Consolidated Water Co. Ltd. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 13, 2013. The company develops and operates reverse-osmosis desalination plants and water systems, principally in the Cayman Islands, The Bahamas and Belize, and has an affiliate in the British Virgin Islands. Retail, bulk and services operations contributed approximately 37%, 62% and 1% of revenue, respectively.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $65.45 million | $55.15 million |
| Gross profit / margin | $21.99 million / 34% | $19.02 million / 34% |
| Operating income | $6.93 million | $5.37 million |
| Net income attributable to company shareholders | $9.32 million | $6.11 million |
| Diluted EPS | $0.64 | $0.42 |
| Cash from operating activities | $11.54 million | $8.55 million |
- Revenue rose 19%; shareholder net income increased 52%. Bulk revenue grew about $10.0 million, mainly due to a 32% increase in water volume following the Blue Hills, Bahamas capacity expansion. Retail revenue rose modestly despite nearly 2% lower sales volume, which management attributed largely to unusually heavy Grand Cayman rainfall. Services revenue declined as the Bermuda contract had ended and plant-construction activity was limited.
- Gross margin remained 34%. Retail gross margin was 52% and bulk gross margin approximately 22%. Operating income improved, although services continued to report an operating loss.
- Cash and cash equivalents were $33.89 million at year-end, down from $37.62 million. Working capital was approximately $52.6 million. Marketable securities were $8.57 million. Investing activities provided $6.67 million, including release of previously restricted cash and OC-BVI distributions; financing activities used $21.94 million, primarily for debt repayment and dividends.
- Year-end total assets were $150.45 million; total liabilities were $14.31 million and equity was $136.13 million. Debt carrying value was $6.85 million, consisting of secured 5.95% bonds due 2016; the company repaid its $8.5 million 7.5% bonds and $7.5 million credit facility during 2012. It reported compliance with debt covenants.
- Dividends declared were $0.30 per share for 2012. The board declared a further $0.075-per-share dividend payable April 30, 2013.
Material changes and unusual items
- Bulk water became a larger share of revenue, driven by the expanded Blue Hills plant; Bahamas revenue increased to $29.0 million from $19.8 million.
- OC-BVI earnings and profit-sharing income increased substantially, reflecting recognition of payments under the Baughers Bay litigation. The BVI government paid OC-BVI $4.7 million in late 2012 and the remaining $2.0 million in January 2013. The company recorded $2.46 million of combined equity earnings and profit-sharing income from OC-BVI in 2012.
- The company recorded $521,444 of impairment losses: $432,727 against the Bimini plant and $88,717 against services-segment goodwill. Remaining goodwill was $3.50 million.
- Accounts receivable increased to $12.52 million. Approximately $7.6 million was due from the Bahamas Water and Sewerage Corporation (WSC), which management considered fully collectible despite payment delays; no allowance was recorded for that balance.
- The Lower Valley, Cayman Islands operating agreement expired in January 2013 and the Water Authority-Cayman assumed plant operations; the company expects no further revenue from that plant.
Outlook, risks and contingencies
- Management outlook: No specific earnings or revenue guidance was provided. Management expected 2013 cash and operating funds to cover approximately $2.1 million of debt principal and interest, $5.9 million of capital spending for existing operations, $2.3 million to complete the Bali plant, and $7.9 million for Mexico-project development. It expected available cash and working capital to decline if it continued funding the Mexico and Bali projects; new projects or expansions could require additional financing.
- Cayman retail license: The exclusive license, which generated 37% of 2012 revenue and 52% of gross profit, remained under renewal negotiation and was extended through March 30, 2013. The company challenged the proposed rate-of-return-on-invested-capital model in court. A less favorable license or adverse regulatory outcome could materially reduce earnings and cash flow.
- Belize regulatory dispute: CW-Belize challenged PUC orders that could impose additional requirements, including a proposed cap on the exclusive supply arrangement. Enforcement was temporarily stayed; the court ruling was pending, and the financial effect was unclear.
- Mexico development project: The proposed 100-million-gallon-per-day Baja California plant remained in development, with permits, land, power and water arrangements, financing and customer contracts still to be secured. A letter of intent contemplated delivery of 20–40 million gallons per day to Otay Water District, but the project was not yet operational or fully contracted. Further development spending could be lost if the project does not proceed.
- Customer and contract exposure: WSC represented 44% of consolidated revenue and Water Authority-Cayman 14%. The Windsor Bahamas agreement was expected to expire after the required volume was delivered, estimated May 2013; an extension proposal was pending. Bulk supply agreements and minimum-volume obligations carry renewal and performance risks.
- Other disclosed risks include tourism and rainfall-driven demand, hurricanes, energy and operating-cost changes, currency exposure, competition, customer credit risk, and possible impairment of goodwill or the OC-BVI investment. The company has no general foreign-exchange hedging program.
Important facts for investors to verify
- Current status and final terms of the Cayman retail license, including the rate-setting model and litigation outcome.
- Collection of the WSC’s overdue receivable and the terms and performance security for Bahamas supply agreements.
- Outcome of the Belize PUC proceedings and any impact on CW-Belize’s rates, exclusivity or operating obligations.
- Whether the Mexico project secures binding customer contracts, permits, financing and required supply arrangements before further substantial spending.
- Actual Bali plant completion, customer uptake and capital cost, given construction began without contracts covering full initial capacity.
- Basis for the OC-BVI earnings recognized and the assumptions supporting the carrying values of goodwill and the affiliate investment.