Consolidated Water Co. Ltd. quarterly report, Q1 FY2016

Consolidated Water Co. Ltd. — Q1 2016 10-Q

Reporting period: Three months ended March 31, 2016; compared with the three months ended March 31, 2015. The company produces and supplies desalinated water and provides water-related products and services across several countries. Figures are in U.S. dollars.

Key financial results

Metric	Q1 2016	Q1 2015	Change
Total revenue	$14.03 million	$14.67 million	Down 4.3%
Gross profit / margin	$6.18 million / 44%	$6.15 million / 42%	Profit up 0.5%; margin improved
Operating income / margin	$1.72 million / 12.2%	$2.26 million / 15.4%	Down 23.9%
Net income attributable to CWCO stockholders	$2.05 million	$1.92 million	Up 6.9%
Diluted EPS	$0.14	$0.13	Up $0.01
Operating cash flow	$(0.36) million	$2.48 million	Shifted to cash use

Net income attributable to shareholders was about 14.6% of revenue, versus 13.1% a year earlier. The improvement in net income despite lower operating income reflected higher net other income, including a smaller OC-BVI investment impairment and foreign-exchange gains. The income-tax line was a $73,269 benefit in Q1 2016; the filing does not provide a current-period tax expense.

Financial position, liquidity and cash flow

At March 31, cash and cash equivalents were $35.55 million; the company also held a $5.64 million certificate of deposit. Combined cash and certificate of deposit totaled about $41.2 million. Cash and cash equivalents declined $9.24 million from year-end 2015.
Current assets were $59.94 million and current liabilities $12.22 million, giving working capital of approximately $47.7 million. Total assets were $171.32 million; total liabilities were $15.20 million.
The $6.49 million demand loan bore interest at LIBOR plus 1.5%, with its remaining balance due May 14, 2016. Management expected to repay it from available cash. The company also reported a $490,000 loan from Aerex’s former owner, due August 10, 2016, at 1% interest.
Operating cash use reflected, among other items, a roughly $3.5 million net increase in accounts receivable and a $1.1 million decrease in accounts payable and other current liabilities.
Investing cash use was $7.81 million, primarily the $7.74 million net cash cost of acquiring a 51% interest in Aerex. Financing cash use was $1.08 million, including about $1.11 million of common dividends and $0.50 million of demand-loan repayments.
Cash held in the Bahamas and Belize was approximately $17.4 million and $4.6 million, respectively; transfers from those accounts to other countries require central-bank approval. Management said it expected sufficient liquidity for the remainder of 2016 and beyond.

Changes from the prior period and business developments

Retail revenue declined 2.7% to $5.97 million. Water volume rose about 5%, but lower energy-cost adjustments and a 4.4% reduction in first-quarter base rates reduced revenue. Retail operating income fell to $443,000 from $470,000.
Bulk revenue fell 13.3% to $7.27 million, mainly due to lower energy-cost components in Bahamas and Cayman rates. Lower energy expense supported a higher gross margin, 37% versus 35%; bulk operating income declined to $2.22 million from $2.50 million.
Services revenue rose to $799,000 from $148,000, reflecting Aerex, acquired on February 11 for approximately $7.74 million in cash. Aerex contributed about $619,000 revenue and $22,000 net income through quarter-end. The services segment nevertheless reported a $946,000 operating loss, versus a $714,000 loss a year earlier, in part because of higher NSC development and legal costs and Aerex expenses.
Consolidated G&A increased 14.6% to $4.46 million. Management attributed the increase principally to approximately $230,000 more Mexican project-development expense and Aerex’s addition.
The company recorded a $50,000 impairment of its OC-BVI investment, compared with $310,000 in Q1 2015. Q1 2016 foreign-currency transaction gains were approximately $154,000, compared with losses of approximately $175,000 in the prior-year quarter.
Quarterly dividends declared were $0.075 per common share, unchanged from Q1 2015. The board declared a $0.075 dividend payable April 30, 2016.

Outlook, risks and contingencies

Cayman retail license: The existing exclusive license extension was due to expire June 30, 2016, while negotiations for a replacement license remained ongoing. The proposed rate-of-return model and other terms could materially reduce retail operating income and cash flows or result in goodwill impairment. Retail operations generated 42% of Q1 revenue and 56% of gross profit.
Mexico desalination project: NSC submitted its tender for the Baja California project on April 21, 2016. The state’s evaluation timing and outcome were uncertain, and the project requires outside equity partners. NSC held land carried at $20.6 million; failure to win the tender or cancellation could lead to a decline in land value and a material impairment. The company expected additional development spending during 2016.
NSC litigation: EWG challenged transactions that increased the company’s NSC ownership to 99.9%. A Mexican court canceled public-record inscriptions but retained an inspector appointment; other court matters remained pending. The company said the outcome was uncertain and the litigation could impede the project. NSC and CW-Cooperatief also pursued a related U.S. claim.
OC-BVI: The investment’s $4.6 million carrying value assumes, on a probability-weighted basis, an extension of the Bar Bay water agreement beyond its March 4, 2017 expiry and recovery of a pending court award relating to the Baughers Bay plant. The company warned additional 2016 impairment could be required—at least the approximately $850,000 goodwill component—unless the agreement is extended or modified; losses could be greater if Bar Bay operations cease. The BVI government is OC-BVI’s sole customer.
CW-Bali: The plant continued to operate below capacity and recorded a Q1 operating loss of about $147,000; its capitalized plant cost was approximately $3.1 million. The company was seeking a strategic partner and additional customers, including through local utility PDAM. Failure to increase sales could trigger impairment.
Other operating exposures: The Bahamas Windsor plant agreement continued month-to-month; Q1 revenue from the plant was about $1.3 million. A Belize regulatory dispute remained pending, with financial impact undetermined. The filing also cites tourism and weather, foreign economies, government relationships, regulation, and expansion into new markets as risks.
Controls and standards: Management concluded disclosure controls were effective at a reasonable-assurance level and said it was integrating Aerex into internal-control processes. Newly issued revenue-recognition guidance was expected to become effective for the company in 2018; its impact was still under evaluation.

Important facts for investors to verify

Whether the $6.49 million demand loan was repaid at its May 14, 2016 maturity and whether any replacement financing was needed.
Any renewal, extension, or final terms for the Cayman retail license, including rate-setting and exclusivity provisions.
The outcome and financing structure of the Baja California tender, and the recoverability of NSC’s $20.6 million land investment.
Developments in the NSC litigation and the related effect on the project tender or ownership position.
Whether OC-BVI secured a Bar Bay agreement extension and the timing and amount of the Baughers Bay court-award recovery; these assumptions underpin its investment valuation.
Whether CW-Bali can obtain PDAM approval, new customers, or a strategic partner, and whether plant impairment becomes necessary.
Collection of the increased receivables, particularly the approximately $2.5 million increase at CW-Bahamas, and the practical availability of cash subject to transfer approvals.