The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Consolidated Water’s bid to supply western New Providence with water via a $7 million joint venture investment has been thrown into jeopardy, after the Water & Sewerage Corporation ruled that the 25-year franchise agreement underpinning the deal was “null and void”.

The BISX-listed reverse osmosis plant operator and its partner in a 50/50 joint venture worth $14 million, New Providence Development Company (NPDevCo), announced their tie-up in May 2012 after securing what they believed was a 25-year deal making them western New Providence’s “exclusive” water supplier.

But, following this year’s general election, the Government and Water & Sewerage Corporation appear to have reversed course, the latter declaring in an October 23, 2012, letter to NPDevCo president, Alistair Henderson, that the May franchise agreement had been “voided”.

This has placed the two companies and the Government/Water & Sewerage Corporation at loggerheads, with Consolidated Water declaring in its Friday 10-Q filing with the US Securities & Exchange Commission (SEC) that it “strongly believes” the franchise agreement “remains in full force and effect”.

But Bradley Roberts, the Water & Sewerage Corporation’s chairman, told Tribune Business that the Government-owned utility had taken its new position because the 25-year franchise agreement was “not executed in its totality”.

He also expressed “surprise” that Consolidated Water had not disclosed to shareholders and the markets the reasons for the Water & Sewerage Corporation’s actions, adding that it and NPDevCo “know the reasons why”.

“I am surprised they wouldn’t tell you why the agreement was not delivered,” Mr Roberts told Tribune Business. “It was not executed in its final totality. The agreement was not executed in its totality. They know the reasons why.”

He added that both companies “know what their obligations are”, and disclosed that he had dinner with representatives from both Consolidated Water and NPDevCo on Thursday night last week.

While the Government/Water & Sewerage Corporation u-turn has placed a block on the Consolidated Water/NPDevCo joint venture, at least for the moment, Mr Roberts indicated that their prospects of obtaining some kind of franchise agreement were not completely dead.

The Government and Corporation have to approve any such agreement, and Mr Roberts said: “I think they wish to be talking further to the Corporation on the matter. I’m sure the talks will continue, and I’m sure there will be some sort of conversation going forward.”

It always appeared likely that the Christie administration would at least review the 25-year franchise deal, given that it was signed by the Ingraham government on May 7, 2012 - the date of the general election.

Some are likely to believe the timing was politically motivated, although both companies previously denied this to Tribune Business. Mr Roberts hinted as much, telling Tribune Business: “It’s rather strange it was signed right in the middle of a general election.”

Either way, it seems the western New Providence water franchise has become caught up in Bahamian political machinations. Some will likely fear that the situation once again shows that investments in the Bahamas face heightened political risk, with agreements reached with one administration not being honoured by its successor - or at least being subject to change.

For the moment, Consolidated Water’s ambitions of entering the Bahamian retail water supply market have been blocked. It would have taken over an operation serving 1,000 customers in some of New Providence’s wealthiest residential and commercial communities, such as Lyford Cay and Old Fort Bay.

Given the rate of growth and development in the west, and its affluent inhabitants, Consolidated Water and NPDevCo would be looking at a lucrative opportunity. The franchise agreement, when combined with Consolidated Water’s position as the Water & Sewerage Corporation’s largest bulk water supplier, would have given it a dominant market position on New Providence verging on a monopoly.

In its 10-Q filing with the SEC, Consolidated Water revealed that final closing of its NPDevCo joint venture had been “delayed” until the dispute with the Government was resolved.

It said: “The company, through its subsidiary Consolidated Water Bahamas, formed a joint venture in May 2012 with the New Providence Development Company Limited (NPDC) in Nassau, Bahamas.

“This joint venture, the NPDC Water Company (NPDC Water), will own and operate a retail water utility that will provide potable water to some of the most prestigious residential and business areas in the Bahamas, including Lyford Cay and Old Fort Bay. NPDC Water will operate pursuant to a 25-year exclusive water utility franchise granted by the Bahamas government for the western end of New Providence island.”

And Consolidated Water added: “Consolidated Water (Bahamas) and NPDC each have 50 per cent ownership of the joint venture. Upon final closing of the joint venture agreement, Consolidated Water (Bahamas) will contribute $7 million to NPDC Water, and NPDC will transfer its existing retail water utility business to NPDC Water.

“This existing business currently collects groundwater from approximately 1,700 acres of land, treats that groundwater and distributes potable water to approximately 1,000 customers. NPDC Water has a license to continue collecting this water for the term of the 25-year franchise. The company will be contracted to provide management and engineering services for NPDC Water, including the construction of a new water treatment plant that incorporates ultra-filtration and reverse osmosis technologies. The joint venture will also operate and maintain NPDC’s recently constructed sewage treatment plant.

“On October 23, 2012, the president of NPDC received a letter from the Water and Sewerage Corporation of the Bahamas stating that it had been directed to advise NPDC that the franchise agreement dated May 7, 2012 is null and void. No explanation was given for this statement. The company strongly believes that the franchise agreement remains in full force and effect, and is currently evaluating with NPDC a response to the October 23 letter.”

Neither Mr Henderson, NPDevCo’s president, nor Rick McTaggart, Consolidated Water’s chief executive, could be contacted for comment before press time. The joint venture would have paid a royalty fee to the Water & Sewerage Corporation based on sales volumes per thousand gallons sold, but it is likely the Christie administration was unhappy with the deal’s terms and wanted to revise them.

Some estimates have projected the joint venture could earn $100-$125 million in revenue at least over its 25 years, and a 2008 report by Chester Engineering, commissioned by the first Christie administration, had recommended that the Water & Sewerage Corporation - not Consolidated Water and NPDevCo - be the retail water supplier for western New Providence, given the growth and economies of scale potential.

Meanwhile, there was better news elsewhere in the Bahamas for Consolidated Water, as the increased volumes from the 2011 expansion at its Blue Hills plant grew its total bulk water revenues by $2.6 million during the 2012 third quarter.

The company’s bulk water operating income for the three months to end-September 2012 rose by 52.6 per cent to $1.938 million, while revenues rose by 34.6 per cent to $10.031 million.

“This increase in bulk revenues from 2011 to 2012 of approximately $2.6 million resulted from a 36 per cent increase in the number of gallons of water sold, which was primarily attributable to the expansion of our Blue Hills plant in the Bahamas during the fourth quarter of 2011, and energy pass-through increases to our rates due to higher energy prices,” Consolidated Water said.

The same pattern was seen for the first nine months in 2012. Bulk water segment operating income was up 64.2 per cent at $6.059 million, while revenues were ahead 35.4 per cent at $30.313 million.

“The increase in bulk revenues of approximately $7.9 million from 2011 to 2012 resulted from a 33 per cent increase in the number of gallons of water sold, which was primarily attributable to the expansion of our Blue Hills plant in the Bahamas during the fourth quarter of 2011,” Consolidated Water said.

“Gross profit as a percentage of bulk revenues increased to approximately 23 per cent for 2012 as compared to approximately 21 per cent for 2011. The improvement in the bulk segment’s gross profit as a percentage of revenues in 2012 from 2011 results from improved economies of scale for our Bahamas operations as a result of the expansion of our Blue Hills plant.”

Professional fees for Consolidated Water’s Bahamas operations were also down $85,000 year-over-year. “Gross profits generated by our retail and bulk segments each posted double-digit percentage gains in the most recent quarter, reflecting higher water volumes sold in the Cayman Islands and Bahamas when compared with the prior-year period,” said Mr McTaggart.”

“The company continues to utilize a portion of these increased gross profits to fund its business development activities in Mexico, Asia and the Bahamas, and consequently administrative costs during the third quarter of 2012 increased by about $1 million.”