Consolidated Water Co. Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. The company produces and supplies desalinated water and provides water-plant engineering and operating services across the Caribbean and Indonesia, with a major development project in Mexico. Unless stated otherwise, amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $14.67 million | $16.35 million |
| Gross profit; gross margin | $6.05 million; 41% | $5.97 million; 37% |
| Operating income; operating margin | $2.26 million; 15% | $0.63 million; 4% |
| Net income attributable to company stockholders | $1.92 million; $0.13 diluted EPS | $0.65 million; $0.04 diluted EPS |
| Operating cash flow | $2.48 million | ($2.13 million) |
| Capital expenditures and construction additions | $0.52 million | $0.66 million |
- Revenue declined about 10% year over year, while gross profit rose about 1% and attributable net income nearly tripled.
- Cash and cash equivalents were $36.75 million at March 31, versus $35.71 million at year-end 2014. The balance sheet also reported a $5.0 million certificate of deposit and $0.44 million restricted cash. Working capital was approximately $46.0 million.
- Total liabilities were $14.83 million. The principal borrowing was an $8.5 million demand loan, down from $9.0 million at year-end; it bears interest at LIBOR plus 1.5%, is secured by substantially all company assets in the Cayman Islands, and is payable on demand. If not called, the stated terms provide quarterly payments on a five-year amortization schedule and a remaining balance due after two years.
- Dividends declared were $0.075 per common share, unchanged from Q1 2014. Cash dividends paid in Q1 were $1.11 million.
Material changes and management commentary
- Bulk: Revenue fell to $8.38 million from $9.96 million, primarily because lower diesel and electricity prices reduced energy-related water rates, particularly in The Bahamas. Lower energy costs also reduced bulk energy expense by approximately $1.58 million; bulk gross profit increased to $2.93 million from $2.85 million.
- Retail: Revenue was broadly stable at $6.14 million. Cayman retail water volume increased 2%, but lower electricity prices reduced the energy component of rates. Segment operating income increased to $0.45 million from $0.29 million.
- Services: Operating loss narrowed to $0.71 million from $2.08 million, chiefly because NSC’s Mexico project-development expenses fell by approximately $1.4 million. Management expects services-segment losses to continue while NSC development continues and absent significant new contracts.
- Management cited approximately $4.5 million of expected remaining-2015 capital expenditures for existing operations, $1.6 million of debt service, and $1.6 million for NSC development. It stated that it expects available liquidity to meet needs, while noting that dividends remain subject to board decisions and financial conditions.
- No specific earnings or revenue guidance was provided. Interim results are not necessarily indicative of full-year results.
Outlook, risks, contingencies and unusual items
- OC-BVI impairment: The company recorded a $310,000 impairment in Q1, reducing its investment carrying value to approximately $5.0 million. Valuation depends on a probability-weighted estimate of future cash flows, including a possible seven-year extension of the Bar Bay agreement and compensation for the Baughers Bay plant. The current Bar Bay agreement expires in February 2017. Without an extension or a material improvement in expected cash flows, management warned that further impairments in 2015 and 2016 could at least equal the approximately $1.6 million of goodwill embedded in the investment; additional losses are possible if the plant ceases operations. A mutually selected appraiser was appointed in Q1 to value the Baughers Bay plant under the court ruling.
- Cayman retail license: The exclusive license, which supported about 41% of Q1 revenue and 56% of gross profit, had been extended through June 30, 2015 while renewal negotiations continued. The regulator favors a rate-of-return model opposed by the company. Management warned that less favorable license terms, or loss of exclusivity, could reduce income and cash flows and potentially trigger impairment of $3.50 million in goodwill. The company was awaiting a draft license and a timetable for renewed negotiations.
- Mexico project: NSC’s proposed 100-million-gallon-per-day desalination and pipeline project remains subject to approvals, a public tender, customer and water-sale arrangements, and financing. The state accepted NSC’s detailed proposal for evaluation; Mexican federal environmental approval was received in February 2015. A February letter of intent contemplates a financially stronger partner funding most equity through a new project company, but its terms apply only if the project is awarded by early February 2016. The company disclosed approximately $35.8 million spent on the project to date and cautioned that completion is uncertain.
- Tax dispute: Mexican tax authorities assessed NSC approximately $379,000, including penalties and surcharges, for alleged 2011 withholding-tax deficiencies. NSC received a favorable tax-court judgment in November 2014, which the tax authority appealed. No provision was recorded because the ultimate liability was uncertain; restricted cash of $442,955 secures a letter of credit. A successful appeal could also lead to assessments for later years.
- Other contract and regulatory exposures: The Bahamas Windsor plant agreement continued month to month after its scheduled term, with a long-term extension undecided. The North Sound operating agreement expired April 1, 2015; a proposed 24-month extension was tentatively accepted subject to approvals. Belize regulatory-order litigation remained pending, with enforcement temporarily stayed.
- Foreign-currency transaction losses contributed to Q1 other expense; management identified tourism and weather, regional economies, government relationships, regulation, and entry into new markets among factors that could cause actual results to differ materially from forward-looking statements.
Important facts for investors to verify
- Progress and terms of the Cayman retail-license renewal, especially pricing, exclusivity, and continuity beyond June 30, 2015.
- OC-BVI’s plant valuation, Baughers Bay appraisal outcome, Bar Bay contract extension prospects, and any subsequent investment impairment.
- NSC’s approval and tender progress, project partner and financing arrangements, customer contracts, and further development spending.
- Whether the $8.5 million demand loan is called, and the timing and cost of scheduled debt service.
- Outcomes of the Mexican tax appeal and pending Belize and Bahamas contract matters.