Item 8.01 Other Events.
As previously disclosed in its reports
filed with the Securities and Exchange Commission, Consolidated Water Co. Ltd. (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”), a British
Virgin Islands company. The Company also owns certain profit sharing rights in OC-BVI that raise its effective interest in the
profits of OC-BVI to approximately 45%.
Until 2009, substantially all of the water
sold by OC-BVI 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”). 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”) for the Baughers Bay plant 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 after
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.
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 of the previous
judgment of 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.
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.
On June 2, 2016, OC-BVI received the
final valuation report from the valuation expert, which sets forth a value for the Baughers Bay plant of $13 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 whether the BVI government will attempt to challenge, or the Appellate Court will
uphold, the Baughers Bay plant valuation or when, if ever, or to what extent the amounts awarded by the Appellate Court 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.