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2016 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
FOR THE YEARS ENDED DECEMBER 31,
(IN U.S. DOLLARS)
Total revenues
Net income
Income from operations
(cid:49)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:430)(cid:82)(cid:90)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)
Total assets
Total stockholders’ equity
Dividends declared per share
Basic earnings per share
Diluted earnings per share
Net income as a % of total revenues
Income from operations as a % of total revenues
(cid:49)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:430)(cid:82)(cid:90)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:8)
of total revenues
TRADING IN SHARES
Shares outstanding at year end
Low closing share price during year
High closing share price during year
Closing share price at year end
2016
57,875,707
3,960,501
1,823,302
7,823,352
163,604,528
154,105,372
0.30
0.27
0.27
6.84
3.15
13.52
%
%
%
2016
14,871,664
10.10
14.62
10.85
$
$
$
$
$
$
$
$
$
$
$
$
2015
57,116,202
7,518,701
8,468,064
17,319,786
161,616,698
148,195,105
0.30
0.51
0.51
13.16
14.83
30.32
%
%
%
2015
14,781,201
9.78
13.50
12.24
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2014
65,559,078
6,265,358
6,461,059
18,184,861
160,459,831
144,082,664
0.30
0.43
0.42
9.56
9.86
27.74
%
%
%
CONSOLIDATED WATER (THE “COMPANY”) WAS INCORPORATED AS CAYMAN
WATER IN 1973. OVER THE YEARS, WE HAVE BENEFITED FROM THE EXPLOSIVE
GROWTH IN THE CAYMAN ISLANDS, GROWTH THAT HAS BEEN FACILITATED
BY THE WATER WE HAVE PROVIDED. CONSOLIDATED WATER OPERATES IN
THE CAYMAN ISLANDS AS CAYMAN WATER COMPANY LIMITED AND OCEAN
CONVERSION (CAYMAN) LIMITED, WHICH TOGETHER OPERATE SEVEN PLANTS
TO PRODUCE SUBSTANTIALLY ALL OF THE PIPED DRINKING WATER ON GRAND
CAYMAN.
ABOUT THE COMPANY
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The 1990 license introduced a new business model which is now used throughout the Company’s
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In July 2000, Consolidated Water acquired Consolidated Water (Belize) Limited, which supplies up
to 550,000 gallons of water per day to the operator of the distribution system on Ambergris Caye,
Belize, Central America under an exclusive supply agreement that expires in 2026.
In February 2003, through the acquisition of four companies from multiple investors, Consolidated
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Cayman Islands and The Bahamas.
The Company owns 50% of the voting shares and has engineering and management services
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Through private transactions and a tender offer, Consolidated Water acquired approximately
91% of the issued shares of Consolidated Water (Bahamas) Ltd., which produces and supplies
water to the Water and Sewerage Corporation of The Bahamas to distribute to Nassau and the
remainder of New Providence Island. In 2011, the Company completed the expansion of its Blue
Hills plant in the Bahamas to make it the world’s largest desalination plant utilizing diesel-driven
high pressure pumps to economically produce water without relying on the local electrical grid.
In February 2016, the Company acquired 51% of Aerex Industries, Inc., an original equipment
manufacturer and service provider of a wide range of products and services applicable to
desalination, municipal water treatment and industrial water and wastewater treatment. Aerex is
located in Fort Pierce, Florida, and its products include reverse osmosis desalination equipment,
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fabricated components.
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the reduction of energy consumption (driven by the necessity of operating in high energy cost
locations) result in a low environmental footprint for its plants. The Company is proud of its
operating record in environmentally sensitive and high energy cost locations as these factors are
often cited as barriers to desalination in potential new markets.
Dear Shareholders,
The efforts and accomplishments of our management and board in 2016 positioned your company for
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the following:
• The acquisition in February 2016 of a 51% ownership interest in Aerex Industries, Inc., (“Aerex”) a highly
(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:429)(cid:72)(cid:71)(cid:3)(cid:73)(cid:68)(cid:69)(cid:85)(cid:76)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:87)(cid:85)(cid:72)(cid:68)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:72)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:80)(cid:68)(cid:81)(cid:92)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)
a key component manufacturer for a number of our seawater reverse osmosis plants. This acquisition
should improve our competitive position for potential future contracts.
• The continued development of our partnership with the Water and Sewerage Corporation of The
Bahamas by (i) contracting for a post treatment system for our Blue Hills plant to improve water
quality; and (ii) obtaining a new 15 year water supply contract for our Windsor plant to replace the
previous contract that expired in 2015.
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(cid:38)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:37)(cid:57)(cid:44)(cid:12)(cid:3)(cid:47)(cid:87)(cid:71)(cid:17)(cid:3)(cid:11)(cid:395)(cid:50)(cid:38)(cid:16)(cid:37)(cid:57)(cid:44)(cid:396)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:85)(cid:76)(cid:87)(cid:76)(cid:86)(cid:75)(cid:3)(cid:57)(cid:76)(cid:85)(cid:74)(cid:76)(cid:81)(cid:3)(cid:44)(cid:86)(cid:79)(cid:68)(cid:81)(cid:71)(cid:86)(cid:3)(cid:74)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)
(cid:50)(cid:38)(cid:16)(cid:37)(cid:57)(cid:44)(cid:393)(cid:86)(cid:3)(cid:37)(cid:68)(cid:85)(cid:3)(cid:37)(cid:68)(cid:92)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:17)
(cid:400)(cid:3) (cid:55)(cid:75)(cid:72)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:71)(cid:3) (cid:71)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3) (cid:87)(cid:82)(cid:3) (cid:70)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3) (cid:68)(cid:3) (cid:20)(cid:19)(cid:19)(cid:3) (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3) (cid:74)(cid:68)(cid:79)(cid:79)(cid:82)(cid:81)(cid:3) (cid:83)(cid:72)(cid:85)(cid:3) (cid:71)(cid:68)(cid:92)(cid:3)
(cid:86)(cid:72)(cid:68)(cid:90)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:85)(cid:86)(cid:72)(cid:3)(cid:82)(cid:86)(cid:80)(cid:82)(cid:86)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:86)(cid:68)(cid:79)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:81)(cid:82)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:81)(cid:3)(cid:37)(cid:68)(cid:77)(cid:68)(cid:3)(cid:38)(cid:68)(cid:79)(cid:76)(cid:73)(cid:82)(cid:85)(cid:81)(cid:76)(cid:68)(cid:15)(cid:3)(cid:48)(cid:72)(cid:91)(cid:76)(cid:70)(cid:82)(cid:17)(cid:3)
Net income attributable to our common stockholders for 2016 was $3,960,501, ($0.27 per share on a fully-
diluted basis), as compared to $7,518,701 ($0.51 per share on a fully-diluted basis) for 2015. The lower net
income in 2016 was largely attributable to non-cash impairment losses.
Total revenues for 2016 and 2015 were $57,875,707 and $57,116,202, respectively. Higher revenues for the
retail and services segments in 2016 served to offset a decrease in the bulk segment revenues.
Net Income
($ in millions)
(cid:26)(cid:17)(cid:24)
(cid:25)(cid:17)(cid:22)
Total Revenue
($ in millions)
(cid:25)(cid:24)(cid:17)(cid:25)
(cid:24)(cid:26)(cid:17)(cid:28)
(cid:24)(cid:26)(cid:17)(cid:20)
(cid:23)(cid:17)(cid:19)
6
1
0
2
(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:36)(cid:49)(cid:49)(cid:56)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:3)(cid:3)(cid:29)(cid:3)(cid:3)2
5
1
0
2
4
1
0
2
6
1
0
2
5
1
0
2
4
1
0
2
Revenues generated by our retail water operations
were $23,505,619 in 2016 as compared to $23,254,757
in 2015. The volume of water sold by our Cayman
Water retail operations increased by 12% from 2015
to 2016 which served to offset lower energy costs,
which reduced the energy component of the rates
charged to Cayman Water customers by $818,771
from 2015 and a reduction in the Cayman Water
(cid:69)(cid:68)(cid:86)(cid:72)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:429)(cid:85)(cid:86)(cid:87)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:82)(cid:73)(cid:3)(cid:23)(cid:17)(cid:23)(cid:8)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)
2015.
Revenues
from our bulk water sales were
$29,647,034 and $31,854,255 for 2016 and 2015,
respectively. The decrease
in bulk revenues
from 2015 to 2016 is attributable to Bahamas
and Cayman operations, which generated
approximately $1,507,000 and $893,000 less in
revenues, respectively, in 2016 than in 2015 due to
(cid:68)(cid:3) (cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:429)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3) (cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3) (cid:76)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:71)(cid:76)(cid:72)(cid:86)(cid:72)(cid:79)(cid:3) (cid:73)(cid:88)(cid:72)(cid:79)(cid:3)
and electricity from 2015 to 2016, which reduced
the pass-through energy component of our bulk
water rates.
(cid:50)(cid:88)(cid:85)(cid:3) (cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3) (cid:86)(cid:72)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3) (cid:90)(cid:72)(cid:85)(cid:72)(cid:3) (cid:7)(cid:23)(cid:15)(cid:26)(cid:21)(cid:22)(cid:15)(cid:19)(cid:24)(cid:23)(cid:3)
and $2,007,190 for 2016 and 2015, respectively.
Services revenues increased in 2016 due to the
addition of approximately $3.9 million of revenues
resulting from our acquisition of a 51% interest in
Aerex in February 2016. The increase in services
revenues in 2016 from the addition of Aerex was
offset by a decrease in revenues recognized on
(cid:85)(cid:72)(cid:73)(cid:88)(cid:85)(cid:69)(cid:76)(cid:86)(cid:75)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)
(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3) (cid:70)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)
performed for the Water Authority-Cayman. Such
revenues totaled $320,296 in 2016 as compared to
$1,478,843 in 2015.
(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:74)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:429)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:7)(cid:21)(cid:23)(cid:15)(cid:21)(cid:24)(cid:19)(cid:15)(cid:27)(cid:27)(cid:25)(cid:3)(cid:82)(cid:85)(cid:3)
42% of total revenues, as compared to $23,308,220
(cid:82)(cid:85)(cid:3) (cid:23)(cid:20)(cid:8)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3) (cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:15)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:21)(cid:19)(cid:20)(cid:24)(cid:17)(cid:3) (cid:42)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3) (cid:83)(cid:85)(cid:82)(cid:429)(cid:87)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3)
the retail and services segments increased from 2015
(cid:87)(cid:82)(cid:3) (cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3) (cid:90)(cid:75)(cid:76)(cid:79)(cid:72)(cid:3) (cid:69)(cid:88)(cid:79)(cid:78)(cid:3) (cid:86)(cid:72)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:74)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3) (cid:83)(cid:85)(cid:82)(cid:429)(cid:87)(cid:3) (cid:85)(cid:72)(cid:80)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)
relatively consistent.
(cid:50)(cid:88)(cid:85)(cid:3) (cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3) (cid:9)(cid:3) (cid:68)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3) (cid:11)(cid:395)(cid:42)(cid:9)(cid:36)(cid:396)(cid:12)(cid:3) (cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)
on a consolidated basis were $18,677,584 and
$14,840,156 for 2016 and 2015, respectively. The
(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3) (cid:76)(cid:81)(cid:3) (cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:42)(cid:9)(cid:36)(cid:3) (cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3) (cid:73)(cid:85)(cid:82)(cid:80)(cid:3) (cid:21)(cid:19)(cid:20)(cid:24)(cid:3)
to 2016 is primarily attributable to the addition of
approximately $2,309,000 in expenses for Aerex
and an increase of approximately $1,036,000 in the
(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3) (cid:76)(cid:81)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3) (cid:70)(cid:82)(cid:81)(cid:81)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)
(cid:71)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:48)(cid:72)(cid:91)(cid:76)(cid:70)(cid:82)(cid:17)
We recorded an impairment loss of $2 million in 2016
to reduce the carrying value of our Bali subsidiary’s
long-lived assets to their estimated fair value. We
also recorded an impairment loss of $1,750,000 in
2016 to reduce the carrying value of the goodwill
associated with the Aerex acquisition.
(cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:11)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:12)(cid:15)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:7)(cid:23)(cid:20)(cid:26)(cid:15)(cid:28)(cid:24)(cid:23)(cid:3)(cid:68)(cid:86)(cid:3)
compared to ($542,570) for 2015. The primary reasons
Stockholders’ Equity
At Year End
($ in millions)
(cid:20)(cid:24)(cid:23)(cid:17)(cid:20)
(cid:20)(cid:23)(cid:27)(cid:17)(cid:21)
(cid:20)(cid:23)(cid:23)(cid:17)(cid:20)
6
1
0
2
5
1
0
2
4
1
0
2
Diluted Earnings
Per Share
(in $)
(cid:19)(cid:17)(cid:24)(cid:20)
(cid:19)(cid:17)(cid:23)(cid:21)
(cid:19)(cid:17)(cid:21)(cid:26)
6
1
0
2
5
1
0
2
4
1
0
2
(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:36)(cid:49)(cid:49)(cid:56)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:3)(cid:3)(cid:29)(cid:3)(cid:3)3
(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:430)(cid:88)(cid:70)(cid:87)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:82)(cid:81)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)
of operations were $271,000 relating to the gain
(cid:82)(cid:81)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:429)(cid:91)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)
currency gains relating to our Bali subsidiary of
approximately $201,000 in 2016, as compared
to foreign currency
losses of approximately
($346,000) in 2015.
In February 2016, we acquired 51% of Aerex, an
original equipment manufacturer and service
provider of a wide range of products and services
applicable to the municipal and industrial water
(cid:87)(cid:85)(cid:72)(cid:68)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)
(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3) (cid:36)(cid:72)(cid:85)(cid:72)(cid:91)(cid:393)(cid:86)(cid:3) (cid:21)(cid:19)(cid:20)(cid:25)(cid:3) (cid:429)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
performance was below our expectations due to
a delay in orders from a large customer. However
this delay had nothing to do with Aerex’s quality,
pricing or customer service and this customer
has recently started purchasing again from Aerex.
Consequently, we expect Aerex’s performance
in 2017 to improve as compared to 2016. We
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outstanding complement to our business model
and enhance our shareholder value in the coming
years.
As our longer term shareholders are well aware,
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operation and minority ownership of a 100
million gallon per day seawater reverse osmosis
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system. Based upon our initiatives and efforts and
in recognition of the pressing need for a new water
supply for its constituents, in November 2015 the
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(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:79)(cid:3)(cid:87)(cid:72)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:51)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:17)(cid:3)(cid:3)
In June 2016, the State designated our consortium,
which was led by NSC, as the winner for the
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company owned by NSC, Aguas de Rosarito S.A.P.I.
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was executed between AdR, the State and
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PPA becomes effective (including the raising of
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believe we are well on the way to meeting those
conditions that apply to us and hope to complete
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construction by the third quarter of 2017. If both
phases of its construction are completed, AdR’s
plant will be the largest desalination facility in the
Western Hemisphere.
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of the water supply agreement for its Bar Bay
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culminating negotiations we and our partners in
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latter half of 2016. Although the extension of this
agreement reduced the base water rate charged
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Islands, such extension provides long term viability
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business partners, customers, employees, suppliers
and other stakeholders for their contributions to
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have the personnel and resources to more than
meet the challenges of our increasingly dynamic
business environment and grow the value of your
investment in our company.
All of us look forward to an exciting and highly
successful future for Consolidated Water.
Yours truly,
Wilmer F. Pergande
Chairman of the Board
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Grand
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Cayman
CayCayCayCayCayCayaymanmmanmananananmyyyyy
Grand Cayman
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centers
in the world with over $1.8 trillion
on deposit in more than 250 banks. A British
(cid:50)(cid:89)(cid:72)(cid:85)(cid:86)(cid:72)(cid:68)(cid:86)(cid:3) (cid:55)(cid:72)(cid:85)(cid:85)(cid:76)(cid:87)(cid:82)(cid:85)(cid:92)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:68)(cid:92)(cid:80)(cid:68)(cid:81)(cid:3)
(cid:44)(cid:86)(cid:79)(cid:68)(cid:81)(cid:71)(cid:86)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3)
comprised of three islands: Grand Cayman, the
country’s capital and commercial center with
approximately 56,000 residents, and the more
sparsely populated “Sister Islands” of Cayman
Brac and Little Cayman, located 80 miles to the
northeast.
The other “economic engine” of the islands is
tourism, which in 2015 attracted approximately
2.1 million visitors to Cayman’s beautiful beaches,
botanical gardens and wildlife, which include
iguana, an endangered species of
the blue
lizard endemic to Grand Cayman. Consolidated
(cid:58)(cid:68)(cid:87)(cid:72)(cid:85)(cid:393)(cid:86)(cid:3) (cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3) (cid:82)(cid:73)(cid:429)(cid:70)(cid:72)(cid:86)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3) (cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3)
(cid:73)(cid:68)(cid:80)(cid:82)(cid:88)(cid:86)(cid:3)(cid:54)(cid:72)(cid:89)(cid:72)(cid:81)(cid:3)(cid:48)(cid:76)(cid:79)(cid:72)(cid:3)(cid:37)(cid:72)(cid:68)(cid:70)(cid:75)(cid:15)(cid:3)(cid:90)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:393)(cid:86)(cid:3)
subsidiary, Cayman Water, has been providing
drinking water since 1973 and operates one of the
two water utilities on Grand Cayman Island.
Consolidated Water’s other Cayman subsidiary,
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water to the other utility on Grand Cayman, the
Water Authority-Cayman.
(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:36)(cid:49)(cid:49)(cid:56)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:3)(cid:3)(cid:29)(cid:3)(cid:3)5
Nassau
Bimini
Nassau
18th-century
NASSAU, the political, tourist and commercial capital
of the Commonwealth of The Bahamas, offers visitors
amenities ranging from modern resorts and gambling
(cid:70)(cid:68)(cid:86)(cid:76)(cid:81)(cid:82)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:76)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:86)(cid:84)(cid:88)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:87)(cid:82)(cid:85)(cid:76)(cid:68)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:70)(cid:68)(cid:87)(cid:75)(cid:72)(cid:71)(cid:85)(cid:68)(cid:79)(cid:86)(cid:3)
and
fortresses. The world-famous
Atlantis Resort on Paradise Island draws tourists to
its luxury hotels, casino and expansive beachfront.
Consolidated Water (Bahamas) Limited provides
drinking water in bulk to the Water and Sewerage
Corporation of The Bahamas.
The Biminis
(cid:55)(cid:43)(cid:40)(cid:3) (cid:37)(cid:44)(cid:48)(cid:44)(cid:49)(cid:44)(cid:54)(cid:15)(cid:3)
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(cid:48)(cid:76)(cid:68)(cid:80)(cid:76)(cid:15)(cid:3) (cid:41)(cid:79)(cid:82)(cid:85)(cid:76)(cid:71)(cid:68)(cid:15)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3) (cid:83)(cid:68)(cid:85)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:68)(cid:81)(cid:3) (cid:76)(cid:86)(cid:79)(cid:68)(cid:81)(cid:71)(cid:3) (cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3) (cid:76)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3)
Commonwealth of The Bahamas. Known for their
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been dubbed the “Game Fishing Capital of the World.”
The Biminis are actually two islands, separated by
(cid:68)(cid:3) (cid:81)(cid:68)(cid:85)(cid:85)(cid:82)(cid:90)(cid:3) (cid:70)(cid:75)(cid:68)(cid:81)(cid:81)(cid:72)(cid:79)(cid:15)(cid:3) (cid:68)(cid:81)(cid:71)(cid:15)(cid:3) (cid:76)(cid:81)(cid:3) (cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:87)(cid:82)(cid:3) (cid:86)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3) (cid:429)(cid:86)(cid:75)(cid:76)(cid:81)(cid:74)(cid:3)
(popularized by Ernest Hemingway’s affection for
angling, as well as his hanging out at a watering hole
called “The Compleat Angler”) offer visitors excellent
scuba diving and yachting activities. Consolidated
Water provides drinking water to the Bimini Sands
Resort, a full-service marina and condominium
development on South Bimini.
(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:36)(cid:49)(cid:49)(cid:56)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:3)(cid:3)(cid:29)(cid:3)(cid:3)6
Ambergris
AmAmbe
bergris
Caye
Caye
Jost
Van
Dyke
Tortola
Ambergris Caye
(cid:37)(cid:72)(cid:68)(cid:88)(cid:87)(cid:76)(cid:73)(cid:88)(cid:79)(cid:3) (cid:36)(cid:48)(cid:37)(cid:40)(cid:53)(cid:42)(cid:53)(cid:44)(cid:54)(cid:3) (cid:38)(cid:36)(cid:60)(cid:40)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:86)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)
1,000 islands in the northern-most waters of Belize,
(cid:38)(cid:72)(cid:81)(cid:87)(cid:85)(cid:68)(cid:79)(cid:3) (cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)(cid:15)(cid:3) (cid:79)(cid:76)(cid:72)(cid:86)(cid:3) (cid:77)(cid:88)(cid:86)(cid:87)(cid:3) (cid:90)(cid:72)(cid:86)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:37)(cid:72)(cid:79)(cid:76)(cid:93)(cid:72)(cid:3) (cid:37)(cid:68)(cid:85)(cid:85)(cid:76)(cid:72)(cid:85)(cid:3)
Reef, which is the second longest barrier reef in the
world. Ambergris Caye attracts tourists from around
the world—many of them scuba divers or sport
(cid:429)(cid:86)(cid:75)(cid:72)(cid:85)(cid:80)(cid:72)(cid:81)(cid:3) (cid:90)(cid:75)(cid:82)(cid:3) (cid:70)(cid:82)(cid:80)(cid:72)(cid:3) (cid:87)(cid:82)(cid:3) (cid:72)(cid:91)(cid:83)(cid:79)(cid:82)(cid:85)(cid:72)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:70)(cid:85)(cid:92)(cid:86)(cid:87)(cid:68)(cid:79)(cid:3) (cid:70)(cid:79)(cid:72)(cid:68)(cid:85)(cid:3)
waters surrounding the island. Consolidated Water’s
wholly-owned subsidiary, Consolidated Water (Belize)
Limited, provides drinking water to the public water
utility on Ambergris Caye.
British Virgin Islands
(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:58)(cid:68)(cid:87)(cid:72)(cid:85)(cid:393)(cid:86)(cid:3)(cid:68)(cid:73)(cid:429)(cid:79)(cid:76)(cid:68)(cid:87)(cid:72)(cid:15)(cid:3)(cid:50)(cid:70)(cid:72)(cid:68)(cid:81)(cid:3)(cid:38)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:37)(cid:57)(cid:44)(cid:12)(cid:3)
(cid:47)(cid:76)(cid:80)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3) (cid:11)(cid:395)(cid:50)(cid:38)(cid:16)(cid:37)(cid:57)(cid:44)(cid:396)(cid:12)(cid:15)(cid:3) (cid:86)(cid:88)(cid:83)(cid:83)(cid:79)(cid:76)(cid:72)(cid:86)(cid:3) (cid:71)(cid:85)(cid:76)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3) (cid:90)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3) (cid:76)(cid:81)(cid:3) (cid:69)(cid:88)(cid:79)(cid:78)(cid:3)
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(cid:55)(cid:82)(cid:85)(cid:87)(cid:82)(cid:79)(cid:68)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:80)(cid:82)(cid:86)(cid:87)(cid:3) (cid:83)(cid:82)(cid:83)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:37)(cid:85)(cid:76)(cid:87)(cid:76)(cid:86)(cid:75)(cid:3) (cid:57)(cid:76)(cid:85)(cid:74)(cid:76)(cid:81)(cid:3)
Islands, is located in the northeastern Caribbean Sea,
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destination for yachtsmen as well as home to several
large yacht-chartering businesses.
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(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3) (cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:76)(cid:86)(cid:79)(cid:68)(cid:81)(cid:71)(cid:3) (cid:82)(cid:73)(cid:3) (cid:45)(cid:82)(cid:86)(cid:87)(cid:3) (cid:57)(cid:68)(cid:81)(cid:3) (cid:39)(cid:92)(cid:78)(cid:72)(cid:15)(cid:3) (cid:78)(cid:81)(cid:82)(cid:90)(cid:81)(cid:3) (cid:68)(cid:86)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3)
“barefoot island” because of its casual lifestyle and
pristine beaches.
(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:36)(cid:49)(cid:49)(cid:56)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:3)(cid:3)(cid:29)(cid:3)(cid:3)7
Bali
Bali
ForFororttForFoor
Fort
PPieerce
PPiPierce
Pierce
Florida
Consolidated Water owns 51% of Aerex Industries,
located in Fort Pierce, Florida. Aerex is an original
equipment manufacturer and service provider of a
wide range of products and services applicable to
municipal water treatment and industrial water and
wastewater treatment. Its products include membrane
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systems, vessels and custom fabricated components.
(cid:36)(cid:72)(cid:85)(cid:72)(cid:91)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:81)(cid:3)(cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)(cid:81)(cid:3)(cid:54)(cid:82)(cid:70)(cid:76)(cid:72)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:72)(cid:70)(cid:75)(cid:68)(cid:81)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:40)(cid:81)(cid:74)(cid:76)(cid:81)(cid:72)(cid:72)(cid:85)(cid:86)(cid:3)
(cid:11)(cid:36)(cid:54)(cid:48)(cid:40)(cid:12)(cid:3) (cid:70)(cid:82)(cid:71)(cid:72)(cid:3) (cid:68)(cid:70)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3) (cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:85)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:80)(cid:68)(cid:76)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:86)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:3) (cid:36)(cid:54)(cid:48)(cid:40)(cid:3) (cid:56)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:54)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:49)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3) (cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3) (cid:49)(cid:37)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:53)(cid:3)
(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:429)(cid:70)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:36)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)
Bali
BALI is an Indonesian island with a population of more
than three million located between Java to the west
and Lombok to the east. Bali is one of the world’s
premier island tourist destinations, home to numerous
(cid:73)(cid:82)(cid:88)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:429)(cid:89)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:85)(cid:3)(cid:85)(cid:72)(cid:86)(cid:82)(cid:85)(cid:87)(cid:86)(cid:17)(cid:3)(cid:37)(cid:68)(cid:79)(cid:76)(cid:3)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:81)(cid:82)(cid:90)(cid:81)(cid:72)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:79)(cid:92)(cid:3)
developed arts, beautiful mountain and coastal areas,
diverse tourist attractions, excellent international
and local restaurants, and the friendliness of the local
people. Consolidated Water Bali has constructed and
is operating a desalination plant that provides fresh
water to resorts in the Nusa Dua tourist area of the
island.
(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:36)(cid:49)(cid:49)(cid:56)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:3)(cid:3)(cid:29)(cid:3)(cid:3)8
2016 FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
(cid:2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
□
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from
to
Commission File Number: 0-25248
CONSOLIDATED WATER CO. LTD.
(Exact name of Registrant as specified in its charter)
CAYMAN ISLANDS
(State or other jurisdiction of
incorporation or organization)
Regatta Office Park
Windward Three, 4th Floor, West Bay Road
P.O. Box 1114
Grand Cayman, KY1-1102, Cayman Islands
(Address of principal executive offices)
98-0619652
(I.R.S. Employer
Identification No.)
N/A
(Zip Code)
Registrant’s Telephone number, including area code: (345) 945-4277
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of each exchange on which registered:
Common Stock, $0.60 Par Value
The NASDAQ Stock Market LLC (NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:4) No (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:2)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:2) No (cid:4)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:2) No (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this 10-K or any amendments to this Form 10-K. [Not Applicable]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definition of ‘‘large accelerated filer’’, ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer □
Accelerated filer (cid:2) Non-accelerated filer □
Smaller reporting company □
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:4) No (cid:2)
The aggregate market value of common stock held by non-affiliates of the registrant, based on the closing sales price for the
registrant’s common shares, as reported on the NASDAQ Global Select Market on June 30, 2016, was $187,204,652.
As of March 10, 2017, 14,871,664 shares of the registrant’s common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s Proxy Statement related to its Annual Shareholders’ Meeting will be subsequently filed with the Securities
and Exchange Commission as to Part III of this Form 10-K.
Section
Description
Page
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B.
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Item 4.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A.
Quantitative and Qualitative Disclosure about Market Risk . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . .
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13.
Item 14.
Certain Relationships and Related Transactions, and Director Independence . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15.
Exhibits, Financial Statement Schedules
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
2
2
16
26
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30
31
31
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54
56
114
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118
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124
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995,
limited to, statements regarding our future
including but not
revenues, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking
statements can be identified by use of the words or phrases ‘‘will,’’ ‘‘will likely result,’’ ‘‘are expected to,’’
‘‘will continue,’’ ‘‘estimate,’’ ‘‘project,’’ ‘‘potential,’’ ‘‘believe,’’ ‘‘plan,’’ ‘‘anticipate,’’ ‘‘expect,’’ ‘‘intend,’’ or
similar expressions and variations of such words. Statements that are not historical facts are based on our
current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the
industry and markets related to our business.
The forward-looking statements contained in this report are not guarantees of future performance and involve
certain risks, uncertainties and assumptions which are difficult to predict. Actual outcomes and results may
differ materially from what is expressed in such forward-looking statements. Important factors which may
affect these actual outcomes and results include, without limitation:
•
•
•
•
•
•
tourism and weather conditions in the areas we serve;
the economies of the U.S. and other countries in which we conduct business;
our relationships with the governments we serve;
regulatory matters, including resolution of the negotiations for the renewal of our retail license on
Grand Cayman;
our ability to successfully enter new markets, including Mexico and the United States; and
other factors, including those ‘‘Risk Factors’’ set forth under Part I, Item 1A. ‘‘Risk Factors’’ in this
Annual Report.
The forward-looking statements in this Annual Report speak as of its date. We expressly disclaim any
obligation or undertaking to update or revise any forward-looking statement contained in this Annual Report
to reflect any change in our expectations with regard thereto or any change in events, conditions or
circumstances on which any forward-looking statement is based, except as may be required by law.
References herein to ‘‘we,’’ ‘‘our,’’ ‘‘ours’’ and ‘‘us’’ refer to Consolidated Water Co. Ltd. and its subsidiaries.
Note Regarding Currency and Exchange Rates
Unless otherwise indicated, all references to ‘‘$’’ or ‘‘US$’’ are to United States dollars.
The exchange rate for conversion of Cayman Island dollars (CI$) into US$, as determined by the Cayman
Islands Monetary Authority, has been fixed since April 1974 at US$1.20 per CI$1.00.
The exchange rate for conversion of Belize dollars (BZE$) into US$, as determined by the Central Bank of
Belize, has been fixed since 1976 at US $0.50 per BZE$1.00.
The exchange rate for conversion of Bahamas dollars (B$) into US$, as determined by the Central Bank of
The Bahamas, has been fixed since 1973 at US$1.00 per B$1.00.
The official currency of the British Virgin Islands is the United States dollar.
Our Netherlands subsidiary conducts business in US$ and euros, our Indonesian subsidiary conducts business
in US$ and Indonesian rupiahs, and our Mexico subsidiary conducts business in US$ and Mexican pesos. The
exchange rates for conversion of euros, rupiahs and Mexican pesos into US$ vary based upon market
conditions.
1
PART I
ITEM 1. BUSINESS
Overview
We develop and operate seawater desalination plants (that utilize reverse osmosis technology) and water
distribution systems in areas where naturally occurring supplies of potable water are scarce or nonexistent.
Through our subsidiaries and affiliates, we provide the following services to our customers in the Cayman
Islands, The Bahamas, Belize, the British Virgin Islands and Indonesia:
•
•
•
•
Retail Water Operations. We produce and supply water
including residential,
commercial and government customers in the Cayman Islands under an exclusive retail license
issued by the Cayman Islands government to provide water in two of the three most populated and
rapidly developing areas on Grand Cayman Island. We also have a desalination plant
in Bali,
Indonesia that sells water to resort and residential properties. In 2016, our retail water operations
generated approximately 41% of our consolidated revenues. Substantially all of our retail revenues
were generated by our Grand Cayman operations.
to end-users,
Bulk Water Operations. We produce and supply water to government-owned distributors in the
In 2016, our bulk water operations generated
Cayman Islands, Belize and the Bahamas.
approximately 51% of our consolidated revenues.
Services Operations. We provide design, engineering, construction and management services for
desalination plants and projects. We manufacture and service a wide range of water-related products
and provide design, engineering, construction, management and other services for commercial and
municipal water production, water supply and treatment, and industrial water and wastewater
treatment.
In 2016, our services operations generated approximately 8% of our consolidated
revenues.
Affıliate Operations. We own 50% of the voting rights and 43.53% of the equity rights of Ocean
Conversion (BVI) Ltd., which produces and supplies bulk water to the British Virgin Islands Water
and Sewerage Department.
As of December 31, 2016, the number of plants we, or our affiliates, operated in each country and the
production capacities of these plants are as follows:
(1) In millions of gallons per day.
Location
Cayman Islands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bahamas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Belize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
British Virgin Islands
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bali
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Plants
6
3
1
2
1
13
Capacity(1)
8.9
15.2
0.6
0.8
0.8
26.3
(1)
In millions of gallons per day.
2
Strategy
Our strategy is to provide water services in areas where (i) the supply of potable water is scarce and (ii) the
production of potable water by reverse osmosis desalination is, or will be, economically viable for customers
in those areas. We also seek to complement this primary strategy with other products and services relevant to
desalination, water production and water treatment. We focus primarily on markets with the following
characteristics:
•
•
•
•
inadequate sources of potable water.
favorable regulatory and tax environments.
a large proportion of tourist properties (which historically have generated higher volume sales than
residential properties).
growing populations and economies.
We believe that our potential market includes any location with a demand for, but a limited supply of, potable
water and that has access to seawater. The desalination of seawater is the most widely used process for
producing potable water
in many locations,
desalination is the only commercially viable means to expand the existing water supply. We believe that our
experience in the development and operation of reverse osmosis desalination plants provides us with the
capabilities to successfully expand our operations beyond our existing markets and we expect to do so in the
coming years.
in areas with an insufficient natural supply.
In addition,
Key elements of our strategy include:
•
•
•
Expanding our existing operations in the Cayman Islands, The Bahamas and Belize. We plan
to continue to seek new water supply agreements and licenses, renewing our existing supply
agreements, and increasing our production levels in our existing markets.
Penetrating new markets. We plan to continue to seek opportunities to profitably expand our
operations into new markets that have significant unfulfilled demands for potable water. These
markets include the rest of the Caribbean, Mexico, Asia, the United States and any other areas
where we can provide water on a profitable basis and in favorable regulatory environments. We may
pursue these opportunities either on our own or through joint ventures and strategic alliances.
Broadening our existing and future operations with complementary products and services. We
consider opportunities to leverage our water-related expertise to enter complementary industries as viable
complements to our existing business and will pursue such opportunities as they arise. We may pursue these
opportunities either on our own or through joint ventures, strategic alliances and/or acquisitions. Consistent
with this strategy, in February 2016, we acquired 51% of the ownership of Aerex Industries, Inc., a
U.S. original equipment manufacturer and service provider of a wide range of products and services
applicable to desalination as well as commercial and municipal water production, water supply and
treatment, and industrial water and wastewater treatment.
3
Our Company
We conduct our operations in the Cayman Islands, The Bahamas, Belize, the British Virgin Islands, Mexico,
the United States and Indonesia through our subsidiaries and our affiliate, as detailed below.
Consolidated Water Co. Ltd.
Retail Segment
Bulk Segment
100%
95%
100%
90.9%
100%
100%
Cayman Water
Company Limited
(Cayman Islands)
Consolidated Water
(Asia) Pte. Limited
(Singapore)
Aquilex, Inc.
(United States)
Consolidated Water
(Bahamas) Limited
(Bahamas)
Consolidated Water
(Belize) Limited
(Belize)
Ocean Conversion
(Cayman) Limited
(Cayman Islands)
43.5%
Ocean Conversion
(BVI) Ltd.
(British Virgin Islands)
95%
PT Consolidated
Water Bali
(Indonesia)
Services Segment
100%
100%
100%
DesalCo Limited
(Cayman Islands)
Consolidated Water
Cooperatief, U.A.
(Netherlands)
Consolidated Water
U.S. Holdings, Inc.
(United States)
99.9%
51%
N.S.C. Agua S.A. de C.V.
(Mexico)
Aerex Industries Inc.
(United States)
99.6%
Aguas de Rosarito
S.A.P.I de C.V.
(Mexico)
Retail segment
Cayman Water Company Limited (‘‘Cayman Water’’). Cayman Water operates under an exclusive retail
license granted by the Cayman Islands government to provide water to customers within a prescribed service
area on Grand Cayman that includes the Seven Mile Beach and West Bay areas, two of the three most
populated areas in the Cayman Islands. Cayman Water owns and operates three desalination plants and is the
only non-government owned public water utility on Grand Cayman.
Consolidated Water (Asia) Pte. Limited (‘‘CW-Asia’’) and PT Consolidated Water Bali (‘‘CW-Bali’’). We
own 95% of CW-Asia, a Singapore company, which owns 95% of CW-Bali, an Indonesian company. CW-Bali
owns and operates a desalination plant with a capacity of 790,000 gallons per day that provides water to
resort and residential properties in the Nusa Dua area of Bali, Indonesia.
Aquilex, Inc. (‘‘Aquilex’’). Aquilex, a United States company, provides financial, engineering, information
technology, administrative and supply chain management support services to our subsidiaries and affiliate. We
include Aquilex in our retail segment for financial reporting purposes; however it provides services to all three
of our business segments.
Bulk segment
Consolidated Water (Bahamas) Limited (‘‘CW-Bahamas’’). We own approximately 90.9% equity interest in
CW-Bahamas, which provides bulk water under long-term contracts to the Water and Sewerage Corporation of
The Bahamas, a government agency. CW-Bahamas owns and operates our largest desalination plant and two
other desalination plants.
4
Consolidated Water (Belize) Limited (‘‘CW-Belize’’). CW-Belize owns and operates one desalination plant
and has an exclusive contract to provide bulk water to Belize Water Services Ltd., a water distributor that
serves residential, commercial and tourist properties in Ambergris Caye, Belize.
Ocean Conversion (Cayman) Limited (‘‘OC-Cayman’’). OC-Cayman provides bulk water under licenses and
agreements to the Water Authority-Cayman, a government-owned utility and regulatory agency, which
distributes the water to properties located outside our exclusive retail license service area in Grand Cayman.
OC-Cayman operates three desalination plants owned by the Water Authority-Cayman.
Services segment
DesalCo Limited (‘‘DesalCo’’). A Cayman Islands company, DesalCo provides management, engineering and
construction services for desalination projects as well as management and engineering services relating to
municipal water distribution and treatment.
Consolidated Water Cooperatief, U.A. (‘‘CW-Cooperatief’’), N.S.C. Agua, S.A. de C.V. (‘‘NSC’’) and Aguas de
Rosarito S.A.P.I. de C.V. (‘‘AdR’’). CW-Cooperatief is a wholly-owned Netherlands subsidiary organized in
2010. CW-Cooperatief owns a 99.9% interest in NSC, a Mexican company. NSC was formed to pursue a
project encompassing the design, construction, ownership and operation of a 100 million gallon per day
seawater
to be located in northern Baja California, Mexico and
accompanying pipeline to deliver water to the Mexican potable water system. This project is currently in the
development stage and NSC does not generate any operating revenues. In August 2016, NSC and another
party incorporated AdR, a special purpose Mexican company that will ultimately own the Baja California
project if it proceeds. NSC presently owns 99.6% of AdR.
reverse osmosis desalination plant
Inc.
(‘‘CW-Holdings’’) and Aerex Industries,
(‘‘Aerex’’). On
Consolidated Water U.S. Holdings,
February 11, 2016, we purchased, through a newly formed wholly-owned U.S. subsidiary (CW-Holdings), a
51% interest
in Aerex, a U.S. company located in Fort Pierce, Florida. Aerex is an original equipment
manufacturer and service provider of a wide range of products and services applicable to desalination,
municipal water treatment and industrial water and wastewater treatment. Its products include reverse osmosis
desalination equipment, membrane separation equipment, filtration equipment, piping systems, vessels and
custom fabricated components. Aerex also offers engineering, design, consulting,
training and
equipment maintenance services to its customers.
inspection,
Inc.
Affiliate
Ocean Conversion (BVI) Ltd. (‘‘OC-BVI’’). We own 50% of the voting stock of OC-BVI, a British Virgin
Islands company, which sells bulk water to the Government of the British Virgin Islands Water and Sewerage
Department. We own an overall 43.53% equity interest in OC-BVI’s profits and certain profit sharing rights
that raise our effective interest in OC-BVI’s profits to approximately 45%. OC-BVI also pays our subsidiary,
DesalCo Limited, fees for certain engineering and administrative services. We account for our investment in
OC-BVI under the equity method of accounting.
Our Operations
For fiscal year 2016, our retail water, bulk water and services segments generated approximately 41%, 51%
and 8%, respectively, of our consolidated revenues. For additional information about our business segments
and geographical
information about our operating revenues and long-lived assets, see Note 17 to our
consolidated financial statements at ITEM 8 of this Annual Report.
Retail Water Operations
For fiscal years 2016, 2015 and 2014, our retail water operations accounted for approximately 41%, 41% and
37%, respectively, of our consolidated revenues. This business produces and supplies water to end-users,
including residential, commercial and government customers in the Cayman Islands and Bali, Indonesia.
Retail Operations in the Cayman Islands
We sell water through our retail operations to a variety of residential and commercial customers through our
wholly-owned subsidiary, Cayman Water, which operates under an exclusive license issued to us by the
Cayman Islands government. Pursuant to the license, we have the exclusive right to produce potable water and
5
distribute it by pipeline to our licensed service area which consists of two of the three most populated areas of
Grand Cayman Island: Seven Mile Beach and West Bay.
Under our license, we pay a royalty to the government of 7.5% of our gross retail water sales revenues
(excluding energy cost adjustments). The selling prices of water sold to our customers are determined by the
license and vary depending upon the type and location of the customer and the monthly volume of water
purchased. The license provides for an automatic adjustment for inflation or deflation on an annual basis,
subject to temporary limited exceptions, and an automatic adjustment for the cost of electricity on a monthly
basis. The Water Authority-Cayman (‘‘WAC’’), on behalf of the government, reviews and confirms the
calculations of the price adjustments for inflation and electricity costs. If we wish to adjust our prices for any
reason other than inflation or electricity costs, we must request prior approval of the Cabinet of the Cayman
Islands government. Disputes regarding price adjustments would be referred to arbitration.
The license was originally scheduled to expire in July 2010 but has been extended several times by the
Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a
new license agreement. The most recent extension of the license expired on June 30, 2016. We continue to
provide water subsequent to June 30, 2016 on the assumption that the license has been further extended to
allow the parties to continue negotiations without interruption to an essential service.
The Cayman Islands government could ultimately offer a third party a license to service some or all of
Cayman Water’s present service area. However, as set forth in the existing license, ‘‘the Governor hereby
agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or
franchise to any other person or company for the processing, distribution, sale and supply of water within the
Licence Area without having first offered such a licence or franchise to the Company on terms no less
favourable than the terms offered to such other person or company.’’
In February 2011, the Water (Production and Supply) Law, 2011 and the Water Authority (Amendment) Law,
2011 (the ‘‘New Laws’’) were published and enacted. Under the New Laws, the WAC will issue any new
license, and such new license could include a rate of return on invested capital model, as discussed in the
following paragraph.
Following the enactment of the New Laws, we were advised in correspondence from the Cayman Islands
government and the WAC that: (i) the WAC, and not
is the principal
negotiator in these license negotiations; and (ii) the WAC has determined that a rate of return on invested
capital model (‘‘RCAM’’) for the retail license is in the best interest of the public and Cayman Water’s
customers. RCAM is the rate model currently utilized in the electricity transmission and distribution license
granted by the Cayman Islands government to the Caribbean Utilities Company, Ltd. We responded to the
Cayman Islands government that we disagreed with the government’s position on these two matters and
negotiations for a new license temporarily ceased.
the Cayman Islands government,
In July 2012, in an effort to resolve several issues relating to our retail license renewal negotiations, we filed
an Application for Leave to Apply for Judicial Review (the ‘‘Application’’) with the Grand Court of the
Cayman Islands (the ‘‘Court’’), seeking declarations that: (i) certain provisions of the New Laws appear to be
incompatible and a determination as to how those provisions should be interpreted; (ii) the WAC’s roles as the
principal license negotiator, statutory regulator and our competitor put the WAC in a position of hopeless
conflict; and (iii) the WAC’s decision to replace the rate structure under our current exclusive license with
RCAM was predetermined and unreasonable. The hearing for this judicial review was held in April 2014 and
in June 2014 the Court issued its ruling, which was limited to the determination that (i) the renewal of the
license does not require a public bidding process; and (ii) the WAC is the proper entity to negotiate with us
for the renewal of the license.
In November 2014, we wrote to the Minister of Works offering to recommence license negotiations on the
basis of the RCAM model subject to the following conditions: (i) the Government would undertake to amend
the current water legislation to provide for an independent regulator and a fair and balanced regulatory regime
more consistent with that provided under the electrical utility regulatory regime, (ii) the Government and we
would mutually appoint an independent referee and chairman of the negotiations, (iii) our new license would
provide exclusivity for the production and provision of all piped water, both potable and non-potable, within
6
our Cayman Islands license area, (iv) the Government would allow us to submit our counter proposal to the
WAC’s RCAM license draft, and (v) the principle of subsidization of residential customer rates by commercial
customer rates would continue under a new license. In March 2015, we received a letter from the Minister of
Works with the following responses to the November 2014 letter: (1) while the Cayman government plans to
create a new public utilities commission, the provision of the new retail license will not depend upon the
formation of such a commission; (2) any consideration regarding inclusion of the exclusive right to sell
non-potable water within the area covered by the retail license will not take place until after the draft license
has proceeded through the review process of the negotiations; (3) rather than allow us to submit our counter
proposal to the WAC’s RCAM license draft, the WAC will draft the license with the understanding that we
will be allowed to propose amendments thereto; (4) the principle of subsidization of residential customer rates
by commercial customer rates would continue under the new license; and (5) a request that we consider
eliminating our monthly minimum volume charge in the new license.
We recommenced license negotiations with the WAC during the third quarter of 2015 based upon a draft
RCAM license provided by the WAC.
to comment on four draft
In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities
regulation and competition office (‘‘OFREG’’). OFREG is an independent and accountable regulatory body
with a view of protecting the rights of consumers, encouraging affordable utility services, and promoting
competition. OFREG has the ability to supervise, monitor and regulate multiple utility undertakings and
markets. Water utilities are not presently included in the scope of OFREG’s regulatory functions and remain
under the regulatory control of the WAC. However, we were given the opportunity by the Cayman Islands
government
legislative bills which are intended to transfer responsibility for
economic regulation of the water utility sector from the WAC to OFREG. We have not been advised as to the
final form and content of these legislative bills and are therefore presently unable to assess their ultimate
impact on our retail license negotiations, however we believe that these bills will be enacted into law within
the coming months. OFREG began operations in January 2017, and we have been advised by the WAC that
they are presently coordinating with OFREG to transfer responsibility for our license negotiations from the
WAC to OFREG. We cannot presently determine the impact of OFREG or the pending legislative bills on our
retail license negotiations, when our retail license negotiations will be completed, or the outcome of such
negotiations.
See also ITEM 1.A. RISK FACTORS and ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Material Commitments, Expenditures and
Contingencies — Renewal of Retail License.
Our retail operations in the Cayman Islands produce potable water at
three reverse osmosis seawater
conversion plants in Grand Cayman located at our Abel Castillo Water Works (‘‘ACWW’’), Britannia and
West Bay sites. We own the land for our ACWW and West Bay plants and have entered into a lease for
the land for our Britannia plant that expires January 1, 2027. The current production capacity of the plant
located at ACWW is 2.0 million gallons of water per day. The production capacity of the Britannia plant
is 715,000 gallons of water per day. The production capacity of the West Bay plant is approximately
900,000 gallons of water per day.
Electricity to our plants is supplied by Caribbean Utilities Co. Ltd., a publicly traded utility company. We
maintain diesel engine-driven standby generators at all
three retail plant sites with sufficient capacity to
operate our distribution pumps and other essential equipment during any temporary interruptions in electricity
supply. Standby generation capacity is available at our West Bay plant and ACWW plants to operate a portion
of the water production capacity as well.
In the event of an emergency, our distribution system is connected to the distribution system of the WAC. In
prior years, we have purchased water from the WAC for brief periods of time and have also sold potable
water to the WAC from our retail plants.
Our pipeline system on Grand Cayman covers the Seven Mile Beach and West Bay areas and consists of
approximately 90 miles of potable water pipeline. We extend our distribution system periodically as demand
warrants. We have a main pipe loop covering the Seven Mile Beach and West Bay areas. We place extensions
7
of smaller diameter pipe off our main pipe to service new developments in our service area. This system of
building branches from the main pipe keeps construction costs low and allows us to provide service to new
areas in a timely manner. Developers are responsible for laying the pipeline within their developments at their
own cost, but in accordance with our specifications. When a development is completed, the developer then
transfers operation and maintenance of the pipeline to us.
We bill our customers on a monthly basis based on metered consumption and bills are typically collected
within 30 to 35 days after the billing date. Receivables not collected within 45 days subject the customer to
disconnection from water service. In 2016, 2015 and 2014, bad debts represented less than 1% of our total
annual retail sales. In addition to their past due invoice balance, customers that have had their service
disconnected must pay re-connection charges.
Historically, demand on our pipeline distribution has varied throughout
the year. Demand depends upon
various factors including the number of tourists visiting and the amount of rainfall during any particular time
of the year and other cyclical climate conditions. In general, the majority of tourists come from the United
States during the winter which is also our dry season.
Retail Operations in Bali, Indonesia
through our subsidiary, CW-Bali,
During the latter half of 2012, we commenced,
the construction of a
seawater desalination plant with an initial capacity of 264,000 gallons per day in Nusa Dua, one of the
primary tourist areas of Bali, Indonesia. Nusa Dua has a target customer profile consisting of tourist resorts
and luxury/vacation residences comparable to our retail service area on Grand Cayman. We believe the water
demands of these properties in Nusa Dua already exceed the supply capacity of the local public water utility,
will soon exceed other local sources (such as wells), and that other areas of Bali will also eventually
experience fresh water shortages. However, as desalination had not been employed to any meaningful extent
in Bali, we concluded that to obtain customers in Bali we must first demonstrate the viability of desalination
as well as our capabilities and expertise. Consequently, we elected to construct this plant before obtaining
water supply agreements for its production. During 2014, we expanded the capacity of this plant to 790,000
gallons per day.
Since its inception, we have recorded operating losses for CW-Bali as the sales volumes for its plant have not
been sufficient to cover its operating costs. In 2016, we determined, based upon probability-weighted scenarios
for CW-Bali’s future undiscounted cash flows, that the carrying values of CW-Bali’s long-lived assets were
not recoverable and recorded an impairment loss of $2.0 million for the three months ended September 30,
2016 to reduce the carrying values of these assets to their estimated fair values.
ITEM 1.A. RISK FACTORS and ITEM 7.
See further discussion of our Bali
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — Material Commitments, Expenditures and Contingencies — CW-Bali.
retail operations at
Bulk Water Operations
For fiscal years 2016, 2015 and 2014, our bulk water operations accounted for approximately 51%, 56% and
60%, respectively, of our consolidated revenues. These operations produce potable water from seawater and
sells this water to governments in the Cayman Islands, Belize and The Bahamas.
Bulk Water Operations in the Cayman Islands
Through our wholly-owned subsidiary OC-Cayman we provide bulk water on a take-or-pay basis to the WAC,
a government owned utility and regulatory agency, under various agreements. The WAC in turn distributes
that water to properties in Grand Cayman outside of our retail license area.
The water we sell to the WAC is produced at three reverse osmosis seawater conversion plants in Grand
Cayman owned by the WAC but designed, built and operated by OC-Cayman: the Red Gate, North Sound and
North Side Water Works plants, which have production capacities of approximately 1.3 million, 1.6 million
and 2.4 million gallons of water per day, respectively. The plants we operate for the WAC are located on land
owned by the WAC.
8
The current operating agreement for the Red Gate plant expires in July 2017. The current operating agreement
for the North Sound plant expires in April 2017. The current operating agreement for the North Side Water
Works plant expires in June 2019.
Bulk Water Operations in Belize
In Belize, we sell bulk water through our wholly-owned subsidiary CW-Belize.
We own the reverse osmosis seawater conversion plant in Belize and lease the land on which our plant is
located from the Belize government at an annual rent of BZE$1.00. The land lease expires in March 2026.
The production capacity of the plant is 600,000 gallons of water per day.
Electricity to our plant is supplied by Belize Electricity Limited. At the plant site, we maintain a diesel
engine-driven, standby generator with sufficient capacity to operate 100% of our water production equipment
during any temporary interruption in the electricity supply.
In Ambergris Caye, Belize we are the exclusive provider of water to Belize Water Services Ltd. (‘‘BWSL’’), a
government controlled entity which distributes the water through its own pipeline system to residential,
commercial and tourist properties. BWSL distributes our water primarily to residential properties, small hotels,
and businesses that serve the tourist market. The base price of water supplied, and adjustments thereto, are
determined by the terms of the contract, which provides for annual adjustments based upon the movement in
the government price indices specified in the contract, as well as monthly adjustments for changes in the cost
of diesel fuel and electricity.
We have an exclusive contract with BWSL to supply a minimum of 2.03 million gallons of water per week
or, upon demand, up to 2.94 million gallons per week, on a take-or-pay basis. This contract expires on
March 23, 2026. BWSL has the right, with six months advance notice before the expiration date, to renew the
contract for a further 25-year period on the same terms and conditions.
Bulk Water Operations in The Bahamas
We sell bulk water in The Bahamas through our majority-owned subsidiary, CW-Bahamas, to the Water and
Sewerage Corporation of The Bahamas (‘‘WSC’’) and to a private resort on Bimini.
We supply bulk water in The Bahamas from our Windsor, Blue Hills and Bimini plants.
The water supply agreement for our Windsor plant, which has a capacity of 3.1 million gallons per day, was
originally scheduled to expire in July 2013. Subsequent to July 2013, we continued to supply water from the
Windsor plant on a month-to-month basis at the request of the government of The Bahamas. On December 28,
2016, we executed an amendment to the Windsor water supply agreement with the WSC, pursuant to which
the agreement was extended for 15 years on a take-or-pay basis for a minimum of 16.8 million gallons per
week. Pursuant to the amended agreement, CW Bahamas is required to complete capital improvements to the
Windsor plant which we estimate will cost approximately $8.9 million to ensure that the plant can meet its
performance guarantees during the extended agreement period. The per gallon price for the water supplied
under the extended agreement, excluding the pass-through energy component, is approximately 18% less than
the price in effect at December 31, 2016. The remaining terms of the amended agreement are substantially
consistent with those of the original Windsor water supply agreement.
We supply water from the Blue Hills plant, our Company’s largest seawater conversion facility with a capacity
of 12.0 million gallons per day, under the terms of a water supply agreement with the WSC that expires in
March 2032 that requires us to deliver and requires the WSC to purchase a minimum of 63.0 million gallons
of water each week.
The Bimini plant has a capacity of 115,000 gallons per day and supplies water to a private resort under a
water supply agreement that expires in December 2020.
The high-pressure pumps at our Windsor and Blue Hills plants in the Bahamas are diesel engine-driven.
Electricity for the remainder of our plant operations is supplied by Bahamas Electricity Corporation. We
maintain a standby generator with sufficient capacity to operate essential equipment at our Windsor and Blue
Hills plants and are able to produce 100% of the production capacity with these plants during temporary
interruptions in the electricity supply.
9
We provide bulk water to the WSC, which distributes the water through its own pipeline system to residential,
commercial and tourist properties on the Island of New Providence.
Services Operations
For fiscal years 2016, 2015 and 2014, our services operations accounted for approximately 8%, 3% and 3%,
respectively, of our consolidated revenues and are comprised of businesses providing services in the Cayman
Islands, The Bahamas,
the British Virgin Islands and the United States. These businesses construct,
manufacture and service a wide range of water-related products and provide design, engineering, management,
and other services for desalination, commercial and municipal water production, water supply and treatment,
and industrial water and wastewater treatment.
We provide design, engineering and construction services for desalination projects through DesalCo, which is
recognized by suppliers as an original equipment manufacturer of reverse osmosis seawater desalination plants
for our Company. DesalCo also provides management and procurement services for desalination plants and
engineering services relating to municipal water production, distribution and treatment. DesalCo also conducts
research and development. DesalCo frequently tests new components and technology offered by suppliers in
our business and, at times, we collaborate with suppliers in the development of their products.
On February 11, 2016, we purchased, through a newly formed wholly-owned U.S. subsidiary (CW-Holdings),
a 51% interest in Aerex, a U.S. company located in Fort Pierce, Florida. Aerex is an original equipment
manufacturer and service provider of a wide range of products and services applicable to desalination,
municipal water treatment and industrial water and wastewater treatment. Its products include reverse osmosis
desalination equipment, membrane separation equipment, filtration equipment, piping systems, vessels and
training and
custom fabricated components. Aerex also offers engineering, design, consulting,
equipment maintenance services to its customers.
inspection,
Affiliate Operations
Our affiliate, OC-BVI, sells water to the Government of the British Virgin Islands Water and Sewerage
Department (‘‘BVIW&S’’). We own 50% of the voting shares of OC-BVI and have an overall 43.53% equity
interest in the profits of OC-BVI. We also own separate profit sharing rights in OC-BVI that raise our
in OC-BVI’s profits from 43.53% to approximately 45%. Sage Water Holdings (BVI)
effective interest
Limited (‘‘Sage’’) owns the remaining 50% of the voting shares of OC-BVI and the remaining 55% interest in
its profits. Under the Articles of Association of OC-BVI, we have the right to appoint three of the six directors
of OC-BVI. Sage is entitled to appoint the remaining three directors. In the event of a tied vote of the
directors,
trade association
comprised primarily of government representatives, is entitled to appoint a junior director to cast a deciding
vote.
the President of the Caribbean Water and Wastewater Association, a regional
We provide certain engineering and administrative services to OC-BVI for a monthly fee and a bonus
arrangement which provides for payment of 4% of the net operating income of OC-BVI.
We account for our investment in OC-BVI using the equity method of accounting.
OC-BVI sells bulk water to BVIW&S, which distributes the water through its own pipeline system to
residential, commercial and tourist properties on the islands of Tortola and Jost Van Dyke in the British Virgin
Islands. OC-BVI provides operating, engineering and procurement services for another plant under a
short-term agreement with Sage.
OC-BVI owns and operates a desalination plant located at Bar Bay, Tortola with a capacity of 720,000 gallons
per day. Pursuant to a water supply agreement with the BVI government, OC-BVI is required to supply up to
600,000 gallons per day to the BVI government on a take-or-pay basis. This water supply agreement was
schedule to expire in March 2017, but was extended in February 2017 to March 2031. The per gallon price
for the water supplied under the extended agreement, excluding the pass-through energy component,
is
approximately 31% less than the price in effect at December 31, 2016. The remaining terms of the extended
agreement are substantially consistent with those of the original Bar Bay water supply agreement.
10
OC-BVI purchases electrical power to operate this plant from BVI Electric Co. and operates diesel engine
driven emergency power generators which can produce 100% of the plant’s production capacity when
BVI Electric Co. is unable to provide power to the plant.
OC-BVI’s plant on the island of Jost Van Dyke has a capacity of 60,000 gallons per day. This plant operates
under a 10-year contract with the BVI government
to the contract,
OC-BVI is operating the plant on a year-to-year basis until the BVI government informs OC-BVI of its
intention to extend the existing, or enter into a new agreement. We purchase electrical power to operate this
plant from BVI Electric Co.
that expired July 8, 2013. Pursuant
Reverse Osmosis Technology
The conversion of seawater to potable water is called desalination. The two primary forms of desalination are
distillation and reverse osmosis. Both methods are used throughout the world and technologies are improving
to lower the costs of production. Reverse osmosis is a fluid separation process in which the saline water
(i.e. seawater) is pressurized and the fresh water is separated from the saline water by passing through a
semi-permeable membrane which rejects the salts. The saline water is first passed through a pretreatment
system, which generally consists of fine filtration and treatment chemicals, if required. Pre-treatment removes
suspended solids and organics which could cause fouling of the membrane surface. Next, a high-pressure
pump pressurizes the saline water thus enabling approximately 40% conversion of the saline water to fresh
water as it passes through the membrane, while more than 99% of the dissolved salts are rejected and remain
in the now concentrated saline water. This concentrate is discharged without passing through the membrane;
however, the remaining hydraulic energy in the concentrate is transferred to the initial saline feed water with
an energy recovery device thus reducing the total energy requirement for the reverse osmosis system. The
final step is post-treatment, which consists of stabilizing the produced fresh water (thereby removing
undesirable dissolved gases), adjusting the pH and providing chlorination to prepare it for distribution.
We use reverse osmosis technology to convert seawater to potable water at all of the plants we construct and
operate. We believe that this technology is the most effective and efficient conversion process for our markets.
However, we are always seeking ways to maximize efficiencies in our current processes and investigating new,
more efficient processes to convert seawater to potable water. The equipment at our plants is among the most
energy efficient available and we monitor and maintain the equipment in an efficient manner. As a result of
our decades of experience in seawater desalination, we believe our expertise and experience with respect to
the development and operation of desalination plants and similar facilities is easily transferable to locations
outside of our current operating areas.
Raw Materials and Sources of Supply
All materials, parts and supplies essential to our business operations are obtained from multiple sources and
we use the latest industry technology. Prior to our acquisition of Aerex, we did not manufacture any parts or
components for equipment essential to our business. Aerex has manufactured some of the key components for
some of our plants in the past and we expect Aerex to do so in the future. Our access to seawater for
processing into potable water is granted through our licenses and contracts with governments of the various
jurisdictions in which we have our operations.
Seasonal Variations in Our Business
Our retail and bulk operations are affected by the levels of tourism and are subject to seasonal variations in
our service areas. Demand for our water in the Cayman Islands, Belize, and the Bahamas is affected by
variations in the level of tourism and local weather, primarily rainfall. Tourism in our service areas is affected
by the economies of the tourists’ home countries, primarily the United States and Europe, terrorist activity and
perceived threats thereof, and increased costs of fuel and airfares. We normally sell more water during the first
and second quarters, when the number of tourists is greater and local rainfall is less in our markets, than in
the third and fourth quarters.
Government Regulations, Custom Duties and Taxes
Our operations and activities are subject to the governmental regulations and taxes of the countries in which
we operate. The following summary of regulatory developments and legislation does not purport to describe
all present and proposed regulation and legislation that may affect our businesses. Legislative or regulatory
11
requirements currently applicable to our businesses may change in the future. Any such changes could impose
new obligations on us that may adversely affect our businesses and operating results. The following
paragraphs set forth some of the key governmental regulations in the jurisdictions in which we operate outside
of the United States.
The Cayman Islands
The Cayman Islands are a British Overseas Territory and have had a stable political climate since 1670, when
the Treaty of Madrid ceded the Cayman Islands to England. The Queen of England appoints the Governor of
the Cayman Islands to make laws with the advice and consent of the legislative assembly. The legislative
assembly consists of 18 elected members and two members appointed by the Governor from the Civil Service.
The Cabinet is responsible for day-to-day government operations. The Cabinet consists of seven ministers who
are chosen by the Premier from its 18 popularly elected members, and the two Civil Service members. The
elected members choose from among themselves a leader, who is designated the Premier, and is in effect the
leader of the elected government. The Governor has reserved powers and the United Kingdom retains full
control over foreign affairs and defense. The Cayman Islands are a common law jurisdiction and have adopted
a legal system similar to that of the United Kingdom.
The Cayman Islands have no taxes on profits, income, distributions, capital gains or appreciation. We have
exemptions from, or receive concessionary rates of customs duties on capital expenditures for plant and major
consumable spare parts and supplies imported into the Cayman Islands under our retail water license. We do
not pay import duty or taxes on reverse osmosis membranes, electric pumps and motors, and chemicals, but
we do pay duty at the rate of 10% of the cost, including insurance and transportation to the Cayman Islands,
of other plant and associated materials and equipment to manufacture or supply water in the Seven Mile
Beach or West Bay areas. We have been advised by the Government of the Cayman Islands that we will not
receive any duty concessions in our new retail water license.
The Bahamas
The Commonwealth of The Bahamas is an independent nation and a constitutional parliamentary democracy
with the Queen of England as the constitutional head of state. The basis of the Bahamian law and legal
system is the English common law tradition with a Supreme Court, Court of Appeals, and a Magistrates court.
Under the current laws of the Commonwealth of The Bahamas, no income, corporation, capital gains or other
taxes are payable by us. We are required to pay an annual business license fee (the calculation of which is
based on our preceding year’s financial statements) which to date has not been material to the results of our
Bahamas operations.
Belize
Belize achieved full
independence from the United Kingdom in 1981. Today, Belize is a constitutional
monarchy with the adoption of a constitution in 1981. Based on the British model with three independent
branches, the Queen of England is the constitutional head of state, represented by a Governor General. A
Prime Minister and cabinet make up the executive branch, while a 31 member elected House of
Representatives and a 13 member appointed Senate form a bicameral legislature. The cabinet consists of a
prime minister, other ministers and ministers of state who are appointed by the Governor-General on the
advice of the Prime Minister, who has the support of the majority party in the House of Representatives.
Belize is an English common law jurisdiction with a Supreme Court, Court of Appeals and local Magistrate
Courts.
The Government of Belize has exempted CW-Belize from certain customs duties and all revenue replacement
duties until April 18, 2026, and had exempted CW-Belize from company taxes until January 28, 2006. Belize
levies a gross receipts tax on corporations at a rate varying between 0.75% and 25%, depending on the type
of business, and a corporate income tax at a rate of 25% of chargeable income. Gross receipts tax payable
amounts are credited towards corporate income tax. The Government of Belize also implemented certain
environmental taxes and a general sales tax effective July 1, 2006 and increased certain business and personal
taxes and created new taxes effective March 1, 2005. Belize levies import duty on most imported items at
rates varying between 0% and 45%, with most items attracting a rate of 20%. Under the terms of our water
12
supply agreement with BWSL we are reimbursed by BWSL for all taxes and customs duties that we are
required to pay and we record this reimbursement as an offset to our tax expense.
The British Virgin Islands
The British Virgin Islands (the ‘‘BVI’’) is a British Overseas Territory, with the Queen as the Head of State
and Her Majesty’s representative, the Governor, responsible for external affairs, defense and internal security,
the Civil Service and administration of the courts. Since 1967, the BVI has held responsibility for its own
internal affairs.
The BVI Constitution provides for the people of the BVI to be represented by a ministerial system of
government, led by an elected Premier, a Cabinet of Ministers and the House of Assembly. The House of
Assembly consists of 13 elected representatives, the Attorney General, and the Speaker.
The judicial system, based on English law, is under the direction of the Eastern Caribbean Supreme Court,
which includes the High Court of Justice and the Court of Appeal. The ultimate appellate court is the Privy
Council in London.
Market and Service Area
Although we currently operate in the Cayman Islands, Belize, the British Virgin Islands, The Commonwealth
of The Bahamas, the United States and Indonesia we believe that our potential market consists of any location
where a need exists for potable water and with access to seawater or brackish water. The desalination of
seawater, either through distillation or reverse osmosis, is the most widely used process for producing potable
water in areas with an insufficient natural supply. We believe our experience in the development and operation
of reverse osmosis desalination plants will provide us with significant opportunities to successfully expand our
operations beyond the markets in which we currently operate.
Cayman Islands. The Cayman Islands government, through the WAC, supplies water to parts of Grand
Cayman, which are not within our licensed area, as well as to Cayman Brac. We operate all but one of the
reverse osmosis desalination plants owned by the WAC on Grand Cayman and supply water under licenses
and supply agreements held by OC-Cayman with the WAC.
According to the most recent information published by the Economics and Statistics Office of the Cayman
Islands Government, the population of the Cayman Islands was estimated in December 2015 to be 60,413.
According to the figures published by the Department of Tourism Statistics Information Center, during the
year ended December 31, 2016, tourist air arrivals increased by less than 1% and tourist cruise ship arrivals
fell by less than 1% compared to 2015.
Total visitors for the year were approximately 2.1 million in 2016 and 2015. We believe that our water sales
in the Cayman Islands are more positively impacted by stay-over tourists that arrive by air than by those
arriving by cruise ship, since cruise ship tourists generally only visit the island for one day or less and do not
remain on the island overnight.
The Bahamas. On South Bimini Island in The Bahamas, we supply water to a private developer and do not
have competitors. GE Water operates a seawater desalination plant on North Bimini Island and other small
family islands. We competed with companies such as GE Water, Veolia, IDE Technologies, GS Inima and
Biwater for the contract with the Bahamian government to build and operate a seawater desalination plant at
Blue Hills, New Providence, Bahamas. We expect to compete with these companies and others for any future
water supply contracts in The Bahamas.
Belize. Our current operations in Belize are located on Ambergris Caye, which consists of residential,
commercial and tourist properties in the town of San Pedro. This town is located on the southern end of
Ambergris Caye, one of many islands located east of the Belize mainland and off the southeastern tip of the
Yucatan Peninsula. Ambergris Caye is approximately 25 miles long and, according to the Central Statistical
Office ‘‘Belize: 2010 National Census Overview’’, has a population of about 11,500 residents. We provide
bulk potable water to BWSL, which distributes this water to this market. BWSL currently has no other source
of potable water on Ambergris Caye. Our contract with BWSL makes us their exclusive producer of
desalinated water on Ambergris Caye through 2026.
13
A 185 mile long barrier reef, which is the largest barrier reef in the Western Hemisphere, is situated just
offshore of Ambergris Caye. This natural attraction is a choice destination for scuba divers and tourists.
According to information published by the Belize Trade and Investment Development Service, tourism is
Belize’s second largest source of foreign income, next to agriculture.
British Virgin Islands. The British Virgin Islands are a British Overseas Territory and are situated east of
Puerto Rico. They consist of 16 inhabited and more than 20 uninhabited islands, of which Tortola is the
largest and most populated. The British Virgin Islands serve as a hub for many large yacht-chartering
businesses.
Competition
Cayman Islands. Pursuant to our license granted by the Cayman Islands government, we have the exclusive
right to provide potable, piped water within our licensed service area on Grand Cayman. We are the only
non-government-owned public water utility on Grand Cayman. The Cayman Islands government, through the
WAC, supplies water to parts of Grand Cayman located outside of our licensed service area. Although we
have no competition within our exclusive retail license service area for potable water, our ability to expand
our service area is at the discretion of the Cayman Island government. Private residences and commercial
multi-unit dwellings up to four units may install potable water making equipment for their own use. Water
plants on premises within our license area and serving only their premises in existence prior to 1991 can be
maintained but not replaced or expanded. We are aware of only one such plant currently in operation. The
Cayman Islands government, through the WAC, supplies water to parts of Grand Cayman outside of our
licensed service area. We have competed with such companies as GE Water, Veolia, and IDE Technologies for
bulk water supply contracts with the WAC.
The Bahamas. On South Bimini Island in The Bahamas, we supply water to a private developer and do not
have competitors. GE Water operates a seawater desalination plant on North Bimini Island and other small
islands. We competed with companies such as GE Water, Veolia, IDE Technologies, GS Inima and Biwater for
the contract with the Bahamian government to build and operate a seawater desalination plant at Blue Hills,
New Providence, Bahamas. We expect to compete with these companies and others for any future water
supply contracts in The Bahamas.
Belize. On Ambergris Caye in Belize, our water supply contract with Belize Water Services Limited is
exclusive, and Belize Water Services Limited cannot seek contracts with other water suppliers, or produce
water itself, to meet their future needs in San Pedro, Ambergris Caye, Belize.
British Virgin Islands.
In the British Virgin Islands, GE Water operates seawater desalination plants in West
End, Tortola, and on Virgin Gorda and generally bids against OC-BVI for projects. In 2010, Biwater PLC
negotiated a 16 year contract on a sole sourced basis, pursuant to which it has constructed and is operating a
2.75 million gallon per day desalination plant
in Parakeeta Bay, Tortola for the British Virgin Islands
government. In August 2015, this plant was acquired from Biwater by Seven Seas Water, a division of
AquaVenture Holdings.
United States. Aerex competes in the highly fragmented industry for manufactured water production and
treatment equipment, systems and services against a large number of manufacturers, fabricators and service
providers, many of which have greater resources than Aerex.
Bali, Indonesia.
equipment and services to individual resort properties.
In Bali, we compete against
local water treatment equipment suppliers who provide
To implement our growth strategy for our desalination businesses outside our existing operating areas, we will
have to compete with some of the same companies we competed with for the Blue Hills project in Nassau,
Bahamas such as GE Water, Veolia, IDE Technologies, GS Inima, and Biwater as well as other companies.
Some of these companies currently operate in areas in which we would like to expand our operations and
already maintain worldwide operations having greater financial, managerial and other resources than our
company. We believe that our low overhead costs, knowledge of local markets and conditions and our efficient
manner of operating desalinated water production and distribution equipment provide us with the capabilities
to effectively compete for new projects in the Caribbean basin and other select markets.
14
Environmental and Health Regulatory Matters
Cayman Islands. With respect to our Cayman Islands operations, we operate our water plants in accordance
with guidelines of the Cayman Islands Department of Environmental Health. We are licensed by the WAC to
discharge concentrated seawater, which is a byproduct of our desalination process, into deep disposal wells.
Our Cayman Islands license requires that our potable water quality meet the World Health Organization’s
Guidelines for Drinking Water Quality and contain less than 200 mg/l of total dissolved solids.
The Bahamas, Belize, and British Virgin Islands. With respect to our Bahamas and Belize operations and
OC-BVI’s British Virgin Islands operations, we and OC-BVI are required by our water supply contracts to
take all reasonable measures to prevent pollution of the environment. We are licensed by the Belize and
Bahamian governments to discharge concentrated seawater, which is a by-product of our desalination process,
into deep disposal wells. OC-BVI
to discharge
concentrated seawater into the sea. At several of our locations hydrogen sulfide gas is present in the seawater
and we operate our plants in a manner so as to minimize the emission of airborne gas into the environment.
is licensed by the British Virgin Islands government
United States. Consistent with other U.S. manufacturers, Aerex must comply with laws and regulations
administered by the U.S. Environmental Protection Agency.
We are not aware of any existing or pending environmental legislation which may affect our operations. To
date, we have not received any complaints from any regulatory authorities.
Employees
As of March 10, 2017, we employed a total of 117 persons, 63 in the Cayman Islands, 19 in The Bahamas,
22 in the United States, seven in Belize and six in Asia. We also leased 18 employees for Aerex’s
manufacturing activities in the United States and managed the six employees of OC-BVI in the British Virgin
Islands. We have 10 management employees and 34 administrative and clerical employees. The remaining
employees are engaged in engineering, purchasing, plant maintenance and operations, pipe laying and repair,
leak detection, new customer connections, meter reading and laboratory analysis of water quality. None of our
employees is a party to a collective bargaining agreement. We consider our relationships with our employees
to be good.
Available Information
Our website address is http://www.cwco.com. Information contained on our website is not incorporated by
reference into this Annual Report, and you should not consider information contained on our website as part
of this Annual Report.
We have adopted a written code of conduct and ethics that applies to all of our employees and directors,
including, but not
limited to, our principal executive officer, principal financial officer, and principal
accounting officer or controller, or persons performing similar functions. The Code of Business Conduct and
Ethics,
the Audit Committee, Compensation Committee, Nominations and Corporate
Governance Committee and the Consolidated Water Co. Ltd. Corporate Governance Guidelines of our Board
of Directors are available at the Investors portion of our website.
the charters of
You may access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and
current reports on Form 8-K, plus amendments to such reports as filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, on our website and on the website of the
Securities and Exchange Commission (the ‘‘SEC’’) as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC. In addition, paper copies of these documents may be
obtained free of charge by writing us at the following address: Consolidated Water Co. Ltd., Regatta Office
Park, Windward Three, 4th Floor, West Bay Road, P.O. Box 1114, Grand Cayman, KY1-1102, Cayman
Islands, Attention: Investor Relations; or by calling us at (345) 945-4277.
15
ITEM 1A. RISK FACTORS
Investing in our common shares involves risks. Prior to making a decision about investing in our common
shares, you should consider carefully the factors discussed below and the information contained in this Annual
Report. Each of these risks, as well as other risks and uncertainties not presently known to us or that we
currently deem immaterial, could adversely affect our business, results of operations, cash flows and financial
condition, and cause the value of our common shares to decline, which may result in the loss of part or all of
your investment.
Our exclusive license to provide water to retail customers in the Cayman Islands may not be renewed in
the future.
In the Cayman Islands, we provide water to retail customers under a license issued in July 1990 by the
Cayman Islands government that grants our subsidiary, Cayman Water, the exclusive right to provide water to
retail customers within our licensed service area. Pursuant to the license, we have the exclusive right to
produce potable water and distribute it by pipeline to our licensed service area, which consists of two of the
three most populated areas of Grand Cayman, the Seven Mile Beach and West Bay areas. For the years ended
December 31, 2016, 2015 and 2014, the Company generated approximately 40%, 40% and 36%, respectively,
of its consolidated revenues and 56%, 56% and 54%, respectively, of its consolidated gross profit from the
retail water operations conducted pursuant to Cayman Water’s exclusive license.
The license was originally scheduled to expire in July 2010 but has been extended several times by the
Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a
new license agreement. The most recent extension of the license expired on June 30, 2016. We continue to
provide water subsequent to June 30, 2016 on the assumption that the license has been further extended to
allow the parties to continue negotiations without interruption to an essential service.
The Cayman Islands government could ultimately offer a third party a license to service some or all of
Cayman Water’s present service area. However, as set forth in the existing license, ‘‘the Governor hereby
agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or
franchise to any other person or company for the processing, distribution, sale and supply of water within the
Licence Area without having first offered such a licence or franchise to the Company on terms no less
favourable than the terms offered to such other person or company.’’
In February 2011, the Water (Production and Supply) Law, 2011 and the Water Authority (Amendment) Law,
2011 (the ‘‘New Laws’’) were published and enacted. Under the New Laws, the WAC will issue any new
license, and such new license could include a rate of return on invested capital model, as discussed in the
following paragraph.
Following the enactment of the New Laws, we were advised in correspondence from the Cayman Islands
government and the WAC that: (i) the WAC, and not
is the principal
negotiator in these license negotiations; and (ii) the WAC has determined that a rate of return on invested
capital model (‘‘RCAM’’) for the retail license is in the best interest of the public and Cayman Water’s
customers. RCAM is the rate model currently utilized in the electricity transmission and distribution license
granted by the Cayman Islands government to the Caribbean Utilities Company, Ltd. We responded to the
Cayman Islands government that we disagreed with the government’s position on these two matters and
negotiations for a new license temporarily ceased.
the Cayman Islands government,
In July 2012, in an effort to resolve several issues relating to our retail license renewal negotiations, we filed
an Application for Leave to Apply for Judicial Review (the ‘‘Application’’) with the Grand Court of the
Cayman Islands (the ‘‘Court’’), seeking declarations that: (i) certain provisions of the New Laws appear to be
incompatible and a determination as to how those provisions should be interpreted; (ii) the WAC’s roles as the
principal license negotiator, statutory regulator and our competitor put the WAC in a position of hopeless
conflict; and (iii) the WAC’s decision to replace the rate structure under our current exclusive license with
RCAM was predetermined and unreasonable. The hearing for this judicial review was held in April 2014 and
in June 2014 the Court issued its ruling, which was limited to the determination that (i) the renewal of the
license does not require a public bidding process; and (ii) the WAC is the proper entity to negotiate with us
for the renewal of the license.
16
In November 2014 we wrote to the Minister of Works offering to recommence license negotiations on the
basis of the RCAM model subject to the following conditions: (i) the Government would undertake to amend
the current water legislation to provide for an independent regulator and a fair and balanced regulatory regime
more consistent with that provided under the electrical utility regulatory regime, (ii) the Government and we
would mutually appoint an independent referee and chairman of the negotiations, (iii) our new license would
provide exclusivity for the production and provision of all piped water, both potable and non-potable, within
our Cayman Islands license area, (iv) the Government would allow us to submit our counter proposal to the
WAC’s RCAM license draft, and (v) the principle of subsidization of residential customer rates by commercial
customer rates would continue under a new license. We received a letter from the Minister of Works in
March 2015 with the following responses to the November 2014 letter: (1) while the Cayman government
plans to create a new public utilities commission, the provision of the new retail license will not depend upon
the formation of such a commission; (2) any consideration regarding inclusion of the exclusive right to sell
non-potable water within the area covered by the retail license will not take place until after the draft license
has proceeded through the review process of the negotiations; (3) rather than allow us to submit our counter
proposal to the WAC’s RCAM license draft, the WAC will draft the license with the understanding that we
will be allowed to propose amendments thereto; (4) the principle of subsidization of residential customer rates
by commercial customer rates would continue under the new license; and (5) a request that we consider
eliminating our monthly minimum volume charge in the new license.
We recommenced license negotiations with the WAC during the third quarter of 2015 based upon a draft
RCAM license provided by the WAC.
In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities
regulation and competition office (‘‘OFREG’’). OFREG is an independent and accountable regulatory body
with a view of protecting the rights of consumers, encouraging affordable utility services, and promoting
competition. OFREG has the ability to supervise, monitor and regulate multiple utility undertakings and
markets. Water utilities are not presently included in the scope of OFREG’s regulatory functions and remain
under the regulatory control of the WAC. However, we were given the opportunity by the Cayman Islands
legislative bills which are intended to transfer responsibility for
government
economic regulation of the water utility sector from the WAC to OFREG. We have not been advised as to the
final form and content of these legislative bills and are therefore presently unable to assess their ultimate
impact on our retail license negotiations, however we believe that these bills will be enacted into law within
the coming months. OFREG began operations in January 2017, and we have been advised by the WAC that
they are presently coordinating with OFREG to transfer responsibility for our license negotiations from the
WAC to OFREG. We cannot presently determine the impact of OFREG or the pending legislative bills on our
retail license negotiations.
to comment on four draft
The resolution of these license negotiations could result in a material reduction of the operating income and
cash flows we have historically generated from our retail license and could require us to record an impairment
loss to reduce the carrying value of our goodwill. Such impairment loss could have a material adverse impact
on our results of operations.
Our bulk water supply agreements in the Cayman Islands may not be renewed or may be renewed on
terms less favorable to us.
All of our bulk water supply agreements are for fixed terms, and such agreements for plants that we operate
but are owned by our customers provide for our customers to take over the operations of the plant upon
expiration of the agreements.
Our bulk water supply agreements with the WAC for their North Sound and Red Gate plants expire in
April 2017 and July 2017 respectively. Our bulk water supply agreement with the WAC for their North Side
Water Works plant expires in June 2019. We generated $3.2 million, $2.2 million, and $2.1 million in
revenues from the North Sound, Red Gate, and North Side Water Works plants, respectively, during the year
ended December 31, 2016. We generated $3.0 million, $3.0 million, and $2.4 million in revenues from the
North Sound, Red Gate, and North Side Water Works plants,
respectively, during the year ended
December 31, 2015. We generated $4.0 million, $3.0 million, and $2.9 million in revenues from the North
Sound, Red Gate, and North Side Water Works plants, respectively, during the year ended December 31, 2014.
17
If our bulk water supply agreements are not renewed or are renewed on terms less favorable to us, our results
of operations and cash flows will be adversely affected and we could be required to record an impairment
charge to reduce the carrying value of our goodwill. Such impairment charge could have a material adverse
impact on our results of operations.
We have paid $20.7 million for land and equipment and incurred development expenses of
approximately $20.5 million to date for a possible project in Mexico. We expect to expend significant
additional funds in 2017 to continue to pursue this project. However, we may not be successful in
completing this project.
We own a 99.9% interest in N.S.C. Agua, S.A. de C.V. (‘‘NSC’’), a development stage Mexico company
formed to pursue a project encompassing the construction, operation and minority ownership of a 100 million
gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico
and an accompanying pipeline to deliver water to the Mexican potable water system (the ‘‘Project’’). As of
December 31, 2016, our consolidated balance sheet
includes purchases for the Project of approximately
$20.6 million in land and $91,000 in equipment. The project development activities we have conducted, which
include conducting an equipment piloting plant and water data collection program at the proposed feed water
source, completing various engineering studies and obtaining various governmental permits, have resulted in
additional developmental expenses totaling $20.5 million from 2010 through December 31, 2016.
In August 2014, the State of Baja California (the ‘‘State’’) enacted new legislation to regulate Public-Private
Association projects which involve the type of long-term contract between a public sector authority and a
private party that NSC is seeking to complete the Project. Pursuant to this new legislation, in January 2015,
NSC submitted an expression of interest for its project
to the Secretary of Infrastructure and Urban
Development of the State of Baja California (‘‘SIDUE’’). SIDUE accepted NSC’s expression of interest and
requested that NSC submit a detailed proposal for the Project that complied with requirements of the new
legislation. NSC submitted this detailed proposal (the ‘‘APP Proposal’’) to SIDUE in late March 2015. The
new legislation required that such proposal be evaluated by SIDUE and submitted to the Public-Private
Association Projects State Committee (the ‘‘APP Committee’’) for review and authorization. If the Project was
authorized the State would be required to conduct a public tender for the Project.
In response to our APP Proposal, in September 2015 NSC received a letter dated June 30, 2015 from the
the State agency with
Director General of the Comisión Estatal de Agua de Baja California (‘‘CEA’’),
responsibility for the Project that stated (i) the Project is in the public interest with high social benefits and is
consistent with the objectives of the State development plan and (ii) that the Project and accompanying
required public tender process should be conducted. In November 2015, the State officially commenced the
tender for the Project,
in 2019
consisting of a 50 million gallons per day plant and a pipeline that connects to the Mexican potable water
infrastructure and a second phase to be operational in 2024 consisting of an additional 50 million gallons
per day of production capacity. A consortium comprised of NSC, NuWater S.A.P.I. de C.V. and Degremont
S.A. de C.V. (the ‘‘Consortium’’) submitted its tender for the Project on the April 21, 2016 tender submission
deadline date set by the State.
the scope of which the State defined as a first phase to be operational
We have acknowledged since the inception of the Project that, due to the amount of capital the Project
requires, NSC will ultimately need an equity partner or partners for the Project. Consequently, NSC’s tender
to the State for the Project was based upon the following: (i) NSC will sell or otherwise transfer the land and
other Project assets to a new company (‘‘Newco’’) that would build and own the Project; (ii) NSC’s potential
partners would provide the majority of the equity for the Project and thereby would own the majority interest
in Newco; (iii) NSC would maintain a minority ownership position in Newco; and (iv) Newco would enter
into a long-term management and technical services contract for the Project with an entity partially owned by
NSC or another Company subsidiary.
On June 15, 2016, the State designated the Consortium as the winner of tender process for the Project.
On August 17, 2016, NSC and NuWater incorporated a special purpose company named Aguas de Rosarito
S.A.P.I. de C.V. (‘‘AdR’’) to execute the Project and executed a shareholders agreement agreeing among other
things that: (i) AdR would purchase the land and other Project assets from NSC on the date that the Project
18
begins commercial operation; and (ii) AdR would enter into a Management and Technical Services Agreement
with NSC effective on the first day that the Project begins commercial operation. As of December 31, 2016,
NSC owned 99.6% of AdR.
On August 22, 2016,
the Public Private Partnership Agreement for public private partnership number
002/2015, contest number SIDUE-CEA-APP-2015-002 (‘‘APP Contract’’) was executed between AdR, the
State Water Commission of Baja California (‘‘CEA’’), the Government of Baja California represented by
the Secretary of Planning and Finance (‘‘SPF’’), and the Public Utilities Commission of Tijuana (‘‘CESPT’’).
The APP Contract requires AdR to design, construct, finance and operate a seawater desalination plant (and
accompanying aqueducts) with a capacity of up to 100 million gallons per day in two phases: the first with a
capacity of 50 million gallons per day and an aqueduct to the Mexican potable water system in Tijuana, Baja
California; and the second phase with a capacity of 50 million gallons per day and an aqueduct to a second
delivery point in Tijuana. The first phase must be operational within 36 months of commencing construction,
and the second phase must be operational by the end of 2024. The APP Contract further requires AdR to
operate and maintain the plant and aqueducts for a period of 37 years starting from the commencement of
operation of the first phase. At the end of the operating period the plant and aqueducts will be transferred
to CEA.
is expected to be approximately 9 billion Mexican pesos, or approximately
The total Project cost
US$463 million (based upon the currency exchange rate as of March 10, 2017). Annual revenues from the
Project are expected to be approximately 1.02 billion Mexican pesos, or approximately US$52 million (based
upon the currency exchange rate as of March 10, 2017). Water rates under the APP Contract are indexed to
the Mexican national consumer price index over its term. Electrical energy costs incurred by AdR to
desalinate and deliver water are treated as a pass through charge to CEA, subject to efficiency guarantees.
AdR expects to raise Mexican peso denominated debt financing through a consortium led by the North
American Development Bank, which also provided financial advisory services to the consortium through the
bidding process and contract negotiations.
The APP Contract does not become effective until the following conditions are met:
•
•
•
•
•
•
the State has established and registered various payment trusts, guaranties and bank credit lines for
specific use by the Project;
the CEA has obtained the rights from the relevant federal authority to take and desalinate seawater
and distribute it for municipal use;
various water purchase and sale agreements between the CEA, the payment trusts and the CESPT
have been executed;
AdR has obtained all rights of ways required for the aqueduct;
AdR has obtained permission from the relevant federal authority to discharge the residual water
from the Project’s desalination plant; and
all equity and debt financing agreements necessary to provide the funding to AdR for the first phase
of the Project have been executed.
Both the exchange rate for the Mexico peso relative to the dollar and general macroeconomic conditions in
Mexico have declined since the U.S. Presidential election in November 2016. These changes have adversely
impacted the estimated construction, operating, and financing costs for the Project. The APP Contract and the
APP Law allow for the parties to negotiate (but do not guarantee) modifications to the water tariff in the event
of such significant macroeconomic condition changes. In February 2017, AdR submitted proposals to the
CEA requesting an increase to the water tariff to compensate for changes in foreign exchange rates, lending
rates and certain changes in law which have impacted the Project. If AdR is unable to obtain this requested
increase in the water tariff it may be unable to obtain the debt and equity financing required for the Project.
We are currently unable to say whether or not such water tariff increase will be approved.
19
If AdR is ultimately unable to proceed with the Project, the land NSC has purchased may lose its strategic
importance as the site for the Project and consequently may decline in value. If AdR does not proceed with
the Project, NSC may ultimately be unable to sell this land for an amount equal to or in excess of its current
carrying value of approximately $20.6 million, and any loss on sale of the land, or impairment loss NSC may
be required to record as a result of a decrease in the fair value of the land could have a material adverse
impact on our results of operations.
in NSC, has filed a lawsuit against NSC,
EWG Water LLC (‘‘EWG’’), a minority shareholder
CW-Cooperatief, the Public Registry of Commerce of Tijuana, Baja California, and other parties in the Civil
Court located in Tecate, Baja California, Mexico.
In this lawsuit, EWG is challenging, among other things, the capital investment transactions that increased our
ownership interest in NSC to 99.9%. EWG requested that the court, as a preliminary matter: (a) suspend the
effectiveness of the challenged transactions; (b) order public officials in Mexico to record the pendency of the
lawsuit in the public records; and (c) appoint an inspector for NSC to oversee its commercial activities. The
court granted, ex-parte, the preliminary relief sought by EWG, which resulted in the placement of inscriptions
for the lawsuit on NSC’s public records.
EWG is also seeking an order directing, among other things: (i) NSA, NSC and CW-Cooperatief to refrain
from carrying out any transactions with respect to the Project; and (ii) NSA, NSC and CW-Cooperatief, and
the partners thereof, to refrain from transferring any interests in NSA, NSC and CW-Cooperatief.
This litigation could adversely impact our efforts to complete the Project.
If we are unable to obtain a strategic partner for CW-Bali or otherwise significantly increase the
amount of water we presently sell from its plant, we may cease its operations and may be required to
record further impairment losses on our investment in this subsidiary.
Through our subsidiary, CW-Bali, we have built and presently operate a seawater reverse osmosis plant with a
productive capacity of approximately 790,000 gallons per day located in Nusa Dua, one of the primary tourist
areas of Bali, Indonesia. Since its inception, the sales volumes for this plant have not been sufficient to cover
its operating costs. CW-Bali’s operating loss was approximately ($2.7 million)
the year ended
December 31, 2016, which includes an impairment loss of $2.0 million recorded for the three months ended
September 30, 2016 to reduce the carrying value of CW-Bali’s long-lived assets to their estimated fair value.
for
in CW-Bali for the period in which we formally commit
If in the coming months we are not able to obtain a strategic partner for CW-Bali or otherwise significantly
increase the revenues generated by its Nusa Dua plant we may cease CW-Bali’s operations. If we cease
operations at CW-Bali, we may be required to record further impairment losses to reduce the carrying value of
the Bali market. Such
our investment
impairment losses could equal the carrying value of our investment in CW-Bali and have a material adverse
impact on our results of operations. Any sale of a portion of our investment in CW-Bali may be for an
amount less than our carrying amount, resulting in a loss on the sale that could have a material adverse
impact on our results of operations. The carrying value of our investment in CW-Bali as of December 31,
2016 totaled $1.8 million, consisting of net assets of $1.2 million and a cumulative translation adjustment
reflected in our stockholders’ equity of $549,555.
to exit
If the financial performance of our recently acquired subsidiary Aerex does not improve, we may be
required to record further impairment losses to reduce the carrying value of the goodwill arising from
this acquisition.
In February 2016, we acquired 51% ownership interest in Aerex. In connection with this acquisition we
recorded initial goodwill of $8,035,211. Aerex’s actual results of operations subsequent to our acquisition of
this company have fallen significantly short of the projected results that were included in the overall cash flow
projections we utilized to determine the purchase price for Aerex and the fair values of its assets and
liabilities. Based upon currently available information, we believe Aerex’s results of operations for fiscal year
2017 will also fall short of our purchase price projections for Aerex. Due to these actual and projected
for possible impairment as of
shortfalls in Aerex’s results of operations, we tested Aerex’s goodwill
September 30, 2016 by estimating its fair value using the discounted cash flow method. As a result of this
20
impairment testing, we determined that the carrying value of our Aerex goodwill exceeded its fair value, and
recorded an impairment loss of $1,750,000 for the three months ended September 30, 2016 to reduce the
carrying value of this goodwill to $6,285,211. We may be required to record additional impairment losses to
reduce the carrying value of our Aerex goodwill in future periods if we determine it likely that Aerex’s results
of operations will continue to fall short of our purchase price projections. Such impairment losses could have
a material adverse impact on our results of operations.
We do not have voting control over our affiliate, OC-BVI. Should our interests and the interests of
OC-BVI’s other voting shareholder diverge, the operations of OC-BVI could be adversely affected which
could decrease the value of our investment in OC-BVI.
trade association comprised primarily of government
We own 43.53% of the equity and 50% of the voting shares of OC-BVI. We and Sage, which owns the
remaining 50% of the voting shares, are each entitled to appoint three of the six directors of OC-BVI. If a tie
vote of the directors occurs on any matter, the president of the Caribbean Water and Wastewater Association, a
regional
is entitled to appoint a
temporary director to cast the deciding vote. As a result, although we provide operating management and
engineering services to OC-BVI, we share the overall management of OC-BVI with Sage and do not fully
control its operations. A divergence of our interests and the interests of Sage could adversely affect the
operations of OC-BVI and in turn decrease the value of our investment in OC-BVI, in which case we could
be required to record an impairment charge to reduce the carrying value of our investment in OC-BVI. Such
an impairment charge would reduce our earnings and could have a material adverse impact on our result of
operations and financial condition.
representatives,
The profitability of our plants is dependent upon our ability to accurately estimate the costs of their
construction and operation.
The cost estimates we prepare in connection with the construction and operation of our plants are subject to
inherent uncertainties. Additionally, the terms of our supply contracts may require us to guarantee the price of
water on a per unit basis, subject to certain annual inflation and monthly energy cost adjustments, and to
assume the risk that the costs associated with producing this water may be greater than anticipated. Because
we base our contracted price of water in part on our estimation of future construction and operating costs, the
profitability of our plants is dependent on our ability to estimate these costs accurately. The cost of materials
and services and the cost of the delivery of such services may increase significantly after we submit our bid
for a plant, which could cause the gross profit and net return on investment for a plant to be less than we
anticipated when the bid was made. The profit margins we initially expect to generate from a plant could be
further reduced if future operating costs for that plant exceed our estimates of such costs. These future
operating costs could be affected by a variety of factors,
including lower than anticipated production
efficiencies and geo-hydrological conditions at the plant site that differ materially from those we believe would
exist at the time we submitted our bid. Any construction and operating costs for our plants that significantly
exceed our initial estimates could adversely impact our results of operations, financial condition and cash
flows.
A significant portion of our consolidated revenues are derived from two customers. A loss of, or a less
favorable relationship with, either of these customers could adversely affect us.
Our top two bulk water customers, the WAC and the Water and Sewerage Corporation of The Bahamas,
accounted for approximately 13% and 33%, respectively, of our consolidated revenues for the year ended
December 31, 2016. If either of these customers terminate for cause or decide not to renew their contracts
with us, or renew such contracts on terms that are less favorable to us, or become unable for financial or other
reasons to comply with the terms of our contracts with them, our results of operations, cash flows and
financial condition could be adversely affected.
Possible future regulatory oversight and control could adversely impact our Belize operations.
By Statutory Instrument No. 81 of 2009,
the Minister of Public Utilities of the government of Belize
published an order, the Public Utility Provider Class Declaration Order, 2009 (the ‘‘Order’’), which as of
May 1, 2009 designated CW-Belize as a public utility provider under the laws of Belize. With this
21
designation, the Public Utilities Commission of Belize (the ‘‘PUC’’) has the authority to set the rates charged
by CW-Belize and to otherwise regulate its activities. On November 1, 2010, CW-Belize received a formal
complaint from the PUC alleging that CW-Belize was operating without a license under the terms of the
Water Industry Act. CW-Belize applied for this license in December 2010. On July 29, 2011, the PUC issued
the San Pedro Public Water Supply Quality and Security Complaint Order (the ‘‘Second Order’’) which
among other things requires that (i) CW-Belize and its customer jointly make a submission to the responsible
Minister requesting that the area surrounding CW-Belize’s seawater abstraction wells be designated a forest
reserve or national park and be designated a Controlled Area under section 58 of the Water Industry Act,
(ii) CW-Belize submit an operations manual for CW-Belize’s desalination plant to the PUC for approval,
(iii) CW-Belize and its customer modify the water supply agreement between the parties to (a) include new
water quality parameters included in the Order and (b) cap the current exclusive water supply arrangement in
the agreement at a maximum of 450,000 gallons per day, (iv) CW-Belize keep a minimum number of
replacement seawater RO membranes in stock at all
times and (v) CW-Belize take possession of and
reimburse the PUC for certain equipment which the PUC purchased from a third-party in late 2010.
CW-Belize has applied for declaratory judgment and has been granted a temporary injunction to stay the
enforcement of the Second Order by the PUC until such time as the Belize courts could hear the matter. The
initial hearing on this matter was conducted on October 30 and 31, 2012 with an additional hearing on
November 29, 2012. The ruling on this case is pending. An unfavorable ruling on the Order or the Second
Order could have an adverse impact on our results of operations, cash flows or financial condition.
Our operations are affected by tourism and are subject to seasonal fluctuations that could affect the
demand for our water.
Our operations are affected by the levels of tourism and are subject to seasonal variations in our service areas.
Demand for our water in the Cayman Islands, Belize, Bimini and The Bahamas is affected by variations in the
level of tourism and local weather, primarily rainfall. Tourism in our service areas is affected by the
economies of the tourists’ home countries, primarily the United States and Europe, terrorist activity and
perceived threats thereof, and increased costs of fuel and airfares. We normally sell more water during the first
and second quarters, when the number of tourists is greater and local rainfall is less, than in the third and
fourth quarters. A downturn in tourism or greater than expected rainfall in the locations we serve could
adversely impact our revenues, cash flows and results of operations.
We may have difficulty accomplishing our growth strategy within and outside of our current operating
areas.
Our expansion both within our current operating areas and into new areas involves significant risks, including,
but not limited to, the following:
•
•
•
•
•
regulatory risks, including government relations difficulties, local regulations, currency controls and
fluctuations in currency exchange rates;
receiving and maintaining necessary permits, licenses and approvals;
political instability, reliance on local economies, environmental problems, shortages of materials,
immigration restrictions and limited skilled labor;
risks related to development of new operations, including inaccurate assessment of the demand for
water, engineering difficulties and inability to begin operations as scheduled; and
risks relating to greater competition in these new territories, including the ability of our competitors
to gain or retain market share by reducing prices.
Even if we successfully expand our operations, we may have difficulty managing our growth. We cannot
assure you that any new operations within or outside of our current operating areas will attain or maintain
profitability or that the results from these new operations will not adversely impact our results of operations,
cash flows and financial condition.
22
Performance shortfalls under any of our bulk supply contracts could result in penalties or cancellation
of the contract.
Our bulk water supply contracts require us to meet specified minimum quality, quantity or energy
consumption guarantees. Membrane fouling or other technical problems could occur at any of our plants, and
if we are unable to meet the guarantees due to such operating issues, we could be in technical default of the
supply contract and subject to various adverse consequences, including financial penalties or cancellation of
the contract.
Our operations could be harmed by hurricanes or tropical storms.
including the large tourist properties
A hurricane or tropical storm could cause major damage to our equipment and properties and the properties of
our customers,
in
September 2004 Hurricane Ivan caused significant damage to our plants and our customers’ properties, which
adversely affected our revenues. Any future damage could cause us to lose use of our equipment and
properties and incur additional repair costs. Damage to our customers’ properties and the adverse impact on
tourism could result in a decrease in water demand. A hurricane or tropical storm could also disrupt the
delivery of equipment and supplies, including electricity, necessary to our operations. These and other possible
effects of hurricanes or tropical storms could have an adverse impact on our results of operations, cash flows
and financial condition.
in our areas of operation. For example,
Contamination of our processed water may cause disruption in our services and adversely affect our
revenues.
including acts of terrorism. In the event
Our processed water may become contaminated by natural occurrences and by inadvertent or intentional
human interference,
that a portion of our processed water is
contaminated, we may have to interrupt the supply of water until we are able to install treatment equipment or
substitute the flow of water from an uncontaminated water production source. In addition, we may incur
significant costs in order to treat a contaminated source of plant feed water through expansion of our current
treatment facilities, or development of new treatment methods. An inability by us to substitute processed water
from an uncontaminated water source or
in a
to adequately treat
cost-effective manner may have an adverse effect on our results of operations, cash flows and financial
condition.
the contaminated plant
feed water
Potential government decisions, actions and regulations could negatively affect our operations.
We are subject to the local regulations of the Cayman Islands, Belize, the British Virgin Islands, The Bahamas
and Indonesia, all of which are subject to change. Any government that regulates our operations may issue
legislation or adopt new regulations, including but not limited to:
•
•
•
•
•
•
•
restricting foreign ownership (by us);
providing for the expropriation of our assets by the government;
providing for nationalization of public utilities by the government;
providing for different water quality standards;
unilaterally changing or renegotiating our licenses and agreements;
restricting the transfer of U.S. currency; or
causing currency exchange fluctuations/devaluations or making changes in tax laws.
As new laws and regulations are issued, we may be required to modify our operations and business strategy,
which we may be unable to do in a cost-effective manner. Failure by us to comply with applicable regulations
could result in the loss of our licenses or authorizations to operate, the assessment of penalties or fines, or
otherwise may have a material adverse effect on our results of operations.
23
We rely on the efforts of key employees. Our failure to retain these employees could adversely affect our
results of operations.
Our success depends upon the abilities of our executive officers. In particular, the loss of the services of
Frederick W. McTaggart, our President and Chief Executive Officer, could be detrimental to our operations
and our continued success. Mr. McTaggart has an employment agreement expiring on December 31, 2019.
Each year, the term of this agreement may be extended for an additional year. However, we cannot guarantee
that Mr. McTaggart will continue to work for us during the term of his agreement or will enter into any
extensions thereof.
We are exposed to credit risk through our relationships with several customers.
We are subject to credit risk posed by possible defaults in payment by our bulk water customers in the
Cayman Islands, Belize, the British Virgin Islands and The Bahamas and by possible defaults in payment by
the WAC on their loans payable to us. Adverse economic conditions affecting, or financial difficulties of, those
parties could impair their ability to pay us or cause them to delay payment. We depend on these parties to pay
us on a timely basis. Our outstanding accounts receivable are not covered by collateral or credit insurance.
Any delay or default in payment could adversely affect our results of operations, cash flows, and financial
condition.
We are exposed to the risk of variations in currency exchange rates.
Although we report our results in United States dollars, the majority of our revenues are earned in other
currencies. Although many of these currencies have been fixed to the United States dollar for more than
20 years, other currencies (e.g. the Mexico peso, Indonesian rupiah and the euro) are not. We do not employ
hedging strategies against the foreign currency exchange rate risk associated with conducting business in
foreign currencies while reporting in United States dollars. If any of the fixed exchange rates becomes a
floating exchange rate, or the other currencies in which we conduct business depreciate significantly against
the United State dollar, our results of operations, cash flows and financial condition could be adversely
affected.
We may enter new markets in the future in which we do not have a contractual commitment for our
products or existing customers.
Our strategy contemplates potential entry into new markets (such as Mexico and other countries) where we
believe a demand for potable water exists beyond the current supply of potable water in those markets. We
may incur significant business development expenses in the pursuit of new markets prior to obtaining a
contract for services in these markets, and such expenses could have an adverse impact on our results of
operations and cash flows. We may decide to enter such markets by building new reverse osmosis desalination
plants before we have obtained a contract for the sale of water produced by the new plant or before we have
established a customer base for the water produced by the new plant. If after completing such plant we are
unable to obtain a contract or sufficient number of customers for the plant, we may be unable to recover the
cost of our investment in the plant, which could have a material adverse effect on our results of operations,
cash flows and financial condition.
We may not pay dividends in the future. If dividends are paid, they may be in lesser amounts than past
dividends.
Our shareholders may receive dividends out of legally available funds if, and when, they are declared by our
Board of Directors. We have paid dividends in the past, but may cease to do so at any time. We may incur
increased operating or development expenses or capital requirements or additional indebtedness in the future
that may restrict our ability to declare and pay dividends. We may also be restricted from paying dividends in
the future due to restrictions imposed by applicable corporate laws, our results of operations, cash flows and
financial condition, covenants contained in our financing agreements, and other factors considered by our
Board of Directors. We may not continue to pay dividends in the future or, if dividends are paid, they may not
be in amounts similar to past dividends.
24
Service of process and enforcement of legal proceedings commenced against us in the United States may
be difficult to obtain.
We are incorporated under the laws of the Cayman Islands and substantially all of our assets are located
outside of the United States. In addition, eight of our 16 directors and executive officers reside outside the
United States. As a result, it may be difficult for investors to affect service of process within the United States
upon us and such other persons, or to enforce judgments obtained against such persons in United States
the
courts, and bring any action,
United States securities laws. In addition, it may be difficult for investors to enforce, in original actions
brought in courts or jurisdictions located outside of the United States, rights predicated upon the United States
securities laws.
including actions predicated upon the civil
liability provisions of
Based on the advice of our Cayman Islands legal counsel, we believe no reciprocal statutory enforcement of
foreign judgments exists between the United States and the Cayman Islands, and that foreign judgments
originating from the United States are not directly enforceable in the Cayman Islands. A prevailing party in a
United States proceeding against us or our officers or directors would have to initiate a new proceeding in the
Cayman Islands using the United States judgment as evidence of the party’s claim. A prevailing party could
rely on the summary judgment procedures available in the Cayman Islands, subject to available defenses
in the Cayman Islands courts,
jurisdiction in the
United States courts, lack of due service of process in the United States proceeding and the possibility that
enforcement or recognition of the United States judgment would be contrary to the public policy of the
Cayman Islands.
the lack of competent
including, but not
limited to,
Depending on the nature of damages awarded, civil liabilities under the Securities Act of 1933, as amended
(or the Securities Act), or the Securities Exchange Act of 1934, as amended (or the Exchange Act),
for original actions instituted outside the Cayman Islands may or may not be enforceable. For example, a
United States judgment awarding remedies unobtainable in any legal action in the courts of the Cayman
Islands, such as treble damages, would likely not be enforceable under any circumstances.
The relatively low trading volume of our stock may adversely impact the ability to sell our shares.
For the year ended December 31, 2016,
the average daily trading volume of our common shares was
approximately 70,000 shares, a much lower trading volume than that of many other companies listed on the
NASDAQ Global Select Market. A public trading market having the desired characteristics of depth, liquidity
and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at
any given time. This presence in turn depends on the individual decisions of investors and general economic
and market conditions over which we have no control. As a consequence of the limited volume of trading in
our common shares, an investor in our stock may have difficulty selling a large number of our common shares
in the manner, or at the price, that might be attainable if our common shares were more actively traded.
We are subject to anti-takeover measures that may discourage, delay or prevent a change of control of
our Company.
Classified Board of Directors. We have a classified Board of Directors that consists of three groups. Only
one group of directors is elected each year. Our classified Board may increase the length of time necessary for
an acquirer to change the composition of a majority of directors in order to gain control of our Board.
Option Deed. We are party to an Option Deed that is intended to improve the bargaining position of our
Board of Directors in the event of an unsolicited offer to acquire our outstanding stock. Under the terms of
the Option Deed, a stock purchase right is attached to each of our current or future outstanding common
shares and redeemable preferred shares issued prior to the time the purchase rights become exercisable, are
redeemed or expire. The purchase rights will become exercisable only if an individual or group has acquired,
or obtained the right to acquire, or announced a tender or exchange offer that if consummated would result in
such individual or group acquiring, beneficial ownership of 20% or more of our outstanding common shares.
Upon the occurrence of a triggering event, the rights will entitle every holder of our shares, other than the
acquirer, to purchase our shares or shares of our successor on terms that would likely be economically dilutive
to the acquirer. Under certain circumstances, instead of common shares, our Board of Directors may issue
cash or debt securities. Our Board of Directors, however, has the power to amend the Option Deed so that it
25
does not apply to a particular acquisition proposal or to redeem the rights for a nominal value before they
become exercisable. These features will likely encourage an acquirer to negotiate with our Board of Directors
before commencing a tender offer or to condition a tender offer on our Board of Directors taking action to
prevent the purchase rights from becoming exercisable. The Option Deed does not expire until July 2017.
As a result of these anti-takeover measures, we could deter efforts to make changes to, or exercise control
over, current management. In addition, our shareholders may not have an opportunity to sell their common
shares to a potential acquirer at the acquirer’s offering price, which is typically at a premium to market price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Cayman Islands Properties
Abel Castillo Water Works
Our wholly owned subsidiary, Cayman Water, owns and operates our Abel Castillo Water Works (‘‘ACWW’’)
site, which encompasses 12,812 square feet of buildings, a high service distribution pump house, warehouse
space and three 1.0 million gallon potable water storage tanks. The site is located on 3.2 acres, including
485 feet of waterfront. The current water production capacity of this site is 2.0 million gallons per day.
We own an approximately one acre property adjacent to our ACWW plant which we purchased in 2007 for
future use.
West Bay Plant
We own, operate and maintain our West Bay plant in Grand Cayman, which is located on 6.1 acres in West
Bay. The plant began operating in 1995, was expanded over the years, and now has a production capacity of
approximately 900,000 gallons per day. On this site we have a 2,600 square foot building which houses our
water production facilities, a 2,400 square foot building which houses the potable water distribution pumps, a
water quality testing laboratory, and office space and water storage capacity consisting of three 1.0 million
gallon potable water tanks.
Britannia Plant
We own the Britannia seawater desalination plant in Grand Cayman, which consists of a seawater reverse
osmosis production plant with a capacity of 715,000 gallons of water per day, an 840,000 gallon potable water
storage tank, potable water high service pumps, and various ancillary equipment to support the operation. We
have entered into a lease of the 0.73 acre site and steel frame building which houses the plant for a term that
ends in 2027 at an annual rent of $1.00.
Distribution System
We own our Seven Mile Beach and West Bay potable water distribution systems in Grand Cayman. The
combined systems consist of potable water pipes, valves, curb stops, meter boxes, and water meters.
Corporate Offıce
We occupy approximately 5,500 square feet of office space at the Regatta Office Park, West Bay Road, Grand
Cayman, Cayman Islands under a lease that expires April 30, 2019.
Red Gate Plant
Under the terms of the water production and supply license that expires in July 2017 between OC-Cayman
and the government of the Cayman Islands, OC-Cayman is allowed to use the property and the plant for the
Red Gate plant to produce approximately 1.3 million gallons of desalinated water per day for sale to the
Water Authority-Cayman (‘‘WAC’’).
North Sound Plant
OC-Cayman operates the electrically powered North Sound plant, which is owned by the WAC, and supplies
approximately 1.6 million gallons of desalinated water per day to the WAC. OC-Cayman leases the property
26
on which the plant is located from the WAC for a minimal annual rent, for the duration of the sale and
operating agreement, which expires in April 2017. Responsibility for operation of the plant passes to the
WAC upon expiration of the sale and operating agreement.
North Side Water Works Plant
OC-Cayman operates this electrically powered plant, which is owned by the WAC. This plant can supply up
to approximately 2.4 million gallons of desalinated water per day under a vendor-financed sale and operating
agreement with the WAC. OC-Cayman leases the property on which the plant is located from the WAC for a
minimal annual rent for the duration of the sale and operating agreement. Responsibility for operation of the
plant passes to the WAC upon expiration of the sale and operating agreement in June 2019.
Bahamas Properties
Bimini plant
We own the water production facility in South Bimini. The facility consists of a 250,000 gallon bolted steel
potable water tank and two 40 foot long standard shipping containers which contain a seawater reverse
osmosis production plant with a rated capacity of 115,000 gallons per day, a high service pump skid and an
office. The facility is located on a parcel of land owned by South Bimini International Ltd., and we are
allowed, under the terms of our agreement, to utilize the land for the term of the agreement without charge.
Windsor plant
We own the Windsor water production facility, located in Nassau, New Providence, with a production capacity
of 3.1 million gallons per day. The plant is powered by a combination of diesel engine-driven high-pressure
pumps, and electrical power purchased from the Bahamas Electricity Corporation to power all other loads in
the plant. The plant is contained within a 13,000 sq. ft. concrete and steel building that also contains a
warehouse, workshop and offices. It is located on land owned by the Water and Sewerage Corporation of The
Bahamas and our water sales agreement gives us a license to use the land throughout the term of that
agreement. This water supply agreement was originally scheduled to expire in July 2013 when we delivered
the total amount of water required under the agreement, but has since been extended through 2031.
Blue Hills plant
In July 2006, we substantially completed construction of a second water production facility in Nassau, New
Providence: the Blue Hills plant. With an initial production capacity of 7.2 million gallons per day this plant
is the largest desalination plant we have built or operated to date. The plant is powered by a combination of
diesel engine-driven high-pressure pumps, and electrical power purchased from the Bahamas Electricity
Corporation to power all other loads in the plant. The plant is contained within a 16,000 sq. ft. concrete and
steel building that also contains a warehouse, workshop and offices. It is located on land owned by the Water
and Sewerage Corporation of The Bahamas and our 20-year water sales agreement gives us a license to use
the land throughout the term of that agreement.
The Blue Hills plant water supply agreement was amended in January 2011 and extended through 2032.
Pursuant to this amendment, we added a second production facility to increase the total production capacity of
the Blue Hills plant to 12.0 million gallons per day. The plant expansion was substantially completed in
March of 2012 and is powered by a combination of diesel engine-driven high-pressure pumps, and electrical
power purchased from the Bahamas Electricity Corporation to power all other loads in the plant. The plant
expansion is contained in a 10,640 sq. ft. steel building located adjacent to the initial production facility on
land owned by the WSC.
Belize Properties
We own our San Pedro water production facility in Ambergris Caye, Belize. The plant consists of a one story
concrete block building, which contains a seawater reverse osmosis water production plant with a production
capacity of 600,000 gallons per day and a 1.0 million gallon potable water storage tank. We lease the land on
which our plant is located from the Government of Belize at an annual rent of BZE$1.00. This lease expires
in April 2026.
27
U.S. Properties
Our Aquilex office consists of 6,500 square feet located in Coral Springs, Florida that has been leased through
March 2021. Our U.S. warehouse consists of 4,100 square feet located in Sunrise, Florida that has been leased
through September 2020.
Aerex owns its 30,000 square foot manufacturing facility located in Fort Pierce, Florida and has
approximately 6,000 square feet of office space in downtown Fort Pierce under a lease that expires in
June 2018.
Mexico Properties
NSC owns 20.1 hectares of land in Rosarito Beach, Baja California, Mexico which is designated for use as
the plant site for the proposed desalination project to be completed by AdR.
In November 2012, NSC entered into a lease with an effective term of 20-years from the date of full
operation of the desalination plant, with the Comisión Federal de Electricidad for approximately 5,000 square
meters of land on which it plans to construct the water intake and discharge works for the plant. The amounts
due on this lease are payable in Mexican pesos at an amount that is currently equivalent to approximately
$20,000 per month. This lease is cancellable by NSC should AdR ultimately not proceed with the project.
Indonesia Property
We own a water production facility located in the Nusa Dua region of Bali, Indonesia consisting of a plant
with a production capacity of 790,000 gallons per day and a 528,000 gallon potable water storage tank. The
land on which this plant and storage tank is located is leased through October 8, 2032.
ITEM 3. LEGAL PROCEEDINGS
CW-Belize
the Minister of Public Utilities of the government of Belize
By Statutory Instrument No. 81 of 2009,
published an order, the Public Utility Provider Class Declaration Order, 2009 (the ‘‘Order’’), which as of
May 1, 2009 designated CW-Belize as a public utility provider under the laws of Belize. With this
designation, the Public Utilities Commission of Belize (the ‘‘PUC’’) has the authority to set the rates charged
by CW-Belize and to otherwise regulate its activities. On November 1, 2010, CW-Belize received a formal
complaint from the PUC alleging that CW-Belize was operating without a license under the terms of the
Water Industry Act. CW-Belize applied for this license in December 2010. On July 29, 2011, the PUC issued
the San Pedro Public Water Supply Quality and Security Complaint Order (the ‘‘Second Order’’) which
among other things requires that (i) CW-Belize and its customer jointly make a submission to the responsible
Minister requesting that the area surrounding CW-Belize’s seawater abstraction wells be designated a forest
reserve or national park and be designated a Controlled Area under section 58 of the Water Industry Act,
(ii) CW-Belize submit an operations manual for CW-Belize’s desalination plant to the PUC for approval,
(iii) CW-Belize and its customer modify the water supply agreement between the parties to (a) include new
water quality parameters included in the Order and (b) cap the current exclusive water supply arrangement in
the agreement at a maximum of 450,000 gallons per day, (iv) CW-Belize keep a minimum number of
replacement seawater RO membranes in stock at all
times and (v) CW-Belize take possession of and
reimburse the PUC for certain equipment which the PUC purchased from a third-party in late 2010.
CW-Belize has applied for declaratory judgment and has been granted a temporary injunction to stay
the enforcement of the Second Order by the PUC until such time as the Belize courts could hear the matter.
The initial hearing on this matter was conducted on October 30 and 31, 2012 with an additional hearing on
November 29, 2012. The ruling on this case is pending. We are presently unable to determine what impact the
Order and the Second Order will have on our financial condition, results of operations or cash flows.
N.S.C. Agua, S.A. de C.V.
In May 2010, we acquired,
subsidiary, Consolidated Water
through our wholly-owned Netherlands
Cooperatief, U.A., (‘‘CW-Cooperatief’’) a 50% interest in N.S.C. Agua, S.A. de C.V. (‘‘NSC’’), a development
stage Mexican company. We have since purchased, through the conversion of a loan we made to NSC,
28
sufficient shares to raise our ownership interest in NSC to 99.9%. NSC was formed to pursue a project
encompassing the construction, operation and minority ownership of a 100 million gallon per day seawater
reverse osmosis desalination plant to be located in northern Baja California, Mexico and an accompanying
pipeline to deliver water to the Mexican potable water system (the ‘‘Project’’).
Immediately following CW-Cooperatief’s acquisition of its initial 50% ownership in NSC, the remaining 50%
ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S. de R.L. de C.V. (‘‘NSA’’).
NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC (‘‘EWG’’) and the
other half of its shares in NSC to Alejandro de la Vega (the ‘‘individual shareholder’’). In February 2012, we
paid $300,000 to enter into an agreement (the ‘‘Option Agreement’’) that provided us with an option,
exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder,
along with an immediate power of attorney to vote those shares, for $1.0 million. Such shares constituted 25%
of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to
CW-Cooperatief by issuing additional shares of its stock. As a result of this share issuance to CW-Cooperatief,
we acquired 99.9% of the ownership of NSC. The Option Agreement contained an anti-dilution provision that
required us to issue new shares in NSC of an amount sufficient to maintain the individual shareholder’s 25%
ownership interest in NSC if (i) any new shares of NSC were issued subsequent to the execution of the
Option Agreement and (ii) we did not exercise our share purchase option by February 7, 2014. We exercised
our option and paid the $1.0 million to the individual shareholder to purchase the Option Agreement shares in
February 2014.
In October 2015, we learned that EWG filed a lawsuit against
the individual shareholder, NSC, NSA,
CW-Cooperatief, Ricardo del Monte Nunez, Carlos Eduardo Ahumada Arruit, Luis de Angitia Becerra, and the
Public Registry of Commerce of Tijuana, Baja California in the Civil Court located in Tecate, Baja California,
Mexico.
In this lawsuit, EWG is challenging, among other things, the capital investment transactions that increased our
ownership interest in NSC to 99.9%. EWG requested that the court, as a preliminary matter: (a) suspend the
effectiveness of the challenged transactions; (b) order public officials in Mexico to record the pendency of the
lawsuit in the public records; and (c) appoint an inspector for NSA and NSC to oversee its commercial
activities. The Court granted, ex-parte, the preliminary relief sought by EWG, which resulted in the placement
of inscriptions for the lawsuit on NSC’s public records.
EWG is also seeking an order directing, among other things: (i) NSA, NSC and CW-Cooperatief to refrain
from carrying out any transactions with respect to the Project; and (ii) NSA, NSC and CW-Cooperatief, and
the partners thereof, to refrain from transferring any interests in NSA, NSC and CW-Cooperatief. The Court
has not yet ruled on these requests.
On April 5, 2016, NSC filed a motion for reconsideration with the Tecate, Mexico Court asking, among other
things, that the Court; (i) reverse its order to record the pendency of the lawsuit in the public records,
(ii) cancel the appointment of the inspector, and (iii) allow NSC to provide a counter-guarantee to suspend the
effects of the Court’s order regarding the challenged transactions. On April 26, 2016, the Tecate, Mexico
Court issued an interlocutory judgment (i) ordering the cancellation of the inscriptions on NSC’s public
records and (ii) rejecting NSC’s motion for cancellation of the appointment of the inspector.
On April 26, 2016, NSC filed a full answer to EWG’s claims, rejecting every claim made by EWG. The
Court’s response on this matter is pending.
On May 17, 2016, the Company filed a claim with the Third District Court in Matters of Amparo and Federal
Trials in the City of Tijuana, Baja California (the ‘‘Amparo Court’’) challenging the Tecate, Mexico Court
ex-parte order which appointed an inspector over NSC’s commercial activities. On July 29, 2016, the Amparo
Court found that such appointment is unconstitutional and reversed the Tecate, Mexico Court’s appointment of
an inspector.
On September 6, 2016, the Tecate, Mexico Court issued a decree granting the counter guaranty requested by
NSC. Such counter-guaranty was fixed in the amount of MXP 300,000.00 Mexican pesos and was given to
the Court on October 13, 2016 at which time all remaining ex-parte restrictions on NSC related to the
challenged transactions were suspended.
29
We believe that the claims made by EWG are baseless and without merit, and we will vigorously defend NSC
and CW-Cooperatief in this litigation, and will seek dismissal of the orders entered by the court and all claims
against NSC and CW-Cooperatief. We incurred legal fees in connection with this litigation of approximately
$203,000 and $138,000 for the years ended December 31, 2016 and 2015, respectively.
We cannot presently determine the outcome of this litigation. However, such litigation could adversely impact
our efforts to complete the Project.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
30
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Class A common stock is listed on the NASDAQ Global Select Market and trades under the symbol
‘‘CWCO.’’ Listed below, for each quarter of the last two fiscal years, are the high and low closing prices for
our Class A common stock on the NASDAQ Global Select Market.
First Quarter 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
$12.17
14.62
13.79
12.15
$11.49
13.12
13.50
13.12
Low
$10.63
11.95
11.45
10.10
$ 9.78
10.59
9.97
10.37
No trading market exists for our redeemable preferred shares, which are only issued to, or purchased by,
long-term employees of our company and must be held by these employees for a period of four years before
they vest.
On December 16, 2016, we issued 15,192 shares of common stock to our directors under the Non-Executive
Directors’ Share Plan in consideration for their service on our Board of Directors and the committees thereof.
See ‘‘ITEM 11. EXECUTIVE COMPENSATION.’’
We are a party to an Option Deed dated August 6, 1997, and amended on August 8, 2005, September 27,
2005 and May 30, 2007 (as amended, the ‘‘Option Deed’’), designed to deter coercive takeover tactics.
Pursuant to the Option Deed, we granted to the holders of our common shares and redeemable preferred
shares options (the ‘‘Options’’) to purchase one one-hundredth of a share of our Class ‘B’ common shares at
an exercise price of $100.00 per one one-hundredth of a Class ‘B’ common share, subject to adjustment. The
Options are attached to and trade with our common shares and redeemable preferred shares, and no separate
certificates representing the Options have been distributed. The Options will separate from our common shares
and redeemable preferred shares, and certificates representing the Options will be issued, upon the earlier of
the date (such date, the ‘‘Distribution Date’’) that is (i) ten business days following a public announcement
that a person or group of affiliated or associated persons (an ‘‘Acquiring Person’’) has acquired, or obtained
the right to acquire, beneficial ownership of 20% or more of our outstanding common shares, or (ii) ten
business days following the commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person.
The Options are not exercisable until the Distribution Date and will expire at the close of business on July 31,
2017, unless the Options are earlier redeemed by us. Additionally, following the Distribution Date, all Options
that are, or in certain circumstances were, beneficially owned by any Acquiring Person will be null and void.
For a period of ten business days following the date that any person, alone or jointly with its affiliates and
associates, becomes an Acquiring Person, we will have the right to redeem the Options at a price of CI$0.01
per Option. If the Options are not redeemed, then following such ten business day period each holder of an
Option will have the right to receive on exercise, in lieu of one one-hundredth of a Class ‘B’ common share,
common shares (or, in certain circumstances, cash, property or other securities) having a value equal to two
times the exercise price of the Option. For example, at an exercise price of $100.00 per Option, each Option
not owned by an Acquiring Person (or by certain related parties) following any person, alone or jointly with
its affiliates and associates, becoming an Acquiring Person would entitle its holder to purchase $200.00 worth
of common shares for $100.00. Assuming that the common shares had a per share value of $20.00 at such
time, the holder of each valid Option would be entitled to purchase 10 common shares for $100.00.
31
Any of the provisions of the Option Deed may be amended by our Board of Directors prior to the Distribution
Date. After the Distribution Date, the provisions of the Option Deed may be amended by the Board of
Directors in order to cure any ambiguity, to make changes which do not adversely affect the interests of
holders of Options (excluding the interests of any Acquiring Person), or to shorten or lengthen any time
period under the Option Deed. The Option Deed expires on July 31, 2017, and we do not expect our Board of
Directors to extend the Option Deed beyond this expiration date.
Currently 2,023,850 Bahamian Depository Receipts (‘‘BDRs’’) that constitute ownership of 404,770 shares of
our common stock are listed and traded on the Bahamian International Stock Exchange. Our common shares
that underlie these BDRs are held in a custodial account in The Bahamas. The BDRs are entitled to dividend
payments, if and when declared on our common shares, in proportion to their relative value to our common
shares.
Holders
As of March 10, 2017, we had 805 holders of record of our common stock.
Dividends
Our Board of Directors declares and approves any and all dividends.
We have paid dividends to owners of our common shares and redeemable preferred shares since we began
declaring dividends in 1985. However, the payment of any future cash dividends will depend upon our
earnings, financial condition, cash flows, capital requirements and other factors our Board of Directors deems
relevant in determining the amount and timing of such dividends.
Listed below, for each quarter of the last two fiscal years, is the amount of dividends declared on our issued
and outstanding shares of common shares and redeemable preferred shares.
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter
2016
$0.075
0.075
0.075
0.075
$ 0.30
2015
$0.075
0.075
0.075
0.075
$ 0.30
Exchange Controls and Other Limitations Affecting Security Holders
Our Company is not subject to any governmental laws, decrees or regulations in the Cayman Islands which
restrict the export or import of capital, or that affect the remittance of dividends, interest or other payments to
non-resident holders of our securities. The Cayman Islands does not impose any limitations on the right of
non-resident owners to hold or vote our common stock. There are no exchange control restrictions in the
Cayman Islands.
Taxation
The Cayman Islands presently impose no taxes on profit, income, distribution, capital gains, or appreciations
of our Company and no taxes are currently imposed in the Cayman Islands on profit, income, capital gains, or
appreciations of the holders of our securities or in the nature of estate duty, inheritance, or capital transfer tax.
The United States and the Cayman Islands do not have an income tax treaty.
The information required by Item 201(d) of Regulation S-K is provided under ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS of this Annual Report.
32
ITEM 6.
SELECTED FINANCIAL DATA
The table below contains selected financial data, derived from our audited consolidated financial statements
for each of the years in the five-year period ended December 31, 2016. Our consolidated financial statements
are prepared in accordance with the accounting principles generally accepted in the United States of America
(‘‘US-GAAP’’). As a result, all financial information presented herein has been prepared in accordance with
US-GAAP. This selected financial data should be read in conjunction with ‘‘Management’s Discussion and
Analysis of Financial Condition and Results of Operations’’ and with our consolidated financial statements and
related notes thereto contained elsewhere in this Annual Report.
2016
Year Ended December 31,
2014
2015
2013
2012
Statement of Income Data:
Revenues . . . . . . . . . . . . . . . . . $ 57,875,707
Net Income . . . . . . . . . . . . . . .
3,960,501(1)
$ 57,116,202 $ 65,559,078 $ 63,822,131 $ 65,450,702
9,315,514
6,265,358
7,518,701
8,594,519
Balance Sheet Data:
Total Assets . . . . . . . . . . . . . . .
Long Term Debt Obligations
163,604,528
161,575,026
160,293,143
165,364,854
150,449,086
(including current portion) . . . .
Demand loan payable . . . . . . . . .
Note payable to related party . . . .
Redeemable Preferred Stock . . . .
Non-controlling interests . . . . . . .
Dividends Declared Per Share . . . $
Basic Earnings Per Share . . . . . . $
Weighted Average Shares-Basic . .
Diluted Earnings Per Share . . . . . $
Weighted Average Shares-Diluted. .
—
—
490,000
21,135
8,500,424
0.30
0.27
14,809,909
0.27
14,944,028
—
6,958,328
—
23,282
3,154,943
— 15,255,167
—
—
22,445
2,599,258
8,833,312
—
22,104
2,933,496
$
$
$
0.30 $
0.51 $
0.30 $
0.43 $
0.30 $
0.59 $
14,741,748
14,697,896
14,633,884
0.51 $
0.42 $
0.58 $
14,827,755
14,764,323
14,703,880
6,852,660
—
—
18,159
1,927,214
0.30
0.64
14,578,518
0.64
14,606,148
(1) Reflects $3,750,000 of impairment losses recorded during the third quarter.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Our primary objective is to provide water services in areas where the supply of potable water is scarce and
where the use of reverse osmosis technology to produce potable water is economically feasible.
We intend to increase revenues by developing new business opportunities both within our current service areas
and in new markets. We expect to maintain operating efficiencies by continuing to properly execute our water
production, energy recovery, equipment maintenance and water loss mitigation programs. We believe that
many water scarce countries in the Caribbean basin and other select markets present opportunities for our
business model.
Our water production operations and activities, and those of our affiliate OC-BVI, are presently conducted at
13 plants in five countries:
the British Virgin Islands and
Indonesia. The following table sets forth the comparative combined production capacity of our retail, bulk and
affiliate operations as of December 31 of each year.
the Cayman Islands, The Bahamas, Belize,
33
Comparative Operations
Plants
6
3
1
2
1
13
Capacity(1)
8.9
15.2
0.6
0.8
0.8
26.3
Location
Cayman Islands
Bahamas
Belize
British Virgin Islands
Bali, Indonesia
2015
Plants
7
3
1
2
1
14
Capacity(1)
9.1
15.2
0.6
0.8
0.8
26.5
2016
Location
Cayman Islands . . . . . . . . . . . . .
Bahamas . . . . . . . . . . . . . . . . . .
Belize . . . . . . . . . . . . . . . . . . . .
British Virgin Islands . . . . . . . . .
Bali, Indonesia . . . . . . . . . . . . . .
(1)
In millions of gallons per day.
Cayman Islands
We have been operating our business on Grand Cayman since 1973 and have been using reverse osmosis
technology to convert seawater to potable water since 1989. The Cayman Islands have a limited natural
supply of fresh water. We currently have an exclusive license from the Cayman Islands government to process
potable water from seawater and then sell and distribute that water by pipeline to the Seven Mile Beach and
West Bay areas of Grand Cayman. Our operations consist of three company owned and three government
owned reverse osmosis seawater conversion plants which provide water to approximately 5,900 retail
residential and commercial customers within a government licensed area and bulk water sales to the Water
Authority-Cayman (‘‘WAC’’), respectively. Our pipeline system in the Cayman Islands covers the Seven Mile
Beach and West Bay areas of Grand Cayman and consists of approximately 90 miles of potable water pipe.
Our exclusive license from the Cayman Islands government was set to expire on July 30, 2010, however, we
and the Cayman Islands government have extended the license several times in order to provide sufficient time
to negotiate the terms of a new license. The most recent extension of the license expired on June 30, 2016.
We continue to provide water subsequent to June 30, 2016 on the assumption that the license has been further
extended to allow the parties to continue negotiations without interruption to an essential service. We have
been informed during our retail license negotiations that the Cayman Islands government seeks to restructure
the terms of our license to employ a rate of return on invested capital model, the implementation of which
could significantly reduce the operating income and cash flows we have historically generated from our retail
license. Our retail license negotiations have also been impacted by the passage of new legislation in the
Cayman Islands. See further discussion of this matter at ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Material Commitments,
Expenditures and Contingencies — Renewal of Retail License.
The Bahamas
CW-Bahamas produces potable water from three reverse osmosis seawater conversion plants. Two of these
plants, the Windsor plant and the Blue Hills plant, are located in Nassau, New Providence and have a total
installed capacity of 15.1 million gallons per day. CW-Bahamas supplies water from these plants on a
take-or-pay basis to the Water and Sewerage Corporation of The Bahamas (‘‘WSC’’) under long-term
build, own and operate supply agreements. During 2016, we supplied approximately 3.8 billion gallons
(2015: 3.7 billion gallons) of water to the WSC from these plants. CW-Bahamas’ third plant is located in
Bimini, has a capacity of 115,000 gallons per day, and provides potable water to the Bimini Sands Resort
and to the Bimini Beach Hotel. We have also sold water intermittently to the WSC from our Bimini plant
when their regular supply was unavailable.
From time to time, CW-Bahamas has experienced delays in collecting its accounts receivable. Representatives
of the Bahamas government have informed us that their previous delays in paying our accounts receivables
did not reflect any type of dispute with us with respect to the amounts owed. To date, we have not been
required to provide an allowance for any delinquent CW-Bahamas accounts receivable as such amounts were
eventually paid in full. Based upon our experience, we believe that the accounts receivable from the WSC are
fully collectible and therefore have not provided any allowance for possible non-payment of these receivables.
Our accounts receivable balances due from the Bahamas government amounted to $11.0 million and
$4.7 million, at December 31, 2016 and 2015, respectively.
34
Belize
CW-Belize was acquired on July 21, 2000, and consists of one reverse osmosis seawater conversion plant on
Ambergris Caye, Belize, capable of producing 600,000 gallons per day. We sell water to one customer, Belize
Water Services Limited, which then distributes the water through its own distribution system to residential,
commercial and tourist properties on Ambergris Caye.
the Minister of Public Utilities of the government of Belize published a declaratory order
In 2009,
designating CW-Belize as a public utility provider. With this order the Public Utilities Commission of
Belize (‘‘PUC’’) has the authority to regulate CW-Belize’s activities. In 2011, the PUC issued a second
order that requires CW-Belize to take various actions mandated by the PUC that would be significant to
its operations. Hearings on this matter have been conducted in a Belize court and the ruling on the matter
is pending. See further discussion of this matter at ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Material Commitments,
Expenditures and Contingencies — CW-Belize.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Our actual results could differ significantly from such estimates and assumptions.
Certain of our accounting estimates or assumptions constitute ‘‘critical accounting estimates’’ for us because:
•
•
the nature of these estimates or assumptions is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to
change; and
the impact of the estimates and assumptions on financial condition and results of operations is
material.
Our critical accounting estimates relate to the valuations of our (i) equity investment in our affiliate, OC-BVI;
(ii) goodwill and intangible assets; and (iii) long-lived assets.
Valuation of Investment in OC-BVI
We account for our investment in OC-BVI under the equity method of accounting for investments in common
stock. This method requires recognition of a loss on an equity investment that is other than temporary, and
indicates that a current fair value of an equity investment that is less than its carrying amount may indicate a
loss in the value of the investment.
As a quoted market price for OC-BVI’s stock is not available,
to test for possible impairment of our
investment in OC-BVI, we estimated its fair value through the use of the discounted cash flow method which
relies upon projections of OC-BVI’s operating results, working capital and capital expenditures. The use of
this method required us to estimate OC-BVI’s cash flows from (i) its water supply agreement with the
BVI government for its Bar Bay plant (the ‘‘Bar Bay agreement’’); and (ii) the pending amount awarded by
the Eastern Caribbean Court of Appeals for the value of the Baughers Bay plant previously transferred by
OC-BVI to the BVI government (see further discussion of the Baughers Bay litigation at Item 8. — Notes to
the Consolidated Financial Statements — Note 8).
We estimated the cash flows OC-BVI will receive from its Bar Bay plant by (i) identifying various possible
future scenarios which included the execution of a new agreement for the Bar Bay plant as well as the
termination of Bar Bay plant operations upon the expiration of
in
March 2017; (ii) estimating the cash flows associated with each possible scenario; and (iii) assigning
a probability to each scenario. We similarly estimated the cash flows OC-BVI will receive from the
BVI government for the amount due under the ruling by the Eastern Caribbean Court of Appeals for the value
of the Baughers Bay plant at the date it was transferred to the BVI government by assigning probabilities to
the existing Bar Bay agreement
35
different valuation scenarios. The resulting probability-weighted sum represented the expected cash flows, and
our best estimate of future cash flows, to be derived by OC-BVI from its Bar Bay plant and the pending court
award.
The identification of the possible scenarios for the Bar Bay plant and the Baughers Bay plant valuation, the
projections of cash flows for each scenario, and the assignment of relative probabilities to each scenario all
represented significant estimates made by us. While we used our best judgment in identifying these possible
scenarios, estimating the expected cash flows for these scenarios and assigning relative probabilities to each
scenario, these estimates were by their nature highly subjective and were also subject to material change by
our management over time based upon new information or changes in circumstances.
During 2016, after updating our probability-weighted estimates of OC-BVI’s future cash flows and our
resulting estimate of the fair value of our investment in OC-BVI, we determined that the carrying value of our
investment in OC-BVI exceeded its fair value and recorded impairment losses of totaling $925,000 through
the nine months ended September 30, 2016. We recorded impairment losses for our investment in OC-BVI of
$1,060,000 and $860,000 for 2015 and 2014, respectively. As a result of the impairment losses recorded to
date, as of December 31, 2016 the amount of our proportionate share (43.5%) of the net assets reflected on
OC-BVI’s balance sheet exceeded the carrying value of our investment in OC-BVI by approximately $30,000.
In February 2017, the BVI government executed a 14 year extension to Bar Bay water supply agreement. The
selling price for the water under this extension is approximately 31% lower than the price that was in effect as
of December 31, 2016. Based upon the execution of this extension we believe further impairment losses to
reduce the carrying value of our investment in OC-BVI will not be required unless the BVI government fails
to comply with the terms of the Bar Bay extension or a presently unforeseen event occurs that would impact
the future net cash flows we expect OC-BVI to generate.
Goodwill and intangible assets
reporting process for
the fourth quarter of each fiscal year. Management
Goodwill represents the excess cost over the fair value of the assets of an acquired business. Goodwill and
intangible assets acquired in a business combination accounted for as a purchase and determined to have an
indefinite useful life are not amortized, but are tested for impairment at least annually. Intangible assets with
estimable useful lives are amortized over their respective estimated useful lives to their estimated residual
values and reviewed periodically for impairment. We evaluate the possible impairment of goodwill annually as
part of our
identifies our
reporting units, which consist of our retail and bulk operations and Aerex, and determines the carrying value
of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units. We determine the fair value of each reporting unit and compare these fair
values to the carrying amounts of the reporting units. To the extent the carrying amount of the reporting unit
exceeds the fair value of the reporting unit, we are required to perform the second step of the impairment test,
as this is an indication that the reporting unit’s goodwill may be impaired. In this step, we compare the
implied fair value of each reporting unit’s goodwill with the carrying amount of such goodwill. The implied
fair value of goodwill
the assets
(recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price
allocation. The residual fair value after this allocation is the implied fair value of the reporting unit’s goodwill.
If the implied fair value is less than its carrying amount, the impairment loss is recorded.
is determined by allocating the fair value of the reporting unit
to all
For the years ended December 31, 2016 and 2015, we estimated the fair value of our reporting units by
applying the discounted cash flow method, the subject company stock price method, the guideline public
company method, and the mergers and acquisitions method.
The discounted cash flow method relied upon seven-year discrete projections of operating results, working
to the discrete period. These
capital and capital expenditures, along with a terminal value subsequent
seven-year projections were based upon historical and anticipated future results, general economic and market
conditions, and considered the impact of planned business and operational strategies. The discount rates for
the calculations represented the estimated cost of capital for market participants at the time of each analysis.
In preparing these seven-year projections for our retail unit we (i) identified possible outcomes of our
on-going negotiations with the Cayman Islands government for the renewal of our retail license; (ii) estimated
the cash flows associated with each possible outcome; and (iii) assigned a probability to each outcome and
36
associated estimated cash flows. The weighted average estimated cash flows were then summed to determine
the overall fair value of the retail unit under this method. The possible outcomes used for the discounted cash
flow method for the retail unit included the implementation of a rate of return on invested capital model, the
methodology proposed by Cayman Islands government representatives for the new retail license.
We also estimated the fair value of each of our reporting units for the years ended December 31, 2016 and
2015 through reference to the quoted market prices for our Company and guideline companies and the market
multiples implied by guideline merger and acquisition transactions.
We weighted the fair values estimated for each of our reporting units under each method and summed such
weighted fair values to estimate the overall fair value for each reporting unit. The respective weightings we
applied to each method as of December 31, 2016 were consistent with those used as of December 31, 2015
and were as follows:
Method
Discounted cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subject company stock price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guideline public company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mergers and acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail
50%
30%
10%
10%
100%
Bulk
50%
30%
10%
10%
100%
The fair values we estimated for our retail, bulk and Aerex units exceeded their carrying amounts by 123%,
41%, and 26%, respectively, as of December 31, 2016. The fair values we estimated for our retail and bulk
reporting units exceeded their carrying amounts by 72% and 20%, respectively, as of December 31, 2015.
We also performed an analysis reconciling the conclusions of value for our reporting units to our market
capitalization at December 31, 2016. This reconciliation resulted in no implied control premium for our
Company.
On February 11, 2016, we acquired 51% ownership interest in Aerex. In connection with this acquisition we
recorded goodwill of $8,035,211. Aerex’s actual results of operations subsequent to its acquisition have fallen
significantly short of the projected results that were included in the overall cash flow projections we utilized to
determine the purchase price for Aerex and the fair values of its assets and liabilities. Based upon currently
available information, we believe Aerex’s results of operations for fiscal 2017 will also fall short of our
purchase price projections for Aerex. Due to these actual and projected shortfalls in Aerex’s results of
operations, we tested Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating its fair
value using the discounted cash flow method. As a result of this impairment testing, we determined that the
carrying value of our Aerex goodwill exceeded its fair value, and recorded an impairment loss of $1,750,000
for the three months ended September 30, 2016 to reduce the carrying value of this goodwill to $6,285,211.
We may be required to record additional impairment losses to reduce the carrying value of our Aerex goodwill
in future periods if we determine it likely that Aerex’s results of operations will continue to fall short of our
purchase price projections.
Long-lived assets
We review the carrying amounts of our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would
necessitate an impairment assessment include a significant decline in the observable market value of an asset,
a significant change in the extent or manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets
to be held and used, we recognize an impairment loss only if its carrying amount is not recoverable through
its undiscounted cash flows and measure the impairment loss based on the difference between the carrying
amount and fair value.
37
Through our subsidiary, CW-Bali, we have built and presently operate a seawater reverse osmosis plant with a
productive capacity of approximately 790,000 gallons per day located in Nusa Dua, one of the primary tourist
areas of Bali, Indonesia. Since its inception, we have recorded operating losses for CW-Bali as the sales
volumes for its plant have not been sufficient to cover its operating costs. In 2016, we determined, based upon
probability-weighted scenarios for CW-Bali’s future undiscounted cash flows,
the carrying values of
CW-Bali’s long-lived assets were not recoverable and recorded an impairment loss of $2.0 million for the
three months ended September 30, 2016 to reduce the carrying values of these assets to their fair values. See
further
and
discussion
Contingencies — CW-Bali.’’
Item 7. — ‘‘Material Commitments, Expenditures
subsidiary
that
this
of
at
Quarterly Results of Operations
The following table presents unaudited quarterly results of operations for
the eight quarters ended
December 31, 2016. We believe that all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly such quarterly information have been included in the amounts reported below.
Total revenues . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Consolidated
Water Co. Ltd. stockholders . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Consolidated
Water Co. Ltd. stockholders . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . .
Year Ended December 31, 2016(1)
First
Quarter
$14,034,772
6,177,031
Second
Quarter
$15,398,635
6,592,379
Third
Quarter
$14,385,353
5,919,323
Fourth
Quarter
$14,056,947
5,562,153
2,054,641
0.14
2,204,333
0.15
(1,865,332)
(0.13)
1,566,859
0.10
Year Ended December 31, 2015(1)
First
Quarter
$14,666,112
6,148,302
Second
Quarter
$14,485,669
5,965,294
Third
Quarter
$14,605,649
5,641,743
Fourth
Quarter
$13,358,772
5,552,881
1,921,261
0.13
2,228,100
0.15
1,775,500
0.12
1,593,840
0.11
(1) Due to rounding, the sum of the quarterly amounts may not equal the reported amounts for the year.
Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our audited consolidated financial statements and accompanying notes included under Part II,
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, of this Annual Report.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Consolidated Results
Net income attributable to Consolidated Water Co. Ltd. stockholders for 2016 was $3,960,501, ($0.27 per
share on a fully-diluted basis), as compared to $7,518,701 ($0.51 per share on a fully-diluted basis) for 2015.
Total revenues for 2016 and 2015 were $57,875,707 and $57,116,202, respectively. Higher revenues for our
retail and services segments in 2016 served to offset a decrease in the bulk segment revenues. Gross profit for
2016 was $24,250,886 or 42% of total revenues, as compared to $23,308,220 or 41% of total revenues, for
2015. Gross profit for the retail and services segments increased from 2015 to 2016 while bulk segment gross
profit remained relatively consistent. For further discussion of revenues and gross profit for 2016, see the
‘‘Results by Segment’’ analysis that follows.
G&A expenses on a consolidated basis were $18,677,584 and $14,840,156 for 2016 and 2015, respectively.
The increase in consolidated G&A expenses from 2015 to 2016 is primarily attributable to the addition of
approximately $2,309,000 in expenses for Aerex after our acquisition of a 51% ownership interest in this
38
company in February 2016 and an increase of approximately $1,036,000 in the expenses incurred in
connection with the project development activities of our Mexican subsidiaries.
We recorded an impairment loss of ($2 million) in 2016 to reduce the carrying value of CW-Bali’s long-lived
assets to their estimated fair value. See further discussion of this impairment loss at Item 7. — ‘‘Material
Commitments, Expenditures and Contingencies — CW-Bali.’’
loss of ($1,750,000) in 2016 to reduce the carrying value of the goodwill
We recorded an impairment
associated with the Aerex acquisition. See further discussion of this impairment loss at the discussion of the
results of the services segment that follows.
Other income (expense), net for 2016 was $417,954 as compared to ($542,570) for 2015. The fluctuation in
this net component of our results of operations reflects (i) interest income that was approximately $404,000
less in 2016 than 2015 due to a decrease in interest earning deposit and loan receivable balances (ii) an
impairment loss recorded for our equity investment in OC-BVI in 2016 of ($925,000) as compared to an
impairment loss of ($1,060,000) for this investment in 2015; (iii) an unrealized loss of ($297,000) recorded in
2016 resulting from the revaluation of the net put/call option value recorded in connection with the Aerex
acquisition; (iv) $271,000 relating to the gain on sale of fixed assets in 2016: and (iv) foreign currency gains
relating to CW-Bali of approximately $201,000 in 2016, as compared to foreign currency losses relating to
CW-Bali of approximately ($346,000) in 2015.
Results by Segment
Retail Segment:
The retail segment generated a loss from operations of ($248,844) in 2016 as compared to income from
operations of $1,615,436 in 2015. The loss from operations for 2016 is attributable to a $2.0 million
impairment loss recorded in 2016 on the long-lived assets of CW-Bali.
Revenues generated by our retail water operations were $23,505,619 in 2016 as compared to $23,254,757 in
2015. The volume of water sold by our Cayman Water retail operations increased by 12% from 2015 to 2016
which served to offset (i) lower energy costs, which reduced the energy component of the rates we charge to
our Cayman Water customers by $818,771 from 2015; (ii) a reduction in Cayman Water base rates in the first
quarter of 2016 of 4.4% from 2015; and (iii) a decrease in sales for CW-Bali of approximately $277,000.
Retail segment gross profit was $13,211,321 (56% of retail revenues) and $12,710,785 (55% of retail
revenues) for 2016 and 2015, respectively.
Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not
allocate any of these non-direct expenses to our other two business segments. Retail G&A expenses for 2016
and 2015 remained relatively consistent at $11,460,165 and $11,095,349, respectively.
CW-Bali owns and operates a seawater reverse osmosis plant with a productive capacity of approximately
790,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. The
revenues we generated from this plant amounted to $91,311 and $368,012 for 2016 and 2015, respectively.
CW-Bali’s operating loss was approximately ($2,744,000) for 2016 as we recorded an impairment loss of
$2.0 million for the quarter ended September 30, 2016 to reduce the carrying value of CW-Bali’s long-lived
assets to their estimated fair value. CW-Bali’s operating loss was approximately ($484,000) for 2015.
See further discussion of
Item 7. — ‘‘Material Commitments, Expenditures and
Contingencies — CW-Bali.’’
subsidiary at
this
Bulk Segment:
The bulk segment contributed $8,413,644 and $8,613,523 to our income from operations for 2016 and 2015,
respectively.
Bulk segment revenues were $29,647,034 and $31,854,255 for 2016 and 2015, respectively. The decrease in
bulk revenues from 2015 to 2016 is attributable to our Bahamas and Cayman operations, which generated
approximately $1,507,000 and $893,000 less in revenues, respectively,
in 2016 than in 2015 due to a
significant decrease in the prices of diesel fuel and electricity from 2015 to 2016, which reduced the
pass-through energy component of our bulk water rates.
39
Gross profit for our bulk segment was $10,158,484 and $10,219,466 for 2016 and 2015, respectively. Gross
profit as a percentage of bulk revenues increased to approximately 34% in 2016 as compared to 32% in 2015
due to the reduced energy prices, as energy expense for our bulk operations was approximately $2,048,000
less in 2016 than in 2015.
Bulk segment G&A expenses were $1,744,840 and $1,605,943 for 2016 and 2015, respectively. The slight
increase in bulk G&A expenses in 2016 is attributable to a $175,467 increase in bank charges incurred by
CW Bahamas attributable to incremental cash transfers from the Bahamas to our Cayman Islands
headquarters.
Services Segment:
The comparability of the services segment’s results from 2015 to 2016 is significantly impacted by the
inclusion of Aerex’s results of operations subsequent to our acquisition of a 51% ownership interest in this
company in February 2016.
The services segment incurred losses from operations of ($6,341,498) and ($1,760,895) for 2016 and 2015,
respectively.
Services segment revenues were $4,723,054 and $2,007,190 for 2016 and 2015, respectively. Services
revenues increased in 2016 due to the addition of approximately $3.9 million of revenues from Aerex in 2016.
The increase in service revenues in 2016 from the addition of Aerex was offset by a decrease in revenues
recognized on plant construction and refurbishment projects performed for the WAC. Such revenues totaled
$320,296 in 2016 as compared to $1,478,843 in 2015.
Gross profit for our services segment was $881,081 and $377,969 for 2016 and 2015, respectively. The
increase in the services segment’s gross profit from 2015 to 2016 reflects incremental gross profit generated by
Aerex of $796,450 offset by a decrease of $293,338 in gross profit generated on plant construction and
refurbishment projects.
G&A expenses for the services segment were $5,472,579 and $2,138,864 for 2016 and 2015, respectively. The
increase in G&A expenses for 2016 as compared to 2015 reflects the incremental G&A expenses of Aerex and
an increase of $1,035,581 in the expenses incurred in connection with the project development activities of
our Mexican subsidiaries. Total G&A expenses for Aerex for 2016 were approximately $2,308,000 and include
$1,320,000 in amortization expenses for the intangible assets arising from our acquisition of Aerex.
Aerex’s actual results of operations for the period subsequent
to our acquisition of the company on
February 11, 2016 fell significantly short of the projected results for this period that were included in the
overall cash flow projections we utilized to determine the purchase price for Aerex and the fair values of its
assets and liabilities. Based upon currently available information, we believe Aerex’s results of operations for
fiscal 2017 will also fall short of our purchase price cash flow projections for Aerex. Due to these actual and
projected shortfalls in Aerex’s results of operations, we tested Aerex’s goodwill for possible impairment as of
September 30, 2016. As a result of this impairment testing, we determined that the carrying value of our
Aerex goodwill exceeded its fair value, and recorded an impairment loss of $1,750,000 to reduce the carrying
value of this goodwill as of September 30, 2016. We may be required to record additional impairment losses
to reduce the carrying value of our Aerex goodwill in future periods if we determine it likely that Aerex’s
results of operations will continue to fall short of our purchase price projections.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Consolidated Results
Net income attributable to Consolidated Water Co. Ltd. common stockholders for 2015 was $7,518,701 ($0.51
per share on a fully-diluted basis), as compared to $6,265,358 ($0.42 per share on a fully-diluted basis)
for 2014.
Total revenues for 2015 decreased to $57,116,202 from $65,559,078 in 2014 due to decreases in revenues for
all three business segments. Gross profit for 2015 was $23,308,220 or 41% of total revenues, as compared to
$23,472,100 or 36% of total revenues, for 2014. In 2015 as compared to 2014, gross profit dollars for the
retail segment increased slightly but decreased for the bulk segment and the services segment generated a
40
gross profit as opposed to incurring a gross loss. For further discussion of revenues and gross profit for 2015,
see the ‘‘Results by Segment’’ analysis that follows.
General and administrative (‘‘G&A’’) expenses on a consolidated basis were $14,840,156 and $17,011,041 for
2015 and 2014, respectively. The decline in consolidated G&A expenses from 2014 to 2015 reflected (i) a
decrease in professional fees of almost $484,000, as we incurred added fees in 2014 for the judicial review
conducted in connection with our retail license negotiations; and (ii) a decrease of approximately $1,534,000
in the project development expenses incurred by NSC, our Mexico subsidiary.
Interest expense decreased to $269,090 in 2015 from $488,770 in 2014 as interest expense for 2014 reflected
the prepayment premium paid for the early redemption in February 2014 of the remaining outstanding balance
on our bonds payable and the amortization of the related bond discount and deferred issuance costs.
As a result of the declining cash flows projected from OC-BVI’s Bar Bay contract, we recorded impairment
charges aggregating $1,060,000 and $860,000 in 2015 and 2014, respectively, to reduce the carrying value of
our investment in OC-BVI to its estimated fair value. See further discussion of these impairment charges at
Note 8 of Notes to Consolidated Financial Statements.
Other expense increased to $626,400 for 2015 from $203,135 for 2014 due to incremental foreign currency
losses recorded for CW-Bali of approximately $223,000.
Results by Segment
Retail Segment:
The retail segment contributed $1,615,436 and $1,043,322 to our income from operations for 2015 and 2014,
respectively.
Revenues generated by our retail water operations were $23,254,757 and $24,104,932 for 2015 and 2014,
respectively. The drop in retail revenues in 2015 was attributable to a decrease in electricity prices from 2014
to 2015 that reduced the energy component of our retail water rates.
Retail segment gross profit was $12,710,785 (55% of retail revenues) and $12,583,655 (52% of retail
revenues) for 2015 and 2014, respectively. The improvement in retail gross profit as a percentage of revenues
from 2014 to 2015 was due to energy prices, maintenance expenses and water system losses for 2015 that
were less than those for 2014.
Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not
allocate any of these non-direct costs to our other two business segments. Retail G&A expenses for 2015 and
2014 were $11,095,349 and $11,540,333, respectively. G&A expenses declined from 2014 to 2015 principally
as a result of a decrease of approximately $531,000 in professional fees primarily due to incremental legal
fees incurred in 2014 for the judicial review conducted in connection with our retail license negotiations.
CW-Bali owns and operates a seawater reverse osmosis plant with a productive capacity of approximately
790,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We sold
approximately 44.0 million and 54.0 million gallons of water from this plant during 2015 and 2014,
respectively. As of December 31, 2015, capitalized costs for this plant reflected on our consolidated balance
sheet were approximately $3.0 million. The revenues we generated from this plant amounted to approximately
$368,000 and $472,000 for 2015 and 2014, respectively. CW-Bali’s operating losses were approximately
($484,000) and ($458,000) for 2015 and 2014, respectively.
Bulk Segment:
The bulk segment contributed $8,613,523 and $9,610,071 to our income from operations for 2015 and 2014,
respectively.
Bulk segment revenues were $31,854,255 and $39,201,011 for 2015 and 2014, respectively. The decrease in
bulk revenues from 2014 to 2015 was principally attributable to our Bahamas and Cayman operations, whose
revenues decreased by approximately $5,641,000 and $1,532,000, respectively. The 2015 revenue decrease for
our bulk operations resulted from significant decreases in the prices of diesel fuel and electricity from 2014 to
2015 that reduced the energy component of our bulk water rates, declines of 13% and 3% in the volumes of
water sold by our Bahamas and Cayman operations, respectively, a reallocation of production to the Red Gate
41
plant from the North Sound plant while the North Sound plant was being refurbished, and a reduction in rates
charged for water produced from the North Sound Plant under the terms of the two-year operating agreement
extension. These lower volumes of water sold by our bulk operations in 2015 reflected (i) the continuing
water conservation and loss mitigation efforts of the Water and Sewerage Corporation of the Bahamas; and
(ii) a decrease in purchases by the WAC.
Gross profit for our bulk segment was $10,219,466 and $11,215,570 for 2015 and 2014, respectively. Gross
profit as a percentage of bulk revenues was approximately 32% for 2015 and 29% for 2014. Total gross profit
dollars decreased in 2015 due to maintenance and repairs expenses that exceeded those for 2014 by
approximately $363,000 and the lower revenues generated in 2015.
Bulk segment G&A expenses remained consistent at $1,605,943 and $1,605,499 for 2015 and 2014,
respectively.
Services Segment:
The services segment incurred losses from operations of ($1,760,895) and ($4,192,334) for 2015 and 2014,
respectively.
Services segment revenues were $2,007,190 and $2,253,135 for 2015 and 2014, respectively. Services
revenues decreased in 2015 due to a decline in procurement services fees of approximately $221,000.
The services segment generated a gross profit of $377,969 in 2015 as opposed to a gross loss in 2014 of
($327,125), as a result of improved gross profit margins for our construction activities.
G&A expenses for the services segment were $2,138,864 and $3,865,209 for 2015 and 2014, respectively. The
decrease in G&A expenses for 2015 as compared to 2014 reflected a decrease of approximately $1,534,000 in
the project development expenses incurred by NSC, our Mexican subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position
Our projected liquidity requirements for 2017 include capital expenditures for our existing operations of
approximately $9.4 million, approximately $882,000 for notes payable and approximately $1.2 million for
NSC’s project development activities. Our liquidity requirements for 2017 may also include quarterly
dividends, if such dividends are declared by our Board. Our dividend payments amounted to approximately
$4.6 million for the year ended December 31, 2016.
In February 2016, we purchased 51% of
the equity ownership of Aerex, a U.S. original equipment
manufacturer and service provider of a wide range of products and services applicable to municipal and
industrial water treatment, for $7.7 million in cash.
Immediately following our acquisition of 51% of the ownership interest in Aerex, we and the former sole
shareholder of Aerex loaned Aerex $510,000 and $490,000, respectively, in the form of notes payable which
mature on June 30, 2017 and bear interest at 1% per annum. In February 2017, we and the former sole
shareholder of Aerex loaned Aerex an additional $408,000 and $392,000, respectively, in the form of notes
payable which mature on September 30, 2017 and bear interest at 1% per annum.
As of December 31, 2016, we had cash and cash equivalents of approximately $39.3 million and working
capital of approximately $54.2 million. We are not presently aware of anything that would lead us to believe
that we will not have sufficient liquidity to meet our needs for 2017 and thereafter.
Discussion of Cash Flows for the Year Ended December 31, 2016
Our cash and cash equivalents decreased to $39,254,116 as of December 31, 2016 from $44,792,734 as of
December 31, 2015.
Cash Flows from Operating Activities
Our operating activities provided net cash of approximately $7.8 million. This net cash provided reflects net
income generated for the year of approximately $2.8 million as adjusted for (i) various items included in the
determination of net income that do not affect cash flows during the year; and (ii) changes in the other
42
components of working capital. The more significant of such items and changes in working capital
components included depreciation and amortization of approximately $7.4 million, a net increase in accounts
losses aggregating approximately
receivable of approximately $5.9 million, and non-cash impairment
$4.7 million.
Cash Flows from Investing Activities
Net cash used in our investing activities was approximately $2.8 million. In February 2016, we acquired a
51% ownership interest in Aerex through a stock purchase agreement for an aggregate purchase price of
approximately $7.7 million in cash. We purchased property plant and equipment and expended funds on
construction in progress in the normal course of business in the aggregate of amount of approximately
$3.5 million. We received approximately $5.6 million upon the maturity of a certificate of deposit. We
collected approximately $1.8 million in principal repayments on our loans receivable from the WAC. As a
result of a favorable ruling by a Mexico appellate court in February 2016, we also obtained the release of
approximately $399,000 in cash that had been restricted and pledged as collateral for a letter of credit at
December 31, 2015.
Cash Flows from Financing Activities
Our financing activities used approximately $10.6 million in net cash as we paid dividends of approximately
$4.6 million and repaid a $7.0 million demand note payable. We also obtained a $490,000 working capital
loan from Aerex’s prior sole stockholder that matures on June 30, 2017.
Material Commitments, Expenditures and Contingencies
Renewal of Retail License
We sell water through our retail operations under a license issued in July 1990 by the Cayman Islands
government that grants Cayman Water the exclusive right to provide potable water to customers within its
licensed service area. As discussed below, this license was set to expire in July 2010 but has since been
extended while negotiations for a new license take place. Pursuant to the license, Cayman Water has the
exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which
consists of two of the three most populated areas of Grand Cayman, the Seven Mile Beach and West Bay
areas. For the years ended December 31, 2016, 2015 and 2014, the Company generated approximately 40%,
40% and 36%, respectively, of its consolidated revenues and 56%, 56% and 54%, respectively, of its
consolidated gross profit from the retail water operations conducted pursuant to Cayman Water’s exclusive
license.
Under the license, Cayman Water pays a royalty to the government of 7.5% of its gross retail water sales
revenues (excluding energy cost adjustments). The selling prices of water sold to its customers are determined
by the license and vary depending upon the type and location of the customer and the monthly volume of
water purchased. The license provides for an automatic adjustment for inflation or deflation on an annual
basis, subject to temporary limited exceptions, and an automatic adjustment for the cost of electricity on a
monthly basis. The Water Authority-Cayman (the ‘‘WAC’’), on behalf of the government, reviews and
confirms the calculations of the price adjustments for inflation and electricity costs. If Cayman Water wants to
adjust its prices for any reason other than inflation or electricity costs, Cayman Water has to request prior
approval of the Cabinet of the Cayman Islands government. Disputes regarding price adjustments would be
referred to arbitration.
The license was originally scheduled to expire in July 2010 but has been extended several times by the
Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a
new license agreement. The most recent extension of the license expired on June 30, 2016. We continue to
provide water subsequent to June 30, 2016 on the assumption that the license has been further extended to
allow the parties to continue negotiations without interruption to an essential service.
The Cayman Islands government could ultimately offer a third party a license to service some or all of
Cayman Water’s present service area. However, as set forth in the existing license, ‘‘the Governor hereby
agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or
franchise to any other person or company for the processing, distribution, sale and supply of water within the
43
Licence Area without having first offered such a licence or franchise to the Company on terms no less
favourable than the terms offered to such other person or company.’’
In February 2011, the Water (Production and Supply) Law, 2011 and the Water Authority (Amendment) Law,
2011 (the ‘‘New Laws’’) were published and enacted. Under the New Laws, the WAC will issue any new
license, and such new license could include a rate of return on invested capital model, as discussed in the
following paragraph.
Following the enactment of the New Laws, we were advised in correspondence from the Cayman Islands
government and the WAC that: (i) the WAC, and not
is the principal
negotiator in these license negotiations; and (ii) the WAC has determined that a rate of return on invested
capital model (‘‘RCAM’’) for the retail license is in the best interest of the public and Cayman Water’s
customers. RCAM is the rate model currently utilized in the electricity transmission and distribution license
granted by the Cayman Islands government to the Caribbean Utilities Company, Ltd. We responded to the
Cayman Islands government that we disagreed with the government’s position on these two matters and
negotiations for a new license temporarily ceased.
the Cayman Islands government,
In July 2012, in an effort to resolve several issues relating to our retail license renewal negotiations, we filed
an Application for Leave to Apply for Judicial Review (the ‘‘Application’’) with the Grand Court of the
Cayman Islands (the ‘‘Court’’), seeking declarations that: (i) certain provisions of the New Laws appear to be
incompatible and a determination as to how those provisions should be interpreted; (ii) the WAC’s roles as the
principal license negotiator, statutory regulator and our competitor put the WAC in a position of hopeless
conflict; and (iii) the WAC’s decision to replace the rate structure under our current exclusive license with
RCAM was predetermined and unreasonable. The hearing for this judicial review was held in April 2014 and
in June 2014 the Court issued its ruling, which was limited to the determination that (i) the renewal of the
license does not require a public bidding process; and (ii) the WAC is the proper entity to negotiate with us
for the renewal of the license.
In November 2014, we wrote to the Minister of Works offering to recommence license negotiations on the
basis of the RCAM model subject to the following conditions: (i) the Government would undertake to amend
the current water legislation to provide for an independent regulator and a fair and balanced regulatory regime
more consistent with that provided under the electrical utility regulatory regime, (ii) the Government and we
would mutually appoint an independent referee and chairman of the negotiations, (iii) our new license would
provide exclusivity for the production and provision of all piped water, both potable and non-potable, within
our Cayman Islands license area, (iv) the Government would allow us to submit our counter proposal to the
WAC’s RCAM license draft, and (v) the principle of subsidization of residential customer rates by commercial
customer rates would continue under a new license. In March 2015 we received a letter from the Minister of
Works with the following responses to the November 2014 letter: (1) while the Cayman government plans to
create a new public utilities commission, the provision of the new retail license will not depend upon the
formation of such a commission; (2) any consideration regarding inclusion of the exclusive right to sell
non-potable water within the area covered by the retail license will not take place until after the draft license
has proceeded through the review process of the negotiations; (3) rather than allow us to submit our counter
proposal to the WAC’s RCAM license draft, the WAC will draft the license with the understanding that we
will be allowed to propose amendments thereto; (4) the principle of subsidization of residential customer rates
by commercial customer rates would continue under the new license; and (5) a request that we consider
eliminating our monthly minimum volume charge in the new license.
We recommenced license negotiations with the WAC during the third quarter of 2015 based upon a draft
RCAM license provided by the WAC.
In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities
regulation and competition office (‘‘OFREG’’). OFREG is an independent and accountable regulatory body
with a view of protecting the rights of consumers, encouraging affordable utility services, and promoting
competition. OFREG has the ability to supervise, monitor and regulate multiple utility undertakings and
markets. Water utilities are not presently included in the scope of OFREG’s regulatory functions and remain
under the regulatory control of the WAC. However, we were given the opportunity by the Cayman Islands
legislative bills which are intended to transfer responsibility for
government
to comment on four draft
44
economic regulation of the water utility sector from the WAC to OFREG. We have not been advised as to the
final form and content of these legislative bills and are therefore presently unable to determine their ultimate
impact on our retail license negotiations, however we believe that these bills will be enacted into law within
the coming months. OFREG began operations in January 2017, and we have been advised by the WAC that
they are presently coordinating with OFREG to transfer responsibility for our license negotiations from the
WAC to OFREG. We cannot presently determine the impact of OFREG or the pending legislative bills on our
retail license negotiations.
We are presently unable to determine what impact the resolution of our retail license negotiations will have on
our cash flows, financial condition or results of operations but such resolution could result in a material
reduction of the operating income and cash flows we have historically generated from our retail operations
loss to reduce the carrying value of our goodwill. Such
and could require us to record an impairment
impairment loss could have a material adverse impact on our results of operations.
N.S.C. Agua, S.A. de C.V.
subsidiary, Consolidated Water
through our wholly-owned Netherlands
In May 2010, we acquired,
Cooperatief, U.A., (‘‘CW-Cooperatief’’) a 50% interest in N.S.C. Agua, S.A. de C.V. (‘‘NSC’’), a development
stage Mexican company. We have since purchased, through the conversion of a loan we made to NSC,
sufficient shares to raise our ownership interest in NSC to 99.9%. NSC was formed to pursue a project (the
‘‘Project’’) encompassing the construction, operation and minority ownership of a 100 million gallon per day
seawater
to be located in northern Baja California, Mexico and
accompanying pipelines to deliver water to the Mexican potable water system. As discussed in the paragraphs
that follow, during 2015 the scope of the Project was defined by the State of Baja California (the ‘‘State’’) to
consist of a first phase consisting of a 50 million gallons per day plant and a pipeline that connects to the
Mexican potable water infrastructure and a second phase consisting of an additional 50 million gallons of
production capacity.
reverse osmosis desalination plant
Since its inception, NSC has engaged engineering groups with extensive regional and/or technical experience
to prepare preliminary designs and cost estimates for the desalination plant and the proposed pipeline and
prepare the environmental impact studies for local, state and federal regulatory agencies, and has also acquired
the land, performed pilot plant and feed water source testing and evaluated financing alternatives for the
Project.
Through a series of transactions completed in 2012 − 2014, NSC purchased 20.1 hectares of land on which
the proposed Project’s plant would be constructed for an aggregate price of approximately $20.6 million.
In 2012, NSC entered into a lease with an effective term of 20 years from the date of full operation of the
desalination plant with the Comisión Federal de Electricidad for approximately 5,000 square meters of land on
which it plans to construct the water intake and discharge works for the plant. The amounts due on this lease
are payable in Mexican pesos at an amount that is currently equivalent to approximately $20,000 per month.
This lease may be cancelled by NSC should NSC ultimately not proceed with the Project.
the State enacted new legislation to regulate Public-Private Association projects which
In August 2014,
involve the type of long-term contract between a public sector authority and a private party that NSC is
seeking to complete the Project. Pursuant to this new legislation, on January 4, 2015, NSC submitted an
expression of interest for its project to the Secretary of Infrastructure and Urban Development of the State of
Baja California (‘‘SIDUE’’). SIDUE accepted NSC’s expression of interest and requested that NSC submit a
detailed proposal for the Project that complies with requirements of the new legislation. NSC submitted this
detailed proposal (the ‘‘APP Proposal’’) to SIDUE in late March 2015. The new legislation required that such
proposal be evaluated by SIDUE and submitted to the Public-Private Association Projects State Committee
(the ‘‘APP Committee’’) for review and authorization. If the Project was authorized the State would be
required to conduct a public tender for the Project.
In response to its APP Proposal, in September 2015 NSC received a letter dated June 30, 2015 from the
Director General of the Comisión Estatal de Agua de Baja California (‘‘CEA’’),
the State agency with
responsibility for the Project, stating that (i) the Project is in the public interest with high social benefits and
is consistent with the objectives of the State development plan and (ii) that the Project and accompanying
45
required public tender process should be conducted. In November 2015,
the State officially commenced
the tender for the Project, the scope of which the State has defined as a first phase to be operational in
2019 consisting of a 50 million gallons per day plant and a pipeline that connects to the Mexican potable
water infrastructure and a second phase to be operational in 2024 consisting of an additional 50 million
gallons per day of production capacity. A consortium comprised of NSC, NuWater S.A.P.I. de C.V. and
Degremont S.A. de C.V. (the ‘‘Consortium’’) submitted its tender for the Project on the April 21, 2016 tender
submission deadline date set by the State.
We have acknowledged since the inception of the Project that, due to the amount of capital the Project
requires, NSC will ultimately need an equity partner or partners for the Project. Consequently, NSC’s tender
to the State for the Project was based upon the following: (i) NSC will sell or otherwise transfer the land and
other Project assets to a new company (‘‘Newco’’) that would build and own the Project; (ii) NSC’s potential
partners would provide the majority of the equity for the Project and thereby would own the majority interest
in Newco; (iii) NSC would maintain a minority ownership position in Newco; and (iv) Newco would enter
into a long-term management and technical services contract for the Project with an entity partially owned by
NSC or another Company subsidiary.
On June 15, 2016, the State designated the Consortium as the winner of tender process for the Project.
On August 17, 2016, NSC and NuWater incorporated a special purpose project company named Aguas de
Rosarito S.A.P.I. de C.V. (‘‘AdR’’) to execute the Project and executed a shareholders agreement for AdR
agreeing among other things that (i) AdR would purchase the land and other Project assets from NSC on the
date that the Project begins commercial operation; and (ii) AdR would enter into a Management and Technical
Services Agreement with NSC effective on the first day that the Project begins commercial operation. As of
December 31, 2016, NSC owned 99.6% of AdR.
On August 22, 2016,
the Public Private Partnership Agreement for public private partnership number
002/2015, contest number SIDUE-CEA-APP-2015-002 (‘‘APP Contract’’) was executed between AdR, CEA,
the Government of Baja California represented by the Secretary of Planning and Finance (‘‘SPF’’), and the
Public Utilities Commission of Tijuana (‘‘CESPT’’). The APP Contract requires AdR to design, construct,
finance and operate a seawater desalination plant (and accompanying aqueducts) with a capacity of up to
100 million gallons per day in two phases: the first with a capacity of 50 million gallons per day and an
aqueduct to the Mexican potable water system in Tijuana, Baja California; and the second phase with a
capacity of 50 million gallons per day and an aqueduct to a second delivery point in Tijuana. The first phase
must be operational within 36 months of commencing construction, and the second phase must be operational
by the end of 2024. The APP Contract further requires AdR to operate and maintain the plant and aqueducts
for a period of 37 years starting from the commencement of operation of the first phase. At the end of the
operating period the plant and aqueducts will be transferred to CEA.
The total Project cost
is expected to be approximately 9 billion Mexican pesos, or approximately
US$463 million (based upon the currency exchange rate as of March 10, 2017). Annual revenues from the
Project are expected to be approximately 1.02 billion Mexican pesos, or approximately US$52 million (based
upon the currency exchange rate as of March 10, 2017). Water rates under the APP Contract are indexed to
the Mexican national consumer price index over its term. Electrical energy costs incurred by AdR to
desalinate and deliver water are treated as a pass through charge to CEA, subject to efficiency guarantees.
AdR expects to raise Mexican peso denominated debt financing through a consortium led by the
North American Development Bank, which also provided financial advisory services to the consortium
through the bidding process and contract negotiations.
The APP Contract does not become effective until the following conditions are met:
•
•
the State has established and registered various payment trusts, guaranties and bank credit lines for
specific use by the Project;
the CEA has obtained the rights from the relevant federal authority to take and desalinate seawater
and distribute it for municipal use;
46
•
•
•
•
various water purchase and sale agreements between the CEA, the payment trusts and the CESPT
have been executed;
AdR has obtained all rights of ways required for the aqueduct;
AdR has obtained permission from the relevant federal authority to discharge the residual water
from the Project’s desalination plant; and
all equity and debt financing agreements necessary to provide the funding to AdR for the first phase
of the Project have been executed.
Both the exchange rate for the Mexico peso relative to the dollar and general macroeconomic conditions in
Mexico have declined since the U.S. Presidential election in November 2016. These changes have adversely
impacted the estimated construction, operating, and financing costs for the Project. The APP Contract and the
APP Law allow for the parties to negotiate (but do not guarantee) modifications to the water tariff in the event
of such significant macroeconomic condition changes. On February 10, 2017, AdR submitted proposals to the
CEA requesting an increase to the water tariff to compensate for changes in foreign exchange rates, lending
rates and certain changes in law which have impacted the Project. If AdR is unable to obtain this requested
increase in the water tariff it may be unable to obtain the debt and equity financing required for the Project.
We are currently unable to say whether or not such water tariff increase will be approved.
If AdR is ultimately unable to proceed with the Project, the land NSC has purchased may lose its strategic
importance as the site for the Project and consequently may decline in value. If AdR does not proceed with
the Project, NSC may ultimately be unable to sell this land for an amount equal to or in excess of its current
carrying value of approximately $20.6 million, and any loss on sale of the land, or impairment loss NSC may
be required to record as a result of a decrease in the fair value of the land could have a material adverse
impact on our results of operations.
Included in our results of operations are general and administrative expenses from NSC and AdR, consisting
of organizational, legal, accounting, engineering, consulting and other costs relating to Project development
activities. Such expenses amounted to approximately $3.0 million, $2.0 million and $3.7 million for the years
ended December 31, 2016, 2015 and 2014, respectively. The assets and liabilities of NSC and AdR included
in our consolidated balance sheets amounted to approximately $23.3 million and $221,000, respectively, as of
December 31, 2016 and approximately $22.0 million and $488,000 respectively, as of December 31, 2015.
We expect to incur additional project development costs on behalf of NSC and AdR during 2017.
Immediately following CW-Cooperatief’s acquisition of its initial 50% ownership in NSC, the remaining 50%
ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S. de R.L. de C.V. (‘‘NSA’’).
NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC (‘‘EWG’’) and the
other half of its shares in NSC to Alejandro de la Vega (the ‘‘individual shareholder’’). In February 2012, we
paid $300,000 to enter into an agreement (the ‘‘Option Agreement’’) that provided us with an option,
exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder,
along with an immediate power of attorney to vote those shares, for $1.0 million. Such shares constituted 25%
of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to
CW-Cooperatief by issuing additional shares of its stock. As a result of this share issuance to CW-Cooperatief,
we acquired 99.9% of the ownership of NSC. The Option Agreement contained an anti-dilution provision that
required us to issue new shares in NSC of an amount sufficient to maintain the individual shareholder’s 25%
ownership interest in NSC if (i) any new shares of NSC were issued subsequent to the execution of the
Option Agreement and (ii) we did not exercise our share purchase option by February 7, 2014. We exercised
our option and paid the $1.0 million to the individual shareholder to purchase the Option Agreement shares in
February 2014.
In October 2015, we learned that EWG has filed a lawsuit against the individual shareholder, NSC, NSA,
CW-Cooperatief, Ricardo del Monte Nunez, Carlos Eduardo Ahumada Arruit, Luis de Angitia Becerra, and the
Public Registry of Commerce of Tijuana, Baja California in the Civil Court located in Tecate, Baja California,
Mexico.
47
In this lawsuit, EWG is challenging, among other things, the capital investment transactions that increased our
ownership interest in NSC to 99.9%. EWG requested that the court, as a preliminary matter: (a) suspend of
the effectiveness of the challenged transactions; (b) order of public officials in Mexico to record the pendency
of the lawsuit in the public records; and (c) appoint an inspector for NSA and NSC to oversee its commercial
activities. The court granted, ex-parte, the preliminary relief sought by EWG, which resulted in the placement
of inscriptions for the lawsuit on NSC’s public records.
EWG also is seeking an order directing, among other things: (i) NSA, NSC and CW-Cooperatief to refrain
from carrying out any transactions with respect to the Project; and (ii) NSA, NSC and CW-Cooperatief, and
the partners thereof, to refrain from transferring any interests in NSA, NSC and CW-Cooperatief.
On April 5, 2016, NSC filed a motion for reconsideration with the Tecate, Mexico Court asking, among other
things, that the Court; (i) reverse its order to record the pendency of the lawsuit in the public records;
(ii) cancel the appointment of the inspector; and (iii) allow NSC to provide a counter-guarantee to suspend the
effects of the Court’s order regarding the challenged transactions. On April 26, 2016, the Tecate, Mexico
Court issued an interlocutory judgment (i) ordering the cancellation of the inscriptions on NSC’s public
records and (ii) rejecting NSC’s motion for cancellation of the appointment of the inspector.
On April 26, 2016, NSC filed a full answer to EWG’s claims, rejecting every claim made by EWG. The
Court’s response on this matter is pending.
On May 17, 2016, NSC filed a claim with the Third District Court in Matters of Amparo and Federal Trials in
the City of Tijuana, Baja California (the ‘‘Amparo Court’’) challenging the Tecate, Mexico Court ex-parte
order which appointed an inspector over NSC’s commercial activities. On July 29, 2016, the Amparo Court
found that such appointment is unconstitutional and reversed the Tecate, Mexico Court’s appointment of an
inspector.
On September 6, 2016, the Tecate, Mexico Court issued a decree granting the counter guaranty requested by
NSC. Such counter-guaranty was fixed in the amount of 300,000 Mexican pesos and was given to the Court
on October 13, 2016 at which time all remaining ex-parte restrictions on NSC related to the challenged
transactions were suspended.
We believe that the claims made by EWG are baseless and without merit, will vigorously defend NSC and
CW-Cooperatief in this litigation, and will seek dismissal of the orders entered by the court and all claims
against NSC and CW-Cooperatief. We cannot presently determine the outcome of this litigation. However,
such litigation could adversely impact our efforts to complete the Project. We incurred legal fees in connection
with this litigation of approximately $203,000 and $138,000 for the years ended December 31, 2016 and
2015, respectively.
CW-Bali
Through our subsidiary CW-Bali, we have built and presently operate a seawater reverse osmosis plant with a
productive capacity of approximately 790,000 gallons per day located in Nusa Dua, one of the primary tourist
areas of Bali, Indonesia. We built this plant based upon our belief that future water shortages in this area of
Bali would eventually enable us to sell all of this plant’s production. However, since its inception, our sales
volumes for this plant have not been sufficient to cover its operating costs.
In 2015, the Indonesian government passed Regulation 122 which provides a mechanism for governmental
the
regulatory oversight over the utilization of Indonesia’s water resources. Under this new regulation,
approval or cooperation of the local government water utility is required for any water supply contracts
executed by non-governmental providers after the effective date of the regulation. Consequently CW-Bali will
be required to enter into a cooperation agreement with Bali’s local government water utility, PDAM, or
otherwise obtain PDAM’s approval, to supply any new customers.
CW-Bali’s target resort customers in Nusa Dua (as do many other parties in Bali) obtain their fresh water
primarily from wells on their properties that access the island’s underground fresh water aquifer. The
continued use of such wells threatens to permanently damage the aquifer making it vulnerable to intrusion by
seawater, sewage and pollution. The Bali government has sought to discourage and/or eliminate the use of
such wells by threatening to impose substantial taxes on the water drawn from them. Our decision to build a
48
speculative plant in Bali was based upon (i) PDAM’s inability to provide water to the various newer and
planned resorts in Nusa Dua, resorts that required large quantities of fresh water; (ii) these resorts’ apparent
interest in securing a new water supply given their eventual reduced access to fresh water wells due to
governmental taxation, other regulatory actions or eventual contamination of the aquifer; and (iii) desalination
as the only viable new means of supplying large amounts of fresh water to Nusa Dua in a reasonable time
frame. We believed the resorts would utilize CW-Bali as a much higher quality, drought-proof,
environmentally safe water supply and reduce or eliminate their dependence on wells and/or trucked water.
However, no taxes have yet been assessed or governmental regulatory actions taken to discourage or end the
use of fresh water wells. Economic conditions in Bali have declined significantly since CW-Bali commenced
operations and, to date, the resorts in Nusa Dua have not elected to replace or supplement their much less
expensive well water with CW-Bali’s alternative supply. A few of these target customers have installed their
own small scale desalination plants. CW-Bali’s sales have been inadequate to cover its costs and we have
incurred operating losses for this subsidiary since its inception.
In late 2015, we decided to seek a strategic partner for CW-Bali to (i) purchase a major portion of its equity
ownership in CW-Bali; (ii) lead CW-Bali’s sales and marketing efforts; (iii) liaise with PDAM; and (iv) assist
with CW-Bali’s on-going funding requirements. While we have held discussions and exchanged information
with potential partners, we have not yet received an offer for an investment in, a purchase of, or a joint
venture for CW-Bali on terms we consider acceptable.
While we continue to believe that desalination will play a major part in addressing the long term water supply
needs of CW-Bali’s target market in Nusa Dua and Bali in general, the time frame for the widespread market
adoption of such technology will likely be significantly longer than we anticipated when we decided to
commence business in Bali. Consequently, effective for the three months ended September 30, 2016, we
reassessed the prospects for CW-Bali in light of (i) its results to date; (ii) current circumstances and the
uncertainties impacting the business; and (iii) its on-going funding requirements and our willingness to
continue to provide such funding, and tested CW-Bali’s long-lived assets for possible impairment. To test for
impairment, we estimated the future undiscounted cash flows CW-Bali will receive from its plant by
(i) identifying various possible future scenarios for the business; (ii) estimating the undiscounted future cash
flows associated with each possible scenario; and (iii) assigning a probability to each scenario. The resulting
probability-weighted sum represents our best estimate of the future undiscounted cash flows to be derived by
long-lived assets
CW-Bali from its long-lived desalination plant assets. The carrying value of our Bali
exceeded our probability-weighted estimate of CW-Bali’s future undiscounted cash flows which indicated
impairment of these assets, and we recorded an impairment loss of $2.0 million for the three months ended
September 30, 2016 to reduce the carrying value of our long-lived CW-Bali assets to their estimated fair
value.
If in the coming months we are not able to obtain a strategic partner for CW-Bali, sell water to PDAM or to
other new customers through a cooperation agreement, or otherwise significantly increase the revenues
generated by our Nusa Dua plant, we may cease CW-Bali’s operations. If we cease operations at CW-Bali, we
in
may be required to record further impairment
CW-Bali for the period in which we formally commit to exit the Bali market. Such impairment losses could
equal the carrying value of our investment in CW Bali and could have a material adverse impact on our
results of operations. Any sale of a portion of our investment in CW-Bali may be for an amount less than our
carrying amount, resulting in a loss on the sale that could have an adverse impact on our results of operations.
The carrying value of our investment in CW-Bali as of December 31, 2016 totaled $1.8 million, consisting of
net assets of $1.2 million and a cumulative foreign currency translation adjustment
reflected in our
stockholders’ equity of $549,555.
losses to reduce the carrying value of our investment
We anticipated at the time CW-Bali commenced operations that CW-Bali’s revenues, expenditures, and other
cash flows would be conducted primarily in the local currency, the Indonesian rupiah (IDR). We expected that
financial support we provided to CW-Bali would not extend beyond CW-Bali’s start-up phase, and that
thereafter CW-Bali would generate positive net cash flows from its operations and thus remain relatively
self-contained and integrated within the economic environment of Bali, Indonesia. As a result, since inception
of its operations through September 30, 2016, the functional currency of CW-Bali was the IDR.
49
However, since its inception CW-Bali has been dependent upon on-going financial support in U.S dollars
(US$) to continue its operations. We expect such funding to continue until such time, if ever, that CW-Bali
generates sufficient revenues to support its operations, or is able to obtain a strategic partner to assist with its
on-going funding requirements, or ceases operations. Consequently, effective as of October 1, 2016, we
changed the functional currency of CW-Bali to US$.
During the periods for which IDR was CW-Bali’s functional currency, we recorded foreign currency gains and
losses arising from CW-Bali’s transactions conducted in currencies other than the IDR. Such foreign currency
gains and losses included amounts associated with (i) transactions denominated in currencies other than the
IDR and (ii) the re-measurement of monetary assets and liabilities denominated in currencies other than the
IDR as of the balance sheet date. CW-Bali’s monetary assets and liabilities denominated in currencies other
than the IDR consist of US$-denominated bank accounts and US$-denominated loans we provided to
CW-Bali. Such foreign currency transaction gains (losses) were included in income and amounted to
approximately $201,000, $(345,936) and $(123,327) for the years ended December 31, 2016, 2015 and 2014,
respectively. After the re-measurement process of monetary assets and liabilities was completed, the assets and
liabilities of CW-Bali were translated into US$ using exchange rates in effect at the end of each period.
Revenues and expenses for CW-Bali were translated using rates that approximated those in effect during the
period. The effect of these foreign currency translations was recognized in the cumulative translation
adjustment included in our stockholders’ equity, which amounted to ($549,555) as of September 30 and
December 31 of 2016 and ($533,365) as of December 31, 2015.
This change in functional currency will be applied on a prospective basis, and therefore, the cumulative
translation adjustment of ($549,555) will remain unchanged until such time that the CW-Bali is no longer
dependent on US$ funding to support its operations, we sell all or a portion of our equity interest in CW-Bali,
or we discontinue CW-Bali’s operations. Translated amounts for non-monetary assets as of September 30,
2016 became the new accounting basis for
those assets effective October 1, 2016. Monetary assets
denominated in foreign currencies, including the IDR, will be re-measured to US$ at the current exchange rate
as of the balance sheet date going forward. We anticipate that the likely effect of this change in functional
currency will result in future foreign currency gains and losses that pertain to (i) transactions denominated in
IDR and (ii) foreign currency re-measurements associated with monetary assets and liabilities denominated in
IDR. As of December 31, 2016, such balances include IDR-denominated cash, and accounts payable, which
amounted to approximately $28,000, and $7,000, respectively, based upon the exchange rate between the
IDR and US$ as of that date. Based on this change in functional currency, our US$-denominated loans to
CW-Bali will not be subject to further re-measurement adjustments.
CW-Belize
the Minister of Public Utilities of the government of Belize
By Statutory Instrument No. 81 of 2009,
published an order, the Public Utility Provider Class Declaration Order, 2009 (the ‘‘Order’’), which as of
May 1, 2009 designated CW-Belize as a public utility provider under the laws of Belize. With this
designation, the Public Utilities Commission of Belize (the ‘‘PUC’’) has the authority to set the rates charged
by CW-Belize and to otherwise regulate its activities. On November 1, 2010, CW-Belize received a formal
complaint from the PUC alleging that CW-Belize was operating without a license under the terms of the
Water Industry Act. CW-Belize applied for this license in December 2010. On July 29, 2011, the PUC issued
the San Pedro Public Water Supply Quality and Security Complaint Order (the ‘‘Second Order’’) which
among other things requires that (i) CW-Belize and its customer jointly make a submission to the responsible
Minister requesting that the area surrounding CW-Belize’s seawater abstraction wells be designated a forest
reserve or national park and be designated a Controlled Area under section 58 of the Water Industry Act,
(ii) CW-Belize submit an operations manual for CW-Belize’s desalination plant to the PUC for approval,
(iii) CW-Belize and its customer modify the water supply agreement between the parties to (a) include new
water quality parameters included in the Order and (b) cap the current exclusive water supply arrangement in
the agreement at a maximum of 450,000 gallons per day, (iv) CW-Belize keep a minimum number of
replacement seawater RO membranes in stock at all
times and (v) CW-Belize take possession of and
reimburse the PUC for certain equipment which the PUC purchased from a third-party in late 2010.
CW-Belize has applied for declaratory judgment and has been granted a temporary injunction to stay the
enforcement of the Second Order by the PUC until such time as the Belize courts could hear the matter. The
50
initial hearing on this matter was conducted on October 30 and 31, 2012 with an additional hearing on
November 29, 2012. The ruling on this case is pending. We are presently unable to determine what impact the
Order and the Second Order will have on our results of operations, financial position or cash flows.
Adoption of New Accounting Standards:
In February 2015, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update
(‘‘ASU’’) 2015-02, Consolidation (Topic 810) — Amendments to the Consolidation Analysis. The amendments
in this update require management
to reevaluate whether certain legal entities should be consolidated.
Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal
entities are variable interest entities (‘‘VIEs’’) or voting interest entities, (2) eliminate the presumption that a
general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting
entities that are involved with VIEs, particularly those that have fee arrangements and related party
relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with
interests in legal entities that are required to comply with or operate in accordance with requirements that are
similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The
amendments in this update are effective for public business entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. The adoption of ASU 2015-02 did not have a material
impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying
the Presentation of Debt Issuance Costs. ASU 2015-03 provides authoritative guidance related to the
presentation of debt issuance costs on the balance sheet, requiring companies to present debt issuance costs as
a direct deduction from the carrying value of debt. The amendments in this update are effective for public
business entities in fiscal years beginning after December 15, 2015, and interim periods within those
fiscal years. The new guidance must be applied retrospectively to each prior period presented. The adoption of
ASU 2015-03 did not have a material impact on the Company’s consolidated financial statements.
In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance
Costs Associated with Line-of-Credit Arrangements, which clarifies the treatment of debt issuance costs from
line-of-credit arrangements after adoption of ASU 2015-03. The SEC Staff announced they would not object
to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred
debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any
outstanding borrowings on the line-of-credit arrangement. The amendment requires retrospective application
and represents a change in accounting principle. The amendment becomes effective in fiscal years beginning
after December 15, 2015. The adoption of ASU 2015-15 did not have a material impact on the Company’s
consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for
Measurement-Period Adjustments, which requires an acquirer to recognize adjustments identified during the
measurement period in the reporting period in which the adjustment amounts are determined. The adjustment
must
include the cumulative effect of the adjustment as if the accounting had been completed on the
acquisition date. The update should be applied prospectively and becomes effective January 1, 2016. Early
application is permitted. The adoption of ASU 2015-16 did not have a material impact on the Company’s
consolidated financial statements.
Effect of newly issued but not yet effective accounting standards:
identification of
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires
revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09
including
prescribes a five step framework in accounting for revenues from contracts within its scope,
(a)
the contract,
identification of
(c) determination of the transaction price, (d) allocation of the transaction price to the identified performance
obligations and (e)
the identified performance obligations are satisfied.
ASU 2014-09 also prescribes additional disclosures and financial statement presentations. ASU 2014-09 may
be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized
at the date of initial application. This amendment was originally effective January 1, 2017. In August 2015,
the performance obligations under
recognition of
the contract,
revenues as
(b)
51
the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date, which defers the effective date by one year to January 1, 2018. Early application is permitted but not
before January 1, 2017.
In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue
Gross versus Net), that amends the principal versus agent guidance in ASU 2014-09. ASU 2016-08 clarifies
that the analysis must focus on whether the entity has control of the goods or services before they are
transferred to the customer. ASU 2016-08 also provides additional guidance about how to apply the control
principle when services are provided and when goods or services are combined with other goods or services.
the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing,
In April 2016,
that
amends the revenue guidance in ASU 2014-09 on identifying performance obligations and accounting for
licenses of intellectual property. ASU 2016-10 changed the FASB’s previous proposals on renewals of
right-to-use licenses and contractual restrictions. The effective date of the standard for the Company will
coincide with ASU 2014-09 during the first quarter 2018.
In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging
(Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16
Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. ASU 2016-11 rescinds several SEC
Staff Announcements that are codified in Topic 605,
including, among other items, guidance relating to
accounting for shipping and handling fees and freight services.
the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606):
In May 2016,
Narrow-Scope Improvements and Practical Expedients, which clarifies implementation guidance around
collectability, sales taxes collected from customers, noncash considerations, contract modifications at
transition, and completed contracts at transition.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606,
Revenue from Contracts with Customers, which amended the guidance on performance obligation disclosures
and makes technical corrections and improvements to the new revenue standard. The standard is effective for
annual reporting periods beginning after December 15, 2017, including interim periods within that reporting
period, and permits early adoption on a limited basis. The update permits the use of either the retrospective or
cumulative effect transition method.
The effective dates of ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12 and ASU 2016-20 are the
same as ASU 2015-14 discussed above. The Company is currently evaluating the effect the adoption of these
standards will have on the Company’s consolidated financial statements.
the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of
In July 2015,
Inventory. ASU 2015-11 applies to all inventory that is measured using first-in, first-out or average cost. The
guidance requires an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is
effective prospectively for fiscal years, and for
interim periods within those years, beginning after
December 15, 2016. Early application is permitted. The adoption of ASU 2015-11 is not expected to have a
material impact on the Company’s financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of
Deferred Taxes. ASU 2015-17 requires net deferred tax assets and liabilities be classified as noncurrent in a
the classification between current and noncurrent amounts
classified balance sheet and eliminates
ASU No. 2015-17 is effective for financial statements issued for annual periods beginning after December 15,
2016 and interim periods within those annual periods. Early adoption is permitted. The adoption of
ASU 2015-17 is not expected to have a material impact on the Company’s financial position, results of
operations or cash flows.
the FASB issued ASU 2016-01, Financial
(Subtopic 825-10):
In January 2016,
Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the
recognition, measurement, presentation and disclosure of financial assets and financial liabilities. ASU 2016-01
is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017
and, for most provisions, is effective using the cumulative-effect transition approach. Early application is
Instruments — Overall
52
permitted for certain provisions. The Company is currently evaluating the effect
amendment will have on the Company’s consolidated financial statements.
the adoption of this
the FASB issued ASU 2016-02, Leases (Topic 842), which provides guidance for
In February 2016,
accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the
rights and obligations created by leased assets. The accounting guidance for lessors will remain relatively
largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning after December 15,
the adoption of this
2018. Early adoption is permitted. The Company is currently evaluating the effect
amendment will have on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments — Equity Method and Joint Ventures (Topic 323):
Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to apply the
equity method of accounting retrospectively when a reporting entity obtains significant
influence over a
previously held investment. ASU 2016-07 will be effective for the Company’s fiscal year beginning January 1,
2017 and subsequent interim periods. The adoption of ASU 2016-07 is not expected to have a material impact
on the Company’s financial position, results of operations or cash flows.
the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718):
In March 2016,
Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects related to the
accounting for share-based payment transactions, including the accounting for income taxes, statutory tax
withholding requirements and classification on the statement of cash flows. ASU 2016-09 is effective for
annual periods beginning after December 15, 2016, and interim periods within those annual periods. The
adoption of ASU 2016-09 is not expected to have a material impact on the Company’s financial position,
results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and payments are
presented in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after
December 15, 2017 and early adoption is permitted. The Company is currently evaluating the effect the
adoption of this amendment will have on the Company’s consolidated financial statements.
for Goodwill Impairment, which removes Step 2 of the goodwill
In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying
the Test
test. Goodwill
impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to
exceed the carrying amount of goodwill allocated to that reporting unit. An entity still has the option to
perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is
necessary. ASU 2017-04 should be applied on a prospective basis and is effective for annual periods
beginning January 1, 2020. Early adoption is permitted for interim or annual goodwill
tests
performed on testing dates after January 1, 2017. The Company is currently evaluating the effect the adoption
of this amendment will have on the Company’s consolidated financial statements.
impairment
impairment
Material Expenditures and Commitments
The following table summarizes our contractual obligations as of December 31, 2016:
Employment agreements . . . .
Operating leases . . . . . . . . .
Purchase obligations
. . . . . .
Security deposits . . . . . . . . .
. . . . . . . . . . . . . . . . .
Total
Total
$ 3,167,484
5,399,179
2,882,113
224,827
$11,673,603
2017
$1,846,150
806,279
2,877,113
—
$5,529,542
2018 − 2020
$1,321,334
1,780,678
5,000
124,827
$3,231,839
2021 − 2023
—
$
562,844
—
—
$562,844
2024 and
Thereafter
$
—
2,249,378
—
100,000
$2,349,378
CW-Bahamas and CW-Belize Liquidity Considerations
Transfers of U.S. dollars from CW-Bahamas to our other subsidiaries require authorization in advance from
the Central Bank of The Bahamas.
Transfers of U.S. dollars from CW-Belize to our other subsidiaries require authorization in advance from the
Central Bank of Belize. Furthermore, weakness in the Belize economy has reduced the amount of U.S. dollars
53
available for transfer by Belize banks, which limited the amount of U.S. dollars we were able to transfer from
Belize to our other subsidiaries during 2016. We cannot presently determine when economic conditions in
Belize will improve or when we will have an unlimited ability to transfer funds from CW-Belize.
CW-Bahamas Performance Guarantees
Our contract to supply water to the WSC from our Blue Hills plant requires us to guarantee delivery of a
minimum quantity of water per week. If we do not meet this minimum, we are required to pay the WSC for
the difference between the minimum and actual gallons delivered at a per gallon rate equal to the price per
gallon that WSC is currently paying us under the contract. The Blue Hills contract expires in 2032 and
requires us to deliver 63.0 million gallons of water each week.
Dividends
•
•
•
•
•
•
On January 31, 2016, we paid a dividend of $0.075 to shareholders of record on January 1, 2016.
On April 30, 2016, we paid a dividend of $0.075 to shareholders of record on April 1, 2016.
On July 31, 2016, we paid a dividend of $0.075 to shareholders of record on July 1, 2016.
On October 31, 2016, we paid a dividend of $0.075 to shareholders of record on October 3, 2016.
On January 31, 2017, we paid a dividend of $0.075 to shareholders of record on January 2, 2017.
On February 14, 2017, our Board declared a dividend of $0.075 payable on May 1, 2017 to
shareholders of record on April 3, 2017.
We have paid dividends to owners of our common shares and redeemable preferred shares since we began
declaring dividends in 1985. Our payment of any future cash dividends will depend upon our earnings,
financial condition, cash flows, capital requirements and other factors our Board deems relevant in determining
the amount and timing of such dividends.
Dividend Reinvestment and Common Stock Purchase Plan
This program is available to our shareholders, who may reinvest all or a portion of their common cash
dividends into shares of common stock at prevailing market prices and may also invest optional cash
payments to purchase additional shares at prevailing market prices as part of this program.
Impact of Inflation
Under the terms of our Cayman Islands license and our water sales agreements in The Bahamas, Belize and
the British Virgin Islands, our water rates are automatically adjusted for inflation on an annual basis, subject
to temporary exceptions. We, therefore, believe that the impact of inflation on our gross profit, measured in
consistent dollars, will not be material. However, significant increases in items such as fuel and energy costs
could create additional credit risks for us, as our customers’ ability to pay our invoices could be adversely
affected by such increases.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Credit Risk
We are not exposed to significant credit risk on retail customer accounts in the Cayman Islands as our policy
is to cease supply of water to customers whose accounts are more than 45 days overdue. Our primary
exposure to credit risk is from accounts receivable arising from bulk water sales to the governments of Belize,
The Bahamas, the British Virgin Islands, and the Cayman Islands.
As of December 31, 2016, we had approximately $3.8 million in loans receivable due from the WAC. These
loans are current as to scheduled principal and interest payments.
Interest Rate Risk
We are not exposed to significant interest rate risk as the balance of our note payable is not material to our
operations or financial condition.
54
Foreign Exchange Risk
All of the currencies in our operating areas other than the Mexican peso, Indonesian rupiah (‘‘IDR’’) and the
euro have been fixed to the dollar for over 20 years and we do not employ a hedging strategy against
exchange rate risk associated with our reporting in dollars. If any of these fixed exchange rates becomes a
floating exchange rate or if any of the foreign currencies in which we conduct business depreciate significantly
against the dollar, our results of operations and financial condition could be adversely affected.
As a result of our foreign operations, we have revenues and expenses, and assets and liabilities that are
denominated in foreign currencies that are subject to variable foreign exchange rates. A 10% hypothetical
adverse change in foreign exchange rates applied consistently to our financial instruments subject to foreign
exchange risk would result in an increase or decrease in our consolidated net income of approximately $7,000
for the year ended December 31, 2016. A 10% hypothetical adverse change in foreign exchange rates applied
variably to our financial instruments subject to foreign exchange risk would result in an increase or decrease
in our consolidated net income of approximately $5,000 for the year ended December 31, 2016.
Although operations generally are conducted in the relevant local currency, we also are subject to foreign
exchange transaction exposure when our subsidiaries transact business in a currency other than their own
functional currency.
55
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED WATER CO. LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014 . . . . .
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016,
2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 2015
and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II, Valuation and Qualifying Accounts, is omitted because the information is included in
the financial statements and notes.
OCEAN CONVERSION (BVI) LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014 . . .
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 2015
and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
57
58
59
60
61
62
63
102
103
104
105
106
107
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Consolidated Water Co. Ltd.
We have audited the accompanying consolidated balance sheets of Consolidated Water Co. Ltd.
(the ‘‘Company’’) as of December 31, 2016 and 2015, and the related consolidated statements of income,
comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2016. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Consolidated Water Co. Ltd as of December 31, 2016 and 2015, and the
consolidated results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2016 in conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Consolidated Water Co. Ltd.’s internal control over financial reporting as of December 31,
2016, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013) and our report dated March 16, 2017
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
/s/ Marcum LLP
Fort Lauderdale, Florida
March 16, 2017
57
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED BALANCE SHEETS
December 31,
2016
2015
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,254,116
—
Certificate of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
16,500,798
Accounts receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,305,879
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,096,200
Prepaid expenses and other current assets
. . . . . . . . . . . . . . . . . . . . . . .
1,633,588
Current portion of loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85,211
Costs and estimated earnings in excess of billings . . . . . . . . . . . . . . . . . .
Total current assets
60,875,792
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,084,105
Property, plant and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
885,494
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,606,088
Inventory, non-current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,135,428
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,086,630
Investment in OC-BVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,195,476
Intangible assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,784,248
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
20,558,424
Land held for development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,392,843
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $163,604,528
$ 44,792,734
5,637,538
428,203
9,529,016
1,918,728
1,282,660
1,841,851
—
65,430,730
53,743,170
1,928,610
4,558,374
3,769,016
4,548,271
771,811
3,499,037
20,558,424
2,767,583
$161,575,026
LIABILITIES AND EQUITY
Current liabilities
Accounts payable and other current liabilities . . . . . . . . . . . . . . . . . . . . . $
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable to related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demand loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billings in excess of costs and estimated earnings . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,898,908
1,187,214
490,000
—
102,966
6,679,088
1,915,241
904,827
9,499,156
$
4,829,535
1,177,246
—
6,958,328
189,985
13,155,094
—
224,827
13,379,921
Commitments and contingencies
Equity
Consolidated Water Co. Ltd. stockholders’ equity
Redeemable preferred stock, $0.60 par value. Authorized 200,000 shares;
issued and outstanding 35,225 and 38,804 shares, respectively . . . . . . . .
21,135
23,282
Class A common stock, $0.60 par value. Authorized 24,655,000 shares;
issued and outstanding 14,871,664 and 14,781,201 shares, respectively . .
8,922,998
8,868,721
Class B common stock, $0.60 par value. Authorized 145,000 shares; none
—
issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85,621,033
51,589,337
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(549,555)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
145,604,948
Total Consolidated Water Co. Ltd. stockholders’ equity . . . . . . . . . . . . . . . .
8,500,424
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
154,105,372
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $163,604,528
—
84,597,349
52,084,175
(533,365)
145,040,162
3,154,943
148,195,105
$161,575,026
The accompanying notes are an integral part of these consolidated financial statements.
58
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF INCOME
Retail revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bulk revenues
Services revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of retail revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of bulk revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of services revenues . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . .
Impairment loss on long-lived assets . . . . . . . . . . . . . . . .
Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profit sharing income from OC-BVI . . . . . . . . . . . . .
Equity in earnings of OC-BVI . . . . . . . . . . . . . . . . .
Impairment loss on investment in OC-BVI . . . . . . . . .
Unrealized loss on put/call option . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . .
Provision for (benefit from) income taxes
. . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) attributable to non-controlling interests
. .
Net income attributable to Consolidated Water Co. Ltd.
Other income (expense), net
2016
$23,505,619
29,647,034
4,723,054
57,875,707
10,294,298
19,488,550
3,841,973
33,624,821
24,250,886
18,677,584
2,000,000
1,750,000
1,823,302
Year Ended December 31,
2015
$23,254,757
31,854,255
2,007,190
57,116,202
10,543,972
21,634,789
1,629,221
33,807,982
23,308,220
14,840,156
—
—
8,468,064
2014
$24,104,932
39,201,011
2,253,135
65,559,078
11,521,277
27,985,441
2,580,260
42,086,978
23,472,100
17,011,041
—
—
6,461,059
609,750
(104,048)
125,550
337,809
(925,000)
(297,000)
670,893
417,954
2,241,256
(536,057)
2,777,313
(1,183,188)
1,013,252
(269,090)
105,300
294,368
(1,060,000)
—
(626,400)
(542,570)
7,925,494
—
7,925,494
406,793
1,440,631
(488,770)
111,375
303,380
(860,000)
—
(203,135)
303,481
6,764,540
—
6,764,540
499,182
stockholders
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,960,501
$ 7,518,701
$ 6,265,358
Basic earnings per common share attributable to
Consolidated Water Co. Ltd. common stockholders
. .
Diluted earnings per common share attributable to
Consolidated Water Co. Ltd. common stockholders
. .
Dividends declared per common share . . . . . . . . . . . . .
$
$
$
Weighted average number of common shares used in the
determination of:
0.27
0.27
0.30
$
$
$
0.51
0.51
0.30
$
$
$
0.43
0.42
0.30
Basic earnings per share . . . . . . . . . . . . . . . . . . . . .
14,809,909
14,741,748
Diluted earnings per share . . . . . . . . . . . . . . . . . . . .
14,944,028
14,827,755
14,697,896
14,764,323
The accompanying notes are an integral part of these consolidated financial statements.
59
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss)
Foreign currency translation adjustment
. . . . . . . . . . . . .
Total other comprehensive income (loss)
. . . . . . . . . . . . . .
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss) attributable to non-controlling
2016
$ 2,777,313
Year Ended December 31,
2015
$7,925,494
2014
$6,764,540
(17,042)
(17,042)
2,760,271
(53,660)
(53,660)
7,871,834
(10,953)
(10,953)
6,753,587
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,184,040)
404,110
498,634
Comprehensive income attributable to Consolidated
Water Co. Ltd. stockholders . . . . . . . . . . . . . . . . . . . .
$ 3,944,311
$7,467,724
$6,254,953
The accompanying notes are an integral part of these consolidated financial statements.
60
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Redeemable
preferred stock
Shares Dollars
Shares
Common stock
Cumulative
translation
adjustment
Balance as of December 31, 2013 . . 37,408 $22,445 14,686,197 $8,811,718 $83,381,387 $47,155,548 $(471,983)
—
. . . . . . . . .
Issue of share capital
—
Conversion of preferred stock . . . .
—
Buyback of preferred stock . . . . . .
—
Net income
. . . . . . . . . . . . . . .
—
Exercise of options . . . . . . . . . . .
Dividends declared . . . . . . . . . . .
—
Foreign currency translation
—
—
—
— 6,265,358
—
— (4,420,285)
5,957
(4,756)
(1,822)
—
53
—
3,574
(2,854)
(1,093)
—
32
—
18,294
4,756
—
—
6,652
—
10,976
2,854
—
—
3,991
—
244,787
—
(12,569)
Additional
paid-in
capital
Retained
earnings
49,113
Dollars
Non-controlling
interests
$ 2,599,258
—
—
—
499,182
—
(164,396)
Total
stockholders’
equity
$141,498,373
259,337
—
(13,662)
6,764,540
53,136
(4,584,681)
—
—
—
—
—
—
adjustment
—
. . . . . . . . . . . . . .
—
Stock-based compensation . . . . . .
Balance as of December 31, 2014 . . 36,840 22,104 14,715,899 8,829,539
6,308
Issue of share capital
. . . . . . . . .
4,317
Conversion of preferred stock . . . .
—
Buyback of preferred stock . . . . . .
Net income
—
. . . . . . . . . . . . . . .
28,557
Exercise of options . . . . . . . . . . .
Dividends declared . . . . . . . . . . .
—
Foreign currency translation
5,169
(4,317)
(449)
—
775
—
8,615
(7,195)
(748)
—
1,292
—
10,514
7,195
—
—
47,593
—
—
—
—
—
—
—
adjustment
. . . . . . . . .
—
. . . . . . . . . . . . . .
Stock-based compensation . . . . . .
—
Balance as of December 31, 2015 . . 38,804 23,282 14,781,201 8,868,721
15,094
Issue of share capital
8,421
6,935
Conversion of preferred stock . . . . (11,558)
—
(1,755)
Buyback of preferred stock . . . . . .
—
Net income
—
. . . . . . . . . . . . . . .
32,248
1,313
Exercise of options . . . . . . . . . . .
—
—
Dividends declared . . . . . . . . . . .
Foreign currency translation
5,053
(6,935)
(1,053)
—
788
—
25,156
11,558
—
—
53,749
—
—
116,574
83,779,292
131,741
—
(5,565)
— (10,405)
—
—
(482,388)
49,000,621
—
—
—
—
—
—
—
— 7,518,701
—
—
—
— (4,435,147)
427,431
(548)
—
2,933,496
—
—
—
406,793
—
(182,663)
—
264,450
84,597,349
159,426
—
(13,001)
(2,683)
— (50,977)
—
—
—
3,154,943
(533,365)
52,084,175
—
—
—
—
—
—
—
—
—
— (1,183,188)
— 3,960,501
—
—
—
(182,663)
—
— (4,455,339)
535,813
(10,953)
116,574
144,082,664
143,218
—
(6,014)
7,925,494
456,763
(4,617,810)
(53,660)
264,450
148,195,105
179,573
—
(14,054)
2,777,313
568,849
(4,638,002)
adjustment
. . . . . . . . . . . . . .
—
—
—
—
—
— (16,190)
(852)
(17,042)
Beginning Aerex non-controlling
interest at fair value . . . . . . . . .
—
Stock-based compensation . . . . . .
Balance as of December 31, 2016 . . 35,225 $21,135 14,871,664 $8,922,998 $85,621,033 $51,589,337 $(549,555)
341,446
—
—
—
—
—
6,712,184
—
$ 8,500,424
6,712,184
341,446
$154,105,372
The accompanying notes are an integral part of these consolidated financial statements.
61
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,777,313
Adjustments to reconcile net income to net cash provided by
$ 7,925,494
$ 6,764,540
Year Ended December 31,
2015
2014
2016
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prepaid land lease . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax benefit
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on put/call option . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense relating to stock and stock option grants . . . .
Net loss (gain) on disposal of fixed assets . . . . . . . . . . . . . . . . . .
Foreign currency transaction adjustment
. . . . . . . . . . . . . . . . . . .
Profit sharing and equity in earnings of OC-BVI . . . . . . . . . . . . . .
Impairment loss on long-lived assets
. . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of investment in OC-BVI . . . . . . . . . . . . . . . . . . . . .
Change in:
Accounts receivable and costs and estimated earnings in excess
of billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets
. . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and other liabilities and billings in excess of costs
and estimated earnings − construction project
. . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . .
Cash flows from investing activities
Purchase of certificate of deposit
Maturity of certificate of deposit
Additions to property, plant and equipment and construction in
. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
progress
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of equipment . . . . . . . . . . . . . . . . . . . . . . . .
Distribution of earnings from OC-BVI
. . . . . . . . . . . . . . . . . . . .
Acquisition of Aerex, net of cash acquired . . . . . . . . . . . . . . . . . .
Collections on loans receivable . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment for land held for development . . . . . . . . . . . . . . . . . . . .
Payment of land purchase obligation . . . . . . . . . . . . . . . . . . . . .
Release/(restriction) of cash balance . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . .
7,241,915
179,353
19,241
41,672
(536,057)
42,553
297,000
521,019
(314,381)
(172,130)
(463,359)
2,000,000
1,750,000
925,000
5,657,580
179,353
23,014
125,016
—
—
—
407,668
32,566
420,641
(399,668)
—
—
1,060,000
5,524,359
179,353
25,968
170,289
—
—
—
202,454
77,495
107,839
(414,755)
—
—
860,000
(5,910,009)
(622,724)
185,401
3,402,728
(732,588)
276,116
5,988,523
(566,928)
423,893
(138,455)
7,823,352
(1,058,134)
17,319,786
(1,158,169)
18,184,861
— (5,637,538)
5,000,000
5,637,538
(5,000,000)
—
(3,462,150)
547,332
—
(7,742,853)
1,841,851
—
—
—
398,744
(2,779,538)
(3,626,278)
(3,113,565)
13,620
10,160
969,600
—
—
—
1,691,102
1,726,310
8,587,475
—
—
(7,382,858)
— (10,050,000)
(456,083)
(15,253,422)
(42,716)
(2,057,349)
Cash flows from financing activities
(4,433,539)
Dividends paid to CWCO common shareholders . . . . . . . . . . . . . .
(182,663)
Dividends paid to non-controlling interests
. . . . . . . . . . . . . . . . .
(11,831)
Dividends paid to CWCO preferred shareholders . . . . . . . . . . . . . .
(14,054)
Repurchase of redeemable preferred stock . . . . . . . . . . . . . . . . . .
568,849
Proceeds received from exercise of stock options
. . . . . . . . . . . . .
490,000
Issuance of note payable to related party . . . . . . . . . . . . . . . . . . .
—
Principal repayments of long term debt . . . . . . . . . . . . . . . . . . . .
—
Proceeds received from demand loan payable . . . . . . . . . . . . . . . .
(7,000,000)
Repayments of demand loan payable . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . .
(10,583,238)
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . .
806
Net increase (decrease) in cash and cash equivalents
(5,538,618)
. . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . .
44,792,734
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $ 39,254,116
(4,417,534)
(201,473)
(11,881)
(6,014)
456,763
—
—
—
(2,000,000)
(6,180,139)
(3,253)
9,079,045
35,713,689
$44,792,734
(4,407,249)
(164,396)
(11,528)
(13,077)
52,551
—
(5,301,327)
10,000,000
(1,000,000)
(845,026)
760
2,087,173
33,626,516
$ 35,713,689
The accompanying notes are an integral part of these consolidated financial statements.
62
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principal activity
Consolidated Water Co. Ltd., and its subsidiaries (collectively,
the ‘‘Company’’) use reverse osmosis
technology to produce potable water from seawater. The Company processes and supplies water and provides
water-related products and services to its customers in the Cayman Islands, Belize, The Bahamas, the British
Virgin Islands, the United States and Indonesia. The Company sells water to a variety of customers, including
public utilities, commercial and tourist properties, residential properties and government facilities. The base
price of water supplied by the Company, and adjustments thereto, are determined by the terms of a retail
license and bulk water supply contracts which provide for adjustments based upon the movement in the
government price indices specified in the license and contracts as well as monthly adjustments for changes in
the cost of energy. The Company also manufactures and services a wide range of products and provides
design, engineering, management, operating and other services applicable to desalination, commercial and
municipal water production, supply and treatment, and industrial water and wastewater treatment.
2. Accounting policies
Basis of preparation: The consolidated financial statements presented are prepared in accordance with the
accounting principles generally accepted in the United States of America.
Use of estimates: The preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant
to estimates and assumptions include the
intangible assets, goodwill and the fair value of the
carrying value of property, plant and equipment,
Company’s investment in its affiliate. Actual results could differ significantly from such estimates.
items subject
Basis of consolidation: The accompanying consolidated financial statements include the accounts of the
Inc., Cayman Water Company Limited (‘‘Cayman
Company’s (i) wholly-owned subsidiaries, Aquilex,
Water’’), Consolidated Water
(Belize) Limited (‘‘CW-Belize’’), Ocean Conversion (Cayman) Limited
(‘‘OC-Cayman’’), DesalCo Limited (‘‘DesalCo’’), Consolidated Water Cooperatief, U.A. (‘‘CW-Cooperatief’’),
Consolidated Water U.S. Holdings, Inc. (‘‘CW-Holdings’’); and (ii) majority-owned subsidiaries Consolidated
(Asia)
Water
Pte. Limited, PT Consolidated Water Bali (‘‘CW-Bali’’), N.S.C. Agua, S.A. de C.V. (‘‘NSC’’) and Aguas de
Rosarito S.A.P.I. de C.V. (‘‘AdR’’). The Company’s investment in its affiliate Ocean Conversion (BVI) Ltd.
(‘‘OC-BVI’’) is accounted for using the equity method of accounting. All significant intercompany balances
and transactions have been eliminated in consolidation.
(‘‘CW-Bahamas’’), Aerex Industries,
(‘‘Aerex’’), Consolidated Water
(Bahamas) Ltd.
Inc.
(other
the Company and its
foreign operating subsidiaries
Foreign currency: The Company’s reporting currency is the United States dollar (‘‘US$’’). The functional
currency of
than CW-Bali, NSC and
CW-Cooperatief) is the currency for each respective country. As discussed in Note 18, the Company changed
the functional currency of CW-Bali from the Indonesian rupiah to the US$ as of October 1, 2016. The
functional currency for NSC and CW-Cooperatief is the US$. The exchange rates for the Cayman Islands
dollar, the Belize dollar and the Bahamian dollar are fixed to the US$. CW-Cooperatief conducts business in
US$ and euros, CW-Bali conducts business in US$ and Indonesian rupiahs, and NSC conducts business
in US$ and Mexican pesos. The exchange rates for conversion of euros, rupiahs and Mexican pesos into
US$ vary based upon market conditions. Net foreign currency gains (losses) arising from transactions and
re-measurements were $50,299, ($485,291) and ($111,409) for the years ended December 31, 2016, 2015 and
2014, respectively, and are included in ‘‘Other income (expense) — Other’’ in the accompanying consolidated
statements of income.
63
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting policies − (continued)
Comprehensive income:
Comprehensive income (loss) is defined as the change in equity during a period
from transactions and other events from non-owner sources. Comprehensive income (loss) is the total of net
income and other comprehensive income (loss) which, for the Company, is comprised entirely of foreign
currency translation adjustments related to CW-Bali.
Cash and cash equivalents:
Cash and cash equivalents consist of demand deposits at banks and highly
liquid deposits at banks with an original maturity of three months or less. Cash and cash equivalents as of
December 31, 2016 and December 31, 2015 include $1.0 million and $13.6 million, respectively, of
certificates of deposits with an original maturity of three months or less.
As of December 31, 2016, the Company had deposits in U.S. banks in excess of federally insured limits of
approximately $2.0 million. As of December 31, 2016, the Company held cash in foreign bank accounts of
approximately $40.0 million.
Transfers from the Company’s Bahamas and Belize bank accounts to Company bank accounts in other
respectively. As of
countries require the approval of
December 31, 2016, the equivalent United States dollar cash balances for deposits held in the Bahamas and
Belize were approximately $5.9 million and $4.9 million, respectively.
the Bahamas and Belize,
the Central Bank of
Accounts receivable and allowance for doubtful accounts: Accounts receivable are recorded at invoiced
amounts based on meter readings or minimum take-or-pay amounts per contractual agreements. The allowance
for doubtful accounts is the Company’s best estimate of the amount of probable credit
losses in the
Company’s existing accounts receivable balance. The Company determines the allowance for doubtful
accounts based on historical write-off experience and monthly review of delinquent accounts. Past due
balances are reviewed individually for collectability and disconnection. Account balances are charged off
against the allowance for doubtful accounts after all means of collection have been exhausted and the potential
for recovery is considered by management to be remote.
Inventory:
Inventory primarily includes consumables stock and spare parts stock that are valued at the
lower of cost or net realizable value with cost determined on the first-in, first-out basis. Inventory also
includes potable water held in the Company’s reservoirs. The carrying amount of the water inventory is the
lower of the average cost of producing water during the year or its net realizable value.
Loans receivable:
Loans receivable relate to notes receivable from customers arising from the construction
and sale of water desalination plants. The allowance for loan losses, if any, is the Company’s best estimate of
the amount of probable credit losses in the Company’s existing loans and is determined on an individual loan
basis.
Property, plant and equipment: Property, plant and equipment
less accumulated
depreciation. Depreciation is calculated using a straight line method with an allowance for estimated residual
values. Rates are determined based on the estimated useful lives of the assets as follows:
is stated at cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings
Plant and equipment
. . . . . . . . . . . . . . . . . . . . . .
Distribution system . . . . . . . . . . . . . . . . . . . . . . .
Office furniture, fixtures and equipment
. . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . .
Lab equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 40 years
4 to 40 years
3 to 40 years
3 to 10 years
3 to 10 years
Shorter of
5 years or lease term
5 to 10 years
Additions to property, plant and equipment are comprised of the cost of the contracted services, direct labor
and materials. Assets under construction are recorded as additions to property, plant and equipment upon
completion of the projects. Depreciation commences in the month the asset is placed in service.
64
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting policies − (continued)
Long-lived assets are reviewed for
Long-lived assets:
impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would
necessitate an impairment assessment include a significant decline in the observable market value of an asset,
a significant change in the extent or manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets
is not
to be held and used,
recoverable through its undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and estimated fair value.
the Company recognizes an impairment
loss only if its carrying amount
Construction in progress:
Interest costs directly attributable to the acquisition and construction of
qualifying assets, which are assets that necessarily take a substantial period of time to be ready for their
intended use, are added to the cost of those assets until such time as the assets are substantially ready for use.
No interest was capitalized during the years ended December 31, 2016, 2015 or 2014.
Goodwill and intangible assets: Goodwill represents the excess cost over the fair value of the assets of an
acquired business. Goodwill and intangible assets acquired in a business combination accounted for as a
purchase and determined to have an indefinite useful life are not amortized, but are tested for impairment at
least annually. Intangible assets with estimable useful lives are amortized over their respective estimated
lives to their estimated residual values and reviewed periodically for impairment. The Company
useful
evaluates the possible impairment of goodwill annually as part of its reporting process for the fourth quarter
of each fiscal year. Management identifies the Company’s reporting units, which consist of the retail and bulk
business segments and Aerex, and determines the carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to those reporting units. The Company
determines the fair value of each reporting unit and compares the fair value to the carrying amount of the
reporting unit. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting
unit, the Company is required to perform the second step of the impairment test, as this is an indication that
the reporting unit’s goodwill may be impaired. In this step, the Company compares the implied fair value of
the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. The implied fair value
of goodwill is determined by allocating the fair value of the reporting unit to all the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation. The
residual fair value after this allocation is the implied fair value of the reporting unit’s goodwill. If the implied
fair value is less than its carrying amount, the impairment loss is recorded.
For the years ended December 31, 2016 and 2015, the Company estimated the fair value of its reporting units
by applying the discounted cash flow method, the subject company stock price method, the guideline public
company method, and the mergers and acquisitions method.
The discounted cash flow method relied upon seven-year discrete projections of operating results, working
capital and capital expenditures, along with a terminal value subsequent
to the discrete period. These
seven-year projections were based upon historical and anticipated future results, general economic and market
conditions, and considered the impact of planned business and operational strategies. The discount rates for
the calculations represented the estimated cost of capital for market participants at the time of each analysis.
In preparing these seven-year projections for its retail unit, the Company (i) identified possible outcomes of its
on-going negotiations with the Cayman Islands government for the renewal of its retail license; (ii) estimated
the cash flows associated with each possible outcome; and (iii) assigned a probability to each outcome and
associated estimated cash flows. The weighted average estimated cash flows were then summed to determine
the overall fair value of the retail unit under this method. The possible outcomes used for the discounted cash
flow method for the retail unit included the implementation of a rate of return on invested capital model, the
methodology proposed by Cayman Islands government representatives for the new retail license.
65
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting policies − (continued)
The Company also estimated the fair value of each of its reporting units for the years ended December 31,
2016 and 2015 through reference to the quoted market prices for the Company and guideline companies and
the market multiples implied by guideline merger and acquisition transactions.
The Company weighted the fair values estimated for each of its reporting units under each method and
summed such weighted fair values to estimate the overall fair value for each reporting unit. The respective
weightings the Company applied to each method as of December 31, 2016 were consistent with those used as
of December 31, 2015 and were as follows:
Method
Discounted cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subject company stock price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guideline public company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mergers and acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail
50%
30%
10%
10%
100%
Bulk
50%
30%
10%
10%
100%
The fair values the Company estimated for its retail, bulk and Aerex units exceeded their carrying amounts
by 123%, 41% and 26%, respectively, as of December 31, 2016. The fair values the Company estimated
for
respectively, as of
December 31, 2015.
its retail and bulk units exceeded their carrying amounts by 72% and 20%,
The Company also performed an analysis reconciling the conclusions of value for its reporting units to its
market capitalization at December 31, 2016. This reconciliation resulted in no implied control premium for the
Company.
On February 11, 2016, the Company acquired 51% ownership interest in Aerex. In connection with this
acquisition the Company recorded goodwill of $8,035,211. Aerex’s actual results of operations subsequent to
the Company’s acquisition have fallen significantly short of the projected results for this period that were
included in the overall cash flow projections the Company utilized to determine the purchase price for Aerex
and the fair values of its assets and liabilities. Based upon currently available information, the Company
believes Aerex’s results of operations for fiscal 2017 will also fall short of its purchase price projections for
Aerex. Due to these actual and projected shortfalls in Aerex’s results of operations, the Company tested
Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating its fair value using the
discounted cash flow method. As a result of this impairment
the
carrying value of the Aerex goodwill exceeded its fair value, and recorded an impairment loss of $1,750,000
for the three months ended September 30, 2016 to reduce the carrying value of this goodwill to $6,285,211.
The Company may be required to record additional impairment losses to reduce the carrying value of its
Aerex goodwill in future periods if the Company determines it likely that Aerex’s results of operations will
continue to fall short of its purchase price projections.
the Company determined that
testing,
Investments:
Investments where the Company does not exercise significant influence over the operating and
financial policies of the investee and holds less than 20% of the voting stock are recorded at cost. The
Company uses the equity method of accounting for investments in common stock where the Company holds
20% to 50% of the voting stock of the investee and has significant influence over its operating and financial
policies but does not meet the criteria for consolidation. The Company recognizes impairment losses on
declines in the fair value of the stock of investees that are other than temporary.
Other assets: Under the terms of CW-Bahamas’ contract with the Water and Sewerage Corporation of The
Bahamas to supply water from its Blue Hills desalination plant, CW-Bahamas was required to reduce the
amount of water lost by the public water distribution system on New Providence Island, The Bahamas, over a
one year period by 438 million gallons, a requirement CW Bahamas met during 2007. The Company was
solely responsible for the engineering, labor and materials costs incurred to effect the reduction in lost water,
66
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting policies − (continued)
which were capitalized and are being amortized on a straight-line basis over the original remaining life of the
Blue Hills contract. Such costs are included in other assets and aggregated approximately $3.5 million as of
December 31, 2016 and 2015. Accumulated amortization for these costs was approximately $1.8 million and
$1.6 million as of December 31, 2016 and 2015, respectively.
Other liabilities: Other liabilities consist of security deposits received from large customers as security for
accounts receivable from such customers.
Income taxes: The Company accounts for the income taxes arising from the operations of its United States
and Mexico subsidiaries under the asset and liability method. Deferred tax assets and liabilities, if any, are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided to the extent any deferred tax asset may not be
realized.
CW-Belize is liable for business and corporate income taxes. Under the terms of its water supply agreement
with Belize Water Services Ltd. (‘‘BWSL’’), its sole customer, CW-Belize is reimbursed by BWSL for all
taxes that it is required to pay and records this reimbursement as an offset to its tax expense.
The Company is not presently subject to income taxes in the other countries in which it operates.
the percentage-of-completion method,
Construction revenue and cost of construction revenue: The Company recognizes revenue and related
costs as work progresses on long term fixed price construction contracts using the percentage-of-completion
method, which relies on contract revenue and estimates of total expected costs. The Company follows this
method since it can make reasonably dependable estimates of the revenue and costs applicable to various
the Company records revenue and
stages of a contract. Under
recognizes profit or loss as work on the contract progresses. The Company estimates total project costs and
profit to be earned on each long term, fixed price contract prior to commencement of work on the contract
and updates these estimates as work on the contract progresses. The cumulative amount of revenue recorded
on a contract at a specified point in time is that percentage of total estimated revenue that incurred costs to
date comprises of estimated total contract costs. If, as work progresses, the actual contract costs exceed
estimates, the profit recognized on revenue from that contract decreases. The Company recognizes the full
amount of any estimated loss on a contract at the time the estimates indicate such a loss. Any costs and
estimated earnings in excess of billings are classified as current assets. Billings in excess of costs and
estimated earnings on uncompleted contracts, if any, are classified as current liabilities.
With respect to the plant construction contracts awarded as the result of a tender process, the Company
assumes the risk that the costs associated with constructing the plant may be greater than it anticipated in
preparing its bid, as the terms of such tender processes typically require the winner to guarantee the sales
price for the plant at the bid amount. Because the Company bases its contracted sales price in part on its
estimation of future construction costs, the profitability of its plant sales is dependent on its ability to estimate
these costs accurately. The cost estimates the Company prepares in connection with the construction of plants
to be sold to third parties are subject to inherent uncertainties. The cost of materials and construction may
increase significantly after the Company submits its tender and accompanying bid price for a plant due to
factors beyond the Company’s control, which could cause the profit margin for a plant to be less than the
Company anticipated when the tender was submitted. The profit margin the Company initially expects to
generate from a plant sale could be further affected by other factors, such as hydro-geologic conditions at the
in
plant site that differ materially from those the Company believes exists, and therefore relies upon,
determining its bid price.
67
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting policies − (continued)
Revenue from water sales: The Company recognizes revenues from water sales at
the time water is
supplied to the customer’s facility or storage tank. The amount of water supplied is determined based upon
water meter readings performed at the end of each month. Under the terms of both its license agreement with
the government of the Cayman Islands and its bulk water supply contracts, the Company is entitled to charge
its customers the greater of a minimum monthly charge or the price for water supplied during the month.
Comparative amounts: Certain amounts presented in the financial statements previously issued for 2015
and 2014 have been reclassified to conform to the current year’s presentation.
3. Cash and cash equivalents
Cash and cash equivalents are not restricted by the terms of the Company’s bank accounts as to withdrawal or
use. As of December 31, 2016 and 2015,
the equivalent United States dollars are denominated in the
following currencies:
Bank accounts:
United States dollar
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cayman Islands dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bahamian dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Belize dollar
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bermudian dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexican peso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Singapore dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indonesian rupiah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short term deposits:
United States dollar
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bahamian dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
2015
$11,355,704
16,511,673
4,859,914
4,884,161
3,733
72,507
11,657
25,840
29,220
37,754,409
$10,961,159
10,590,207
1,983,236
4,213,923
4,571
27,872
23,819
25,879
40,483
27,871,149
490,914
1,008,793
1,499,707
$39,254,116
1,307,337
15,614,248
16,921,585
$44,792,734
Transfers from the Company’s Bahamas and Belize bank accounts to Company bank accounts in other
countries require the approval of the Central Bank of the Bahamas and Belize, respectively.
4. Accounts receivable
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivable − construction project
. . . . . . . . . . . . . . . . . . . . . . . .
Receivable from OC-BVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . .
December 31
2016
$15,368,218
—
53,970
1,271,948
16,694,136
(193,338)
$16,500,798
2015
$8,235,514
521,250
45,118
920,472
9,722,354
(193,338)
$9,529,016
68
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Accounts receivable − (continued)
The activity for the allowance for doubtful accounts consisted of:
Opening allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts
. . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts written off during the year . . . . . . . . . . . . . . . . . . . . . . .
Ending allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . .
Significant concentrations of credit risk are disclosed in Note 21.
5. Inventory
Water stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumables stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spare parts stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory (non-current) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Loans receivable
All loans receivable are due from the Water Authority-Cayman and
consisted of:
Two loans originally aggregating $10,996,290, bearing interest at
6.5% per annum, receivable in aggregate monthly installments of
$124,827 to June 2019, and secured by the machinery and
equipment of the North Side Water Works plant.
. . . . . . . . . . . . .
Two loans originally aggregating $3,671,039, bearing interest at 6.5%
per annum, receivable in aggregate monthly installments of $54,513
to June 2017, and secured by the machinery and equipment of the
Red Gate plant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans receivable, excluding current portion . . . . . . . . . . . . . . . . . .
December 31
2016
$193,338
42,553
(42,553)
$193,338
2015
$193,338
—
—
$193,338
December 31,
$
2016
23,905
143,028
6,745,034
6,911,967
2,305,879
$4,606,088
$
2015
27,670
152,350
6,297,082
6,477,102
1,918,728
$4,558,374
December 31,
2016
2015
$3,448,051
$4,678,355
320,965
3,769,016
1,633,588
$2,135,428
932,512
5,610,867
1,841,851
$3,769,016
69
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Property, plant and equipment and construction in progress
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lab equipment
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
$ 3,570,361
19,366,123
62,227,399
33,482,674
3,405,633
1,396,886
261,147
151,233
123,861,456
70,777,351
$ 53,084,105
$
2015
3,223,361
18,437,758
63,733,553
31,726,766
3,210,819
1,384,294
260,519
157,851
122,134,921
68,391,751
$ 53,743,170
$
885,494
$
1,928,610
As of December 31, 2016, the Company had outstanding capital commitments of $1,809,418. The Company
maintains insurance for loss or damage to all fixed assets that it deems susceptible to loss. The Company does
not insure its underground distribution system as the Company considers the possibility of material loss or
damage to this system to be remote. During the years ended December 31, 2016 and 2015, $3,542,119 and
$2,694,733, respectively, of construction in progress was placed in service. Depreciation expense was
$5,765,580, $5,501,491, and $5,355,771 for the years ended December 31, 2016, 2015 and 2014, respectively.
8. Investment in OC-BVI
The Company owns 50% of the outstanding voting common shares and a 43.53% equity interest in the profits
of Ocean Conversion (BVI) Ltd. (‘‘OC-BVI’’). The Company also owns certain profit sharing rights in
to a
OC-BVI that raise its effective interest
management services agreement, OC-BVI pays the Company monthly fees for certain engineering and
administrative services. OC-BVI’s sole customer is the Ministry of Communications and Works of the
Government of the British Virgin Islands (the ‘‘Ministry’’) to which it sells bulk water.
in the profits of OC-BVI to approximately 45%. Pursuant
The Company’s equity investment in OC-BVI amounted to $4,086,630 and $4,548,271 as of December 31,
2016 and 2015, respectively.
Until 2009, substantially all of the water sold by OC-BVI to the Ministry was supplied by one desalination
plant with a capacity of 1.7 million gallons per day located at Baughers Bay, Tortola (the ‘‘Baughers Bay
plant’’). As discussed later in this Note (see ‘‘Baughers Bay litigation’’), the BVI government assumed the
operating responsibilities for the Baughers Bay plant in March 2010. During 2007, OC-BVI completed the
construction of a desalination plant with a capacity of 720,000 gallons per day located at Bar Bay, Tortola (the
‘‘Bar Bay plant’’). OC-BVI began selling water to the Ministry from this plant in January 2009 and on
March 4, 2010, OC-BVI and the BVI government executed a seven-year contract for the Bar Bay plant (the
‘‘Bar Bay agreement’’). The Bar Bay agreement was extended by 14 years on February 14, 2017. Under the
terms of the Bar Bay agreement, OC-BVI delivers up to 600,000 gallons of water per day to the BVI
government from the Bar Bay plant on a take-or-pay basis. The Bar Bay agreement required OC-BVI to
complete a storage reservoir on a BVI government site by no later than March 4, 2011. OC-BVI has not
commenced construction of this storage reservoir due to the BVI government’s failure to pay (i) the full
amount of invoices for the water provided by the Bar Bay plant on a timely basis; and (ii) the full amount
ordered pursuant to a court ruling relating to the Baughers Bay litigation (see discussion that follows).
70
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Investment in OC-BVI − (continued)
Summarized financial information for OC-BVI is as follows:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities
Non-current liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
$5,627,414
3,963,242
$9,590,656
2015
$4,323,792
4,682,650
$9,006,442
December 31,
2016
$ 197,673
1,854,900
$2,052,573
2015
$ 584,116
1,650,252
$2,234,368
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenues
Cost of revenues
. . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) attributable to non-controlling interests . .
Net income attributable to controlling interests . . . . . .
2016
$3,832,929
2,107,557
1,725,372
930,838
794,534
51,475
846,009
69,975
$ 776,034
Year Ended December 31,
2015
$4,143,882
2,261,973
1,881,909
958,364
923,545
(176,448)
747,097
70,854
$ 676,243
2014
$4,679,829
2,833,007
1,846,822
940,072
906,750
(188,751)
717,999
21,045
$ 696,954
A reconciliation of the beginning and ending balances for the investment in OC-BVI for the year ended
December 31, 2016:
Balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profit sharing and equity from earnings of OC-BVI . . . . . . . . . . . . . . . . . . . . . . .
Distributions received from OC-BVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of investment in OC-BVI
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,548,271
463,359
—
(925,000)
$4,086,630
The Company recognized $337,809, $294,368 and $303,380 in earnings from its equity investment in OC-BVI
for the years ended December 31, 2016, 2015 and 2014, respectively. The Company recognized $125,550,
$105,300 and $111,375 in profit sharing income from its profit sharing agreement with OC-BVI for the years
ended December 31, 2016, 2015 and 2014, respectively.
For the years ended December 31, 2016, 2015, and 2014, the Company recognized $515,474, $528,346, and
$747,340, respectively, in revenues from sales of consumable stock and its management services agreement
with OC-BVI, which is included in services revenues in the accompanying consolidated statement of income.
Amounts payable by OC-BVI to the Company were $34,218 and $23,803 as of December 31, 2016 and 2015,
respectively. The Company’s
services
agreement, which is reflected as an intangible asset on the consolidated balance sheet, was approximately
$15,500 and $106,000 as of December 31, 2016 and 2015, respectively (see Note 10).
remaining unamortized balance recorded for
this management
71
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Investment in OC-BVI − (continued)
Baughers Bay Litigation
Under the terms of a water supply agreement dated May 1990 (the ‘‘1990 Agreement’’) between OC-BVI and
the Government of the British Islands (the ‘‘BVI Government’’), upon the expiration of its initial seven-year
term in May 1999, the 1990 Agreement would automatically be extended for another seven-year term unless
the BVI government provided notice, at least eight months prior to such expiration, of its decision to purchase
the plant from OC-BVI at the agreed upon amount under the 1990 Agreement of approximately $1.42 million.
In correspondence between the parties from late 1998 through early 2000, the BVI government indicated that
it intended to purchase the plant but would be amenable to negotiating a new water supply agreement, and
that it considered the 1990 Agreement to be in force on a monthly basis until negotiations between the BVI
government and OC-BVI were concluded. Occasional discussions were held between the parties since 2000
without
from the plant and expended
approximately $4.7 million between 1995 and 2003 to significantly expand the production capacity of the
plant beyond that contemplated in the 1990 Agreement.
the matter. OC-BVI continued to supply water
resolution of
In 2006, the BVI government took the position that the seven-year extension of the 1990 Agreement had been
completed and that it was entitled to ownership of the Baughers Bay plant. In response, OC-BVI disputed the
BVI government’s contention that the original terms of the 1990 Agreement remained in effect.
During 2007, the BVI government significantly reduced its payments for the water being supplied by OC-BVI
and filed a lawsuit with the Eastern Caribbean Supreme Court (the ‘‘Court’’) seeking ownership of the
Baughers Bay plant. OC-BVI counterclaimed to the Court that it was entitled to continued possession and
operation of the Baughers Bay plant until the BVI government paid OC-BVI approximately $4.7 million,
which OC-BVI believed represented the value of the Baughers Bay plant at its expanded production capacity.
OC-BVI subsequently filed claims with the Court seeking payment for water sold and delivered to the BVI
government through May 31, 2009 at the contract prices in effect before the BVI government asserted its
purported right of ownership of the plant.
The Court ruled on this litigation in 2009, determining that (i) the BVI government was entitled to immediate
ownership and possession of the Baughers Bay plant; (ii) OC-BVI was not entitled to compensation for the
expenditures made to expand the production capacity of the plant; (iii) OC-BVI was entitled to full payment
of water invoices issued up to December 20, 2007, which had been calculated under the terms of the original
1990 Agreement; and (iv) OC-BVI was entitled to the amount of $10.4 million for water produced by
OC-BVI from the Baughers Bay plant subsequent to December 20, 2007.
OC-BVI filed an appeal with the Eastern Caribbean Court of Appeals (the ‘‘Appellate Court’’)
in
October 2009 asking the Appellate Court to review the September 17, 2009 ruling by the Court as it related to
OC-BVI’s claim for compensation for expenditures made to expand the production capacity of the Baughers
Bay plant. In October 2009, the BVI government also filed an appeal with the Appellate Court requesting the
Appellate Court to reduce the $10.4 million awarded by the Court to OC-BVI for water supplied subsequent
to December 20, 2007 to an amount equal to the cost of producing such water.
In March 2010, OC-BVI vacated the Baughers Bay plant and the BVI government assumed direct
responsibility for the plant’s operations.
In June 2012, the Appellate Court issued the final ruling with respect to the Baughers Bay litigation. This
ruling dismissed the BVI government’s appeal against
the Court awarding
$10.4 million for the water supplied, and also awarded OC-BVI compensation for improvements made to the
plant in the amount equal to the difference between (i) the value of the Baughers Bay plant at the date
OC-BVI transferred possession of the plant to the BVI government and (ii) $1.42 million (the purchase price
for the Baughers Bay plant under the 1990 Agreement). OC-BVI was also awarded all of its court costs at the
trial level and two-thirds of such costs incurred on appeal.
the previous judgment of
72
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Investment in OC-BVI − (continued)
OC-BVI and the BVI government engaged a mutually approved valuation expert to complete a valuation of
the Baughers Bay plant at the date it was transferred to the BVI government in accordance with the Appellate
Court ruling.
In June 2016, OC-BVI received the final valuation report from the valuation expert, which sets forth a value
for the Baughers Bay plant of $13.0 million as of the date OC-BVI transferred possession of the plant to the
BVI government. Applying the valuation determined by the valuation expert to the formula set forth by the
Appellate Court in its ruling, OC-BVI would be entitled to $11.58 million from the BVI government for the
Baughers Bay plant. The BVI government has indicated that it disagrees with the valuation methodology used
by the valuation expert and the resulting valuation for the Baughers Bay plant. We cannot presently determine
if the Appellate Court will uphold the Baughers Bay plant valuation or when, or to what extent, any amount
for the value of the Baughers Bay plant will be paid by the BVI government to OC-BVI. Consequently, any
amount due for the Baughers Bay plant valuation will not be included in OC-BVI’s results of operations until
such amount, if any, is paid by the BVI government.
Valuation of Investment in OC-BVI
The Company accounts for its investment in OC-BVI under the equity method of accounting for investments
in common stock. This method requires recognition of a loss on an equity investment that is other than
temporary, and indicates that a current fair value of an equity investment that is less than its carrying amount
may indicate a loss in the value of the investment.
As a quoted market price for OC-BVI’s stock is not available,
to test for possible impairment of its
investment in OC-BVI, the Company estimated its fair value through the use of the discounted cash flow
method which relies upon projections of OC-BVI’s operating results, working capital and capital expenditures.
The use of this method required the Company to estimate OC-BVI’s cash flows from (i) its water supply
agreement with the BVI government for its Bar Bay plant (the ‘‘Bar Bay agreement’’); and (ii) the pending
amount awarded by the Eastern Caribbean Court of Appeals for the value of the Baughers Bay plant
previously transferred by OC-BVI to the BVI government.
The Company estimated the cash flows OC-BVI will receive from its Bar Bay plant by (i) identifying various
possible future scenarios which included the execution of a new agreement for the Bar Bay plant as well as
the termination of Bar Bay plant operations upon the expiration of the existing Bar Bay agreement
in
March 2017; (ii) estimating the cash flows associated with each possible scenario; and (iii) assigning a
probability to each scenario. The Company similarly estimated the cash flows OC-BVI will receive from the
BVI government for the amount due under the ruling by the Eastern Caribbean Court of Appeals for the value
of the Baughers Bay plant at the date it was transferred to the BVI government by assigning probabilities to
different valuation scenarios. The resulting probability-weighted sum represented the expected cash flows, and
the Company’s best estimate of future cash flows, to be derived by OC-BVI from its Bar Bay plant and the
pending court award.
The identification of the possible scenarios for the Bar Bay plant and the Baughers Bay plant valuation, the
projections of cash flows for each scenario, and the assignment of relative probabilities to each scenario all
represented significant estimates made by the Company. While the Company used its best
in
identifying these possible scenarios, estimating the expected cash flows for these scenarios and assigning
relative probabilities to each scenario, these estimates were by their nature highly subjective and were also
subject to material change by the Company’s management over time based upon new information or changes
in circumstances.
judgment
During 2016, after updating its probability-weighted estimates of OC-BVI’s future cash flows and its resulting
estimate of the fair value of our investment in OC-BVI, the Company determined that the carrying value of its
investment in OC-BVI exceeded its fair value and recorded impairment losses of totaling $925,000 through
the nine months ended September 30, 2016. The Company recorded impairment losses for its investment in
73
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Investment in OC-BVI − (continued)
OC-BVI of $1,060,000 and $860,000 for 2015 and 2014, respectively. As a result of the impairment losses
recorded to date, as of December 31, 2016 the amount of the Company’s proportionate share (43.5%) of the
net assets reflected on OC-BVI’s balance sheet exceeded the carrying value of its investment in OC-BVI by
approximately $30,000.
In February 2017, the BVI government executed a 14 year extension to Bar Bay plant agreement. The selling
price for the water under this extension is approximately 31% lower than the price that was in effect as of
December 31, 2016.
9. N.S.C. Agua, S.A. de C.V.
In May 2010, the Company acquired, through its wholly-owned Netherlands subsidiary, CW-Cooperatief, a
50% interest in NSC, a development stage Mexican company. The Company has since purchased, through the
conversion of a loan it made to NSC, sufficient shares to raise its ownership interest in NSC to 99.9%. NSC
was formed to pursue a project (the ‘‘Project’’) that originally encompassed the construction, operation and
minority ownership of a 100 million gallon per day seawater reverse osmosis desalination plant to be located
in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable
water system. As discussed in paragraphs that follow, during 2015 the scope of the Project was defined by the
State of Baja California (the ‘‘State’’) to consist of a first phase consisting of a 50 million gallons per day
plant and a pipeline that connects to the Mexican potable water infrastructure and a second phase consisting
of an additional 50 million gallons of production capacity.
Since its inception, NSC has engaged engineering groups with extensive regional and/or technical experience
to prepare preliminary designs and cost estimates for the desalination plant and the proposed pipeline and
prepare the environmental impact studies for local, state and federal regulatory agencies, and has also acquired
the land, performed pilot plant and feed water source testing and evaluated financing alternatives for the
Project.
Through a series of transactions completed in 2012 − 2014, NSC purchased 20.1 hectares of land on which
the proposed Project’s plant would be constructed for an aggregate price of approximately $20.6 million.
In November 2012, NSC entered into a lease with an effective term of 20-years from the date of full
operation of the desalination plant, with the Comisión Federal de Electricidad for approximately 5,000 square
meters of land on which it plans to construct the water intake and discharge works for the plant. The amounts
due on this lease are payable in Mexican pesos at an amount that is currently equivalent to approximately
$20,000 per month. This lease may be cancelled by NSC should NSC ultimately not proceed with the Project.
In August 2014,
the State enacted new legislation to regulate Public-Private Association projects which
involve the type of long-term contract between a public sector authority and a private party that NSC is
seeking to complete the Project. Pursuant to this new legislation, on January 4, 2015, NSC submitted an
expression of interest for its project to the Secretary of Infrastructure and Urban Development of the State of
Baja California (‘‘SIDUE’’). SIDUE accepted NSC’s expression of interest and requested that NSC submit a
detailed proposal for the Project that complies with requirements of the new legislation. NSC submitted this
detailed proposal (the ‘‘APP Proposal’’) to SIDUE in late March 2015. The new legislation required that such
proposal be evaluated by SIDUE and submitted to the Public-Private Association Projects State Committee
(the ‘‘APP Committee’’) for review and authorization. If the Project was authorized the State would be
required to conduct a public tender for the Project.
In response to its APP Proposal, in September 2015 NSC received a letter dated June 30, 2015 from the
Director General of the Comisión Estatal de Agua de Baja California (‘‘CEA’’),
the State agency with
responsibility for the Project, stating that (i) the Project is in the public interest with high social benefits and
is consistent with the objectives of the State development plan and (ii) that the Project should proceed and the
required public tender should be conducted. In November 2015, the State officially commenced the tender for
74
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. N.S.C. Agua, S.A. de C.V. − (continued)
the Project, the scope of which the State defined as a first phase to be operational in 2019 consisting of a
50 million gallons per day plant and a pipeline that connects to the Mexican potable water infrastructure and a
second phase to be operational in 2024 consisting of an additional 50 million gallons per day of production
capacity. A consortium comprised of NSC, NuWater S.A.P.I. de C.V. and Degremont S.A. de C.V. (the
‘‘Consortium’’) submitted its tender for the Project on the April 21, 2016 tender submission deadline date set
by the State.
The Company has acknowledged since the inception of the Project that, due to the amount of capital the
Project requires, NSC will ultimately need an equity partner or partners for the Project. Consequently, NSC’s
tender to the State for the Project was based upon the following: (i) NSC will sell or otherwise transfer the
land and other Project assets to a new company (‘‘Newco’’) that would build and own the Project; (ii) NSC’s
potential partners would provide the majority of the equity for the Project and thereby would own the majority
interest in Newco; (iii) NSC would maintain a minority ownership position in Newco; and (iv) Newco would
enter into a long-term management and technical services contract for the Project with an entity partially
owned by NSC or another Company subsidiary.
On June 15, 2016, the State designated the Consortium as the winner of tender process for the Project.
On August 17, 2016, NSC and NuWater incorporated Aguas de Rosarito S.A.P.I. de C.V. (‘‘AdR’’), a special
project company, to execute the Project and executed a shareholders agreement for AdR agreeing among other
things that (i) AdR would purchase the land and other Project assets from NSC on the date that the Project
into a Management and Technical Services
begins commercial operations; and (ii) AdR would enter
the Project begins commercial operations. As of
Agreement with NSC effective on the first day that
December 31, 2016, NSC owned 99.6% of AdR.
On August 22, 2016,
the Public Private Partnership Agreement for public private partnership number
002/2015, contest number SIDUE-CEA-APP-2015-002 (‘‘APP Contract’’) was executed between AdR, CEA,
the Government of Baja California represented by the Secretary of Planning and Finance (‘‘SPF’’), and the
Public Utilities Commission of Tijuana (‘‘CESPT’’). The APP Contract requires AdR to design, construct,
finance and operate a seawater desalination plant (and accompanying aqueducts) with a capacity of up to
100 million gallons per day in two phases: the first with a capacity of 50 million gallons per day and an
aqueduct to the Mexican potable water system in Tijuana, Baja California; and the second phase with a
capacity of 50 million gallons per day and an aqueduct to a second delivery point in Tijuana. The first phase
must be operational within 36 months of commencing construction, and the second phase must be operational
by the end of 2024. The APP Contract further requires AdR to operate and maintain the plant and aqueducts
for a period of 37 years starting from the commencement of operation of the first phase. At the end of the
operating period the plant and aqueducts will be transferred to CEA.
The total Project cost
is expected to be approximately 9 billion Mexican pesos, or approximately
US$463 million (based upon the currency exchange rate as of March 10, 2017). Annual revenues from the
Project are expected to be approximately 1.02 billion Mexican pesos, or approximately US$52 million (based
upon the currency exchange rate as of March 10, 2017). Water rates under the APP Contract are indexed to
the Mexican national consumer price index over its term. Electrical energy costs incurred by AdR to
desalinate and deliver water are treated as a pass through charge to CEA, subject to efficiency guarantees.
AdR expects to raise Mexican peso denominated debt financing through a consortium led by the North
American Development Bank, which also provided financial advisory services to the Consortium through the
bidding process and contract negotiations.
75
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. N.S.C. Agua, S.A. de C.V. − (continued)
The APP Contract does not become effective until the following conditions are met:
•
•
•
•
•
•
the State has established and registered various payment trusts, guaranties and bank credit lines for
specific use by the Project;
the CEA has obtained the rights from the relevant federal authority to take and desalinate seawater
and distribute it for municipal use;
various water purchase and sale agreements between the CEA, the payment trusts and the CESPT
have been executed;
AdR has obtained all rights of ways required for the aqueduct;
AdR has obtained permission from the relevant federal authority to discharge the residual water
from the Project’s desalination plant; and
all equity and debt financing agreements necessary to provide the funding to AdR for the first phase
of the Project have been executed.
Both the exchange rate for the Mexico peso relative to the dollar and general macroeconomic conditions in
Mexico have declined since the U.S. Presidential election in November 2016. These changes have adversely
impacted the estimated construction, operating, and financing costs for the Project. The APP Contract and the
APP Law allow for the parties to negotiate (but do not guarantee) modifications to the water tariff in the event
of such significant macroeconomic condition changes. On February 10, 2017 AdR submitted proposals to the
CEA requesting an increase to the water tariff to compensate for changes in foreign exchange rates, lending
rates and certain changes in law which have impacted the Project. If AdR is unable to obtain this requested
increase in the water tariff it may be unable to obtain the debt and equity financing required for the Project.
The Company is currently unable to say whether or not such water tariff increase will be approved.
If AdR is ultimately unable to proceed with the Project, the land NSC has purchased may lose its strategic
importance as the site for the Project and consequently may decline in value. If AdR does not proceed with
the Project, NSC may ultimately be unable to sell this land for an amount equal to or in excess of its current
carrying value of approximately $20.6 million, and any loss on sale of the land, or impairment loss NSC may
be required to record as a result of a decrease in the fair value of the land could have a material adverse
impact on our results of operations.
Included in the Company’s results of operations are general and administrative expenses from NSC and AdR,
consisting of organizational, legal, accounting, engineering, consulting and other costs relating to Project
development activities. Such expenses amounted to approximately $3.0 million, $2.0 million and $3.7 million
for the years ended December 31, 2016, 2015 and 2014, respectively. The assets and liabilities of NSC and
AdR included in the Company’s consolidated balance sheets amounted to approximately $23.3 million and
$221,000, respectively, as of December 31, 2016 and approximately $22.0 million and $488,000 respectively,
as of December 31, 2015.
NSC Litigation
Immediately following CW-Cooperatief’s acquisition of its initial 50% ownership in NSC, the remaining 50%
ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S. de R.L. de C.V. (‘‘NSA’’).
NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC (‘‘EWG’’) and the
other half of its shares in NSC to Alejandro de la Vega (the ‘‘individual shareholder’’). In February 2012, the
Company paid $300,000 to enter into an agreement (the ‘‘Option Agreement’’) that provided it with an option,
exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder,
along with an immediate power of attorney to vote those shares, for $1.0 million. Such shares constituted 25%
of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to
CW-Cooperatief by issuing additional shares of its stock. As a result of this share issuance to CW-Cooperatief,
76
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. N.S.C. Agua, S.A. de C.V. − (continued)
the Company acquired 99.9% of the ownership of NSC. The Option Agreement contained an anti-dilution
provision that required the Company to issue new shares in NSC of an amount sufficient to maintain the
individual shareholder’s 25% ownership interest in NSC if (i) any new shares of NSC were issued subsequent
to the execution of the Option Agreement and (ii) the Company did not exercise its share purchase option by
February 7, 2014. The Company exercised its option and paid the $1.0 million to the individual shareholder to
purchase the Option Agreement shares in February 2014.
In October 2015, the Company learned that EWG had filed a lawsuit against the individual shareholder, NSC,
NSA, CW-Cooperatief, Ricardo del Monte Nunez, Carlos Eduardo Ahumada Arruit, Luis de Angitia Becerra,
and the Public Registry of Commerce of Tijuana, Baja California in the Civil Court located in Tecate, Baja
California, Mexico.
In this lawsuit, EWG is challenging, among other things, the capital investment transactions that increased the
Company’s ownership interest in NSC to 99.9%. EWG requested that the court, as a preliminary matter:
(a) suspend the effectiveness of the challenged transactions; (b) order public officials in Mexico to record the
pendency of the lawsuit in the public records; and (c) appoint an inspector for NSA and NSC to oversee its
commercial activities. The court granted, ex-parte, the preliminary relief sought by EWG, which resulted in
the placement of inscriptions for the lawsuit on NSC’s public records.
EWG is also seeking an order directing, among other things: (i) NSA, NSC and CW-Cooperatief to refrain
from carrying out any transactions with respect to the Project; and (ii) NSA, NSC and CW-Cooperatief, and
the partners thereof, to refrain from transferring any interests in NSA, NSC and CW-Cooperatief.
On April 5, 2016, NSC filed a motion for reconsideration with the Tecate, Mexico Court asking, among other
things, that the Court; (i) reverse its order to record the pendency of the lawsuit in the public records,
(ii) cancel the appointment of the inspector, and (iii) allow NSC to provide a counter-guarantee to suspend the
effects of the Court’s order regarding the challenged transactions. On April 26, 2016, the Tecate, Mexico
Court issued an interlocutory judgment (i) ordering the cancellation of the inscriptions on NSC’s public
records and (ii) rejecting NSC’s motion for cancellation of the appointment of the inspector.
On April 26, 2016, NSC filed a full answer to EWG’s claims rejecting every claim made by EWG. The
Court’s response on this matter is pending.
On May 17, 2016, NSC filed a claim with the Third District Court in Matters of Amparo and Federal Trials in
the City of Tijuana, Baja California (the ‘‘Amparo Court’’) challenging the Tecate, Mexico Court ex-parte
order which appointed an inspector over NSC’s commercial activities. On July 29, 2016, the Amparo Court
found that such appointment is unconstitutional and reversed the Tecate, Mexico Court’s appointment of an
inspector.
On September 6, 2016, the Tecate, Mexico Court issued a decree granting the counter guaranty requested by
NSC. Such counter-guaranty was fixed in the amount of 300,000 Mexican pesos and was given to the Court
on October 13, 2016 at which time all remaining ex-parte restrictions on NSC related to the challenged
transactions were suspended.
The Company believes that the claims made by EWG are baseless and without merit, will vigorously defend
NSC and CW-Cooperatief in this litigation, and will seek dismissal of the orders entered by the court and all
claims against NSC and CW-Cooperatief. The Company incurred legal fees in connection with this litigation
of approximately $203,000 and $138,000 for the years ended December 31, 2016 and 2015, respectively.
The Company cannot presently determine the outcome of this litigation. However, such litigation could
adversely impact the Company’s efforts to complete the Project.
77
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. N.S.C. Agua, S.A. de C.V. − (continued)
Mexico Tax Authority
The Mexico tax authority, the Servicio de Administracion Tributaria (‘‘SAT’’), assessed NSC for taxes relating
to payments to foreign vendors on which the SAT contended should have been subject
to income tax
withholdings during NSC’s 2011 tax year. As of December 31, 2015, the assessment and related penalties,
surcharges,
inflation adjustments and late fees totaled 7,367,875 Mexican pesos. Such assessments were
equivalent to approximately $428,203 as of December 31, 2015 based upon the exchange rate between the
United States dollars and the Mexican peso.
NSC retained the assistance of Mexican tax advisers in this matter, as it believed the assumptions and related
work performed by the SAT did not support their tax assessment. As a result, NSC elected to contest this
assessment in Mexico federal tax court. NSC was required to provide an irrevocable letter of credit which
amounted to 7,367,875 Mexican pesos as of December 31, 2015 as collateral in connection with this tax case.
The restricted cash balance of $428,203 included in the accompanying consolidated balance sheet as of
December 31, 2015 represented the US dollar equivalent of Mexican pesos on deposit with a bank to secure
payment of this irrevocable letter of credit.
In November 2014, NSC received a favorable judgment from the tax court. Based on this outcome, the SAT
filed an appeal shortly thereafter to contest the judgment. On February 15, 2016, NSC received a favorable
judgment from the appellate tax court and shortly thereafter obtained the release of the Mexican pesos cash
balance that had been restricted and pledged as collateral as of December 31, 2015 for the irrevocable letter of
credit.
10. Intangible assets
In 2003, as part of the acquisition of a group of companies, the Company acquired 100% of the outstanding
voting common shares of DesalCo, which had an agreement to provide management and engineering services
to OC-BVI. The Company attributed $856,356 of the purchase price of the acquisition to the value of this
management services agreement, which has no expiration term. Initially, the Company determined that this
intangible asset had an indefinite life and therefore it was not amortized. However in 2010, as a result of the
loss by OC-BVI of its Baughers Bay contract (see Note 8), the Company began amortizing this asset over the
life of OC-BVI’s remaining seven-year water supply contract for its Bar Bay plant.
The carrying amount of the Belize Water Production and Supply Agreement is being amortized over the
23-year term of the agreement that expires in March 2026.
On February 11, 2016, the Company purchased a 51% ownership interest in Aerex Industries, Inc. The
purchase transaction identified certain intangible assets with a fair value of $5,900,000 and useful life as
follows: Non-Compete (5 years), Trade name (15 years), Certifications/programs (3 years), Customer backlog
(1 year), and Customer relationships (4 years). See further discussion of this acquisition at Note 11.
78
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Intangible assets − (continued)
Cost
Intangible asset management service agreement
. . . . . . . . . . . . . .
Belize water production and supply agreement . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Aerex − Non-compete agreement
Aerex − Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aerex − Certifications/programs . . . . . . . . . . . . . . . . . . . . . . . . .
Aerex − Customer backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aerex − Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization
. . . . . . . . . . . . . .
Intangible asset management service agreement
Belize water production and supply agreement . . . . . . . . . . . . . . .
Aerex − Non-compete agreement
. . . . . . . . . . . . . . . . . . . . . . . .
Aerex − Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aerex − Certifications/programs . . . . . . . . . . . . . . . . . . . . . . . . .
Aerex − Customer backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aerex − Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
2015
$
856,356
1,522,419
400,000
1,400,000
2,000,000
100,000
2,000,000
8,278,775
(840,839)
(922,460)
(73,333)
(85,556)
(611,111)
(91,667)
(458,333)
(3,083,299)
$ 5,195,476
$
856,356
1,522,419
—
—
—
—
—
2,378,775
(750,697)
(856,267)
—
—
—
—
—
(1,606,964)
771,811
$
Amortization of intangible assets for each of the next five years and thereafter is expected to be as follows:
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,430,042
1,406,192
795,081
281,192
166,192
1,116,777
$5,195,476
Amortization expense was $1,476,335, $156,089, and $168,588 for the years ended December 31, 2016, 2015
and 2014, respectively.
11. Purchase of interest in Aerex Industries, Inc.
the Company,
through its wholly-owned subsidiary,
On February 11, 2016 (the ‘‘Closing Date’’),
CW-Holdings, entered into a stock purchase agreement (the ‘‘Purchase Agreement’’) with Aerex and Thomas
Donnick, Jr. (‘‘Donnick’’), Aerex’s sole shareholder prior to the Closing Date. Pursuant to the terms of the
Purchase Agreement, CW-Holdings purchased a 51% ownership interest in Aerex for an aggregate purchase
price of approximately $7.7 million in cash. After giving effect to the transactions contemplated by the
Purchase Agreement, CW-Holdings owns 51% of the outstanding capital stock of Aerex and Donnick owns
49% of the outstanding capital stock of Aerex. CW-Holdings also acquired from Donnick an option to compel
Donnick to sell, and granted to Donnick an option to require CW-Holdings to purchase, Donnick’s 49%
ownership interest in Aerex at a price based upon the fair market value of Aerex at the time of the exercise of
the option. The options are exercisable on or after the third anniversary of the Closing Date. In connection
79
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Purchase of interest in Aerex Industries, Inc. − (continued)
with the Purchase Agreement, the Company guaranteed the obligations of CW-Holdings with respect to the
option granted to Donnick to require CW-Holdings to purchase Donnick’s 49% ownership interest in Aerex.
Aerex is an original equipment manufacturer and service provider of a wide range of products and services
applicable to municipal water treatment and industrial water and wastewater treatment. Its products include
membrane separation equipment, filtration equipment, piping systems, vessels and custom fabricated
components. Aerex also offers engineering, design, consulting, inspection, training and equipment maintenance
services to its customers. Aerex is an American Society of Mechanical Engineers (ASME) code accredited
manufacturer and maintains the ASME U and S and the National Board NB and R Certificates of
Authorization. Its corporate offices and manufacturing facilities are located in Fort Pierce, Florida.
In connection with the Purchase Agreement, CW-Holdings, Aerex and Donnick entered into a shareholders
agreement pursuant to which CW-Holdings and Donnick agreed to certain rights and obligations with respect
to the governance of Aerex. Immediately following the acquisition, Donnick and the Company loaned
$490,000 and $510,000, respectively,
to Aerex. These loans bear interest at 1% per annum and mature
June 30, 2017. In February 2017, the Company and the former sole shareholder of Aerex loaned Aerex an
additional $408,000 and $392,000, respectively, in the form of notes payable which mature on September 30,
2017 and bear interest at 1% per annum.
The purchase price for Aerex is summarized as follows:
Cash consideration
Purchase price (excluding working capital) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,140,000
605,179
(2,326)
$7,742,853
The following table summarizes the estimated fair values of the assets and liabilities assumed at
acquisition date:
the
Financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and estimated earnings in excess of billings . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net liability arising from put/call options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identifiable net assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest in Aerex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The identifiable intangible assets consisted of the following items:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreement
Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certifications/programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships
Amount
$ 400,000
1,400,000
2,000,000
100,000
2,000,000
$5,900,000
$
456,664
70,487
784,465
2,159,401
5,900,000
(2,451,298)
(116,893)
(383,000)
6,419,826
(6,712,184)
8,035,211
$ 7,742,853
Useful life
5 years
15 years
3 years
1 year
4 years
80
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Purchase of interest in Aerex Industries, Inc. − (continued)
Aerex’s actual results of operations for the period subsequent
to its acquisition by the Company on
February 11, 2016 fell significantly short of the projected results for this period that were included in the
overall cash flow projections utilized by the Company to determine the purchase price for Aerex and the fair
values of its assets and liabilities. Due to this negative variance in actual results compared to projected results,
the Company tested Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating its fair
value using the discounted cash flow method. As a result of this impairment testing, the Company determined
that the carrying value of its Aerex reporting unit exceeded its fair value, and recorded an impairment loss for
the three months ended September 30, 2016 of $1,750,000 for the goodwill associated with the Aerex
acquisition to reduce the goodwill balance associated with the Aerex acquisition to $6,285,211.
The results of operations of Aerex included in the Company’s results of operations for the period February 11,
2016 to December 31, 2016 are as follows:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
Amortization of intangibles
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment loss
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
2016
$ 3,887,284
796,450
(1,320,000)
(1,750,000)
(1,566,281)
The following unaudited pro forma financial information presents the results of operations of the Company for
the years ended December 31, 2016 and 2015, as if the acquisition of Aerex had taken place on January 1,
2015. The pro forma results have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which would have actually occurred had the transaction taken place on
January 1, 2015, or of future results of operations:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . .
Impairment loss on long-lived assets . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net
. . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes
Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) attributable to non-controlling interests
. . . . . . . . . .
Net income attributable to Consolidated Water Co. Ltd.
stockholders
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per common share attributable to Consolidated Water
Co. Ltd. common stockholders . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share attributable to Consolidated
Water Co. Ltd. common stockholders
. . . . . . . . . . . . . . . . . . .
Weighted average number of common shares used in the
determination of:
Year Ended December 31,
2016
$58,381,424
33,892,238
24,489,186
18,992,301
2,000,000
1,750,000
1,746,885
419,458
2,166,343
(608,970)
2,775,313
(1,148,675)
2015
$75,919,627
47,624,001
28,295,626
17,266,335
—
—
11,029,291
226,762
11,256,053
1,127,911
10,128,142
1,719,425
$ 3,923,988
$ 8,408,717
$
$
0.26
0.26
$
$
0.57
0.57
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,809,909
14,944,028
14,741,748
14,827,755
81
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Dividends
Interim dividends declared on Class A common stock and redeemable preferred stock for each quarter of the
respective years ended December 31 were as follows:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
$0.075
0.075
0.075
0.075
$ 0.30
2015
$0.075
0.075
0.075
0.075
$ 0.30
2014
$0.075
0.075
0.075
0.075
$ 0.30
13. Long term debt
Long term debt consists of the following:
Demand loan payable with an original balance of $10.0 million,
payable in quarterly installments of $500,000 with the remaining
principal balance due on May 14, 2016, if not called by the lender;
bearing interest at LIBOR plus 1.5%. . . . . . . . . . . . . . . . . . . . . .
Working capital loan from related party to Aerex bearing interest at
1% per annum and payable on June 30, 2017 . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long term debt, excluding current portion . . . . . . . . . . . . . . . . . . .
December 31,
2016
2015
$
—
$7,000,000
490,000
490,000
490,000
—
$
—
7,000,000
7,000,000
—
$
14. Share capital and additional paid-in capital
Shares of redeemable preferred stock (‘‘preferred shares’’) are issued under the Company’s Employee Share
Incentive Plan (see Note 19) and carry the same voting and dividend rights as shares of common stock
(‘‘common shares’’). Preferred shares vest over four years and convert to common stock on a share for share
basis on the fourth anniversary of each grant date. Preferred shares are only redeemable with the Company’s
agreement. Upon liquidation, preferred shares rank in preference to the common shares to the extent of the par
value of the preferred shares and any related additional paid in capital.
The Company is a party to an Option Deed dated August 6, 1997, and amended on August 8, 2005,
September 27, 2005 and May 30, 2007 (as amended, the ‘‘Option Deed’’), which expires on July 31, 2017,
that is designed to deter coercive takeover tactics. Pursuant to the Option Deed, the Company granted to the
holders of its common shares and redeemable preferred shares options (the ‘‘Options’’) to purchase one
one-hundredth of a share of Class ‘B’ common shares of the Company at an exercise price of $100.00 per one
one-hundredth of a Class ‘B’ common share, subject to adjustment. The Options are attached to and trade with
the Company’s common shares and redeemable preferred shares, and no separate certificates representing the
Options have been distributed. The Options will separate from the Company’s common shares and redeemable
preferred shares, and certificates representing the Options will be issued, upon the earlier of the date (such
date, the ‘‘Distribution Date’’) that is (i) ten business days following a public announcement that a person or
group of affiliated or associated persons (an ‘‘Acquiring Person’’) has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more of the Company’s outstanding common shares, or (ii) ten
business days following the commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person.
82
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Share capital and additional paid-in capital − (continued)
The Options are not exercisable until the Distribution Date and will expire at the close of business on July 31,
2017, unless that date is extended or the Options are earlier redeemed by us. Additionally, following the
Distribution Date, all Options that are, or in certain circumstances were, beneficially owned by any Acquiring
Person will be null and void.
For a period of ten business days following the date that any person, alone or jointly with its affiliates and
associates, becomes an Acquiring Person, the Company will have the right to redeem the Options at a price of
CI$0.01 per Option. If the Options are not redeemed, then following such ten business day period each holder
of an Option will have the right to receive on exercise, in lieu of one one-hundredth of a Class ‘B’ common
share, common shares of the Company (or, in certain circumstances, cash, property or other securities) having
a value equal to two times the exercise price of the Option. For example, at an exercise price of $100.00 per
Option, each Option not owned by an Acquiring Person (or by certain related parties) following any person,
alone or jointly with its affiliates and associates, becoming an Acquiring Person would entitle its holder to
purchase $200.00 worth of the Company’s common shares for $100.00. Assuming that the common shares had
a per share value of $20.00 at such time, the holder of each valid Option would be entitled to purchase
10 common shares for $100.00.
Any of the provisions of the Option Deed may be amended by the Company’s Board of Directors prior to the
Distribution Date. After the Distribution Date, the provisions of the Option Deed may be amended by the
Board of Directors in order to cure any ambiguity, to make changes which do not adversely affect the interests
of holders of Options (excluding the interests of any Acquiring Person), or to shorten or lengthen any time
period under the Option Deed.
15. Cost of revenues and general and administrative expenses
Cost of revenues consist of:
Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel oil
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of plant sales . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail license royalties . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses consist of:
Employee costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . .
Directors’ fees and expenses . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NSC project expenses
. . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
2014
2016
$ 9,037,347
5,355,529
4,210,542
5,541,983
142,151
3,545,269
1,528,914
992,374
1,280,794
1,989,918
$33,624,821
$ 7,598,829
782,013
1,101,938
774,769
384,045
3,011,989
1,410,143
3,613,858
$18,677,584
$10,675,287
5,270,454
4,974,421
4,287,783
878,396
3,436,736
1,427,073
1,187,097
—
1,670,735
$33,807,982
$ 6,841,274
802,386
941,193
754,145
218,032
1,976,408
89,896
3,216,822
$14,840,156
$14,631,638
5,077,293
8,726,195
4,274,007
1,470,045
3,131,947
1,405,067
1,397,799
—
1,972,987
$42,086,978
$ 6,671,510
923,089
1,424,927
686,228
278,478
3,606,332
89,896
3,330,581
$17,011,041
83
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Earnings per share
Earnings per share (‘‘EPS’’) are computed on a basic and diluted basis. Basic EPS is computed by dividing
income (less preferred stock dividends) available to common stockholders by the weighted average
net
number of common shares outstanding during the period. The computation of diluted EPS assumes the
issuance of common shares for all potential common shares outstanding during the reporting period and, if
dilutive, the effect of stock options as computed under the treasury stock method.
The following summarizes information related to the computation of basic and diluted EPS:
Ltd. stockholders
Net income attributable to Consolidated Water Co.
. . . . . . . . . . . . . . . . . . . . .
Less: preferred stock dividends . . . . . . . . . . . . . .
Net income available to common shares in the
determination of basic earnings per common
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of common shares in the
determination of basic earnings per common
share attributable to Consolidated Water Co. Ltd.
. . . . . . . . . . . . . . . . . .
common stockholders
Plus:
Weighted average number of preferred shares
outstanding during the period . . . . . . . . . . . . .
Potential dilutive effect of unexercised options . . .
Weighted average number of shares used for
determining diluted earnings per common share
attributable to Consolidated Water Co. Ltd.
common stockholders
. . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
2014
2016
$ 3,960,501
(11,563)
$ 7,518,701
(12,028)
$ 6,265,358
(11,485)
$ 3,948,938
$ 7,506,673
$ 6,253,873
14,809,909
14,741,748
14,697,896
37,706
96,413
38,612
47,395
37,924
28,503
14,944,028
14,827,755
14,764,323
17. Segment information
The Company has three reportable segments: retail, bulk and services. The retail segment primarily operates
the water utility for the Seven Mile Beach and West Bay areas of Grand Cayman Island pursuant to an
exclusive license granted by the Cayman Islands government. The bulk segment supplies potable water to
government utilities in Grand Cayman, The Bahamas and Belize under long-term contracts. The services
segment manufactures and services a wide range of water-related products and provides design, engineering,
management, operating and other services applicable to commercial and municipal water production, water
supply and treatment, and industrial water and wastewater treatment. The services segment
includes the
operations of Aerex beginning February 11, 2016. Consistent with prior periods, the Company records all
non-direct general and administrative expenses in its retail business segment and does not allocate any of
these non-direct costs to its other two business segments.
The accounting policies of the segments are consistent with those described in Note 2. The Company
evaluates each segment’s performance based upon its income from operations. All intercompany transactions
are eliminated for segment presentation purposes.
The Company’s segments are strategic business units that are managed separately because each segment sells
different products and/or services, serves customers with distinctly different needs and generates different gross
profit margins.
84
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Segment information − (continued)
. . . . . . . . . . . . . . . . . . . . . . . . .
Revenues
Cost of revenues
. . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . .
Impairment loss on long-lived assets . . . . . . .
Impairment of goodwill . . . . . . . . . . . . . . . .
Income (loss) from operations
. . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . .
Provision for (benefit from) income taxes . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Loss attributable to non-controlling interests . .
Net income attributable to Consolidated Water
Co. Ltd. stockholders . . . . . . . . . . . . . . . .
Year Ended December 31, 2016
Retail
$23,505,619
10,294,298
13,211,321
11,460,165
2,000,000
—
$ (248,844)
Bulk
$29,647,034
19,488,550
10,158,484
1,744,840
—
—
$ 8,413,644
Services
$ 4,723,054
3,841,973
881,081
5,472,579
—
1,750,000
$(6,341,498)
Total
$57,875,707
33,624,821
24,250,886
18,677,584
2,000,000
1,750,000
1,823,302
417,954
2,241,256
(536,057)
2,777,313
(1,183,188)
$ 3,960,501
Depreciation and amortization expenses for the year ended December 31, 2016 for the retail, bulk and services
segments were $2,468,846, $3,288,083 and $1,664,339, respectively.
Accounts receivable, net
. . . . . . . . . . . . . . .
Property plant and equipment, net . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Intangibles, net
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .
Land held for development
. . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Revenues
. . . . . . . . . . . . . . . . . . . .
Cost of revenues
Gross profit (loss) . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . .
Income (loss) from operations
. . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Income attributable to non-controlling interests
Net income attributable to Consolidated Water
Co. Ltd. stockholders . . . . . . . . . . . . . . . .
Retail
$ 2,646,628
$24,890,031
$
134,392
$
$ 1,170,511
$
$54,303,011
As of December 31, 2016
Services
Bulk
$ 1,161,456
$12,692,714
$ 2,069,350
$26,124,724
$
743,296
$
7,806
$ 4,595,516
599,960
— $
$ 6,285,211
$ 2,328,526
— $20,558,424
$40,637,889
$68,663,628
— $
Year Ended December 31, 2015
Retail
$23,254,757
10,543,972
12,710,785
11,095,349
$ 1,615,436
Bulk
$31,854,255
21,634,789
10,219,466
1,605,943
$ 8,613,523
Services
$ 2,007,190
1,629,221
377,969
2,138,864
$(1,760,895)
Total
$ 16,500,798
$ 53,084,105
885,494
$
5,195,476
$
$
9,784,248
$ 20,558,424
$163,604,528
Total
$57,116,202
33,807,982
23,308,220
14,840,156
8,468,064
(542,570)
7,925,494
406,793
$ 7,518,701
Depreciation and amortization expenses for the year ended December 31, 2015 for the retail, bulk and services
segments were $2,344,315, $3,389,717 and $102,901, respectively.
85
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Segment information − (continued)
Accounts receivable, net
. . . . . . . . . . . . . . .
Property plant and equipment, net . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Intangibles, net
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .
Land held for development
. . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Revenues
Cost of revenues
. . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . .
Income from operations . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Income attributable to non-controlling interests
Net income attributable to Consolidated
Water Co. Ltd. stockholders . . . . . . . . . . .
Retail
$ 2,261,141
$25,204,226
$ 1,860,050
$
$ 1,170,511
$
$54,561,577
As of December 31, 2015
Services
Bulk
$ 1,036,249
$ 6,231,626
$
$28,421,906
117,038
$
68,560
$
$
666,152
— $
$
$ 2,328,526
105,659
— $
$83,284,439
— $20,558,424
$23,729,010
— $
$
— $
Total
$
9,529,016
$ 53,743,170
1,928,610
771,811
3,499,037
$ 20,558,424
$161,575,026
Year ended December 31, 2014
Retail
$24,104,932
11,521,277
12,583,655
11,540,333
$ 1,043,322
Bulk
$39,201,011
27,985,441
11,215,570
1,605,499
$ 9,610,071
Services
$ 2,253,135
2,580,260
(327,125)
3,865,209
$(4,192,334)
Total
$65,559,078
42,086,978
23,472,100
17,011,041
6,461,059
303,481
6,764,540
499,182
$ 6,265,358
Depreciation and amortization expenses for the year ended December 31, 2014 for the retail, bulk and services
segments were $2,404,404, $3,196,912 and $102,396, respectively.
Revenues earned by major geographic region were:
Cayman Islands . . . . . . . . . . . . . . . . . . . . . . . . .
Bahamas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Belize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenues earned from management services
agreement with OC-BVI
. . . . . . . . . . . . . . . . .
Revenues earned from major customers were:
2016
$31,211,705
19,554,944
91,311
2,614,989
3,887,284
Year ended December 31,
2015
$32,735,215
21,062,081
368,012
2,422,547
—
2014
$35,040,803
26,702,605
471,919
2,596,410
—
515,474
$57,875,707
528,347
$57,116,202
747,341
$65,559,078
Year ended December 31,
2015
2014
2016
Revenues earned from the Water and Sewerage
Corporation of the Bahamas (‘‘WSC’’)
. . . . . . .
Percentage of total revenues from the WSC . . . . . .
Revenues earned from the Water
Authority − Cayman (‘‘WAC’’) . . . . . . . . . . . . .
Percentage of total revenues from the WAC . . . . .
$19,254,395
$20,770,347
$26,376,520
33%
36%
40%
$ 7,477,101
$ 8,369,627
$ 9,901,996
13%
15%
15%
86
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Segment information − (continued)
Property, plant and equipment, net by major geographic region were:
Cayman Islands
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bahamas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Belize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other country operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
$24,252,351
25,180,669
907,752
612,568
1,978,321
152,444
$53,084,105
2015
$22,518,524
27,441,376
920,149
2,665,312
—
197,809
$53,743,170
18. Commitments and contingencies
Commitments
As of December 31, 2016, the Company held operating leases for land, office space, warehouse space, and
equipment. In addition to minimum lease payments, certain leases provide for payment of real estate taxes,
insurance, common area maintenance, and certain other expenses. Lease terms may include escalating rent
provisions and rent incentives. Minimum lease payments and rent incentives are expensed using a straight line
method over the non-cancellable lease term, which expire at various dates through the year 2035.
The short-term and long-term components of deferred rent assets are included within prepaid expenses and
other current assets, and other assets, respectively, in the consolidated balance sheets.
Future minimum lease payments under these non-cancellable operating leases as of December 31, 2016 are as
follows:
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 806,279
790,725
557,480
432,473
216,786
2,595,436
$5,399,179
Total rental expense for the years ended December 31, 2016, 2015 and 2014 was $834,738, $821,845, and
$812,658, respectively, and is included within general and administrative expenses in the consolidated
statements of income.
The Company has entered into employment agreements with certain executives, which expire through
December 31, 2019 and provide for, among other things, base annual salaries in an aggregate amount of
approximately $2.1 million, performance bonuses and various employee benefits.
The Company has purchase obligations totaling approximately $2.9 million through March 31, 2018.
Retail License
The Company sells water through its retail operations under a license issued in July 1990 by the Cayman
Islands government that grants Cayman Water the exclusive right to provide potable water to customers within
its licensed service area. As discussed below, this license was set to expire in July 2010 but has since been
extended while negotiations for a new license take place. Pursuant to the license, Cayman Water has the
exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which
consists of two of the three most populated areas of Grand Cayman, the Seven Mile Beach and West Bay
87
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Commitments and contingencies − (continued)
areas. For the years ended December 31, 2016, 2015 and 2014, the Company generated approximately 40%,
40% and 36%, respectively, of its consolidated revenues and 56%, 56% and 54%, respectively, of its
consolidated gross profit from the retail water operations conducted pursuant to Cayman Water’s exclusive
license.
Under the license, Cayman Water pays a royalty to the government of 7.5% of its gross retail water sales
revenues (excluding energy cost adjustments). The selling prices of water sold to its customers are determined
by the license and vary depending upon the type and location of the customer and the monthly volume of
water purchased. The license provides for an automatic adjustment for inflation or deflation on an annual
basis, subject to temporary limited exceptions, and an automatic adjustment for the cost of electricity on a
monthly basis. The Water Authority-Cayman (the ‘‘WAC’’), on behalf of the government, reviews and
confirms the calculations of the price adjustments for inflation and electricity costs. If Cayman Water wants to
adjust its prices for any reason other than inflation or electricity costs, Cayman Water has to request prior
approval of the Cabinet of the Cayman Islands government. Disputes regarding price adjustments would be
referred to arbitration.
The license was scheduled to expire in July 2010 but has been extended several times by the Cayman Islands
government in order to provide the parties with additional time to negotiate the terms of a new license
agreement. The most recent extension of the license expired on June 30, 2016. The Company continues to
provide water subsequent to June 30, 2016 on the assumption that the license has been further extended to
allow the parties to continue negotiations without interruption to an essential service.
The Cayman Islands government could ultimately offer a third party a license to service some or all of
Cayman Water’s present service area. However, as set forth in the existing license, ‘‘the Governor hereby
agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or
franchise to any other person or company for the processing, distribution, sale and supply of water within the
Licence Area without having first offered such a licence or franchise to the Company on terms no less
favourable than the terms offered to such other person or company.’’
In February 2011, the Water (Production and Supply) Law, 2011 and the Water Authority (Amendment) Law,
2011 (the ‘‘New Laws’’) were published and enacted. Under the New Laws, the WAC will issue any new
license, and such new license could include a rate of return on invested capital model, as discussed in the
following paragraph.
Following the enactment of the New Laws, the Company was advised in correspondence from the Cayman
Islands government and the WAC that: (i) the WAC, and not the Cayman Islands government, is the principal
negotiator in these license negotiations; and (ii) the WAC has determined that a rate of return on invested
capital model (‘‘RCAM’’) for the retail license is in the best interest of the public and Cayman Water’s
customers. RCAM is the rate model currently utilized in the electricity transmission and distribution license
granted by the Cayman Islands government to the Caribbean Utilities Company, Ltd. The Company responded
to the Cayman Islands government that it disagreed with the government’s position on these two matters and
negotiations for a new license temporarily ceased.
In July 2012, in an effort to resolve several issues relating to its retail license renewal negotiations, the
Company filed an Application for Leave to Apply for Judicial Review (the ‘‘Application’’) with the Grand
Court of the Cayman Islands (the ‘‘Court’’), seeking declarations that: (i) certain provisions of the New Laws
appear to be incompatible and a determination as to how those provisions should be interpreted; (ii) the
WAC’s roles as the principal license negotiator, statutory regulator and the Company’s competitor put the
WAC in a position of hopeless conflict; and (iii) the WAC’s decision to replace the rate structure under the
Company’s current exclusive license with RCAM was predetermined and unreasonable. The hearing for this
judicial review was held in April 2014 and in June 2014 the Court issued its ruling, which was limited to the
88
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Commitments and contingencies − (continued)
determination that (i) the renewal of the license does not require a public bidding process; and (ii) the WAC is
the proper entity to negotiate with the Company for the renewal of the license.
its counter proposal
In November 2014, the Company wrote to the Minister of Works offering to recommence license negotiations
on the basis of the RCAM model subject to the following conditions: (i) the Government would undertake to
amend the current water legislation to provide for an independent regulator and a fair and balanced regulatory
regime more consistent with that provided under the electrical utility regulatory regime, (ii) the Government
and the Company would mutually appoint an independent referee and chairman of the negotiations, (iii) the
Company’s new license would provide exclusivity for the production and provision of all piped water, both
potable and non-potable, within its Cayman Islands license area, (iv) the Government would allow the
to the WAC’s RCAM license draft, and (v) the principle of
Company to submit
subsidization of residential customer rates by commercial customer rates would continue under a new license.
In March 2015 the Company received a letter from the Minister of Works with the following responses to the
Company’s November 2014 letter: (1) while the Cayman government plans to create a new public utilities
commission, the provision of the new retail license will not depend upon the formation of such a commission;
(2) any consideration regarding inclusion of the exclusive right to sell non-potable water within the area
covered by the retail license will not take place until after the draft license has proceeded through the review
process of the negotiations; (3) rather than allow the Company to submit its counter proposal to the WAC’s
RCAM license draft, the WAC will draft the license with the understanding that the Company will be allowed
to propose amendments thereto; (4) the principle of subsidization of residential customer rates by commercial
customer rates would continue under the new license; and (5) a request that the Company consider eliminating
its monthly minimum volume charge in the new license.
The Company recommenced license negotiations with the WAC during the third quarter of 2015 based upon a
draft RCAM license provided by the WAC.
In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities
regulation and competition office (‘‘OFREG’’). OFREG is an independent and accountable regulatory body
with a view of protecting the rights of consumers, encouraging affordable utility services, and promoting
competition. OFREG has the ability to supervise, monitor and regulate multiple utility undertakings and
markets. Water utilities are not presently included in the scope of OFREG’s regulatory functions and remain
under the regulatory control of the WAC. However, the Company was given the opportunity by the Cayman
Islands government to comment on four draft legislative bills which are intended to transfer responsibility for
economic regulation of the water utility sector from the WAC to OFREG. The Company has not been advised
as to the final form and content of these legislative bills and is therefore presently unable to assess their
ultimate impact on its retail license negotiations, however the Company believes that these bills will be
enacted into law within the coming months. OFREG began operations in January 2017, and the Company has
been advised by the WAC that they are presently coordinating with OFREG to transfer responsibility for the
Company’s license negotiations from the WAC to OFREG. The Company cannot presently determine the
impact of OFREG or the pending legislative bills on its retail license negotiations.
The Company is presently unable to determine what impact the resolution of its retail license negotiations will
have on its cash flows, financial condition or results of operations but such resolution could result in a
material reduction of the operating income and cash flows the Company has historically generated from its
retail operations and could require the Company to record an impairment loss to reduce the carrying value of
its goodwill. Such impairment
loss could have a material adverse impact on the Company’s results of
operations.
89
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Commitments and contingencies − (continued)
CW-Belize
the Minister of Public Utilities of the government of Belize
By Statutory Instrument No. 81 of 2009,
published an order — the Public Utility Provider Class Declaration Order, 2009 (the ‘‘Order’’) — which as of
May 1, 2009 designated CW-Belize as a public utility provider under the laws of Belize. With this
designation, the Public Utilities Commission of Belize (the ‘‘PUC’’) has the authority to set the rates charged
by CW-Belize and to otherwise regulate its activities. On November 1, 2010, CW-Belize received a formal
complaint from the PUC alleging that CW-Belize was operating without a license under the terms of the
Water Industry Act. CW-Belize applied for this license in December 2010. On July 29, 2011, the PUC issued
the San Pedro Public Water Supply Quality and Security Complaint Order (the ‘‘Second Order’’) which
among other things requires that (i) CW-Belize and its customer jointly make a submission to the responsible
Minister requesting that the area surrounding CW-Belize’s seawater abstraction wells be designated a forest
reserve or national park and be designated a Controlled Area under section 58 of the Water Industry Act;
(ii) CW-Belize submit an operations manual for CW-Belize’s desalination plant to the PUC for approval;
(iii) CW-Belize and its customer modify the water supply agreement between the parties to (a) include new
water quality parameters included in the Order and (b) cap the current exclusive water supply arrangement in
the agreement at a maximum of 450,000 gallons per day; (iv) CW-Belize keep a minimum number of
replacement seawater RO membranes in stock at all
times; and (v) CW-Belize take possession of and
reimburse the PUC for certain equipment which the PUC purchased from a third-party in late 2010.
CW-Belize has applied for declaratory judgment and has been granted a temporary injunction to stay the
enforcement of the Second Order by the PUC until such time as the Belize courts could hear the matter. The
initial hearing on this matter was conducted on October 30 and 31, 2012 with an additional hearing on
November 29, 2012. The ruling on this case is pending. The Company is presently unable to determine what
impact the Order and the Second Order will have on its financial condition, results of operations or cash
flows.
CW-Bali
Through its subsidiary CW-Bali, the Company has built and presently operates a seawater reverse osmosis
plant with a productive capacity of approximately 790,000 gallons per day located in Nusa Dua, one of the
primary tourist areas of Bali, Indonesia. Since its inception, the sales volumes for this plant have not been
sufficient
to cover its operating costs. CW-Bali’s summarized financial results for the three most recent
fiscal years are as follows:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment loss on long-lived assets
. . . . . . . . . .
Loss from operations . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
91,311
$
(2,000,000)
(2,744,361)
(2,547,332)
450,736
Year ended December 31,
2015
$ 368,012
—
(483,544)
(860,783)
304,673
2014
$ 471,919
—
(458,393)
(585,744)
279,037
In 2015, the Indonesian government passed Regulation 122 which provides a mechanism for governmental
regulatory oversight over the utilization of Indonesia’s water resources. Under this new regulation,
the
approval or cooperation of the local government water utility is required for any water supply contracts
executed by non-governmental providers after the effective date of the regulation. Consequently CW-Bali will
be required to enter into a cooperation agreement with Bali’s local government water utility, PDAM, or
otherwise obtain PDAM’s approval, to supply any new customers.
In late 2015, the Company decided to seek a strategic partner for CW-Bali to (i) purchase a major portion of
its equity ownership in CW-Bali; (ii) lead CW-Bali’s sales and marketing efforts; (iii) liaise with PDAM; and
(iv) assist with CW-Bali’s on-going funding requirements.
90
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Commitments and contingencies − (continued)
During the three months ended September 30, 2016, the Company reassessed the prospects for CW-Bali in
light of its results to date, current circumstances and uncertainties impacting the business, and expected future
funding requirements and tested its long-lived assets for possible impairment. To test for impairment, the
Company estimated the future undiscounted cash flows CW-Bali will receive from its plant by (i) identifying
various possible future scenarios for the business; (ii) estimating the undiscounted future cash flows associated
with each possible
resulting
probability-weighted sum represents the Company’s best estimate of the future undiscounted cash flows to be
derived by CW-Bali from its long-lived desalination plant assets. The carrying value of CW-Bali’s long-lived
assets exceeded the Company’s probability-weighted estimate of CW-Bali’s future undiscounted cash flows
which indicated impairment of these assets, and the Company recorded an impairment loss of $2.0 million
during the three months ended September 30, 2016 to reduce the carrying value of its long-lived CW-Bali
assets to their estimated fair value.
assigning a probability to each scenario. The
and (iii)
scenario;
If in the coming months CW-Bali is not able to obtain a strategic partner, sell water to PDAM or to other new
customers through a cooperation agreement, or otherwise significantly increase the revenues generated by its
Nusa Dua plant, the Company may cease CW-Bali’s operations. If the Company ceases CW-Bali’s operations,
it may be required to record further impairment losses to reduce the carrying value of its investment in
CW-Bali to its fair value for the period in which the Company formally commits to exit the Bali market. Such
impairment losses could have a material adverse impact on the Company’s results of operations. Any sale of a
portion of the Company’s investment in CW-Bali may be for an amount less than its carrying amount,
resulting in a loss on the sale that could have a material adverse impact on the Company’s results of
operations. The carrying value of the Company’s investment in CW-Bali as of December 31, 2016 totaled
$1.8 million, consisting of net assets of approximately $1.2 million and a cumulative foreign currency
translation adjustment reflected in stockholders’ equity of $549,555.
The Company anticipated at the time CW-Bali commenced operations that CW-Bali’s revenues, expenditures,
and other cash flows would be conducted primarily in the local currency, the Indonesian rupiah (IDR). The
Company expected that financial support it and its other subsidiaries provided to CW-Bali would not extend
beyond CW-Bali’s start-up phase, and that thereafter CW-Bali would generate positive net cash flows from its
operations and thus remain relatively self-contained and integrated within the economic environment of Bali,
Indonesia. As a result, since inception of its operations through September 30, 2016, the functional currency
of CW-Bali was the IDR.
However, since its inception CW-Bali has been dependent upon on-going financial support from the Company
in U.S dollars (US$) to continue its operations. The Company expects such funding to continue until such
time, if ever, that CW-Bali generates sufficient revenues to support its operations, or is able to obtain a
strategic partner to assist with its on-going funding requirements, or ceases operations. Consequently, effective
as of October 1, 2016, the Company changed the functional currency of CW-Bali to US$.
During the periods for which IDR was CW-Bali’s functional currency, the Company recorded foreign currency
gains and losses arising from CW-Bali’s transactions conducted in currencies other than the IDR. Such foreign
currency gains and losses included amounts associated with (i) transactions denominated in currencies other
than the IDR and (ii) the re-measurement of monetary assets and liabilities denominated in currencies other
than the IDR as of the balance sheet date. CW-Bali’s monetary assets and liabilities denominated in currencies
other than the IDR consist of US$-denominated bank accounts and US$-denominated loans provided to
CW-Bali by the Company. Such foreign currency transaction gains (losses) were included in income and
amounted to approximately $28,000 and ($309,000) for the three months ended September 30, 2016 and 2015,
respectively and approximately $202,000 and ($542,000) for the nine months ended September 30, 2016 and
2015, respectively. After the re-measurement process of monetary assets and liabilities was completed, the
assets and liabilities of CW-Bali were translated into US$ using exchange rates in effect at the end of each
period. Revenues and expenses for CW-Bali were translated using rates that approximated those in effect
91
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Commitments and contingencies − (continued)
during the period. The effect of these foreign currency translations was recognized in the cumulative
translation adjustment included in the Company’s stockholders’ equity, which amounted to ($549,555) as of
September 30, 2016 and December 31, 2016 and ($533,365) as of December 31, 2015.
This change in functional currency will be applied on a prospective basis, and therefore, the cumulative
translation adjustment of ($549,555) as of September 30, 2016 will remain unchanged until such time that the
CW-Bali is no longer dependent on US$ funding to support its operations, the Company sells all or a portion
of its equity interest in CW-Bali, or the Company discontinues CW-Bali’s operations. Translated amounts for
non-monetary assets as of September 30, 2016 will become the new accounting basis for those assets effective
October 1, 2016. Monetary assets denominated in foreign currencies, including the IDR, will be re-measured
to US$ at the current exchange rate as of the balance sheet date going forward. The Company anticipates that
the likely effect of this change in functional currency will result in future foreign currency gains and losses
that pertain to (i) transactions denominated in IDR and (ii) foreign currency re-measurements associated with
monetary assets and liabilities denominated in IDR. As of December 31, 2016, such balances include
IDR-denominated cash and accounts payable, which amounted to approximately $28,000 and $7,000,
respectively, based upon the exchange rate between the IDR and US$ as of that date. Based on this change in
functional currency, the US$-denominated loans to CW-Bali from its parent and affiliates will not be subject to
further re-measurement adjustments.
Other Contingencies
CW-Bahamas’ contract
to supply water to the WSC from its Blue Hills plant requires CW-Bahamas to
guarantee delivery of a minimum quantity of water per week. If CW-Bahamas does not meet this minimum, it
will be required to pay the WSC for the difference between the minimum and actual gallons delivered at a per
gallon rate equal to the price per gallon that WSC is currently paying under the contract. The Blue Hills
contract expires in 2032 and requires CW-Bahamas to deliver 63.0 million gallons of water each week.
19. Stock-based compensation
The Company has the following stock compensation plans that form part of its employees’ remuneration:
Employee Share Incentive Plan (Preferred Shares)
The Company awards shares of its preferred stock for $nil consideration under its Employee Share Incentive
Plan to eligible employees, other than Directors and Officers, after four consecutive years of employment. If
these employees remain with the Company for an additional four consecutive years, they can convert these
preferred shares into shares of common stock on a one for one basis. In addition, at the time the preferred
shares are granted, the employees receive options to purchase an equal number of shares of preferred stock at
a discount to the average trading price of the Company’s common stock for the first seven days of the
October immediately preceding the date of the preferred stock grant. If these options are exercised, the shares
of preferred stock obtained may also be converted to shares of common stock if the employee remains with
the Company for an additional four consecutive years. Each employee’s option to purchase shares of preferred
stock must be exercised within 30 days of the grant date, which is the 90th day after the date of the
independent registered public accountants firm’s audit opinion on the Company’s consolidated financial
statements. Shares of preferred stock not subsequently converted to shares of common stock are redeemable
only at the discretion of the Company. Shares of preferred stock granted under this plan during the years
ended December 31, 2016, 2015 and 2014, totaled 8,421, 8,615 and 5,957, respectively, and an equal number
of preferred stock options were granted in each of these years.
92
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Stock-based compensation − (continued)
2008 Equity Incentive Plan
On May 14, 2008, the Company’s stockholders approved the 2008 Equity Incentive Plan (the ‘‘2008 Plan’’)
and reserved 1,500,000 shares of the Company’s Class A common shares for issuance under this plan. All
Directors, executives and key employees of the Company or its affiliates are eligible for participation in the
2008 Plan which provides for the issuance of options, restricted stock and stock equivalents at the discretion
of the Board. No options were granted under the plan in 2014, 2015 or 2016.
The Company measures and recognizes compensation expense at fair value for all share-based payments,
including stock options. Stock-based compensation for the Employee Share Incentive Plan, Employee Share
Option Plan and the 2008 Equity Incentive Plan totaled $152,078, $143,951 and $116,574 for the years ended
December 31, 2016, 2015 and 2014, respectively, and is included in general and administrative expenses in
the consolidated statements of income.
Non-Executive Directors’ Share Plan
This stock grant plan provides part of Directors’ remuneration. Under this plan, non-Executive Directors
receive a combination of cash and common stock for their participation in Board meetings. The number of
shares of common stock granted is calculated based upon the market price of the Company’s common stock
on October 1 of the year preceding the grant. Common stock granted under this plan during the years ended
December 31, 2016, 2015 and 2014 totaled 15,192, 10,514 and 5,992 shares, respectively. The Company
recognized stock-based compensation for these share grants of $179,573, $143,218 and $85,880 for the years
ended December 31, 2016, 2015 and 2014, respectively.
Employee Share Option Plan (Common Stock Options)
The Company has an employee stock option plan for certain long-serving employees of the Company. Under
the plan, these employees are granted in each calendar year, as long as the employee is a participant in the
Employee Share Incentive Plan, options to purchase common shares. The price at which the option may be
exercised will be the closing market price on the grant date, which is the 40th day after the date of the
Company’s Annual Shareholder Meeting. The number of options each employee is granted is equal to five
times the sum of (i) the number of preferred shares which that employee receives for $nil consideration and
(ii) the number of preferred share options which that employee exercises in that given year. Options may be
exercised during the period commencing on the fourth anniversary of the grant date and ending on the
thirtieth day after the fourth anniversary of the grant date. Options granted under this plan during the years
ended December 31, 2016, 2015, and 2014, totaled 3,980, 4,030 and 2,990, respectively.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing
that uses the assumptions noted in the table below. Expected volatilities are based on historical
model
volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise
and post-vesting termination behavior. The expected term of options granted is based on historical data and
represents the period of time that options granted are expected to be outstanding. The Company uses historical
data to estimate stock option exercises and forfeitures within its valuation model. The risk-free interest rate for
the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The significant weighted average assumptions for the years ended December 31, 2016, 2015 and 2014 were as
follows:
Risk free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected option life (years) . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . .
2016
0.43%
1.4
33.49%
2.29%
2015
0.41%
1.4
33.74%
2.35%
2014
0.48%
1.4
48.06%
2.71%
93
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Stock-based compensation − (continued)
A summary of the Company’s stock option activity for the year ended December 31, 2016 is as follows:
Outstanding at beginning of period . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/expired . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2016 . . . . . . . . . . . .
Options
94,478
12,401
(55,061)
(34,218)
17,600
Exercisable as of December 31, 2016 . . . . . . . . . . . .
—
Weighted
Average
Exercise
Price
$10.52
10.05
7.90
9.87
$12.02
$ 0.00
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value(1)
1.90 years
— years
$
$
—
—
(1) The intrinsic value of a stock option represents the amount by which the fair value of the underlying
stock, measured by reference to the closing price of the common shares of $10.85 on the Nasdaq Global
Select Market on December 31, 2016, exceeds the exercise price of the option.
As of December 31, 2016, 17,600 non-vested options were outstanding, with weighted average exercise price
remaining unrecognized
of $12.02, and average remaining contractual
compensation costs related to unvested stock-based arrangements were $25,336 as of December 31, 2016 and
are expected to be recognized over a weighted average period of 1.90 years.
life of 1.90 years. The total
As of December 31, 2016, unrecognized compensation costs relating to redeemable preferred stock
outstanding were $155,231 and are expected to be recognized over a weighted average period of 1.22 years.
The following table summarizes the weighted average fair value of options at the date of grant and the
intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014:
Options granted with an exercise price below market price
on the date of grant:
Employees − preferred stock . . . . . . . . . . . . . . . . . . . . . .
Overall weighted average . . . . . . . . . . . . . . . . . . . . . . . .
$
4.48
4.48
$
4.19
4.19
$ —
—
2016
2015
2014
Options granted with an exercise price at market price on
the date of grant:
Management employees . . . . . . . . . . . . . . . . . . . . . . . . .
Employees − common stock . . . . . . . . . . . . . . . . . . . . . .
Overall weighted average . . . . . . . . . . . . . . . . . . . . . . . .
$ —
3.13
3.13
$ —
3.39
3.39
$ —
3.11
3.11
Options granted with an exercise price above market price
on the date of grant:
Management employees . . . . . . . . . . . . . . . . . . . . . . . . .
Employees − preferred stock . . . . . . . . . . . . . . . . . . . . . .
Overall weighted average . . . . . . . . . . . . . . . . . . . . . . . .
Total intrinsic value of options exercised . . . . . . . . . . . . . .
$ —
—
—
$73,753
$ —
—
—
$87,371
$ —
0.59
0.59
$17,162
94
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Stock-based compensation − (continued)
Long-Term Incentive Compensation
The Board of Directors approved changes to the long-term incentive compensation for the Company’s
executive officers effective for 2015 and thereafter to better align the interests of its executive officers with
those of its shareholders. The revised long-term compensation plan includes a combination of performance
and non-performance based grants of common stock. The non-performance based stock grants vest ratably
the end of three years based upon the
over a three-year period. The performance based grants vest at
achievement of three year cumulative performance outcomes. The initial three year measurement period for
the performance based stock grants is 2015 − 2017. Common stock granted under this plan for the year ended
December 31, 2015 but issued in 2016 totaled 9,964 shares. Common stock granted under this plan for the
year ended December 31, 2016 but issued in 2017 totaled 17,825 shares. The Company recognized $189,368
and $120,500 in stock-based compensation expense related to the non-performance stock grants under the
revised long-term compensation plan for the year ended December 31, 2016 and 2015, respectively.
20. Retirement benefits
Staff pension plans are offered to all employees in Florida, Cayman Islands and Bahamas. The plans are
administered by third party pension plan providers and are defined contribution plans. The Company matches
the contribution of the first 5% of each participating employee’s salary up to $104,400 for the Cayman
Islands, there is no salary limit for the Bahamas and up to 6% of each participating employee salary for
Florida employees. The total amount recognized as an expense under the plan during the year ended
December 31, 2016, 2015, and 2014 was $376,086, $328,084, and $325,576, respectively.
21. Financial instruments
Credit risk:
The Company is not exposed to significant credit risk on its retail customer accounts as its policy is to cease
supply of water to customers’ accounts that are more than 45 days overdue. The Company’s exposure to credit
risk is concentrated on receivables from its Bulk water customers. The Company considers these receivables
fully collectible and therefore has not recorded an allowance for these receivables.
Interest rate risk:
The Company is not subject to significant interest-rate risk arising from fluctuations in interest rates as the
balance of the Company’s note payable to related party at December 31, 2016 is not significant to its financial
condition or results of operations.
Foreign exchange risk:
All relevant foreign currencies other than the Mexican peso, Indonesian rupiah and the euro have been fixed
to the dollar for over 30 years and the Company does not employ a hedging strategy against exchange rate
risk associated with the reporting in dollars. If any of these fixed exchange rates becomes a floating exchange
rate or if any of the foreign currencies in which the Company conducts business depreciate significantly
against the dollar, the Company’s consolidated results of operations could be adversely affected.
Fair values:
As of December 31, 2016 and 2015 the carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and other current liabilities, the note payable to related party, the demand loan payable and
dividends payable approximate their fair values due to the short
term maturities of these instruments.
Management considers that the carrying amounts for loans receivable as of December 31, 2016 and 2015
approximate their fair value as the stated interest rates approximate market rates.
95
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. Financial instruments − (continued)
Under US GAAP, fair value is defined as the exit price, or the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.
US GAAP guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset
or liability and are developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants
would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to
measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets
or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the
fair value measurements. The Company reviews its fair value hierarchy classifications on a quarterly basis.
Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities
within the fair value hierarchy.
The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair
value as of December 31, 2016 and 2015:
Level 1
Level 2
Level 3
Total
December 31, 2016
Liabilities:
Recurring
Net liability arising from put/call options . . .
$ —
$
—
$680,000
$680,000
Level 1
Level 2
Level 3
Total
December 31, 2015
Assets:
Recurring
Restricted cash . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Certificate of deposit
Total recurring . . . . . . . . . . . . . . . . . . . . . . .
$428,203
—
$428,203
$
—
5,637,538
$5,637,538
$
$
—
—
—
$ 428,203
5,637,538
$6,065,741
The activity for the Level 3 liability for the year ended December 31, 2016:
Net liability arising from put/call options(1)
Balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
383,000
297,000
$680,000
(1) The net
liability arising from the put/call options is included other liabilities in the accompanying
consolidated balance sheets as of December 31, 2016.
96
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. Supplemental disclosure of cash flow information
Interest paid in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Year Ended December 31,
2015
$ 147,546
2016
74,898
2014
$ 196,768
Non-cash transactions:
Transfers from inventory to property plant and equipment and
construction in progress . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers from construction in progress to property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of 25,156, 10,514, and 18,294, respectively, shares of
common stock for services rendered . . . . . . . . . . . . . . . .
Issuance of 8,421, 8,615, and 5,957, respectively, shares of
$ 276,807
$ 123,036
$ 168,622
$3,542,119
$2,694,733
$2,693,622
$ 278,388
$ 119.018
$ 263,098
redeemable preferred stock for services rendered . . . . . . . .
$ 111,410
$ 110,703
$
65,289
Conversion (on a one-to-one basis) of 11,558, 7,195, and
4,756, respectively, shares of redeemable preferred stock to
common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared but not paid . . . . . . . . . . . . . . . . . . . . .
$
6,935
$1,118,017
$
4,317
$1,111,501
$
2,854
$1,106,456
23. Impact of recent accounting standards
Adoption of New Accounting Standards:
In February 2015, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update
(‘‘ASU’’) 2015-02, Consolidation (Topic 810) — Amendments to the Consolidation Analysis. The amendments
in this update require management
to reevaluate whether certain legal entities should be consolidated.
Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal
entities are variable interest entities (‘‘VIEs’’) or voting interest entities, (2) eliminate the presumption that a
general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting
entities that are involved with VIEs, particularly those that have fee arrangements and related party
relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with
interests in legal entities that are required to comply with or operate in accordance with requirements that are
similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The
amendments in this update are effective for public business entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. The adoption of ASU 2015-02 did not have a material
impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying
the Presentation of Debt Issuance Costs. ASU 2015-03 provides authoritative guidance related to the
presentation of debt issuance costs on the balance sheet, requiring companies to present debt issuance costs as
a direct deduction from the carrying value of debt. The amendments in this update are effective for public
business entities in fiscal years beginning after December 15, 2015, and interim periods within those
fiscal years. The new guidance must be applied retrospectively to each prior period presented. The adoption of
ASU 2015-03 did not have a material impact on the Company’s consolidated financial statements.
In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance
Costs Associated with Line-of-Credit Arrangements, which clarifies the treatment of debt issuance costs from
line-of-credit arrangements after adoption of ASU 2015-03. The SEC Staff announced they would not object
to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred
debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any
outstanding borrowings on the line-of-credit arrangement. The amendment requires retrospective application
97
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. Impact of recent accounting standards − (continued)
and represents a change in accounting principle. The amendment becomes effective in fiscal years beginning
after December 15, 2015. The adoption of ASU 2015-15 did not have a material impact on the Company’s
consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for
Measurement-Period Adjustments, which requires an acquirer to recognize adjustments identified during the
measurement period in the reporting period in which the adjustment amounts are determined. The adjustment
must
include the cumulative effect of the adjustment as if the accounting had been completed on the
acquisition date. The update should be applied prospectively and becomes effective January 1, 2016. Early
application is permitted. The adoption of ASU 2015-16 did not have a material impact on the Company’s
consolidated financial statements.
Effect of newly issued but not yet effective accounting standards:
the contract,
identification of
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires
revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09
including
prescribes a five step framework in accounting for revenues from contracts within its scope,
the contract,
identification of
(a)
(c) determination of the transaction price, (d) allocation of the transaction price to the identified performance
obligations and (e)
the identified performance obligations are satisfied.
ASU 2014-09 also prescribes additional disclosures and financial statement presentations. ASU 2014-09 may
be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized
at the date of initial application. This amendment was originally effective January 1, 2017. In August 2015,
the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date, which defers the effective date by one year to January 1, 2018. Early application is permitted but not
before January 1, 2017.
the performance obligations under
recognition of
revenues as
(b)
In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue
Gross versus Net), that amends the principal versus agent guidance in ASU 2014-09. ASU 2016-08 clarifies
that the analysis must focus on whether the entity has control of the goods or services before they are
transferred to the customer. ASU 2016-08 also provides additional guidance about how to apply the control
principle when services are provided and when goods or services are combined with other goods or services.
the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing,
In April 2016,
that
amends the revenue guidance in ASU 2014-09 on identifying performance obligations and accounting for
licenses of intellectual property. ASU 2016-10 changed the FASB’s previous proposals on renewals of
right-to-use licenses and contractual restrictions. The effective date of the standard for the Company will
coincide with ASU 2014-09 during the first quarter 2018.
In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging
(Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16
Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. ASU 2016-11 rescinds several SEC
including, among other items, guidance relating to
Staff Announcements that are codified in Topic 605,
accounting for shipping and handling fees and freight services.
the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606):
In May 2016,
Narrow-Scope Improvements and Practical Expedients, which clarifies implementation guidance around
collectability, sales taxes collected from customers, noncash considerations, contract modifications at
transition, and completed contracts at transition.
98
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. Impact of recent accounting standards − (continued)
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606,
Revenue from Contracts with Customers, which amended the guidance on performance obligation disclosures
and makes technical corrections and improvements to the new revenue standard. The standard is effective for
annual reporting periods beginning after December 15, 2017, including interim periods within that reporting
period, and permits early adoption on a limited basis. The update permits the use of either the retrospective or
cumulative effect transition method.
The effective dates of ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12 and ASU 2016-20 are the
same as ASU 2015-14 discussed above. The Company is currently evaluating the effect the adoption of these
standards will have on the Company’s consolidated financial statements.
the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of
In July 2015,
Inventory. ASU 2015-11 applies to all inventory that is measured using first-in, first-out or average cost. The
guidance requires an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is
interim periods within those years, beginning after
effective prospectively for fiscal years, and for
December 15, 2016. Early application is permitted. The adoption of ASU 2015-11 is not expected to have a
material impact on the Company’s financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification
of Deferred Taxes. ASU 2015-17 requires net deferred tax assets and liabilities be classified as noncurrent
in a classified balance sheet and eliminates the classification between current and noncurrent amounts
ASU No. 2015-17 is effective for financial statements issued for annual periods beginning after December 15,
2016 and interim periods within those annual periods. Early adoption is permitted. The adoption of
ASU 2015-17 is not expected to have a material impact on the Company’s financial position, results of
operations or cash flows.
the FASB issued ASU 2016-01, Financial
(Subtopic 825-10):
In January 2016,
Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the
recognition, measurement, presentation and disclosure of financial assets and financial liabilities. ASU 2016-01
is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017
and, for most provisions, is effective using the cumulative-effect transition approach. Early application is
the adoption of this
permitted for certain provisions. The Company is currently evaluating the effect
amendment will have on the Company’s consolidated financial statements.
Instruments — Overall
the FASB issued ASU 2016-02, Leases (Topic 842), which provides guidance for
In February 2016,
accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the
rights and obligations created by leased assets. The accounting guidance for lessors will remain relatively
largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning after December 15,
2018. Early adoption is permitted. The Company is currently evaluating the effect
the adoption of this
amendment will have on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments — Equity Method and Joint Ventures (Topic 323):
Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to apply the
influence over a
equity method of accounting retrospectively when a reporting entity obtains significant
previously held investment. ASU 2016-07 will be effective for the Company’s fiscal year beginning January 1,
2017 and subsequent interim periods. The adoption of ASU 2016-07 is not expected to have a material impact
on the Company’s financial position, results of operations or cash flows.
99
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. Impact of recent accounting standards − (continued)
the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718):
In March 2016,
Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects related to the
accounting for share-based payment transactions, including the accounting for income taxes, statutory tax
withholding requirements and classification on the statement of cash flows. ASU 2016-09 is effective for
annual periods beginning after December 15, 2016, and interim periods within those annual periods. The
adoption of ASU 2016-09 is not expected to have a material impact on the Company’s financial position,
results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and payments are
presented in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after
December 15, 2017 and early adoption is permitted. The Company is currently evaluating the effect the
adoption of this amendment will have on the Company’s consolidated financial statements.
for Goodwill Impairment, which removes Step 2 of the goodwill
In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying
the Test
test. Goodwill
impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to
exceed the carrying amount of goodwill allocated to that reporting unit. An entity still has the option to
perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is
necessary. ASU 2017-04 should be applied on a prospective basis and is effective for annual periods
beginning January 1, 2020. Early adoption is permitted for interim or annual goodwill
tests
performed on testing dates after January 1, 2017. The Company is currently evaluating the effect the adoption
of this amendment will have on the Company’s consolidated financial statements.
impairment
impairment
24. Income taxes
The components of income (loss) before income taxes are as follows:
Foreign (not subject to income taxes)
. . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
$ 8,851,332
(3,339,932)
(3,270,144)
$ 2,241,256
Years Ended December 31
2015
$10,502,379
(2,576,885)
—
$ 7,925,494
2014
$10,355,689
(3,591,149)
—
$ 6,764,540
The Company’s provision for
U.S. operations of $536,057.
income taxes for 2016 consisted of a deferred tax benefit
relating to
A reconciliation of the U.S. statutory federal tax rate to the effective benefit rate for the U.S. loss before
income taxes for the year ended December 31, 2016 is as follows:
U.S statutory federal rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes, net of federal effect
Foreign tax rate differential
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance for deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.0%
(2.0)%
(128.3)%
20.9%
51.4%
(23.9)%
100
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24. Income taxes − (continued)
The tax effects of significant
December 31, 2016 were as follows:
items comprising the Company’s net
long term deferred tax liability at
Deferred tax assets:
Operating loss carryforwards − Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating loss carryforwards − United States
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,545,008
150,758
(5,695,766)
—
129,041
1,786,200
1,915,241
$ 1,915,241
25. Subsequent events
The Company evaluated subsequent events through the time of the filing of its Annual Report on Form 10-K.
Other than as disclosed in these consolidated financial statements, the Company is not aware of any significant
events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have
a material impact on its consolidated financial statements.
101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Ocean Conversion (BVI) Ltd.
We have audited the accompanying consolidated balance sheets of Ocean Conversion (BVI) Ltd. (the
‘‘Company’’) as of December 31, 2016 and 2015, and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016.
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States) and in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
the financial statements referred to above present fairly,
In our opinion,
the
consolidated financial position of Ocean Conversion (BVI) Ltd., as of December 31, 2016 and 2015, and the
consolidated results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2016 in conformity with accounting principles generally accepted in the United States of
America.
in all material respects,
/s/ Marcum LLP
Fort Lauderdale, Florida
March 16, 2017
102
OCEAN CONVERSION (BVI) LTD.
CONSOLIDATED BALANCE SHEETS
December 31,
2016
2015
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets
Total assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,509,590
974,368
80,699
62,757
5,627,414
3,318,288
—
262,537
382,417
$9,590,656
$1,290,227
2,839,338
63,365
130,862
4,323,792
3,925,802
63,047
274,384
419,417
$9,006,442
LIABILITIES AND EQUITY
Current liabilities
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profit sharing obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 197,673
197,673
1,854,900
—
2,052,573
$ 584,116
584,116
1,603,800
46,452
2,234,368
Equity
Class A, voting shares, $1 par value. Authorized 600,000 shares: issued and
outstanding 555,000 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B, voting shares, $1 par value. Authorized 600,000 shares: issued and
outstanding 555,000 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class C, non-voting shares, $1 par value. Authorized 600,000 shares: issued
and outstanding 165,000 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total OC-BVI stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
555,000
555,000
555,000
555,000
165,000
225,659
5,832,863
7,333,522
204,561
7,538,083
$9,590,656
165,000
225,659
5,056,829
6,557,488
214,586
6,772,074
$9,006,442
The accompanying notes are an integral part of these consolidated financial statements.
103
OCEAN CONVERSION (BVI) LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profit sharing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Other income (expense), net
. . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income attributable to non-controlling interests . . . . . . . . . . . . .
Net income attributable to controlling interests . . . . . . . . . . .
2016
$3,832,929
2,107,557
1,725,372
930,838
794,534
Year Ended December 31,
2015
$4,143,882
2,261,973
1,881,909
958,364
923,545
2014
$4,679,829
2,833,007
1,846,822
940,072
906,750
302,575
(251,100)
—
51,475
846,009
69,975
$ 776,034
33,152
(210,600)
1,000
(176,448)
747,097
70,854
$ 676,243
39,299
(222,750)
(5,300)
(188,751)
717,999
21,045
$ 696,954
The accompanying notes are an integral part of these consolidated financial statements.
104
OCEAN CONVERSION (BVI) LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
Additional
paid-in
capital
Retained
earnings
Dollars
Shares
Balance as of December 31, 2013 . . 1,275,000 $1,275,000 $225,659 $ 5,315,632
—
—
Net income . . . . . . . . . . . . . . . . .
696,954
— (1,632,000)
Dividends declared . . . . . . . . . . . .
—
4,380,586
Balance as of December 31, 2014 . . 1,275,000
676,243
—
Net income . . . . . . . . . . . . . . . . .
Dividends declared . . . . . . . . . . . .
—
—
5,056,829
Balance as of December 31, 2015 . . 1,275,000
776,034
—
Net income . . . . . . . . . . . . . . . . .
—
—
Dividends declared . . . . . . . . . . . .
Balance as of December 31, 2016 . . 1,275,000 $1,275,000 $225,659 $ 5,832,863
—
—
1,275,000
—
—
1,275,000
—
—
225,659
—
—
225,659
—
—
Non-controlling
interest
$122,687
21,045
—
143,732
70,854
—
214,586
69,975
(80,000)
$204,561
Total
stockholders’
equity
$ 6,938,978
717,999
(1,632,000)
6,024,977
747,097
—
6,772,074
846,009
(80,000)
$ 7,538,083
The accompanying notes are an integral part of these consolidated financial statements.
105
OCEAN CONVERSION (BVI) LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss on disposal of fixed assets . . . . . . . . . . . . . . . . . . .
Profit sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in accounts receivable . . . . . . . . . . . . . .
(Increase) decrease in inventory . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in prepaid expenses and other assets
. . . .
Increase (decrease) in accounts payable and other liabilities . .
Increase (decrease) in deferred revenue . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . .
Cash flows from investing activities
Additions to property, plant and equipment and construction in
Year Ended December 31,
2015
2014
2016
$ 846,009
$
747,097
$
717,999
716,750
—
251,100
1,864,970
(5,487)
105,105
(386,443)
(46,452)
3,345,552
673,711
—
210,600
(1,340,817)
13,013
(1,972)
156,847
46,452
504,931
753,759
14,454
222,750
1,253,309
(69,010)
62,373
(290,618)
—
2,665,016
progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) investing activities . . . . . . . . . . . . . . . . . .
(46,189)
(46,189)
(63,664)
(63,664)
(122,583)
(122,583)
Cash flows from financing activities
Profit sharing rights paid . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) financing activities
. . . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents
. . . . . . . . . . . . . .
Cash and cash equivalents at the beginning of the period . . .
Cash and cash equivalents at the end of the period . . . . . . . .
—
(80,000)
(80,000)
3,219,363
1,290,227
$4,509,590
—
(518,400)
— (1,632,000)
— (2,150,400)
392,033
456,927
848,960
$
441,267
848,960
$ 1,290,227
Non-cash transactions
Transfers from inventory to property, plant and equipment, net . .
$ 109,236
$
64,426
$
—
The accompanying notes are an integral part of these consolidated financial statements.
106
OCEAN CONVERSION (BVI) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principal activity
(‘‘OC-BVI’’) was incorporated in the British Virgin Islands under
Ocean Conversion (BVI) Ltd.
the
Companies Act, Cap 285, on May 14, 1990 and is engaged in the production and sale of potable water to the
Government of the British Virgin Islands (the ‘‘BVI government’’). OC-BVI has an agreement with the
BVI government, its sole customer, to produce and supply a guaranteed quantity and quality of potable water.
This agreement provides for specific penalties should OC-BVI not be able to provide the guaranteed quantity
of water.
JVD Ocean Desalination Ltd. (‘‘JVD’’), a majority owned subsidiary of OC-BVI, was incorporated on
January 2, 2003 and began producing potable water on the island of Jost Van Dyke for the BVI government
in July 2003 under a 10-year contract with the BVI government that expired July 8, 2013. Pursuant to the
contract, OC-BVI is operating the plant on a year-to-year basis until the BVI government informs OC-BVI of
its intention to extend the existing, or enter into a new agreement.
OC-BVI supplies water to the BVI government under a seven-year contract executed in March 2010 for
OC-BVI’s plant located at Bar Bay, Tortola (the ‘‘Bar Bay Agreement’’). Under the terms of the Bar Bay
Agreement, OC-BVI delivers up to 600,000 gallons of water per day to the BVI government from the Bar
Bay plant and the BVI government is obligated to pay for this water at a specified price as adjusted by a
monthly energy factor. In February 2017, the OC-BVI and BVI government executed a 14 year extension of
the Bar Bay Agreement at a reduced price per gallon for the water provided.
2. Accounting policies
Basis of preparation: The consolidated financial statements presented are prepared in accordance with the
accounting principles generally accepted in the United States of America.
Basis of consolidation: The consolidated financial statements include the financial statements of OC-BVI
and its majority owned subsidiary, JVD (collectively, the ‘‘Company’’). All significant intercompany balances
and transactions have been eliminated.
Use of estimates: The preparation of the consolidated financial statements in conformity with the accounting
principles generally accepted in the United States of America requires management of the Company to make
estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions
include the carrying value of property, plant and equipment and inventory. Actual results could differ from
those estimates.
Cash and cash equivalents: Cash and cash equivalents are comprised of demand deposits at banks and
highly liquid deposits at banks with an original maturity of three months or less. Cash and cash equivalents
are not restricted as to withdrawal or use.
Accounts receivable: Accounts receivable are recorded at the invoiced amounts based on meter readings.
Interest income: The Company earns interest income on accounts receivable based on the overdue invoices
from its customer.
Inventory:
net realizable value, with cost determined on the first-in, first-out basis.
Inventory primarily includes replacement spares and parts that are valued at the lower of cost or
Impairment of
long-lived assets: Assets such as property, plant and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount exceeds the fair value of the asset.
107
OCEAN CONVERSION (BVI) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting policies − (continued)
Property, plant and equipment: Property, plant and equipment is stated at cost less accumulated depreciation.
Depreciation is calculated using a straight line method with an allowance for estimated residual values. Rates are
determined based on the estimated useful lives of the assets as follows:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant and equipment
Office furniture, fixtures and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lab equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 to 14 years
3 to 10 years
3 to 10 years
5 to 10 years
Additions to property, plant and equipment consist of the cost of the contracted services, direct labor and
materials. Assets under construction are recorded as additions to property, plant and equipment upon
completion of the projects. Depreciation commences in the month of addition.
Revenue from water sales: OC-BVI recognizes revenues from Bar Bay plant water sales at the time water
is supplied to the BVI government’s distribution system. The amount of water supplied is determined based
upon water meter readings performed at the end of each month. Under the terms of its bulk water supply
contracts, OC-BVI is entitled to charge its customers the greater of a minimum monthly charge or the price
for water supplied during the month.
3. Litigation with the BVI government
Under the terms of a water supply agreement dated May 1990 (the ‘‘1990 Agreement’’) between OC-BVI and
the Government of the British Islands (the ‘‘BVI Government’’), upon the expiration of its initial seven-year
term in May 1999, the 1990 Agreement would automatically be extended for another seven-year term unless
the BVI government provided notice, at least eight months prior to such expiration, of its decision to purchase
the plant from OC-BVI at the agreed upon amount under the 1990 Agreement of approximately $1.42 million.
In correspondence between the parties from late 1998 through early 2000, the BVI government indicated that
it intended to purchase the plant but would be amenable to negotiating a new water supply agreement, and
that it considered the 1990 Agreement to be in force on a monthly basis until negotiations between the
BVI government and OC-BVI were concluded. Occasional discussions were held between the parties since
2000 without resolution of the matter. OC-BVI continued to supply water from the plant and expended
approximately $4.7 million between 1995 and 2003 to significantly expand the production capacity of the
plant beyond that contemplated in the 1990 Agreement.
In 2006, the BVI government took the position that the seven-year extension of the 1990 Agreement had been
completed and that it was entitled to ownership of the Baughers Bay plant. In response, OC-BVI disputed the
BVI government’s contention that the original terms of the 1990 Agreement remained in effect.
During 2007, the BVI government significantly reduced its payments for the water being supplied by OC-BVI
and filed a lawsuit with the Eastern Caribbean Supreme Court (the ‘‘Court’’) seeking ownership of the
Baughers Bay plant. OC-BVI counterclaimed to the Court that it was entitled to continued possession and
operation of the Baughers Bay plant until the BVI government paid OC-BVI approximately $4.7 million,
which OC-BVI believed represented the value of the Baughers Bay plant at its expanded production capacity.
OC-BVI subsequently filed claims with the Court seeking payment for water sold and delivered to the
BVI government through May 31, 2009 at the contract prices in effect before the BVI government asserted its
purported right of ownership of the plant.
The Court ruled on this litigation in 2009, determining that (i) the BVI government was entitled to immediate
ownership and possession of the Baughers Bay plant; (ii) OC-BVI was not entitled to compensation for the
expenditures made to expand the production capacity of the plant; (iii) OC-BVI was entitled to full payment
of water invoices issued up to December 20, 2007, which had been calculated under the terms of the original
1990 Agreement; and (iv) OC-BVI was entitled to the amount of $10.4 million for water produced by
OC-BVI from the Baughers Bay plant subsequent to December 20, 2007.
108
OCEAN CONVERSION (BVI) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Litigation with the BVI government − (continued)
OC-BVI filed an appeal with the Eastern Caribbean Court of Appeals (the ‘‘Appellate Court’’)
in
October 2009 asking the Appellate Court to review the September 17, 2009 ruling by the Court as it related to
OC-BVI’s claim for compensation for expenditures made to expand the production capacity of the Baughers
Bay plant. In October 2009, the BVI government also filed an appeal with the Appellate Court requesting the
Appellate Court to reduce the $10.4 million awarded by the Court to OC-BVI for water supplied subsequent
to December 20, 2007 to an amount equal to the cost of producing such water.
In March 2010, OC-BVI vacated the Baughers Bay plant and the BVI government assumed direct
responsibility for the plant’s operations.
In June 2012, the Appellate Court issued the final ruling with respect to the Baughers Bay litigation. This
ruling dismissed the BVI government’s appeal against
the Court awarding
$10.4 million for the water supplied, and also awarded OC-BVI compensation for improvements made to the
plant in the amount equal to the difference between (i) the value of the Baughers Bay plant at the date
OC-BVI transferred possession of the plant to the BVI government and (ii) $1.42 million (the purchase price
for the Baughers Bay plant under the 1990 Agreement). OC-BVI was also awarded all of its court costs at the
trial level and two-thirds of such costs incurred on appeal.
the previous judgment of
OC-BVI and the BVI government engaged a mutually approved valuation expert to complete a valuation of
the Baughers Bay plant at the date it was transferred to the BVI government in accordance with the Appellate
Court ruling.
In June 2016, OC-BVI received the final valuation report from the valuation expert, which sets forth a value
for the Baughers Bay plant of $13.0 million as of the date OC-BVI transferred possession of the plant to the
BVI government. Applying the valuation determined by the valuation expert to the formula set forth by the
Appellate Court in its ruling, OC-BVI would be entitled to $11.58 million from the BVI government for the
Baughers Bay plant. The BVI government has indicated that it disagrees with the valuation methodology used
by the valuation expert and the resulting valuation for the Baughers Bay plant. OC-BVI cannot presently
determine if the Appellate Court will uphold the Baughers Bay plant valuation or when, or to what extent, any
amount for the value of the Baughers Bay plant will be paid by the BVI government. Consequently, any
amount due for the Baughers Bay plant valuation will not be included in OC-BVI’s results of operations until
such amount, if any, is paid by the BVI government.
4. Inventory
Inventory consists of:
Consumables stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spare parts inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory (non-current) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
$ 16,302
326,934
343,236
80,699
$262,537
$
2015
8,043
329,706
337,749
63,365
$274,384
109
OCEAN CONVERSION (BVI) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Property, plant and equipment
Property, plant and equipment consist of:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant and equipment
Office furniture, fixtures and equipment
. . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tools & test equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net
December 31,
2016
$ 3,599,824
5,864,904
44,203
78,428
9,622
9,596,981
(6,278,693)
$ 3,318,288
2015
$ 3,599,824
5,755,668
44,203
78,428
9,622
9,487,745
(5,561,943)
$ 3,925,802
Depreciation expense was $716,750, $673,711 and $753,759 for the years ended December 31, 2016, 2015
and 2014, respectively.
During 2007, OC-BVI completed, for a total cost of approximately $8 million,
the construction of a
desalination plant with a capacity of 720,000 gallons per day located at Bar Bay, Tortola (the ‘‘Bar Bay
plant’’). OC-BVI began selling water to the Ministry from this plant in January 2009 and on March 4, 2010,
OC-BVI and the BVI government executed a definitive seven-year contract for the Bar Bay plant (the ‘‘Bar
Bay Agreement’’). Under the terms of the Bar Bay Agreement, OC-BVI delivers up to 600,000 gallons of
water per day to the BVI government from the Bar Bay plant and the BVI government is obligated to pay for
this water at a specified price as adjusted by a monthly energy factor. The Bar Bay Agreement included a
seven-year extension option exercisable by the BVI government and required OC-BVI to complete a storage
reservoir on a BVI government site by no later than March 4, 2011. OC-BVI has not commenced construction
of this storage reservoir due to the BVI government’s failure to pay the invoices for the water provided by the
Bar Bay plant on a timely basis. In February 2017, the OC-BVI and BVI government executed a 14 year
extension of the Bar Bay Agreement at a reduced price per gallon for the water provided.
6. Commitments
During 2005, OC-BVI entered into a 25-year lease agreement with Bar Bay Estate Holdings Limited (‘‘Bar
Bay Holdings’’), a private company incorporated in the Territory of the British Virgin Islands, pursuant to
which OC-BVI agreed to lease from Bar Bay Holdings approximately 50,000 square feet of land on Tortola,
British Virgin Islands on which a seawater desalination plant and wells was constructed. Under the terms of
the lease agreement, a lease premium payment of $750,000 was made on June 10, 2005, annual lease and
easement payments of $17,662 are due annually and royalty payments of 2.87% of annual sales, as defined in
the lease agreement, are payable quarterly. Sage Water Holdings (BVI) Limited currently owns 100% of the
non-voting stock, 50% of the voting common stock and 50% of the profit sharing rights of OC-BVI. A
Director of Sage Water Holdings is also a Director of OC-BVI and holds 50% of the outstanding shares of
Bar Bay Holdings.
OC-BVI entered into an agreement that grants an easement over a parcel of land used to access certain Bar
Bay plant. Under the terms of the agreement, an initial premium payment of $70,000 was made and fees of
$6,000 are due annually through September 2019.
110
OCEAN CONVERSION (BVI) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments − (continued)
Future minimum lease payments under non-cancelable operating leases as of December 31, 2016 are as follows:
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
$ 25,319
25,319
23,319
19,319
19,319
162,597
$275,192
Total rental expense amounted to $77,227, $76,262 and $76,262 for the years ended December 31, 2016, 2015
and 2014, respectively.
7. Expenses
Cost of water sales consist of the following:
Fuel oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee costs
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
General and administrative expenses consist of the following:
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors fees and expenses . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee costs
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Year Ended December 31,
2015
2014
2016
$
26,121
585,177
114,615
715,084
338,899
73,183
254,478
$2,107,557
$
42,685
777,680
85,518
671,804
338,143
74,394
271,749
$2,261,973
$
89,672
1,114,780
90,025
751,705
395,648
74,086
317,091
$2,833,007
$611,722
48,750
78,390
69,969
1,666
410
119,931
$930,838
$630,932
88,738
28,525
66,254
1,908
948
141,059
$958,364
$628,643
71,390
25,626
65,213
2,054
—
147,146
$940,072
8. Related party transactions
Pursuant
to an amended and restated Management Services Agreement between DesalCo Limited
(‘‘DesalCo’’), a wholly-owned subsidiary of CWCO, and the Company, DesalCo provides the Company with
management, administration, finance, operations, maintenance, engineering and purchasing services, and is
entitled to be reimbursed for all reasonable expenses incurred on behalf of the Company.
Pursuant to a Management Services Memorandum effective January 1, 2004 between the Class B Directors
who at any point in time represent Sage Water Holdings (BVI) Limited (‘‘SWHL’’), and the Company, the
Class B directors provide the Company with delegated operational matters, general management of local
business matters, donation, sponsorship and public relations activities, and are entitled to an annual fixed fee
111
OCEAN CONVERSION (BVI) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Related party transactions − (continued)
of $60,000, adjusted annually for inflation, and a profit sharing bonus equal to 2% of the Company’s income
before depreciation, interest (income and expense), and other expenses not directly related to the operation of
the Company.
Pursuant to a Services Agreement effective November 30, 2012 between the Company and Sage Utilities
Holdings (BVI) Limited (‘‘SUHL’’), which is related to Sage Water Holdings (BVI) Ltd. through common
ownership, the Company provides SUHL with operations, maintenance, engineering, and purchasing services.
The statements of operations include the following transactions with related parties:
Year ended December 31,
2015
2014
2016
Revenues
SUHL management fees
. . . . . . . . . . . . . . . . . . . . .
$303,477
$331,599
$447,965
General and administrative expenses
DesalCo management fees . . . . . . . . . . . . . . . . . . . .
SWHL management fees . . . . . . . . . . . . . . . . . . . . .
$497,544
114,178
$611,722
$514,858
116,074
$630,932
$513,048
115,595
$628,643
The accompanying balance sheets include the following amounts associated with related parties:
December 31,
2016
2015
Accounts receivable
SUHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$368,922
$351,161
Prepaid expenses and other assets
DesalCo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
$ 46,452
Accounts payable and other liabilities
DesalCo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SWHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 53,900
8,790
$ 62,690
$ 44,977
9,251
$ 54,228
Deferred revenue
SUHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
$ 46,452
9. Profit sharing obligation
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Opening balance
Additions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions paid and accrued . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
$1,603,800
251,100
—
$1,854,900
2015
$1,393,200
210,600
—
$1,603,800
In 1993, the Company and its existing shareholders at that time, entered into two Share Repurchase and Profit
Sharing Agreements (the ‘‘Agreements’’) to repurchase 225,000 shares each from those shareholders (the
‘‘Parties’’), whose shares were issued in exchange for guarantees of the Company’s long term debt. The
the
Agreements were subsequently approved by special resolution at an Extraordinary Meeting of all
Company’s shareholders.
112
OCEAN CONVERSION (BVI) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Profit sharing obligation − (continued)
Under the terms of the Agreements, the Company, in exchange for the above-mentioned shares, granted the
Parties, profit sharing rights in the Company’s profits for as long as the Company remains in business as a
going concern. The Agreement states that where the Company has profits available for the payment of
dividends and pays a dividend from there, a distribution shall be made to each of the Parties equal to 202,500
times the dividend per share received by the remaining shareholders and paid concurrently with such dividend.
The factor of 202,500 shall be subject to amendment by the same proportion and at the same time as changes
take place or adjustments are made in respect of the remaining shareholders.
The current shareholders and an affiliate of a current shareholder have acquired these profit sharing rights. The
Company has recorded an obligation as of December 31, 2016 for the maximum profit shares payable to the
Parties if all retained earnings were to be distributed as dividends and profit shares.
10. Taxation
Under the terms of the water sale agreements with the Government,
non-employee taxation in the British Virgin Islands.
the Company is exempt from all
11. Pension plan
Effective December 1, 2003, the Company established the MWM Global Retirement Plan (the ‘‘Plan’’). The
Plan is a defined contribution plan whereby the Company contributes 5% of each participating employee’s
salary to the Plan. The total amount recognized as an expense under the plan was $11,587, $11,648, and
$11,319 for the years ended December 31, 2016, 2015 and 2014, respectively.
12. Financial instruments
Credit risk:
Financial assets that potentially subject the Company to concentrations of credit risk consist principally of
cash and cash equivalents, accounts receivable and intercompany loans receivable. The Company’s cash is
placed with high credit quality financial institutions. The accounts receivable are due from the Company’s sole
customer, the BVI government. As a result, the Company is subject to credit risk to the extent of any
non-performance by the BVI government.
Interest rate risk:
The Company has no long-term debt as of December 31, 2016.
Fair values:
As of December 31, 2016 and 2015, the carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair values due to the short term maturities of these
assets and liabilities.
13. Subsequent events
On January 3, 2017, the Company declared a cash dividend of $1.50 per share to the shareholders of record
on that date, amounting to total dividends and profit sharing rights payable of $2,520,000.
The Company has evaluated subsequent events through the date the financial statements were issued and has
determined that other than as disclosed in these consolidated financial statements, the Company is not aware
of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report
that would have a material impact on its consolidated financial statements.
113
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are the Company’s controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934, as amended (the ‘‘Exchange Act’’) is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed by us
in the reports that we file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as appropriate,
to allow timely
decisions regarding required disclosure. Our management recognizes that any controls and procedures, no
matter how well designed and operated, can only provide reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the possible controls and procedures.
Our management has evaluated, with the participation of our principal executive officer and principal financial
officer, the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that
evaluation, our management,
including our principal executive officer and principal financial officer, has
concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and
procedures were effective at the reasonable assurance level.
Internal Control Over Financial Reporting
(a) Management’s Annual Report on Internal Control Over Financial Reporting
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Company management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process designed by, or under the
supervision of, our principal executive officer and principal financial officer and effected by the
Company’s Board of Directors, management and other personnel
to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the United States of America and
includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles in the United States
of America, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of the Company’s assets that could have a material effect on the financial statements.
limitations,
Because of inherent
internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2016. In making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated
Framework (2013).
114
Based on our assessment, management has concluded that, as of December 31, 2016, the Company’s
internal control over financial reporting was effective at the reasonable assurance level.
The Company’s independent registered public accounting firm, Marcum LLP, has issued a report on the
effectiveness of
report appears in
ITEM 9A(b).
the Company’s internal control over financial
reporting. Their
(b) Attestation Report of the Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Stockholders
Consolidated Water Co. Ltd.
We have audited Consolidated Water Co. Ltd.’s (the ‘‘Company’’) internal control over financial reporting
as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (2013). The Company’s
management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management Annual Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that degree of compliance with
the policies or procedures may deteriorate.
In our opinion, Consolidated Water Co. Ltd. maintained, in all material aspects, effective internal control
over financial
reporting as of December 31, 2016, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013).
115
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 31, 2016 and 2015 and the related
consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows for
each of the years in the three-year period ended December 31, 2016 of the Company and our report
dated March 16, 2017 expressed an unqualified opinion on those financial statements.
/s/ Marcum LLP
Fort Lauderdale, Florida
March 16, 2017
(c) Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection
with the evaluation of such internal control that occurred during the Company’s last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
116
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item with respect to our directors and the nomination process is contained in the
proxy statement for our 2016 Annual Meeting of Shareholders to be filed with the SEC (the ‘‘Proxy
Statement’’) under the heading ‘‘Proposal 1 — Election of Group II Directors’’ and is incorporated by
reference in this Annual Report.
Information required by this item with respect to our executive officers is set forth in the Proxy Statement
under the heading ‘‘Executive Officers.’’
contained in the Proxy Statement under
Information required by this item with respect to our audit committee and our audit committee financial expert
is
the heading ‘‘Proposal 1 — Election of Group II
Directors — Committees of the Board of Directors — Audit Committee’’ and is incorporated by reference in
this Annual Report.
Information required by this item with respect to compliance with Section 16(a) of the Exchange Act is
contained in the Proxy Statement under
Information Regarding Executive
Compensation — Section 16(a) Beneficial Ownership Reporting Compliance’’ and is incorporated by reference
in this Annual Report.
the heading ‘‘Additional
The Board of Directors has adopted a Code of Business Conduct and Ethics (the ‘‘Code’’) that applies to all
of the Company’s directors, officers (including the principal executive officer, principal financial officer and
principal accounting officer) and employees. Information related to the Code is contained in the Proxy
Statement under the heading ‘‘Proposal 1 — Election of Group II Directors — Governance of the Company’’
and is incorporated by reference in this Annual Report.
We intend to disclose future amendments to certain provisions of the Code, or waivers of such provisions
granted to executive officers and directors, on our website within four business days following the date of
such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
to executive compensation and director compensation is
Information required by this item with respect
contained in the Proxy Statement under
the headings ‘‘Compensation Discussion and Analysis’’ and
‘‘Additional Information Regarding Executive Compensation’’, respectively, and is incorporated by reference
in this Annual Report.
The information required by this item with respect
to compensation committee interlocks and insider
participation is contained in the Proxy Statement under the heading ‘‘Additional Information Regarding
Executive Compensation — Compensation Committee Interlocks and Insider Participation in Compensation
Decisions’’ and is incorporated by reference in this Annual Report. The compensation committee report
required by this item is contained in the Proxy Statement under the heading ‘‘Compensation Discussion and
Analysis — Compensation Committee Report’’ and is incorporated by reference in this Annual Report.
The information required by this item with respect to compensation policies and practices as they relate to the
Company’s risk management
the heading ‘‘Compensation
is contained in the Proxy Statement under
Discussion and Analysis’’ and is incorporated by reference in this Annual Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information required by this item with respect
to security ownership of certain beneficial owners and
management is contained in the Proxy Statement under the heading ‘‘Security Ownership of Certain Beneficial
Owners and Management and Related Shareholders Matters’’ and is incorporated by reference in this Annual
Report.
117
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by this item with respect to such contractual relationships and director independence is
contained in the Proxy Statement under
Information Regarding Executive
Compensation — Transactions With Related Persons’’ and is incorporated by reference in this Annual Report.
the headings ‘‘Additional
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information with respect to principal accounting fees and services are contained in the Proxy Statement under
the heading ‘‘Proposal 4 Ratification of the Selection of Independent Accountants — Principal Accounting
Fees and Services’’ and is incorporated by reference in this Annual Report.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
1. Financial Statements
The Consolidated Water Co. Ltd. Financial statements found in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA are incorporated herein by reference.
Pursuant to Rule 3-09 of Regulation S-X, when either the first or third condition set forth in Rule 1-02(w),
substituting 20 percent for 10 percent, is met by a 50 percent-or-less-owned person accounted for by the
equity method separate financial statements shall be filed. The Ocean Conversion (BVI) Ltd. financial
statements found in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA are incorporated
herein by reference.
2. Financial Statement Schedules
None
3. Exhibits
The Exhibits listed in the Exhibit Index immediately preceding the Signatures are filed as part of this Annual
Report on Form 10-K.
118
Number
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
10.1.1
10.1.2
10.1.3
10.1.4
10.1.5
10.1.6
CONSOLIDATED WATER CO. LTD.
INDEX TO EXHIBITS FILED WITH 10-K
Exhibit Description
Amended and Restated Memorandum of Association of Consolidated Water Co. Ltd. dated
May 14, 2008 (incorporated by reference to Exhibit 3.1 filed as part of our Form 8-K filed
June 6, 2008, Commission File No. 0-25248)
Amended and Restated Articles of Association of Consolidated Water Co. Ltd. dated May 10,
2006 (incorporated by reference to Exhibit 4.2 filed as part of our Form F-3 filed October 12,
2006, Commission File No. 333-137970)
Amendment to Articles of Association of Consolidated Water Co. Ltd. dated May 11, 2007
(incorporated by reference to Exhibit 3.1 filed as part of our Form 8-K filed May 14, 2007,
Commission File No. 0-25248)
Amendment to Articles of Association of Consolidated Water Co. Ltd. dated May 26, 2009
(incorporated by reference to Exhibit 3.1 filed as part of our Form 8-K filed May 27, 2009,
Commission File No. 0-25248)
Option Deed, dated August 6, 1997, between Cayman Water Company Limited and American
Stock Transfer & Trust Company (incorporated herein by reference to the exhibit filed on our
Form 6-K, dated August 7, 1997, Commission File No. 0-25248)
Deed of Amendment of Option Deed dated August 8, 2005 (incorporated herein by reference
to Exhibit 4.2 filed as a part of our Form 8-K dated August 11, 2005, Commission File
No. 0-25248)
Second Deed of Amendment of Option Deed, dated September 27, 2005 (incorporated herein
by reference to Exhibit 4.2 filed as a part of our Form 8-K dated October 3, 2005,
Commission File No. 0-25248)
Third Deed of Amendment to Option Deed, dated May 30, 2007 (incorporated herein by
reference to Exhibit 4.3 filed as part of our Form 8-K filed June 1, 2007, Commission File
No. 0-25248)
License Agreement dated July 11, 1990 between Cayman Water Company Limited and the
Government of the Cayman Islands (incorporated herein by reference to the exhibit filed as a
part of our Form 20-F dated December 7, 1994, Commission File No. 0-25248)
First Amendment to License Agreement dated September 18, 1990 between Cayman Water
Company Limited and the Government of the Cayman Islands. (incorporated herein by
reference to the exhibit filed as a part of our Form 20-F dated December 7, 1994, Commission
File No. 0-25248)
Second Amendment to License Agreement dated February 14, 1991 between Cayman Water
Company Limited and the Government of the Cayman Islands. (incorporated herein by
reference to the exhibit filed as a part of our Form 20-F dated December 7, 1994, Commission
File No. 0-25248)
Third Amendment to a License to Produce Potable Water dated August 15, 2001 between
Consolidated Water Co. Ltd. by the Government of the Cayman Islands (incorporated herein
by reference to Exhibit 10.4 filed as a part of our Form 10-K for the fiscal year ended
December 31, 2001, Commission File No. 0-25248)
Fourth Amendment to a License to Produce Potable Water dated February 1, 2003 between
Consolidated Water Co. Ltd. by the Government of the Cayman Islands (incorporated herein
by reference to Exhibit 10.5 filed as a part of our Form 10-K for the fiscal year ended
December 31, 2002, Commission File No. 0-25248)
Amendment
to License Agreement dated July 20, 2010 between the Government of the
Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to
Exhibit 10 filed as a part of our Form 8-K filed July 23, 2010, Commission File No. 0-25248)
119
Number
10.1.7
10.1.8
10.1.9
10.1.10
10.1.11
10.1.12
10.1.13
10.1.14
10.2
10.3.1*
10.3.2*
10.3.3*
10.4*
Exhibit Description
Amendment to a License to Produce Potable Water dated July 11, 2012 between Cayman
Water Company Limited and the Government of the Cayman Islands (incorporated herein by
reference to Exhibit 10.1 filed as a part of our Form 10-Q for the second quarter ended
June 30, 2012, Commission File No. 0-25248)
Amendment to License Agreement dated December 31, 2012 between the Government of the
Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to
Exhibit 10.1 filed as a part of our Form 8-K filed March 4, 2013, Commission File
No. 0-25248)
to License Agreement dated April 24, 2013 between the Government of the
Amendment
Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to
Exhibit 10.1.9 filed as a part of our Form 10-K for the fiscal year ended December 31, 2013,
Commission File No. 0-25248)
Amendment to License Agreement dated November 6, 2013 between the Government of the
Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to
Exhibit 10.1.10 filed as a part of our Form 10-K for the fiscal year ended December 31, 2013,
Commission File No. 0-25248)
to License Agreement dated June 30, 2014 between the Government of the
Amendment
Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to
Exhibit 10.1 to our Form 8-K filed July 14, 2014, Commission File No. 0-25248)
Amendment to License Agreement dated January 20, 2015 between the Government of the
Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to
Exhibit 10.1.12 filed as a part of our Form 10-K for the fiscal year ended December 31, 2014,
Commission File No. 0-25248)
Amendment to License Agreement dated August 5, 2015 between the Government of the
Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to
Exhibit 10.1.13 filed as a part of our Form 10-K for the fiscal year ended December 31, 2015,
Commission File No. 0-25248)
Amendment
to License Agreement dated April 11, 2016 between the Government of the
Cayman Islands and Cayman Water Company Limited (incorporated by reference to
Exhibit 10.1 filled as part of our Form 10-Q for the fiscal quarter ended June 30, 2016,
Commission File No. 0-25248)
Water Supply Agreement dated December 18, 2000 between Consolidated Water Co. Ltd. and
South Bimini International Ltd. (incorporated herein by reference to Exhibit 10.2 filed as a
part of our Form 10-K for the fiscal year ended December 31, 2000, Commission File
No. 0-25248)
Employment contract dated December 5, 2003 between Frederick McTaggart and Consolidated
Water Co. Ltd. (incorporated herein by reference to Exhibit 10.18 filed as a part of our
Form 10-K for the fiscal year ended December 31, 2003, Commission File No. 0-25248)
Amendment of Engagement Agreement dated September 14, 2007 between Frederick W.
McTaggart and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.2
to our Form 8-K filed September 19, 2007, Commission File No. 0-25248)
Third Amendment of Engagement Agreement dated September 9, 2009 between Frederick W.
McTaggart and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.1
to our Form 8-K filed September 9, 2009, Commission File No. 0-25248)
Engagement Agreement dated January 15, 2008 between David Sasnett and Consolidated
Water Co. Ltd. (incorporated herein by reference to Exhibit 10.1 filed as part of our Form 8-K
filed January 22, 2008, Commission File No. 0-25248)
120
Number
10.5*
10.6*
10.7*
10.8
10.9*
10.10*
10.11*
10.12
10.13
10.14
10.15
10.16.1
10.16.2
10.16.3
10.16.4
Exhibit Description
Employment contract dated January 14, 2008 between Ramjeet Jerrybandan and Consolidated
Water Co. Ltd. (incorporated herein by reference to Exhibit 10.11 filed as part of our
Form 10-K for the fiscal year ended December 31, 2008, Commission File No. 0-25248)
Employment contract dated January 16, 2008 between Gerard Pereira and Consolidated Water
Co. Ltd. (incorporated herein by reference to Exhibit 10.12 filed as a part of our Form 10-K
for the fiscal year ended December 31, 2008, Commission File No. 0-25248)
Engagement Agreement dated July 12, 2011 between John Tonner and Consolidated Water Co.
Ltd. (incorporated herein by reference to Exhibit 10.1 filed as a part of our Form 8-K filed
August 5, 2011, Commission File No. 0-25248).
Specimen Service Agreement between Cayman Water Company Limited and consumers
(incorporated herein by reference to the exhibit filed as part of our Registration Statement on
Form F-1 dated March 26, 1996)
Summary Share Grant Plan for Directors (incorporated herein by reference to Exhibit 10.24
filed as part of our Registration Statement on Form F-2 dated May 17, 2000, Commission File
No. 333-35356)
Employee Share Option Plan (incorporated herein by reference to Exhibit 10.26 filed as a
part of our Form 10-K for the fiscal year ended December 31, 2001, Commission File
No. 0-25248)
2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 filled as part of our
Form 10-Q for the fiscal quarter ended September 30, 2008, Commission File No. 0-25248)
Agreement dated February 1, 2002 between Consolidated Water Co. Ltd. and Cayman Hotel
and Golf Inc. (incorporated herein by reference to Exhibit 10.31 filed as a part of our
Form 10-K for the fiscal year ended December 31, 2001, Commission File No. 0-25248)
Lease dated December 10, 2001 between Cayman Hotel and Golf Inc. and Consolidated Water
Co. Ltd. (incorporated herein by reference to Exhibit 10.52 filed as a part of our Form 10-K
for the fiscal year ended December 31, 2001, Commission File No. 0-25248)
Amended Lease dated April 27, 1993 signed January 2, 2004 between Government of Belize
and Belize Water Limited (incorporated herein by reference to Exhibit 10.36 filed as a part of
our Form 10-K for the fiscal year ended December 31, 2003, Commission File No. 0-25248)
Loan Agreement dated February 7, 2003 between Consolidated Water Co. Ltd. and Scotiabank
(Cayman Islands) Ltd. (incorporated herein by reference to Exhibit 10.1 filed as a part of our
Form 8-K dated February 13, 2003, Commission File No. 0-25248)
Loan Agreement dated May 25, 2005 between Ocean Conversion (BVI), Ltd. and
Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 99.1 filed as a part
of our Form 8-K dated June 1, 2005, Commission File No. 0-25248)
Debenture Agreement dated August 24, 2007 between Ocean Conversion (BVI), Ltd. and
Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.31.2 filed as a
part of our Form 10-K for the fiscal year ended December 31, 2009, Commission File
No. 0-25248)
Amending Debenture Agreement dated March 14, 2008 between Ocean Conversion (BVI),
Ltd. and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.31.3
filed as a part of our Form 10-K for the fiscal year ended December 31, 2009, Commission
File No. 0-25248)
Second Amending Debenture Agreement dated February 18, 2009 between Ocean Conversion
(BVI), Ltd. and Consolidated Water Co. Ltd.
(incorporated herein by reference to
Exhibit 10.31.4 filed as a part of our Form 10-K in the fiscal year ended December 31, 2009,
Commission File No. 0-25248)
121
Number
10.16.5
10.16.6
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29.1†
Exhibit Description
Amending Loan Agreement dated August 20, 2009 between Ocean Conversion (BVI), Ltd.
and Consolidated Water Co. (incorporated herein by reference to Exhibit 10.31.5 filed as a
part of our Form 10-K for the fiscal year ended December 31, 2009, Commission File
No. 0-25248)
Amending Loan Agreement dated February 10, 2010 between Ocean Conversion (BVI), Ltd.
and Consolidated Water Co. (incorporated herein by reference to Exhibit 10.31.6 filed as a
part of our Form 10-K for the fiscal year ended December 31, 2009, Commission File
No. 0-25248)
Trust Deed dated August 4, 2006 between Consolidated Water Co. Ltd. and Dextra Bank &
Trust Co. Ltd. (incorporated herein by reference to Exhibit 10.1 filed as a part of our
Form 8-K filed August 9, 2006, File No. 0-25248)
Subscription Agreement dated August 4, 2006 between Consolidated Water Co. Ltd. and
Scotiatrust and Merchant Bank Trinidad & Tobago Limited (incorporated herein by reference
to Exhibit 10.2 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)
Deed of Second Debenture dated August 4, 2006 between Consolidated Water Co. Ltd. and
Dextra Bank & Trust Co. Ltd. (incorporated herein by reference to Exhibit 10.5 filed as a part
of our Form 8-K filed August 9, 2006, File No. 0-25248)
Deed of Second Collateral Debenture dated August 4, 2006 between Cayman Water Company
Limited and Dextra Bank & Trust Co. Ltd. (incorporated herein by reference to Exhibit 10.6
filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)
Equitable Charge of Shares dated August 4, 2006 between Consolidated Water Co. Ltd. and
Dextra Bank & Trust Co. Ltd. (incorporated herein by reference to Exhibit 10.7 filed as a part
of our Form 8-K filed August 9, 2006, File No. 0-25248)
Intercreditor Deed dated August 4, 2006 among Scotiabank & Trust (Cayman) Ltd., Dextra
Bank & Trust Co. Ltd., Consolidated Water Co. Ltd. and Cayman Water Company Limited
(incorporated herein by reference to Exhibit 10.8 filed as a part of our Form 8-K filed
August 9, 2006, File No. 0-25248)
Cayman Islands Collateral Charge, West Bay Beach South Property, Block 12D, Parcel
79REM1/2 (incorporated herein by reference to Exhibit 10.9 filed as a part of our Form 8-K
filed August 9, 2006, File No. 0-25248)
Cayman Islands Collateral Charge, West Bay Beach North, Block 11D, Parcel 40
(incorporated herein by reference to Exhibit 10.10 filed as a part of our Form 8-K filed
August 9, 2006, File No. 0-25248)
Cayman Islands Collateral Charge, West Bay Beach North, Block 11D, Parcel 8 (incorporated
herein by reference to Exhibit 10.11 filed as a part of our Form 8-K filed August 9, 2006, File
No. 0-25248)
Cayman Islands Collateral Charge, West Bay North East, Block 9A, Parcel 8 (incorporated
herein by reference to Exhibit 10.12 filed as a part of our Form 8-K filed August 9, 2006, File
No. 0-25248)
Cayman Islands Collateral Charge, West Bay North East, Block 9A, Parcel 469 (incorporated
herein by reference to Exhibit 10.13 filed as a part of our Form 8-K filed August 9, 2006, File
No. 0-25248)
Loan Agreement dated as of October 4, 2006, by and between Royal Bank of Canada and
Consolidated Water (Bahamas) Ltd. (incorporated herein by reference to Exhibit 10.1 filed as
a part of our Form 8-K filed October 6, 2006, File No. 0-25248)
Form of Agreement
for Desalinated Water Supply dated May 2005 among Water and
Sewerage Corporation, Consolidated Water Co. Ltd. and Consolidated Water (Bahamas)
Limited (incorporated herein by reference to Exhibit 10.1 filed as a part of our Form 8-K filed
February 4, 2011, File No. 0-25248)
122
Number
10.29.2†
10.29.3†
10.30.1
10.30.2
10.30.3
10.30.4
10.31
10.32
21.1**
23.1**
23.2**
31.1**
31.2**
32.1**
32.2**
Exhibit Description
Letter of Acceptance dated January 25, 2011 (effective January 31, 2011) between Water and
Sewerage Corporation and Consolidated Water Co. Ltd. (incorporated herein by reference to
Exhibit 10.2 filed as a part of our Form 8-K filed February 4, 2011, File No. 0-25248)
Proposal letter dated December 8, 2010 addressed to the Water and Sewerage Corporation
(incorporated herein by reference to Exhibit 10.3 filed as a part of our Form 8-K filed
February 4, 2011, File No. 0-25248)
N.S.C. Agua S.A. de C.V. agreement for the purchase of 12 hectares of land dated May 16,
2013 (incorporated herein by reference to Exhibit 10.32.1 filed as a part of our Form 10-K for
the fiscal year ended December 31, 2013, Commission File No. 0-25248)
Appendix to N.S.C. Agua S.A. de C.V. agreement for the purchase of 12 hectares of land
dated May 16, 2013 (incorporated herein by reference to Exhibit 10.32.2 filed as a part of our
Form 10-K for the fiscal year ended December 31, 2013, Commission File No. 0-25248)
Exhibit Index to N.S.C. Agua S.A. de C.V. agreement for the purchase of 12 hectares of land
dated May 16, 2013 (incorporated herein by reference to Exhibit 10.32.3 filed as a part of our
Form 10-K for the fiscal year ended December 31, 2013, Commission File No. 0-25248)
Exhibits to N.S.C. Agua S.A. de C.V. agreement for the purchase of 12 hectares of land dated
May 16, 2013 (incorporated herein by reference to Exhibit 10.32.4 filed as a part of our
Form 10-K for the fiscal year ended December 31, 2013, Commission File No. 0-25248)
Stock Purchase Agreement dated February 11, 2016 among Consolidated Water U.S. Holdings,
Inc., Aerex Industries, Inc. and Thomas Donnick, Jr. (incorporated herein by reference to
Exhibit 10.1 filed as a part of our Form 8-K filed February 16, 2016, File No. 0-25248)
Public-Private Partnership Contract dated August 22, 2016 among Aguas de Rosarito S.A.P.I.
de C.V., the State Water Commission of Baja California, the Government of Baja California
represented by the Secretary of Planning and Finance, and the Public Utilities Commission of
Tijuana. (incorporated herein by reference to Exhibit 10.1 to be filed as a part of our
amendment to Form 8-K filed August 26, 2016, File No. 0-25248)
Subsidiaries of the Registrant
Consent of Marcum LLP — Consolidated Water Co. Ltd.
Consent of Marcum LLP — Ocean Conversion (BVI) Ltd.
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, Section 906
of the Sarbanes-Oxley Act of 2002
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, Section 906
of the Sarbanes-Oxley Act of 2002
101.INS**
XBRL Instance Document
101.SCH** XBRL Taxonomy Schema
101.CAL** XBRL Taxonomy Calculation Linkbase
101.DEF** XBRL Taxonomy Definition Linkbase
101.LAB** XBRL Taxonomy Label Linkbase
101.PRE** XBRL Taxonomy Presentation Linkbase
Indicates a management contract or compensatory plan.
*
** Filed herewith.
†
Portions of these Exhibits have been omitted pursuant to a request for confidential treatment.
123
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CONSOLIDATED WATER CO. LTD.
By: /s/ Wilmer F. Pergande
Wilmer F. Pergande
Chairman of the Board of Directors
Dated: March 16, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
By: /s/ Wilmer F. Pergande
Wilmer F. Pergande
Chairman of the Board of Directors
March 16, 2017
By: /s/ Frederick W. McTaggart
Frederick W. McTaggart
Director, Chief Executive Officer and President
(Principal Executive Officer)
March 16, 2017
By: /s/ David W. Sasnett
David W. Sasnett
By: /s/ Brian E. Butler
Brian E. Butler
By: /s/ Carson K. Ebanks
Carson K. Ebanks
By: /s/ Richard L. Finlay
Richard L. Finlay
By: /s/ Clarence B. Flowers, Jr.
Clarence B. Flowers, Jr.
By: /s/ Leonard J. Sokolow
Leonard J. Sokolow
By: /s/ Raymond Whittaker
Raymond Whittaker
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
Director
Director
Director
Director
Director
Director
124
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
In connection with the Form 10-K of Consolidated Water Co. Ltd. for the fiscal year ended December 31,
2016, as filed with the Securities and Exchange Commission on the date hereof, I, Frederick W. McTaggart,
certify, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, that:
1.
I have reviewed the Form 10-K of Consolidated Water Co. Ltd.
December 31, 2016;
for
the fiscal year ended
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
to provide reasonable assurance
financial reporting to be designed under our supervision,
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 16, 2017
By:
Name:
Title:
/s/ Frederick W. McTaggart
Frederick W. McTaggart
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
In connection with the Form 10-K of Consolidated Water Co. Ltd. for the fiscal year ended December 31,
2016, as filed with the Securities and Exchange Commission on the date hereof, I, David W. Sasnett, certify,
pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, that:
1.
I have reviewed the Form 10-K of Consolidated Water Co. Ltd.
December 31, 2016;
for
the fiscal year ended
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
to provide reasonable assurance
financial reporting to be designed under our supervision,
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 16, 2017
By:
/s/ David W. Sasnett
Name: David W. Sasnett
Title:
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Form 10-K of Consolidated Water Co. Ltd. for the year ended December 31, 2016 as
filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Frederick W.
McTaggart, certify, pursuant
the
Sarbanes-Oxley Act of 2002, that:
to 18 U.S.C. Sec. 1350, as adopted pursuant
to Section 906 of
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects,
the financial
condition and result of operations of the Company.
Date: March 16, 2017
By:
/s/ Frederick W. McTaggart
Name: Frederick W. McTaggart
Chief Executive Officer
Title:
(Principal Executive Officer)
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Form 10-K of Consolidated Water Co. Ltd. for the year ended December 31, 2016 as
filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, David W. Sasnett,
certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects,
the financial
condition and result of operations of the Company.
Date: March 16, 2017
By:
/s/ David W. Sasnett
Name: David W. Sasnett
Title:
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
CORPORATE INFORMATION
Board of Directors
Wilmer F. Pergande
Independent Consultant
WF Pergande Consulting LLC
Chairman of the Board
Consolidated Water Co. Ltd.
Frederick W. McTaggart
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Consolidated Water Co. Ltd.
Richard L. Finlay
Attorney-at-Law and Notary Public
Cayman Islands
Clarence B. Flowers, Jr.
Real Estate Developer
Orchid Development Company Ltd.
Director
C.L. Flowers & Sons
Brian E. Butler
Property Developer
Butler Development Group
Leonard J. Sokolow
CEO and President
Newbridge Financial, Inc.
Carson K. Ebanks, MBE, JP
Retired Permanent Secretary of Finance
Tourism and Development
Cayman Islands Government
Raymond Whittaker
Principal
FCM, Ltd.
INDEPENDENT ACCOUNTANTS
Marcum LLP
450 East Las Olas Boulevard, Suite 950
Ft. Lauderdale, FL 33301 USA
LEGAL COUNSEL
Duane Morris LLP
200 South Biscayne Boulevard, Suite 3400
Miami, FL 33131 USA
PRINCIPAL BANKERS
Scotiabank & Trust (Cayman) Ltd.
P.O. Box 689
Grand Cayman, KY1-1107
Cayman Islands
Fidelity Merchant Bank &
Trust Limited
51 Frederick Street
P.O. Box CB-12337
Nassau, The Bahamas
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Frederick W. McTaggart
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Armando V. Averhoff
Vice President of Information Technology
David W. Sasnett
Executive Vice President and
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John B. Tonner
Executive Vice President and
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Ramjeet Jerrybandan
Executive Vice President of
Operations
Brent A. Brodie
Vice President of Sales and Marketing
Gregory S. McTaggart
Vice President of Cayman Operations
Robert B. Morrison
Vice President of Procurement & Logistics
Douglas R. Vizzini
Vice President of Finance
Transfer Agents & Registrar
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
REGISTERED AND PRINCIPAL OFFICE
Consolidated Water Co. Ltd.
(cid:53)(cid:72)(cid:74)(cid:68)(cid:87)(cid:87)(cid:68)(cid:3)(cid:50)(cid:73)(cid:429)(cid:70)(cid:72)(cid:3)(cid:51)(cid:68)(cid:85)(cid:78)
Windward Three, 4th Floor
West Bay Road
P.O. Box 1114
Grand Cayman, KY1-1102
Cayman Islands
TEL: (345) 945-4277
FAX: (345) 949-2957
EMAIL: info@cwco.com
www.cwco.com
STOCK EXCHANGE LISTING
The Company’s common shares trade on
the NASDAQ Global Select Market. The
trading symbol is “CWCO.” “The Nasdaq
Stock Market, Inc.” or “NASDAQ” is a
highly regulated electronic securities
market comprising of competing Market
Makers whose trading is supported
by a communications network linking
them to quotation dissemination, trade
reporting, and execution systems.
FORMS 10-Q AND 10-K
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Reports with the U.S. Securities and
Exchange Commission on Form 10-Q
and 10-K, pursuant to the Securities
Exchange Act of 1934.
A copy of these reports may be
obtained by calling or writing to the
(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:393)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:82)(cid:73)(cid:429)(cid:70)(cid:72)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
address shown on overleaf, attention:
Investor Relations Department, or
alternatively online at the SEC website
www.sec.gov.
Consolidated Water Co. Ltd.
(cid:90)(cid:286)(cid:336)(cid:258)(cid:425)(cid:258)(cid:3)(cid:75)(cid:312)(cid:272)(cid:286)(cid:3)(cid:87)(cid:258)(cid:396)(cid:364)
(cid:116)(cid:349)(cid:374)(cid:282)(cid:449)(cid:258)(cid:396)(cid:282)(cid:3)(cid:100)(cid:346)(cid:396)(cid:286)(cid:286)(cid:853)(cid:3)(cid:1008)(cid:410)(cid:346)(cid:3)(cid:38)(cid:367)(cid:381)(cid:381)(cid:396)
(cid:116)(cid:286)(cid:400)(cid:410)(cid:3)(cid:17)(cid:258)(cid:455)(cid:3)(cid:90)(cid:381)(cid:258)(cid:282)
(cid:87)(cid:856)(cid:75)(cid:856)(cid:3)(cid:17)(cid:381)(cid:454)(cid:3)(cid:1005)(cid:1005)(cid:1005)(cid:1008)
(cid:39)(cid:396)(cid:258)(cid:374)(cid:282)(cid:3)(cid:18)(cid:258)(cid:455)(cid:373)(cid:258)(cid:374)(cid:853)(cid:3)(cid:60)(cid:122)(cid:1005)(cid:882)(cid:1005)(cid:1005)(cid:1004)(cid:1006)
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