Consolidated Water Co. Ltd. — FY2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; the filing was signed March 15, 2016. Consolidated Water develops and operates seawater reverse-osmosis desalination plants and water systems across the Caribbean and Indonesia. Revenue came primarily from retail water operations (about 41%), bulk water operations (56%) and services (3%).
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $57.12 million | $65.56 million |
| Gross profit / margin | $22.93 million / 40% | $23.12 million / 35% |
| Income from operations | $8.47 million | $6.46 million |
| Net income | $7.93 million | $6.76 million |
| Net income attributable to company shareholders | $7.52 million; diluted EPS $0.51 | $6.27 million; diluted EPS $0.42 |
| Cash from operating activities | $17.32 million | $18.18 million |
| Cash and cash equivalents at year-end | $44.79 million | $35.71 million |
| Working capital at year-end | $52.2 million | Not stated in the provided text |
| Debt at year-end | $7.0 million demand loan | $9.0 million demand loan |
Revenue fell approximately 13%, while gross margin rose to 40% from 35%, reflecting lower energy costs and improved retail and services gross margins. Lower revenue and gross profit dollars were concentrated in bulk operations. General and administrative expense declined to $14.46 million from $16.65 million, including lower Mexico project-development expense and professional fees. FY2015 included a $1.06 million impairment of the OC-BVI investment and approximately $223,000 of incremental foreign-currency losses at CW-Bali. The company declared $0.30 per common share in dividends, unchanged from 2014.
Fourth-quarter 2015 revenue was $13.36 million, gross profit $5.46 million, shareholder-attributable net income $1.59 million and diluted EPS $0.11. For Q4 2014, the corresponding reported figures were $15.26 million, $5.07 million, $0.97 million and $0.07.
Operating cash flow was $17.32 million; investing activities used $2.06 million and financing activities used $6.18 million. The demand loan bears interest at LIBOR plus 1.5%, is payable in quarterly installments, and its remaining principal was due May 14, 2016 unless not called by the lender. Substantially all assets of the Cayman subsidiaries secure the loan. The filing describes cash resources as sufficient for expected 2016 needs, while noting that transfers from Bahamas and Belize accounts to other countries require central-bank approval.
Material changes versus the prior comparable period
- Retail revenue declined 4% to $23.25 million, mainly because lower electricity prices reduced the energy component of retail rates; retail gross profit increased slightly.
- Bulk revenue declined 19% to $31.85 million. Lower energy prices reduced tariff adjustments, volumes fell in the Bahamas and Cayman Islands, and the North Sound plant extension carried lower rates. Bulk operating income declined to $8.61 million from $9.68 million.
- Services revenue declined to $2.01 million, but the segment moved from a $327,000 gross loss to a $378,000 gross profit. Its operating loss narrowed to $1.76 million from $4.19 million, largely due to reduced NSC project-development spending.
- Bahamas Water and Sewerage Corporation water purchases fell; 2015 deliveries from the Windsor and Blue Hills plants were affected by conservation and distribution-loss mitigation. Windsor continued operating month-to-month.
- Cash and cash equivalents increased by $9.08 million. The demand loan balance declined by $2.0 million, and long-term debt obligations were reported as zero.
Outlook, risks, contingencies and unusual items
- 2016 expected funding needs: approximately $3.9 million for existing-operations capital expenditures, $7.0 million for demand-loan debt service and $1.2 million for NSC development, plus dividends if declared. These are liquidity estimates, not earnings or revenue guidance.
- Cayman retail license: the exclusive license was extended through June 30, 2016, with formal documentation still in process, while renewal negotiations continued. The proposed rate-of-return model could materially reduce retail income and cash flows; the segment generated about 40% of consolidated revenue and 55% of gross profit in 2015. A goodwill impairment is possible depending on the outcome.
- Mexico project: NSC had spent about $20.7 million on land and equipment and incurred about $16.8 million in development expenses through 2015. The state tender deadline was March 23, 2016; NSC planned to bid with equity partners. The state could award the project to another bidder or cancel it, potentially impairing the land. A Mexican shareholder lawsuit challenges transactions that raised Consolidated Water’s NSC ownership to 99.9%; the court granted preliminary relief, and the ultimate outcome was uncertain.
- OC-BVI: the company recorded $1.06 million of 2015 impairment charges and carried the investment at about $4.55 million. The valuation assumes, among other things, an extension of the Bar Bay contract beyond its March 2017 initial expiry and a court-related payment for the Baughers Bay plant. Further impairment of at least $900,000 was expected in 2016 absent a material increase in projected cash flows.
- Bali: CW-Bali’s plant operated below break-even, with a 2015 operating loss of about $484,000 and carrying costs of approximately $3.0 million. Failure to increase sales, obtain new customers or secure a strategic partner could lead to impairment. New customer contracts require cooperation or approval from the local utility under a 2015 Indonesian regulation.
- Other contracts and regulation: the Bahamas Windsor agreement remained month-to-month and generated $5.8 million of 2015 revenue. The Belize regulator’s disputed order, including a proposed cap on the exclusive supply arrangement, remained before the courts under a temporary injunction. The company also had customer concentration: WSC accounted for 36% and WAC for 15% of FY2015 revenue.
- Post-year-end event: in February 2016, the company paid $7.7 million for 51% of Aerex Industries, a U.S. water-treatment equipment manufacturer and service provider, and granted reciprocal options relating to the remaining 49%, exercisable from February 2019.
- Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether the Cayman retail license extension was formally documented and what final renewal terms, tariff model and exclusivity rights were agreed.
- Whether the $7.0 million demand loan was repaid or refinanced by its May 14, 2016 maturity, and how the Aerex acquisition affected liquidity.
- The outcome of the Baja California tender and NSC litigation, the status of prospective equity partners, and the recoverability of the $20.6 million land carrying value.
- Whether the Bar Bay contract was extended and the Baughers Bay valuation resolved, and the resulting OC-BVI impairment exposure.
- Progress in Bali customer sales and partnership efforts, and the outcome of the Belize regulatory litigation and Windsor contract discussions.
- Collection and concentration risk in government receivables, including the Bahamas WSC balance of approximately $4.7 million and the Cayman WAC loans receivable of approximately $5.6 million.