Hawaii Superferry executives told the state in early discussions on interisland ferry service that requiring an environmental assessment could jeopardize federal financing and essentially halt the project.

The U.S. Department of Transportation's Maritime Administration approved $140 million in loan guarantees for Superferry in January 2005 on the condition that the state give all governmental and environmental clearances, including confirmation that there was no need for an environmental assessment of port facilities.

The state was aware of this condition when it ruled in February 2005 that $40 million in state harbor improvements for the Superferry project were minor and exempt from an environmental assessment.

"They pointed out that this was the condition that they were faced with," Barry Fukunaga, the director of the state Department of Transportation, said of Superferry executives. "But we didn't use that as the basis for our argument."

Pressure to meet conditions of the federal loan guarantees helps explain why Superferry executives, at crucial moments over the past two years, have insisted that an environmental assessment — and the chance it could lead to a more thorough environmental impact statement — would endanger the project. The federal loan guarantees were for the construction of the Alakai and a second ferry being built and cover most of the $180 million cost.

The state Supreme Court has ruled that an environmental assessment is necessary for Superferry-related harbor improvements at Kahului on Maui. A Maui Circuit Court judge has issued a temporary restraining order stopping the ferry on Maui, while the court considers the state's request to allow Superferry to resume service as an environmental assessment is conducted. Superferry has indefinitely suspended service to Kaua'i because of protests.

John Garibaldi, the Superferry's chief executive officer, told the Maui court last week that the temporary restraining order could mean the ferries might be moved elsewhere by investors, the latest of several warnings by Superferry about the future of the project.

The state's February 2005 exemption for Superferry is at the center of the controversy, and interviews and court documents show that Superferry executives have claimed from the start that an exemption was not only warranted, but critical to the project moving forward.

"If there wasn't an exemption, the project wouldn't have gone forward," Garibaldi said yesterday. "That would have said, 'Jeez, this project isn't doable, it's not going ahead. It would have to have something else.'

"It was very significant that if it wasn't an exemption, what else would it be? And then that would have had to have been analyzed at that time."

STATE SUED

After the Sierra Club, Maui Tomorrow and the Kahului Harbor Coalition sued the state over the exemption, Superferry executives, in both a court declaration and in a confidential settlement offer, said an environmental assessment or delays from a lawsuit would threaten the federal loan guarantees as well as private equity investments.

A Superferry attorney offered to settle the lawsuit in July 2005 and agree to a contractual environmental review of the project, but was adamant about not going through a state environmental assessment.

"Our funding is contingent on completion of 'environmental clearances,' " Lisa Munger, the Superferry attorney, wrote Isaac Hall, an attorney representing the environmentalists. "Accordingly it is critical to us that the process remain contractual not regulatory. If DOT participates, we cannot receive funding."

The Superferry's settlement offer, which was rejected by environmentalists, was to have a consultant review the project and address issues such as the spread of invasive species, whale avoidance, traffic congestion, and conflicts between the ferry and other Kahului harbor users. Superferry ultimately took steps on its own to address the environmental concerns, but not to the satisfaction of environmentalists who wanted a state environmental assessment.

Gov. Linda Lingle has defended the state's exemption as proper and said Superferry is being unfairly singled out when airlines, barges and cruise lines did not have to undergo similar environmental review.

Lingle also referred to the conditions of the federal loan guarantees on Wednesday in a letter to state Senate Majority Leader Gary Hooser, D-7th (Kaua'i, Ni'ihau), in which she argued that federal, state and county governments had carefully scrutinized the legal and environmental issues surrounding the ferry.

"It is important to remember that the U.S. Maritime Administration, which provided a loan guarantee for construction of the Alakai, put as a condition that no EIS would be required," Lingle wrote.

Fukunaga, who was the department's deputy director of harbors at the time, said he knew of the conditions of the federal loan guarantees before the department's ruling but did not feel pressure to grant the Superferry exemption.

"We knew about that but it didn't really effect our outcome," Fukunaga said.

The department ruled that the harbor improvements for Superferry in Honolulu, Kahului, Nawiliwili and Kawaihae were minor and mostly involve barges and boarding ramps for passengers and vehicles that are consistent with existing harbor use. The department did not consider secondary or cumulative issues related to ferry operation, a decision that was criticized in February by the state's Environmental Council and in the Supreme Court's full opinion released on Friday.

WARNINGS ON RISK

Superferry executives, beyond the warnings about the risk to its federal loan guarantees, also suggested to some at the state Legislature that the project could be significantly delayed or even scrapped if an environmental assessment was required. Their statements are being recalled now that the state is asking the Maui court to allow Superferry to proceed during the environmental assessment.

"It's a very unfortunate case of 'I told you so,' " said state Sen. Shan Tsutsui, D-4th (Kahului), one of the Neighbor Island senators who wanted an environmental review. "I think, at this point, nobody wins in a situation like this."

Superferry hired some of the state's top lobbyists last session to help stop an attempt by Hooser, Tsutsui and others to force an environmental review of the ferry's effect on state harbors. The state Senate did pass a compromise bill with the intent of allowing the ferry to launch while a review took place, but it failed in the state House after objections from Superferry and the state.

A Superferry public-relations campaign included a poll that asked whether people would support the Senate compromise even if it meant it could delay the launch by three years or cancel plans to ever start ferry service. Asked about the tone of the poll questions, David Wilson, of McNeil Wilson Communications, the Superferry's public-relations firm, told the Advertiser's Capitol Notebook blog in March: "We're saying this: 'If there is an EIS, Superferry is leaving.' "

Garibaldi said yesterday that Superferry objected to specific language in the Senate bill it believed would have made the environmental review a condition of the project moving ahead. "That was a show-stopper for us," he said.

DELAYS FEARED

Neighbor Island senators offered to work on the language with the House, but Superferry feared potential delays to its summer launch.

State Rep. Joseph Souki, D-8th (Wailuku, Waihe'e, Waiehu), the chairman of the House Transportation Committee, said last week that one reason he refused to hear the Senate compromise was because Superferry executives warned it would delay the launch. He also thought singling out Superferry for an environmental review was unfair.

"I'm convinced we did the right thing," Souki said, "but I respect the decisions of the courts."

In his declaration in Maui court last week, Garibaldi said the temporary restraining order could mean Superferry will be unable to pay its debt obligations on ferry construction and that could lead to default, which would leave the federal government to pay the cost of building the ferries. A separate declaration from the federal maritime administration also warned of a potential default.

Without revenues from ferry operations, Garibaldi said Superferry would not be paying fees to the state that could be used to service debt on the $40 million in harbor improvements. With no return on investment, he added, Superferry might "lose control of the ferries."

"The investors and lenders will cause the ferries to be deployed where they can generate revenues," Garibaldi said.

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com.