No deal is perfect, but this one is worth pursuing, senators said Tuesday before ratifying an agreement between the government and Fortune Brands that would keep Cruzan VIRIL in the Virgin Islands for at least another 30 years.
The agreement hinges upon the government floating up to $105 million in bonds to fund a wastewater treatment plant and expanded Cruzan Rum facility on St. Croix that would increase Cruzan’s production capacity by about 50 percent.
"Gov. deJongh, I have to congratulate you — this is the one," Sen. Wayne James said during Tuesday’s special session. "This is the one. It may not be perfect, but it is most certainly good enough."
The vote came down around 9:30 p.m., with Sens. Craig W. Barshinger, Adlah "Foncie" Donastorg, Carlton "Ital" Dowe, Louis P. Hill, Wayne James, Shawn-Michel Malone, Nereida Rivera-O’Reilly, Usie R. Richards, Sammuel Sanes, Patrick Simeon Sprauve, Michael Thurland, Celestino A. White Sr. and Alvin L. Williams voting in favor.
Sens. Neville James and Terrence "Positive" Nelson voted against ratifying the agreement.
During the first few hours of the session — which started out as a Committee of the Whole hearing — it appeared senators’ concerns over the financing structure, Fortune’s proposed benefits and the use of an off-island trustee for holding the bond proceeds would hold up the vote. But after a second round of debate, only a few disparaged Fortune’s presentation or, in the case of Rivera-O’Reilly, described the agreement as "lopsided," bringing in more benefits for Fortune than the local community.
Instead, most drew upon Cruzan’s rich history in the Virgin Islands, calling it the "backbone" for revenues in the territory. The sentiments were echoed earlier in the day by testifies who underscored the importance of the local rum industry, calling the projected revenue an essential ingredient to the rebuilding and stabilization of the local economy.
Officials have said that once the effects of the national economic downturn started to set in locally and revenues took a hit, there were few financial options available for the government to pursue. Cutting the workforce and raising taxes were out of the question, so the government, among other things, looked at building its rum revenue stream.
A first step was the approval of a 30-year agreement with wine and spirits giant Diageo PLC, whose projected revenues are currently backing newly floated bonds and a $250 million line of credit that will maintain critical government services in the wake of multi-million dollar budget shortfalls during this and last fiscal year.
Revenues brought in by Cruzan Rum sales have backed the government’s previous matching fund bond indentures and since 2003, matching fund — or rum revenue — support for government services has exceeded $210 million, according to the governor’s legal counsel, attorney Adam Christian.
The federal government currently collects $13.50 in excise taxes — commonly referred to as cover-over revenues — on each proof gallon of V.I. produced rum sold throughout the mainland. Of that amount, $13.25 is remitted to the V.I. government. Since Fortune Brands took ownership of Cruzan VIRIL in September 2008, monthly rum receipts to the government have increased from $7.6 million to $10.6 million.
Through the proposed agreement, rum production will jump to 16.1 million proof gallons a year, bringing in about $133 million in net annual revenues for the government.
With the new agreement with Fortune in place, and the Captain Morgan rum distillery on the way, the territory will also be able to increase its stake in the world rum market.
The proposed agreement allows Cruzan to expand its focus from the production of bulk rum to branded rum. Fortune Brands (whose Beam Global subsidiary owns, among others, Jim Beam, Canadian Club and Courvoisier) wants the company to become a competitor in the upper end of the rum market, which warrants an increase in production. Over the 30-year proposed agreement, which carries a 30-year option to renew, Cruzan would be producing 16.1 million proof gallons per year — a large jump from its current 10.5 million gallons, according to Cruzan President Gary Nelthropp.
The largest supplier of bulk rum on the U.S. market, between 75 to 80 percent of Cruzan’s profits is based on bulk rum sales, while approximately 25 percent comes from branded rum. The government’s main concern when negotiations for an agreement with Fortune began about a year ago was that Cruzan, as a bulk rum producer, would take a hit if it continues to compete based on price with South American and other Caribbean locales with lower production costs.
Cruzan’s current U.S. Environmental Protection Agency discharge permit, which is based on the company’s current production capacity, expires in 2012. To carry the increased production load, the new treatment plant and expanded facility must be completed by then, Nelthropp said.
"With EPA, we’re at the point now where we have to build a treatment plant," he said during Tuesday’s session.
Under the new agreement, the company agrees to produce all of its Cruzan and Ronrico (another rum brand already owned by Fortune) rums for sale in the United States at the St. Croix distillery for the life of the deal. The V.I. government will continue to share the cost of molasses, a critical input in rum production, as it has for the past several decades. This year, the $14.7 million from the General Fund has been budgeted for the Molasses Subsidy.
The government will also continue to invest 35 percent of the cover-over revenues generated from the sales of the branded rum in the U.S. in marketing efforts that will build the brand and future revenues, Christian said.
The V.I. government will provide financing for the construction of the wastewater treatment plant and to expand capacity of the Cruzan distillery by issuing as much as $30 million in bonds for a wastewater treatment facility to address the long-standing environmental issues at the St. Croix facility, and another $75 million in bonds to expand the capacity of the existing distillery.
Because of the current volatility in the bond market, the government hopes to have the transaction closed by the second or third week in December, said the government’s bond counsel Patricia Goins.
All senators were present during Tuesday’s special session.
