10-K 1 alex201510k.htm 10-K 10-K



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from [_______ to _______]

Commission file number 001-35492
(Exact name of registrant as specified in its charter)
 Hawaii
 
45-4849780
(State or other jurisdiction of
 
 (I.R.S. Employer
incorporation or organization)
 
Identification No.)
822 Bishop Street
Post Office Box 3440, Honolulu, Hawaii 96801
(Address of principal executive offices and zip code)
808-525-6611
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Name of each exchange
Title of each class
on which registered
Common Stock, without par value
NYSE
Securities registered pursuant to Section 12(g) of the Act:
None
Number of shares of Common Stock outstanding at February 15, 2016:
48,950,736
Aggregate market value of Common Stock held by non-affiliates at June 30, 2015:
$1,815,784,893
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Documents Incorporated By Reference
Portions of Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders (Part III of Form 10-K)



TABLE OF CONTENTS

PART I
 
Page
 
 
 
 
Items 1 & 2.
 
Business and Properties
 
 
 
 
A.
 
Real Estate Development and Sales Segment
 
 
(1)
Landholdings
 
 
(2)
Planning and Zoning
 
 
(3)
Development Projects
 
 
 
 
 
B.
 
Real Estate Leasing Segment
 
 
 
 
C.
 
Materials and Construction
 
 
 
 
D.
 
Agribusiness
 
 
(1)
Agribusiness Operations
 
 
(2)
Marketing of Sugar
 
 
(3)
Land Designations and Water
 
 
(4)
Energy
 
 
 
 
 
 
Employees and Labor Relations
 
 
 
 
 
 
Available Information
 
 
 
 
Item 1A.
 
Risk Factors
 
 
 
 
Item 1B.
 
Unresolved Staff Comments
 
 
 
 
Item 3.
 
Legal Proceedings
 
 
 
 
Item 4.
 
Mine Safety Disclosures
 
 

PART II
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
 
 
Item 6.
 
Selected Financial Data
 
 
 
 
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Items 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
Item 8.
 
Financial Statements and Supplementary Data



i


 
Page
Item 9.
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
 
 
 
Item 9A.
 
Controls and Procedures
 
 
 
 
A.
 
Disclosure Controls and Procedures
 
 
 
 
B.
 
Internal Control over Financial Reporting
 
 
 
 
Item 9B.
 
Other Information

PART III
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
 
 
 
A.
 
Directors
 
 
 
 
B.
 
Executive Officers
 
 
 
 
C.
 
Corporate Governance
 
 
 
 
D.
 
Code of Ethics
 
 
 
 
Item 11.
 
Executive Compensation
 
 
 
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
 
 
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
 
 
 
Item 14.
 
Principal Accounting Fees and Services

PART IV
Item 15.
 
Exhibits and Financial Statement Schedules
 
 
 
 
A.
 
Financial Statements
 
 
 
 
B.
 
Financial Statement Schedules
 
 
 
 
C.
 
Exhibits Required by Item 601 of Regulation S-K
 
 
 
 
Signatures
 
 
Consent of Independent Registered Public Accounting Firm



ii


ALEXANDER & BALDWIN, INC.
FORM 10-K
Annual Report for the Fiscal Year
Ended December 31, 2015
PART I
ITEMS 1 & 2. BUSINESS AND PROPERTIES
Overview
Alexander & Baldwin, Inc. (“A&B” or the “Company”), whose history in Hawaii dates back to 1870, is a premier Hawaii company with interests in real estate development, real estate leasing, materials and construction, and agribusiness. A&B’s assets include over 87,700 acres in Hawaii, 4.9 million square feet of high-quality retail, office and industrial properties in Hawaii and on the Mainland, and a real estate development portfolio encompassing residential and commercial projects across Hawaii. A&B's real estate holdings make it the state's fourth largest private landowner (by acreage) and largest owner of grocery-anchored retail properties (by gross leasable area "GLA"). In October 2013, A&B acquired Grace Pacific LLC (“Grace”)―the largest materials and paving company in Hawaii.
A&B is headquartered in Honolulu and operates in four segments―Real Estate Development and Sales, Real Estate Leasing, Materials and Construction, and Agribusiness. A&B's business segments are generally as follows:
A.
Real Estate: The Company's two real estate segments engage in real estate development and ownership activities, including planning, zoning, financing, constructing, purchasing, managing, leasing, selling, exchanging and investing in real property. Real estate activities are conducted through A&B Properties, Inc. and other wholly owned subsidiaries of A&B.
•
Real Estate Development and Sales - generates its revenues and creates value through an active and comprehensive program of land stewardship, planning, entitlement, development, real estate investment and sale of land and commercial and residential properties, principally in Hawaii.
•
Real Estate Leasing - owns, operates, and manages a portfolio of 58 high-quality retail, office and industrial properties in Hawaii and on the Mainland totaling 4.9 million square feet of GLA, including 42 acres on Oahu (improved with 660,000 square feet of commercial space owned by the ground lessees) and 64 acres on the neighbor islands ground leased to tenants. The significant recurring cash flow generated by this portfolio and ground leases serves as an important source of funding for A&B’s Real Estate Development and Sales segment activities.
B.
Materials and Construction: performs asphalt paving as prime contractor and subcontractor; imports and sells liquid asphalt; mines, processes and sells basalt aggregate; produces and sells concrete; provides and sells various construction- and traffic-control-related products; and manufactures and sells precast concrete products.
C.
Agribusiness: produces and sells bulk raw sugar, specialty food grade sugars and molasses; provides general trucking services, mobile equipment maintenance and repair services; leases agricultural land to third parties; and generates and sells electricity to the extent not used in segment operations. In January 2016, the Company announced that it would be transitioning out of farming sugar and instead pursue a diversified agricultural model. The final sugar harvest is expected to be completed by the end of 2016, and the transition to a new model will occur over a multi-year period.
The following table contains key information regarding each of the Company’s segments. Since the purchase and sale of real estate is generally considered an ongoing and recurring activity of its real estate businesses, Real Estate Development and Sales segment revenue includes amounts related to sales of commercial property.


1


Segment
2015 Revenue
(in millions)1
Percentage of
Total 2015
Revenue
2015
Operating
Profit
(in millions)
Percentage of
Total 2015
Operating
Profit
Key Facts
Real Estate Development and Sales1   
$131.5
22%
$65.0
67%
Hawaii-focused, experienced developer with a large development pipeline encompassing over a dozen projects entitled for over 3,000 residential units. Fourth largest private landowner in Hawaii with over 87,700 acres.
Real Estate Leasing
133.8
22%
53.1
55%
High-quality commercial portfolio consisting of 58 improved properties in Hawaii and five Mainland states, totaling 4.9 million square feet, and 106 acres of urban commercial ground leases to third parties. A&B is the second largest commercial retail property owner in Hawaii.
Materials and Construction
219.0
36%
30.9
32%
Leader in asphalt paving and in the production of asphaltic concrete and is the largest producer of aggregate in Hawaii.
Agribusiness2  
117.2
20%
(51.9)
(54)%
Largest farmer in Hawaii and significant producer of renewable energy on Kauai.
Total
$601.5
100%
$97.1
100%
 
1 Includes the sales of an office building in Washington in December 2015, a Colorado retail property in March 2015 and a Texas office building in May 2015 that are classified within cost of sales and development in the Consolidated Statement of Income, but reflected as revenue for segment reporting purposes.
2 On December 31, 2015, due to continuing and significant operating losses, the Company determined it would cease its sugar operations upon completing its final harvest in 2016. The Agribusiness results of operations for 2015 include pre-tax charges of $22.6 million resulting from the cessation decision.
Further information about the revenue, operating profits and identifiable assets of A&B’s industry segments for the three years ended December 31, 2015 is contained in Note 19 “Segment Results” to A&B’s financial statements in Item 8 of Part II below.
Competitive Strengths
The Company has significant competitive strengths in Hawaii that it can leverage to create shareholder value.
Premier Hawaii Assets:
•
Extensive, premium landholdings: A&B is the fourth largest private landowner in Hawaii, with over 87,700 acres, primarily on Maui and Kauai, including 837 acres fully entitled for urban use, which includes 190 acres under commercial improved properties.
•
High-quality commercial real estate portfolio and ground leases producing strong free cash flow: A&B owns and manages a high-quality commercial portfolio of 58 properties in Hawaii and five Mainland states, totaling 4.9 million square feet, and has 106 acres of urban land in Hawaii leased to third parties, both of which provide significant, stable recurring cash flows that support A&B’s real estate investment activities. A&B's retail holdings make it the largest owner of grocery-anchored retail properties in Hawaii (by GLA).
•
Diverse pipeline of development projects: A&B’s development pipeline encompasses over a dozen resort residential, primary residential and commercial projects comprising more than 3,000 units throughout the State of Hawaii, which provides for substantial embedded growth opportunities.
•
Prime agricultural real estate in Hawaii: A&B farms approximately 36,000 acres of mostly contiguous lands in Maui’s central valley with extensive infrastructure to meet the water, power and transportation needs of large-scale agronomic activity. Additionally, A&B owns approximately 7,000 acres of high-quality agricultural land on Kauai’s sunny south shore, of which over 4,000 acres are leased to other parties for a variety of agricultural uses, principally for the cultivation of coffee.


2


•
Infrastructure-related assets: A&B owns over 800 acres in the state related to its quarrying operations, including 541 acres on Oahu's growing west side. A&B's Makakilo, Oahu quarry facility completed a multi-year capital improvement program in September 2015, including three new asphaltic concrete plants, which is expected to result in greater operational efficiencies and lower costs going forward. Due to the high cost of transporting aggregate, A&B's quarry is ideally situated on Oahu's west side, which is expected to see significant growth over the next two decades. In addition to three Oahu plants, A&B also owns strategically placed asphaltic concrete plants located throughout the state in Maui (one location), Kauai (one location), Hawaii Island (one location) and Molokai (two locations).
Leading Hawaii Real Estate Capabilities:
•
Experienced management team with deep local knowledge and expertise: A&B has been in the development business in Hawaii since 1949 when it established Kahului Development Co., Ltd. to develop and market “Dream City,” which today is Kahului, Maui’s principal population center and commercial hub. In the ensuing decades, A&B has expanded and diversified its pipeline of development projects and broadened its development capabilities and expertise. For instance, A&B developed the world famous Wailea master-planned resort community on Maui’s south shore in the 1970s and 1980s and has continued to broaden its development activities since. The Company’s knowledge, expertise and relationships forged through over six decades of Hawaii development activity, combined with disciplined underwriting, enable it to profitably pursue a wide range of long-term commercial and residential developments in a manner that is both responsive to market needs and sensitive to local concerns. This local knowledge and expertise, combined with the Company’s strong financial position, also serves to make A&B an ideal partner for landowners, developers and others seeking to participate in the Hawaii real estate sector.
•
Track record of success: A&B has an extensive track record of investing in Hawaii real estate. Since 2000, A&B has invested approximately $700 million in Hawaii real estate development projects outside of its legacy holdings―including seven high-rise condominiums in urban Honolulu―and over $1.5 billion in the acquisition of Hawaii and Mainland commercial properties, mainly through tax-deferred property exchanges.
Leading Materials and Construction Capabilities:
•
Leading market position: A&B holds a leading market position in asphalt paving and in the production of asphaltic concrete, and also is the largest producer of aggregate in Hawaii. Due to the relatively high capital requirements needed to compete in the market, A&B’s scale provides a cost advantage relative to other competitors in the state. A&B is positioned to benefit from continued strength in the Hawaii economy and the impact that is expected to have on infrastructure spending and private development activity. For example, the condition of Hawaii’s roads, in general, and Oahu’s roads, in particular, is consistently ranked near the bottom as compared to other states and metropolitan areas and, as a result, the City and County of Honolulu administration (the "City") has maintained its annual road maintenance budget in excess of $100 million for the past several years, with $120 million budgeted for the City's fiscal year 2016 (July 1, 2015 to June 30, 2016).
•
Experienced management team: In addition to its unique tangible assets, the segment's management team has extensive expertise in quarry management and operations, asphaltic concrete production, asphalt paving, and precast concrete production.
•
Vertically integrated business model: A&B’s vertically integrated business model, which includes the mining of basalt aggregate and the importation and distribution of liquid asphalt, provides it with cost benefits at higher throughput rates, while also increasing cost certainty due to the ability to manage costs throughout the supply chain. This cost certainty allows A&B to compete effectively as an efficient, high-quality, low-cost provider. In addition, A&B provides and markets various construction- and traffic-control-related products and services.


3


Strategy
A&B strives to create value by leveraging its extensive asset base, knowledge of and experience in the Hawaii market to make superior investments in real estate in Hawaii. A&B has a long track record of successfully investing in Hawaii real estate and believes that Hawaii has attractive opportunities for growth. Management is focused on strategically positioning the Company to capitalize on this growth.
Additional details regarding A&B’s key strategies follow:
Land:
•
Employ lands at their highest and best use: A&B strives to maximize value in its legacy landholdings by employing land at its highest and best use to the benefit of shareholders, employees, its communities and other key stakeholder groups. For a significant portion of A&B’s substantial Hawaii landholdings, this implies a wide spectrum of non-development uses, ranging from conservation/watershed to pasture to active farming. While a material portion of A&B’s landholdings has limited or no long-term urban development potential, these landholdings remain valuable for farming and other uses, such as providing access to natural resources or hydro-electric generation capability.
•
Entitle and develop core Hawaii lands: A&B continually focuses on entitling and developing a portion of its core landholdings in Hawaii to respond to market demand while meeting community needs.
Commercial Properties:
•
Optimize returns of A&B’s commercial portfolio: A&B seeks to organically grow its commercial portfolio through active management, including repositioning and redevelopment activities, in order to increase occupancy, secure quality tenants and reduce costs, with the ultimate goal of maximizing the financial performance of these properties.
•
Migrate the commercial portfolio to Hawaii from the Mainland: A&B is focused on opportunistically migrating its Mainland portfolio to Hawaii over time, where it believes it can leverage its market knowledge and proximity to generate greater incremental shareholder value over the long run.
Real Estate Investment:
•
Invest in high-returning real estate opportunities in Hawaii: A&B is focused on pursuing and investing in attractive real estate opportunities in Hawaii where it can leverage its market knowledge, experience and financial strength to create significant value and, at the same time, expand and diversify its existing portfolio and pipeline.
•
Build a pipeline of development projects scaled to market opportunities and designed to optimize risk-adjusted returns: A&B owns a valuable pipeline of development projects encompassing a wide-range of product types, from resort residential real estate, to commercial and industrial, to primary residential housing. A&B employs a disciplined approach to its investments and prudently invests capital to position select projects to meet anticipated market demand. A&B pursues joint ventures, where appropriate, to supplement its in-house capabilities, access third-party capital, gain access to new opportunities in the Hawaii market, diversify its pipeline and optimize risk-adjusted returns.
Materials and Construction:
•
Leverage vertically integrated business model to lower costs: A&B maintains cost benefits through a vertically integrated business model that encompasses the production of aggregate and the importation of liquid asphalt and sand. These activities help ensure that A&B has adequate access to raw materials needed to produce asphaltic concrete and, therefore, also provides for a level of cost certainty that allows A&B to compete effectively on sealed-bid contracts. In addition, A&B and its consolidated and non-consolidated affiliated companies provide and market various construction- and traffic-control-related products and services.
•
Capitalize on strategically located quarry adjacent to growing area on Oahu: A&B owns one of two operating quarries on the island of Oahu that has suitable grade A material required for the production of hot mix asphalt. A&B's quarry is also the only quarry located adjacent to the growing region on the west side of Oahu. It is proximate to the first two phases of the Honolulu Rail Project and to more than 15,000 residential units and various commercial projects, which are projected in the future. Due to the high cost of transporting aggregate and the limited shelf life of asphaltic concrete once it is produced, A&B’s quarry and hot mix plant locations in west Oahu are ideally located to service the growth in the area for the foreseeable future.


4


Agriculture:
•
Grow renewable energy operations: A&B is a leading provider of renewable energy on Kauai, and in recent years, has added high-returning renewable solar generation to its portfolio. A&B continues to evaluate and further capitalize on new renewable energy opportunities in Hawaii to expand its portfolio and support the State of Hawaii's Clean Energy Initiative.

DESCRIPTION OF BUSINESS AND PROPERTIES
Business Segments
A.    Real Estate Development and Sales Segment
A&B is actively involved in the entire spectrum of real estate development and ownership, including planning, zoning, financing, constructing, purchasing, managing and leasing, selling and exchanging, and investing in real property.

(1)    Landholdings
As of December 31, 2015, A&B and its subsidiaries owned 87,870 acres, consisting of 87,715 acres in Hawaii and 155 acres on the U.S. Mainland. Hawaii landholdings are primarily used for agriculture, pasture, watershed and conservation purposes. A portion is used for urban purposes or planned for development. The Mainland properties are primarily used or held for commercial purposes.
 
Acres
Location
Urban/Entitled*
 
Agriculture
 
Conservation
Total
Maui
566

 
49,289

 
15,870

 
65,725

 
Kauai
81

 
6,874

 
13,325

 
20,280

 
Oahu
180

 
615

 
640

 
1,435

 
Molokai
—

 
265

 
—

 
265

 
Big Island
10

 
—

 
—

 
10

 
TOTAL HAWAII
837

 
57,043

 
29,835

 
87,715

 
TOTAL MAINLAND
155

 
—

 
—

 
155

 
TOTAL LANDHOLDINGS
992

 
57,043

 
29,835

 
87,870

 
*
Land is designated "fully entitled urban" when all four land use approvals described in the "Planning and Zoning" section have been obtained. The total includes lands available for development and 345 acres under commercial properties.


5


The table above does not include 1,016 acres under joint venture development that are shown below. An additional 2,900 acres on Maui, Kauai and Oahu are leased from third parties, and are not included in any of the tables.
Joint Venture Projects as of December 31, 2015
 
Original Acres
 
Acres at December 31, 2015
Kukui’ula (HI)
 
1,000

 
917

California joint ventures
 
75

 
75

Ka Milo (HI)
 
31

 
14

Keala o Wailea (HI)
 
7

 
7

The Collection (HI)
 
3

 
3

TOTAL
 
1,116

 
1,016


(2)    Planning and Zoning
The entitlement process for development of property in Hawaii is complex, lengthy (spanning multiple years) and costly (involving numerous state and county regulatory approvals). For example, conversion of an agriculturally-zoned parcel usually requires the following approvals:
•
County amendment of the County General Plan to reflect residential use;
•
State Land Use Commission approval to reclassify the parcel from the Agricultural district to the Urban district;
•
County amendment of the County Community Plan to reflect land use; and
•
County approval to rezone the property to the precise land use desired.
The entitlement process is complicated by the conditions, restrictions and exactions that are placed on these approvals, including, among others, the requirement to construct infrastructure improvements, payment of impact fees, restrictions on the permitted uses of the land, requirement to provide affordable housing and required phased development of projects.
A&B actively works with regulatory agencies, commissions and legislative bodies at various levels of government to obtain zoning reclassification of land to its highest and best use for both investment and development. A&B designates a parcel as “fully entitled” or “fully zoned” when all of the above-mentioned land use approvals have been obtained.


6


(3)    Development Projects
The following is a summary of the Company’s real estate development and investment portfolio as of December 31, 2015:
Project
Location
Product type
Acres at
12/31/15
 
Original planned units, saleable acres or
gross
leasable
square feet
Estimated
project
cost (1) ($mil)
A&B capital invested
A&B
net investment
as of
12/31/15 ($mil; including capitalized interest)
Estimated
substantial
completion of construction
ACTIVE PLANNING, DEVELOPMENT AND SALES - WHOLLY OWNED
 
 
 
 
Kahala Avenue Portfolio
Honolulu, Oahu
Residential
6

 
 30 lots
135

134

51

n/a
Kamalani
Kihei, Maui
Primary residential
95

 
 630 units
tbd

3

3

2023
Maui Business Park II
Kahului, Maui
Light industrial lots
125

(2)
136 acres
96

77

45

2021
Mililani Mauka South
Mililani, Oahu
Retail/office developed for commercial portfolio
1

 
 18,500 sf
8

7

7

2016
The Ridge at Wailea (MF-19)
Wailea, Maui
Resort residential
6

 
 9 lots
10

9

9

2009
Wailea B-1
Wailea, Maui
Commercial/retail
11

 
 60,000 sf
tbd

5

5

tbd
Total
 
 
244

 
 
 
 
 
 
Project
Location
Product type
Acres at
12/31/15
 
Planned units, saleable acres or
gross
leasable
square feet
Estimated
project
cost (1) ($mil)
A&B capital invested
A&B
net investment
as of
12/31/15 ($mil; including capitalized interest)
Estimated
substantial
completion of construction
ACTIVE PLANNING, DEVELOPMENT AND SALES - JOINT VENTURES
 
 
 
 
Ka Milo at Mauna Lani
Kona, Hawaii
Resort residential
14

 
 137 units
125

16

10

2018
Keala o Wailea (MF-11)
Wailea, Maui
Resort residential
7

 
70 units
63

9

9

2018
Kukui'ula
Poipu, Kauai
Resort residential
917

 
 Up to 1,500 units on 640 saleable acres
854

285

276

2030
The Collection
Honolulu, Oahu
Primary residential/
commercial
3

 
 465 units
(464 salable)
285

53

49

2016
Total
 
 
941

 
 
 
 
 
 
(1)
Includes land cost at book value and capitalized interest, but excludes sales commissions and closing costs.
(2)
Includes 19 acres of roadways and other infrastructure that are not saleable.


7


Project
Location
Product type
Acres at
12/31/15
 
A&B
net investment
as of
12/31/15
($mil; including capitalized interest)
FUTURE DEVELOPMENT - WHOLLY OWNED
 
 
Aina 'O Kane
Kahului, Maui
Primary residential/commercial
4

 
1
Brydeswood
Kalaheo, Kauai
Agricultural lots
336

 
3
Haliimaile
Haliimaile, Maui
Primary residential
55

(1)
1
Kai Olino
Port Allen, Kauai
Primary residential
4

 
11
Wailea SF-8
Kihei, Maui
Primary residential
13

 
1
Wailea MF-6
Wailea, Maui
Resort residential lots
23

 
6
Wailea MF-7
Wailea, Maui
Resort residential
13

 
9
Wailea MF-10
Wailea, Maui
Resort/commercial
7

 
3
Wailea MF-16
Wailea, Maui
Resort residential lots
7

 
3
Wailea, other
Wailea, Maui
Various
76

 
23
Total
 
538

 
 
 
 
 
 
 
 
Joint ventures
 
 
 
 
 
Bakersfield
Bakersfield, CA
Retail
57

 
7
Palmdale Center
Palmdale, CA
Office/industrial
18

 
5
Total
 
 
75

 
 
(1)
Eighteen of the 55 acres are designated for parks, open space, drainage and a waste water treatment plant.

Project
Location
Product type
Acres at
12/31/15
Planned units,
saleable acres or
gross leasable
square feet
ENTITLEMENT
 
 
 
 
Ele'ele Community Phase I
Ele'ele, Kauai
Primary residential
260

 tbd
Wai'ale
Kahului, Maui
Primary residential
545

 up to 2,550 units
Total
 
 
805

 
A&B’s major active projects include:
Maui:
(a)    Maui Business Park II. Maui Business Park II (“MBP II”), 154 acres (136 acres salable; 106 acres remain salable at December 31, 2015) in Kahului zoned for light industrial, retail and office use, represents the second phase of the Company’s Maui Business Park project. A 4-acre parcel was sold in 2012 for a Costco gas station. In 2013, a 24-acre parcel adjacent to Maui Business Park was sold for the development of Maui’s first Target-anchored center, which opened in March 2015 and has contributed to strong sales activity at MBP II. In 2014, 7.2 acres were sold to the County of Maui, American Savings Bank, and Shelton Holdings (BMW) for $14.4 million. In 2015, 18.4 acres were sold to Lowe's, Servco Pacific, Pacific Pipe, and Kihei Auto for $33.5 million.
(b)    Wailea. In October 2003, A&B reacquired 270 acres of fully-zoned, undeveloped residential and commercial land at the Wailea Resort on Maui for $67.1 million. A&B was the original developer of the Wailea Resort, beginning in the 1970s and continuing until A&B sold the resort to the Shinwa Golf Group in 1989.
Since reacquisition, A&B has sold approximately 110 acres, and currently owns about 160 acres, which are planned for up to 700 units. A&B is in various stages of development or sale for various parcels within Wailea, which include the following projects:


8


•
At the 7.4-acre MF-11 (Keala o Wailea) project, A&B’s 70 unit multi-family joint venture development with Armstrong Builders, construction commenced in December 2015. Of the 50 units released for pre-sale, 30 units are under binding contracts. Closings are projected to commence in 2017.
•
The 6-acre MF-19 parcel (Ridge at Wailea) was developed into nine residential lots. Eight lots remain available for sale.
•
At the 11-acre B-1 parcel, A&B continues to evaluate bulk sale or development options.
(c)    Kamalani. A&B’s Kamalani project is a 630-unit residential project on 95 acres in Kihei, Maui. During 2015, significant progress was made in design work, securing requisite government approvals and marketing of the project. Preliminary subdivision approval was secured in April 2015. Pre-sales and construction are expected to commence in in March 2016.
Kauai:
(d)    Kukui`ula. In April 2002, A&B entered into a joint venture with DMB Communities II (“DMBC”), an affiliate of DMB Associates, Inc. ("DMB"), an Arizona-based developer of master-planned communities, for the development of Kukui’ula, a 1,000-acre master planned resort residential community located in Poipu, Kauai, planned for up to 1,500 resort residential units. As of December 31, 2015, total capital contributed to the joint venture by A&B was approximately $280 million, which included $30 million representing the value of land initially contributed by the Company. As of December 31, 2015, DMB has contributed approximately $190 million.
Offsite infrastructure is complete for 500 to 800 units and all resort core amenities were completed and opened for business in 2011, including the Tom Weiskopf-designed championship golf course, an owners' clubhouse, pool and spa facilities, and a golf clubhouse. Increased vertical home construction activity at Kukui’ula continues to generate positive sales momentum, with 22 closings in 2015 and eight additional units under binding contracts as of December 31, 2015. The various vertical construction programs are being pursued in joint ventures with five third-party developers. As of December 31, 2015, a total of 134 units had closed, and 72 lots and 8 houses were available for purchase.
Oahu:
(e)    Kahala Avenue Portfolio. In September and December 2013, A&B acquired a total of 30 properties for approximately $128 million in the prestigious Kahala neighborhood of East Honolulu. These properties were in various stages of disrepair and A&B immediately commenced clearing, landscape maintenance, and sales and marketing. Through December 31, 2015, revenue from sales totaled $123 million. As of December 31, 2015, nine lots were available for purchase totaling approximately 245,000 square feet. The nine available properties include four higher-value oceanfront properties totaling approximately 174,000 square feet or 71% of the total square footage available for purchase.
(f)    The Collection. In 2012, A&B secured an option agreement with Kamehameha Schools for the development of a 3.3-acre city block near downtown Honolulu. The project includes a 396-unit high-rise condominium tower, 14 three-bedroom townhomes and a 54-unit mid-rise building. In August 2014, a joint venture was formed for the project development. The land was acquired from Kamehameha Schools and construction commenced in October 2014, with completion projected by year-end 2016. As of December 31, 2015, all 396 tower units and 54 mid-rise units and four townhomes were under binding contracts. Construction of all phases is projected to be completed in late 2016.
(g)    Waihonua at Kewalo. In 2010, A&B acquired a fully-entitled high-rise condominium development site near the Ala Moana Center in Honolulu. Sales and marketing commenced in December 2011 for a 340 saleable-unit project. In September 2012, the Company formed a joint venture for the development of the project. By July 2013, all 340 units were sold under binding contracts. Construction was completed in November 2014, and 12 units closed in December 2014. The remaining 328 units closed in January 2015.
(h)    Keauhou Place. In October 2015, A&B closed its $35 million “B-note” investment in the 423-unit Keauhou Place residential condominium in Kaka’ako. Although construction commenced in October 2015, A&B does not expect to fund its investment until mid-2016. As of December 31, 2015, 349 of the project's 422 units have been sold, with 345 units under binding contracts.


9




B.    Real Estate Leasing Segment
The Company’s commercial portfolio’s Net Operating Income ("NOI")1 and GLA summarized by geographic location and property type as of December 31, 2015 is as follows:
NOI ($ in millions)
Hawaii
Mainland
Total
Retail
$
38.7

$
2.5

$
41.2

Industrial
10.8

4.7

15.5

Office
3.7

10.5

14.2

Ground leases
13.0

—

13.0

Total
$
66.2

$
17.7

$
83.9

1 
Refer to page 46 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures.
GLA (square feet, in millions)
Hawaii
Mainland
Total
Retail
1.7

0.2

1.9

Industrial
0.8

1.2

2.0

Office
0.2

0.8

1.0

Total
2.7

2.2

4.9

(1)    Hawaii Commercial Properties
A&B’s Hawaii commercial portfolio consists of retail, industrial and office properties, comprising approximately 2.7 million square feet of GLA as of December 31, 2015. Most of the commercial properties are located on Oahu and Maui, with smaller holdings on Kauai and the Island of Hawaii. The average occupancy for the Hawaii portfolio was 93 percent in 2015, compared to 94 percent in 2014.
In December 2014, A&B acquired Kaka'ako Commerce Center, a 204,400-square-foot, light-industrial complex in urban Honolulu. The purchase was funded by proceeds from several Maui land sales and the sale of three mainland properties in 2015.


10


The Hawaii commercial properties owned as of year-end 2015 were as follows:
Property
Location
Type
Leasable Area
(sq. ft.)
 
 
 
 
Pearl Highlands Center
Pearl City, Oahu
Retail
415,400

Kailua-Retail (16 properties)
Kailua, Oahu
Retail
414,300

Komohana Industrial Park
Kapolei, Oahu
Industrial
238,300

Kaka'ako Commerce Center
Honolulu, Oahu
Industrial
204,400

Waianae Mall
Waianae, Oahu
Retail
170,300

Waipio Industrial
Waipahu, Oahu
Industrial
158,400

Kaneohe Bay Shopping Center
Kaneohe, Oahu
Retail
125,100

Waipio Shopping Center
Waipahu, Oahu
Retail
113,800

P&L Building
Kahului, Maui
Industrial
104,100

The Shops at Kukui'ula
Poipu, Kauai
Retail
89,000

Lanihau Marketplace
Kailua-Kona, Hawaii
Retail
88,300

Port Allen (4 buildings)
Port Allen, Kauai
Industrial/Retail
87,400

Kailua-Industrial (6 properties)
Kailua, Oahu
Industrial
68,800

Kunia Shopping Center
Waipahu, Oahu
Retail
60,400

Kahului Office Building
Kahului, Maui
Office
59,600

Lahaina Square
Lahaina, Maui
Retail
50,200

Kahului Shopping Center
Kahului, Maui
Retail
49,700

Napili Plaza
Napili, Maui
Retail
45,700

Kahului Office Center
Kahului, Maui
Office
33,400

Stangenwald Building
Honolulu, Oahu
Office
27,100

Judd Building
Honolulu, Oahu
Office
20,200

Gateway at Mililani Mauka
Mililani, Oahu
Retail
34,900

Gateway at Mililani Mauka South
Mililani, Oahu
Office
18,700

Maui Clinic Building
Kahului, Maui
Office
16,600

Lono Center
Kahului, Maui
Office
13,700

Total
 
 
2,707,800





11


(2)    U.S. Mainland Commercial Properties
On the Mainland, A&B owns a portfolio of 10 commercial properties, acquired primarily by way of tax-deferred 1031 exchanges, consisting of retail, industrial and office properties, comprising approximately 2.2 million square feet of leasable space as of December 31, 2015. A&B’s Mainland commercial properties’ occupancy rate was 95 percent in 2015 as compared to 93 percent in 2014.
A&B’s Mainland commercial properties owned as of December 31, 2015 were as follows:
Property
Location
Type
Leasable Area
(sq. ft.)
 
 
 
 
Midstate Hayes
Visalia, CA
Industrial
790,200

Sparks Business Center
Sparks, NV
Industrial
396,100

1800 and 1820 Preston Park
Plano, TX
Office
198,800

Ninigret Office Park
Salt Lake City, UT
Office
185,500

2868 Prospect Park
Sacramento, CA
Office
163,300

Little Cottonwood Center
Sandy, UT
Retail
141,500

Concorde Commerce Center
Phoenix, AZ
Office
138,700

Deer Valley Financial Center
Phoenix, AZ
Office
126,600

Gateway Oaks
Sacramento, CA
Office
59,700

Royal MacArthur Center
Dallas, TX
Retail
44,800

Total
 
 
2,245,200

(3)    Lease Expirations
The Company’s schedule of lease expirations for its Hawaii and U.S. Mainland commercial portfolio is as follows:
Year of expiration
Sq. ft. of
expiring
leases
Percentage
of total
leased GLA
Annual
gross rent
expiring(1)
($ in millions)
Percentage
of total
annual gross
rent
 
 
 
 
 
 
 
 
 
2016
930,566

 
20.8
%
 
11.0

 
14.1
%
 
2017
815,619

 
18.2
%
 
13.6

 
17.4
%
 
2018
803,809

 
18.0
%
 
9.6

 
12.3
%
 
2019
431,936

 
9.7
%
 
10.9

 
13.9
%
 
2020
523,026

 
11.7
%
 
11.0

 
14.1
%
 
2021
261,561

 
5.8
%
 
5.9

 
7.5
%
 
2022
87,335

 
2.0
%
 
2.4

 
3.1
%
 
2023
204,199

 
4.6
%
 
3.4

 
4.3
%
 
2024
122,625

 
2.7
%
 
3.2

 
4.1
%
 
2025
64,817

 
1.4
%
 
2.8

 
3.6
%
 
Thereafter
229,415

 
5.1
%
 
4.4

 
5.6
%
 
Total
4,474,908

 
100.0
%
 
78.2

 
100.0
%
 
(1)
Annual gross rent means the annualized base rent amounts of expiring leases and includes improved properties only and excludes 0.2 million square feet of month-to-month leases.



12


The Company’s schedule of lease expirations for its ground leases is as follows:
Year of expiration
Annual gross rent expiring ($ in millions)
 
Percentage of total annual gross rent(1)
Month-to-month
0.9

 
6.3
%
2016
1.2

 
8.5
%
2017
0.7

 
4.9
%
2018
0.3

 
2.1
%
2019
0.3

 
2.1
%
2020
0.8

 
5.7
%
2021
0.7

 
4.9
%
2022
0.3

 
2.1
%
2023
1.2

 
8.5
%
2024
—

 
—
%
2025
—

 
—
%
Thereafter
7.8

 
54.9
%
Total
14.2

 
100.0
%
(1)
Annual gross rent means the annualized base rent amounts of expiring leases.


C.    Materials and Construction
(1)    Business
Major activities of the Materials and Construction segment include asphalt paving as prime contractor and subcontractor; importing and selling liquid asphalt; mining, processing and selling rock and sand aggregate; producing and selling asphaltic and ready-mix concrete; providing and selling various construction- and traffic-control-related products and manufacturing and selling precast concrete products. Segment activities are conducted through Grace and its consolidated and non-consolidated affiliates.
The market for Grace’s business can be generally divided into the public sector market and the private sector market. The public sector construction market includes spending by federal, state and county governments for road and highway paving, aggregate materials, and highway-related maintenance and management services. In general, public sector spending is less cyclical than private sector construction projects. Approximately 90 percent of Grace’s paving revenue in 2015 was directly or indirectly attributable to public sector contracts. The private sector construction market includes spending for commercial and residential asphalt paving and material sales. Private sector spending is generally more cyclical than public sector spending and is primarily driven by economic conditions in Hawaii.
Aggregate: Aggregate production involves drilling and blasting rock from quarries, crushing the rock to appropriate sizes and screening materials after extraction to separate aggregate into two grades with more than 20 gradations with varying specifications. Basalt aggregate is used in the construction industry for residential and commercial developments, highways, roads, asphaltic concrete and ready-mix concrete products. Based on production in 2015, Grace was the largest producer of basalt aggregate in the state. Grace also has a recycling plant that accepts demolition concrete and reclaimed aggregate material from job sites for a fee and recycles them into salable aggregate products. Aggregate can also be imported into Hawaii from abroad to meet the state’s needs. Due to the high cost of handling and transporting aggregate, location is an important driver in determining a customer’s preferred source.
Asphaltic Concrete (hot mix asphalt): Grace imports liquid asphalt through its 70 percent-owned consolidated subsidiary, GLP Asphalt, LLC (GLP), for use in the manufacture of asphaltic concrete. Asphaltic concrete is produced by heating asphalt to a liquid consistency, drying the aggregate to remove moisture, and mixing the liquid asphalt with the aggregate in "hot mix plants." Asphaltic concrete consists of approximately 94 percent aggregate and 6 percent asphalt. Due to the high cost of transporting rock, Grace will generally utilize aggregate sources nearest to its hot mix asphalt plant and/or locate its hot mix plant next to the aggregate resource. Grace sources liquid asphalt through GLP, which purchases asphalt from Venezuela, Canada, and other foreign locations, typically several times a year, depending on demand and the size of the available shipments. GLP is currently the only local distributor of liquid asphalt in the state, and approximately 65 percent of GLP asphalt sales are to Grace and a non-consolidated affiliate. Liquid asphalt can also be imported in 20-ton transit tankers


13


from refineries on the U.S. West Coast. Approximately 20 percent of asphaltic concrete produced by Grace is sold to third parties and the remainder is used on construction jobs by Grace's asphalt paving division or a non-consolidated affiliate.
Asphalt Paving: The asphalt paving market is predominately composed of paving projects contracted by federal, state and county agencies. The contracts are based on competitive sealed bids, with the bid awarded to a qualified contractor with the lowest bid. Approximately 90 percent of all asphalt paving work performed by Grace in 2015 was for federal, state and county governmental entities. The remainder of the work consists of private contracts, such as residential and commercial developments.
Grace’s primary paving competitors include Jas A. Glover, Ltd.; Roads and Highways, LLC (a division of Sterling Construction-NASDAQ: STRL); Road Builders Corp.; and Maui Kupono Builders, LLC/Maui Master Builders, Inc.
Construction- and Traffic-Control-Related Products: Through various consolidated subsidiaries, Grace provides a range of construction-related products. Grace’s wholly owned subsidiary, GP Roadway Solutions, Inc. (“GPRS”) operates as a subcontractor and prime contractor and provides guardrail, fencing and sign installation, and maintenance; rents and sells safety and traffic control equipment and supplies; provides traffic control services; provides road and parking lot striping, seal coating and crack sealing, and security services; and performs application of maintenance-related encapsulation product. Grace’s 51 percent-owned GP/RM Prestress, LLC (“GP/RM”) is a manufacturer and supplier in the prestressed and precast concrete industry. GP/RM fabricates architectural concrete products such as exterior columns, walls and spandrels in a variety of colors with varying finishes and features used in the construction of parking structures, buildings and high rises. GP/RM is also a major supplier of structural concrete products such as rectangular, hexagonal and octagonal columns; various types of beams, double tees, walls, spandrels, stairs, flat slabs, bridge girders, planks; and stadium bleachers used to support various types of structures. In addition, other construction materials and products are sold by non-consolidated affiliates.
As of December 31, 2015, total backlog, which consists of signed contracts and awarded contracts not yet executed, including the backlog of Grace, GPRS, GP/RM and Maui Paving, LLC, a 50-percent-owned non-consolidated affiliate, totaled approximately $226.5 million, compared to $219.4 million at December 31, 2014. For purposes of calculating backlog, the entire estimated revenue attributable to Grace's consolidated subsidiaries and all of the backlog of Maui Paving, which was approximately $13.9 million and $38.1 million at December 31, 2015 and 2014, respectively, was included. Backlog represents the amount of revenue that Grace and Maui Paving expect to realize on contracts awarded primarily related to asphalt paving and, to a lesser extent, Grace’s consolidated revenue from GPRS and GP/RM.
The length of time that projects remain in backlog can span from a few days for a small volume of work to approximately 36 months for large paving contracts and contracts performed in phases. Backlog includes estimated revenue from the remaining portion of contracts not yet completed, as well as revenue from approved change orders.
(2)     Assets
Quarries: Grace owns 541 acres in Makakilo, Oahu, approximately 200 acres of which are used for its quarrying operations. Approximately 800,000 tons of rock were mined and processed by Grace in 2015. The operation of the quarry is governed by special and conditional use permits, which allow Grace to extract aggregate through 2032. Grace also owns approximately 265 acres on Molokai, which are licensed to a third-party operator for quarrying operations.
Grace began the infrastructure work for new crushing plants, which are used to reduce large rocks down to salable grade aggregate, at the Makakilo quarry in April 2012. Primary and secondary crushing plants are used to reduce quarried rock to a 4” to 5” “surge” material. The surge is then processed at the finish plants, where the rock is further reduced and screened to exact product specifications. The erection of the new “A” grade finish plant began in January 2013, and was online at the end of September 2013. The existing “B” grade finish plant upgrade was completed in December 2014. The new primary and secondary crushing plants were completed in 2015. The new facilities are expected to increase the productivity and efficiency of the operations, resulting in lower production costs. Through December 31, 2015, approximately $43.0 million has been incurred related to the quarry improvements ($33.8 million was incurred by Grace prior to its acquisition by A&B in 2013).
Equipment: Grace owns approximately 530 pieces of on- and off-highway rolling stock, which consists of heavy duty trucks, passenger vehicles and various road paving, quarrying and operations equipment. Additionally, Grace owns approximately 550 pieces of non-rolling stock items used in its operations, such as generators, transit tankers, light towers, message boards and nuclear gauges. The Materials and Construction segment has six rock crushing plants and eight asphaltic concrete plants (three on Oahu, one on Maui, one on Kauai, one on Hawaii island, and two on Molokai).



14


D.    Agribusiness
(1)    Agribusiness Operations
A&B’s current Agribusiness and related operations consist of: (1) a sugar plantation on the island of Maui, operated by its Hawaiian Commercial & Sugar Company (“HC&S”) division, (2) renewable energy operations on the island of Kauai, operated by McBryde Resources, Inc. (“McBryde”), (3) Kahului Trucking & Storage, Inc. (“KT&S”), which provides several types of trucking services, including sugar and molasses hauling on Maui, mobile equipment maintenance and repair services on Maui, Kauai, and the Big Island, and self-service storage facilities on Maui and Kauai, and (4) Hawaiian Sugar & Transportation Cooperative (“HS&TC”), an agricultural cooperative that provides raw sugar marketing and transportation services solely to HC&S. HS&TC owns the MV Moku Pahu, a Jones Act-qualified integrated tug barge bulk dry carrier, which is used to transport raw sugar and molasses from Hawaii to the U.S. West Coast and coal from the U.S. West Coast to Hawaii.
On December 31, 2015, the Company determined that it would cease its sugar operations at HC&S (the "Cessation"), which will result in the eventual layoff of over 650 employees. The sugar operation is expected to be phased out by the end of 2016, and the transition to a new diversified agriculture model will occur over a multi-year period.
The Company currently projects recording total pre-tax book charges related to the Cessation in the range of $112 million to $133 million ($68 million to $81 million, net of taxes), which consists of $23 million to $28 million of employee severance and related benefit charges, $69 million to $76 million of accelerated depreciation and asset write-offs, and $20 million to $29 million of property removal, restoration and other exit-related costs. Of the $112 million to $133 million of total pre-tax book charges mentioned above, approximately $69 million to $76 million will be non-cash charges and approximately $43 million to $57 million will be cash outlays, primarily related to employee severance and compensation benefits and property removal, restoration and other exit-related costs. Net of tax benefits, the cash outlays related to the Cessation will range from approximately $11 million to $21 million. However, the total net cash outlays related to the Cessation are projected to be offset by cash proceeds generated from the final harvest, based on current production estimates and sugar prices.
(2)    Marketing of Sugar
Approximately 92 percent of the sugar produced by HC&S in 2015 was bulk raw sugar purchased by C&H Sugar Company, Inc. (“C&H”), based in Crockett, California. C&H processes the raw cane sugar at its refinery at Crockett, California and markets the refined products primarily in the western and central United States. Pursuant to a supply contract with HS&TC, the raw sugar is sold to C&H at forward price contracts equal to the New York No. 16 Contract settlement price at the time of executed market trades, or mutually agreed upon pricing also based on current New York No. 16 Contract prices.
The remaining sugar produced by HC&S was specialty food-grade sugars, which are sold by HC&S to food and beverage producers and to retail stores under its Maui Brand® label, and to distributors that license our trademarks or repackage the sugars under their own labels. HC&S’s largest food-grade sugar customers are Cumberland Packing Corp., which repackages HC&S’s turbinado sugar for its “Sugar in the Raw” product line, and Sugar Foods Corporation, which licenses HC&S’s Maui Brand® label for exclusive use outside of Hawaii.
(3)    Land Designations and Water
The HC&S sugar plantation consists of 43,300 acres, with approximately 36,000 acres under active sugar cane cultivation.
On Kauai, approximately 3,000 acres are cultivated in coffee by Massimo Zanetti Beverage USA, Inc., which leases the land from A&B. Additional acreage is cultivated in seed corn and used for pasture purposes.
The Hawaii Legislature, in 2005, passed Important Agricultural Lands (“IAL”) legislation to fulfill the state constitutional mandate to protect agricultural lands, promote diversified agriculture, increase the state’s agricultural self-sufficiency, and assure the long-term availability of agriculturally suitable lands. In 2008, the Legislature passed a package of incentives, which is necessary to trigger the IAL system of land designation. In 2009, A&B received approval from the State Land Use Commission for the designation of over 27,000 acres on Maui and over 3,700 acres on Kauai as IAL. These designations were the result of voluntary petitions filed by A&B.
A&B holds rights to an irrigation system in West Maui, which provided approximately 13 percent of the irrigation water used by HC&S over the last ten years. A&B also owns 16,000 acres of watershed lands in East Maui, which supply a portion of the irrigation water used by HC&S. A&B also held four water licenses to another 30,000 acres owned by the State of Hawaii in East Maui, which over the last ten years have supplied approximately 56 percent of the irrigation water used by HC&S. The last of these water license agreements expired in 1986, and all four agreements were then extended as revocable


15


permits that were renewed annually. In 2001, a request was made to the State Board of Land and Natural Resources (the “BLNR”) to replace these revocable permits with a long-term water lease. Pending the conclusion by the BLNR of this contested case hearing on the request for the long-term lease, the BLNR has renewed the existing permits on a holdover basis, which has been the subject of litigation. In January 2016, the state court ruled that the BLNR lacked legal authority to keep the revocable permits in holdover status beyond one year. The court has allowed for an immediate appeal of this ruling. For information regarding legal proceedings involving A&B’s irrigation systems, see “Legal Proceedings” below.
(4)    Energy
HC&S uses bagasse, the residual fiber of the sugar cane plant, as a fuel to generate steam for the production of most of the electrical power for sugar milling and irrigation pumping operations. In addition to bagasse, HC&S uses coal, diesel, fuel oil and recycled motor oil to generate power during factory shutdown periods when bagasse is not being produced or during periods when bagasse is not produced in sufficient quantities. HC&S also generates a limited amount of hydroelectric power. To the extent it is not used in A&B’s factory and farming operations, HC&S sells electricity under a power purchase agreement ("PPA") with Maui Electric. Beginning on January 1, 2015, Maui Electric and HC&S mutually agreed to reduce the maximum amount of firm generation capacity to be supplied by HC&S during peak hours from 12 megawatts to 8 megawatts. In the fourth quarter of 2015, the PPA was further amended and significantly reduced the firm power provided by HC&S, but HC&S will continue to provide emergency backup power. In 2015, HC&S produced and sold, respectively, approximately 150,300 megawatt hours (MWH) and 51,100 MWH of electric power (compared with 181,300 MWH produced and 67,900 MWH sold in 2014). The decrease in power sold was due to the amendment to the PPA that eliminated regularly scheduled dispatched power. Hydroelectric generation increased to 25,200 MWH in 2015 (compared with 18,800 MWH in 2014) from an increase in rainfall during the year. Coal used for power generation was 51,100 short tons, about 6,000 tons less than that used in 2014. Less coal was required because of the lower power commitment to Maui Electric.
In 2015, McBryde produced approximately 27,600 MWH of hydroelectric power (compared with approximately 27,900 MWH in 2014) and approximately 11,400 MWH of solar power from its Port Allen Solar Facility (compared with approximately 11,700 MWH in 2014). To the extent it is not used in A&B-related operations, McBryde sells electricity to Kauai Island Utility Cooperative (“KIUC”). Power sales in 2015 amounted to approximately 30,800 MWH (compared with 32,800 MWH in 2014). The decrease in power sold was primarily due to higher internal power consumption.
Employees and Labor Relations
As of December 31, 2015, A&B and its subsidiaries had 1,496 regular full-time employees. The Agribusiness segment employed 773 regular full-time employees, the Real Estate segment employed 53 regular full-time employees, the Materials and Construction segment employed 601 regular full-time employees, and the remaining full-time employees were employed in administration. Approximately 69 percent of A&B's employees are covered by collective bargaining agreements with unions.
Bargaining unit employees of HC&S are covered by two collective bargaining agreements with the International Longshore and Warehouse Union ("ILWU"). The agreements with the HC&S production unit employees and clerical and technical employees bargaining units cover 593 workers and will terminate upon cessation of the HC&S sugar operations. The 31 bargaining unit employees at KT&S also are covered by two collective bargaining agreements with the ILWU. The agreement for bulk sugar employees expires on June 30, 2019, while the agreement for hourly employees expires on March 31, 2016. There are two collective bargaining agreements with 23 A&B Fleet Services employees, on the Big Island and Kauai, represented by the ILWU.  Both the Kauai and Big Island agreements expire on August 31, 2017.
A collective bargaining agreement with the International Union of Operating Engineers AFL-CIO, Local Union 3 (“IUOE”) covers 195 of Grace’s employees, who are primarily classified as heavy duty equipment operators, paving construction site workers, quarry workers, truck drivers and mechanics. The agreement expires on September 2, 2019.
Collective bargaining agreements with Laborers International Union of North America Local 368 (“Laborers”) cover 201 Grace employees who engage in various types of work. The Laborers' agreement with fence, guardrail and sign installation workers expires on September 30, 2019; the traffic and rentals Laborers’ agreement expires on August 31, 2018; and the precast/prestressed Laborers’ agreement expires on August 31, 2019.
Available Information
A&B files reports with the Securities and Exchange Commission (the “SEC”). The reports and other information filed include: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports and information filed under the Securities Exchange Act of 1934 (the “Exchange Act”).


16


The public may read and copy any materials A&B files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov, which contains reports, proxy and information statements, and other information regarding A&B and other issuers that file electronically with the SEC.
A&B makes available, free of charge on or through its Internet website, A&B’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. A&B’s website address is www.alexanderbaldwin.com.

ITEM 1A. RISK FACTORS
A&B’s business and its common stock are subject to a number of risks and uncertainties. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Form 10-K and the Company’s filings with the U.S. Securities and Exchange Commission. Based on information currently known, A&B believes that the following information identifies the most significant risk factors affecting A&B’s business and its common stock. However, the risks and uncertainties faced by A&B are not limited to those described below, nor are they listed in order of significance. Additional risks and uncertainties not presently known to A&B or that it currently believes to be immaterial may also materially adversely affect A&B’s business, liquidity, financial condition, results of operation and cash flows. This Form 10-K also contains forward-looking statements that involve risks and uncertainties.
If any of the following events occur, A&B’s business, liquidity, financial condition, results of operations and cash flows could be materially adversely affected, and the trading price of A&B common stock could materially decline.
Risks Relating to A&B’s Business
Note: All references to “A&B” and "the Company" in this section refer to, and includes, each segment and line of business comprising A&B, and any reference to any particular segment or line of business does not limit the foregoing.
Changes in economic conditions may result in a decrease in market demand for A&B’s real estate assets in Hawaii and the Mainland and its material and construction products.
The Company's business, including its assets and operations, are concentrated in Hawaii. A weakening of economic drivers in Hawaii, which include tourism, military and consumer spending, public and private construction starts and spending, personal income growth, and employment, or the weakening of consumer confidence, market demand, or economic conditions on the Mainland, may adversely affect the demand for or sale of Hawaii real estate, the level of real estate leasing activity in Hawaii and on the Mainland, and demand for the Company's materials and construction products. In addition, an increase in interest rates or other factors could reduce the market value of the Company's real estate holdings, as well as increase the cost of buyer financing that may reduce the demand for A&B's real estate assets.
A&B may face new or increased competition.
There are numerous other developers, buyers, managers and owners of commercial and residential real estate and undeveloped land that compete or may compete with A&B for management and leasing revenues, land for development, properties for acquisition and disposition, and for tenants and purchasers for properties. Intense competition could lead to increased vacancies, decreased rents, sales prices or sales volume, or lack of development opportunities.
Grace competes in an industry that favors the lowest bid. An increase in competition, including out-of-state contractors, competing for a limited number of projects available, could lead to lost bids and lower prices and volume. Grace also mines aggregate and imports asphalt for sale. Grace's customers or its competitors could seek alternative sources of supply, such as imported liquid asphalt and aggregate.
A&B may face potential difficulties in obtaining operating and development capital.
The successful execution of A&B’s strategy requires substantial amounts of operating and development capital. Sources of such capital could include banks, life insurance companies, public and private offerings of debt or equity, including rights offerings, sale of certain assets and joint venture partners. If A&B’s credit profile deteriorates significantly, its access to the debt capital markets or its ability to renew its committed lines of credit may become restricted, the cost to borrow may increase, or A&B may not be able to refinance debt at the same levels or on the same terms. Further, A&B relies on its ability to


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obtain and draw on a revolving credit facility to support its operations. Volatility in the credit and financial markets or deterioration in A&B’s credit profile may prevent A&B from accessing funds. There is no assurance that any capital will be available on terms acceptable to A&B or at all to satisfy A&B’s short or long-term cash needs.
A&B may raise additional capital in the future on terms that are more stringent to A&B, that could provide holders of new issuances rights, preferences and privileges that are senior to those currently held by A&B common stockholders, or that could result in dilution of common stock ownership.
To execute its business strategy, A&B may require additional capital. If A&B incurs additional debt or raises equity, the terms of the debt or equity issued may give the holders rights, preferences and privileges senior to those of holders of A&B common stock, particularly in the event of liquidation. The terms of any new debt may also impose additional and more stringent restrictions on A&B’s operations than currently in place. If A&B issues additional common equity, either through public or private offerings or rights offerings, your percentage ownership in A&B would decline if you do not participate on a ratable basis.
Failure to comply with certain restrictive financial covenants contained in A&B’s credit facilities could impose restrictions on A&B’s business segments, capital availability or the ability to pursue other activities.
A&B’s credit facilities contain certain restrictive financial covenants. If A&B breaches any of the covenants and such breach is not cured timely or waived by the lenders, and results in default, A&B’s access to credit may be limited or terminated and the lenders could declare any outstanding amounts immediately due and payable.
Increasing interest rates would increase A&B’s overall interest expense.
Interest expense on A&B's floating-rate debt ($141.8 million at December 31, 2015) would increase if interest rates rise.
A&B’s significant operating agreements and leases could be replaced on less favorable terms or may not be replaced.
The significant operating agreements and leases of A&B in its various businesses expire at various points in the future and may not be replaced or could be replaced on less favorable terms.
An increase in fuel prices may adversely affect A&B’s operating environment and costs.
Fuel prices have a significant direct impact on the health of the Hawaii economy. Increases in the price of fuel may result in higher transportation costs to Hawaii and adversely affect visitor counts and the cost of goods shipped to Hawaii, thereby affecting the strength of the Hawaii economy and its consumers. Increases in fuel costs also can lead to other non-recoverable, direct expense increases to A&B through, for example, increased costs of energy and petroleum-based raw materials used in the production and transportation of sugar, the production of aggregate, and the manufacture, transportation, and placement of hot mix asphalt. Increases in energy costs for A&B’s leased real estate portfolio are typically recovered from lessees, although A&B’s share of energy costs increases as a result of lower occupancies, and higher operating cost reimbursements impact the ability to increase underlying rents. Rising fuel prices also may increase the cost of construction, including delivery costs to Hawaii, and the cost of materials that are petroleum-based, thus affecting A&B’s real estate development projects.
Noncompliance with, or changes to, federal, state or local law or regulations may adversely affect A&B’s business.
A&B is subject to federal, state and local laws and regulations, including government rate regulations, land use regulations, environmental regulations, tax regulations and federal government administration of the U.S. sugar program. Noncompliance with, or changes to, the laws and regulations governing A&B’s business could impose significant additional costs on A&B and adversely affect A&B’s financial condition and results of operations. For example, the real estate segments are subject to numerous federal, state and local laws and regulations, which, if changed, or not complied with may adversely affect A&B’s business. The Company frequently utilizes Section 1031 of the IRS Code to defer taxes when selling qualifying real estate and reinvesting the proceeds in replacement properties. This often occurs when the Company sells bulk parcels of land in Hawaii or commercial properties in Hawaii or on the Mainland, all of which typically have a very low tax basis. A repeal of or adverse amendment to Section 1031, which has often been considered by Congress, could impose significant additional costs on A&B. A&B is subject to Occupational Safety and Health Administration regulations, Environmental Protection Agency regulations, and state and county permits related to its operations. The Materials and Construction segment is additionally subject to Mine Safety and Health Administration regulations. The Agribusiness segment is subject to the federal government’s administration of the U.S. sugar program, such as the 2014 Farm Bill, the Hawaii Public Utilities Commission’s


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regulation of agreements between A&B and Hawaii’s utilities regarding the sale of electric power, and various county, state and federal environmental laws, regulations and permits governing farming operations and generation of electricity (including, for example, the use of pesticides and the burning of cane, bagasse and coal).
Changes to, or A&B’s violation of or inability to comply with any of the laws, regulations and permits mentioned above could increase A&B’s operating costs or ability to operate the affected line of business. Climate change legislation, such as limiting and reducing greenhouse gas emissions through a “cap and trade” system of allowances and credits, if enacted, may also increase A&B's operating costs or ability to operate the affected line of business.
Work stoppages or other labor disruptions by the unionized employees of A&B or other companies in related industries may increase operating costs or adversely affect A&B's ability to conduct business.
As of December 31, 2015, approximately 69 percent of A&B's 1,496 regular full-time employees were covered by collective bargaining agreements with unions. A&B may be adversely affected by actions taken by employees of A&B or other companies in related industries against efforts by management to control labor costs, restrain wage or benefits increases or modify work practices. Strikes and disruptions may occur as a result of the failure of A&B or other companies in its industry to negotiate collective bargaining agreements with such unions successfully. For example, in its Real Estate Development and Sales segment, A&B may be unable to complete construction of its projects if building materials or labor are unavailable due to labor disruptions in the relevant trade groups.
The loss of or damage to key vendor and customer relationships may adversely affect A&B’s ability to conduct business and its profitability.
A&B’s business is dependent on its relationships with key vendors, customers and tenants. The loss of or damage to any of these key relationships may adversely affect A&B’s ability to conduct business and its profitability.
Interruption, breaches or failure of A&B’s information technology and communications systems could impair A&B’s ability to operate, adversely affect its profitability and damage its reputation.
A&B is highly dependent on information technology systems. All information technology and communication systems are subject to reliability issues, integration and compatibility concerns and security-threatening intrusions. Further, A&B may experience failures caused by the occurrence of a natural disaster or other unanticipated problems at A&B’s facilities. Any failure, or security breaches of, A&B’s systems could result in interruptions in its service or production, lower profitability and damage to its reputation.
A&B is susceptible to weather and natural disasters.
A&B’s real estate operations are vulnerable to natural disasters, such as hurricanes, earthquakes, tsunamis, floods, fires, tornadoes and unusually heavy or prolonged rain, which could damage its real estate holdings and which could result in substantial repair or replacement costs to the extent not covered by insurance, a reduction in property values, or a loss of revenue, and could have an adverse effect on its ability to develop, lease and sell properties. The occurrence of natural disasters could also cause increases in property insurance rates and deductibles, which could reduce demand for, or increase the cost of owning or developing A&B’s properties.
For the Agribusiness segment, drought, greater than normal rainfall, hurricanes, low-wind conditions, earthquakes, tsunamis, floods, fires, other natural disasters, agricultural pestilence, or negligence or intentional malfeasance by individuals, may have an adverse effect on the sugar planting, growing, harvesting and production, electricity generation and sales, and the Agribusiness segment’s facilities, including dams and reservoirs.
For the Materials and Construction segment, because nearly all of the segment's activities are performed outdoors, its operations are substantially dependent on weather conditions. For example, periods of wet or other adverse weather conditions could interrupt paving activities, resulting in delayed or loss of revenue, under-utilization of crews and equipment and less efficient rates of overhead recovery. Adverse weather conditions also restrict the demand for aggregate products, increase aggregate production costs and impede its ability to efficiently transport material.
A&B maintains casualty insurance under policies it believes to be adequate and appropriate. These policies are generally subject to large retentions and deductibles. Some types of losses, such as losses resulting from physical damage to dams or crop damage, generally are not insured. In some cases A&B retains the entire risk of loss because it is not economically prudent to purchase insurance coverage or because of the perceived remoteness of the risk. Other risks are uninsured because insurance coverage may not be commercially available. Finally, A&B retains all risk of loss that exceeds the limits of its insurance.


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Heightened security measures, war, actual or threatened terrorist attacks, efforts to combat terrorism and other acts of violence may adversely impact A&B’s operations and profitability.
War, terrorist attacks and other acts of violence may cause consumer confidence and spending to decrease, or may affect the ability or willingness of tourists to travel to Hawaii, thereby adversely affecting Hawaii’s economy and A&B. Additionally, future terrorist attacks could increase the volatility in the U.S. and worldwide financial markets.
Loss of A&B’s key personnel could adversely affect its business.
A&B’s future success will depend, in significant part, upon the continued services of its key personnel, including its senior management and skilled employees. The loss of the services of key personnel could adversely affect its future operating results because of such employee’s experience, knowledge of its business and relationships. If key employees depart, A&B may have to incur significant costs to replace them, and A&B’s ability to execute its business model could be impaired if it cannot replace them in a timely manner. A&B does not maintain key person insurance on any of its personnel.
A&B is subject to, and may in the future be subject to, disputes, legal or other proceedings, or government inquiries or investigations, that could have an adverse effect on A&B.
The nature of A&B’s business exposes it to the potential for disputes, legal or other proceedings, or government inquiries or investigations, relating to labor and employment matters, contractual disputes, personal injury and property damage, environmental matters, construction litigation, business practices, and other matters, as discussed in the other risk factors disclosed in this section. These disputes, individually or collectively, could harm A&B’s business by distracting its management from the operation of its business. If these disputes develop into proceedings, these proceedings, individually or collectively, could involve or result in significant expenditures or losses by A&B. For more information, see Item 3 entitled “Legal Proceedings.” As a real estate developer, A&B may face warranty and construction defect claims, as described below under “Risks Related to A&B’s Real Estate Segments.”
Changes in the value of pension assets, or a change in pension law or key assumptions, may result in increased expenses or plan contributions.
The amount of A&B’s employee pension and postretirement benefit costs and obligations are calculated on assumptions used in the relevant actuarial calculations. Adverse changes in any of these assumptions due to economic or other factors, changes in discount rates, higher health care costs, or lower actual or expected returns on plan assets, may result in increased cost or required plan contributions. In addition, a change in federal law, including changes to the Employee Retirement Income Security Act and Pension Benefit Guaranty Corporation premiums, may adversely affect A&B’s single-employer pension plans and plan funding. These factors, as well as a decline in the fair value of pension plan assets, may put upward pressure on the cost of providing pension and medical benefits and may increase future pension expense and required funding contributions. Although A&B has actively sought to control increases in these costs, there can be no assurance that it will be successful in limiting future cost and expense increases.
Risks Relating to A&B’s Real Estate Segments
A&B is subject to risks associated with real estate construction and development.
A&B’s development projects are subject to risks relating to A&B’s ability to complete its projects on time and on budget. Factors that may result in a development project exceeding budget or being prevented from completion include, but are not limited to:
•
an inability of A&B or buyers to secure sufficient financing or insurance on favorable terms, or at all;
•
construction delays, defects, or cost overruns, which may increase project development costs;
•
an increase in commodity or construction costs, including labor costs;
•
the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues;
•
an inability to obtain, or a significant delay in obtaining, zoning, construction, occupancy and other required governmental permits and authorizations;


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•
difficulty in complying with local, city, county and state rules and regulations regarding permitting, zoning, subdivision, utilities, affordable housing and water quality, as well as federal rules and regulations regarding air and water quality and protection of endangered species and their habitats;
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an inability to have access to sufficient and reliable sources of water or to secure water service or meters for its projects;
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an inability to secure tenants or buyers necessary to support the project or maintain compliance with debt covenants;
•
failure to achieve or sustain anticipated occupancy or sales levels;
•
buyer defaults, including defaults under executed or binding contracts;
•
condemnation of all or parts of development or operating properties, which could adversely affect the value or viability of such projects; and
•
an inability to sell A&B’s constructed inventory.
Instability in the financial industry could reduce the availability of financing.
Significant instability in the financial industry like that experienced during the financial crisis of 2008-2009, may result in, among other things, declining property values and increasing defaults on loans. This, in turn, could lead to increased regulations, tightened credit requirements, reduced liquidity and increased credit risk premiums for virtually all borrowers. Fewer loan products and strict loan qualifications make it more difficult for borrowers to finance the purchase of units in A&B’s projects. Additionally, more stringent requirements to obtain financing for buyers of commercial properties make it significantly more difficult for A&B to sell commercial properties and may negatively impact the sales prices and other terms of such sales. Deterioration in the credit environment may also impact A&B in other ways, including the credit or solvency of customers, vendors, tenants, or joint venture partners, the ability of partners to fund their financial obligations to joint ventures and A&B's access to mortgage financing for its own properties.
A&B is subject to a number of factors that could cause leasing rental income to decline.
A&B owns a portfolio of commercial income properties. Factors that may adversely affect the portfolio’s profitability include, but are not limited to:
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a significant number of A&B’s tenants are unable to meet their obligations;
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increases in non-recoverable operating and ownership costs;
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A&B is unable to lease space at its properties when the space becomes available;
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the rental rates upon a renewal or a new lease are significantly lower than prior rents or do not increase sufficiently to cover increases in operating and ownership costs;
•
the providing of lease concessions, such as free or discounted rents and tenant improvement allowances; and
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the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues at the property.
The bankruptcy of key tenants may adversely affect A&B’s cash flows and profitability.
A&B may derive significant cash flows and earnings from certain key tenants. If one or more of these tenants declare bankruptcy or voluntarily vacates from the leased premise and A&B is unable to re-lease such space or to re-lease it on comparable or more favorable terms, A&B may be adversely impacted. Additionally, A&B may be further adversely impacted by an impairment or “write-down” of intangible assets, such as lease-in-place value, favorable lease asset, or a deferred asset related to straight-line lease rent, associated with a tenant bankruptcy or vacancy.


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Governmental entities have adopted or may adopt regulatory requirements that may restrict A&B’s development activity.
A&B is subject to extensive and complex laws and regulations that affect the land development process, including laws and regulations related to zoning and permitted land uses. Government entities have adopted or may approve regulations or laws that could negatively impact the availability of land and development opportunities within those areas. It is possible that increasingly stringent requirements will be imposed on developers in the future that could adversely affect A&B’s ability to develop projects in the affected markets or could require that A&B satisfy additional administrative and regulatory requirements, which could delay development progress or increase the development costs to A&B.
Real estate development projects are subject to warranty and construction defect claims in the ordinary course of business that can be significant.
As a developer, A&B is subject to warranty and construction defect claims arising in the ordinary course of business. The amounts payable under these claims, both in legal fees and remedying any construction defects, can be significant and could exceed the profits made from the project. As a consequence, A&B may maintain liability insurance, obtain indemnities and certificates of insurance from contractors generally covering claims related to workmanship and materials, and create warranty and other reserves for projects based on historical experience and qualitative risks associated with the type of project built. Because of the uncertainties inherent in these matters, A&B cannot provide any assurance that its insurance coverage, contractor arrangements and reserves will be adequate to address some or all of A&B’s warranty and construction defect claims in the future. For example, contractual indemnities may be difficult to enforce, A&B may be responsible for applicable self-insured retentions, and certain claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered and the availability of liability insurance for construction defects could be limited or costly. Accordingly, A&B cannot provide any assurance that such coverage will be adequate, available at an acceptable cost, or available at all.
A&B is involved in joint ventures and is subject to risks associated with joint venture relationships.
A&B is involved in joint venture relationships and may initiate future joint venture projects. A joint venture involves certain risks such as, among others:
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A&B may not have voting control over the joint venture;
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A&B may not be able to maintain good relationships with its venture partners;
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the venture partner at any time may have economic or business interests that are inconsistent with A&B’s economic or business interests;
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the venture partner may fail to fund its share of capital for operations and development activities or to fulfill its other commitments, including providing accurate and timely accounting and financial information to A&B;
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the joint venture or venture partner could lose key personnel
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the venture partner could become insolvent, requiring A&B to assume all risks and capital requirements related to the joint venture project, and any resulting bankruptcy proceedings could have an adverse impact on the operation of the project or the joint venture; and
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A&B may be required to perform on guarantees it has provided or agrees to provide in the future related to the completion of a joint venture's construction and development of a project, joint venture indebtedness, or on indemnification of a third party serving as surety for a joint venture's bonds for such completion.
A&B’s financial results are significantly influenced by the economic growth and strength of Hawaii.
Virtually all of A&B’s real estate development activity is conducted in Hawaii. Consequently, the growth and strength of Hawaii’s economy has a significant impact on the demand for A&B’s real estate development projects. As a result, any adverse change to the growth or health of Hawaii’s economy could have an adverse effect on A&B’s real estate business.
The value of A&B’s development projects and its commercial properties are affected by a number of factors.
The Company has significant investments in various commercial real estate properties, development projects, and joint venture investments. Weakness in the real estate sector, especially in Hawaii, difficulty in obtaining or renewing project-level financing, and changes in A&B’s investment and development strategy, among other factors, may affect the fair value of these


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real estate assets owned by A&B or by its joint ventures. If the fair value of A&B’s joint venture development projects were to decline below the carrying value of those assets, and that decline was other-than-temporary, A&B would be required to recognize an impairment loss. Additionally, if the undiscounted cash flows of its commercial properties or development projects were to decline below the carrying value of those assets, A&B would be required to recognize an impairment loss if the fair value of those assets were below their carrying value.
Risks Relating to A&B’s Materials and Construction Segment
A&B's Materials and Construction segment's revenue growth and profitability are dependent on factors outside of its control.
A&B's Materials and Construction segment's ability to grow its revenues and improve profitability are dependent on factors outside of its control, which include, but are not limited to:
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decreased government funding for infrastructure projects (see the "Economic downturns or reductions in government funding of infrastructure projects could reduce A&B's revenues and profits from its materials and construction businesses." risk factor below);
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reduced spending by private sector customers resulting from poor economic conditions in Hawaii;
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an increased number of competitors;
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less success in competitive bidding for contracts;
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a decline in transportation and logistical costs, which may result in customers purchasing material from sources located outside of Hawaii in a more cost-efficient manner;
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limitations on access to necessary working capital and investment capital to sustain growth;
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inability to hire and retain essential personnel and to acquire equipment to support growth; and
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inability to identify acquisition candidates and successfully acquire and integrate them into A&B's materials and construction businesses.
Economic downturns or reductions in government funding of infrastructure projects could reduce A&B's revenues and profits from its materials and construction businesses.
The segment's products are used in public infrastructure projects, which include the construction, maintenance and improvement of highways, streets, roads, airport runways and similar projects. A&B's materials and construction businesses, including its aggregates business, are highly dependent on the amount and timing of infrastructure work funded by various governmental entities, which, in turn, depends on the overall condition of the economy, the need for new or replacement infrastructure, the priorities placed on various projects funded by governmental entities and federal, state or local government spending levels. A&B cannot be assured of the existence, amount and timing of appropriations for spending on these and other future projects, including state and federal spending on roads and highways. Spending on infrastructure could decline for numerous reasons, including decreased revenues received by state and local governments for spending on such projects (including federal funding), and other competing priorities for available state, local and federal funds. State spending on highway and other projects can be adversely affected by decreases or delays in, or uncertainties regarding, federal highway funding. The segment is reliant upon contracts with the City and County of Honolulu, the State of Hawaii and the Federal Government for a significant portion of its revenues.
A&B may face community opposition to the operation or expansion of quarries or other facilities.
Quarries and other segment facilities require special and conditional use permits to operate. Permitting and licensing applications and proceedings and regulatory enforcement proceedings are all matters open to public scrutiny and comment. In addition, the Makakilo quarry is adjacent to residential areas and heavy equipment and explosives are used in the mining process. As a result, from time to time, A&B's Materials and Construction segment operations may be subject to community opposition and adverse publicity that may have a negative effect on operations and delay or limit any future expansion or development of segment operations.


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A&B's materials and construction businesses operate only in Hawaii, and adverse changes to the economy and business environment in Hawaii could adversely affect operations and profitability.
Because of its operations are concentrated in a specific geographic location, A&B's materials and construction businesses are susceptible to fluctuations in operations and profitability caused by changes in economic or other conditions in Hawaii.
Significant contracts may be canceled or A&B may be disqualified from bidding for new contracts.
Governmental entities typically have the right to cancel their contracts with A&B's construction businesses at any time with payment generally only for the work already completed plus a negotiated compensatory overhead recovery amount. In addition, A&B's construction businesses could be prohibited from bidding on certain governmental contracts if it fails to maintain qualifications required by those entities, such as maintaining an acceptable safety record.
If A&B's materials and construction businesses are unable to accurately estimate the overall risks, requirements or costs when bidding on or negotiating a contract that it is ultimately awarded, the segment may achieve a lower than anticipated profit or incur a loss on the contract.
The majority of the Materials and Construction segment's revenues are derived from “quantity pricing” (fixed unit price) contracts. Approximately 20 percent of 2015 segment revenues and backlog are derived from “lump sum” (fixed total price) contracts. Quantity pricing contracts require the provision of line-item materials at a fixed unit price based on approved quantities irrespective of actual per unit costs. Lump sum contracts require that the total amount of work be performed for a single price irrespective of actual quantities or actual costs. Expected profits on contracts are realized only if costs are accurately estimated and then successfully controlled. If cost estimates for a contract are inaccurate, or if the contract is not performed within cost estimates, then cost overruns may result in losses or cause the contract not to be as profitable as expected.
If A&B's materials and construction businesses are unable to attract and retain key personnel and skilled labor, or encounter labor difficulties, the ability to bid for and successfully complete contracts may be negatively impacted.
The ability to attract and retain reliable, qualified personnel is a significant factor that enables A&B's materials and construction businesses to successfully bid for and profitably complete its work. This includes members of management, project managers, estimators, supervisors, and foremen. The segment's future success will also depend on its ability to hire, train and retain, or to attract, when needed, highly skilled management personnel. If competition for these employees is intense, it could be difficult to hire and retain the personnel necessary to support operations. If A&B does not succeed in retaining its current employees and attracting, developing and retaining new highly skilled employees, segment operations and future earnings may be negatively impacted.
A majority of segment personnel are unionized. Any work stoppage or other labor dispute involving unionized workforce, or inability to renew contracts with the unions, could have an adverse effect on operations.
A&B's construction and construction-related businesses may fail to meet schedule or performance requirements of its paving contracts.
Asphalt paving contracts have penalties for late completion. In most instances, projects must be completed within an allotted number of business or calendar days from the time the notice to proceed is received, subject to allowances for additional days due to weather delays or additional work requested by the customer. If A&B's construction businesses subsequently fail to complete the project as scheduled, A&B may be responsible for contractually agreed-upon liquidated damages, an amount assessed per day beyond the contractually allotted days, at the discretion of the customer. Under these circumstances, the total project cost could exceed original estimates and could result in a loss of profit or a loss on the project. Additionally, A&B's construction businesses enter into lump sum and quantity pricing contracts where profits can be adversely affected by a number of factors beyond its control, which can cause actual costs to materially exceed the costs estimated at the time of its original bid.
Timing of the award and performance of new contracts could have an adverse effect on Materials and Construction segment operating results and cash flow.
It is generally very difficult to predict whether and when bids for new projects will be offered for tender, as these projects frequently involve a lengthy and complex design and bidding process, which is affected by a number of factors, such as market conditions, funding arrangements and governmental approvals. Because of these factors, segment results of operations and cash flows may fluctuate from quarter to quarter and year to year, and the fluctuation may be substantial.


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The uncertainty of the timing of contract awards after a winning bid is submitted may also present difficulties in matching the size of equipment fleet and work crews with contract needs. In some cases, A&B's materials and construction businesses may maintain and bear the cost of more equipment than is currently required, in anticipation of future needs for existing contracts or expected future contracts.
In addition, the timing of the revenues, earnings and cash flows from contracts can be delayed by a number of factors, including delays in receiving material and equipment from suppliers and services from subcontractors and changes in the scope of work to be performed.
Dependence on a limited number of customers could adversely affect A&B's materials and construction businesses and results of operations.
Due to the size and nature of the segment's construction contracts, one or a few customers have in the past and may in the future represent a substantial portion of consolidated segment revenues and gross profits in any one year or over a period of several consecutive years. For example, in 2015, approximately 90 percent of Grace's construction related revenue was generated from projects administered by the State of Hawaii or the various counties in Hawaii where Grace served as general contractor or subcontractor. Similarly, segment backlog frequently reflects multiple contracts for certain customers; therefore, one customer may comprise a significant percentage of backlog at a certain point in time. For example, the State of Hawaii comprised approximately 33 percent of Grace’s construction backlog at December 31, 2015. The loss of business from any such customer, or a default or delay in payment on a significant scale by a customer, could have an adverse effect on A&B's materials and construction businesses or results of operations.
A&B's materials and construction businesses are likely to require more capital over the longer term.
The property and machinery needed to produce aggregate products and perform asphaltic concrete paving contracts are expensive. Although capital needs over the next five years are expected to be relatively modest, over the longer term, A&B's materials and construction businesses may require increasing annual capital expenditures. The segment's ability to generate sufficient cash flow to fund these expenditures depends on future performance, which will be subject to general economic conditions, industry cycles and financial, business, and other factors affecting operations, many of which are beyond A&B's control. If the segment is unable to generate sufficient cash to operate its business, it may be required, among other things, to further reduce or delay planned capital or operating expenditures.
An inability to obtain bonding could limit the aggregate dollar amount of contracts that A&B's materials and construction businesses are able to pursue.
As is customary in the construction industry, A&B may be required to provide surety bonds to its customers to secure its performance under construction contracts. A&B's ability to obtain surety bonds primarily depends upon its capitalization, working capital, past performance, management expertise and reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of backlog and their underwriting standards, which may change from time to time. Events that adversely affect the insurance and bonding markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. The inability to obtain adequate bonding would limit the amount that A&B's construction businesses are to able bid on new contracts and could have an adverse effect on the segment's future revenues and business prospects.
A&B's Materials and Construction segment operations are subject to hazards that may cause personal injury or property damage, thereby subjecting A&B to liabilities and possible losses, which may not be covered by insurance.
Segment employees are subject to the usual hazards associated with performing construction activities on road construction sites, plants and quarries. Operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. A&B maintains general liability and excess liability insurance, workers’ compensation insurance, auto insurance and other types of insurance, all in amounts consistent with A&B’s materials and construction businesses' risk of loss and industry practice, but this insurance may not be adequate to cover all losses or liabilities incurred in operations.
Insurance liabilities are difficult to assess and quantify due to unknown factors, including the severity of an injury, the determination of liability in proportion to other parties, the number of incidents not reported and the effectiveness of the segment's safety program. If insurance claims or costs were above its estimates, A&B's materials and construction businesses might be required to use working capital to satisfy these claims, which could impact its ability to maintain or expand its operations.


25


Environmental and other regulatory matters could adversely affect A&B's materials and construction businesses' ability to conduct its business and could require significant expenditures.
Segment operations are subject to various environmental laws and regulations relating to the management, disposal and remediation of hazardous substances, climate change and the emission and discharge of pollutants into the air and water. A&B's materials and construction businesses could be held liable for such contamination created not only from their own activities but also from the historical activities of others on properties that the segment acquires or leases. Segment operations are also subject to laws and regulations relating to workplace safety and worker health, which, among other things, regulate employee exposure to hazardous substances. Violations of such laws and regulations could subject A&B to substantial fines and penalties, cleanup costs, third-party property damage or personal injury claims. In addition, these laws and regulations have become, and enforcement practices and compliance standards are becoming, increasingly stringent. Moreover, A&B cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could require substantial expenditures for, among other things, equipment not currently possessed, or the acquisition or modification of permits applicable to segment activities.
Short supplies and volatility in the costs of fuel, energy and raw materials may adversely affect A&B's materials and construction businesses.
A&B's materials and construction businesses require a continued supply of diesel fuel, electricity and other energy sources for production and transportation. The financial results of these businesses have at times been affected by the high costs of these energy sources. Significant increases in costs or reduced availability of these energy sources have and may in the future reduce financial results. Moreover, fluctuations in the supply and costs of these energy sources can make planning business operations more difficult. A&B does not hedge its fuel price risk, but instead focuses on volume-related price reductions, fuel efficiency, alternative fuel sources, consumption and the natural hedge created by the ability to increase aggregates prices.
Similarly, segment operations also require a continued supply of liquid asphalt, which serves as a key raw material in the production of asphaltic concrete. Liquid asphalt is subject to potential supply constraints and significant price fluctuations, which are generally correlated to the price of crude oil, though not as closely as diesel or gasoline, and are beyond the control of A&B's materials and construction business. Accordingly, significant increases in the price of crude oil will have an adverse impact on the financial results of the materials and construction segment due to higher costs of production of asphaltic concrete. Conversely, significant declines in the price of oil had, and in the future, may have an adverse impact on A&B's material and construction sales of liquid asphalt concrete, due to lower costs of importing asphalt to Hawaii, which may result in customers sourcing liquid asphalt from competition located outside of Hawaii.
Risks Relating to A&B’s Agribusiness Segment
The lack of water for agricultural irrigation could adversely affect Agribusiness operations and profitability.
It is crucial for the Agribusiness segment to have access to sufficient, reliable and affordable sources of water for the irrigation of sugar cane. As further described in “Legal Proceedings,” there are regulatory and legal challenges to the segment’s ability to divert water from streams in Maui. In addition, access to water is subject to weather patterns that cannot be reliably predicted. If the segment is limited in its ability to divert stream waters for its use or there is insufficient rainfall on an extended basis, it would have an adverse effect on existing sugar operations, as well as the ability to employ the land in active agricultural use.
Low raw sugar prices adversely affect the profitability of A&B's sugar business.
The operations and profitability of the Agribusiness segment are substantially affected by market factors, particularly the domestic prices for raw cane sugar. These market factors are influenced by a variety of forces, including prices of competing crops and suppliers, weather conditions and United States farm and trade policies.
Wet weather during the harvesting season may significantly affect sugar production and yields.
Wet weather during the harvesting season creates muddy field conditions, which reduces the efficiency of harvesting operations and lowers the amount of cane that can be harvested from the fields in a given period of time. Additionally, wet weather also increases the amount of mud and other debris that must be removed in the processing of the cane into sugar, which results in decreased yields.


26


A&B is subject to risks associated with raw sugar production.
A&B's production of raw sugar is subject to numerous risks that could adversely affect the volume and quality of sugar produced. Any of these risks has the potential to adversely impact the final sugar harvest, including by causing significant losses and possibly stopping the HC&S sugar operations earlier than anticipated. These risks include, but are not limited to:
•
equipment accidents or failures in the factory or the power plant, particularly where equipment is old and difficult to repair or replace;
•
government restrictions on farming practices, including cane burning and pesticide use;
•
loss of A&B's major customer;
•
weather and natural disasters, such as excessive rain, which impacts the efficiency of harvesting operations, and vog, which leads to inefficient and costly no-burn cane harvesting;
•
increases in costs, including, but not limited to fuel, fertilizer, herbicide and drip tubing;
•
labor, including labor availability (see risk factor above regarding labor disruptions) and loss of qualified personnel;
•
lack of demand for sugar production;
•
failure to comply with food quality and safety requirements;
•
disease;
•
uncontrolled fires, including arson; and
•
weed control.
A&B’s ability to use or lease agricultural lands for agricultural purposes may be limited by government regulation.
Given the large scale of its agricultural landholdings on Maui and Kauai, many of the third parties to whom A&B leases land for agricultural purposes may be characterized as large scale commercial agricultural operations. Recent legislation passed on Kauai places restrictions on the ability of such operations to use land within specified distances of highways, schools, oceans, streams, residences, parks, care homes, hospitals and other similar uses, to grow crops other than ground cover. This legislation also puts significant restrictions regarding, and public notification obligations concerning, pesticide use on such operations and limits their ability to use genetically modified organism (GMO) crops. On Maui, similar legislation passed by a voter initiative places a moratorium on the ability to farm GMO crops. The Kauai and Maui legislation is in the process of being challenged in the courts and, if such legislation is upheld by the courts, or additional legislative agricultural restrictions are passed, such as restrictions on the use of pesticides, the ability of A&B to use or lease its lands for large scale agricultural purposes, and any rents that it can achieve for those lands, may be adversely affected by this and similar legislation.
The transition to a diversified agricultural model is subject to both the risks affecting the business generally and the inherent difficulties associated with implementing a new strategy. 
The ability to transition to a new diversified model and improve the operating results depends upon a number of factors, including:

•
the extent to which management has properly understood and is able to manage the dynamics and demands of the various farming operations comprising the diversified agricultural model, in which the Company may have limited or no prior experience;
•
the ability to successfully complete the final harvest and transition from the sugar operations in an orderly and efficient manner;
•
the time required to prepare the land currently under sugar cane cultivation and ready it for a new purpose under the diversified model;


27


•
the ability to respond to any unanticipated changes in expected cash flows, liquidity, cash needs and cash expenditures with respect to the new diversified model, including the Company's ability to obtain any additional financing or other liquidity enhancing transactions, if and when needed;
•
the ability to execute strategic initiatives in a cost-effective manner, including identifying business partners to explore potential opportunities;
•
The Company's ability to access adequate, affordable and uninterrupted sources of water (see the "The lack of water for agricultural irrigation could adversely affect Agribusiness operations and profitability" risk factor above);
There is no assurance that the Company will be able to transition to and implement a new diversified agricultural model, which could have an adverse impact on the Company's results of operations.
 
The diversified agricultural model may not achieve the financial results expected.
The Company is currently evaluating several categories of replacement agricultural activities in the transition to the diversified model, including but not limited to energy crops, agroforestry, grass finished livestock operations, diversified food crops/agricultural park, and orchard crops. There is no assurance that the Company's replacement agricultural activities will be economically feasible or improve the Agribusiness segment's operating results.

A&B’s power sales contracts could be replaced on less favorable terms or may not be replaced.
A&B’s power sales contracts expire at various points in the future and may not be replaced or could be replaced on less favorable terms, which could adversely affect Agribusiness profitability. For example, during 2015, the Company's power supply contract with Maui Electric Co. ("MECO") was amended pursuant to which, among other items, MECO's minimum power purchase obligation was eliminated.
The market for power sales in Hawaii is limited.
The power distribution systems in Hawaii are small and island-specific; currently, there is no ability to move power generated on one island to any other island. In addition, Hawaii law limits the ability of independent power producers, such as A&B, to sell their output to firms other than the respective utilities on each island, without themselves becoming utilities and subject to the State’s Public Utilities Commission (PUC) regulation. Further, any sales of electricity by A&B to the utilities on each island are subject to the approval of the PUC. Unlike some areas in the Mainland, Hawaii’s independent power producers have no ability to use utility infrastructure to transfer power to other locations.
A&B has limited options for carriage of sugar to domestic markets.
In order to directly ship bulk or partially processed food-grade sugar from Maui to markets on the U.S. West Coast, or any alternate U.S. domestic port, A&B must utilize vessels that are subject to the restrictions delineated in Section 27 of the Merchant Marine Act, 1920, commonly referred to as the Jones Act. A&B currently owns a bulk sugar transportation vessel, the MV Moku Pahu, and therefore, A&B is also subject to the restrictions of the Jones Act. Under the Jones Act, all vessels transporting cargo between covered U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75 percent owned by U.S. citizens. U.S.-flagged vessels are generally required to be maintained at higher standards than foreign-flagged vessels and are supervised by, as well as subject to rigorous inspections by, or on behalf of, the U.S. Coast Guard, which requires appropriate certifications and background checks of the crew members. Because of these restrictions, A&B would have limited options for carriage of sugar to domestic markets if the MV Moku Pahu no longer qualified under the Jones Act or were taken out of service due to its age.
A&B has limited options and strict time constraints for carriage of molasses to domestic markets.
All of the molasses produced by A&B is shipped out of Kahului Harbor. A&B currently has the ability to store approximately 20 percent of annual molasses production before having to cease harvest and milling operations, which cessation would result in significant additional operating costs. The frequency and timing of vessel arrivals to ship molasses off island are therefore important to A&B's ability to continue its sugar operations without interruption, and there is no assurance that such interruptions will not occur. Additionally, if domestic Jones Act shipping capacity is not available in the market when required, A&B may be forced to sell its molasses to foreign buyers, which would result in lower profitability.


28


A&B has aging infrastructure in its sugar factory, irrigation and power facilities.
A&B maintains critical spares for primary factory equipment in the event of a breakdown or failure. However, due to the extensive age and complexity of the mill, factory and power plant, it is possible that damage to equipment may not be repaired in a timely manner or at an acceptable cost, which may adversely affect the final sugar harvest, including incurring significant losses and possibly ceasing the HC&S sugar operations earlier than anticipated. A&B also operates renewable energy facilities, some of which are located on conservation-zoned land, which is subject to restrictions on activities conducted on the land. It therefore may not be feasible to expediently repair damage to such facilities should it occur. A&B has property, boiler and machinery, and business interruption insurance for most of such events; however, it is possible that A&B’s insurance coverage may not cover all risk of loss.
Risks Relating to the Separation from Matson Navigation Company
If the Separation were to fail to qualify as tax-free for U.S. federal income tax purposes, then A&B, Matson, Inc.("Matson") and the shareholders who received their shares of A&B common stock in the Separation could be subject to significant tax liability or tax indemnity obligations.
Prior to June 29, 2012, A&B’s businesses included Matson Navigation Company , a wholly owned subsidiary that provided ocean transportation, truck brokerage and intermodal services. As part of a strategic initiative designed to allow A&B to independently execute its strategies and to best enhance and maximize its earnings, growth prospects and shareholder value, A&B made a decision to separate the transportation businesses from the Hawaii real estate and agriculture businesses. In preparation for the separation, A&B modified its legal-entity structure and became a wholly owned subsidiary of a newly created entity, Alexander & Baldwin Holdings, Inc. (“Holdings”). On June 29, 2012, Holdings distributed to its shareholders all of the shares of A&B stock in a tax-free distribution (the “Separation”). Holders of Holdings common stock continued to own the transportation businesses, but also received one share of A&B common stock for each share of Holdings common stock held at the close of business on June 18, 2012, the record date. Following the Separation, Holdings changed its name to Matson. On July 2, 2012, A&B began regular trading on the New York Stock Exchange under the ticker symbol “ALEX” as an independent, public company.
Matson received a private letter ruling from the Internal Revenue Service ("IRS Ruling") that, for U.S. federal income tax purposes, (i) certain transactions to be effected in connection with the Separation qualify as a reorganization under Sections 355 and/or 368 of the Internal Revenue Code of 1986, as amended ("Code"), or as a complete liquidation under Section 332(a) of the Code and (ii) the Separation qualifies as a transaction under Section 355 of the Code. In addition to obtaining the IRS Ruling, Matson received a tax opinion ("Tax Opinion") from the law firm of Skadden, Arps, Slate, Meagher & Flom LLP (which Tax Opinion relies on the effectiveness of the IRS Ruling) substantially to the effect that, for U.S. federal income tax purposes, the Separation and certain related transactions qualify as a reorganization under Section 368 of the Code. The IRS Ruling and Tax Opinion rely on certain facts and assumptions, and certain representations from A&B and Matson regarding the past and future conduct of their respective businesses and other matters. Notwithstanding the IRS Ruling and Tax Opinion, the Internal Revenue Service ("IRS") could determine on audit that the Separation and related transactions should be treated as a taxable transaction if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated, or that the Separation and related transactions should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the Separation or if the IRS were to disagree with the conclusions in the Tax Opinion that are not covered by the IRS Ruling. If the Separation and related transactions ultimately were determined to be taxable, the distribution of A&B stock in the Separation could be treated as taxable for U.S. federal income tax purposes to the shareholders who received their shares of A&B common stock in the Separation, and such shareholders could incur significant U.S. federal income tax liabilities. In addition, Matson would recognize a gain in an amount equal to the excess of the fair market value of the shares of A&B common stock distributed to Matson's shareholders on the Separation date over Matson tax basis in such shares.
In addition, under the terms of the Tax Sharing Agreement that A&B entered into with Matson, A&B also generally is responsible for any taxes imposed on Matson that arise from the failure of the Separation and certain related transactions to qualify as tax-free for U.S. federal income tax purposes within the meaning of Sections 355 and 368 of the Code, to the extent such failure to qualify is attributable to actions, events or transactions relating to A&B’s stock, assets or business, or a breach of the relevant representations or covenants made by A&B and its subsidiaries in the Tax Sharing Agreement, the materials submitted to the IRS in connection with the request for the IRS Ruling or the representation letter provided to counsel in connection with the Tax Opinion. The amounts of any such taxes could be significant.



29


ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings and Other Contingencies: A&B owns 16,000 acres of watershed lands in East Maui that supply a significant portion of the irrigation water used by Hawaiian Commercial & Sugar Company ("HC&S"), a division of A&B that produces raw sugar. A&B also held four water licenses to another 30,000 acres owned by the State of Hawaii in East Maui which, over the last ten years, have supplied approximately 56 percent of the irrigation water used by HC&S. The last of these water license agreements expired in 1986, and all four agreements were then extended as revocable permits that were renewed annually. In 2001, a request was made to the State Board of Land and Natural Resources (the "BLNR") to replace these revocable permits with a long-term water lease. Pending the conclusion by the BLNR of this contested case hearing on the request for the long-term lease, the BLNR has kept the existing permits on a holdover basis. Three parties filed a lawsuit on April 10, 2015 (the “4/10/15 Lawsuit”) alleging that the BLNR has been renewing the revocable permits annually rather than keeping them in holdover status. The lawsuit asks the court to void the revocable permits and to declare that the renewals were illegally issued without preparation of an environmental assessment (“EA”). In December 2015, the BLNR decided to re-affirm its prior decisions to keep the permits in holdover status. This decision by the BLNR is being challenged by the three parties. In January 2016, the court in the 4/10/15 Lawsuit ruled that the renewals were not subject to the EA requirement but that the BLNR lacked legal authority to keep the revocable permits in holdover status beyond one year. The court has allowed the parties to take an immediate appeal of this ruling.
 
In addition, on May 24, 2001, petitions were filed by a third party, requesting that the Commission on Water Resource Management of the State of Hawaii ("Water Commission") establish interim instream flow standards ("IIFS") in 27 East Maui streams that feed the Company's irrigation system. The Water Commission initially took action on the petitions in 2008 and 2010, but the petitioners requested a contested case hearing to challenge the Water Commission's decisions on certain petitions. The Water Commission denied the contested case hearing request, but the petitioners successfully appealed the denial to the Hawaii Intermediate Court of Appeals, which ordered the Water Commission to grant the request. The Commission then authorized the appointment of a hearings officer for the contested case hearing and expanded the scope of the contested case hearing to encompass all 27 petitions for amendment of the IIFS for East Maui streams in 23 hydrologic units. The evidentiary phase of the hearing before the Commission-appointed hearings officer was completed on April 2, 2015. On January 15, 2016, the Commission-appointed hearings officer issued his recommended decision on the petitions. The recommended decision would restore water to streams in 11 of the 23 hydrologic units. A final decision on the petitions from the Commission is not expected until at least the second quarter of 2016.

If the Company is not permitted to use sufficient quantities of stream waters, it would have a material adverse effect on the Company’s sugar-growing operations in 2016 and the Company’s pursuit of a diversified agricultural model in subsequent years.

In January 2013, the Environmental Protection Agency (“EPA”) finalized nationwide standards for controlling hazardous air pollutant emissions from industrial, commercial, institutional boilers and process heaters (the “Boiler MACT” rule), which apply to HC&S's three boilers at the Puunene Sugar Mill. The initial deadline for compliance with the Boiler MACT rule was January 2016, with full compliance required by July 2016. The Company anticipates that the Puunene Mill boilers will meet all applicable compliance deadlines and that the remaining compliance costs will be less than $250,000, based on available information. The Company is currently implementing strategies for achieving full compliance with the new regulations and is assessing whether the announced end to sugar operations may impact some compliance requirements.  Although the EPA has finalized its reconsideration of the rule, there remains some uncertainty as to final requirements pending the outcome of ongoing litigation. Any resulting changes to the Boiler MACT rule could impact the Company’s compliance requirements.
On June 24, 2014, the Hawaii State Department of Health ("DOH") Clean Air Branch issued a Notice and Finding of Violation and Order ("NFVO") to HC&S alleging various violations relating to the operation of HC&S's three boilers at its sugar mill. The DOH reviewed a five-year period (2009-2013) and alleged violations relating primarily to periods of excess visible emissions and operation of the wet scrubbers installed to control particulate matter emissions from the boiler stacks. All incidents included in the NFVO were self-reported by HC&S to the DOH prior to the DOH's review, and there is no indication that these deviations resulted in any violation of health-based air quality standards. The NFVO includes an administrative penalty of $1.3 million, which HC&S has contested. The Company is unable to predict, at this time, the outcome or financial


30


impact of the NFVO but does not believe that the financial impact of the NFVO will be material to its financial position, cash flows or results of operations.

On July 1, 2015, a lawsuit was filed against the State of Hawaii and the Director of the Department of Health, alleging that the sugar cane burning permits issued by the State to HC&S were unlawfully issued, and seeking an injunction against the burning of cane. On July 6, 2015, the plaintiffs added the Company as a defendant. If the Company is not permitted or is substantially limited in its ability to burn sugar cane, this would have a material adverse effect on the Company's sugar operations in 2016. The Company will vigorously defend itself in this matter.

A&B is a party to, or may be contingently liable in connection with, other legal actions arising in the normal conduct of its businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a material effect on A&B’s consolidated financial statements as a whole.

ITEM 4. MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulations S-K (17 CFR 229.104) is included in Exhibit 95 to this Annual Report on Form 10-K.


31




PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of February 14, 2016, there were 2,437 shareholders of record of A&B common stock. In addition, Cede & Co., which appears as a single record holder, represents the holdings of thousands of beneficial owners of A&B common stock.     
The following performance graph compares the monthly dollar change in the cumulative shareholder return on the Company’s common stock:

Trading volume averaged 172,542 shares a day in 2015, 203,642 shares a day in 2014, and 192,977 shares a day in 2013.     
    


32


The quarterly intra-day high and low sales prices and end of quarter closing prices, as reported by the New York Stock Exchange, were as follows:
 
Dividends Paid Per Share
 
Market Price
 
 
 
High
 
Low
 
Close
2014
 
 
 
 
 
 
 
First Quarter
$
0.04

 
$
45.16

 
$
36.98

 
$
42.56

Second Quarter
$
0.04

 
$
43.19

 
$
36.61

 
$
41.45

Third Quarter
$
0.04

 
$
42.38

 
$
35.96

 
$
35.97

Fourth Quarter
$
0.05

 
$
40.99

 
$
33.98

 
$
39.26

 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
First Quarter
$
0.05

 
$
43.33

 
$
36.95

 
$
43.18

Second Quarter
$
0.05

 
$
43.68

 
$
39.12

 
$
39.40

Third Quarter
$
0.05

 
$
40.00

 
$
32.15

 
$
34.33

Fourth Quarter
$
0.06

 
$
39.00

 
$
33.87

 
$
35.31

A&B increased the dividend rate by $0.01 in the fourth quarters of 2015 and 2014. Although A&B expects to continue paying quarterly cash dividends on its common stock, the declaration and payment of dividends in the future are subject to the discretion of the Board of Directors and will depend upon A&B's financial condition, results of operations, cash requirements and other factors deemed relevant by the Board of Directors.
A&B common stock is included in the Dow Jones U.S. Real Estate Index, the Russell 2000 Index, the Russell 3000 Index, the Dow Jones U.S. Composite Average and the S&P MidCap 400.
In October 2015, A&B's Board of Directors authorized A&B to repurchase up to two million shares of its common stock beginning on January 1, 2016. The authorization expires on December 31, 2017. No shares were repurchased in 2015, 2014, or 2013.
Securities authorized for issuance under equity compensation plans as of December 31, 2015, included:
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
(a)
(b)
(c)
Equity compensation plans approved by security holders
1,098,645
$18.81
1,277,179*
Total
1,098,645
$18.81
1,277,179
*
Under the 2012 Incentive Compensation Plan, 1,277,179 shares may be issued either as restricted stock grants, restricted stock unit grants, or stock option grants.


33


ITEM 6. SELECTED FINANCIAL DATA
The following should be read in conjunction with Item 8, “Financial Statements and Supplementary Data,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (dollars and shares in millions, except shareholders of record and per-share amounts):

2015
 
2014
 
2013
 
2012 1
 
2011 1
Revenue:


 


 


 


 


Real Estate:


 


 


 


 


Leasing
$
133.8

 
$
125.6

 
$
110.4

 
$
100.6

 
$
99.7

Development and Sales
131.5

 
150.0

 
423.0

 
32.2

 
59.8

Less amounts reported in discontinued operations2
—

 
(70.4
)
 
(369.2
)
 
(45.3
)
 
(81.9
)
Reconciling items4
(31.0
)
 
—

 
—

 
(8.3
)
 
—

Materials and Construction3
219.0

 
234.3

 
54.9

 
—

 
—

Agribusiness
117.2

 
120.5

 
146.1

 
182.3

 
157.5

Total revenue
$
570.5

 
$
560.0

 
$
365.2

 
$
261.5

 
$
235.1




 


 


 


 


Operating Profit (Loss):


 


 


 


 


Real Estate:


 


 


 


 


Leasing
$
53.1

 
$
47.5

 
$
43.4

 
$
41.6

 
$
39.3

Development and Sales5
65.0

 
85.7

 
44.4

 
(4.4
)
 
15.5

Less amounts reported in discontinued operations2
—

 
(56.2
)
 
(36.7
)
 
(21.1
)
 
(38.8
)
Materials and Construction3
30.9

 
25.9

 
2.9

 
—

 
—

Agribusiness Operations
(29.3
)
 
(11.8
)
 
10.7

 
20.8

 
22.2

Agribusiness Cessation costs12
(22.6
)
 
—

 
—

 
—

 
—

Total operating profit
97.1

 
91.1

 
64.7

 
36.9

 
38.2

Interest expense
(26.8
)
 
(29.0
)
 
(19.1
)
 
(14.9
)
 
(17.1
)
General corporate expenses
(20.1
)
 
(18.6
)
 
(17.4
)
 
(15.1
)
 
(19.9
)
Reduction in KRS II carrying value, net6
(2.6
)
 
(14.7
)
 
—

 
—

 
—

Acquisition/Separation costs
—

 
—

 
(4.6
)
 
(6.8
)
 
—

Income from continuing operations before income taxes
47.6

 
28.8

 
23.6

 
0.1

 
1.2

Income tax expense (benefit)
16.5

 
(1.4
)
 
11.1

 
(5.9
)
 
2.8

Income (loss) from continuing operations
31.1

 
30.2

 
12.5

 
6.0

 
(1.6
)
Income from discontinued operations
—

 
34.3

 
22.3

 
12.8

 
23.3

Net income
31.1

 
64.5

 
34.8

 
18.8

 
21.7

Income attributable to noncontrolling interest
(1.5
)
 
(3.1
)
 
(0.5
)
 
—

 
—

Net income attributable to A&B Shareholders
$
29.6

 
$
61.4

 
$
34.3

 
$
18.8

 
$
21.7

 
 
 
 
 
 
 
 
 
 
Identifiable Assets:
 
 
 
 
 
 
 
 
 
Real Estate:
 
 
 
 
 
 
 
 
 
Leasing
$
1,058.8

 
$
1,121.1

 
$
1,113.0

 
$
771.3

 
$
772.0

Development and Sales8
$
622.0

 
$
633.9

 
$
640.4

 
$
504.8

 
$
451.5

Agribusiness
$
151.5

 
$
159.7

 
$
155.3

 
$
149.9

 
$
157.8

Materials and Construction
$
386.6

 
$
385.9

 
$
358.7

 
$
—

 
$
—

Other13
$
24.6

 
$
21.0

 
$
8.4

 
$
3.7

 
$
1.6

Total assets
$
2,243.5

 
$
2,321.6

 
$
2,275.8

 
$
1,429.7

 
$
1,382.9




34


SELECTED FINANCIAL DATA (CONTINUED)

2015

2014

2013

2012 1
 
2011 1
Capital Expenditures:









Real Estate:









Leasing9
$
23.0


$
51.8

 
$
488.5

 
$
23.1

 
$
43.6

Development and Sales10
—


—

 
0.1

 
—

 
5.2

Agribusiness11
13.1


10.8

 
11.8

 
31.7

 
10.5

Materials and Construction3
7.2


10.7

 
4.8

 
—

 
—

Other
1.4


1.8

 
0.1

 
—

 
—

Total capital expenditures
$
44.7


$
75.1


$
505.3


$
54.8


$
59.3











Depreciation and Amortization:









Real Estate:









Leasing2
$
30.3


$
26.9

 
$
24.3

 
$
22.0

 
$
21.6

Development and Sales
0.2


0.2

 
0.2

 
0.2

 
0.2

Agribusiness
12.1


11.5

 
11.7

 
11.6

 
11.9

Materials and Construction3
11.6


15.2

 
4.4

 
—

 
—

Other
1.5


1.2

 
1.1

 
1.3

 
1.1

Total depreciation and amortization
$
55.7


$
55.0


$
41.7


$
35.1


$
34.8

 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share7:
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
Continuing operations attributable to A&B shareholders
$
0.54


$
0.56

 
$
0.27


$
0.14


$
(0.04
)
Discontinued operations attributable to A&B shareholders
$
—


$
0.70

 
$
0.50


$
0.30


$
0.55

Basic earnings per share attributable to A&B shareholders
$
0.54

 
$
1.26

 
$
0.77

 
$
0.44

 
$
0.51

Diluted:
 
 
 
 
 
 
 
 
 
Continuing operations attributable to A&B shareholders
$
0.54

 
$
0.55

 
$
0.26

 
$
0.14

 
$
(0.04
)
Discontinued operations attributable to A&B shareholders
$
—

 
$
0.70

 
$
0.50

 
$
0.30

 
$
0.55

Diluted earnings per share attributable to A&B shareholders
$
0.54

 
$
1.25

 
$
0.76

 
$
0.44

 
$
0.51

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.21

 
$
0.17

 
$
0.04

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Balance sheet data (in millions):
 
 
 
 
 
 
 
 
 
Investment in real estate and joint ventures
$
1,564.6

 
$
1,639.9

 
$
1,606.8

 
$
1,203.4

 
$
1,165.0

Total assets13
$
2,243.5

 
$
2,321.6

 
$
2,275.8

 
$
1,429.7

 
$
1,382.9

Total liabilities13
$
1,004.8

 
$
1,106.8

 
$
1,107.1

 
$
518.8

 
$
658.9

Redeemable noncontrolling interest
$
11.6

 
$
—

 
$
—

 
$
—

 
$
—

Total equity (includes noncontrolling interest)
$
1,227.1

 
$
1,214.8

 
$
1,168.7

 
$
910.9

 
$
724.0

Long-term debt – non-current
$
497.8

 
$
631.5

 
$
605.5

 
$
220.0

 
$
327.2

1 
The financial statements and related financial information pertaining to the years ended 2012 and 2011 have been presented on a combined basis and reflect the financial position, results of operations and cash flows of the real estate and agriculture businesses and corporate functions of Alexander & Baldwin, Inc., all of which were under common ownership and common management prior to the Separation. The financial statements for periods prior to the Separation included herein may not necessarily reflect what A&B’s results of operations, financial position and cash flows would have been had A&B been a stand-alone company during the periods presented.
2 
Amounts recast to reflect discontinued operations.
3 
2013 includes the results, capital expenditures, and depreciation and amortization of Grace from the acquisition date of October 1, 2013 through December 31, 2013.
4 
2015 amounts represent the sales of an office building in Washington in December 2015, a Colorado retail property in March 2015 and a Texas office building in May 2015 that are classified within cost of sales and development in the Consolidated Statement of Income, but reflected as revenue for segment reporting purposes. The amount in 2012 represent the sale of a 286-acre agricultural parcel in 2012 classified as “Gain on sale of agricultural parcel” in the Consolidated Statements of Income, but reflected as revenue for segment reporting purposes.


35


5 
The Real Estate Development and Sales segment includes approximately $30.2 million, $2.0 million, $4.2 million, $(8.3) million, and $(7.9) million in equity in earnings (losses) from its various real estate joint ventures for 2015, 2014, 2013, 2012, and 2011, respectively. Included in operating profit are non-cash impairment and equity losses of $0.3 million related to the sale of Crossroads in 2014, $6.3 million related to the consolidation of The Shops at Kukui'ula in 2013, $9.8 million related to the Bakersfield joint venture and Santa Barbara real estate project in 2012, and $6.4 million related to the Waiawa real estate joint venture in 2011.
6 
Represents a non-cash reduction in the carrying value of a $23.8 million tax equity investment in a 12-megawatt solar farm on Kauai (KRS II) that was made in July 2014. Tax benefits associated with the KRS II investment are accompanied by non-cash reductions of the investment's carrying value. Tax benefits associated with the investment are included in the Income tax expense (benefit) line item in the Consolidated Statements of Income.
7 
The computation of basic and diluted earnings per common share for all periods prior to Separation is calculated using 42.4 million, the number of shares of A&B common stock outstanding on July 2, 2012, which was the first day of trading following the June 29, 2012 distribution of A&B common stock to Holdings shareholders, as if those shares were outstanding for those periods. For all periods prior to Separation, there were no dilutive shares because no actual A&B shares or share-based awards were outstanding prior to the Separation.
8 
The Real Estate Development and Sales segment includes approximately $379.7 million, $383.8 million, $335.0 million, $319.7 million and $290.1 million related to its investment in various real estate joint ventures as of December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
9 
Represents gross capital additions and acquisitions to the leasing portfolio, including gross tax-deferred property purchases, but excluding the assumption of debt, that are reflected as non-cash transactions in the Consolidated Statements of Cash Flows.
10 
Excludes expenditures for real estate developments held for sale which are classified as Cash Flows from Operating Activities within the Consolidated Statements of Cash Flows and excludes investment in joint ventures classified as Cash Flows from Investing Activities. Operating cash flows for expenditures related to real estate developments were $7.2 million, $41.7 million, $150.6 million, $37.2 million and $13.8 million for 2015, 2014, 2013, 2012 and 2011, respectively. Investments in real estate joint ventures were $25.8 million, $28.7 million, $22.2 million, $17.4 million and $27.9 million in 2015, 2014, 2013, 2012 and 2011, respectively.
11 
Includes $21.8 million of capital in 2012 related to the Company’s Port Allen solar project before tax credits.
12 
Costs related to the cessation of HC&S sugar operation.
13 
Amounts recast to reflect adoption of FASB Accounting Standard Update No. 2015-17, Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes.


36





ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
We have made forward-looking statements in this Form 10-K that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, the effects of competition and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "continue," "may," "might," "should," "could" or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements in this Form 10-K. We do not have any intention or obligation to update forward-looking statements after we file this Form 10-K.
The risk factors discussed in "Risk Factors" could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our financial position, results of operations or cash flows. Any such risks could cause our results to differ materially from those expressed in forward-looking statements.
Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information about A&B’s business, recent developments, financial condition, liquidity and capital resources, cash flows, results of operations and how certain accounting principles, policies and estimates affect A&B’s financial statements. MD&A is organized as follows:
•
Basis of Presentation: This section provides a discussion of the basis on which A&B’s consolidated financial statements were prepared, including A&B’s historical results of operations.
•
Business Overview: This section provides a general description of A&B’s business, as well as recent developments that A&B believes are important in understanding its results of operations and financial condition or in understanding anticipated future trends.
•
Critical Accounting Estimates: This section identifies and summarizes those accounting policies that significantly impact A&B’s reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application.
•
Consolidated Results of Operations: This section provides an analysis of A&B’s results of operations for the three years ended December 31, 2015, 2014 and 2013.
•
Analysis of Operating Revenue and Profit by Segment: This section provides an analysis of A&B’s results of operations by business segment.
•
Liquidity and Capital Resources: This section provides a discussion of A&B’s financial condition and an analysis of A&B’s cash flows for the years ended December 31, 2015, 2014 and 2013, as well as a discussion of A&B’s ability to fund its future commitments and ongoing operating activities through internal and external sources of capital.
•
Contractual Obligations, Commitments, Contingencies and Off-Balance-Sheet Arrangements: This section provides a discussion of A&B’s contractual obligations and other commitments and contingencies that existed at December 31, 2015.


37


•
Quantitative and Qualitative Disclosures about Market Risk: This section discusses how A&B monitors and manages exposure to potential gains and losses associated with changes in interest rates.
•
Outlook: This section provides a discussion of management’s general outlook about its markets and A&B’s competitive position.
Business Overview
A&B, whose history dates back to 1870, is headquartered in Honolulu and operates four segments, principally in Hawaii: Real Estate Leasing; Real Estate Development and Sales; Agribusiness; and Materials and Construction.
Real Estate Leasing
The Real Estate Leasing segment owns, operates and manages retail, industrial and office properties in Hawaii and on the Mainland. The Real Estate Leasing segment also leases land in Hawaii to third-party lessees.
Real Estate Development and Sales
The Real Estate Development and Sales segment generates its revenues through real estate and real estate-related investment in Hawaii, development and sale of land in Hawaii and through the sale of properties in the Company's Leasing portfolio.
Agribusiness
The Agribusiness segment produces bulk raw sugar, specialty food grade sugars and molasses; markets and distributes specialty food-grade sugars; provides general trucking services, equipment maintenance and repair services; leases agricultural land to third parties; and generates and sells electricity to the extent not used in A&B’s Agribusiness operations.
On December 31, 2015, the Company determined it would cease its HC&S sugar operation on Maui and transition to a diversified agribusiness model. The Company expects that the final harvest and the cessation-related activities will be substantially completed by the end of 2016.
Materials and Construction
The Materials and Construction segment performs asphalt paving as prime contractor and subcontractor; imports and sells liquid asphalt; mines, processes and sells basalt aggregate; produces and sells asphaltic and ready-mix concrete; provides and sells various construction- and traffic-control-related products and manufactures and sells precast concrete products.
Critical Accounting Estimates
A&B’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, upon which the MD&A is based, requires that management exercise judgment when making estimates and assumptions about future events that may affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with certainty and actual results will, inevitably, differ from those critical accounting estimates. These differences could be material.
A&B considers an accounting estimate to be critical if: (i)(a) the accounting estimate requires A&B to make assumptions that are difficult or subjective about matters that were highly uncertain at the time that the accounting estimate was made, (b) changes in the estimate are reasonably likely to occur in periods subsequent to the period in which the estimate was made, or (c) different estimates by A&B could have been used, and (ii) changes in those assumptions or estimates would have had a material impact on the financial condition or results of operations of A&B. The critical accounting estimates inherent in the preparation of A&B’s financial statements are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of Alexander & Baldwin, Inc. and all wholly owned and controlled subsidiaries, after elimination of significant intercompany amounts. Significant investments in businesses, partnerships and limited liability companies in which the Company does not have a controlling financial interest, but has the ability to exercise significant influence, are accounted for under the equity method. A controlling financial interest is one in which the Company has a majority voting interest or one in which the Company is the primary beneficiary of a variable interest


38


entity. In determining whether the Company is the primary beneficiary of a variable interest entity in which it has an interest, the Company is required to make significant judgments with respect to various factors including, but not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, the rights and ability of other investors to participate in decisions affecting the economic performance of the entity, and kick-out rights, among others. Activities that significantly affect the economic performance of the entities in which the Company has an interest include, but are not limited to, establishing and modifying detailed business, development, marketing and sales plans, approving and modifying the project budget, approving design changes and associated overruns, if any, and approving project financing, among others. The Company has not consolidated any variable interest entity in which the Company does not also have voting control because it has determined that it is not the primary beneficiary since decisions to direct the activities that most significantly impact the entity’s performance are shared by the joint venture partners.
Impairment of Long-Lived Assets and Finite-Lived Intangible Assets
A&B’s long-lived assets, including finite-lived intangible assets, are reviewed for possible impairment when events or circumstances indicate that the carrying value may not be recoverable. In such an evaluation, the estimated future undiscounted cash flows generated by the asset are compared with the amount recorded for the asset to determine if its carrying value is not recoverable. If this review determines that the recorded value will not be recovered, the amount recorded for the asset is reduced to estimated fair value. These asset impairment analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among others, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets and, thus, the accounting estimates may change from period to period. If management uses different assumptions or if different conditions occur in future periods, A&B’s financial condition or its future operating results could be materially impacted. A&B has evaluated certain long-lived assets, including intangible assets, for impairment.
Impairment of Investments
A&B’s investments in unconsolidated affiliates are reviewed for impairment whenever there is evidence that fair value may be below carrying cost. An investment is written down to fair value if fair value is below carrying cost and the impairment is believed to be other-than-temporary. In evaluating the fair value of an investment and whether any identified impairment is other-than-temporary, significant estimates and considerable judgments are involved. These estimates and judgments are based, in part, on A&B’s current and future evaluation of economic conditions in general, as well as a joint venture’s current and future plans. Additionally, these impairment calculations are highly subjective because they also require management to make assumptions and apply judgments to estimates regarding the timing and amount of future cash flows and take into account various factors, including sales prices, development costs, market conditions, and absorption rates, probabilities related to various cash flow scenarios, and appropriate discount rates based on the perceived risks, among others. In evaluating whether an impairment is other-than-temporary, A&B considers all available information, including the length of time and extent of the impairment, the financial condition and near-term prospects of the affiliate, A&B’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and projected industry and economic trends, among others. Changes in these and other assumptions could affect the projected operational results and fair value of the unconsolidated affiliates, and accordingly, may require valuation adjustments to A&B’s investments that may materially impact A&B’s financial condition or its future operating results. For example, if current market conditions deteriorate significantly or a joint venture’s plans change materially, impairment charges may be required in future periods, and those charges could be material.
In July 2014, the Company invested $23.8 million in a tax equity investment related to the construction and operation of a 12-megawatt solar farm on Kauai. The Company recovers its investment primarily through tax credits and tax benefits, which are recorded in the Income tax expense (benefit) line item in the Consolidated Statements of Income. As these tax benefits were received and recognized, the Company recorded non-cash reductions of the investment's carrying value. For the years ended December 31, 2015 and 2014, the Company recorded net, non-cash reductions of the investment's carrying value of $2.6 million and $14.7 million, respectively.
In September 2013, the Company entered into an Amended and Restated Limited Liability Company Agreement of Kukui'ula Village ("Agreement") with DMB Kukui'ula Village LLC ("DMB"). Under the Agreement, the Company assumed financial and operational control of Kukui'ula Village LLC ("Village") and consolidated the assets and liabilities of Village at fair value, resulting in a $6.3 million write down of its investment in the joint venture, which is included in Impairment and equity losses related to joint ventures in the Consolidated Statements of Income.


39


Weakness in particular real estate markets, difficulty in obtaining or renewing project-level financing or development approvals, and changes in A&B’s development strategy, among other factors, may affect the value or feasibility of certain development projects owned by A&B or by its joint ventures and could lead to additional impairment charges in the future.
Goodwill
The Company reviews goodwill for impairment at the reporting unit level annually and whenever events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The goodwill impairment test involves a two-step process. Step one of the goodwill impairment test estimates the fair value of a reporting unit using various methodologies, including discounted cash flows and market multiples. The discounted cash flow approach relies on a number of assumptions, including future macroeconomic conditions, market factors specific to the reporting unit, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a discount rate that considers the risks related to the amount and timing of the cash flows, among others. Although the assumptions used by the Company in its discounted cash flow model are based on the best available market information and are consistent with the assumptions the Company used to generate its internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows and the risk of achieving those cash flows. Under the market multiple methodology, the estimate of fair value may be based on market multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) or revenues. When using market multiples of EBITDA or revenues, the Company must make judgments about the comparability of those multiples in closed and proposed transactions. Accordingly, changes in assumptions and estimates, including, but not limited to, changes driven by external factors, such as industry and economic trends, and those driven by internal factors, such as changes in business strategy and its internal forecasts, could have a material effect on the reporting unit's business, financial condition and results of operations. Additionally, the foregoing assumptions could be adversely impacted by any of the risks discussed in "Risk Factors."
If the results of the Company's step one test indicate that a reporting unit's estimated fair value is less than its carrying value, a step two analysis is performed. In the step two analysis, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. The implied value of goodwill is compared to the carrying value of goodwill. If the implied value of the goodwill exceeds the carrying value of goodwill, then goodwill is not considered to be impaired, and impaired if the implied value of goodwill is less than the carrying value of goodwill.

At December 31, 2015, the Company's goodwill totaled $102.3 million, primarily related to the 2013 acquisition of Grace Pacific. Of the total goodwill, $93.6 million relates to three reporting units in the Materials and Construction segment. The valuation of each reporting unit assumes that each is an unrelated business to be sold separately and independently from the other reporting units. As of the date of the last impairment test in the fourth quarter of 2015, the weighted average percentage (using reporting units’ carrying value) by which the fair values of the reporting units exceeded their carrying values was estimated to be between 9 and 10 percent. The Company's fair value estimate for reporting units include a number of assumptions, including increased levels of road infrastructure spending by governmental and private entities, expectations about the Company's share of governmental contracts, and material input and labor costs, among others. If actual revenues are lower (for example, due to a lower level of government or private contracts bid or won by the reporting units), or costs are higher than anticipated and cannot be recovered as part of the price of the work performed, as well as other factors that result in adverse changes in the key assumptions used in the fair value estimates mentioned above, the fair value of the Company's reporting units could be negatively impacted.
Revenue Recognition for Certain Long-Term Real Estate Developments
As discussed in Note 2 to the Consolidated Financial Statements, revenues from real estate sales are generally recognized when sales are closed and title, risks and rewards pass to the buyer. For certain real estate sales, A&B and its joint venture partners account for revenues on long-term real estate development projects that have continuing post-closing involvement, such as Kukui’ula, using the percentage-of-completion method. Following this method, the amount of revenue recognized is based on the percentage of development costs that have been incurred through the reporting period in relation to total expected development cost associated with the subject property. Accordingly, if material changes to total expected development costs or revenues occur, A&B’s financial condition or its future operating results could be materially impacted.
Pension and Post-Retirement Estimates
The estimation of A&B’s pension and post-retirement expenses and liabilities requires that A&B make various assumptions. These assumptions include the following factors:
•
Discount rates


40


•
Expected long-term rate of return on pension plan assets
•
Health care cost trend rates
•
Salary growth
•
Inflation
•
Retirement rates
•
Mortality rates
•
Expected contributions
Actual results that differ from the assumptions made with respect to the above factors could materially affect A&B’s financial condition or its future operating results. The effects of changing assumptions are included in unamortized net gains and losses, which directly affect accumulated other comprehensive income. Additionally, these unamortized gains and losses are amortized and reclassified to income (loss) over future periods.
The benefit obligations for qualified pension and post-retirement plans, as of December 31, 2015, were determined using a discount rate of 4.50 percent. For A&B’s non-qualified benefit plans, the December 31, 2015 obligation was determined using a discount rate of 3.90 percent. The discount rate used for determining the year-end benefit plan obligation was generally calculated using a weighting of expected benefit payments and rates associated with high-quality U.S. corporate bonds for each year of expected payment to derive a single estimated rate at which the benefits could be effectively settled at December 31, 2015.
The expected return on plan assets assumption of 7.10 percent is principally based on the long-term outlook for various asset class returns, asset mix, the historical performance of the plan assets under the liability-driven investment strategy and a comparison of the estimated long-term return calculated to the distribution of assumptions adopted by other plans.
As of December 31, 2015, A&B’s post-retirement obligations were measured using an initial 7.0 percent health care cost trend rate in 2016, decreasing to 6.8 percent in 2017, and further decreasing by approximately 0.2-0.3 percent each year through 2028, with an ultimate rate of 4.5 percent in 2037.
Lowering the expected long-term rate of return on A&B’s qualified plan assets by one-half of one percent would have increased pre-tax pension expense for 2015 by approximately $0.8 million. Lowering the discount rate assumption by one-half of one percentage point would have increased pre-tax pension expense by approximately $1.0 million. Additional information about A&B’s benefit plans is included in Note 11 to the Consolidated Financial Statements.
As of December 31, 2015, the market value of A&B’s defined benefit plan assets totaled approximately $146.2 million, compared with $160.8 million as of December 31, 2014. The recorded net pension liability was approximately $48.4 million as of December 31, 2015 and approximately $43.6 million as of December 31, 2014. A&B’s contributions to its pension plans were approximately $2.6 million in 2015 and $5.7 million in 2014.
Income Taxes
A&B makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are applied in the calculation of tax credits, tax benefits and deductions, and in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to A&B’s tax provision in a subsequent period.
In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertain tax positions taken or expected to be taken with respect to the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could materially affect A&B’s financial condition or its future operating results.


41


Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a full description of the impact of recently issued accounting standards, which is incorporated herein by reference, including the expected dates of adoption and estimated effects on A&B’s results of operations and financial condition.

CONSOLIDATED RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results of operations of Alexander & Baldwin, Inc. and its subsidiaries (collectively, the “Company”) should be read in conjunction with the consolidated financial statements and related notes thereto. Amounts in this narrative are rounded to millions, but per-share calculations and percentages were calculated based on thousands. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may be slightly different than the more accurate amounts included herein.
(dollars in millions, except per-share amounts)
2015
 
Chg.
 
2014
 
Chg.
 
2013
Operating Revenue
$
570.5

 
2%
 
$
560.0

 
53%
 
$
365.2

Operating Costs and Expenses
531.5

 
7%
 
495.4

 
52%
 
325.3

Operating Income
39.0

 
(40)%
 
64.6

 
62%
 
39.9

Other Income (Expense)
8.6

 
NM
 
(35.8
)
 
120%
 
(16.3
)
Income Tax Expense (Benefit)
16.5

 
NM
 
(1.4
)
 
NM
 
11.1

Income From Continuing Operations
31.1

 
3%
 
30.2

 
142%
 
12.5

Discontinued Operations (net of taxes)
—

 
(100)%
 
34.3

 
54%
 
22.3

Net Income
31.1

 
(52)%
 
64.5

 
85%
 
34.8

Income attributable to noncontrolling interest
(1.5
)
 
(52)%
 
(3.1
)
 
6X
 
(0.5
)
Net income attributable to A&B
$
29.6

 
(52)%
 
$
61.4

 
79%
 
$
34.3


 
 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
0.54

 
(57)%
 
$
1.26

 
64%
 
$
0.77

Diluted Earnings Per Share
$
0.54

 
(57)%
 
$
1.25

 
64%
 
$
0.76

2015 vs. 2014
Operating Revenue for 2015 increased 2 percent, or $10.5 million, to $570.5 million, primarily due to increased revenue from the Real Estate Development and Sales and Real Estate Leasing segments, partially offset by lower revenue from the Materials and Construction and Agribusiness segments. The reasons for business- and segment-specific year-to-year fluctuations in revenue are further described below in the Analysis of Operating Revenue and Profit by Segment.
Operating Costs and Expenses for 2015 increased 7 percent, or $36.1 million, to $531.5 million. Operating costs increased $36.1 million due to higher Real Estate Development segment and Agribusiness segment costs, partially offset by lower Materials and Construction segment costs. Agribusiness segment costs increased during 2015 as compared to 2014 primarily due to higher sugar operating costs of $14.0 million and $22.6 million of costs associated with the cessation of sugar operations. The reasons for changes in business- and segment-specific year-to-year fluctuations in operating costs, which affect segment operating profit, are more fully described below in the Analysis of Operating Revenue and Profit by Segment.
Other Income (Expense) was $8.6 million in 2015 compared with $(35.8) million in 2014. The change in other income (expense) was principally due to increased joint venture earnings from the closing of 329 Waihonua units in 2015, and a higher non-cash reduction in the carrying value of a tax equity investment in 2014. The Company made a $23.8 million investment in a 12-megawatt solar farm on Kauai ("KRS II") in July 2014, and the tax benefits associated with the KRS II investment are accompanied by non-cash reductions of the investment's carrying value. Tax benefits associated with the investment are included in the Income tax expense (benefit) line item in the Consolidated Statements of Income. Interest expense decreased by $2.2 million due to higher average debt levels in 2014 as a result of acquisitions made in late 2013.
Income Taxes and the effective rate were higher in 2015 compared with 2014, due principally to higher tax credits in 2014 associated with the Company's investment in KRS II.


42


Income attributable to noncontrolling interest decreased $1.6 million in 2015 compared to 2014. The noncontrolling interest represents third-party minority interests in two entities that Grace consolidates and in which Grace owns a 70 percent share and 51 percent share.
2014 vs. 2013
Operating Revenue for 2014 increased 53 percent, or $194.8 million, to $560.0 million, primarily due to a full year of Materials and Construction revenue in 2014, compared to one fiscal quarter of revenue in 2013, as Grace was acquired on October 1, 2013. In addition, Real Estate Leasing revenue increased primarily due to expansion of the portfolio though acquisitions made in 2013. These increases were partially offset by a reduction in Agribusiness revenue. The reasons for business- and segment-specific year-to-year fluctuations in revenue are further described below in the Analysis of Operating Revenue and Profit by Segment.
Operating Costs and Expenses for 2014 increased 52 percent, or $170.1 million, to $495.4 million. Operating costs increased principally due to a full year of operating costs and expenses for Grace in 2014, compared to one quarter of Grace operating costs and expenses in 2013. Additionally, operating costs increased due to higher Real Estate Leasing segment costs, including increased depreciation expense related to 2013 acquisitions, and increased operating costs due to the expansion of the portfolio in 2013. The reasons for changes in business- and segment-specific year-to-year fluctuations in operating costs, which affect segment operating profit, are more fully described below in the Analysis of Operating Revenue and Profit by Segment.
Other Income (Expense) was $(35.8) million in 2014 compared with $(16.3) million in 2013. The change in other income (expense) was principally due to a $14.7 million reduction in the carrying value of the Company's investment in KRS II. Tax benefits associated with the KRS II investment are accompanied by non-cash reductions of the investment's carrying value. Tax benefits associated with the investment are included in the Income tax expense (benefit) line item in the Consolidated Statements of Income. Interest expense increased by $9.9 million due to higher average debt levels as a result of acquisitions made in 2013.
Income Taxes and the effective rate were lower in 2014 compared with 2013 due principally to tax benefits associated with the Company's investment in KRS II and Agribusiness losses from continuing operations in 2014 as compared to income in 2013, but was partially offset by higher income from continuing operations from the Materials and Construction segment due to a full year of results in 2014 versus