The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

BISX-listed Consolidated Water last night warned Bahamian investors there would be a material impact on its financial performance if the Government decided not to renew its contract to operate the Windsor reverse osmosis plant, something that would force it to take an impairment hit to its $3.45 million ‘goodwill’.

The operator of Nassau’s two water supply plants, in its 10-Q filing with the Securities & Exchange Commission (SEC), confirmed that it was continuing to supply the Water & Sewerage Corporation from Windsor on a month-to-month basis to give the Government “more time” to determine whether it wanted a new partner to replace Consolidated Water.

Noting that Windsor had generated $5.5 million in revenues for Consolidated Water for the first nine months of 2013, and $7.5 million for the 2012 full year, the company said any of the three options open to the Government could impact cash flow and operating income.

“At the request of the Government of the Bahamas, we continue to operate the Windsor plant to provide the Government with additional time to decide whether or not it will extend Consolidated Water (Bahamas) water supply agreement for the Windsor plant on a long-term basis,” Consolidated Water said in its filing.

“We are presently unable to determine if Consolidated Water (Bahamas) supply agreement for its Windsor plant will be extended or, if extended, on what terms.”

Noting that its previous contract expired when it delivered the required water volume to the Water & Sewerage Corporation in July 2013, Consolidated Water reiterated that the Government had three options.

These were another five-year deal with Consolidated Water; exercising its option to purchase the plant, facilities and equipment from the company; or requiring it to remove all these from the western New Providence site.

“The outcome of any of these three contingencies could materially reduce the operating income and cash flows that the company has historically generated, and could require the company to record an impairment charge to reduce the $3.45 million carrying value of its goodwill. Such impairment charge could have a material adverse impact on the company’s results of operations,” Consolidated Water warned.

“Consolidated Water (Bahamas) generated approximately $1.9 million, $5.5 million and $7.5 million in revenues from the operation of this plant during the three and nine months ended September 30, 2013, and the year ended December 31, 2012, respectively.”

Tribune Business previously revealed how Consolidated Water was dangling a potential initial public offering (IPO) of shares in its Bahamian subsidiary to local investors as an apparent inducement to keep the Windsor plant contract with the company.

And Rick McTaggart, its chief executive, also warned that the Windsor plant requires an “urgent investment” of $3.328 million to maintain its operational efficiency, with any delay potentially creating “an unsafe working environment” for its Bahamian staff.

His October 2, 2013, letter to Deputy Prime Minister Philip Davis set out both several ‘options’ for the Government’s consideration and Consolidated Water’s negotiating position.

It offered Mr Davis, and the Water & Sewerage Corporation, two different water pricing options and ‘purchase prices’ for the Windsor plant, setting the ‘base price’ at $5.25 million.

This price is without the $3.328 million worth of upgrades that Consolidated Water says are urgently required at Windsor, and in its proposal, the BISX-listed company adds this to the $5.25 million ‘base’ to create the starting point for any discussions about purchasing the reverse osmosis plant from it.

Consolidated Water’s first option offers the Water & Sewerage Corporation a reduced water purchase price of $5.90 per 1,000 imperial gallons of water supplied by Windsor, with a $1.083 credit for “deferred payment” of its additional capital investment.

Choosing this proposal, though, would mean that while the Water & Sewerage Corporation - and its Bahamian customers - would likely see a drop in water costs, either it or a new Windsor plant operator (if this is the route the Government chooses) would have to pay Consolidated Water a much higher purchase price to take over the facility.

The second option offered by Mr McTaggart is a higher water price of $6.983 per 1,000 imperial gallons of water supplied by Windsor.

This would enable Consolidated Water to recover its capital investment upfront, rather than at the ‘back end’, as proposed in the other option. The result, if the Government/ Water & Sewerage Corporation opted for this, would be a lower ‘purchase price’ for the Windsor plant.

The Windsor ‘purchase price’ could ultimately hit either $11.581 million or $7.087 million, depending on if the Government went with either option, and for the full five years.

But Mr McTaggart offered to “waive” these payments if it would enhance Consolidated Water’s bid to hold on to the Windsor plant for a further five years.

Highly-placed Tribune Business sources said the Windsor situation was now before the Christie Cabinet for a decision on both the duration, and terms and conditions, of any new contract with Consolidated Water.

The Government’s thinking is unclear, with the opinion of Tribune Business contacts divided. One highly-placed source said the Christie administration, led by the Deputy Prime Minister, was still committed to putting the Windsor plant contract out to tender in the interests of transparency and fairness.

This would result in Consolidated Water being given a temporary, transitional contract until the tender was complete and new operator selected - whether Consolidated Water or someone else.

But another source familiar with developments suggested that the Government, realising it was not going to receive better offers, had decided to give Consolidated Water the new agreement it had been seeking since October 2012.

It is especially concerned to ensure there is no interruption to Windsor’s water supply, which at a minimum two million gallons per day would have major implications for the Water & Sewerage Corporation and its New Providence customers.