Consolidated Water Co Ltd (CWCO) 2010 Q1 法說會逐字稿

Hello and welcome to the Consolidated Water Company's first-quarter 2010 conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at the appropriate time.

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 risk 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 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 Rick McTaggart. Mr. McTaggart, the floor is yours, sir.

Thanks a lot, Mike. Good morning, ladies and gentlemen. Thanks for joining us this morning on this first-quarter 2010 conference call.

Our first-quarter financial results were shaped primarily by two factors. Firstly, our gross profit numbers declined from the prior year due to slightly lower revenues in our retail and bulk business segments resulting from inflation index related decreases in our base water rates, which went into effect earlier this year in accordance to the terms of our Cayman Islands utility concession and our other water sale agreements.

Secondly, and our net income benefited from a $212,000 profit on our equity investment in our BVI affiliate OC-BVI. That is compared to a $609,000 loss which we reported in the first quarter of last year on that same investment. This quarter's profit on our OC-BVI investment resulted primarily from revenues and earnings recognized from the Bar Bay plant in Tortola, pursuant to the seven-year water sale agreement that OC-BVI signed with the BVI government in early March this year.

Our retail segment revenues declined by about 2% compared to prior year period despite volume sales that were about 19% over the first-quarter 2009. In January this year we reduced our base water rates by about 6% in accordance with the terms of our Cayman utility license. This rate adjustment was driven by a sharp decline in the United States Producer Price Index and a first time ever decline in the local Cayman Islands Consumer Price Index.

Prior to this year, we had only experienced base water rate reductions twice over the past 20 years, once in 1999 and again in 2002, which in both cases were less than 1%. In fact last year shareholders will recall that we benefited from an inflation index related base water rate increase of more than 7% in January 2009.

In the first quarter we sold water at a bulk rate to Water Authority-Cayman while we carried out renovations on the authority's Red Gate desalination plant. These sales accounted for virtually all of the additional volume sales this past quarter compared to 2009.

The lower base water rates coupled with the large volume sold to Water Authority at a lower-price bulk rate resulted in a retail gross profit dollar decline for the quarter, while our gross profit as a percentage of sales remained very respectable at 55% compared to a full-year 2009 figure of 58%.

As previously reported, we are in negotiations to renew our utility concession in Grand Cayman and have been meeting with representatives of the Cayman Islands government regularly since late 2008 to negotiate the terms of the new license. We were advised late last year that the government intended to replace our present rate cap pricing model with a regulated rate of return pricing model, which we believe would not benefit either our customers or the Company.

We have subsequently expressed our concerns to the government, and at our most recent meeting we received indications that government will give serious consideration to our objections to the rate of return model. The present license expires in mid-July and we will advise investors of developments at the appropriate time.

Our first-quarter bulk segment revenues and gross profit in dollars were essentially flat compared to the prior-year period, in spite of the shutdown of the Water Authority's Red Gate plant for refurbishment, which consequently did not generate any revenues during the first quarter. We are presently commissioning that plant or recommissioning the plant; and we expect that to have a positive impact on our bulk segment revenues when Red Gate goes back into service this quarter.

Bulk segment gross profit as a percentage of sales remained consistent at 22%, reflecting efficiency improvements that were achieved early last year at our two desalination plants in the Bahamas.

Service segment revenues decreased by about 30% or $900,000 in the most recent quarter compared to prior-year period due to a decrease in project activity. Right now we have the one project we're working on is the Red Gate rehabilitation project. However, gross profit in dollars for our service segment increased slightly due to reduction of construction costs.

We are currently finishing up the Red Gate project. This will continue to impact service segment revenues and earnings through the end of this quarter, after which the project or the plant will impact our operating revenues and earnings in the bulk segment.

Our management contract for the Tynes Bay plant in Bermuda officially expired in April, and we have received instructions from the Bermuda government to continue managing the plant for an additional six-month period while they evaluate their long-term operating strategy for the plant.

During the extension period the government will be directly responsible for all electrical power costs, which will effectively reduce our revenues and profits on this operation, since the plant is operated at a better efficiency than guaranteed. So investors will recall that this was a Design Build Operate contract initially with the operating period of one year. We have already gone longer than next now, and we hope that we will have an opportunity to continue operating that when the government decides how they want to handle that long-term.

I would like to turn the call over to David to discuss our working capital and cash issues briefly.

Thanks, Rick. Good morning, everyone. Rick has touched on most of the operating highlights for this quarter, but I would like to point out that our balance sheet, which we thought was very solid before the start of this quarter, continued to improve over the last three months. Presently we have now more than $48 million in cash on hand and increased our cash balance more than $3.5 million from the end of the year.

Our existing liquidity and our cash balances provide us with a tremendous amount of opportunity to pursue new projects. Historically we've averaged these projects at about an 80/20 debt-to-equity ratio. But with $48 million in cash on hand we have a lot of opportunities to pursue projects that perhaps are larger than what we have done in the past and in geographical jurisdictions that are outside of just the Caribbean.

So we are very excited about the possibility of aggressively pursuing new business and making some kind of discretionary expenses that we haven't necessarily made in the past.

I would like to point out also that looking forward we still have the potential of additional cash infusions from the settlement of the litigation in the British Virgin Islands. You will note and remember from our previous filings we were awarded -- or our affiliate was awarded -- a substantial amount of money as a result of litigation of the Baughers Bay plant. As of September 17 of last year that amount was a little over $10 million of which our affiliate has only received $2 million to date.

The BVI government did not pay OC-BVI much in the way of cash relating to this litigation this quarter. So hopefully we will be seeing additional cash infusions from this affiliate in the coming months. I think part of that is dependent upon whether or not the British Virgin Island government decides to pass anything prior to the hearing of the appeal on litigation.

With that, I will turn things back over to Rick.

Okay. Thanks. Just a quick update on the various projects that we have been talking about over the last few months. We have been pursuing opportunities in the US Virgin Islands and in Aruba. We understand that we were the high bid on the Aruba project, which happens to us sometimes. We understand that another company has been selected for the project, so that one is done.

And a US VI, the project was rebid in late April. We submitted our bid along with five other companies. And we understand that our pricing was somewhere in the middle of the range submitted by the six bidders. No official announcement has been made regarding the bid award. We continue to await information from the US VI government regarding the status of our bid.

The Trinidad government released bid document in March for the Design Construction Operation and Financing of two seawater desalination plants in Trinidad and Tobago with a combined production capacity of about 30 million gallons per day. As reported last quarter we have teamed up with a well-respected international desalination engineering and construction company and a highly qualified Trinidadian engineering firm to bid these projects.

Bids for both plants are due this summer. And we hope that the successful bidder for these projects would be announced by the end of the summer or early fall of this year. We'd just like to caution that general elections have been scheduled in Trinidad for this month, and any potential changes in the political climate may affect the desal project timetable.

In addition to these regional opportunities, we're very excited about a number of other business opportunities in other areas of the world that we're actively pursuing. Should these develop we will provide updates to investors at the appropriate time.

I would just like to end before questions saying that we are cohosting the Caribbean Desalination Association Conference with the Water Authority-Cayman early next month. We look forward to seeing some of the desalination industry's premier companies in the Cayman Islands for several days of technical discussions. The Association has graciously allowed us to conduct plant tours and to showcase our technology during the event.

At this point I would like to open the call up for questions, Mike.

(Operator Instructions) Christopher Purtill, Janney.

Thank you. Just a clarification point on BVI. The Q1 numbers, the affiliate earnings line, that included costs associated with operating Baughers Bay without any real meaningful revenue contribution. Is that correct?

That's correct. That would be through the end of March when we turned the plant over to the government on March 29, yes.

Okay, so those costs are now gone. Any timeline on the appeals case from the government?

We understand the Appeals Court is meeting later this month and also in November. We haven't been scheduled as far as I know for hearings yet. So we're awaiting advice from the courts.

Okay. Great. Then just a quick question. The operating margin in the services segment, that was really strong for the quarter. Were there any nonrecurring items that may have skewed that number upwards? Or is a 20% margin sustainable there?

Those numbers are a little bit higher than what we would expect going forward, CJ, only because as Rick mentioned the Bermudian government is taking over payment of the electricity in the Bermuda plant. We brought the operations of that plant significantly in below what was projected. We are making good money on that. The margins I don't think going forward will be quite as high.

Okay. All right, great. Thanks, guys.

(Operator Instructions) Michael Gaugler, Brean Murray, Carret.

Morning, everyone. Rick, maybe you could give me a little better clarification on the situation with the Grand Cayman license. You sort of faded out when you were going over how that was playing out.

You know, we have not -- I guess the key points are that the license expires mid-July. We have been actively engaged in negotiations with the government for more than a year and a half now.

We ran into a bit of a disagreement on the rate model going forward at the end of last year. We've been in negotiations directly with the government on this matter; and indications are that they are seriously considering our objections to the rate of return model.

So other than that, that is about all I can tell you right now, Mike. It's fairly sensitive, and we're engaged in the discussions with government for the renewal.

Mike, we did add to the 10-Q this time that we don't think the license will be -- the negotiations will be completely finished by the expiration date of the license in July. So there is probably going to be some type of interim license signed until we can reach some kind of resolution on the negotiations for a long-term license.

Understood, I --

And the terms for all of this is still very much up in the air.

I am just wondering, do they realize that a rate of return model probably takes several years to implement? I have gone through this with one of the companies in my coverage universe, and it is a time-consuming and very difficult process.

So it seemed a little off to me when you guys first brought this up on last quarter's call, given the time frame that was in front of you with the July expiration. If they were actually serious about doing something like that, it seems to me it would make more sense to plan that several years down the road not within a couple of months.

Yes. I mean we are just -- our arguments are certainly centering on what would be best for the customer and best for the Company. We think that the model that we have used over the last 30 years basically has been very successful. It's kept the rates at reasonable levels, and it has allowed the Company to make a respectable return on investment.

So we have compared the rates to other jurisdictions in the Caribbean, and we think that we are in a favorable position to argue that the rates are reasonable under the existing license. So that is how we have been attacking.

And certainly you are correct, it would take a lot more resources and time to implement a rate of return rate structure here.

That's all I had, guys. Thank you.

Mr. McTaggart, gentlemen, it appears that we have no further questions at this time.

All right, well, thanks, Mike. I appreciate everybody that dialed in for the call. We look forward to speaking with you again in August. Thank you.

Thank you, gentlemen, for your time. To access the digital replay of this conference you may dial 1-877-344-7529 or 412-317-0088 beginning at 1.30 p.m. Eastern Time today. You will be prompted to enter a conference number which will be 440419. You will also be prompted to record your name and company when joining.

The conference is now concluded. We thank you all for attending today's presentation. You may now disconnect.