Consolidated Water Co. Ltd. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 13, 2015. The filing also reports unaudited fourth-quarter results. The company develops and operates seawater desalination plants and water distribution systems in the Caribbean and Indonesia. Revenue came primarily from bulk water sales (about 60%) and retail water sales (about 37%); services contributed about 3%.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $65.56 million | $63.82 million |
| Gross profit / margin | $23.12 million / 35% | $23.51 million / 37% |
| Operating income | $6.46 million | $7.66 million |
| Net income attributable to company shareholders | $6.27 million; diluted EPS $0.42 | $8.59 million; diluted EPS $0.58 |
| Cash flow from operations | $19.28 million | $9.74 million |
| Cash and cash equivalents at year-end | $35.71 million | $33.63 million |
| Working capital | $43.3 million | Not stated in the provided text |
| Debt at year-end | $9.0 million demand loan | $5.3 million long-term bonds |
FY2014 revenue increased about 2.7%, while shareholder net income fell about 27%. Gross margin declined to 35% from 37%. Operating cash flow increased mainly as accounts receivable fell following substantial payments from the Bahamas utility. The company ended the year with a $5.0 million certificate of deposit and $456,083 of restricted cash, in addition to cash and cash equivalents.
Fourth-quarter 2014 revenue was $15.26 million, gross profit was $5.07 million, net income attributable to company shareholders was $968,064, and diluted EPS was $0.07. The comparable fourth-quarter 2013 figures were $15.26 million, $5.66 million, $1.09 million, and $0.07, respectively.
Material changes and unusual items
- Retail revenue rose to $24.10 million from $23.02 million, reflecting 3% higher Cayman retail water volumes and increased Bali sales. Retail gross margin eased to 50% from 52%, partly due to higher Cayman maintenance costs and Bali’s negative gross profit.
- Bulk revenue declined to $39.20 million from $39.96 million, mainly because the Bahamas utility bought less water from Blue Hills after reducing distribution losses. Higher Cayman bulk sales partly offset the decline.
- Services revenue rose to $2.25 million from $0.84 million, largely from Cayman plant refurbishment and construction work. The segment’s operating loss widened to $4.19 million from $3.62 million, with Mexico project development costs a significant factor.
- The company recorded an $860,000 impairment loss on its OC-BVI investment in Q4; its carrying value was $5.2 million at year-end. It also reported lower OC-BVI earnings than in 2013, when OC-BVI received a $2 million court-award payment.
- Cash flow from operations benefited from the $7.08 million cash-flow contribution from changes in receivables. Bahamas accounts receivable declined by about $6.9 million after government payments; approximately $7.0 million remained due from the Bahamas utility at year-end.
- The company paid $17.4 million to complete Mexico project land purchases, using liquidated marketable securities and a $10 million demand loan. It repaid $1 million of that loan during 2014; the year-end balance was $9 million. The loan bears interest at LIBOR plus 1.5%, is payable on demand, and otherwise has a remaining balance due in May 2016.
Outlook, risks, and contingencies
- 2015 planned funding needs: About $5.1 million for existing-operations capital expenditures, $2.1 million for demand-loan debt service, and $2.1 million for NSC project development. The filing provides no specific revenue or earnings guidance. Management stated it expected sufficient liquidity for 2015 and thereafter. The 2014 dividend was $0.30 per common share; future dividends remain at the board’s discretion.
- Cayman retail license: The exclusive license, which generated about 36% of consolidated revenue and 53% of gross profit in 2014, had been extended through June 30, 2015. Renewal negotiations remained unresolved. The Water Authority-Cayman favored a rate-of-return model; the company had challenged aspects of the process and warned that new terms could reduce income and cash flows. The filing says negotiations were expected to recommence.
- Mexico project: NSC had spent about $35.2 million developing a proposed 100-million-gallon-per-day plant and pipeline but had no operating revenue. Customer contracts, permits, financing, and a public tender remained outstanding. A February 2015 letter of intent contemplated a financially stronger partner, conditional on the project being awarded. The company warned it might not complete the project.
- OC-BVI: The investment valuation assumes, on a probability-weighted basis, that the BVI government exercises a seven-year extension of the Bar Bay agreement, expiring initially in February 2017, and pays an estimated court award for the Baughers Bay plant. Absent a material extension or change to the Bar Bay agreement, the company expected further 2015 and 2016 impairment losses totaling at least the approximately $2.0 million of goodwill embedded in the investment.
- Other significant exposures: A Belize regulatory dispute remained pending, including an order that could cap the supply arrangement at 450,000 gallons per day; enforcement was stayed by a temporary injunction. NSC contested a Mexican tax assessment of about $390,000; it obtained a favorable judgment, but the tax authority appealed. No provision was recorded, and $456,083 was restricted as collateral.
- Other risks include dependence on the Bahamas Water and Sewerage Corporation and Cayman Water Authority, the month-to-month Windsor plant arrangement (which generated $6.2 million revenue in 2014), seasonal tourism and weather, foreign-exchange exposure, and possible production shortfalls or storm damage.
Most important facts for investors to verify
- Status and terms of the Cayman retail-license renewal, including any extension after June 30, 2015 and the final rate-setting framework.
- Collection timing and collectability of the remaining Bahamas utility receivable, and whether the Windsor supply contract is renewed or otherwise resolved.
- Whether NSC secures a project award, customers, required permits, financing, and a binding partner agreement—and the amount of further development spending required.
- OC-BVI’s Bar Bay contract extension and the outcome and value of the Baughers Bay plant valuation, given the disclosed potential for additional impairment.
- Outcome of the Belize regulatory litigation and the Mexican tax authority’s appeal, including any financial or operating consequences.
- Cash-flow sustainability after the receivables recovery, repayment schedule and demand feature of the loan, and the board’s ability to maintain dividends alongside planned investment.
The independent auditor reported that the consolidated financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective as of December 31, 2014.