Business Context and Reporting Period
Company: Consolidated Water Co. Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2012
Business Overview: The Company produces fresh water from seawater using reverse osmosis technology, operating in the Cayman Islands, Belize, the Bahamas, and the British Virgin Islands (BVI). Operations are divided into three segments: Retail (exclusive license in Cayman), Bulk (long-term contracts with governments), and Services (engineering, construction, and management).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2012 | Nine Months Ended Sep 30, 2012 |
|---|---|---|
| Total Revenues | $15,840,136 | $48,799,642 |
| Gross Profit | $5,234,994 (33% Margin) | $16,594,543 (34% Margin) |
| Net Income (Attributable to Stockholders) | $1,304,843 | $5,605,001 |
| Earnings Per Share (Diluted) | $0.09 | $0.38 |
| Cash and Cash Equivalents | $31,644,158 (as of Sep 30, 2012) | |
| Working Capital | ~$49.4 million | |
| Total Debt Outstanding | $7,246,021 (5.95% Secured Bonds) | |
| Operating Cash Flow (9 Months) | $8,443,606 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 23.7% for the three months ended September 30, 2012, compared to the same period in 2011. This was driven primarily by a 34.6% increase in Bulk segment revenues due to a 36% volume increase (Bahamas plant expansion) and energy pass-throughs.
- Segment Performance:
- Bulk: Strong growth in income from operations ($1.94M vs $1.27M in Q3 2011) due to volume and improved economies of scale.
- Retail: Incurred an operating loss of $336,650 in Q3 2012 compared to a profit of $93,337 in Q3 2011, driven by a 30% increase in General and Administrative (G&A) expenses, despite a 7% increase in water sales volume.
- Services: Continued to incur operating losses ($455,620 in Q3 2012) due to development costs for the Mexico affiliate (NSC).
- Debt Reduction: The Company repaid a $7.5 million non-revolving credit facility and redeemed $8.5 million of Series A bonds during the nine-month period, significantly reducing total liabilities.
- Investment Income: Equity earnings from the BVI affiliate (OC-BVI) decreased to $201,693 for the nine months ended September 30, 2012, compared to $791,722 in the prior year, as the prior year included a $1.0 million court award payment.
Outlook, Risks, and Contingencies
- OC-BVI Litigation (BVI): A critical contingency involves a $10.4 million court award against the BVI government for water supplied. Only $5.0 million has been received to date. The Appellate Court clarified in June 2012 that the remaining balance (estimated at $6.7 million including interest/costs) is due. The Company's investment carrying value ($6.4 million) assumes full collection; failure to collect could trigger a material impairment charge.
- Cayman Retail License Renewal: The Company's exclusive retail license was extended to December 31, 2012. Negotiations for a new license are ongoing. The Company has filed for Judicial Review regarding the regulator's proposed "Rate of Return on Invested Capital" (RCAM) model, arguing it is unreasonable. Unfavorable renewal terms could materially reduce income and trigger goodwill impairment.
- Mexico Project (NSC): The Company is developing a 100 MGD desalination plant in Baja California. The project is in the development stage, requiring significant additional funding (estimated $4.4 million through Q2 2013) and regulatory approvals. Construction is not expected to commence until late 2013 at the earliest.
- Bahamas Joint Venture (NPDC Water): A joint venture to operate a retail utility in the Bahamas faces a contingency where the local Water and Sewerage Corporation declared the franchise agreement "null and void" in October 2012. The closing of the venture is delayed pending resolution.
- Goodwill Impairment Risk: With goodwill valued at $3.6 million, the Company notes that if stock trading prices remain below book value or license negotiations fail, an impairment charge may be required in the fourth quarter of 2012.
Investor Verification Checklist
- OC-BVI Collection Status: Verify if the BVI government has paid the remaining ~$6.7 million of the court award by the stated deadline of December 31, 2012.
- Cayman License Terms: Monitor the outcome of the Judicial Review and the final terms of the new retail license, specifically regarding the rate-setting model (RCAM vs. current structure).
- Bahamas Franchise Validity: Confirm the resolution of the dispute regarding the NPDC Water franchise agreement declared void by the Water and Sewerage Corporation.
- NSC Funding Requirements: Assess the Company's ability to fund the estimated $4.4 million in additional development costs for the Mexico project without diluting shareholders or increasing debt significantly.
- Goodwill Testing: Review the Q4 2012 annual goodwill impairment test results, given the current market capitalization relative to book value.