Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CWCO > SEC Filings for CWCO > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for CONSOLIDATED WATER CO LTD

Form 10-Q for CONSOLIDATED WATER CO LTD


11-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our future revenues, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking statements can be identified by use of the words or phrases "will," "will likely result," "are expected to," "will continue," "estimate," "project," "potential," "believe," "plan," "anticipate," "expect," "intend," or similar expressions and variations of such words. Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the industry and markets related to our business.

The forward-looking statements contained in this report are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Important factors which may affect these actual outcomes and results include, without limitation:

tourism and weather conditions in the areas we serve;

the economies of the U.S., the areas, and the governments we serve;

our relationships with the governments we serve;

regulatory matters, including resolution of the negotiations for the renewal of our retail license on Grand Cayman;

our ability to successfully enter new markets, including Mexico and Asia; and

other factors, including those "Risk Factors" set forth under Part II, Item 1A in this Quarterly Report and in our 2013 Annual Report on Form 10-K.

Each of the forward-looking statements in this Quarterly Report speaks as of its date. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained in this Quarterly Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based, except as may be required by law.

Unless otherwise indicated, references to "we," "our," "ours" and "us" refer to Consolidated Water Co. Ltd. and its subsidiaries.

Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ significantly from such estimates and assumptions.

Certain of our accounting estimates or assumptions constitute "critical accounting estimates" for us because:

the nature of these estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

the impact of the estimates and assumptions on financial condition and results of operations is material.

Our critical accounting estimates relate to the valuation of our (i) equity investment in our affiliate, OC-BVI; and (ii) goodwill and intangible assets.

Valuation of Investment in OC-BVI.We account for our investment in OC-BVI under the equity method of accounting for investments in common stock. This method requires recognition of a loss on an equity investment that is other than temporary, and indicates that a current fair value of an equity investment that is less than its carrying amount may indicate a loss in the value of the investment.

As a quoted market price for OC-BVI's stock is not available, to test for possible impairment of our investment in OC-BVI, we estimate its fair value through the use of the discounted cash flow method, which relies upon projections of OC-BVI's operating results, working capital and capital expenditures. The use of this method requires us to estimate OC-BVI's cash flows from (i) its water supply agreement with the BVI government for its Bar Bay plant (the "Bar Bay agreement"); and (ii) the pending amount awarded by the Eastern Caribbean Court of Appeals in the Baughers Bay litigation relating to the value of the Baughers Bay plant previously transferred by OC-BVI to the BVI government.

We estimate the cash flows OC-BVI will receive from its Bar Bay agreement by (i) identifying various possible future scenarios for this agreement, which include the cancellation of the agreement after its initial seven-year term, and the exercise by the BVI government of the seven-year extension in the agreement;
(ii) estimating the cash flows associated with each possible scenario; and (iii) assigning a probability to each scenario. We similarly estimate the cash flows OC-BVI will receive from the BVI government for the amount due under the ruling by the Eastern Caribbean Court of Appeals for the value of the Baughers Bay plant at the date it was transferred to the BVI government by assigning probabilities to different valuation scenarios. The resulting probability-weighted sum represents the expected cash flows, and our best estimate of future cash flows, to be derived by OC-BVI from its Bar Bay agreement and the pending court award.

The identification of the possible scenarios for the Bar Bay plant agreement and the Baughers Bay plant valuation, the projections of cash flows for each scenario, and the assignment of relative probabilities to each scenario all represent significant estimates made by us. While we use our best judgment in identifying these possible scenarios, estimating the expected cash flows for these scenarios and assigning relative probabilities to each scenario, these estimates are by their nature highly subjective and are also subject to material change by our management over time based upon new information or changes in circumstances.

During the fourth quarter of 2013, after reassessing what we believe will be the future demand for water in Tortola, British Virgin Islands, and the probable sources the BVI government will utilize to meet this demand, we determined it appropriate to modify the projections of cash flows for OC-BVI that we use to estimate the fair value of our investment in OC-BVI by increasing (from those used in prior years) the probabilities assigned to those scenarios that result in a lower supply of water or revenue stream from the Bar Bay plant. Based on these current estimates of OC-BVI's cash flows and our resulting estimate of the fair value of our investment in OC-BVI, we determined that the carrying value of our investment in OC-BVI exceeded its fair value and recorded an impairment loss on this investment of $200,000. The resulting carrying value of our investment in OC-BVI of approximately $6.6 million as of December 31, 2013, and our current carrying value for this investment of approximately $6.1 million as of June 30, 2014, are based upon the assumptions that the BVI government will honor its obligations under the Bar Bay agreement and (on a probability-weighted basis) that the BVI government will exercise its option to extend the Bar Bay agreement for seven years beyond its initial term, which expires in 2017.

The $6.1 million carrying value of our investment in OC-BVI as of June 30, 2014 exceeds our underlying equity in OC-BVI's net assets by approximately $2.8 million. We account for this excess as goodwill. The BVI government is OC-BVI's sole customer and substantially all of OC-BVI's revenues are generated from its Bar Bay plant. As the Bar Bay agreement matures and OC-BVI receives (or is determined by the court to not be entitled to receive) the pending court award amount assumed due for the value of the Baughers Bay plant, OC-BVI's expected future cash flows, and therefore its fair value computed under the discounted cash flow method, will decrease. Unless OC-BVI obtains an expansion or other modification of its Bar Bay agreement that results in a significant increase in the estimated future cash flows from its Bar Bay plant, we will be required to record impairment losses in future periods to reduce the carrying value of our investment in OC-BVI to its then current fair value. These impairment losses will, in the aggregate, equal the underlying $2.8 million in goodwill reflected in the carrying value of our investment in OC-BVI and could have a material adverse effect on our earnings and consolidated statement of operations.

Goodwill and intangible assets. Goodwill represents the excess cost over the fair value of the assets of an acquired business. Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment. We evaluate the possible impairment of goodwill annually as part of our reporting process for the fourth quarter of each fiscal year. Management identifies our reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. We determine the fair value of each reporting unit and compare the fair value to the carrying amount of the reporting unit. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, we are required to perform the second step of the impairment test, as this is an indication that the reporting unit goodwill may be impaired. In this step, we compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the implied fair value is less than its carrying amount, the impairment loss is recorded.

For the years ended December 31, 2013 and 2012, we estimated the fair value of our reporting units by applying the discounted cash flow method, the subject company stock price method, the guideline public company method, the mergers and acquisitions method and, on an exception basis and where necessary and appropriate, the net asset value method.

The discounted cash flow method relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period. These seven-year projections were based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and operational strategies. The discount rates for the calculations represented the estimated cost of capital for market participants at the time of each analysis. In preparing these seven-year projections for our retail unit we (i) identified possible outcomes of our on-going negotiations with the Cayman Islands government for the renewal of our retail license; (ii) estimated the cash flows associated with each possible outcome; and (iii) assigned a probability to each outcome and associated estimated cash flows. The weighted average estimated cash flows were then summed to determine the overall fair value of the retail unit under this method. The possible outcomes used for the discounted cash flow method for the retail unit included the implementation of a rate of return on invested capital model, the methodology proposed by Cayman Islands government representatives for the new retail license.

We also estimated the fair value of each of our reporting units for each of the years in the three-year period ended December 31, 2013 through reference to the quoted market prices for our Company and guideline companies and the market multiples implied by guideline merger and acquisition transactions. For the year ended December 31, 2012, we also relied upon net asset values to estimate the fair value of our services unit.

We weighted the fair values estimated for each of our reporting units under each method and summed such weighted fair values to estimate the overall fair value for each reporting unit. We changed the relative weightings for 2013 from those used for 2012 to increase the weightings applied to those methods that resulted in more conservative estimates of fair value. The respective weightings we applied to each method for the years ended December 31, 2013 and 2012 are as follows:

                                            2013                                 2012
          Method               Retail      Bulk      Services       Retail      Bulk      Services
Discounted cash flow                50 %      50 %           -           20 %      30 %           -
Subject company stock price         30 %      30 %           -           60 %      50 %          10 %
Guideline public company            10 %      10 %           -           10 %      10 %           -
Mergers and acquisitions            10 %      10 %           -           10 %      10 %           -
Net asset value                      -         -             -            -         -            90 %
                                   100 %     100 %           -          100 %     100 %         100 %

The fair values we estimated for our retail and bulk units exceeded their carrying amounts by 39% and 6%, respectively, for the year ended December 31, 2012. The fair value we estimated for our services unit for the year ended December 31, 2012 was 10% less than its carrying amount. As a result of this estimate and our subsequent step 2 analysis of the implied fair value of the goodwill recorded for our services unit, we recorded an impairment charge for the services unit goodwill of $88,717 for the year ended December 31, 2012. The fair values we estimated for our retail and bulk units exceeded their carrying amounts by 47% and 23%, respectively, for the year ended December 31, 2013.

We also performed an analysis reconciling the conclusions of value for our reporting units to our market capitalization at October 1, 2013. This reconciliation did not result in an implied control premium for our Company.

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Part I, Item 1 of this Quarterly Report and our consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2013 ("2013 Form 10-K") and the information set forth under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2013 Form 10-K.

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Consolidated Results

Net income attributable to our common stockholders for the three months ended June 30, 2014 was $2,759,693 ($0.19 per share on a fully-diluted basis) as compared to $2,853,850 ($0.19 per share on a fully-diluted basis) for the three months ended June 30, 2013.

Total revenues for the three months ended June 30, 2014 increased slightly to $16,931,832 from the $16,569,380 in revenues generated for the three months ended June 30, 2013, due to an increase in revenues for the retail and services segments that offset a decrease in revenues for the bulk segment. Gross profit for the three months ended June 30, 2014 was $6,370,046 or 38% of total revenues, as compared to $6,397,521 or 39% of total revenues, for the three months ended June 30, 2013, as gross profit decreased slightly for the bulk and services segments. For further discussion of revenues and gross profit for the three months ended June 30, 2014, see the "Results by Segment" analysis that follows.

General and administrative ("G&A") expenses on a consolidated basis were $3,781,161 and $3,594,762 for the three months ended June 30, 2014 and 2013, respectively. For 2014 as compared to 2013, project development expenses incurred by our Mexico subsidiary, N.S.C. Agua, S.A. de C.V. ("NSC"), increased by approximately $60,000, professional fees increased by approximately $142,000 (primarily as a result of legal fees incurred for the judicial review conducted in connection with our retail license negotiations), and employee costs were approximately $36,000 greater due to base salary increases.

Interest income increased to $366,772 for the three months ended June 30, 2014 from $169,796 for the three months ended June 30, 2013 due to the receipt of interest due on delinquent accounts receivables from the Water and Sewerage Corporation of the The Bahamas ("WSC").

Interest expense for the three months ended June 30, 2014 and 2013 was $47,531 and $124,845, respectively. The decrease in interest expense for 2014 reflects the early redemption on February 17, 2014 of the remaining outstanding balance on our bonds payable.

We recognized earnings and profit sharing on our investment in OC-BVI for the three months ended June 30, 2014 and 2013 of $116,215 and $103,984, respectively.

Results by Segment

Retail Segment:

The retail segment contributed $536,481 and $630,173 to our income from operations for the three months ended June 30, 2014 and 2013, respectively.

Revenues generated by our retail water operations were $6,499,257 and $6,179,597 for the three months ended June 30, 2014 and 2013, respectively. The increase in retail revenues from 2013 to 2014 resulted from an increase in the total gallons of water sold by the retail segment of approximately 8%.

Retail segment gross profit was $3,379,774 (52% of revenues) and $3,309,422 (54% of revenues) for the three months ended June 30, 2014 and 2013, respectively. The slight decrease in retail gross profit as a percentage of sales reflects a negative gross profit for our Bali retail operations for the quarter of approximately $34,000 resulting from the underutilization of this plant.

Consistent with prior periods, we record all non-direct G&A expenses in our retail business segment and do not allocate any of these non-direct costs to our other two business segments. Retail segment G&A expenses for the three months ended June 30, 2014 and 2013 were $2,843,293 and $2,679,249 respectively. G&A expenses increased from 2013 to 2014 primarily due to an increase of approximately $170,000 in legal fees incurred for the judicial review conducted in connection with our retail license negotiations.

During 2013, our subsidiary, PT Consolidated Water Bali ("CW-Bali"), completed the first phase of the construction of a seawater reverse osmosis ("SWRO") plant in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. The capital investment for this plant was estimated at approximately $5 million, to fund production, reservoir storage, and distribution capacity of approximately 750,000 gallons per day. As of June 30, 2014, capitalized costs for this plant reflected on our consolidated balance sheet were approximately $3.4 million. The revenues we generated from this plant amounted to approximately $74,000 and $21,000 for the three months ended June 30, 2014 and 2013, respectively. CW-Bali's operating losses were approximately $86,000 and $71,000 for the three months ended June 30, 2014 and 2013, respectively.

Bulk Segment:

The bulk segment contributed $2,744,877 and $2,760,265 to our income from operations for the three months ended June 30, 2014 and 2013, respectively.

Bulk segment revenues decreased to $9,966,194 for the three months ended June 30, 2014 as compared to $10,162,572 for the three months ended June 30, 2013. The drop in our bulk water revenues in 2014 is attributable to our Bahamas operations, which generated approximately $659,000 less in revenues in 2014 than in 2013. The revenue decrease for our Bahamas operations resulted from a decrease in the volume of water sold (primarily from our Blue Hills plant) to the WSC. In 2013, the WSC purchased water volumes from our Blue Hills plant that were significantly higher than the minimum amounts they were required to purchase under the water supply agreement for this plant. However, as a result of water conservation and loss mitigation efforts it has conducted since that time, the WSC has reduced the amount of water lost by its distribution system and consequently in 2014 decreased its volume of water purchases from our Blue Hills plant, but continued to purchase more than the contract minimum amount.

Bulk segment gross profit was $3,070,280 (31% of revenues) and $3,115,226 (31% of revenues) for the three months ended June 30, 2014 and 2013, respectively. The decrease in gross profit dollars from 2013 to 2014 resulted from the decrease in revenues. Gross profit as a percentage of sales remained consistent from 2013 to 2014 despite the decrease in revenues as the water sales made in 2013 by our Bahamas operation that exceeded the contractual minimum generated relatively small gross profits.

Bulk segment G&A expenses were relatively consistent at $325,403 and $354,961 for the three months ended June 30, 2014 and 2013, respectively.

We supplied the aggregate amount of water contracted by the WSC under the water supply agreement for our Windsor plant in July 2013, at which time such agreement was extended on a month-to-month basis. See further discussion of the Windsor plant at "Material Commitments, Expenditures and Contingencies."

Services Segment:

The services segment incurred losses from operations of ($692,473) and ($587,679) for the three months ended June 30, 2014 and 2013, respectively. We expect our services segment to continue to incur losses from operations while we continue to fund the project development activities of NSC and/or until such time as we obtain significant new management services agreements or plant construction contracts.

Services segment revenues were $466,381 and 227,211 for the three months ended June 30, 2014 and 2013, respectively. Services revenues increased from 2013 to 2014 due to construction revenues generated from our contracts with the Water Authority-Cayman to refurbish their Lower Valley plant and build a plant on Cayman Brac.

Our services segment generated a negative gross profit of ($80,008) and ($27,127) for the three months ended June 30, 2014 and 2013, respectively. The reduction in gross profit for 2014 resulted from a decrease in sales of consumables stock to OC-BVI.

G&A expenses for the services segment were $612,465 and $560,552 for the three months ended June 30, 2014 and 2013, respectively. The increase in G&A expenses for 2014 as compared to 2013 reflects an increase of approximately $60,000 in the project development expenses of our Mexico subsidiary, NSC.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Consolidated Results

Net income attributable to our common stockholders for the six months ended June 30, 2014 was $3,414,602 ($0.23 per share on a fully-diluted basis) as compared to $6,595,853 ($0.45 per share on a fully-diluted basis) for the six months ended June 30, 2013.

Total revenues for the six months ended June 30, 2014 increased slightly to $33,280,442 from the $33,124,577 in revenues generated for the six months ended June 30, 2013, due to marginal increases in revenues for the retail and services segments. Gross profit for the six months ended June 30, 2014 was $12,340,471 or 37% of total revenues, as compared to $12,618,028, or 38% of total revenues, for the six months ended June 30, 2013, as gross profit for the bulk segment increased while gross profit for the retail and services segments decreased. For further discussion of revenues and gross profit for the six months ended June 30, 2014, see the "Results by Segment" analysis that follows.

General and administrative ("G&A") expenses on a consolidated basis were $9,123,794 and $7,163,698 for the six months ended June 30, 2014 and 2013, respectively. For 2014 as compared to 2013, project development expenses incurred by our Mexico subsidiary NSC increased by approximately $1.6 million, professional fees increased by approximately $262,000 primarily due to additional legal fees incurred for the judicial review conducted in connection with our retail license negotiations, and employee costs increased by approximately $160,000 due to base salary increases.

Interest income increased to $539,704 for the six months ended June 30, 2014 from $349,884 for the six months ended June 30, 2013 due to the receipt of interest on past due accounts receivables from the WSC.

Interest expense for the six months ended June 30, 2014 and 2013 was $343,268 and $257,270, respectively. The increase in interest expense for 2014 reflects the prepayment premium paid for the early redemption in February 2014 of the remaining outstanding balance on our bonds payable and the amortization of the related bond discount and deferred issuance costs.

We recognized earnings and profit sharing on our investment in OC-BVI for the six months ended June 30, 2014 and 2013, of $190,954 and $1,179,304, respectively. The additional earnings and profit sharing we recognized in 2013 from this equity investment resulted from the payment by the British Virgin Islands government to OC-BVI in January 2013 of $2.0 million of the amount awarded to OC-BVI as a result of the Baughers Bay litigation. See further discussion of this litigation at Note 6 of the Notes to Condensed Consolidated Financial Statements included at "ITEM 1. FINANCIAL STATEMENTS" of this Quarterly Report.

Results by Segment

Retail Segment:

The retail segment contributed $829,839 and $1,558,923 to our income from operations for the six months ended June 30, 2014 and 2013, respectively.

Revenues generated by our retail water operations were $12,612,218 and $12,574,609 for the six months ended June 30, 2014 and 2013, respectively. The volume of water sold by our retail segment increased by approximately 2% from 2013 to 2014.

Retail segment gross profit was $6,561,359 (52% of revenues) and $6,869,682 (55% of revenues) for the six months ended June 30, 2014 and 2013, respectively. The decrease in retail gross profit in 2014 resulted from incremental repairs and maintenance expenses of approximately $154,000, an increase in depreciation expense of approximately $103,000 and a negative gross profit for our Bali retail operations of approximately $101,000 resulting from the underutilization of this plant.

Consistent with prior periods, we record all non-direct G&A expenses in our retail business segment and do not allocate any of these non-direct costs to our other two business segments. Retail segment G&A expenses for the six months ended June 30, 2014 and 2013 were $5,731,520 and $5,310,759, respectively. G&A expenses increased from 2013 to 2014 primarily due to an increase of $133,000 in employee costs due to base salary increases and an increase of $288,000 in professional fees primarily due to additional legal fees incurred for the judicial review conducted in connection with our retail license negotiations.

During 2013, our subsidiary, PT Consolidated Water Bali ("CW-Bali"), completed the first phase of the construction of a seawater reverse osmosis ("SWRO") plant in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. The capital investment for this plant was estimated at approximately $5 million, to fund production, reservoir storage, and distribution capacity of approximately 750,000 gallons per day. As of June 30, 2014, capitalized costs for this plant reflected on our consolidated balance sheet were approximately $3.4 million. The . . .

  Add CWCO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CWCO - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.