Business Context and Reporting Period
Company: Consolidated Water Co. Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The Company uses reverse osmosis technology to produce fresh water from seawater, supplying retail and bulk customers in the Cayman Islands, Belize, and the Bahamas. It also provides engineering, design, and management services for water plants in Bermuda, the British Virgin Islands (BVI), and Mexico.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $13,906,620 | $14,677,311 |
| Gross Profit | $5,250,555 | $5,486,249 |
| Gross Margin | 37.8% | 37.4% |
| Net Income (Attributable to Common Stockholders) | $1,993,010 | $3,076,936 |
| Diluted EPS | $0.14 | $0.21 |
| Operating Cash Flow | $2,773,812 | $4,494,016 |
| Cash and Cash Equivalents (Ending) | $48,092,662 | $48,073,599 |
| Total Debt (Current + Long Term) | $17,960,748 | Filing text does not provide a clear consolidated total for Q1 2010 |
| Working Capital | $59,149,798 | Filing text does not provide a clear value |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately 5.3% ($770,691) compared to Q1 2010. This was primarily driven by a significant drop in the Services segment, which generated $1.7 million less in revenue due to a lack of plant construction activity and reduced management fees in Bermuda.
- Profitability Decrease: Net income attributable to common stockholders fell 35% to $1.99 million. This decline was largely due to a 52% increase in General and Administrative (G&A) expenses, driven by approximately $1.1 million in development costs for the Mexico affiliate (NSC Agua).
- Segment Performance:
- Retail: Operating income decreased slightly (7.5%) due to lower water volumes sold to the Water Authority Cayman, partially offset by a 2% base rate increase.
- Bulk: Operating income increased 10% due to higher water volumes from the refurbished Red Gate plant and energy pass-through rate adjustments.
- Services: Shifted from a profit of $563,668 in Q1 2010 to an operating loss of $(968,356) in Q1 2011.
- Equity Earnings: Equity in earnings from the OC-BVI affiliate increased to $507,813 from $212,709, aided by a $1 million payment received from the BVI government regarding the Baughers Bay litigation.
Outlook, Risks, and Contingencies
- Cayman Retail License Renewal: The Company's exclusive retail license in the Cayman Islands is currently extended through July 4, 2011. Negotiations for a new long-term license are ongoing. The government proposes a "rate of return on invested capital model," which the Company objects to, fearing it could reduce operating income and necessitate a goodwill impairment of approximately $1.2 million.
- OC-BVI Litigation (BVI): The Company's investment in OC-BVI ($7.6 million carrying value) depends on the collection of a $10.4 million court award against the BVI government. The BVI government has appealed the ruling and requested a stay of execution. If the appeal succeeds or payments are not made, the Company may be required to record additional impairment losses.
- Mexico Project (NSC Agua): The Company is developing a desalination plant in Baja California. It has committed up to $4 million in initial funding, with approximately $213,000 remaining as of the filing date. The project requires significantly more than $4 million to complete, and the Company may expend additional funds or abandon the project if it proves unviable.
- Bahamas Receivables: CW-Bahamas is owed approximately $6.9 million by the Water and Sewerage Corporation (WSC). While the government has budgeted funds to pay these arrears, collection timing remains a liquidity consideration.
- Blue Hills Expansion: The Company is required to expand the Blue Hills plant in the Bahamas to 12 million gallons per day by September 30, 2011. It is seeking $10 million in new financing for this project.
Investor Verification Checklist
- License Negotiations: Monitor the status of the Cayman Islands retail license renewal and the potential adoption of the "rate of return" pricing model.
- BVI Litigation Status: Track the Eastern Caribbean Court of Appeals' ruling on the BVI government's appeal regarding the $10.4 million award to OC-BVI.
- Mexico Project Viability: Assess the progress of the NSC Agua project and the Company's commitment to fund costs exceeding the initial $4 million.
- Bahamas Receivables: Verify the collection of the $6.9 million owed by the WSC to ensure liquidity for the Blue Hills expansion.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the debt service coverage ratio and debt-to-equity ratios, given the increased G&A expenses.