Evil discusses Tesco and Nasdaq-listed Cadiz…

So Tesco (TSCO) is to be investigated for unfair trade practices such as late payment to suppliers and space sales to suppliers who seek to promote their lines.

All this will take time and money and achieve nothing whatsoever. It is just modern government in practice.

All that a supplier has to do is to enter into a supply contract to Tesco and/or other dominant purchasers such that really penal clauses will kick in in the event of late payment. There must be a solicitor out there who can draft on a pro bono basis the necessary clauses. It can be on a website which is here styled www.latepaymentssyndrome.com.

The feature of space sales is also easily dealt with. A supplier can simply decide not to buy such space.

In short, this investigation is a complete waste of time conducted at the cost of everybody.

(I am aware that Tesco has engaged in fishy accounting practices concerning space sales but they are history and in any event nothing to do with unfair trading practices as regards suppliers.)

*****

A few days ago I was sent a set of notes written by a large shareholder of Cadiz (CDZI on Nasdaq) pursuant to a visit to Cadiz in California. My own view is not coloured by any knowledge of local law or politics but the belief that Angelenos need water. Here it comes:

“Meeting with Scott Slater and Tim Shaheen
Burl East and Mark Lindee
1-28-2015

Forward Timeline/Risk Summary

• Definitive Agreements – Company believe they will turn LOI into finals agreements over the next six months and finish in July
• Met – Company believes they will finish negotiations for customer wheeling by August 1.  This seems to include valuing and divvying up the ICS credits.
• BLM – Company believes the BLM should provide a negative declaration (no permit required) by fall of this year as per serving a RR purpose.
• Appeals – Company believes oral arguments will conclude by end of year (unless settled before) and a ruling will follow nearly immediately.

The practical risks are behind us at this point.  We have EIR approval and the lawsuits have been dismissed.  The Met will want to carve up the ICS credits and won’t want the political blow back of not delivering water to central valley farmers, and there is literally NO reading of RR right of way law in which this project does not qualify.  Finally, based on a reading of Judge Adler’s summaries, the appeal will be thrown out. 
There is the theoretical risk that the science is wrong and that years out Cadiz will have depleted the water table and have to reduce pumping.  In a practical sense, we have no way to underwrite this risk as we have a $3M EIR from C2MHill that there is 50,000 AF of renewable water annually.

Valuation Conclusion

Phase I has a present value of $36/share and Phase II has an additional value of about $40/share. Once water is flowing (actually once a shovel hits the ground) the company has a value of ballpark $75 share.  The only assumption that creates any meaningful variation is the required return on the project.  We believe it would be valued like any other large scale infrastructure project with a couple notable positive exceptions. 

• The asset is everlasting and barring some huge change in demand or supply for water the cash flow is perpetual.
• Unlike most infrastructure projects it’s not a depreciating asset (Like a toll bridge for instance)
• Unlike most infrastructure projects, cash flow is known for 50 year into the future at least.  Demand is contractual with take or pay contracts and not subject to market swings
• The buyers are predominantly local or county governments and have A –AA bond ratings.

For this combination of reasons we believe the required IRR would be inside high quality core real estate (like the GM building in NY) which is priced to return 7-8% unlevered.  Our model uses 7%
We do not include any value for ICS ($8.00/ share), front pump (where they move later deliveries to forward deliveries ($5/ share) or REIT/MLP conversion once they deplete NOLs ($40/share).  Final item, we have not applied leverage.

Appeal

Company is processing the appeals in the OC appeals court and feels as of oral arguments will be complete by the end of the year and in Scotts words “the opinion is written beforehand”.  It seems highly likely that court will reaffirm the lower level court and dismiss the cases.  The process is similar to the original process in that is on the record.  The appeals court will review the evidence in the case (the record) look at the judges ruling and decide is the case was a breach of conduct or mis trial or if the judge mis-handled it.
The standard for reversal is very high.  The judge needs to have excluded material evidence or mis-applied the law.  Since this is a simple EIR case in which the lower court decision is simply an application of CEQA law to the project and a review of the record (facts and science), its seems highly likely the court will uphold.
In the meant time Cadiz has approached the plaintiffs on many occasions with offers to settle. The CBD seems more likely to want to settle as (even though they are irrational) Cadiz has value to give them.  Tetra seems very dug in and appears to want to increase the scope of the brine operation.

BLM

The remaining permit (or negative declaration) is from BLM.  Under the 1875 RR act and subsequent revisions (M provision) Cadiz’s use of the RR right of way must serve a railroad purpose.  Cadiz’s program includes
Automated sprinkler system with cameras, heat sensors and piping to contain trestle fires.  Cadiz will build and install this along with the pipeline.

• Fiber optics and communications
• A service road alongside the pipeline and RR, which will allow for easier shift changes and car maintenance
• A steam engine designed for tourists which will stop and take on water from the pipeline
• An in-pipe electrical generation system (lucidpipe) on the downhill slope which will generate enough electricity to run the entire project we think (picture below)

The company has two ex BLM employees on payroll working the process:  David Bernhardt (ex-Solicitor General for the DOI) and Larry Jenson.  They spend most of their time in DC.
The BLM has all the information now and the company thinks they make a decision by late summer.  The company is effectively 100% sure that this qualifies as serving a RR purpose under the law and seems no way for the BLM to interfere.”

—-ENDS—-

Cadiz finished at a shade over $10 last night. There is a large short position, presumably developed in the belief that special interest groups will get their way in blocking Cadiz. But Rudyard Kipling pointed out that when it comes to slaughter (here, if you wish, delete slaughter and insert bathing or bulking up orange squash or whatever) you’ll do your work on water. Plus ca change.