Consolidated Water Co. Ltd. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited results are presented in U.S. dollars. The company produces and supplies desalinated water in the Caribbean and Indonesia and provides water-plant services; it is also developing a large desalination project in Mexico.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $14.49 million | $16.93 million | $29.15 million | $33.28 million |
| Gross profit; gross margin | $5.87 million; 41% | $6.37 million; 38% | $11.92 million; 41% | $12.34 million; 37% |
| Operating income | $2.30 million | $2.59 million | $4.56 million | $3.22 million |
| Net income attributable to company shareholders | $2.23 million; $0.15 diluted EPS | $2.76 million; $0.19 diluted EPS | $4.15 million; $0.28 diluted EPS | $3.41 million; $0.23 diluted EPS |
| Operating cash flow | Not presented quarterly | $8.16 million | $13.40 million |
- Quarterly revenue fell about 14% year over year; first-half revenue fell about 12%. Lower bulk-water volumes and lower energy-linked rates were key factors. First-half earnings attributable to shareholders increased about 22%, helped by lower G&A and interest expense despite lower revenue.
- Retail revenue declined as lower electricity prices reduced energy-related rate adjustments, while retail gross profit was broadly stable. Bulk revenue and operating income declined; lower volumes, lower energy-linked rates, and higher Bahamas maintenance costs weighed on results. Services revenue declined after prior-year plant-refurbishment and construction work; the segment continued to report operating losses.
- Q2 included a $275,000 impairment charge on the OC-BVI investment; first-half impairment totaled $585,000. First-half interest expense was $137,000, versus $343,000 a year earlier, when expense included a bond prepayment premium and related amortization.
Financial position and liquidity
- At June 30, cash and cash equivalents were $39.3 million, with a further $5.6 million certificate of deposit and $0.47 million restricted cash. Working capital was approximately $48.3 million; current assets were $61.7 million and current liabilities $13.4 million.
- Total assets were $160.1 million and total liabilities $13.6 million. The principal reported borrowing was an $8.0 million demand loan, down from $9.0 million at year-end 2014. It bears interest at LIBOR plus 1.5%, is secured by substantially all Cayman Islands assets, and is callable by the lender; scheduled payments and a remaining balance payment also apply if not called.
- Operating cash flow was $8.2 million, down from $13.4 million in the first half of 2014. Investing activities used $1.3 million, including $1.5 million for property, plant and equipment and construction in progress. Financing activities used $3.2 million, including $2.4 million of dividends and $1.0 million of loan repayment. Cash increased $3.6 million during the period.
- Management said liquidity should be sufficient for the remainder of 2015 and thereafter. It estimated remaining-2015 requirements of $3.6 million for existing-operation capital spending, $1.0 million for loan service, $1.1 million for NSC project development, and about $1.0 million for a third-party services project. Dividends are subject to board declaration; $0.075 per common share was declared for payment July 31, 2015.
Outlook, risks and contingencies
- Cayman retail license: The exclusive license, a significant earnings contributor, was extended through December 31, 2015 while renewal negotiations continue. The Water Authority-Cayman favors a return-on-invested-capital rate model; the company has raised concerns and is awaiting a draft license. A changed rate structure or loss of favorable terms could materially reduce income and cash flows and lead to impairment of goodwill.
- OC-BVI: The $4.8 million investment valuation depends on assumptions about extension of the Bar Bay contract, which expires in February 2017, and recovery of a pending award related to the Baughers Bay plant. A plant valuation was in process. The company warned that further impairment during 2015 and 2016 may be required, totaling at least the approximately $1.4 million goodwill embedded in the investment absent improved future cash flows.
- Mexico development project: NSC submitted a project proposal under new public-private partnership rules and received federal environmental approval, but still needs government authorization, a tender award, customer agreements, additional permits and financing. A potential partner’s letter of intent is conditional on NSC being awarded the project by early February 2016. The company reported approximately $36.3 million spent on the project to date and cautioned it may not be completed.
- Other operating exposures: CW-Bali remained loss-making, with first-half operating losses of about $302,000 and plant carrying costs of approximately $3.3 million; continued insufficient sales could trigger impairment. The Bahamas Windsor plant agreement remained month-to-month. The Belize regulatory dispute was unresolved. In July 2015, after quarter-end, the North Sound plant agreement was extended through April 1, 2017 on modified terms, including a refurbishment commitment.
- Tax dispute: Mexican tax authorities’ revised NSC assessment was approximately $445,000. NSC had received a favorable court judgment, which the tax authority appealed; no provision was recorded because the outcome remained uncertain. Restricted cash secures a letter of credit for the matter.
- Management identified tourism and weather, regional economic conditions, government relationships, regulation, and the ability to enter new markets among the factors that could cause actual results to differ from expectations. No material change in market-risk exposure was reported. Disclosure controls were assessed as effective.
Key facts investors should verify
- Progress and terms of the Cayman retail-license renewal, including any rate-model changes and extension beyond December 31, 2015.
- OC-BVI’s plant valuation, Baughers Bay award recovery, Bar Bay contract extension, and any further impairment charges.
- NSC’s authorization and tender status, financing and customer commitments, partner agreement, and total remaining development funding.
- Renewal or other resolution of the Windsor agreement, and the financial and regulatory outcomes of the Belize and Mexican tax matters.
- Whether cash held in the Bahamas and Belize can be transferred when needed; the filing says transfers require central-bank approval.