Diageo begins shipping Captain Morgan distilled on St. Croix to U.S. mainland


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ST. CROIX - Diageo has begun to ship Captain Morgan rum distilled in the territory for sale on the U.S. mainland.

Government House last week released a statement saying Gov. John deJongh Jr. had accepted the first case of Captain Morgan rum produced at the St. Croix distillery during a meeting with Diageo officials.

In a brief phone interview, Dan Kirby, vice-president and general manager of Diageo USVI, said that locally distilled Captain Morgan has been shipped to the mainland and that the first bottling has been done.

It will take time for the St. Croix-produced rum to make its way through the supply chain and onto store shelves in the United States, Kirby said.

Rum produced in the territory and sold in the United States represents an economic boon locally, brought by rum tax rebates - also called coverovers - that the territory receives from the federal government.

For every proof gallon of Virgin Islands-produced rum exported to the U.S. mainland, the federal government collects $13.50 in excise taxes from the manufacturer and, since 1999, has been returning $13.25 of it to the territory.

Prior to 1999, the territory got back $10.50 per proof gallon, before Congress passed legislation that temporarily increased that rebate to $13.25 per proof gallon. That measure has been renewed several times since then, keeping the rate at $13.25.

Although the latest coverover extension expired in December, V.I. Delegate to Congress Donna Christensen said she did not anticipate much of a fight in passing the extension again this year.

The expiration did not affect the rum tax revenues the territory received for Fiscal Year 2012, said Debra Gottlieb, director of the Office of Management and Budget.

For FY 2012, as it typically does, the territory filed a request with the Interior Department in July or August, asking for an advance on its rum tax rebate for the coming fiscal year.

The advance is based on the amount the territory projects the rum tax revenues will generate for the coming fiscal year, and the territory typically receives the money by the beginning of the fiscal year, Gottlieb said.

The anticipated additional revenues that Diageo-produced rum will generate for the territory during this fiscal year already have been included in the $195.3 million advance the territory received at the beginning of the fiscal year, Gottlieb said.

"Although Diageo just started to ship, we already got an advance from Treasury for what they're going to produce," she said.

Of that $195.3 million, $116.4 million is for anticipated rum-tax rebates from the sale of Cruzan Rum in the United States, while $78.9 million is for anticipated sales of Diageo's rum in the United States, based on a partial year of Captain Morgan production, Gottlieb said.

"This year will not be a full year for Diageo," Gottlieb said.

The advance was based on projections for about seven months of coverover revenues from Diageo-produced rum, starting in March 2012 through the end of the fiscal year, she said.

Although the Captain Morgan distillery had a ribbon-cutting ceremony in November 2010, the rum products made there must be aged for at least a year.

Kirby noted that the contract with Diageo's former supplier did not end until Dec. 31, 2011, and said that there was a period when the company transitioned from one supplier to the other.

The $195.3 million advance for FY 2012 coverover revenue already has been obligated, Gottlieb said.

The first thing that is paid with the money is debt service, which are the required payments on government-issued bonds, Gottlieb said.

The government's portion of debt service this year was more than $78 million, Gottlieb said.

Cruzan and Diageo also receive a portion of the rum tax rebate, under deals negotiated with the government.

The local government used revenue from future rum tax proceeds to back bonds that were used to build Diageo's Captain Morgan distillery and to expand and make improvements to Cruzan's distillery. The V.I. government also is heavily subsidizing marketing for the two brands and provided them with other benefits, in return for agreeing to produce their rums for export to the United States on St. Croix for the next 30 years.

The debt service for the building of the Diageo facility and the improvements at Cruzan come from their portions of the rum tax rebate and not from the government's share, Gottlieb said.

There also is a requirement that some of the government's coverover revenues go to different government funds that are designated for certain purposes, such as an annual $1 million transfer to the Crisis Intervention Fund, Gottlieb said.

Ultimately this year, just more than $37 million in rum coverover revenue was transferred to the government's General Fund, she said.

At the end of the calendar year, after the fiscal year ends on Sept. 30 and the books are closed out, the Interior Department and the local government do what is called a "true-up," during which the actual amount of rum tax rebate the territory earned is figured, Gottlieb has said.

If the figure is more than the advance, the extra money is paid to the territory. If it is less than the advance, the amount is taken out of the next year's advance, she said.

In the Government House release about deJongh accepting the first case of locally produced Captain Morgan rum, deJongh called it "some sorely needed good news for this territory's economy," and said that it is "a reassurance to all Virgin Islanders that even as we face the impact of the global economic downturn, we have laid the groundwork for our future prosperity."

"These bottles represent decades of future revenue for the USVI, which will create jobs and be an engine of growth and prosperity for the Virgin Islands," deJongh said.

David Gosnell, Diageo's President of Global Supply, told the governor that a million cases of Captain Morgan will be ready for distribution by the end of the month, and the visitor center at the Captain Morgan distillery plans to celebrate its grand opening in April, according to the release.

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