The demise Tuesday of Cadiz Inc.'s plan to build a multimillion-dollar water storage project in the Mojave Desert places the company under a huge financial strain that raises the question of whether it can survive.
The project, which was to be built in partnership with the Metropolitan Water District of Southern California, was to generate an estimated $500 million to $1 billion in revenue for the company over the next 50 years. It also was to become the centerpiece of its transformation from a modest agricultural producer to a global water resource enterprise.
The MWD board voted Tuesday, however, to abandon the project, citing, among other concerns, the company’s questionable financial strength and doubts that the district could be adequately protected against the possibility of a Cadiz default on its joint obligations.
Cadiz suggested in a statement Tuesday night that the MWD may have violated its contract with the company by killing the project before formally reviewing its environmental impact report.
“From our perspective, they are obligated by the contract to complete the environmental review process,” said Cadiz spokeswoman Wendy Mitchell. Mitchell would not say whether the company was planning litigation, a bankruptcy filing or any other action.
“We are reviewing all of our options right now,” she said.
MWD lawyers maintained, however, that the board’s action was “legally defensible.”
Cancellation of the project comes at an exceptionally perilous moment for Santa Monica-based Cadiz. An interest payment of $7 million to bondholders is due within a week. A bank loan of about $35 million is due at the end of January. That loan from ING Baring Bank has customarily been rolled over each year on the expectation that it would eventually be paid off from water project revenue--now a dashed hope.
Shareholders are likely to feel as pained as debt holders. Cadiz shares fell 76% on Nasdaq on Tuesday, closing at 36 cents, on stunning volume of 5.6 million shares--even before the MWD vote was taken. A similar fall presumably awaits the stock today. The stock traded at more than $8 as recently as June 30.
The collapse of the project also places a harsh light on Keith Brackpool, the company’s chairman and chief executive and the leading promoter of the water project.
Brackpool made himself a prominent figure on the California political scene by contributing liberally to Democratic candidates, especially Gov. Gray Davis, who received more than $235,000 from Brackpool and Cadiz over the last four years.
He placed such party stalwarts as former Rep. Tony Coelho on the Cadiz board and hired Bruce Babbitt, the former Democratic governor of Arizona and Clinton administration Interior secretary, to head a subsidiary devoted to developing water resource clients in the Middle East.
This gave Cadiz a high profile when it was promoting its pet project to the politically sensitive MWD in the late 1990s.
But investment professionals say Brackpool also kept many bondholders and shareholders mollified as the water project faltered by minimizing the bureaucratic and political challenges it faced. This included overstating its prospects before the MWD, critics say, even as the water district’s professional staff soured on the plan and political opposition grew.
“Keith tells a great story,” said one investment advisor. “The holders listened to him and got caught with their pants down.”
Cadiz said Brackpool wasn’t available for comment.
Brackpool was supported by a small cadre of investment analysts who continually promoted the stock even as its financial and political position deteriorated. These included Debra Coy, a water industry analyst at Schwab Washington Research Group, a unit of Charles Schwab & Co., and Michael Crawford of Los Angeles-based B. Riley & Co., both of whom kept “buy” recommendations on the shares through the summer.
Throughout that period, however, the company’s deteriorating financial position was becoming obvious.
In July, Cadiz announced that a proposed merger of its money-losing Sun World agricultural operations with a company owned by Saudi Prince Al Waleed ibn Talal ibn Abdulaziz al Saud had fallen through, depriving Cadiz of an opportunity to restructure its crushing debt of more than $140 million.
In August, the company disclosed that Brackpool and former Cadiz Chairman Dwight Makins had both sold large positions in Cadiz stock; Brackpool said his shares had been sold without his knowledge by a bank that held them as collateral.
Meanwhile, the company continued to lose money and net worth. In the second quarter ended June 30, Cadiz lost $6 million, and its shareholder equity--its assets compared with liabilities--shrank to $8.9 million from $17 million at the beginning of the year.