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The Associated Press July 21, 2010, 8:09AM ET

APNewsBreak: Hawaii Superferry shorted state

The Hawaii Superferry was sailing under a facade of success in the summer of 2008 -- boasting of record ridership -- but it had already begun to shortchange the state on its monthly fees, according to an Associated Press review of Department of Transportation records.

The company's inability to pay fully in July indicates it was in troubled waters nine months before the Hawaii Supreme Court decision widely blamed for the ferry's closure came in March, 2009. The court overturned a state law that allowed the Superferry to operate while an environmental impact statement was being conducted.

Two months later, the $300 million Superferry -- which had as its large ambition changing the way residents and visitors traveled between the state's four major islands -- filed for bankruptcy.

Following months of low booking numbers, extensive legal wranglings and Kauai protesters who rode kayaks and surfboards to prevent the Superferry from landing, the ferry company ran out of money.

Neither the company nor the state had disclosed that the ferry service couldn't make its required payments until the the DOT released the Superferry's payment records at the AP's request.

During the first month the Superferry shorted the state, company President Tom Fargo went so far as to proclaim "business is good," with July showing a 40 percent increase in passenger traffic on the vessel compared to the previous month.

The state demanded payment in at least four letters to the Superferry, and legal action was threatened in two of the letters, according to the documents reviewed by the AP.

The state never followed through with lawsuits to collect money owed until after the ferry's bankruptcy.

"They were having financial difficulties already, and that's why they were heading toward bankruptcy," said state Transportation Director Brennan Morioka. "We could only make certain assumptions because they were keeping things pretty close to their vest."

Attorneys for the Hawaii Superferry's parent company, HSF Holding Inc., had no comment.

The Hawaii Superferry owed the state $1.3 million in unpaid fees, compared to the $2.6 million it did pay. The government recovered an additional $676,000 in a March 18 settlement filed in U.S. Bankruptcy Court in Delaware.

The state invested $40 million in the Superferry, which Gov. Linda Lingle strongly supported.

The state's investment will be paid off over the next 18 years using fees contributed by the islands' remaining harbor users, especially shipping companies. The Superferry's monthly fees, if projected over the term of the debt service requirements on the state's general obligation bonds, would have equaled roughly that amount.

The money was spent to build two-lane barges and ramps used only by the Superferry at four island harbors.

"All along, we felt that the state was carrying this thing, for whatever reasons," said Irene Bowie, executive director for Maui Tomorrow, one of the groups that fought the Superferry in court. "The Superferry was able to play the victim when they never had an operation that made financial sense."

The court battle surrounding the Superferry stemmed from a 2005 decision by Lingle's administration exempting the ferry service from environmental review. The Hawaii Supreme Court later ruled that the vessel couldn't run until an environmental study was completed.

An April 2008 report by the Hawaii auditor said the government caved in to pressure from the Hawaii Superferry when the state allowed it to bypass the environmental review.

Lingle stood behind her administration's decisions favoring the Superferry, and she criticized the court ruling.

"We know from the beginning we were correct and accurate, did the right thing," she said after the court's March 2009 decision. "I certainly feel our administration acted always in accordance with the law and clearly made the right decisions."

Hawaii's remaining harbor users don't resent the Superferry's failure or the loss of payments to the state's special fund for harbor improvements, said Gary North, executive director of the Hawaii Harbors Users Group.

"The state was trying to work with Superferry to help Superferry succeed," said North, a former senior vice president for Matson Navigation, the largest shipper between Hawaii and the West Coast. "The Superferry concept would have been a good concept for the state if it worked. Unfortunately it didn't work."

The Hawaii Superferry's operating agreement with the state required a minimum of $191,667 in monthly payments during the first three years of service for various fees including dockage, port entry, passengers and vehicles. The company paid the full amount from the time it started service in December 2007 until July 2008, and then payments gradually declined until March 2009, when it stopped paying altogether.

The operating agreement potentially could have been revoked after the Superferry didn't pay its fees.

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