Consolidated Water makes splash with quarterly results

Infrastructure

Revenues and net income are up for Grand Cayman’s private water supplier, thanks in part to increased retail water usage. However, uncertainty continues around Consolidated Water Co. Ltd.’s contract with the Cayman Islands government to supply water to the Seven Mile Beach area and West Bay, which accounts for most of the company’s gross profits.

According to Consolidated Water’s report for the second quarter and first half of 2013, the company’s total revenues of US$16.6 million increased by 2 per cent in the three-month period ending 30 June, 2013, compared to the second quarter of 2012. The increase can be attributed to a 5 per cent increase in retail water revenues, which account for 37 per cent of total revenues. The total number of gallons sold increased by approximately 4 per cent.

“We believe that this sales volume increase was probably due to drier weather conditions this past quarter, compared to the second quarter of last year when our sales were adversely impacted by nearly 2 feet of rain that fell over that three-month period last year,” Consolidated Water CEO Rick McTaggart said during a conference call Monday.

Listed on the NASDAQ stock exchange, the company files regular reports with the US Securities and Exchange Commission.

Mr. McTaggart said the gross profit from the company’s retail segment increased by 11 per cent, or US$300,000, due to higher sales and flat production costs. During the call, Mr. McTaggart highlighted the Dart group’s Kimpton hotel/condominium project and extension of the Esterley Tibbetts Highway to West Bay, saying Consolidated Water took the opportunity to invest about US$350,000 to install water distribution infrastructure in the new road corridor as it was being built.

He estimated that the Kimpton hotel and condos will use more than 18.5 million gallons of water per year from the Consolidated Water system.

Projects

Consolidated Water has an exclusive agreement with the Cayman Islands government to provide water to retail customers within its licensed service area. Retail operations generated 38 per cent of the company’s consolidated revenues and 54 per cent of its consolidated gross profits in the first half of 2013.

In addition to its retail operations, the company also produces and supplies bulk water to government-owned distributors in Cayman, Belize and the Bahamas. The company also has an affiliate in the British Virgin Islands that produces and supplies bulk water to BVI’s water and sewerage department. The company also launched a new water plant in Bali, Indonesia, in April, and is developing a major project in Baja California, Mexico.

At the end of 2012, the company had eight plants in Cayman with a total production capacity of 10.2 million gallons of water per day, three plants in Bahamas (15.2 million gallons per day), one in Belize (600,000 gallons per day) and two in BVI (800,000 gallons per day). The company’s new plant in Bali is producing 250,000 gallons per day for a nearby resort customer, and the company is actively trying to sell the rest of its capacity, which totals some 1.6 million gallons per day.

The Mexico project would consist of a desalinisation plant capable of producing 100 million gallons per day. In May, the company purchased about 29.7 acres of land for the project, at a price of US$12 million, of which US$2 million was paid.

The remaining balance is due in May 2014. Mr. McTaggart said the Bali and Mexico projects have led to other potential opportunities in southeast Asia and Mexico.

Bulk water

According to the report, bulk water revenues for the quarter stayed roughly the same as last year, at US$10.2 million, or 61 per cent of total revenues. The company’s operating agreement with Water Authority-Cayman to operate a Lower Valley desalinisation plant expired in January, but higher bulk water revenues in Cayman, Bahamas and Belize offset most of the lost Lower Valley plant revenues.

Mr. McTaggart said that Consolidated Water has no current plans to resume operational activities at the Lower Valley plant but there might be a chance for the company to participate in future projects at the site.

“We know that the former customer would like to do some work on that plant so we will have the opportunity at least to make a proposal to do some capital works on it in the future,” he said.

In the second quarter, the company grossed profits of US$3.3 million on retail revenues (representing 54 per cent of retail revenues) and US$3.1 million on bulk revenues (31 per cent of bulk revenues). Consolidated gross profits were US$6.4 million (39 per cent of total revenues), an 18 per cent increase compared to the second quarter of 2012.

According to the report, the improvement in gross profits reflected improved margins for bulk operations and the reduction of about US$518,000 in depreciation expense, as older assets reached the end of their depreciable lives but do not yet have to be replaced.

Cayman courts

Consolidated Water has had a licence since July 1990 granting it exclusive rights to provide water to retail customers in Seven Mile Beach and West Bay. The licence was set to expire in July 2010, but the company and government have extended the licence several times while they attempt to negotiate terms of a new licence agreement.

The most recent extension expires 30 September.

Disagreements between the company and the government’s Water Authority-Cayman have arisen during new licence negotiations, including about the best way to calculate customers’ rates, if the Water Authority should be the principal licence negotiator, and if Cayman’s relevant laws are contradictory. The company took its concerns to the Grant Court of the Cayman Islands in July 2012. In October 2012, the Grand Court agreed to a trial proceeding.

However, Mr. McTaggart said the company has decided to hold off on further legal action until Consolidated Water officials can 
discuss the issues with the new People’s Progressive Movement-led government.

When asked to elaborate on how talks with the new government were proceeding, Mr. McTaggart said it could be a while before any progress is made.

“The government has just taken power and we’re meeting with them to find out what their views are about the negotiations so it’s not been going badly but it’ll take some more time to work with the new group and see what their conditions are,” he said.

According to the report, “If the company does not ultimately enter into a new licence agreement and no other party is awarded a licence, the company expects to be permitted to continue to supply water to its service area.”

If the government offers another party a licence to service some or all of Consolidated Water’s service area, the company could exercise its rights of first refusal and assume the licence offered to the third party. However, those new terms may not be as favourable to the company as its current terms.

“The company is presently unable to determine what impact the resolution of this matter will have on its financial condition, results of operations or cash flows,” according to the report.

In addition to uncertainties in Cayman, the company is also working through issues in Belize and Bahamas. The company is awaiting a ruling from a Belizean court in regard to a dispute the company has with Public Utilities Commission of Belize. In the Bahamas, the company’s contract for one of its plants ended in early July, and the company is now operating on a 60-day extension there while the Bahamas authority considers the company’s proposal for a five-year contract extension.

Compass reporter Hannah Reid contributed to this article.

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