Business Context and Reporting Period
Company: Consolidated Water Co. Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: The Company operates in three segments: retail water supply, bulk water supply, and engineering/construction services. Operations are primarily located in the Cayman Islands, Bahamas, Belize, and the British Virgin Islands (BVI).
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $27,376,797 | $31,319,056 |
| Gross Profit | $9,717,552 (35.5% Margin) | $13,567,548 (43.3% Margin) |
| Net Income (Consolidated) | $4,275,502 | $6,730,144 |
| Net Income Attributable to Stockholders | $4,110,011 | $6,417,761 |
| Diluted EPS | $0.28 | $0.44 |
| Cash and Cash Equivalents | $45,354,320 | $40,996,303 |
| Working Capital | $52,252,865 | $50,485,863 |
| Total Debt (Current + Long Term) | $20,480,133 | $21,129,267 |
| Operating Cash Flow | $3,390,159 | $8,129,814 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately 12.6% year-over-year. All three segments reported lower revenues.
- Retail: Decreased due to downward adjustments in base rates linked to consumer price indices and a 5% decline in volume sold.
- Bulk: Decreased due to rate adjustments and the temporary loss of revenue from the Red Gate plant during refurbishment.
- Services: Decreased significantly (approx. 56%) due to reduced plant construction activity.
- Profitability Impact: Net income attributable to stockholders dropped 35.9%. The Services segment incurred an operating loss of $300,950 for the six months ended June 30, 2010, compared to an operating income of $2,764,189 in the prior year.
- This loss was driven by $260,000 in liquidated damages and cost overruns on the Red Gate plant refurbishment project.
- Equity Investment Turnaround: The Company recognized earnings of $295,112 from its affiliate OC-BVI (BVI) in the current period, reversing a loss of $1,198,021 in the prior year. This improvement is attributed to revenue recognition from the Bar Bay plant.
- Expense Growth: General and administrative expenses increased by 8.6%, primarily due to professional fees ($504,000) related to the development of a new Mexico joint venture (NSC).
Outlook, Risks, and Contingencies
- OC-BVI Litigation (BVI): A significant contingency exists regarding the Baughers Bay plant dispute with the BVI government.
- The Court awarded OC-BVI $10.24 million for water supplied. As of July 2010, only $4.0 million had been collected.
- The BVI government has appealed the ruling, seeking to reduce payments to actual production costs.
- The Company's investment valuation ($8.7 million) assumes full collection of the award. An adverse appellate ruling could trigger a material impairment loss.
- Mexico Joint Venture (NSC): The Company has committed up to $4 million in equity funding for a speculative desalination project in Baja California. The project is in early development; the Company anticipates expensing substantially all remaining funding.
- Cayman Retail License: The Company's exclusive 20-year retail license expired July 10, 2010, but was extended for three months on July 20, 2010. Renewal negotiations are ongoing. The government is proposing a "rate of return on invested capital" model, which the Company objects to, fearing it could reduce operating income and require a goodwill write-down.
- CW-Bahamas Receivables: Accounts receivable from the Water and Sewerage Corporation (WSC) of The Bahamas increased to $6.9 million due to payment delays. The government has assured payment, but delinquent balances are expected to increase slightly in 2010.
- Dividends: The Company declared a quarterly dividend of $0.075 per share, payable July 31, 2010.
Investor Verification Checklist
- OC-BVI Collection Status: Verify the collection of the remaining $6.24 million court award from the BVI government and the status of the government's appeal.
- Red Gate Plant Commissioning: Confirm the final commissioning of the Red Gate plant (noted as occurring in July 2010) and the impact on future bulk water revenues.
- Cayman License Terms: Monitor the outcome of the retail license renewal negotiations, specifically regarding the proposed "rate of return" regulatory model.
- Mexico Project Viability: Track the progress of the NSC joint venture, including land acquisition, permitting, and the potential for the $4 million commitment to be fully expensed without revenue generation.
- Bahamas Receivables: Monitor the payment schedule from the WSC to ensure the $6.9 million receivable is collected without further delay.