Consolidated Water Co. Ltd. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; amounts in U.S. dollars. The company produces and supplies desalinated water and provides related engineering and operating services in the Caribbean, with development projects in Mexico and the Bahamas.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $16.23 million | $14.84 million | $32.96 million | $28.74 million |
| Gross profit (margin) | $5.41 million (33%) | $5.25 million (35%) | $11.35 million (34%) | $10.50 million (37%) |
| Operating income | $1.96 million | $2.07 million | $4.40 million | $3.53 million |
| Net income attributable to company stockholders | $1.96 million | $1.93 million | $4.30 million | $3.92 million |
| Diluted EPS | $0.13 | $0.13 | $0.29 | $0.27 |
- Revenue mix and performance: Bulk revenue rose to $10.21 million in Q2 (+31%) and $20.28 million for six months (+36%), principally from higher volumes following the Blue Hills, Bahamas plant expansion and energy pass-throughs. Retail revenue fell 10% in Q2 and 4% for six months; management attributed lower volumes to unusually heavy Grand Cayman rainfall. Services revenue declined following expiration of the Bermuda management contract in June 2011.
- Profitability: Higher bulk gross profit was offset by lower retail and services gross profit. Q2 operating income decreased about 5%, while six-month operating income increased about 25%. Six-month net income also benefited from lower services-segment losses and lower non-controlling interest; equity earnings from OC-BVI were substantially lower than in 2011.
- Cash flow: Six-month operating cash flow was $5.10 million, versus $7.88 million in 2011. Investing activities provided $6.90 million, including release of $7.5 million of restricted cash after repayment of the related facility. Financing used $18.99 million, including debt repayments and $2.19 million of dividends. Cash declined from $37.62 million at year-end to $30.63 million at June 30.
- Balance sheet and liquidity: Current assets were $55.61 million and current liabilities $6.82 million; management reported working capital of approximately $48.8 million. Marketable securities were $8.55 million. Total assets were $146.22 million and total equity $132.94 million. Total borrowings were reported as $7.63 million; the remaining debt was 5.95% secured bonds, with $7.85 million principal outstanding, due in 2016. The company reported compliance with bond covenants and said cash and expected operating cash flow should meet foreseeable liquidity needs.
- Dividends: The company declared $0.075 per common share for Q2, unchanged from 2011; $0.15 per share was declared for the first half.
Material developments, outlook and risks
- Cayman retail license: The exclusive license, a significant source of revenue and gross profit, remained under renewal negotiations. The government formally extended it through December 31, 2012. The company challenged the proposed rate-of-return model and the Water Authority’s role in negotiations through an application for judicial review. A less favorable renewal or loss of the license could materially affect earnings and cash flows and potentially impair goodwill.
- OC-BVI litigation: The appellate court upheld a $10.4 million award against the BVI government and awarded additional compensation for plant improvements and legal costs. Only $5.0 million of the $10.4 million had been paid; the government was withholding further payment pending clarification. The company’s $6.34 million investment carrying value assumes collection of the full award and performance of the Bar Bay water contract. No impairment was recorded; a collection shortfall or contract failure could require a material impairment.
- Mexico development: The proposed 100-million-gallon-per-day Baja California desalination project remained in development, subject to land, power and water arrangements, permits, customer contracts, and financing. Management expected to spend a further $6.5 million on development over the next four fiscal quarters and estimated development would continue at least through Q4 2013; the project may not proceed to construction.
- Bahamas expansion: The company agreed to invest $7 million for a 50% interest in NPDC Water, a new retail utility with a 25-year franchise. Funding was expected in Q3 2012 after closing conditions; construction of plant improvements was scheduled for completion in the first half of 2013.
- Other contingencies: Belize’s regulator had issued orders affecting CW-Belize’s operations; enforcement was temporarily stayed while court proceedings continued, and the ultimate impact was undetermined. The company also cautioned that services-segment losses could continue absent significant new contracts. It provided no consolidated earnings guidance.
- Operating sensitivity: Grand Cayman received about 28 inches of rain in Q2 2012 versus just over 4 inches in Q2 2011 and a 30-year Q2 average of about 13 inches; retail water volume fell about 17% for the quarter. Management noted exposure to tourism, weather, economic conditions, regulation, energy costs, litigation, and access to capital.
Key facts for investors to verify
- Progress and final terms of the Cayman license renewal, including the proposed rate-setting model and court review.
- Collection status of the unpaid $5.4 million portion of the OC-BVI award, any additional court awards, and the assumptions supporting the investment valuation.
- Actual funding and spending for the $7 million NPDC Water investment and the $6.5 million planned Mexico development expenditure.
- Retail volumes and margins as rainfall normalizes, and bulk-segment margins following the Blue Hills expansion and energy pass-throughs.
- Remaining bond principal, covenant compliance, and cash generation after debt service, dividends, and project commitments.