Consolidated Water Co. Ltd. — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. The company produces and supplies desalinated water in the Cayman Islands, Belize and the Bahamas, and provides water-plant services and development activities. Unless otherwise noted, amounts are U.S. dollars.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $16.73 million | $13.91 million | +20.3% |
| Gross profit / margin | $5.95 million / 35.5% | $5.25 million / 37.8% | +13.3%; margin down |
| Operating income | $2.43 million | $1.46 million | +66.9% |
| Net income attributable to company shareholders | $2.34 million | $1.99 million | +17.5% |
| Diluted EPS | $0.16 | $0.14 | +$0.02 |
| Operating cash flow | $(1.92) million | $2.77 million | Decreased |
| Cash and cash equivalents at quarter end | $25.00 million | $48.09 million | Decreased |
Dividends declared were $0.075 per common share in both periods. The company reported working capital of approximately $46.3 million. At March 31, total borrowings were $15.51 million; this included $8.25 million outstanding on 5.95% secured bonds. The $8.5 million Bahamas Series A bonds were redeemed on March 31. The separate $7.5 million Scotiabank facility was repaid on April 30 using restricted cash.
Material changes and operating performance
- Bulk water: Revenue rose about $2.9 million, primarily reflecting a 34% increase in gallons sold following the Blue Hills plant expansion in the Bahamas, plus higher energy pass-through charges. Segment operating income increased to $2.09 million from $1.26 million.
- Retail water: Revenue increased 3%, despite gallons sold falling approximately 5%; rate adjustments and higher energy pass-through charges offset lower volume. Segment operating income fell to $0.73 million from $1.20 million, partly due to higher general and administrative costs.
- Services: Revenue declined to $0.09 million from $0.37 million, reflecting the end of the Bermuda management contract in June 2011 and lower OC-BVI-related fees. The segment recorded an operating loss of $0.38 million, improved from a $1.00 million loss as Mexico project-development expenses fell.
- Consolidated gross profit increased, but gross margin narrowed as total costs rose faster than revenue. Lower general and administrative expenses and improved bulk results supported operating income. Net income growth was tempered by lower interest income and OC-BVI equity earnings; Q1 2011 included a $1.0 million court-award payment to OC-BVI.
Cash, debt and liquidity
Operating activities used $1.92 million, mainly because Bahamas accounts receivable increased approximately $6.2 million. The company reported that the Bahamas government paid approximately $6.3 million in April 2012 to reduce those receivables. Investing activities used $0.71 million, including $1.10 million of capital additions and a $0.30 million payment for an option to acquire another NSC shareholder’s shares. Financing activities used $9.99 million, including debt repayments and approximately $1.1 million of dividends. Management stated that cash on hand and expected operating cash generation should meet liquidity needs for the next 12 months and the foreseeable future.
The secured bonds mature in 2016 and carry financial covenants; the company reported compliance at March 31, 2012. The credit facility required a cash deposit as collateral and expired 12 months after its December 2011 initial advance; it was repaid after quarter-end.
Outlook, risks and unusual items
- Retail license: The Cayman Islands retail license, responsible for about 39% of Q1 revenue and 54% of gross profit, remained under renewal negotiations. The government had approved an extension through June 30, 2012, but the company was awaiting execution. The government was seeking a rate-of-return-on-invested-capital model, which the company said could reduce retail operating income and cash flows and potentially cause impairment of $3.6 million of related goodwill.
- OC-BVI litigation and investment: On April 18, 2012, after quarter-end, the appeals court upheld the $10.4 million award for water supplied and awarded additional compensation for plant improvements and certain legal costs. Only $5.0 million of the $10.4 million award had been paid. The BVI government appeared to withhold further payment pending clarification of the ruling; OC-BVI planned enforcement steps and sought leave to appeal if necessary. The company’s $6.6 million investment carrying value assumes collection of the full award and performance under the Bar Bay contract. No impairment was recorded for Q1; the company said a reduction in the award or failure to meet contract obligations could require impairment. Awarded amounts will not be included in the company’s OC-BVI earnings until paid.
- Mexico development project: NSC is pursuing development of a proposed 100-million-gallon-per-day desalination plant and pipeline. The project still requires permits, customer and supply contracts, financing, and other development work. The company expects at least two years of further development before construction could begin, and warned that substantial additional spending may not result in a buildable or financeable project. The company acquired an option and voting power over another NSC shareholder’s shares in February 2012.
- Other exposures: Belize regulatory orders affecting CW-Belize were subject to a temporary injunction while negotiations continued; the financial impact was not determinable. The company also cited possible goodwill impairment if its share price remains below book value. It expects continuing services-segment operating losses until development spending declines or significant external contracts are obtained. No formal consolidated earnings guidance was provided.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Investor verification priorities
- Track execution and terms of the Cayman retail-license extension and any final rate-setting model.
- Verify OC-BVI’s collection of the unpaid award, resolution of the appellate ruling’s payment language, and any further appeal or impairment implications.
- Monitor Bahamas receivable collections and confirm the effect of the April payment on operating cash flow and liquidity.
- Assess the funding, permitting, customer-contract and financing milestones—and potential further costs—of the NSC project.
- Review the terms and impact of the post-quarter repayment of the $7.5 million credit facility and the remaining secured-debt obligations.