Business context and reporting period
Consolidated Water Co. Ltd. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company produces and sells desalinated water, primarily in the Cayman Islands, Belize and The Bahamas, and also conducts engineering, construction and water-plant management activities. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $12.81 million | $11.70 million | $41.55 million | $39.08 million |
| Gross profit (margin) | $4.01 million (31%) | $3.77 million (32%) | $14.51 million (35%) | $13.49 million (35%) |
| Income from operations | $0.98 million | $0.44 million | $4.51 million | $4.47 million |
| Net income attributable to company stockholders | $1.29 million; $0.09/share | $1.27 million; $0.09/share | $5.21 million; $0.36/share | $5.38 million; $0.37/share |
- Q3 revenue rose about 9% year over year, led by bulk water sales; nine-month revenue increased about 6%, but attributable earnings declined about 3%.
- Nine-month operating cash flow was $14.63 million, versus $5.37 million in 2010. Investing activities used $7.30 million, including $10.25 million for property, plant and construction additions; financing activities used $4.41 million, including $3.28 million in dividends and $1.14 million in debt repayments. Cash increased to $49.05 million from $46.13 million at year-end 2010.
- At September 30, total assets were $155.59 million, total liabilities $24.88 million and equity $130.71 million. Current assets of $63.81 million exceeded current liabilities of $8.71 million by approximately $55.10 million.
- Total borrowings were $17.25 million, all bonds payable, down from approximately $18.31 million at December 31, 2010. The company reported compliance with its secured-bond financial covenants. It had no borrowings under CW-Bahamas’ $500,000 working-capital facility.
- Quarterly dividends declared were $0.075 per common share, unchanged from 2010; nine-month declared dividends were $0.225 per share.
Material changes and management commentary
- Bulk revenue increased 18% for the quarter and 19% for the nine-month period, reflecting higher volumes and energy-price pass-throughs. Bulk operating income also improved. Retail revenue grew, but retail gross margin narrowed amid higher energy pass-throughs and operating costs.
- Services revenue fell to $70,217 in Q3 and $942,838 for nine months, principally due to reduced plant-construction activity, the June 2011 end of the Bermuda management contract and lower OC-BVI fees. The segment recorded operating losses of $386,506 for Q3 and $1.69 million year to date. Management expects continued services-segment losses until new management or construction contracts are secured.
- Nine-month general and administrative expense rose to $10.01 million from $9.02 million, including increased spending on the Mexico project and employee costs. Q3 expense declined year over year, mainly because Mexico development costs were lower.
- Management said cash on hand and expected operating cash flow should meet liquidity needs for the next 12 months, including about $2.7 million of debt principal and interest payments and quarterly dividends if declared. Scotiabank committed $10 million toward the Blue Hills expansion; use of the facility would require cash collateral of approximately 110% of amounts borrowed.
Outlook, risks and contingencies
- Blue Hills expansion: The Bahamas plant expansion was operational but not complete as of November 1, 2011. The agreement provided for liquidated damages of $5,000 per day if completion was not achieved by that date. The company expected any assessment period, if applicable, to be short. Completion triggers a minimum purchase commitment of 63 million gallons per week and extends the supply agreement for 20 years or until specified cumulative deliveries are reached, whichever is later.
- Cayman retail license: The exclusive license, which generated about 41% of Q3 revenue and 46% of Q3 gross profit, was extended through January 31, 2012 while negotiations continue. The government has proposed a rate-of-return-on-invested-capital model. The company warned that less favorable terms could reduce earnings and cash flow and potentially impair up to $1.2 million of retail goodwill.
- OC-BVI dispute: The BVI government had paid $5 million of the $10.4 million awarded by the court for water supplied at Baughers Bay. Appeals were heard September 30, 2011, with a ruling expected by year-end. The company’s $6.7 million OC-BVI investment valuation assumes collection of the full award and performance of the Bar Bay supply agreement; an adverse ruling or contract failure could require further impairment.
- Mexico affiliate: NSC’s proposed Baja California desalination project still required additional development funding, permits, land-title resolution, power and feed-water arrangements, customer contracts and project financing. An option allowing a related third party to buy the company’s shares for substantially less than the $4 million incurred expired November 21, 2011. If not exercised, alternatives included a sale, restructuring or cessation; approximately $606,000 of recorded NSC-related assets could be expensed.
- Belize: The utility regulator’s order imposed requirements affecting operations and the supply agreement; enforcement was temporarily stayed pending court proceedings. The company also said it could not determine the effect of proposed constitutional legislation concerning public-utility ownership. Transfers of U.S. dollars from CW-Belize require advance central-bank approval.
- The company identified tourism, weather, economic conditions, regulation, litigation and access to capital as risks. It reported no material change in market-risk exposure, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Outcome of the OC-BVI appeals, collection of the remaining court award and continued performance under the Bar Bay agreement.
- Status and terms of the Cayman retail-license renewal, including any rate-setting changes.
- Blue Hills expansion completion, any liquidated damages, the Scotiabank financing terms and required cash collateral.
- Whether the NSC purchase option was exercised and whether further funding, restructuring or asset impairment followed.
- Developments in Belize’s regulatory proceedings and legislation, and the status of customer receivables and performance-bond arrangements.