CWCO

Consolidated Water Co. Ltd. - Q2 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2009. Consolidated Water Co. Ltd. operates in three primary segments: retail water supply, bulk water supply, and engineering/construction services. The company operates in the Cayman Islands, Bahamas, Belize, and the British Virgin Islands (BVI). As of August 3, 2009, there were 14,537,530 shares of common stock outstanding.

Key Financial Metrics (Six Months Ended June 30, 2009)

Material Changes vs. Prior Period

• Profitability Surge: Net income attributable to controlling interests increased 76% year-over-year (from $3.65M to $6.42M), driven by a significant improvement in gross margins across all segments.
• Revenue Decline: Total revenues decreased 2.5% to $31.3M. This was primarily due to lower energy cost pass-throughs in the bulk segment, despite a 1.4% increase in water volume sold.
• Margin Expansion: Consolidated gross margin improved from 29% in the prior year to 43%. The bulk segment margin rose from 13% to 23%, and the retail segment margin rose from 56% to 61%, benefiting from lower energy costs and inflation-based rate adjustments.
• Services Segment Growth: Operating income in the services segment jumped from $628k to $2.76M, largely due to downward adjustments in estimated costs for completed construction projects (Frank Sound and Bermuda plants) and new management fees from the Tynes Bay plant in Bermuda.
• Investment Losses: The company recorded a loss of $1.2M from its equity investment in affiliate OC-BVI, consistent with the prior year, due to an ongoing dispute with the BVI government.

Outlook, Risks, and Contingencies

• OC-BVI Litigation (Critical Risk): A major dispute exists with the British Virgin Islands government regarding the ownership of the Baughers Bay plant and payment for water delivered. The government claims ownership; OC-BVI claims the government owes ~$13.8M. A trial is ongoing with a final ruling expected in September or October 2009.
  • Impact: OC-BVI has switched to cash-basis revenue recognition for this plant, resulting in recorded losses. Management currently believes the investment is not impaired, but an adverse ruling could trigger a material impairment charge.
• CW-Bahamas Liquidity: The Water and Sewerage Corporation of the Bahamas (WSC) is delinquent on payments, owing approximately $4.7M as of June 30, 2009. While the government asserts these will be paid, continued delays could force CW-Bahamas to reduce water production.
• CW-Belize Regulation: CW-Belize was designated a public utility provider in May 2009, subjecting it to rate regulation by the Public Utilities Commission of Belize. The impact on future profitability is currently undetermined.
• Bar Bay Plant: OC-BVI has constructed a new plant in the BVI and executed a binding term sheet for water sales, but a definitive contract is still under negotiation. Failure to secure this contract could impair the $8M investment.

Investor Verification Checklist

• OC-BVI Trial Outcome: Monitor the Eastern Caribbean Supreme Court's final ruling (expected Sept/Oct 2009) regarding the Baughers Bay ownership and payment dispute.
• Bahamas Receivables: Verify the collection status of the $4.7M owed by the Water and Sewerage Corporation of the Bahamas.
• Belize Regulatory Impact: Assess how the new Public Utilities Commission rate-setting authority affects CW-Belize's margins.
• Bar Bay Contract: Confirm the execution of a definitive water supply contract for the new Bar Bay plant in the BVI.
• Debt Covenants: Review compliance with the 5.95% Secured Bonds covenants (Debt Service Coverage Ratio, Debt/EBITDA, Debt/Equity), which the company reported as compliant as of June 30, 2009.