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Contingencies | 9 Months Ended
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Sep. 30, 2016
Commitments and Contingencies Disclosure [Abstract] |
Commitments and Contingencies Disclosure [Text Block] | 9. Contingencies 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 areas. For the three months ended September 30, 2016 and 2015, the Company generated approximately 38%, and 39%, respectively, of its consolidated revenues and 52% and 57%, respectively, of its consolidated gross profit from the retail water operations conducted pursuant to Cayman Water’s exclusive license. For the nine months ended September 30, 2016 and 2015, the Company generated approximately 40% and 41%, respectively, of its consolidated revenues and 55% and 58%, 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 under a further extension of the license that the Company believes will be forthcoming. 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. In October 2012 the Company was notified that the Court agreed to consider the issues raised in the Application. The hearing for this judicial review was held on April 1, 2014. Prior to the commencement of the hearing, the parties agreed that the Court should solely be concerned with the interpretation of the statutory provisions. As part of this agreement, the WAC agreed to consider the Company’s submissions on the RCAM model and/or alternative models of pricing. In June 2014, the Court determined 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. The Company’s submissions on the RCAM model and/or alternative models of pricing were made to the WAC on June 9, 2014. The Company received a letter from the WAC dated September 11, 2014, which fully rejected the Company’s submissions and stated that they intended to provide the Company with a draft RCAM license in due course. On November 21, 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 Company to submit its counter proposal to the WAC’s June 2010 RCAM license draft, and (v) the principle of subsidization of residential customer rates by commercial customer rates would continue under a new license. On March 23 2015, the Company received a letter from the Minister of Works with the following responses to the Company’s November 21, 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 June 2010 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. Such license negotiations remain on-going. The Company is presently unable to determine when such negotiations will be completed or the final outcome of such negotiations. In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“URCO”). This legislation will become law when it is assented to by the Governor of the Cayman Islands and published in the official Cayman Islands Gazette. URCO is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility services, and promoting competition. URCO has the ability to supervise, monitor and regulate multiple utility undertakings and markets. Water utilities are not presently included in the scope of URCO’s regulatory functions and remain under the regulatory control of the WAC. The Company has been advised by government officials that it is government’s intention to include water utilities under the ambit of URCO through additional legislation in 2017. The Company has been further advised that if and when this additional legislation is enacted, the WAC will no longer regulate water utilities since this function will be taken over by URCO. The Company is presently unable to determine (i) when such additional legislation will be enacted and consequently if or when URCO will become its new regulator in the Cayman Islands; or (ii) the impact of URCO on its retail license negotiations. The resolution of these license negotiations could result in a material reduction of the operating income and cash flows the Company has historically generated from its retail license 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. The Company is presently unable to determine what impact the resolution of these matters 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 operating losses were approximately ($2.1 million) and ($80,000) for the three months ended September 30, 2016, and 2015, respectively. CW-Bali’s operating losses were approximately ($2.4 million) and ($383,000) for the nine months ended September 30, 2016, and 2015, respectively. CW-Bali’s operating losses for the three and nine months ended September 30, 2016 include an impairment loss (as discussed later in this note) of $2.0 million to reduce the carrying value of its long-lived assets to their estimated fair value. 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. Since commencing operations, CW-Bali has held discussions with PDAM and other governmental entities for possible water sale arrangements, and CW-Bali is presently pursuing a formal cooperation agreement with PDAM for the sale of water to the resorts in its target market that are not presently served by PDAM. As an Indonesian company that is majority-owned by foreigners, CW-Bali is required to obtain and maintain an “in-principle” (i.e. – short term, temporary) license to operate until such time as it is able to demonstrate that it has invested sufficient capital and made sufficient progress under its business plan to receive a non-temporary business license. The term of CW-Bali’s initial in-principle license ended in October 2016. CW-Bali is applying for a new in-principle license. However, the Indonesian government could decide not to grant CW-Bali a new in-principle license, in which case the Company would be required to cease CW-Bali’s operations and dispose of its investment in this subsidiary. 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. 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 scenario; and (iii) assigning a probability to each scenario. The 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. If 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 in the future, the Company may cease CW-Bali’s operations. The Company will also be required to cease CW-Bali’s operations if CW-Bali does not obtain a new in-principle license. 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 September 30, 2016 totaled $2.1 million, consisting of net assets of approximately $1.51 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 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) and ($533,565) as of September 30, 2016 and December 31, 2015, respectively. 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 September 30, 2016, such balances include IDR-denominated cash, accounts receivable, and accounts payable, which amounted to approximately $20,000, $37,000, and $35,000, respectively, based upon the exchange rate between the IDR and US$ 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. CW-Belize 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 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. Windsor Plant Water Supply Agreement CW-Bahamas provides bulk water to the Water and Sewerage Corporation of The Bahamas (“WSC”), which distributes the water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence. Pursuant to a water supply agreement, CW-Bahamas was required to provide the WSC with at least 16.8 million gallons per week of potable water from the Windsor plant. This water supply agreement was scheduled to expire when CW-Bahamas delivered the total amount of water required under the agreement in July 2013, but has been extended on a month-to-month basis. At the conclusion of the agreement, the WSC has the option to (i) extend the agreement for an additional five years at a rate to be negotiated; (ii) exercise a right of first refusal to purchase any materials, equipment and facilities and CW-Bahamas intends to remove from the site at a purchase price to be negotiated with CW-Bahamas; or (iii) require CW-Bahamas to remove all materials, equipment and facilities from the site. At the request of the government of The Bahamas, CW-Bahamas continues to operate and maintain the Windsor plant on a month-to-month basis to provide the government of The Bahamas with additional time to decide whether or not it will extend CW-Bahamas’ water supply agreement for the Windsor plant on a long-term basis. CW-Bahamas generated revenues from the operation of this plant of approximately $1.3 million and $1.5 million during the three months ended September 30, 2016 and 2015, respectively, and $4.0 million and $4.5 million during the nine months ended September 30, 2016 and 2015, respectively.

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