Remarks by Governor John P. de Jongh, Jr.
Announcing an Agreement with Fortune Brands, Inc. to Expand the Production of Cruzan Rum in the Virgin Islands

October 6, 2009
Government House, St. Croix

GOVERNOR de Jongh: Good evening my fellow Virgin Islanders and friends. The past two years have been difficult for so many in our community, in so many communities. It has been a time of tremendous adjustment to too many uncertainties; a nerve-wrenching time. This recession has been deep and long lasting. Layoffs and cutbacks, furloughs and reduced services and work weeks have been announced by Governors from coast to coast. Indeed, a recent Wall Street Journal article described it best in a headline that read "States Shut Down to Save Cash."

This global financial crisis and economic recession has spared few, and the result has been catastrophic on state and territorial tax revenues and budgets, and on the budgets of many households. And here at home has been no exception. Our tax revenues are off by 30 percent, I have restricted new hiring and cut back on the resources that have historically have flowed to many organizations. We have faced the need to makeup a shortfall in our tax revenues of over $200.0 million. What tourists we do have spend less, some private sector projects have stopped while others have not started, and many businesses have lowered their expenses by either laying-off workers, reducing work hours, or just closing. 

And yet with a great deal of effort and focus, we have been able to persevere. We know one thing to be true and that is, that unlike what has happened in many states and other territories, not a single public school teacher, police officer, public health worker or any other VI government worker has been laid off, sent home, had his, or her, pay reduced or has not been paid. 

To do this we have had to make tough decisions during these difficult times. I have had to make some tough choices about the future of our Territory given our present circumstances. For even if we might cut our payroll, how would those people survive? We all know that we would not avoid the resulting unemployment costs and social service costs. And the health care costs for these folks would simply be shifted to emergency and uncompensated charges at our hospitals and health clinics. We have limited access to federal programs, do not receive state-like treatment in many, and so we have limited ability to shift costs from our budget to someone else's. 

What we have done is borrow for the short term to survive this economic cycle, to provide key services to individuals and businesses. So, in the last month we have borrowed to maintain the continuity of government services and programs, to stimulate local economic activity by starting essential road and capital projects that put our contractors and their workers back to work, and we have refunded certain other loans to reduce our annual interest rate costs. What we have done is really no different than what each of us would do to survive --- we drew on what is, in essence, a credit card to pay some current expenses we did not have the ready cash to pay, we used some of the money to make improvements, and we ensured that we lowered other costs in order to afford to repay the obligation. But to do this we needed to show the banks and capital market investors, especially in this environment of extreme credit crunch, that we have a future, that if we could survive this current crisis, that we had a way to build a future that would give them assurance that we could repay their loans and pay their bonds. 

We needed to show them that we could grow our revenues even as we cleared a path out of recession, while showing that we were not depending solely on our historic revenue streams from tourist activity, real property taxes which are still subject to a District Court restriction, and our income taxes collections either from individuals or businesses, which are at rock bottom levels. 

However, we can be hopeful. We have set the stage in tourism with more airlift planned for both airports, and both seaports will have increasing cruise ship calls. Hotel resort projects on St. Croix have passed the hurdle of CZM approvals, and like many in the St. Thomas market these projects are just waiting for access to the credit markets to open up again. A new shopping center with a Home Depot as its anchor tenant is planned for St. Croix, and affordable housing projects on each island will be starting construction soon. And the University’s research and technology park is fostering strategic partnerships and actively pursuing its goal of attracting knowledge-based businesses. Throw into the mix the public sector capital projects that are in various stages of implementation and you have light at the end of the tunnel, opportunities in our grasp. However, to support our borrowing and do what we had to do, we turned to the use of a tool we had been given by Congress, in this case a tool that we had only just begun to use. For this tool not only allowed us to borrow but also to build a foundation to diversify our economy. 

I refer, of course, to the provision of law first passed in 1917, which the Virgin Islands gained access to in 1954, and confirmed again in 1983 and 2000, in which Congress said that if we build a rum industry we will receive back the federal excise taxes that are collected from the domestic sales of that rum, that these taxes will be returned to the Virgin Islands, or "covered over," and that these taxes are to be considered as local taxes on local products.

Our rum revenues have been critically important to our financial viability for many years. But until 2006, the Government did little to proactively grow that revenue stream, despite it being a tool of significance that Congress has granted to us. Beginning in 2006, the government worked with our single rum company, Cruzan VIRIL, the owner of Cruzan Rum, after it approached the government for assistance. At that time an agreement was made to invest in their branding and marketing in an effort to build and stabilize their company—and our rum revenues. I quickly realized that growing the rum industry was the tool that we possessed to assure our survival not just in the short term, but to solidify our long term and develop our own economy and take control of our financial future. I saw the value in the marketing support agreement that was in place with Cruzan rum, because that agreement reflected the understanding that over time, the only way a rum company can succeed is if it builds the strength of its brands. And I knew that if our rum industry was to survive, we needed to work as true partners. Simply stated, we needed to invest in their future, if our rum industry was going to have a future. 

But I also knew that what we had in place did not go far enough. That agreement provided for the Government to begin to assist Cruzan in building the Cruzan rum brand. 

I knew we had to build on it, but we had to take a longer view, to be more aggressive. We had to become a real partner in growing our rum industry, and in doing so build a more stable future for our people. 

Then, in 2007, Diageo came to us during their search for a location to build a distillery for Captain Morgan rum, the second largest rum brand in the world. They had purchased that brand a few years earlier from Seagrams, and with it came a supply relationship with a distillery in Puerto Rico. But Diageo had determined as a matter of corporate policy that it wanted to own its own production facilities for its signature global brands, and they had determined that at the end of their current supply contract they would build a new home elsewhere in the Caribbean. It would be, they suggested, Honduras, Guatemala, or, if we were interested, the Virgin Islands.

This was the type of opportunity that no Governor across the country could pass on. This was an opportunity for the Virgin Islands to diversify its economy, build fiscal stability, and have a chance at funding some long outstanding obligations to its employees and vendors. And, doing this by using the rum cover over program to build the rum industry was exactly what Congress intended for us to do.

So we entered into a partnership with Diageo. And it had two primary elements. First, we would provide them the statutory molasses subsidy that has been provided for many years to all producers of rum in the Virgin Islands. Second, we would provide the marketing support payments provided in the 2006 agreement with Cruzan. But instead of a three-year agreement like the one we had in place with Cruzan Rum, we told Diageo that we would only agree to make a substantial public investment in the Captain Morgan brand if it was part of a longer partnership and that we needed a long-term return on those investments. And if we were going to commit to them, they had to give us an exclusive, thirty year commitment to us. Diageo agreed. And today their new state of the art rum distillery is under construction on St. Croix with 36 local firms, employing 136 people, 90 percent hired out of our local workforce.

With our long-term agreement with Diageo in place and the history of revenue collections from Cruzan, we could begin to assure investors in VI loans and bonds that we would be able to pay back what we were borrowing to survive the present crisis. 

But what about our future needs? And how assured were we of Cruzan Rum's future? They were operating under the restrictions of an environmental order that limited their production and required they comply with current laws dealing with their waste water treatment. The costs of their environmental compliance are very great, and the distillery requires capital investment. And they also kept getting sold to new owners. Indeed, Cruzan has had five owners in the past ten years. They were bought and sold twice in 2008.

Last year, Fortune Brands, a major Illinois-based consumer brand company, bought Cruzan Rum through its Beam Global subsidiary, the largest American spirits company. You may not know the name Fortune Brands or know the brands that Beam Global owns, but they are well known brands. They include Jim Beam, Courvoisier, Canadian Club, Sauza Tequila, Teachers scotch, Dekuypers liqueurs and many more. 

But what Fortune Brands needed was a premium rum to compete at the upper end of the market and they wanted to make Cruzan their premium brand. 

They were buying the brand, and even though they got a distillery on St. Croix, it was a distillery that is capped in its production size and required major investment. We knew that if we did not act, we would soon see the Cruzan brand moved offshore. We could not let Cruzan leave St. Croix. We would lose our opportunity to build a rum industry. 

Tonight, I am pleased to announce some very good news. We have reached an agreement with Fortune Brands that will keep Cruzan Rum on St. Croix and expand the brand and its importance in the portfolio of Fortune Brands.

This agreement is a comprehensive solution to the challenges Cruzan has faced, and it is a very good agreement for the Government and people of the Virgin Islands. This agreement will keep Cruzan in St. Croix for at least the next thirty years. This agreement will also provide Cruzan with the resources to promote their environmental sustainability, and it will provide Cruzan the resources to expand their distillery, and to grow new brands on St. Croix, including the Beam Global brand, Ronrico. 

This agreement is a real partnership that benefits the company and the people of the Virgin Islands that is projected over the coming years to allow us to more than double the amount of cover-over revenue to be collected from the sale of rum from their modernized and environmentally compliant distillery in Estate Diamond on St. Croix. With this agreement, the U.S. Virgin Islands now and long into the future will be home to the #2 rum sold in U.S. markets as well as the #4 and the #5 rum brands sold today. And we will be working with their owners to help them grow these brands for their benefit -- and for ours.

The agreement with Cruzan Rum will be presented to the Virgin Islands Legislature for its study and approval. I will be calling the Senate into Special Session. But I would like to highlight some terms with you this evening as this is a partnership whose importance is so great that it can be said that its approval will lead to a positive impact on the life of everyone living in this Territory and likely provide the basis for the saving of our retirement system which impacts the day-to-day well being of over 7,100 retirees and the future of all our current government workers.

Once again, we demanded and received commitments that will provide us with long-term stability, and once again we only agreed to invest our funds if we received real long-term value and exclusivity in return.

Under the terms of our new agreement with Fortune Brands' subsidiary, Cruzan VIRIL, the company agrees to produce all of its Cruzan and Ronrico rum for sale in the United States at the St. Croix distillery for the term of the agreement. The agreement incorporates the statutory molasses subsidy that Cruzan has received for several decades, and it provides for the Government to make significant investments in Cruzan branded product sales in exchange for a minimum thirty year commitment over which time we will receive a substantial return on our investment. 

The agreement provides for the issuance of up to $30 million of Cruzan Project Bonds for the purposes of investment in a wastewater treatment facility to fully address the long-standing environmental issues at the distillery. The agreement provides for the issuance of up to $75 million of Cruzan Project Bonds for the purpose of expanding the production capacity of the existing distillery by approximately 5 million proof gallons per year. 

The expansion project is expected to be implemented upon completion of the wastewater treatment facilities and the lifting of the current environmental cap on production.

What does this mean for the future? In response to the stable and long-term incentives provided in this agreement, Fortune Brands projects significant growth in its production on St. Croix, including a 50% increase in production capacity by 2013. Fortune Brands projects that capacity will reach 15 million proof gallons by 2013, allowing for the anticipated growth in Matching Fund revenues from the 2008 level of $91.0 million to upwards of $199.0 million. 

This long-term partnership is good for us, and it is good for Cruzan. Historically, Cruzan VIRIL has produced largely bulk rum. This agreement will allow Cruzan VIRIL to move away from the more volatile business of producing primarily bulk rum, a commodity where price is the foremost market consideration and increasingly focus on the production of branded products for Fortune Brands. 

This agreement incorporates the statutory molasses subsidy and continues government investment in branded product sales through marketing support payments, and funds both the financing and support payments through the Matching Fund revenues that are generated by U.S. sales of rum produced at the Cruzan facility.

Molasses support and marketing investment in branded rum products will total 40% of Matching Fund revenues produced by the sales of such products, rising to 46% when branded rum sales grow to exceed 11 million proof gallons annually.

In order to be sure that Cruzan can compete to keep as much of its present bulk rum business as possible, we have agreed to continue Molasses support and rum promotion funding for bulk rum at 40% of Matching Fund revenues produced by the sales of such products through fiscal year 2010, declining to 31.5% though the projected completion of the wastewater facilities in 2012, and declining to 18% thereafter. 

By doing this, we and Cruzan together will work to retain as much of the bulk business as we can, until Cruzan is able to expand their production capacity and grow both bulk and branded businesses. Our collective goal is to expand and stabilize the long-term production and sales, and the revenues that will accrue over time to the Government.

What we are doing will be paid for by the rum revenues produced. The debt service costs related to bonds issued for wastewater or investment in production facilities will be payable from Cruzan-generated Matching Fund revenues, subordinate to the Matching Fund Bonds, with such debt service costs deducted from the funding amounts otherwise due to Cruzan.

This is the pattern that we established with the Diageo agreement. It forms a fair basis for extending these benefits to Cruzan. This agreement does not require any investment of General Fund or other Government resources. Not only does this agreement not require spending any of our General Fund monies it actually removes the burden of funding the existing molasses subsidy and marketing support payments from the General Fund.

All investment and costs related to this project will be funded from the revenues generated through the sale of rum from the Cruzan distillery. As long as the Cruzan brand remains popular and grows, then investors in the bonds will be pleased and the people of the Virgin Islands will be the beneficiary of the partnership. 

I cannot tell you what a pleasure it is for me to speak to you tonight and to be announcing such very good news. But I must remind us all that that next year will not be easy, and we are not yet out of our current financial and budget crisis. I will be spending a significant amount of time explaining our diversification efforts in the rum industry to many in the capital markets and in Washington, D.C. and our right to fight for the tool provided to us by Congress in 1954. This I will do even as I continue to work with Delegate Christensen to push for our inclusion in health care reform, ensure our use of ARRA funds and as I work with the Obama Administration to address enhancements to our Medical Assistance Program to expand its offerings and broaden it reach to our people. These actions continue even as I try to right what I inherited with the unequal treatment by the IRS of so many of our taxpayers in the area of the statute of limitations. 

I shall continue to work every day to try to keep our government operating as we get through this crisis to the day when we can again collect real property taxes and our general tax revenues reflect an upturn in economic activity and business growth, and our people are secure in their jobs and have an opportunity to get a job.

None of this is easy in our high-cost environment and in competition with the rest of the Caribbean and the world. But that is our challenge and we will meet it. We will meet it by continuing everyday to work together to make the Virgin Islands safer, to make Virgin Islanders better prepared, and to bring together the best ideas and the best people, regardless of who they are or where they are from, to build a brighter future for all in the Virgin Islands. This we can do. This we shall do. Let us move forward together!

May God Bless you and God Bless the Virgin Islands.

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