Consolidated Water Co. Ltd. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; audited annual results, with unaudited quarterly comparisons. Amounts are in U.S. dollars unless stated otherwise.
Business context
The company develops and operates reverse-osmosis desalination plants and water distribution systems. It operated or was affiliated with 14 plants across the Cayman Islands, The Bahamas, Belize and the British Virgin Islands, with combined capacity of 26.8 million U.S. gallons per day. FY2011 revenue was approximately 42% retail water, 56% bulk water and 2% services. The Bermuda plant agreement ended June 30, 2011; the Mexico desalination project remained in development and generated no operating revenue.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $55.15 million | $50.71 million |
| Gross profit / margin | $19.02 million / approximately 34% | $16.61 million / approximately 33% |
| Income from operations | $5.37 million | $5.28 million |
| Net income attributable to company shareholders | $6.11 million; $0.42 diluted EPS | $6.29 million; $0.43 diluted EPS |
| Net cash from operating activities | $8.45 million | $6.10 million |
| Capital spending on PP&E and construction in progress | $13.96 million | $1.27 million |
| Cash and cash equivalents | $37.62 million | $46.13 million |
| Total borrowings, including current portion | $24.38 million | $18.31 million |
Year-end current assets were $67.33 million and current liabilities $23.30 million; reported working capital was approximately $44.0 million. These figures include $7.5 million of restricted cash pledged against the Scotiabank facility and $8.50 million of marketable securities. The company reported sufficient liquidity for the next 12 months, including expected debt service, capital spending and dividends, while noting new projects or expansions could require additional financing.
Quarterly results: Q4 revenue was $13.61 million versus $11.63 million in Q4 2010; gross profit was $4.51 million versus $3.12 million; and net income attributable to company shareholders was $0.90 million versus $0.92 million. Diluted EPS was $0.06 in both quarters.
Changes versus prior period
- Annual revenue rose approximately 9%, led by a $5.46 million increase in bulk revenue, while services revenue fell $2.50 million. Bulk sales volumes increased 6%; higher energy pass-through charges and the Blue Hills expansion also contributed.
- Gross profit increased $2.41 million, with bulk gross margin improving to about 22% from 17%. Retail revenue rose, but retail gross margin eased to about 51% from 53%, reflecting energy pass-through charges and higher non-revenue water.
- Shareholder net income declined about 3% despite higher revenue and operating income. General and administrative expense rose $2.32 million, including $3.0 million of Mexico project development expense; the services segment’s operating loss widened to $2.73 million.
- Blue Hills capacity in The Bahamas increased from 7.2 million to 12.0 million gallons per day during 2011. The amended supply agreement increased required minimum deliveries and is expected to extend for 20 years from substantial completion, which management expected in Q1 2012.
- Debt increased with a $7.5 million draw under a $10 million non-revolving facility. The company elected to redeem the remaining B$8.5 million of Series A bonds on March 31, 2012.
Outlook, risks and unusual items
- Cayman retail license: The exclusive license had expired in July 2010 and was repeatedly extended during renewal negotiations. The government approved an extension through June 30, 2012, but the company was still awaiting execution. The government sought a rate-of-return-on-invested-capital model; the company warned this could reduce retail income and cash flow and potentially impair $1.2 million of retail goodwill.
- Customer concentration and collections: The Water and Sewerage Corporation of The Bahamas (WSC) represented 36% of FY2011 revenue and the Water Authority-Cayman 16%. WSC receivables were approximately $4.4 million at year-end; the filing also reports approximately $8.3 million due at February 29, 2012. Management considered collection likely and recorded no allowance, despite payment delays.
- Belize regulation: A Public Utilities Commission order would impose operating, water-quality and supply-agreement requirements, including a 450,000-gallon-per-day cap. A temporary injunction stayed enforcement pending court review; the financial impact was undetermined.
- British Virgin Islands litigation: A court awarded OC-BVI $10.4 million relating to the Baughers Bay dispute; $5.0 million had been paid. The remaining award was subject to appeal. The company’s $6.6 million investment carrying value assumes full collection and no repayment of prior amounts; an adverse outcome could trigger a material charge.
- Goodwill review: Management concluded goodwill of $3.59 million was not impaired at year-end, but SEC staff was reviewing the company’s impairment analysis and could disagree.
- Mexico development: The proposed 100-million-gallon-per-day project required further permits, customer and supply contracts, and project financing. Management expected at least two more years of development and warned that substantial additional spending might not result in construction or a viable project. In February 2012, the company obtained an option and voting authority over another NSC shareholder’s shares.
- Other risks and commentary: Services operations were expected to continue losing money while Mexico development costs continued and until significant new contracts were secured. Tourism, rainfall, hurricanes, energy costs, contract renewals, production performance and government regulation could affect results. No quantified earnings or revenue guidance was provided. The company declared quarterly dividends of $0.075 per share during 2011.
The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2011.
Key facts for investors to verify
- Whether the Cayman retail license extension was executed and the final license’s pricing and economic terms.
- WSC’s subsequent payments and the recoverability and timing of its overdue receivables.
- The appellate outcome and remaining collections in the OC-BVI dispute, and any resulting investment impairment.
- Whether the Blue Hills expansion reached substantial completion and the related contract extension and delivery requirements took effect.
- SEC staff’s conclusion on goodwill impairment, and the future funding, permits, customer commitments and financing for the NSC project.
- Debt repayment and refinancing needs after the planned Series A bond redemption, including liquidity available after restricted cash and capital commitments.