Consolidated Water Co. Ltd. — Q1 2013 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2013, Consolidated Water produced and supplied desalinated water in the Cayman Islands, Belize and the Bahamas, and provided water-plant engineering and operating services. Results are unaudited and may not indicate full-year performance.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $16.56 million | $16.73 million | Down 1% |
| Gross profit / margin | $6.22 million / 38% | $5.95 million / 36% | Up 5%; margin improved |
| Operating income | $2.65 million | $2.43 million | Up 9% |
| Net income attributable to shareholders | $3.74 million; $0.26 diluted EPS | $2.34 million; $0.16 diluted EPS | Up 60% |
| Operating cash flow | $3.18 million provided | $2.06 million used | Improved |
Revenue declines in retail and bulk water were partly offset by services revenue growth. Gross profit improved as retail and bulk margins strengthened, while services recorded a small gross loss. G&A was $3.57 million, broadly flat year over year. Net income growth was substantially aided by $1.08 million of equity and profit-sharing earnings from OC-BVI, including the effect of the BVI government’s January 2013 payment on the Baughers Bay litigation award.
- Retail: Revenue fell 3% to $6.40 million as gallons sold declined 5%; operating income rose to $0.93 million from $0.73 million.
- Bulk: Revenue fell 2% to $9.86 million as gallons sold declined 6%, partly due to expiration of the Lower Valley operating agreement. Operating income increased to $2.26 million from $2.09 million.
- Services: Revenue rose to $0.30 million from $0.09 million, but the operating loss widened to $0.54 million, largely reflecting Mexico project-development costs.
Cash, debt and liquidity
At March 31, 2013, cash and cash equivalents were $35.86 million, marketable securities $8.57 million, working capital approximately $55.4 million, and total debt approximately $6.45 million ($1.68 million current and $4.77 million long-term). Cash increased by $1.97 million during the quarter. Investing activities provided $0.08 million net, including $0.76 million distributed from OC-BVI; financing activities used $1.29 million, including $1.10 million in dividends and $0.42 million in debt principal repayments.
Management said cash on hand and anticipated operating cash flow should cover 2013 liquidity needs. Estimated remaining-2013 requirements included approximately $2.1 million of debt principal and interest, $3.4 million of capital expenditures for existing operations, $1.8 million to complete the Bali plant, and $7.8 million for Mexico affiliate development. Management expected available cash and working capital to decline if funding for Mexico and Bali continued. The company reported compliance with its debt agreements.
Material changes, outlook and risks
- Cayman retail license: The license renewal remained unresolved. An extension through September 30, 2013 was executed with the Water Authority-Cayman but still required the Governor’s signature. The company is pursuing judicial review of the proposed rate model and related regulatory issues. Retail operations generated about 39% of Q1 revenue and 56% of gross profit; unfavorable renewal terms could reduce earnings and cash flow and potentially impair goodwill.
- Mexico development: The proposed 100-million-gallon-per-day project remained in development, with customer, land, power and feed-water arrangements, permits, feasibility work and financing still required. The company estimated at least through Q2 2014 to complete development needed to begin construction; it anticipated $5.6 million of further 2013 development expenses and $2.2 million of land deposits. Completion and financing are not assured.
- Bahamas Windsor plant: The WSC supply agreement was expected to expire when the contracted volume was delivered, estimated in June 2013. The company had proposed a five-year extension but had no confirmed renewal; Windsor generated about $1.8 million of Q1 revenue.
- Belize regulatory dispute: A court ruling remained pending on CW-Belize’s challenge to regulatory orders concerning its water supply operations. The outcome’s financial effect could not be determined.
- OC-BVI: The BVI government paid the remaining $2.0 million of the court-ordered Baughers Bay amounts in January 2013. The company’s investment value nevertheless assumes the government honors the Bar Bay water-supply agreement; failure could lead to an impairment charge.
- Bali: The company had invested approximately $2.4 million in the plant by March 31. In late April, it commissioned initial 250,000-gallon-per-day capacity and began deliveries to a resort customer; selling the plant’s full capacity is not assured.
No formal earnings or revenue guidance was provided. Management’s liquidity outlook and project-development timelines are expectations subject to the risks described above. The filing reported no material change in market-risk exposure and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether the Cayman license extension was signed and the outcome, timing and economic terms of the renewal and judicial-review process.
- Whether the Windsor agreement was renewed, and the revenue and utilization impact if it was not.
- Mexico project milestones, total future funding requirements, customer and supply contracts, permits, and financing feasibility.
- OC-BVI collections and performance under the Bar Bay agreement, and any effect on the carrying value of the investment.
- Whether Bali achieves expected sales and capacity utilization, and whether actual spending remains within management’s estimates.
- The extent to which Q1 earnings growth depended on the nonrecurring Baughers Bay award-related income.