Maui Council, Consumer Advocate oppose Young Brothers’ proposed shipping rate hikes

As opposition mounts to its proposed inter-island shipping rate increases, Young Brothers maintains its financial position has become even more precarious and continues to deteriorate since it originally filed its request for rate relief in October.

Earlier this month, the company double-downed on its rate hike request after the Hawaiʻi Consumer Advocate filed a protest on April 24 (filing No. F-324434) to Young Brothers’ request for temporary shipping rate hikes.

The Advocate recommended a temporary rate hike of $3.2 million, which it says should be enough for Young Brothers to comply with its debt covenants and provide sufficient funding to continue operations at current levels of service. Young Brothers’ attorneys called that increase “woefully deficient.”

The Advocate also said it would be in the public interest for the Public Utilities Commission to investigate Young Brothers’ parent company — Foss Maritime, part of the Saltchuk Marine family of companies based in Seattle.

Young Brothers has two rate increase requests: (1) a general rate increase of $26 million (27% more in revenue over that collected at present rates with a Water Carrier Inflationary Cost Index, an automatic mechanism for adjusting the amount of revenue Young Brothers is approved to recover; and (2) a temporary rate increase for $18.5 million in regulated revenues, temporarily, while the general rate increase is being considered.

In response to the Consumer Advocate’s protest, Young Brothers maintains it needs all of its requested rate hikes and objects to an investigation of its parent company and other proposed conditions as being inappropriate and outside the scope of the inter-island shipper’s application for temporary rate increases.

“Without a rate increase, the cost to provide the services exceeds the revenue received,” Young Brothers’ attorneys tell the PUC in a recent filing. “No company can absorb continuous losses over an extended period.”

In its protest filing last month, the Consumer Advocate recalled that, in 2020, when Young Brothers was asked about parent company Saltchuk’s financial dedication to local shipping, the inter-island shipper said previous statements about Saltchuk’s support “were made over 20 years ago, and YB does not make any contention regarding the applicability of such statements to the particular situation” in its then-current application for a rate tariff.

“Not just in the ’20 years’ since Saltchuk acquired Young Brothers and the last request for emergency or temporary rates, but still since then until today, Young Brothers’ managerial and financial decisions have strongly implied that Saltchuk has not treated Young Brothers like a public utility and vital service for the state of Hawaiʻi, but rather purely like a financial asset, from which resources can be extracted in good times, for which no support is maintained during hard times,” the Consumer Advocate said.

It added: “If Young Brothers’ management were not as eager to distribute dividends up to Saltchuk whenever possible and to the maximum extent possible, Young Brothers may have the cash reserves to better weather the storms of its cyclical financial distresses. Any long-term search for a way out of Young Brothers’ repeated financial distresses will be incomplete without an examination of Saltchuk’s influence and direction.”

In their response, Young Brothers’ attorneys said the Consumer Advocate has not established “any legitimate grounds or evidence” for an investigation of Saltchuk under Hawaiʻi law.

“Despite the aspersions cast by the Consumer Advocate, it is undisputed that Salchuk’s rate of return in YB has been well below its allowed and average rate of return over the course of its ownership,” the attorneys said, providing an exhibit that shows an average rate of return of 1.1% from 2007 to 2024.

The attorneys said Young Brothers recognizes the commission’s broad investigative powers, however, the company does not have the authority to agree to an investigation of Saltchuk or any of its affiliates.

“YB and Saltchuk are separate and independent entities, and as the Commission is aware, YB is currently governed by a separate independent board of directors. Therefore, any investigation of Saltchuk will require Saltchuk’s direct involvement and representation by its own counsel,” they said.

In its protest filing, the Consumer Advocate emphasized its “significant and ongoing concern” about Young Brothers’ temporary rate increase, calling it “another example of Young Brothers continuing to repeat a cycle of seeking relief to address urgent financial concerns by requesting approval of rate increases, or the establishment of rate increase mechanisms, and then soon thereafter requesting additional rate increases in an unsustainable pattern.”

“Young Brothers is seeking emergency rates again because it has made no meaningful efforts to control its costs, or its investments or dividend distributions for that matter,” the Advocate says in its protest. “Therefore, even though the Consumer Advocate is not outright opposing a temporary rate increase in this protest, it does find a lower ‘probable entitlement’ than Young Brothers’ request, based on Young Brothers’ descriptions of its current debt negotiations.”

In addition to Young Brothers’ attorneys calling the Consumer Advocate’s suggestion of a $3.2 million revenue increase “woefully deficient,” they said that figure was “based on incorrect assumptions and calculations. Additionally, it is unclear how a specific dollar amount revenue increase would practically be implemented.”

The attorneys also said the shipper has taken “extraordinary measures” to delay and hopefully avoid the “bad outcomes” possible if its request were not granted by April 1, 2025.

“However, despite these extraordinary measures, YB remains in a very precarious position, which continues to deteriorate, resulting in YB now being in a worse financial position than it was in at the time YB filed its motion,” the attorneys say. “YB desperately needs the requested temporary rate increase to stop the bleeding.”

Young Brothers also emphasized its dire debt problems.

“If YB does not receive, prior to the expiration of its working capital credit facility, a temporary rate increase that is in an amount sufficient to satisfy its lender, its lender could refuse to extend the working capital facility maturity beyond June 30, 2025, accelerate the remainder of the outstanding facility, and foreclose on YB’s assets,” the shipper’s attorneys said.

Also, all of Young Brothers’ debt under its credit agreement ($52.2 million) has been classified as a current liability on its balance sheet. “YB also remains at risk of receiving a going concern opinion,” they said.

In the vernacular of auditing and financial reporting, a “going concern opinion” would be a statement by an independent auditor that raises substantial concern about a company’s ability to continue as a viable business for a reasonable amount of time, usually a year from the date of financial statements. This warns investors, creditors and others that the company faces significant financial difficulties and its future’s uncertain.

In its protest, the Consumer Advocate scolds Young Brothers, saying that in its arguments for a temporary rate hike the inter-island shipper “blames a lack of rate increases since its last emergency rate request as a major factor of why it claims to need this emergency rate request.”

“Young Brothers does not seem to take seriously the (Public Utility) Commission’s repeated admonitions to control its costs, nor even begin to fathom the long-term risks that its climbing rates may reach a price-elasticity-of-demand tipping point and precipitate a vicious cycle of (even further) falling cargo levels,” the Advocate says. “Young Brothers makes scant mention of any meaningful attempts to control its costs and address revenue sufficiency that way.”

The Advocate recommended certain conditions of approval for the temporary rate hike. These include prior PUC approval of before issuing any future dividend payments to Saltchuk and investigating the parent-company relationship between Saltchuk Resources Inc. and Foss Marine Company and Young Brothers’ actions regarding investment and operational decisions, as well as financing and dividends.

Such an investigation would be in the “public interest,” the Advocate says. “Since acquiring Young Brothers, Saltchuk’s parent-company conduct, as evidenced by Young Brothers business decisions, demonstrates little appreciation for Young Brothers’ role as a Hawaiʻi-regulated public utility.”

Young Brothers objected to prior commission approval of dividends payments to Saltchuk, arguing that such a regulatory restriction would overstep the commission’s legal authority and common law rate-making principles. It also would violate Young Brothers’ constitutional rights and unlawfully infringe on interstate commerce, the shippers’ attorneys said.

In any case, they said, it’s unnecessary because the terms of Young Brothers’ loan agreement already prevents it from issuing dividend distributions until specific debt covenant ratios are met.

Saltchuk’s purchase of Young Brothers was approved by the commission in October 1999.

In Young Brothers’ and Saltchuk’s joint application to the commission at that time, Saltchuk reported that it “is strong financially and has more than adequate liquidity” and “will dedicate the resources which are necessary to support growth, development and safe operations at Young Brothers.”

The Consumer Advocate noted, however, that in 2020, “Young Brothers informed the Commission and Consumer Advocate that Saltchuk had ceased short-term working capital support to it – and for the vital service Young Brothers provides in Hawaiʻi, especially to under-served Neighbor Island ports during the COVID-19 pandemic.”

The advocate noted there has been public support for the rate increase from those who rely on Young Brothers’ service and positioned to absorb the increases and significant concerns from others, including the public, customers and public officials that “detailed the substantial adverse impact that the proposed rate increases would have on businesses, and on people’s day-to-day lives and ability to absorb the increased costs and continue living within the state.”

Adding to the public pressure on Young Brothers, the Maui County Council followed through during its May 2 meeting in adopting a resolution opposed to Young Brothers’ proposed increased shipping costs. The resolution, introduced by Council Member Keani Rawlins-Fernandez, passed by a vote of 7-1, with Council Member Yuki Lei Sugimura voting “no” and Council Member Nohelani Uʻu-Hodgins absent and excused.

Before voting, council members peppered Young Brothers President Jay Ana with a wide variety of questions. Ana said the two main problems are rising labor costs and a lack of shipping volume.

Immediately during the COVID-19 pandemic, all shipping volume dropped 40%, he said. Later, it rebounded, primarily with interstate cargo from the US Mainland. And, up until 2022, that volume eclipsed what was seen before the pandemic.

But, with local community regulated cargo, Ana said Young Brothers didn’t see the same rebound. “If fell off the cliff with COVID, but it was a slower decline, and it never rebounded to 2019 levels,” he said.

Ana noted that, around the same time as the Lahaina wildfire, an Amazon distribution center became established in the islands. Such factors have reduced Young Brothers’ interstate shipping volume.

“The paradigm has shifted,” he said. “And there’s a cyclical shift in consumer behavior, which emphasizes greater e-commerce and less brick-and-mortar consumption, more big box consumption, less local shop consumption.”

The Council’s resolution was amended to encourage the PUC to “seek alternatives other than rate hikes,” and it included some “whereas” clauses that referred to the Consumer Advocate’s protest and proposed conditions of approval.

Those suggested conditions for the temporary rate hike include commission pre-approval for any dividend payments from YB to its parent company, Saltchuk Resources, Inc., and an investigation into the companies’ relationship to ensure their dealings are in the public’s interest.

Young Brothers is an independent subsidiary of Foss Maritime, part of the Saltchuk Marine family of companies protesting Young Brothers’ proposed inter-island shipping rate increase of nearly $26.4 million, or 27% increase over current effective rates.

Saltchuk is a privately owned family of diversified freight transportation, marine service and energy distribution companies headquartered in Seattle, according to its website. It boasts consolidated annual revenue of approximately $5.5 billion and employs 8,500 people. Saltchuk is ranked among Washington’s largest privately held businesses.

Young Brothers’ applied to the Hawaiʻi Public Utilities Commission for rate hikes on Oct. 15. (Public comments and other case filings can be found here under Docket No. 2024-0255.)

The shipping company has reported significant losses on its Maui County routes alone in 2024, including nearly $1.5 million on the Island of Maui, nearly $3.3 million on Lāna‘i, and nearly $3.5 million on Moloka‘i.

To illustrate the potential impact on consumers, Young Brothers used the example of shipping a medium-sized car from Honolulu to Kahului. Now, the one-way shipping cost is about $334. With the proposed general rate increase, the same shipment would cost $100 more, approximately $434.

Young Brothers reported that, since the PUC set customer rates in 2020, the company has experienced a 17% increase in operational costs and invested over $120 million in fleet and harbor infrastructure to maintain safe, reliable and sustainable services.

The company noted that it was not permitted to request a rate increase until after September 2023. Moreover, cargo volume and revenue have not recovered to pre-pandemic levels, with intrastate volume down an average of 13% from 2019 to 2023, Young Brothers said.

The Public Utilities Commission regulates two water carriers in Hawaiʻi: Young Brothers, which provides inter-island cargo service among all major islands; and Hone Heke Corp., a passenger and cargo carrier providing water transportation services between Maui and Lānaʻi. The PUC reviews proposed rate increases, tariffs, charges and fees, and determines the allowable rate of earnings in establishing rates.

The commission is expected to render a decision on Young Brother’s application for temporary rate relief in the coming weeks.