Consolidated Water Co. Ltd. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. Amounts are U.S. dollars. The company produces and supplies desalinated water and provides water-plant services in the Cayman Islands, Belize, The Bahamas and Indonesia, while developing a large desalination project in Mexico.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $15.44m | $15.84m | $48.56m | $48.80m |
| Gross profit | $5.23m | $5.23m | $17.84m | $16.59m |
| Gross margin | 33.9% | 33.0% | 36.7% | 34.0% |
| Operating income | $0.92m | $1.15m | $6.37m | $5.54m |
| Net income attributable to company stockholders | $0.91m | $1.30m | $7.50m | $5.61m |
| Diluted EPS | $0.06 | $0.09 | $0.51 | $0.38 |
- Q3 comparison: Revenue declined 2.5% and attributable net income declined 30.4%. Gross profit was essentially flat, with a higher gross margin, while G&A expenses rose about $0.22m.
- Nine-month comparison: Revenue declined 0.5%, while attributable net income increased 33.9%. Gross margin rose to 36.7%; improved bulk profitability and lower interest expense contributed, alongside higher OC-BVI earnings.
- Cash flow: Operating activities provided $8.57m in the first nine months, versus $8.45m in 2012. Investing activities used $7.32m; financing activities used $4.12m. Cash and cash equivalents ended at $30.82m, down $3.07m from year-end 2012.
- Liquidity and debt: Current assets were $66.01m and current liabilities $19.33m; management reported working capital of approximately $46.7m. Cash, certificate of deposit and marketable securities totaled $44.41m. Long-term debt, including its current portion, was $5.63m, down from $6.85m at December 31, 2012. Current liabilities include a $10.05m land-purchase obligation due in May 2014.
- Dividends: The company declared $0.075 per common share per quarter; $3.30m of dividends were paid in the first nine months.
Material changes and business drivers
- Retail revenue fell 12% in Q3 as water volumes sold declined approximately 13%; management cited higher rainfall and lower purchases by some large customers. Nine-month retail volume declined approximately 4%.
- Bulk Q3 revenue increased modestly, while operating contribution rose to $2.59m from $1.94m. Higher margins and lower depreciation helped; the Lower Valley operating agreement expired in January 2013.
- The services segment recorded an operating loss of $1.37m in Q3 and $2.50m year to date, reflecting Mexico project-development spending and higher engineering and employee costs. The company said services losses are expected to continue while it funds development and before it secures significant external contracts.
- OC-BVI income included a $2.0m judgment payment received in January 2013 by the affiliate in the Baughers Bay dispute; this contributed to higher year-to-date equity and profit-sharing income. The affiliate’s remaining claim for compensation for the plant itself had not been determined.
Outlook, commitments and risks
- Mexico project: NSC is developing a proposed 100-million-gallon-per-day desalination plant and pipeline. The first phase of pilot testing was completed in October 2013, but further development, customer and supply contracts, permits, land purchases and project financing remain outstanding. An Otay Water District letter of intent contemplates 20–40 million gallons per day; it is not described as a final water-sale contract. Management estimated about $24m of projected NSC funding needs, including approximately $17m of remaining land payments and $7m of development and other costs, and expected development to continue at least through Q3 2014. The project may not proceed.
- Cayman retail license: The exclusive license was extended through June 30, 2014. A judicial review hearing over the proposed rate model was scheduled for April 1–2, 2014, and meaningful renewal negotiations were on hold pending its outcome. Retail operations generated approximately 52% of year-to-date gross profit; changed license terms or loss of the license could materially affect earnings, cash flow and goodwill.
- Bahamas contract: The Windsor plant agreement expired in July 2013 after the contracted water volume was delivered. The company continued operating at the government’s request, but an extension and its terms were uncertain. The plant generated approximately $5.5m of revenue in the first nine months of 2013.
- Other contingencies: A Belize regulatory dispute remained unresolved, with enforcement stayed by a temporary injunction. The company warned that adverse outcomes involving the Cayman license, Belize or Windsor could materially reduce operating income and cash flows and potentially require goodwill impairment.
- Management said available cash, operating cash flow and financing sources were expected to meet known liquidity needs, while noting liquidity could decline during 2014 if NSC development continued. No formal earnings guidance was provided. Key stated risks include weather and rainfall, tourism and economic conditions, government relationships, regulation, project execution and foreign-currency movements.
Important facts for investors to verify
- Progress and final terms for renewing the Cayman retail license, including the judicial review and any resulting rate framework.
- Whether NSC secures binding customers, permits, power and feed-water arrangements, project financing, and the funds needed for land payments and development.
- Whether the Windsor agreement is extended, on what pricing and volume terms, and the consequences if it is not.
- Resolution of the Belize regulatory matter and the remaining Baughers Bay plant-compensation claim; assess any resulting impairment exposure.
- Cash generation and liquidity after the $10.05m land obligation, projected NSC spending, planned capital expenditures and dividends.