Business Context and Reporting Period
This Form 8-K, filed on November 22, 2007, by Consolidated Water Co. Ltd. (the "Company"), reports on a significant dispute involving its subsidiary, Ocean Conversion (BVI) Ltd. ("OC-BVI"). The Company holds a 43.5% equity interest in OC-BVI, with profit-sharing rights raising its effective interest in profits to 45.1%. OC-BVI operates a desalination plant in Baughers Bay, Tortola, selling water exclusively to the British Virgin Islands (BVI) Water and Sewer Department.
Key Financial Metrics
- Accounts Receivable: As of September 30, 2007, OC-BVI held approximately $5.6 million in receivables from the BVI Government for water sales.
- Collection Status: OC-BVI has received payment for less than 27% of amounts billed to the BVI Government for the period January 2007 through September 2007.
- Company Exposure: As of September 30, 2007, the Company's loan to and equity investment in OC-BVI totaled approximately $16.9 million.
- Intangible Assets: The recorded value of the Company's management services agreement with OC-BVI was approximately $856,000.
- Historical Income (Nine Months Ended Sept 30, 2007):
- Equity investment earnings: $1,361,000
- Management services revenue: $538,000
- Profit-sharing income: $540,000
- New Investment: OC-BVI completed a new desalination plant at Bar Bay in July 2007 at a cost of approximately $8 million, with the Company providing $2.9 million in loans as of September 30, 2007.
Material Changes and Events
The BVI Government has asserted a purported right of ownership over OC-BVI's Baughers Bay desalination plant. Consequently, the government advised OC-BVI it would only pay amounts approximating production costs, representing approximately 40% of billed amounts. This dispute has caused OC-BVI to experience liquidity problems, though water supply to residents has not been interrupted.
On November 15, 2007, OC-BVI issued a demand letter for approximately $6.2 million, including interest and legal fees. The BVI Government rejected this claim on November 19, 2007. On November 21, 2007, OC-BVI demanded arbitration under the 1990 Deed of Agreement. Subsequently, the BVI Government filed a lawsuit in the Eastern Caribbean Supreme Court seeking ownership of the plant.
Outlook, Risks, and Contingencies
Management intends to vigorously pursue full payment and defend against the government's ownership claim, believing the dispute will be resolved satisfactorily. However, the Company cannot assure a successful resolution.
Material Risks:
- Asset Impairment: If the BVI Government is found to own the Baughers Bay plant, OC-BVI could lose its water supply agreement and the plant itself. This would likely require the Company to record significant impairment charges on its $16.9 million investment and $856,000 management agreement asset.
- New Plant Viability: Due to the ongoing dispute, OC-BVI may fail to secure a water supply agreement for its new Bar Bay plant. Failure to obtain favorable terms could prevent cost recovery, potentially leading to impairment charges on the $2.9 million loan provided by the Company.
- Liquidity: OC-BVI is currently facing liquidity issues due to sporadic payments from the BVI Government.
Investor Verification Checklist
- Verify the current status of the lawsuit filed by the BVI Government in the Eastern Caribbean Supreme Court.
- Confirm the timeline and progress of the arbitration demand filed by OC-BVI.
- Assess the likelihood of OC-BVI securing a new water supply agreement for the Bar Bay plant given the government's stance on the Baughers Bay plant.
- Monitor OC-BVI's cash flow and liquidity position to determine if additional capital support from the Company is required.
- Review the Company's financial statements for any subsequent impairment charges related to the OC-BVI investment or management agreement.