Consolidated Water Co Ltd (CWCO) 2011 Q2 法說會逐字稿

Hello and welcome to the Consolidated Water Company Limited conference call. (Operator Instructions).

This conference 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 could 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 and 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, revisions or changes after the date of the conference call.

(Operator Instructions). Please note that this event is being recorded.

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

Thanks, Keith. Good morning, ladies and gentlemen, and thank you for joining me and David, our CFO, this morning on the call. I will be relatively brief this morning since many of you are no doubt following events closely in the financial markets.

Before I discuss the Company's second-quarter results, I would like to mention that August 29 will mark the 38th anniversary of the Company's incorporation here in the Cayman Islands, and the world has certainly changed since 1973, and the desalination industry, which was in its infancy at that time, has grown from a worldwide production capacity of around 0.5 billion gallons per day to more than 17 billion gallons per day in 2010, and it is produced by more than 15,000 desalination plants worldwide. And, over the last 38 years, Consolidated Water has strived to remain on the cutting edge of the desalination business by utilizing our extensive operating know-how and the best available technologies and in some cases participating in the development of new technologies, and our abilities have allowed us to consistently offer more affordable product to our customers and better compete in our market.

While all of us have been carefully following the unprecedented events over the last few weeks and the reactions of the financial markets around the world, we take great comfort in the fact that our Company has a very simple mission -- to provide a product that is essential for life, which is fresh drinking water, to populations that demand our product because their access to naturally occurring freshwater is either limited or unavailable.

I'm pleased to report that revenues and gross profits from all three of our business segments improved in the second quarter of this year compared to the same period last year, and this resulted in an 87% increase in our non-net income to approximately $1.9 million for the quarter or $0.13 per diluted share compared to approximately $1 million or $0.07 per diluted share during the same period last year. Retail revenue in Grand Cayman during the second quarter this year benefited from a 2% inflation index increased to our base rates, which was effective in January this year, as well as higher energy pass-through charges resulting from higher electricity costs.

Excluding nonrecurring water sales to the government-owned water utility in the second quarter of last year, our retail water sales by volume for this past quarter increased by about 5.3%, which probably reflects dry weather and to a lesser extent higher stayover visitor numbers in Grand Cayman. Government data indicates that tourism continued to recover from the downturn that started in late 2008 with stayover visitors in the second quarter up 9.4% over the second quarter last year. We are certainly pleased to see this trend, and if it continues, we may see some resurgence in development activity in our franchise area, which could translate into higher water sales.

We were advised by the Cayman Islands government last month that it had extended our retail water franchise agreement until January 31, 2012, to allow negotiations for a new water franchise agreement to continue without interruption to critical water services for residents and businesses in our franchise area.

As noted in the press release, we are working to resolve certain unanticipated legal issues that arose as a result of new legislation that was passed earlier this year to facilitate the privatization of the government-owned water and waste water systems here in Grand Cayman. We expect negotiations on the commercial aspects of the new franchise agreement to continue as soon as those legal issues are resolved.

During our last investor call, we reported that the Cayman Islands government had embarked on several major initiatives to foster growth of the local economy, and these included a new cruise ship port, an economic free zone and a medical tourism hospital, which is being developed by a well-known Indian physician and entrepreneur. These projects continue to move through their development stages and, in fact, today it was announced that the new hospital is going to be located on the East end of the island. It actually identified a site which is within the government-owned water utilities service area. However, we do supply bulk water to that government utility through ocean conversion Cayman subsidiary.

In addition to these projects, the Dart Group has announced yet another major project within our franchise area on the West Bay Beach, which will positively impact our retail water sales in the future. This project includes the redevelopment into a four or five star resort of an existing 230-room hotel that has been closed since late 2008 because of hurricane damage. The project also includes the relocation of a major route along the beach, which will open up new resort development land with direct access to the ocean, and Dart's plans also include a new school and public park areas.

Revenue and gross profit from our bulk water segment increased 25% and 24% respectively this past quarter compared to the second quarter of 2010, reflecting a 5% increase in sales volumes and higher energy pass-through charges to our customers.

In addition, fees for operating the Red Gate plant in Grand Cayman, which was refurbished and put back into service in July last year, favorably impacted last quarter's results and were absent from the second-quarter results last year while the plant was being refurbished.

Construction of an expansion to our Blue Hills plant in Nassau is continuing quickly, and we believe that we will be able to begin delivering water on schedule on October 1. We are dedicating a great amount of resources to this project, which is slated to replace the current water barging operation from Andros Island to Nassau. And when completed, our water production capacity in Nassau will increase by about 48% to slightly more than 15 million US gallons per day. This expansion plan incorporates state-of-the-art energy recovery technology, as well as high efficiency pumps and five years of operational know-how in relation to the feed water quality and other conditions on this specific site. So we expect this expansion to positively impact bulk segment gross profit and earnings when it comes online in the fourth quarter of this year.

Results from our Belize bulk water operation were in line with expectations last quarter and contributed about $175,000 to net income for the quarter, which is consistent with last year's performance for the same quarter. However, investors have probably noted in the international press that the government of Belize recently nationalized the privately owned power utility in Belize and last year nationalized one of the privately owned telecom companies. Obviously this is of great concern to us, and we are following events closely to determine whether these actions or future actions by government will potentially impact our business.

We supply water to the government-owned water utility in a limited area of Belize and consequently have a much lower profile than utilities that supply directly to the public. So we hope this is in our favor. Our relationship with our customer remains cordial, and the plant is operating normally and reliably, and the customer is keeping current on its payments.

Our services segment saw the largest variance in gross profit this past quarter compared to last year because of an increase in service revenues and more significantly the absence of one-time costs of approximately $400,000 last year relating to liquidated damages on the Red Gate project in Grand Cayman.

With the expiration of the Bermuda management contract on June 30, going forward investors should expect to see a modest level of income and profit in this segment from our management contract with Ocean Conversion BVI until such time as we embark on new projects, which require management services or construction of plants for sale or transfer to customers.

Subsequent to the expiration of the operating agreement between our Bermuda affiliate and the government of Bermuda, the government has recently issued tender documents for a long-term operation of the Tynes Bay facility, and we are evaluating those documents with our Bermudian partners.

In addition to the Blue Hills expansion mentioned earlier, we are involved in the development of 100 million gallon per day seawater desalination plant in Northern Baja California, Mexico. This project, if successful, will produce desalinated water for Northern Mexico and will deliver water to Southern California via a 25-mile long transmission main from Rosarito, Mexico to the US border. This project has presented certain technical and practical challenges so far, which has slowed progress and increased development costs. Over the past 15 months, the development company has entered into agreements to purchase sufficient land on which to build the plant in Rosarito, Mexico. The sellers are currently in the process of transferring this land, which is communal property under Mexican law, to private ownership, and we hope that the privatization process will be completed before the end of the year.

We have also made significant progress negotiating groundbreaking agreements with the Mexican Federal Electricity Commission, which will give us access to feed water and electrical power for the project, and we also expect that these agreements will be concluded in the coming months.

We believe that this project will require significant additional capital to complete its development activities and specifically to purchase the land, and we are currently in discussions with our partners regarding the amount and sources of this additional funding. We will keep investors updated if any new material developments occur with this project.

New opportunities in our historical market of the Caribbean continue to be few and far between, and consequently we have turned our attention to other areas of the world with robust tourism-based economies, and we are developing some very promising project opportunities in these areas, and again, we will keep investors advised if any of these new opportunities develop.

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

(Operator Instructions). Christopher Purtill, Janney Montgomery Scott.

I am just hoping maybe you could add a little bit more color on the Mexico project. You noted in the Q that you are evaluating whether or not to continue with the project. I just wanted to maybe get your bigger picture thought process there. Is this primarily a cost issue, or was there -- is there anything specific that may have happened in the quarter or since starting the project that was a leading driver for the reevaluation?

I think it is just a cost issue at this point. We are looking at the additional costs required to finish the development activities, and we are presently in negotiations with the partner to see how we handle that. Nothing else more specific.

Okay. And then, I guess, on the costs, now that you have met your $4 million obligation, and you are working with a partner on sourcing new funds and figuring out how much more will be needed, I mean do you have any kind of rough estimate on what we could expect at least in the back half or into 2012?

I mean we have done our internal cost estimates for the development, the continuing development. Obviously we are in discussions with a partner, and we are not prepared to -- well, it is not finalized yet, so we're not prepared to share anything at this point.

Okay. Can you let us know -- have you spent anything quarter to date in the third quarter just kind of ongoing project development costs?

No, we have not. (multiple speakers) Anything, any material commitments we made was to investors.

Chris, we have some assets that are capitalized on the balance sheet. If we did not move forward with the project, obviously those would be written off. So there is still an overhang there.

Okay.

I think there is approximately -- I want to say something along the lines of $800,000 in amounts that we put down on agreements that, if the project did not go forward, then we would have to write those off.

Michael Gaugler, Brean Murray, Carret.

Two questions, Rick. I'm going to kind of follow along C.J. path's in terms of the Mexico project. I'm just wondering where that stands from the environmental impact study standpoint. Has that been submitted yet?

It has been prepared. It has not been submitted yet, Mike.

Okay. That is all I had on that one. And then on Grand Cayman, I would like to delve a little bit into what is going on there. When is the next election period there, Rick?

It would be 2013.

And your current agreement has now been extended through 2012?

Through January 31, yes.

Given the length of time this is taking, is this really subject to political whim, and could this prospect just kind of fade away if government were changed out in the next election?

The process fade away? I mean I think we need to complete the negotiations. I'm not sure what you mean by that.

I meant on their focus on moving to a regulated model.

I really could not answer that at this point. I would not know.

Okay. Again, the reason for the question was it seems like it just keeps getting pushed out and pushed out, and I am just wondering if perhaps the political will to change the system is fading.

It is being pushed out, Chris, because as we disclosed -- I mean, excuse me, Mike -- like we disclosed in the 10-K -- 10-Q, there are certain legal issues that have to be resolved as a result of new litigation. That is the reason why it has been pushed back.

Understood. Just, again, when you are looking at the timeline, it really looks like it is going to be quite a while.

Let me just correct David. It is not litigation; it is legislation. They have just passed some new legislation that inadvertently impacted us. There is no litigation involved.

I actually used the term legal. I know we are not in litigation there. We only have litigation in the OC-BVI.

Thank you and we show no questions at this time. I would like to turn the call back over to Rick McTaggart for any closing remarks.

Thanks, Keith. Just appreciate everybody dialing in this morning and wish you all the best, and we will talk to you in November again. Thank you.

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