Business Context and Reporting Period
Company: Consolidated Water Co. Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: The Company develops and operates seawater desalination plants and water distribution systems in the Caribbean (Cayman Islands, Belize, Barbados, British Virgin Islands, and The Bahamas). Operations are divided into three segments: Retail Water (47% of revenue), Bulk Water (48% of revenue), and Services (5% of revenue). The Company operates 13 reverse osmosis plants with a total capacity of 19.4 million U.S. gallons per day.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenue | $38,229,208 | $26,187,205 |
| Net Income | $7,521,126 | $5,514,258 |
| Diluted EPS | $0.59 | $0.45 |
| Gross Profit | $15,613,806 | $10,354,397 |
| Operating Cash Flow | $11,574,025 | $7,824,572 |
| Total Assets | $138,961,343 | $88,365,191 |
| Long-Term Debt | $23,500,593 | $19,378,212 |
| Cash and Equivalents | $37,310,699 | $11,955,589 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 46% to $38.2 million, driven by a 35% increase in retail sales (due to tourism recovery in Grand Cayman) and a 56% increase in bulk sales.
- Profitability: Net income rose 36% to $7.5 million. Gross profit increased from $10.4 million to $15.6 million.
- Expansion: The Blue Hills plant in The Bahamas (7.2 million gallons/day capacity) was commissioned in July 2006, significantly boosting bulk water volume. However, Q4 margins for this plant were near break-even due to start-up costs and contractual obligations to provide free water to reduce system losses.
- Capital Structure: The Company raised approximately $40.1 million via a common stock offering in December 2006 and $14.4 million via 5.95% secured bonds in August 2006. These proceeds were used to fund the Blue Hills plant and repay prior debt.
- Expense Increases: General and administrative expenses rose 38% to $8.4 million, primarily due to personnel costs and the opening of a U.S. support office. Interest expense more than doubled to $1.9 million due to increased borrowings and the cessation of interest capitalization on the Blue Hills plant.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management expects continued growth through organic expansion in the Cayman Islands and new markets. A new design, build, and operate agreement for a plant in Bermuda was signed in January 2007.
- Key Risks:
- OC-BVI Ownership Dispute: The British Virgin Islands government asserted a right of ownership over the OC-BVI Baughers Bay plant. Resolution is ongoing; failure to resolve could result in asset impairment charges.
- Contract Renewals: The exclusive retail license in the Cayman Islands expires in July 2010. Bulk water contracts in various jurisdictions have fixed terms and may not be renewed on favorable terms.
- Customer Concentration: Two bulk customers (Water and Sewerage Corporation of The Bahamas and Water Authority-Cayman) accounted for 45% of total revenue in 2006.
- Operational Penalties: The Windsor plant in The Bahamas has faced penalties for failing to meet minimum delivery volumes and efficiency standards, though management believes membrane fouling issues are resolved.
- Dividends: The Board declared a quarterly dividend of $0.06 per share for Q4 2006. The Company modified its dividend policy in 2006, no longer targeting a specific payout ratio of net income due to capital requirements for growth.
Investor Verification Checklist
- OC-BVI Resolution: Verify the status of the ownership dispute regarding the Baughers Bay plant in the British Virgin Islands and potential impairment risks to the $15.5 million investment.
- Blue Hills Margins: Monitor the profitability of the Blue Hills plant in The Bahamas, specifically the timeline for achieving the required reduction in non-revenue water to eliminate the obligation to provide free water.
- License Renewals: Track the renewal process for the Cayman Islands retail license (expires 2010) and bulk water contracts in The Bahamas and Belize.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly the liabilities to tangible net worth ratio for CW-Bahamas, which was non-compliant as of December 31, 2006 (though term loans were repaid in March 2007).
- Tourism Sensitivity: Assess the correlation between regional tourism levels and retail water demand, particularly in the Cayman Islands and Bimini.