trickle.

“I believe that a lot of their problems are self inflicted and they are cooking the books to make it appear that they are worse off than reality,” he said.

Many comment letters to the PUC raised concerns about Young Brothers wanting to stop the more labor- intensive operation of carrying cargo loads not big enough to fill a container.

“Please consider prompt approval of (the) Young Brothers requested $25 million in CARES ACT funding from the state and reject their request to discontinue (less than container-load) service to Kauai,” said Michael Davis of Mike Davis Construction in a letter to the PUC.

In its Friday submission, Young Brothers laid out different envisioned operating scenarios depending on whether it receives $25 million immediately, less quickly or not at all.

Without the aid, the company said, it would explore the sale of assets, seek to renegotiate vendor payments and debts, reduce sailing frequency and stop carrying less-than-container cargo, including livestock, to some ports.

The company also would seek to increase rates, obtain long-term financing and recoup losses tied to COVID-19.

With delayed aid, Young Brothers said it would still take most of the same steps but perhaps only until relief is received, though a long-term rate increase would still be necessary.

With $25 million immediately, Young Brothers would maintain its recently reduced sailing schedule throughout the year but would still seek higher rates, financing, recovery of losses tied to COVID-19 and a delayed partial suspension of less-than-container cargo to certain ports.

“Ultimately, YB views its request for CARES Act funding not as a bailout or a permanent fix, but rather, as the first step in a series of many that will be necessary to set YB on the path to financial sustainability,” Ana said to the PUC.