Consolidated Water Co. Ltd. — FY 2018 Form 10-K
Business and period: The company develops and operates seawater desalination plants and water distribution systems, with retail, bulk water, services and manufacturing operations. This annual report covers the fiscal year ended December 31, 2018, with 2017 comparisons; it is not a standalone fourth-quarter report. The company filed on March 15, 2019.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $65.72 million | $59.37 million |
| Gross profit / margin | $26.74 million / 40.7% | $24.00 million / 40.4% |
| Operating income | $7.98 million | $2.28 million |
| Net income attributable to Consolidated Water shareholders | $11.29 million; diluted EPS $0.75 | $6.14 million; diluted EPS $0.41 |
| Net income from continuing operations attributable to shareholders | $10.18 million; diluted EPS $0.68 | $5.10 million; diluted EPS $0.34 |
| Operating cash flow, continuing operations | $7.99 million | $13.29 million |
| Cash and cash equivalents at year-end | $31.34 million | $45.48 million |
| Working capital | $54.5 million | Not stated in the filing text |
Gross margin is calculated from reported revenue and gross profit. The balance sheet showed total assets of $172.52 million and total liabilities of $8.76 million at December 31, 2018. No note payable was outstanding at year-end; the filing reports no material long-term debt balance. Current assets were $62.36 million and current liabilities $7.90 million.
Material changes and drivers
- Revenue increased 10.7% year over year. Retail revenue rose to $25.62 million, primarily as water volumes increased 8%; the company attributed this mainly to lower Grand Cayman rainfall. Bulk revenue grew to $31.03 million, largely reflecting higher energy pass-through charges as fuel and electricity prices rose.
- Operating income improved substantially, in part because 2017 included about $3.0 million more in asset and goodwill impairment losses than 2018. The 2017 charges included about $1.7 million for CW-Bali and $1.4 million for Aerex goodwill.
- Other income, net increased to $2.74 million, including increased earnings and profit-sharing income from affiliate OC-BVI. OC-BVI recorded a litigation settlement; Consolidated Water recognized about $2.3 million of incremental aggregate income from the affiliate.
- Cash from continuing operations declined as accounts receivable increased, chiefly due to delayed payments from the Bahamas Water and Sewerage Corporation (WSC). Capital spending also rose: investing activities used $17.41 million, including $16.20 million for property, plant and equipment and construction in progress.
- Services remained loss-making, with an operating loss of $2.62 million; manufacturing’s operating loss narrowed to $0.15 million. Retail and bulk operating income was $2.57 million and $8.18 million, respectively.
Outlook, risks and unusual items
- Grand Cayman retail license: The exclusive license expired January 31, 2018. The company continued service month to month under the expired license while negotiating with OfReg. Management said proposed restructuring could materially reduce or eliminate historical retail operating income and cash flow; a requested January 2019 rate adjustment was deferred.
- Bahamas collections and liquidity: WSC receivables were $17.6 million at year-end, up from $9.1 million; about 75% of the 2018 balance was delinquent. The company had not recorded an allowance, citing prior collections. It reported subsequent receipts of $5.6 million in January 2019 and $1.4 million on March 12, 2019, while warning that prolonged nonpayment could require shareholder funding, revenue-recognition changes or an allowance.
- Mexico project: The proposed Rosarito project remains subject to conditions including government approvals, payment security arrangements, rights of way and debt financing. Prior legislative authorization for public payment obligations expired at year-end 2018. The equity funding agreement was due to expire June 30, 2019 unless extended. The company identified about $21.1 million of land and $3.0 million of right-of-way deposits at risk if the project cannot proceed, as well as ongoing development spending. Litigation challenging NSC ownership transactions also remained unresolved; the company said its impact on project completion could not be determined.
- Bulk contract pricing: A new five-year North Sound and Red Gate operating contract began February 1, 2019 at a per-gallon price, excluding energy pass-through, about 25% below the February 2018 rate. Management expected lower revenue and operating income at comparable volumes. The company had also bid to continue operating the North Side Water Works plant, with results pending; proposed rates were lower than current rates.
- Business sale and other items: CW-Belize was sold in February 2019 for approximately $7.0 million, with $265,000 retained for potential indemnification obligations; its 2018 and 2017 results are presented as discontinued operations. CW-Bali continued to incur losses, but its 2018 effect was immaterial; the company had decided to discontinue its operations and was seeking to dispose of the investment. The OC-BVI settlement followed long-running litigation over the Baughers Bay plant.
- Management outlook: No specific 2019 revenue or earnings guidance is provided. Planned 2019 liquidity requirements included approximately $4.0 million of capital spending for existing operations, $2.5 million for Mexico project development, and $1.3 million for dividends payable. The company also approved a $4.0 million Aerex revolving facility in February 2019; Aerex borrowed $2.5 million in March.
- Other material risks include tourism and rainfall variability, energy and operating-cost estimates, government and regulatory actions, customer concentration (WSC represented 35% of 2018 revenue), weather-related damage, foreign-exchange exposure and project execution. The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Progress and final terms of the Cayman retail license negotiations, including permitted rates and any resulting asset impairment.
- Actual timing and amount of WSC collections, CW-Bahamas liquidity needs, and whether an allowance for doubtful accounts or revenue-recognition changes become necessary.
- Whether the Rosarito project obtains required legislative approvals, financing, rights of way and partner funding before relevant agreements expire, and the status of the EWG litigation.
- Revenue and operating-income effects of the lower-priced Cayman bulk contracts and the outcome of the North Side plant bid.
- Completion of the CW-Belize sale indemnification period and any further costs or disposal developments relating to CW-Bali.