Government negotiates Consolidated Water licence

Change to water rate determination sought

Consolidated Water, the water
company that supplies West Bay and Seven Mile Beach through its wholly owned
subsidiary Cayman Water with desalinated potable water, received a three-month
extension to its licence on 20 July to help it negotiate a new licence with the
government.

Consolidated Water has been in
negotiations with the government over a new licence since June 2008. However,
its previous licence expired on 10 July, 2010, before terms could be agreed.

In a filing with the Securities and
Exchange Commission, the water company said during the course of the
negotiations the Cayman Islands Government has indicated that it seeks to
restructure the terms of a new agreement. According to the filing, the
Government would like to implement a water rate that is derived from a rate of
return on invested capital.

Consolidated Water is concerned
that this new formula could offer customers lower water rates, resulting in a
lower operating income for the company. 

“Depending upon the terms included
in such new licence, the company’s water rates to customers could be reduced,
thereby resulting in a corresponding reduction in the company’s operating
income as compared to operating income that the company has historically
generated under the licence,” Consolidated Water said in its filing.

If during the three months new
terms cannot be agreed, Consolidated Water will retain the right of first
refusal to a new licence on the same terms that the government might offer
another provider. This means that a new licence would have to be offered to
Consolidated Water first.

But the company warns in its filing
“the terms of the new licence agreement may not be as favourable to the company
as the terms under which the company is presently operating”.

In 2009 Consolidated Water derived
40 per cent of its revenues and 59 per cent of its gross profits from the
retail business in Grand Cayman.

Consolidated Water sells water to
residential and commercial customers through its wholly owned subsidiary Cayman
Water. The company pays a royalty of 7.5 per cent of gross retail water sales
revenues to the government under its exclusive licence for the service area.
Water rates vary according to volume purchased and are adjusted for inflation
or deflation as well as the cost of electricity.

Water rates for residential
customers and public authorities are between 12.2 per cent and 18.9 per cent
higher with Cayman Water than they are with the Water Authority. Small
commercial customers have 19 per cent higher rates with Cayman Water than with
the Water Authority, whereas the rates for larger commercial customers are the
same.

In a previous filing with the SEC
in March 2009, Consolidated Water stated that it had formally objected to the
adoption of a rate of return on invested capital model to determine water
rates, because “such a model would not promote the efficient operation of our
water utility and could ultimately increase water rates to our customers”.   As a major risk factor the company pointed
out that if it was unable to renew the exclusive licence or if the terms of a
new licence were less favourable to the company, it would adversely impact the
company’s revenues, cash flows and operational results.

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