Item 2. M
ANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017 and the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. Depending upon the context, the terms the “Company,” “we,” “our,” and “us,” refer to either Maui Land & Pineapple Company, Inc. alone, or to Maui Land & Pineapple Company, Inc. and its subsidiaries collectively.
Overview
Maui Land & Pineapple Company, Inc. is a Hawaii corporation and the successor to a business organized in 1909. The Company consists of a landholding and operating parent company, its principal subsidiary, Kapalua Land Company, Ltd. and certain other subsidiaries of the Company.
We own approximately 23,000 acres of land on the island of Maui, Hawaii and develop, sell, and manage residential, resort, commercial, agricultural and industrial real estate through the following business segments:
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Real Estate
—Our real estate operations consist of land planning and entitlement, development and sales activities. This segment also includes the operations of Kapalua Realty Company, Ltd., a general brokerage real estate company located in the Kapalua Resort.
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Leasing
—Our leasing operations include residential, resort, commercial, agricultural and industrial land and property leases, licensing of the Company’s registered trademarks and trade names, and stewardship and conservation efforts.
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Utilities
—We own two publicly-regulated utility companies which provide potable and non-potable water and wastewater transmission services to the Kapalua Resort. In addition, we also own a network of several major non-potable water systems in West and Upcountry Maui.
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Resort Amenities
—We manage the operations of the Kapalua Club, a private, non-equity club program providing our members special programs, access and other privileges at certain amenities at the Kapalua Resort.
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Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of accounting estimates. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. Our critical accounting policies that require the use of estimates and assumptions were discussed in detail in our most recently filed Form 10-K. On January 1, 2018, we adopted ASU No. 2017-07 Compensation-Retirement Benefits without material impact, as well as ASU No. 2014-09, Revenue Recognition using the modified retroactive approach which did not result in an adjustment to our retained earnings. There have been no significant changes in our critical accounting policies during the first six months of 2018, other than the adoption of ASU Nos. 2017-07 and 2014-09 on January 1, 2018.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30,
2018
compared to Three and Six Months Ended June 30,
2017
CONSOLIDATED
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Three Months Ended June 30,
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Six Months Ended June 30,
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2018
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2017
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2018
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2017
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(in thousands)
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(in thousands)
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Operating revenues
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$
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2,960
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$
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9,336
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$
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5,502
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$
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19,019
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Operating costs and expenses
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(1,900
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)
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(1,378
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)
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(3,418
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)
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(3,469
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)
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General and administrative
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(725
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)
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(586
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)
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(1,556
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)
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(1,075
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)
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Share-based compensation
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(320
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)
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(253
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)
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(899
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)
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(812
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)
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Depreciation
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(446
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)
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(417
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)
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(885
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)
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(833
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)
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Pension and other postretirement expenses
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(102
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)
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(202
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)
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(204
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)
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(404
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)
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Operating income (loss)
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(533
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)
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6,500
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(1,460
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)
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12,426
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Interest expense
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(37
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)
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(19
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)
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(74
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)
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(113
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)
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Net income (loss)
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$
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(570
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)
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$
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6,481
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$
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(1,534
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)
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$
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12,313
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Net income (loss) per common share
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$
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(0.03
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)
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$
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0.34
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$
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(0.08
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)
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$
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0.65
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The decrease in operating revenues for the three and six months ended June 30, 2018 compared to the same periods in 2017 were due to the sale of the 15-acre Kapalua Golf Academy practice course in February 2017 and the conveyance of certain land improvements to us by the owner of a 125-acre portion of our Kapalua Mauka project in April 2017. The increase in general and administrative expenses for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017 was primarily due to higher legal and outside consultant fees.
REAL ESTATE
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Three Months Ended June 30,
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Six Months Ended June 30,
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2018
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2017
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2018
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2017
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(in thousands)
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(in thousands)
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Operating revenues
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$
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300
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$
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6,852
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$
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336
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$
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13,991
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Operating costs and expenses
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(443
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)
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(152
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)
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(509
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)
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(888
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)
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Operating income (loss)
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$
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(143
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)
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$
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6,700
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$
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(173
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)
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$
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13,103
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Included in real estate operating revenues for the three and six months ended June 30, 2017 were approximately $6.7 million of land improvements that were conveyed to us by the owner of a 125-acre portion of our Kapalua Mauka project. The owner purchased the 125-acre property, commonly known as Mahana Estates, in 2009. As part of the sale, the owner agreed to subsequently develop and convey to us upon completion certain easements, subdivision and utility improvements related to the Mahana Estates property. The owner completed and conveyed the land improvements to us in April 2017.
In February 2017, we sold the 15-acre Kapalua Golf Academy practice course located in the Kapalua Resort for $7.0 million to the owner of the Kapalua Plantation and Bay Golf Courses. The property was sold without any development entitlements. The sale resulted in a gain of approximately $6.4 million. The property was not pledged as collateral under our revolving line of credit facility. We applied $5.6 million of the sale proceeds toward our revolving line of credit facility.
Also included in our real estate operating revenues were sales commissions totaling $300,000 and $171,000 for the three months ended June 30, 2018 and 2017, respectively, and $336,000 and $310,000 for the six months ended June 30, 2018 and 2017, respectively, from resales of properties owned by private residents in the Kapalua Resort and surrounding areas by our wholly-owned subsidiary, Kapalua Realty Company, Ltd.
We did not have any significant real estate development expenditures during the first six months of 2018 or 2017.
Real estate development and sales are cyclical and depend on a number of factors. Results for one period are therefore not necessarily indicative of future performance trends in this business segment.
LEASING
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Three Months Ended June 30,
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Six Months Ended June 30,
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2018
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2017
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2018
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2017
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(in thousands)
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(in thousands)
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Operating revenues
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$
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1,558
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$
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1,370
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$
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3,053
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$
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2,956
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Operating costs and expenses
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(706
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)
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(587
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)
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(1,284
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)
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(1,056
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)
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Operating income
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$
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852
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$
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783
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$
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1,769
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$
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1,900
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The increase in operating revenues during the three months ended June 30, 2018 compared to the three months ended June 30, 2017 was primarily due to increases in our Kapalua Resort and Hali’imaile commercial property occupancies and improved renegotiated terms of several existing tenant leases. The increase in operating costs and expenses for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017 was due to higher repairs and maintenance costs
Our leasing operations face substantial competition from other property owners in Maui and Hawaii.
UTILITIES
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Three Months Ended June 30,
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Six Months Ended June 30,
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2018
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2017
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2018
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2017
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(in thousands)
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(in thousands)
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Operating revenues
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$
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810
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$
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829
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$
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1,514
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$
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1,505
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Operating costs and expenses
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(520
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)
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(426
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)
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(1,041
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)
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(979
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)
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Operating income
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$
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290
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$
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403
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$
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473
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$
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526
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We have contracted a third-party water engineering and management company to manage the operations of our wholly-owned subsidiaries: Kapalua Water Company, Ltd. and Kapalua Waste Treatment Company, Ltd. We have contracted a water maintenance company to manage our non-potable/irrigation water systems in West and Upcountry Maui.
Our Utilities segment operations are primarily affected by the amount of rainfall and the level of development and volume of visitors in the Kapalua Resort. Rates charged by our Kapalua Water Company, Ltd. and Kapalua Waste Treatment Company, Ltd. subsidiaries are regulated by the Hawaii Public Utilities Commission. The increase in utilities operating costs and expenses for the three and six months ended June 30, 2018 as compared to the three and six months ended June 30, 2017 was primarily due to higher deferred maintenance expenditures.
We did not incur any significant capital or improvement expenditures related to our Utilities segment infrastructure in the first six months of 2018 or 2017.
RESORT AMENITIES AND OTHER
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Three Months Ended June 30,
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Six Months Ended June 30,
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2018
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2017
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2018
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2017
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(in thousands)
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(in thousands)
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Operating revenues
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$
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292
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$
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285
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$
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599
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$
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567
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Operating costs and expenses
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(231
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)
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(213
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)
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(584
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)
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(546
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)
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Operating income
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$
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61
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$
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72
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$
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15
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$
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21
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Our Resort Amenities segment includes the operations of the Kapalua Club, a private, non-equity club providing its members special programs, access and other privileges at certain of the amenities at the Kapalua Resort including a 30,000 square foot full-service spa and a private pool-side dining beach club. The Kapalua Club does not operate any resort amenities and the member dues collected are primarily used to pay contracted fees to provide access for its members to the spa, beach club and other resort amenities.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We had cash on hand of $1.2 million and $13.8 million of available credit under a $15.0 million revolving line of credit facility with First Hawaiian Bank as of June 30, 2018.
We have a $15.0 million revolving line of credit facility with First Hawaiian Bank (Credit Facility). The Credit Facility matures on December 31, 2019 and provides for two optional one-year extension periods. Interest on borrowings is at LIBOR plus 3.50% (5.48% at June 30, 2018). We have pledged our 800-acre Kapalua Mauka project and approximately 30,000 square feet of commercial leased space in the Kapalua Resort as security for the Credit Facility. Net proceeds from the sale of any collateral are required to be repaid toward outstanding borrowings and will permanently reduce the Credit Facility’s revolving commitment amount. There are no commitment fees on the unused portion of the Credit Facility.
The terms of the Credit Facility include various representations, warranties, affirmative, negative and financial covenants and events of default customary for financings of this type. Financial covenants include a minimum liquidity (as defined) of $1.5 million, a maximum of $45.0 million in total liabilities, and a limitation on new indebtedness.
As of June 30, 2018, we were in compliance with the covenants under the Credit Facility.
Cash Flows
During the first six months of 2018, net cash flow provided by our operating activities totaled $0.8 million. Net cash provided by our operating activities for the first six months of 2017 was $7.6 million.
Interest payments on our long-term debt totaled $67,000 for the six months ended June 30, 2018.
We were not required to make any minimum funding contributions to our defined benefit pension plans during the six months ended June 30, 2018.
Future Cash Inflows and Outflows
Our business initiatives for the next year include investing in our operating infrastructure and continued planning and entitlement efforts on our development projects. At times, this may require borrowing under our Credit Facility or other indebtedness, repayment of which may be dependent on selling of our real estate assets at acceptable prices in condensed timeframes.
Our indebtedness could have the effect of, among other things, increasing our exposure to general adverse economic and industry conditions, limiting our flexibility in planning for, or reacting to, changes in our business and industry, and limiting our ability to borrow additional funds.
FORWARD-LOOKING STATEMENTS AND RISKS
This and other reports filed by us with the Securities and Exchange Commission, or SEC, contain forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They contain words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue” or “pursue,” or the negative or other variations thereof or comparable terminology. Actual results could differ materially from those projected in forward-looking statements as a result of the following factors, among others:
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unstable macroeconomic market conditions, including, but not limited to, energy costs, credit markets, interest rates and changes in income and asset values;
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risks associated with real estate investments generally, and more specifically, demand for real estate and tourism in Hawaii;
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risks due to joint venture relationships;
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our ability to complete land development projects within forecasted time and budget expectations, if at all;
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our ability to obtain required land use entitlements at reasonable costs, if at all;
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our ability to compete with other developers of real estate in Maui;
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potential liabilities and obligations under various federal, state and local environmental regulations with respect to the presence of hazardous or toxic substances;
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changes in weather conditions or the occurrence of natural disasters;
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our ability to maintain the listing of our common stock on the New York Stock Exchange;
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our ability to comply with funding requirements of our defined benefit pension plans;
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our ability to comply with the terms of our indebtedness, including the financial covenants set forth therein, and to extend maturity dates, or refinance such indebtedness, prior to its maturity date;
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our ability to raise capital through the sale of certain real estate assets;
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availability of capital on terms favorable to us, or at all; and
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failure to maintain security of internal and customer electronic information.
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Such risks and uncertainties also include those risks and uncertainties discussed in the sections entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2017 and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in this Quarterly Report on Form 10-Q, as well as other factors described from time to time in our reports filed with the SEC. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable as of the date of this report, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this report. Thus, you should not place undue reliance on any forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our 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. Further, any forward-looking statements speak only as of the date made and, except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this report.