Consolidated Water Co Ltd (CWCO) 2008 Q1 法說會逐字稿

Hello, and welcome to the Consolidated Water Company first-quarter 2008 conference call. (OPERATOR INSTRUCTIONS) This conference call may include statements that may constitute forward-looking statements usually containing the words believe, estimate, project, intend, expect or similar expressions. These statements are made pursuant to the safe safe of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include but are not limited to continued acceptance of Company's products and services in the marketplace, changes in its relationship with the governments of the jurisdictions in which it operates, the ability to successfully secure contracts for water projects in other countries, the ability to develop and operate such projects profitably, and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission. By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of this conference call.

(OPERATOR INSTRUCTIONS) Please note this conference is being recorded.

Now I would like to turn the conference over to Mr. David (sic) McTaggart. You may begin.

Thank you, it is Rick McTaggart. Good morning, ladies and gentlemen, thank you for joining us this morning to discuss Consolidated Water's first-quarter result. I am joined this morning by David Sasnett, our Executive Vice President and CFO.

There are a couple of issue us that materially impacted our first-quarter results, with the most significant one being our change in accounting treatment of our equity investment in the BVI operation. I would like to have David start off by explaining our presentation of ocean conversion BVIs results for the quarter and explain why we chose this treatment.

Thanks, Rick. Good morning, everyone. For start, I would like to provide some recent history with expect to the OC-BVI situation. The issue of the ownership of the Baughers Bay plant was raised by the previous administration of the BVI Government. OC-BVI last held negotiations with this previous administration during the second quarter of 2007. These negotiations ended as a result of elections held in the British Virgin Islands in August 2007 at which time a new Premier was elected. The new Premier of the new administration understandably needed time to become familiar with the issues surrounding the Baughers Bay plant prior to proceeding with further negotiations with OC-BVI.

In December 2007 and in early March 2008, members of OC-BVI's Board and management met with BVI officials. As a result of the December meeting, OC-BVI received a $3.5 million payment on its outstanding accounts receivable balances. Based upon the March 2008 meeting, OC-BVI fully expected by late March or early April of this year to receive further payments on its outstanding accounts receivable balances and to have made significant progress in negotiating both resolution of the Baughers Bay ownership issue and contract for the recently constructed plant at Bar Bay. Both Consolidated Water and our partners at OC-BVI anticipated that by now OC-BVI would be well on its way to resolving the outstanding issues and re-establishing its good business relationship with the BVI Government.

Unfortunately, things have not proceeded as we anticipated. Further payments from the government have not been forthcoming and in the interim period, no meaningful progress has been made with respect to any negotiations. Further complicating matters is the fact that if the BVI government does not make any new payments by the end of June 2008 reason OC-BVI will be required under the local Statue of Limitations to initiate legal action or lose its rights to collect these receivables.

OC-BVI's Board continues to believe based upon consultation with its local Counsel that it is contractually entitled to receive full payment for everything that is billed to the BVI Government and that it will ultimately collect these amounts. Given this belief OC-BVI continues to recognize revenues using the accrual method of accounting. However, given the lack of progress on the negotiations since March 2008 when quite frankly significant progress was anticipated, given that no further accounts receivable payments have been received since January 2008 and in light of the increased possibility because of the statue of limitations that legal action will ultimately be required to collect the OC-BVI's account receivables balances, the management of Consolidated Water decided this quarter to change the method we use to account for our share of OC-BVI's results. We did so by adjusting their results to put them on the cash basis nor revenue recognition.

Since no cash was received by OC-BVI during this quarter, their adjusted revenues for the first-quarter 2008 were zero. Consequently, we recorded a loss of approximately $490,000 from our investment in OC-BVI for the three months ended March 31, 2008. This is a decrease in our profitability of almost $1 billion in light of the fact that we recorded a $459,000 equity pickup earnings from OC-BVI during the first quarter of 2007. You should understand that we will continue to adjust OC-BVI's results to the cash basis for revenues until such time as the Baughers Bay dispute is resolved. Thus future earnings for investment in OC-BVI will be dependent upon the amount and timing of any payments they receive on their accounts receivable until such time as a new contract is reached for the OC-BVI with Baughers Bay. With that I will turn things back over to Rick.

Thanks, David. We continue to believe that ultimately our BVI affiliate will be able to reach an agreement with the Virgin Islands government and avoid litigation; however, we cannot control the pace of these negotiations. We are aware that the Virgin Islands government has been involved in their annual budget debate over the past two years -- two months, sorry, and think that this may have delayed our discussions on the Baughers Bay and Bar bay plants; however, we have been told that the budget sessions recently finished and hope that the government will have more opportunities to meet with us and our partners to resolve these long-standing issues in BVI.

I would like to discuss some of our other business segments now. Our retail sales in Grand Cayman were flat compared to last year and were impacted by a couple of factors that we detailed in the 10Q. Firstly, weather data sources indicate that we experienced much higher rainfall during the first quarter of this year than during 2007 and in fact higher levels than the 30-year average for this period. We believe that this increased rainfall reduced the demand from two golf courses that use our water and also generally reduced irrigation demand at commercial and tourist properties within our retail service area in Grand Cayman.

In addition, reduced usage from two large commercial customers adversely impacted our sales volumes. The Ritz-Carlton golf course used their own water to irrigate the golf course during the quarter and consequently did not buy any water from us in the first quarter. Also a large tourist business, the Cayman Turtle Farm significantly reduced its demand this past quarter compared to last year. So far, it looks like this trend has continued into the second quarter, although we are encouraged by the ramping up of demand from some new properties in our service area and the apparent limited rainfall so far this quarter.

We are making good progress on construction of our new retail production plant at Governors Harbor in Grand Cayman and expect this plant to be producing water later this year. As mentioned on the March call this permanent facility will replace temporary containerized plants that have been in Grand Cayman for a couple of years and which will be located to our other operations as required.

Sales on our bulk segment grew nicely in the first quarter of this year when compared to 2007, and benefited from increased sales both in our Bahamas and Cayman operations. However, these higher sales were more than offset by higher maintenance and operating costs at the Windsor plant in the Bahamas which reduced our overall margins. The new Bahamas management team has been aggressively working to reduce these costs through improved maintenance and as I mentioned in the March call, we are in the process of making capital improvements to the Windsor plant that we believe will improve margins later this year. We have been designing and constructing these improvements at Windsor for more than nine months, and although the plant has been using more diesel fuel than we can charge back to our customer for some time, the spike in fuel prices over the past year has exacerbated the problem, and the incremental fuel costs have become more material to our operations. And this all stems from the quality of the feed water at the plant. And we believe that the new wells and other improvements that we are making will resolve this problem once and for all.

Our Cayman Bulk operations continue to perform very well and met our expectation for the quarter for sales and profitability. All three of these plants are operating within efficiency specifications and to the complete satisfaction of management. Last month, we made a proposal to our customer in Grand Cayman, the Water Authority to update the 19-year-old Red Gate plant in Grand Cayman and to extend the operating contract which is set to expire in November of this year. We are hopeful that they will find the proposal acceptable, and we await their reply.

Work also commenced earlier this year on the fourth Bulk plant that we will operate for the water authority in Grand Cayman and I will talk a little bit more about this plant in a moment.

You will note that we report our income from plant sales and management fees in our Services segment and these revenues declined in the first quarter of this year compared to 2007 because of the number and timing of projects that we had under way this year. Last year we had three projects that impacted the first-quarter services segment, while this past quarter we had one, the Tynes Bay project in Bermuda. However, looking forward in this year, we recently reached an agreement with the Bermuda government to expand the capacity of the Tynes Bay plant to 1.2 million gallons per day and construction of this project is now expected to continue through the end of this year. We have also started construction on the 2.4 million-gallon-per-day north side plant for the government-owned Water Authority which I mentioned earlier. And both these projects are expected to positively impact our services segment throughout end of the year as we recognize revenues from the plant sale portion of these contracts.

What should investors expect in the way of new opportunities for the Company? Well, the demand for our products and services continues to remain very robust. Over the past several months, we have submitted proposal for desal projects in the Bahamas, Rotan, St. Lucia, and the Turks and Caicos Islands. And although we can offer no guarantees that we will secure these projects, we have been successful in the past with similar projects and we believe that we have the skills and experience to continue to take our successful business model into these markets. Both the Rotan and the Turks and Caicos projects are very exciting opportunities and provide us with a chance to implement our successful Cayman retail model in other areas of the Carribean. We are also at various stages of involvement in a number of other new business opportunities both within and outside our Carribean market and areas like South America, and we will keep you advised of any developments on these opportunities. I'd like to open up the call for questions now, please.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Michael Gaugler of Brean Murray and Carret.

Good morning, everyone.

Hi, Mike. How are you doing?

Doing well. Rick, I wanted to follow-up on your -- I guess your closing comment here about proposals that you have already submitted across the various geographic regions. Perhaps you can give us a little more color, sizes of the projects in terms of the gallons per day for those that have already been submitted?

We have a couple of projects that are over 1 million gallons per day. And then as I mentioned the Rotan and the Turks and Caicos projects will be retail, and those projects will, if we are successful, will ramp up over time. We expect them to be very good markets and long-term investments.

Have you heard anything back from Barbados yet?

No. That project as I mentioned on the last call, we were prequalified for a brackish water project there and the bid documents have not come out on that yet, no.

Okay. That's all I had, guys. Thanks.

Thanks, Mike

Our next question comes from Ryan Connors of Boenning & Scattergood.

Good morning, Rick, Dave.

Good morning, Ryan.

I just wanted to touch on the BVI issue coming from a little bit of a different angle. Basically I am kind of wondering, what are the government's alternatives here in terms of -- let's just entertain hypothetically for a minute the scenario where they basically continue to stonewall, and you eventually go your separate ways. If that type of scenario were to play out, are there any adverse consequences for BVI in terms of would it be difficult for them to operate the facilities effectively? Did they actually have the expertise to upgrade and maintain these plants? I am just trying to really get at -- and kind of understand what kind of leverage you have in terms of there being potential adverse consequences if they did follow this thing through?

I think that's a key point in this. The Baughers Bay plant supplies about 75% of the water in Tortola right now. It is an older plant and originally constructed in 1990. So there would be issues for them to operate that plant. If it turned out that they were the operators in the future. And we have tried to -- to bring that to their attention and really be patient and work through this.

And then kind of follow-on to that, Rick, is just in terms of the personnel there that are running the facility now. Obviously they are BVI citizens, I assume. Would they -- I mean -- would they continue to work for the facility if it were to go under BVI ownership? Or are those sort of your people you would pull out or redeploy elsewhere?

Well, I couldn't answer that. There are BV Islanders who work at the plant and there are some ex-pats that work at the plant. I think it is key to note that that plant does require the close support of our Corporate engineering and operations staff here in Grand Cayman. So I think it would be somewhat difficult for them to proceed without us.

Okay, okay. That helps me understand the situation. Thanks, guys.

Okay, Ryan, thanks.

Our next question comes from [Charles Lansberg] from [Von Track].

Thank you, guys. A question about fuel cost. Do you all have any clause in any of the contracts that gives you a chance to adjust for the fuel?

Yes, we do. And we tried to make that point in the -- in the 10-Q. We do have energy pass-throughs in our contracts; however, with the particular situation at -- at the Windsor plant, we are not operating within the guaranteed efficiency of the plant. So we are not able to pass through all of the fuel costs. So we do have some incremental cost there at the moment that we cannot pass through, and that has affected the margins.

That's all I had, thanks.

Yes.

(OPERATOR INSTRUCTIONS) Our next question comes from Debra Coy of Janney Montgomery. Please go ahead.

Thanks. Good morning, guys. Just a couple of follow-up questions. One, Rick, you didn't mention Blue Hills. Can we take that to mean that operations are running as normal and expected there?

Yes.

So that's positive. No -- you are not really seeing the same feed water and port problems at Blue Hills that you have been seeing in Windsor, is that correct?

We have seen some issues there, Debra but we have been able to address those quickly.

So you think that that will -- no further upgrades are really going to be needed. It's really just Windsor?

I don't foresee any at the moment, no, Debra.

Okay. Thanks. And then you mentioned earlier that you have put in a proposal to extend the Red Gate plant and extend the contract which expires this year. Is there any potential issue there if you come up to the end of the year and you haven't gotten a contract extension? How will the logistics of that work?

I don't foresee any issues at the moment. We have a good relationship with the customer here, and we have had that discussion already.

Okay. And so chances are you would expect to get some resolution on that one way or the other in the next few months?

Yes.

And then just finally coming back to the BVI, kind of to build on -- on Ryan's earlier question. Are there any other (inaudible - audio difficulties) or are they looking at any other capacity addition not through OC-BVI? I mean kind of what are their -- with Ryan you talked through the options of the Baughers Bay plant, the Bar Bay plant is still sitting there. It seems that the government has limited options at this point.

Well, I can't tell you exactly what they are thinking. I know that the area that the Bar Bay plant is located in is still experiencing very acute water shortages and the government has been getting pressure to get that plant going. I mean people see it sitting there. So people assume that -- that their problems will be resolved soon but they have not. So we hope that that helps to move things forward. Regarding the Baughers Bay plant, I am not sure what sort of options they would have other than operating it themselves or building another plant.

Then there are no plans that you are aware of to build any other plants?

Not that I am aware of, Debra, no.

All right, thanks a lot

Our next question comes from [Vernon Jones] of [Nashua Guardian].

Hello. I was wondering if you had, in fact, negotiated with the government of the Bahamas on the Blue Hills water targets. I think there was some question of payment. A discrepancy between their accounting and yours. Has that been resolved?

I think you might be talking about the NRW project. That was -- that was closed out as of July 1, of last year. We are still negotiating on a couple of tidying-up things, but that project was agreed and closed out.

Wasn't there something with Blue Hills where you were to have met some waste reduction targets targets you had said you had met those targets I believe last year, at some point and the government said you had met them maybe three months later and there was a discrepancy as to when that was met and so your -- your payment?

That's correct. That is still under review by the government. My understanding is that they have retained an independent consultant to review our calculations, and they gave us an undertaking to get back to us on that. It was a discrepancy between the March 1, completion date which we asserted and a July 1 completion date for the project. So there still is some revenue that we are reserving for in the Bahamas until that is resolved.

Okay. And I am also wondering if you have decided whether or not you are going to be -- let's see. If you are going to redeem those bonds in the Bahamas? I think you have the option to do so after June.

I mean, we will consider whatever is in the best interest of the Company. I haven't really taken a decision on that nor has our Board.

Okay then. Thank you.

Our next question comes from [Eric Petterson] of [Terrapin Partners].

Hello, Rick. This is Eric Petterson at The Waterfront. The question for you is are you guys seeing any slowdown in water sales as a result of decline in tourism in your service areas, and if so, can you quantify what the impact has been?

The only service area that is really directly impacted by tourism is the Cayman Islands market. Other bulk markets are take or pay contracts, we're required to just provide the governments with a fixed amount of money. In the Cayman market, the tourism figures indicate that it has been on the upswing. What actually -- as I mentioned earlier what affected our sales last quarter was the weather primarily and some other factors that are really not related to tourism.

Okay, thank you.

Our next question comes from (inaudible) of Fine Capital Partners. Please go ahead.

Hi, thank you. I was wondering with regards to the outstanding AR balance due from the Bahamas government that was mentioned in the Q, can you give us more detail on the operational issues that they are having?

Are you talking about the reserve that I spoke about with the earlier--?

No, the -- in the Q it mentioned there was a $5.6 million balance due from the Bahamas government and that the delay in payment when you met with them in April was due to operational issues within the water and sewage corporation?

Those issues -- the Corporation there in the Bahamas is subsidized by government.

Okay.

And they -- their budgets go from June to June during the year. And it is our understanding that they have exhausted their subsidy for this fiscal year, and we have been working with them to make sure that we get up to date on payments when the new government budget is -- is put in place next month.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Our next question is from Charles Lansberg of Von Track, please go ahead.

Yes, just one more follow-up question on the golf course. I think you said that they are using their own water at the Ritz-Carlton, was it?

That's correct, yes.

Can you give us -- give us a little more details on that?

Sure. When the project was constructed I guess about two years ago now, three years ago, the previous government here in Grand Cayman gave the developer permission to produce its own water for golf course irrigation. Initially they didn't take advantage of that, and we were selling them water. Last -- last year we sold them a significant amount of water. They have brought in a plant over the past 12 months and supplemented their production capacity. So we didn't benefit from any sales to them this past quarter; however, we are hopeful that from time to time they will take water from us to supplement their production capacity. And that falls outside of our retail license so that -- we have a license here in Cayman to produce potable water, not irrigation water.

We show no further questions at this time. I would like to turn the conference over to Mr. McTaggart for any closing remarks.

Thank you very much for joining us this morning. And we look forward to talking to you again in August. Thank you.

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