Consolidated Water Co. Ltd. quarterly report, Q3 FY2014

Business context and reporting period

Consolidated Water Co. Ltd. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company produces and supplies desalinated water in the Caribbean and Indonesia, and also provides water-plant engineering, construction and operating services. Figures are in U.S. dollars.

Financial performance and position

MetricQ3 2014Q3 2013Nine months 2014Nine months 2013
Revenue$17.02 million$15.44 million$50.30 million$48.56 million
Gross profit (margin)$5.70 million (33%)$5.23 million (34%)$18.04 million (36%)$17.84 million (37%)
Operating income$1.72 million$0.92 million$4.93 million$6.37 million
Net income attributable to company stockholders$1.88 million; $0.13 diluted EPS$0.91 million; $0.06 diluted EPS$5.30 million; $0.36 diluted EPS$7.50 million; $0.51 diluted EPS
Net cash from operating activitiesNot separately reportedNot separately reported$22.74 million$9.57 million

At September 30, cash and cash equivalents were $33.58 million; working capital was approximately $41.2 million. Current assets were $57.36 million and current liabilities $16.13 million. The company had a $9.5 million demand loan outstanding, bearing interest at LIBOR plus 1.5%, secured by substantially all Cayman Islands assets. The loan is payable quarterly on a five-year amortization schedule if not called, with the remaining balance due after two years. The filing reports no long-term debt balance at quarter-end.

Nine-month investing cash outflow was $23.45 million, largely reflecting $17.43 million for Mexico project land, alongside $2.78 million in capital additions and a $5.0 million certificate of deposit purchase. Financing provided $0.71 million net, including $10.0 million of demand-loan proceeds, offset by $5.30 million in debt repayments and $3.48 million in dividends.

Material changes versus prior periods

  • Third-quarter revenue rose about 10%, and attributable net income more than doubled. Retail revenue increased with higher Cayman water volumes; services revenue increased on Cayman plant construction work. Lower G&A, including reduced Mexico project-development costs for the quarter, also helped results.
  • Nine-month revenue rose about 4%, but attributable net income fell about 29%. Management attributed the decline principally to higher 2013 earnings from OC-BVI’s Baughers Bay litigation award and higher 2014 NSC development spending.
  • Retail revenue increased 5% for the nine months, while bulk revenue declined about 1%, mainly because Bahamas utility purchases fell from unusually high 2013 volumes. Services revenue increased to $1.92 million from $0.71 million, but the segment recorded a $3.59 million operating loss for the nine months.
  • Operating cash flow increased substantially year over year; management cited significant payments from the Bahamas Water and Sewerage Corporation, reducing the company’s Bahamas receivables by approximately $6.6 million.
  • The company completed $17.4 million of NSC land purchases, funded by liquidating marketable securities and obtaining the $10 million demand loan. Marketable securities fell from $8.59 million at year-end 2013 to zero.

Outlook, risks and unusual items

  • Management estimated remaining-2014 needs of approximately $2.5 million for existing-operation capital expenditures, $0.5 million for demand-loan debt service and $0.55 million for NSC development. It stated it expected adequate liquidity. Services-segment operating losses were expected to continue while NSC development continues or until significant new service or construction contracts are obtained.
  • The Cayman retail license, a major source of gross profit, was extended only through December 31, 2014. The Water Authority-Cayman rejected the company’s proposed pricing submissions and indicated it intended to provide a draft rate-of-return-on-invested-capital license. Less favorable terms could reduce cash flows and operating income and could trigger goodwill impairment.
  • NSC is pursuing a proposed 100-million-gallon-per-day Mexico desalination plant and pipeline. It had spent approximately $34.5 million by September 30; customer contracts, permits, financing and public tender outcomes remain uncertain. Management warned the project may not be completed.
  • NSC is contesting a Mexican tax assessment equivalent to approximately $426,000. No provision was recorded; $498,929 of restricted cash secures a letter of credit. An adverse ruling could also lead to assessments for later tax years.
  • OC-BVI depends on the BVI government as its sole customer. The company’s $5.96 million investment valuation assumes the Bar Bay agreement is honored and, on a probability-weighted basis, extended beyond its 2017 initial term. Management disclosed approximately $2.8 million of goodwill embedded in the investment and warned that future impairment charges could be material. The separate Baughers Bay plant valuation award remained unresolved.
  • The Bahamas Windsor plant agreement continues month-to-month; its future extension and terms are uncertain. The Belize regulator’s order remains subject to pending court proceedings, with enforcement temporarily stayed.
  • Quarterly dividends were $0.075 per common share; the board declared another $0.075 dividend payable October 31, 2014. Management reported effective disclosure controls and no material changes in internal control over financial reporting.

Most important facts for investors to verify

  • Progress and final economics of the Cayman retail-license renewal, especially the proposed rate model and license terms after December 31, 2014.
  • NSC project milestones, further development spending, customer commitments, tender eligibility, permits, financing and exposure to the disputed tax assessment.
  • Whether Bahamas receivable collections continue, and the Windsor agreement’s status and impact on bulk-water revenue.
  • OC-BVI cash flows, the Bar Bay extension outlook, resolution of the Baughers Bay valuation and any resulting impairment risk.
  • Demand-loan call provisions, repayment schedule and the company’s capacity to fund investment, debt service and dividends.