Consolidated Water Co. Ltd. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited results are presented in U.S. dollars. The company produces and supplies desalinated water in the Cayman Islands, Belize and the Bahamas, and provides water-plant engineering, construction and management services.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $14.84 million | $12.70 million | $28.74 million | $27.38 million |
| Gross profit | $5.25 million | $4.23 million | $10.50 million | $9.72 million |
| Gross margin | 35% | 33% | 37% | 35% |
| Operating income | $2.07 million | $1.03 million | $3.53 million | $4.03 million |
| Net income attributable to company stockholders | $1.93 million | $1.03 million | $3.92 million | $4.11 million |
| Diluted earnings per share | $0.13 | $0.07 | $0.27 | $0.28 |
- Revenue and segment drivers: Q2 revenue rose 16.8%, primarily on bulk water revenue growth. Bulk revenue increased with a 5% rise in water volume and higher energy pass-through charges. Retail revenue benefited from an approximately 2% base-rate increase and energy pass-throughs. First-half revenue increased 5.0%.
- Profit and costs: Q2 stockholder-attributable income rose about 87%, while first-half income declined about 4.6%. First-half G&A increased by approximately $1.3 million, largely reflecting development costs for the Mexico affiliate, NSC. First-half operating income also fell as services revenue declined amid limited plant-construction activity and higher NSC costs.
- Cash flow: Operating activities provided $7.88 million in the first half, versus $3.39 million in 2010. Investing activities used $0.22 million, including $2.38 million for property, plant and construction-in-progress additions; financing activities used $2.94 million, including $2.18 million of dividends and $0.75 million of debt principal repayments. Cash increased $4.71 million to $50.84 million.
- Liquidity and debt: Working capital was approximately $60.9 million. Total borrowings were $17.61 million, consisting of bonds; no amount was drawn on the Bahamas working-capital facility. The company reported compliance with secured-bond covenants at June 30, 2011.
- Dividends: $0.075 per common share was declared for each quarter shown; $0.15 per share was declared for the first half.
Material changes and outlook
- Bulk operations improved year over year in both the quarter and first half. Services-segment operating losses were $0.33 million for Q2 and $1.30 million for the first half; the first-half deterioration reflected lower plant-sales revenue and increased NSC development spending.
- The Bermuda plant management contract ended June 30, 2011; management does not expect further fees or revenue from that affiliate.
- The company had no formal earnings guidance in the filing. Management said existing cash and expected operating cash flow should meet liquidity needs for the next 12 months, including about $2.7 million of debt principal and interest payments and quarterly dividends if declared. It was seeking approximately $10 million of financing for the Blue Hills plant expansion and expected to fund the balance from cash.
- The Blue Hills expansion was required to raise capacity to 12 million gallons per day by September 30, 2011 under the amended supply agreement. If incomplete by November 1, the company could owe liquidated damages of $5,000 per day. Completion would trigger a 20-year extension of the supply agreement, subject to its stated volume term.
Risks, contingencies and unusual items
- Cayman retail license: The license supports a business representing approximately 45% of first-half revenue and 54% of gross profit. It was extended to January 31, 2012 while negotiations continued. The government sought a rate-of-return-on-invested-capital model; the company warned that less favorable terms could reduce earnings and cash flow and lead to impairment of up to the $1.2 million retail goodwill carrying value.
- OC-BVI dispute: The company’s $6.9 million carrying value in OC-BVI assumes the BVI government fulfills the Bar Bay agreement and OC-BVI collects the court-awarded $10.4 million. Only $5.0 million had been paid by June 30, 2011. Appeals and a government request to stay further payments create potential for reduced collections and additional impairment. The company recorded no impairment in the first half.
- NSC project: The proposed 100-million-gallon-per-day Mexico desalination project remained in development. The company had met its initial $4 million funding commitment, but said substantially more funding would be needed and was evaluating whether to continue. Land title, permits, power and feed-water arrangements, customer contracts and project financing remained outstanding; the project might not proceed.
- Belize regulatory matters: A July 2011 regulator order imposed requirements concerning water quality, operating procedures, supply limits and equipment. Proposed Belize constitutional legislation could require public utilities to be majority-owned and controlled by the government. The company said the effects were uncertain.
- Other: The Bahamas Water and Sewerage Corporation’s overdue receivable fell from approximately $6.2 million at year-end 2010 to approximately $3.5 million at June 30, 2011 after additional payments. Transfers of U.S. dollars from the Belize and Bahamas subsidiaries require central-bank authorization. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Progress and final terms of the Cayman retail-license renewal, including any rate-setting changes.
- OC-BVI appeal status, further court-award collections, and the assumptions supporting the $6.9 million carrying value.
- Whether the company proceeds with NSC, its additional funding needs, and whether the project secures permits, customers and financing.
- Completion, financing and operating performance of the Blue Hills expansion, including any delay-related damages.
- Collection of remaining Bahamas receivables and the impact of Belize regulatory or legislative developments.