Consolidated Water Co Ltd (CWCO) 2009 Q4 法說會逐字稿

Hello and welcome to the Consolidated Water Company fourth quarter and year end 2009 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 Harbor provisions 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 the 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 & 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 the conference call. (Operator Instructions) Please note this conference is being recorded.

Now I would like to turn the conference over to Rick McTaggart. Mr. McTaggart, the floor is yours, sir.

Thank you, Mike. Good morning, ladies and gentlemen, and thank you for joining David and I on this call this morning.

The fourth quarter went pretty much as we anticipated except for some developments in the BVI which caused us to reevaluate the carrying value of our investment in our BVI affiliate and to incur an impairment charge of $4.5 million for the quarter. I think that this bad news was apparent from a first glance at our income statement, and David will talk a bit more about that in a minute.

I would like to start off by concentrating on some of the good news from the quarter. Our consolidated gross profit which reflects the performance of our core operations without BVI rose 23% year-over-year and reached a record level in 2009 of $23 million. This was achieved by increases in gross profit in terms of dollars and gross profit margins in all three of our core business segments. Retail segment gross profit which reflects the performance of our retail water utility in Grand Cayman increased by approximately $1.6 million for the year and gross profit margin increased from 53% of revenues in 2008 to 58% of revenues in 2009. This was mainly due to reduced maintenance costs and our annual base rate increase in January of 2009.

I think most of you know that our Cayman retail rates are indexed to the local Cayman islands CPI and the United States PPI and with drops in these indexes year-over-year in 2009, our 2010 base rates were adjusted down by approximately 7.5%, and that was after a 7.2% increase at the beginning of 2009. However, we do expect some of our operating costs to remain lower this year particularly on the material and equipment side as we move through 2010.

In the fourth quarter our retail segment water sales by volume were just about 11.4% higher than the fourth quarter of 2008 and benefited from additional sales to the Water Authority Cayman at a preferred rate while the Authorities Red Gate desalination plant was shut down for refurbishment by our Cayman subsidiary ocean conversion Cayman Limited. In August we completed a new 1 million-gallon per day desalination plant at our Abel Castillo Water Works, which is formerly the Governor's Harbor site, and this plant is operating very well and consistent with our ultra low energy desalination plant designs.

Although the total number of tourist visiting Grand Cayman declined by by 10% in 2009, the outlook for the Cayman Islands market appears to be improving with up-ticks in the number of stay over tourists on Grand Cayman of 4.5% and 5% respectively in November and December of 2009.

As disclosed in our 10-K we are currently engaged in negotiations with the Cayman Islands government and their representatives to renew our Grand Cayman retail franchise, and we expect these negotiations to continue through the second quarter and possibly into the third quarter of this year. We will keep investors advised of any significant developments on this front.

Bulk water segment gross profit which reflects the performance of our Cayman Islands, Bahamas, and Belize water contracts, with large governmental customers also improved in 2009. In dollar terms, bulk segment gross profit increased by about $1.2 million and gross profit margin increased to 22% of revenues compared with 15% of revenues in 2008. These impressive increases were mainly due to a reduction of amortization costs related to the Red Gate plant in Grand Cayman and improved operating efficiencies at our Windsor and Blue Hills plants in the Bahamas. We're very pleased with the significant progress that we made in our Bahamas operations over the past several years, after grappling with and eventually overcoming severe membrane filing problems at both of our large Bahamian desalination plants. In fact, we're very pleased to note that the Blue Hill plant is now operating at the lowest specific power of any plant of its size in the world at an equivalent of less than 13.5-kilowatt hours per thousand imperial gallons. This is good news for both Consolidated Water and our customer, the Bahamas government, since under the terms of the Bahamian water sale agreements we share equally in any energy savings that are achieved at these plants.

In the third -- sorry -- in the fourth quarter, gross profit from our Belize operation increased by about 8% over the prior year due to operating and maintenance cost savings, and we're also pleased to report that the Belize government is now current on all of our invoices both for water sales and tax reimbursements. Fourth quarter sales by volume in our Cayman bulk segment business decreased year over year by about 13%. That was primarily due to the decommissioning of the Red Gate plant while it was being refurbished. This drop was partially offset by new sales from the 2.4 million-gallon per day north side or Frank Sound desalination planted which was commissioned in June, and was further offset in our consolidated sales by additional water that we sold to the water authority through our retail segment. And work continues on the Red Gate refurbishment. We expect that to be back online in late April.

Gross profit of our services segment increased to $3.8 million in 2009 compared to $2.3 million in 2008. That's mainly due to the commencement of the operating contract at Times Bay in Bermuda and savings on construction costs in the second quarter when we completed the North Side Water Works and Bermuda plants. We expect overall service segment revenues to run at a lower level in 2010 due to a decrease in new project activity, and at present we are, as I said, completing the Red Gate refurbishment. That will continue to generate revenues in our services business until it is commissioned in the second quarter.

Now looking at BVI, recent events in the British Virgin Islands have adversely impacted the carrying value of our BVI investment and consequently caused us to incur significant impairment charge on this investment in the fourth quarter. I would like to turn the call over to David who will discuss our BVI affiliates financial performance and provide more detail about the impairment charge and then I will finish up with some news on project opportunities and questions. David?

Good morning, everyone.

Well, as has been the case for the last two years, our results for most CBVI have been a major impact on our operating results. For the year we reported an operating loss of $1 million from this subsidiary. This loss is attributable to the lack of sufficient cash payments over the year from the BVI government to cover this affiliate's operatings costs. As you know, OCBVI has been on the cash basis for revenue recognition since the first quarter of 2008. It should be noted that as OCBVI actually reported net income for the fourth quarter due to $2 million paid by the government on the $10 million awarded OCBVI by the eastern Supreme Court of the Caribbean for water delivered prior to September 30, 2009, but it is also important to note that the government continues to hold back further payments on this award even though OCBVI's legal counsel informed us that the government is contractually obligated to pay us.

In February 2010 the BVI news announced that the government had signed a contract with another company to build a new plant under a 16-year operating contract. We believe that this plant is intended to replace Baughers Bay. Interestingly enough this award was made without an open bidding process and OCBVI had previously submitted what we and our partners in OCBVI considered to be a highly competitive and very attractive proposal for the continued operation of Baughers Bay. We really have no information from the government as to why they elected to construct this new plant, that will probably take about a year to build, rather than continue to utilize the proven capacity of Baughers Bay. The government has indicated in the press that they plan to negotiate an interim one year contract for Baughers Bay with OCBVI, but the ultimate resolution of such negotiations is uncertain at this time given government's payment history and the amounts still outstanding for water supply from this plant.

When we prepared our analysis of the fair value of our investment in OCBVI at December 31, 2009, we eliminated from our projections of cash flows for this investment any future cash flows from the Baughers Bay plant. Baughers Bay had a capacity of about 1.7 million-gallons and the presumed future cash flows of this plant were very important in continuing to maintain the value of this investment. When we eliminated those cash flows, the resulting analysis left with us a $4.5 million impairment charge. We wrote this asset down to just a little over $9 million at the end of the year.

I want to point out that the continuing value of our investment in OCBVI presumes that we will collect the amount that was awarded to the Company by the court. For some reason the government is successful in their appeal to rescind this award or to reduce it to the extent that the amount is reduced it would impact the value of our ongoing investment in OCBVI. If OCBVI continues to operate Baughers Bay and the government fails to pay enough money to cover their operating costs, we will still have to pick up a piece of their loss in 2010. I wanted to alert our (inaudible) possibilities.

We do have some good news relative to BVI. We were able to sign the Bar Bay contract in March and those cash flows were factored into our fair value for this investment and if you look at our quarter overall, we were pleased with the results. If you take out OCBVI, we would have had EPS I believe of about $0.80 for the year. We have an improving balance sheet, strong financial condition, we continue to lower our debt, we have excellent liquidity. And really with the exception of some of these issues that we've had for OCBVI, I believe we've had a solid year from a financial perspective. If you're looking at our results towards 2010, we have no reason to believe the demand for water will not be consistent both in our retail and bulk segments from what we experienced in 2009, but I want to point out that our services segment presently has no new contracts. We're continuing to complete the construction of the Red Gate plant on Grand Cayman, but unless we win some new projects you can expect a decline in plant construction revenues for next year.

With that I would like to turn the call back over to Rick.

Thanks, David.

That's a good intro to some of the project opportunities that are on the horizon for us. We reported last quarter that we were pursuing a couple of project opportunities in the Caribbean, one in the US Virgin Islands and a second in Aruba, and we submitted our bid for the USVI project late last year and submitted our Aruba bid a few weeks ago. The USVI water authority recently canceled the bid process for administrative reasons, and this is fairly common in our market. A lot of these projects go to rebid, and they have issued a revised bid document which we're now reviewing. Regarding Aruba, we believe that we were the high bid on this project and we are waiting an official response from the customer regarding the status of our bid.

Other news, the Trinidad government recently invited interested companies to submit qualifications to bid on more than 80 million US gallons per day of desalination plant capacity in Trinidad and Tobago over the next year, and we have teamed up with a renowned international desalination engineering and construction company as well as a highly qualified Trinidadian engineering firm to bid these projects. I am pleased to report that the Trinidad government recently pre-qualified our team and we look forward to tackling these very challenging opportunities. We believe that we have assembled a highly qualified and capable team which leverages each member's core capabilities in the desalination business. And just to add a little bit to that, the Company, the contractor that we've teamed up with is one of the largest if not the largest, desalination plant construction company in the world, and obviously we'll leverage their expertise and opportunities to build these large plants in Trinidad, if we're successful, and we will operate the plants after the construction is finished along with our Trinidadian partner, so we're very pleased to be involved in these projects and with this group.

In addition to opportunities in our historical market area, we're evaluating a number of other business opportunities in other areas of the world and should these opportunities develop we will provide updates at the appropriate time.

Finally, we're pleased to announce that the Caribbean Desalination Association which is an affiliate of the International Desalination Association, has chosen the Cayman Islands, Consolidated Water, and Water Authority Cayman to host its semi-annual conference in June of this year. This will bring together the desalination industry's premier companies to Grand Cayman for several days of technical discussions, and we will be conducting tours of our plants to showcase our technology and expertise in plant design, construction and maintenance. We hope that some of you might also attend this very important regional conference.

With that, Mike, I would like to open the call up for questions.

Yes, sir. (Operator Instructions) The first question we have comes from Christopher [Tourtel] of [Janne].

Hello Rick, hello David.

Hello, CJ, how are you doing?

Good thanks. First on Bar Bay, congratulations on signing the new agreement. Curious how collections are looking there so far with the government and is it safe to assume a positive half a million dollars impact there in 2010?

I wouldn't want to tell you how much of the impact would be, CJ. I can tell thaw today they are paying us on a timely basis for Bar bay. I guess perhaps they have considered that contract to not be in any kind of dispute, so we're up to date on that.

Okay --

We have been recognized down on the cash basis, but we'll take a look at it in the first quarter. If it looks like the contract is performing and we're collecting on a timely basis, we may recognize those revenues on the accrual basis.

Okay.

But as far as how much of an impact it is going to have first year, we haven't really given any guidance on that.

Okay --

And I just want to point out, CJ, if OCBVI continues to operate Baughers Bay for whatever reason, whatever reason they may decide to operate it, and the government continues to delay their payments, then you can have an operating loss at Baughers Bay that exceeds the income from Bar Bay. And to complicate it further, there is still $8 million due on the award, when that comes in it will be recognized on a cash basis. So obviously if the government decided to pay all that in the first quarter they would have OCBVI would have incremental revenue stream of $8 million.

Okay. Okay. And then on the retail segment, it looks like the gross margin dipped a little bit sequentially in the segment in the fourth quarter and just curious if you think you can hold onto improved margin there that you saw in 2009? Maybe you can talk a little bit about the negotiation for the license renewable in Cayman and how that affects the margins along with the CPI changes?

Rick, I will let you take the license question, but relative to the margins here -- CJ, the retail business is very consistent from us from a [margin] perspective. Two things that do impact it is utilization of the plants. We have a certain amount of fixed costs that are spread over those revenues. So when the capacity of the plant's fully utilized, you're having those fixed costs spread over a large revenue base which will improve the margins. And then from time to time we do preventative maintenance and things like that and those are not necessarily steady for each quarter. But if you go back and look historically at our retail business we have always generated around 55 points. So, I mean it may change a point or two from quarter to quarter, but it is just probably the most solid part of our business when it comes to guessing what the margins will be.

Regarding the license negotiations, we have a more detailed risk factor in the 10-K now about that. We are currently in negotiations with the government. As I said, we expect that to continue perhaps into the third quarter of this year. We're not in a position to say to investors one way or another how that's going to end up. We expect that there will continue to be some pressure to reduce our rates. We just, we don't know how, how much pressure they're going to bring to bear on that at this point. We indicated in the K that the government has suggested that we change the basis of how our rates are determined in the license and we feel very strongly that that is not in the best interests of -- certainly not in our best interests, and not in the best interests of the customers. We have had a very successful 20-year license which is really very different from what the types of licenses that utilities get in the United States, and we think it is benefited the customers greatly on the rate side.

So we're still in those discussions and we'll report back to the investors as soon as anything definitive is decided.

All right. Great. Thanks, guys.

[ Operator Instructions ] The next question we have comes from Peter Trapp with Bifrost Capital.

Good morning. I wonder if you could just comment on the enforceability of any judgment the courts may give you against the government? Because even though that you may win in court, is there a sovereign government, I presume, that they can just refuse to pay? I mean, how does the process work assuming that your appeal works?

We have been advised by our attorneys in the BVI that there is an enforcement process. We're presently going through that process. We don't have any reason to believe at this point that they won't pay. I think they have just been dragging their feet because of the appeal process. However, there is a legal way that we can get this judgment enforced against the BVI government.

Okay. I presume this plant is of strategic enough importance that if the plant were to go down, or to not produce water, they would -- they could declare imminent domain?

It is their plant now, so what we're trying to do is decide when the best point would be to vacate the plant if there is -- as David said earlier, there has been an indication by the government that they would like to contract with the affiliate for another year to operate. So we believe that those negotiations will begin very soon and after -- as that progresses we'll decide, and our affiliate will decide, whether it is worthwhile to continue to operate that plant or not. But if government wanted to go in there right now, they could take it. It is their property. We're -- They've allowed us to be there to operate it. But there is no long-term commitment on either part to operate that plant.

Yes, if OCBVI likes to walk away from the plant our presumption is the government will bring in their own operator to take over the plant.

Okay -- (inaudible)

The plant does provide most of the water (inaudible).

-- Including another water company?

They could do that if they wished. It is their property, yes.

All right. Thank you.

Gentlemen, it appears that we have no further questions at this time.

All right, Mike, I would just like to thank everybody for listening in this morning, and we will look forward to talking with you again in May. Thank you.

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