Consolidated Water Co. Ltd. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company develops and operates seawater desalination plants and water systems, and manufactures water-treatment equipment. Revenue is primarily from bulk water supply (51%) and retail water operations (37%); manufacturing contributed 11% and services 1%. Percentages are approximate.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $62.3 million | $57.9 million |
| Gross profit / margin | $25.4 million / 40.8% | $24.3 million / 41.9% |
| Operating income / margin | $3.3 million / 5.3% | $2.1 million / 3.7% |
| Net income | $5.7 million | $2.8 million |
| Net income attributable to company shareholders; diluted EPS | $6.1 million; $0.41 | $4.0 million; $0.27 |
| Cash from operating activities | $13.6 million | $7.8 million |
| Cash and cash equivalents at year-end | $47.2 million | $39.3 million |
| Working capital at year-end | $59.1 million | Not stated in the provided filing text |
| Total liabilities; debt | $9.5 million; no long-term debt, $0.686 million related-party note | $9.5 million; no long-term debt, $0.490 million related-party note |
Revenue rose 7.7%, while gross margin edged down, reflecting higher energy costs and a lower Windsor plant water price. Operating cash flow improved substantially; investing activities used $1.4 million and financing activities used $4.3 million, including approximately $4.5 million in dividends. The company declared $0.31 per share in 2017, up from $0.30 in 2016.
Material changes and segment results
- Bulk: Revenue increased to $31.6 million from $29.6 million, with water volume up 4%. Segment operating income rose to $9.3 million from $8.4 million. Bahamas revenue benefited from higher fuel and electricity pass-through charges and increased volume; higher energy costs and the Windsor price reduction weighed on gross margin.
- Retail: Revenue slipped to $23.2 million from $23.5 million despite a 1% increase in water volume, partly because a Grand Cayman customer obtained broader access to a concessionary rate. The segment recorded a $0.9 million operating loss, including Bali impairment charges.
- Manufacturing: Revenue increased to $7.0 million from $3.9 million, in part because 2017 included a full year of Aerex results versus a partial year in 2016. The segment remained loss-making, with a $2.0 million operating loss and a $1.4 million goodwill impairment.
- Services: Revenue declined to $0.5 million from $0.8 million and the segment recorded a $3.0 million operating loss, reflecting lower project revenue and continued Mexico development costs.
- Unusual items: The company recorded approximately $3.0 million of long-lived-asset and goodwill impairment losses, mainly related to CW-Bali and Aerex. Other income included a $0.96 million unrealized gain on Aerex put/call options. A U.S. tax-law change contributed a $0.545 million deferred tax benefit.
Liquidity, outlook and key risks
Management said available liquidity should meet needs in 2018 and beyond. Planned 2018 spending includes approximately $18.7 million of capital expenditures, primarily Windsor plant improvements and expansion of the ACWW plant; approximately $1.4 million for Mexico project development; and approximately $1.3 million of dividends payable. These plans are not earnings guidance. No specific revenue or earnings forecast is provided.
- Grand Cayman retail license: The most recent extension expired January 31, 2018. The company continued service on the assumption of a further extension while negotiating with OfReg. Management warned that new terms could materially reduce retail operating income and cash flow; retail generated about 37% of 2017 revenue and 50% of gross profit.
- Contract renewals and customer concentration: Cayman bulk operating agreements for North Sound and Red Gate expire in July 2018; North Side expires in June 2019. The Water and Sewerage Corporation of The Bahamas accounted for about 34% of consolidated revenue. The Windsor contract was extended 15 years, but its non-energy price is about 18% lower than the prior price.
- Mexico project: Phase 1 is estimated to cost about 9.1 billion Mexican pesos. The February 2018 equity subscription agreement and project financing remain subject to conditions, including permits and financing; requested tariff relief had not been resolved. Challenges to state legislation and possible impairment of approximately $20.6 million of land and $0.947 million of right-of-way deposits add risk.
- CW-Bali: The board decided to discontinue operations after recurring losses; 2017 operating loss was approximately $1.9 million. A customer lawsuit seeks compensatory and punitive damages equivalent to about $6.0 million at the stated exchange rate. The litigation prevents the company from disposing of CW-Bali or further assets while unresolved.
- Belize and cash access: A Belize court ruled favorably for the company in a regulatory dispute, but the PUC appealed in February 2018. Transfers from Belize require central-bank approval and available U.S. dollars; approximately $6.3 million was held in Belize at year-end. Bahamas transfers also require central-bank approval.
- Other exposures: Tourism, rainfall, severe storms, energy and construction costs, government regulation, foreign exchange, and performance guarantees may affect results. The company reported no long-term debt, but some cash is held in jurisdictions where transfers are constrained. It reported an unqualified audit opinion and effective internal control over financial reporting.
Investor verification priorities
- Confirm the status and terms of the Grand Cayman retail license extension and negotiations, including any impact on rates, royalties, or profitability.
- Track renewal outcomes for the North Sound and Red Gate agreements and the North Side contract, plus the economics of the extended Windsor agreement.
- Verify that Mexico project conditions, tariff relief, financing, and equity funding are secured, and assess exposure to related legal challenges and asset impairment.
- Monitor the CW-Bali lawsuit, restrictions on disposal, and any change in the company’s expected exit costs or recovery.
- Assess collectability of government receivables, access to cash held in Belize and The Bahamas, and execution of the planned 2018 capital program.