Consolidated Water Co Ltd (CWCO) 2011 Q1 法說會逐字稿

Hello. And welcome to the Consolidated Water Company first quarter 2011 conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. Instructions on how to ask your questions will be provided at that 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 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 relationships 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. Please note this conference is being recorded.

Now I would like to turn the conference over to Rick McTaggart. Mr. McTaggart?

Thank you, Maureen. Good morning, ladies and gentlemen, and thank you for joining David and I on this call today. Aside from the incremental administrative expenses associated with the development activities of our consolidated Mexican affiliate NSC Agua, which relate to the proposed 100 million gallon per day Rosarito desalination plant in northern Mexico, our first quarter net results were relatively consistent with those for the first quarter of last year. A decline in service segment gross profit in the first quarter, due to lack of new projects was approximately offset by an increase in bulk segment gross profit and an increase in equity earnings from our investment in our BVI affiliate, which David will discuss in more detail in a moment.

Retail segment water sales and gross profit remained essentially the same as the first quarter 2010, in spite of a 16% decline in sales volume. During the first half of 2010 we provided water to the Water Authority in Grand Cayman to meet their requirements while the Red Gate plant was refurbished. Because we provide water to a Water Authority under a special pricing arrangement, the impact to our retail segment revenues was reduced.

Volume sales to our normal retail segment customers remained essentially flat when compared to last year, and the loss of revenues from the Water Authority sales was offset by our annual inflation-related water, base water rate increase which went into effect in January, as well as an increase in energy pass-through charges due to higher fuel prices.

The trends we are seeing in tourist arrivals to the Cayman Islands during the first quarter of this year are encouraging with an almost 7% increase in air arrivals and an 8% increase in cruise ship arrivals over last year. This bodes well for increased economic activity in Grand Cayman, but we will have to wait and see if these numbers will ultimately have a meaningful impact on our water sales. The Cayman Islands government in the meantime has embarked on several major initiatives to spur economic growth, including a major cruise ship port expansion, creation of a special economic zone, and a proposed 2,000-bed medical tourism facility, which is being promoted by the renowned Indian low cost healthcare pioneer, Dr. Devi Shetty.

The government has over the past several months passed several pieces of special legislation to facilitate the development of specifically the special economic zone and the Healthcare City, as it is being dubbed in the media. It has been reported that the construction of the initial $100 million phase of the healthcare project is set to begin this year, with a 200 to 300-bed facility that will be completed in 18 months. It is not clear yet where these projects would be located either within our franchise area or within the Water Authority service area, but in any event either of these projects could generate significant long-term economic growth in Grand Cayman, and has the potential to positively impact our business in the future.

As disclosed in our recently filed Form 10-Q, the Cayman Islands government advised us last week that it had extended our current retail water license until July 4 of this year, in order to allow more time to complete our negotiations for a new license. In late 2009, you will recall we were advised by the government negotiating team that the new license would include provisions to regulate our water rates based on our return on invested capital or rate base, and this proposed rate of return model is much more complex than our current inflation-based rate model, and it inherently requires much more regulatory oversight by the Water Authority, so consequently it has taken much more time than anticipated to negotiate the new license. We are optimistic that negotiations will continue to be constructive, and that we will eventually reach a satisfactory conclusion.

Both revenues and gross profit generated by our bulk segment businesses improved by 15% over last year, reflecting more efficient operation of our plants due to higher utilization and improved energy efficiencies, particularly in the Bahamas operation, where tight control of energy usage at our Windsor and Blue Hill plants have yielded positive results. Bulk segment water sales by volume improved by 4% over last year, reflecting additional water sold from the recently refurbished Red Gate plant in Grand Cayman.

As previously reported, we were awarded a 5 million US gallon per day expansion to our Blue Hill plant in Nassau earlier this year, and that project is progressing as planned. We are on a very tight delivery schedule of October 1 in order to meet our customer's deadline to replace water from a 30-year-old barge water operation that will be ending before the year is out. And when completed, we expect this expansion to enhance revenues and profitability of our bulk segment businesses.

Results of our service segment were impacted by a lull in new project activity, and we would expect results going forward to be consistent with this quarter until we obtain contracts for new projects or services. Because the Blue Hill expansion will not be owned by others this project will not impact service segment revenues in the future, and it will be included in our bulk segment results.

David would like to discuss the BVI situation, as well as recent Bahamas receivable events and new debt financing. David?

Good morning everyone. I would like to touch briefly on our financial condition. We continue to improve it this quarter. Cash balances increased, we continued to pay down debt, and our stockholders equity increased. We are very comfortable with our financial condition at this moment. There are a couple of matters that will impact our financial condition going forward that I will talk about in just a moment.

First of all, with respect to the BVI situation, our affiliate OC-BVI received a $1 million payment this past quarter, on a court order associated with the Baughers Bay litigation. However the BVI government has filed an application for stay of execution to avoid paying OC-BVI any of the other monies still due on that court order which amounted to about $5 million.

So unfortunately, it would appear that OC-BVI will not be receiving any cash from the court order until the appeal on this order is heard by the appellate Court in the Caribbean. Our attorneys have not given us a definitive date for the hearing of this appeal, but we don't believe it will occur before the fourth quarter of this year. Of course, that has the implications to our investment in OC-BVI, because the valuation that we have placed on this investment assumes that we will collect the full $5 million or that OC-BVI will collect the full $5 million remaining under the court order.

Rick talked earlier about the Blue Hills expansion. We expect to incur approximately $10 million in short-term construction loan financing to build this expansion. But our goal is to refinance this $10 million construction loan with long-term bonds to be offered in the Bahamas. This would be comparable to the offering that we made back when we built the Blue Hills plant. This is a chance for Bahamian citizens and incorporations to participate in the growth of our water business in the Bahamas.

Also touching on the situation in the Bahamas, we were pleased to receive a $2.75 million payment on the overdue Accounts Receivables from the Bahamian government. This payment was received in April. The government has always told us that it was their intention to bring these receivables to a more current status, and we believe this $2.75 million payment that we received is just the first of three payments that will ultimately normalize the aging of the Accounts Receivable of our Bahamas subsidiary.

I would like to touch briefly on the situation with our services segment, as we noted in our 10-Q, our management agreement for our Bermuda plant will be expiring in June of this year, and the government has indicated that they will take this contract to tender. So we cannot presume that we will continue to earn the revenues from that plant.

And with that I would like to turn things back over to Rick.

Thanks, David. I will talk a bit now about new project opportunities. In addition to the Blue Hill expansion that we mentioned, we are involved in the development of a 100 million-gallon per day seawater desalination plant in northern Baja, California, and Mexico, this project if successful will product desalinated water for northern Mexico and specifically the cities of Tijuana and Rosarito, and will deliver water to southern California via a 25-mile long transmission main to the US border.

This is a very ambitious project, and it has a number of technical and regulatory challenges, however, we believe ultimately that we will be successful developing this project because of the acute need for new water sources in an arid and fast growing region of North America. Over the past year we and our partners have been successful in securing certain rights to a key site in northern Mexico, and have made significant progress negotiating ground-breaking agreements with the Mexican Federal Electricity Commission, and these agreements would give us access to a feed water source, as well as electrical power for the project.

Additionally, we and our strategic partners, Doosan Heavy Industries and Construction, expect to soon commence on-site pilot testing of the seawater treatment systems that will be used in the large-scale plant.

It is important to recognize that this is a long-term project. We believe that development activities will continue into early next year, and will require additional financial commitments from us and our partners. If we successfully develop the project and obtain customer contracts for water, construction of the plant is expected to take between two and three years to complete. So in addition to the Rosarito project, we are following other project opportunities in Mexico, as well as other parts of the world including Asia, and we will keep investors advised as these opportunities develop.

Maureen, I would like to open the call up now for questions.

Thank you. (Operator Instructions). We have a question from Christopher Purtill, Janney Montgomery Scott, please go ahead.

Yes, thank you. Good morning, guys.

Good morning. How are you doing?

Alright. I was hoping that you could offer a little bit more color on how much additional dollars you expect to contribute to the NSC joint venture beyond the $4 million commitment that we started with?

We are developing the budget with our partners at the moment, so we don't have any information that we could give to investors regarding future commitments at this point. It could be affected by a number of items, and we will disclose that when things are finalized.

Okay. But at a minimum we have I guess the remaining $0.5 million on the initial commitment?

I think it is a little less than that, Chris. I think it is somewhere around $200,000 at this point.

Alright. Great. And then I guess has there been any other developments on the Ensenada project that you talked about on the last conference call?

Well, they have extended the bid again which works well for us, and the bid process continues. A lot of companies are asking questions about the project, and that is about all I can report at this point.

Great. Thanks, guys.

(Operator Instructions). We show no further questions at this time. I would like to turn the conference back over to Rick McTaggart for any closing remarks. Actually, we just have a question has just popped in. We have Chris Noon from Brean Murray. Please go ahead.

Good morning guys. I was just going to piggyback maybe off that previous question. If you could give some color on the SG&A line, what kind of run rate we should expect for the rest of the year? I think it was $3.7 million in this quarter. We had been modeling about $3 million to try to take into account some of those costs related to the joint venture in Mexico, but if you guys could give some clarity on what we should expect on the SG&A line, that would be helpful?

Chris, we really can't tell you what we will spend in Mexico yet. We are still working on that and obviously that will have a big impact on our SG&A. But if you look at the history of our Company our SG&A has tracked fairly consistently. There is nothing out there in terms of discretionary G&A expenses that would cause our historical patterns to vary.

I guess what I am getting at we shouldn't expect big $1.1 million chunks in quarters going forward?

Well, I don't know. As Rick said earlier, we are in the process of evaluating how we move forward with Mexico, and how we fund that.

Alright. Thanks a lot.

And exactly how much funding we have spent. So we will let you know.

Sounds good. Thanks.

Having no further questions, I would like to turn the conference back over to Rick McTaggart for any closing remarks.

Thank you, and I would just like to thank everybody for joining the call today. And I hope to hear from you next quarter. Thank you.

To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 12.30 Eastern Time today. You will be prompted to enter a conference number which will be 450838. Please record your name and company when prompted.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.