CWCO

Business Context and Reporting Period

Company: Consolidated Water Co. Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Operations: The company develops and operates seawater desalination plants and water distribution systems in the Cayman Islands, Belize, the British Virgin Islands (via affiliate), and The Bahamas. Operations are divided into three segments: Retail Water (40% of revenue), Bulk Water (45% of revenue), and Services (15% of revenue).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 28.6% year-over-year, driven primarily by increased bulk water sales (due to the Blue Hills plant in The Bahamas) and significant growth in the Services segment ($7.5M vs $1.9M in 2006) from plant construction contracts.
• Profitability: Net income increased 51.4% to $11.4M. However, the consolidated gross margin decreased from 41% to 38% due to the lower margin profile of the new construction projects and non-revenue water (NRW) obligations in The Bahamas.
• Segment Performance:
  • Retail: Revenue up 8.4% to $19.5M; gross margin stable at 63%.
  • Bulk: Revenue up 20.7% to $22.1M; gross margin stable at 19%.
  • Services: Revenue up 291% to $7.5M, largely due to the Tynes Bay plant construction in Bermuda.
• Dividends: Declared dividends per share decreased to $0.195 in 2007 from $0.24 in 2006.

Guidance, Outlook, Risks, and Contingencies

Management Commentary and Outlook

Management expects to maintain operating efficiencies and pursue growth through new business opportunities in current and new markets. The company is currently constructing the Tynes Bay plant in Bermuda (expected completion June 2008) and the Frank Sound plant in the Cayman Islands (expected completion late 2008).

Significant Risks and Contingencies

• BVI Affiliate Dispute (OC-BVI): The British Virgin Islands (BVI) government has asserted a purported right of ownership over OC-BVI's Baughers Bay plant and filed a lawsuit. The government has also unilaterally reduced payments to approximately 30% of billed amounts. As of Dec 31, 2007, OC-BVI had $8.2M in gross receivables from the BVI government. While management believes the investment is not impaired, a loss of the plant or contract could result in significant impairment charges.
• Non-Revenue Water (NRW) in The Bahamas: The company incurred costs to reduce water loss for the Blue Hills plant. While the company believes it met the requirement in March 2007, the customer (WSC) confirmed completion in July 2007. The company has reserved approximately $332,000 for invoices from March-June 2007 due to uncertainty of collection.
• Contract Renewals: The exclusive retail license in the Cayman Islands expires in July 2010. Several bulk water agreements are fixed-term and may not be renewed or may be renewed on less favorable terms.
• Customer Concentration: The top two bulk customers (Water and Sewerage Corporation of The Bahamas and Water Authority-Cayman) accounted for approximately 42% of total consolidated revenues in 2007.

Key Facts for Investor Verification

• BVI Receivables: Verify the collectibility of the $8.2M receivable from the BVI government and the status of the ongoing litigation regarding plant ownership.
• NRW Revenue Recognition: Confirm the final resolution of the Non-Revenue Water dispute in The Bahamas and the ultimate recognition of the reserved $332,000.
• Construction Costs: Monitor the completion costs and timelines for the Tynes Bay (Bermuda) and Frank Sound (Cayman) plants, as cost overruns could impact margins.
• License Renewal: Track negotiations for the renewal of the Cayman Islands retail license expiring in 2010.
• Debt Covenants: Note that the CW-Bahamas credit facility was not in compliance with its financial covenant as of December 31, 2007.