Business Context and Reporting Period
Company: Consolidated Water Co. Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: The Company develops and operates seawater desalination plants and water distribution systems in the Caribbean basin and adjacent areas (Cayman Islands, Bahamas, Belize, British Virgin Islands, Bermuda). Operations are divided into three segments: Retail Water (43% of revenue), Bulk Water (50% of revenue), and Services (7% of revenue). The Company operates 15 reverse osmosis plants with a total capacity of 22.6 million U.S. gallons per day.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenue | $50,708,554 | $58,019,517 |
| Gross Profit | $16,610,495 | $22,999,077 |
| Gross Margin | 33% | 40% |
| Net Income (Attributable to Stockholders) | $6,292,025 | $6,098,571 |
| Diluted EPS | $0.43 | $0.42 |
| Cash and Cash Equivalents | $46,130,237 | $44,429,190 |
| Working Capital | $56,834,594 | $50,485,863 |
| Total Long-Term Debt | $18,306,785 | $21,129,267 |
| Dividends Declared Per Share | $0.30 | $0.28 |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased by approximately 12.6% ($7.3 million) compared to 2009. This was driven by lower revenues in the Retail and Services segments.
- Margin Compression: Gross profit margin declined from 40% in 2009 to 33% in 2010. The Retail segment margin dropped from 58% to 53%, and the Bulk segment margin dropped from 22% to 17%, primarily due to downward inflation adjustments to base water rates.
- Services Segment Loss: The Services segment incurred an operating loss of $1.1 million in 2010, compared to an operating income of $3.6 million in 2009. This was due to a $5.1 million decline in plant sales revenues and increased G&A expenses related to the new Mexico affiliate.
- OC-BVI Investment: The Company recognized earnings of $1.1 million from its investment in affiliate OC-BVI in 2010, reversing a loss of $1.0 million in 2009. This improvement was due to court-ordered payments received from the BVI government regarding the Baughers Bay dispute.
- Debt Reduction: Total borrowings decreased by approximately $2.8 million due to scheduled debt payments and the redemption of $1.5 million in Series A bonds.
Guidance, Outlook, Risks, and Contingencies
- Cayman Retail License Renewal: The Company's exclusive retail license in the Cayman Islands expired in July 2010 and has been extended multiple times. Negotiations for a new license are ongoing but stalled. The government proposes a "rate of return on invested capital model," which the Company objects to, fearing it could significantly reduce operating income and require a goodwill impairment of up to $1.2 million.
- OC-BVI Litigation: The Company's affiliate, OC-BVI, is involved in ongoing litigation with the BVI government regarding the Baughers Bay plant. While a court awarded OC-BVI $10.4 million, the BVI government has appealed. The Company has recorded an impairment of $4.5 million in 2009 related to this dispute. Future impairment charges may be required if the appellate court reduces the award.
- Mexico Project (NSC): The Company acquired a 50% interest in NSC Agua, S.A. de C.V., to pursue a large desalination project in Baja California. The Company has committed up to $4 million in initial funding, with approximately $1.7 million expensed in 2010. The project remains in the development stage with no revenue generated.
- Bahamas Receivables: As of December 31, 2010, the Company was due approximately $6.2 million from the Water and Sewerage Corporation of The Bahamas (WSC). Management believes these receivables are fully collectible based on government communications, but collection timing remains uncertain.
- Blue Hill Expansion: An amended agreement requires the Company to expand the Blue Hill plant in the Bahamas to 12 million gallons per day by September 30, 2011.
Key Facts for Investor Verification
- License Negotiation Status: Verify the current status of the Cayman Islands retail license negotiations and the likelihood of the government implementing the "rate of return" model.
- OC-BVI Collection Risk: Monitor the outcome of the BVI government's appeal regarding the $10.4 million court award and the actual collection of remaining funds.
- Bahamas Receivables: Track the collection of the $6.2 million receivable from the WSC to ensure it does not impact liquidity.
- Mexico Project Viability: Assess the progress of the NSC Agua project in Mexico, including permitting, financing, and customer contract status, given the $4 million funding commitment.
- Blue Hill Expansion Costs: Review the capital expenditure requirements and financing for the mandated expansion of the Blue Hill plant in the Bahamas.