Business Context and Reporting Period
Company: Consolidated Water Co. Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: The Company develops and operates seawater desalination plants and water distribution systems in the Caribbean and adjacent areas (Cayman Islands, Bahamas, Belize, British Virgin Islands, Bermuda). Operations are divided into three segments: Retail Water (40% of revenue), Bulk Water (45% of revenue), and Services (15% of revenue). The Company operates 16 reverse osmosis plants with a total capacity of 24.3 million U.S. gallons per day.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenue | $58,019,517 | $65,678,959 |
| Gross Profit | $22,999,077 (40% margin) | $18,633,843 (28% margin) |
| Net Income (Attributable to Stockholders) | $6,098,571 | $7,209,716 |
| Diluted EPS | $0.42 | $0.50 |
| Cash and Cash Equivalents | $44,429,190 | $36,261,345 |
| Working Capital | $50,485,863 | $44,457,577 |
| Total Debt Obligations | $21,129,267 | $22,358,340 |
| Operating Cash Flow | $15,471,092 | $7,860,063 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 11.7% to $58.0 million, primarily due to lower revenues in the Bulk and Services segments. Bulk revenue dropped due to significantly lower energy costs passed through to customers, despite a 2% increase in water volume sold.
- Margin Expansion: Gross profit margin improved significantly from 28% in 2008 to 40% in 2009. This was driven by lower energy costs (diesel and electricity) and inflation-indexed rate increases in the Cayman Islands.
- Net Income Decline: Net income decreased 15.4% to $6.1 million. This decline was largely driven by a $4.66 million impairment loss on the Company's investment in its affiliate, Ocean Conversion (BVI) Ltd. (OC-BVI), and a $1.03 million equity loss from the affiliate.
- Segment Performance:
- Retail: Income from operations increased to $5.2 million (from $4.7 million) due to volume growth and rate adjustments.
- Bulk: Income from operations increased to $4.1 million (from $3.2 million) due to improved efficiencies and lower energy costs.
- Services: Income from operations increased to $3.6 million (from $2.0 million) despite lower construction revenues, due to downward adjustments in estimated costs for the North Side Water Works and Bermuda plants.
Guidance, Outlook, Risks, and Contingencies
- OC-BVI Litigation and Impairment: The Company recorded a $4.5 million impairment loss in Q4 2009 regarding its investment in OC-BVI. This followed a court ruling in the British Virgin Islands (BVI) awarding ownership of the Baughers Bay plant to the BVI government and a subsequent decision by the BVI government to award a new water plant contract to a competitor (Biwater PLC). The Company believes OC-BVI is unlikely to secure a long-term operating contract for Baughers Bay. The remaining carrying value of the investment ($9.2 million) assumes full collection of a $10.3 million court award for past water sales, which is currently under appeal by the BVI government.
- Cayman Retail License Renewal: The Company's exclusive retail license in the Cayman Islands expires in July 2010. Negotiations are ongoing. The Cayman government has proposed restructuring the license to a "rate of return on invested capital model," which the Company objects to, fearing it would significantly reduce operating income.
- Customer Concentration: The Water and Sewerage Corporation of The Bahamas (WSC) accounted for 26% of total revenues, and the Water Authority-Cayman accounted for 15%. The WSC has delayed payments, with approximately $5.4 million outstanding as of year-end, though the Company believes these are fully collectible.
- Liquidity: The Company holds $44.4 million in cash and expects sufficient liquidity to meet requirements for the next 12 months, including debt service and capital expenditures.
Key Facts for Investor Verification
- OC-BVI Recovery: Verify the status of the BVI government's appeal regarding the $10.3 million court award and the likelihood of full collection, as this underpins the remaining value of the OC-BVI investment.
- Cayman License Terms: Monitor the outcome of the retail license renewal negotiations in the Cayman Islands, specifically whether the "rate of return" model is adopted.
- Bahamas Receivables: Track the collection of the $5.4 million receivable from the Water and Sewerage Corporation of The Bahamas.
- Energy Cost Pass-Through: Assess the impact of future energy price fluctuations on revenue, as a significant portion of revenue is tied to pass-through energy costs.