Consolidated Water (CWCO) 2015 Third Quarter Update

Consolidated Water (CWCO) reported 2015 third quarter earnings of $0.12 per share, compared with $0.13 per share in the prior year comparable quarter. Revenues of $14.6 million, were down 14% from $17.0 million last year.  Both earnings and revenues fell short of consensus views, but this was a quarter in which I had no expectations for any significant changes in the company’s performance, either up or down.

The magnitude of the revenue decline was most noteworthy, even though it had mostly been anticipated. The primary cause of the drop was lower bulk water volumes in the Bahamas and the Caymans.  The government of the Bahamas has been buying less water because of its efforts to conserve water and stem leaks.  In the Caymans, the Water Authority purchased less water from CWCO, presumably because a plant there which had been offline has come back on.  (I am really just guessing here, because CWCO gave no clear explanation.)

While a 14% drop in revenues is never good news, CWCO pointed out that its two major bulk water customers (the Bahamas and Caymans) are under take-or-pay contracts, so a minimum level of profitability is guaranteed. To its credit, CWCO was able to adjust its operating expenses during the quarter to avoid a corresponding decline in profits.

The most significant news to come out of the quarter related to the company’s Rosarita desalination project in Mexico. CWCO reported that the state of Baja California had endorsed the project and that a tender has been opened under which interested parties may submit bids.  CWCO will submit its bid, which is due on March 23, 2016.  When the tender period expires, the government will presumably then select a winning bidder and negotiate final terms.

Along with this news, CWCO disclosed that the Federal government of Mexico will not allow it to sell water directly to any parties outside of Mexico. CWCO had previously disclosed that it had entered into an agreement with the Otay Water District to receive 20-40 million gallons of water per day at the U.S.-Mexico border.  Now, if Otay is to become a customer of this proposed desalination plant, CWCO will have to sell the water to the government of Mexico, which in turn will sell it to Otay.  This new arrangement potentially complicates the financing of the deal, because CWCO will probably have to get the Mexican government to commit to take a minimum volume of water in order to satisfy lender requirements.

CWCO also reported that its former partners have filed suit to reclaim their interest in the Rosarita project. CWCO believes that it acted lawfully in previous transactions between the parties and so it believes the lawsuit is without merit and intends to fight it vigorously.

From my perspective, despite the uncertainties surrounding Otay and the lawsuit, these latest developments in Mexico provide proof that this is in fact a real project. Local and Federal authorities have apparently demonstrated a strong interest in Rosarita and while there is a possibility that CWCO may not be the winning bidder or may have to give away some of the upside potential in the project, it should at the very least be able to get its money back (quite possibly with a return on its investment) as long as the project proceeds and the rule of law prevails.  It should also be the case the CWCO’s required spending on this project should mostly subside (except for the costs associated with preparing its tender bid) until the tender process is completed in March.

Beyond that, there was little news. CWCO reported that the negotiations with the Water Authority of Cayman have recommenced over the past three months and management says that it is hopeful of achieving a satisfactory outcome.  On the other hand, the Bali project continues to lose money and it looks increasingly likely that the company will have to take an impairment charge against its investment there, unless there is a dramatic improvement in its performance during the final quarter of 2015.

On balance, therefore, this was a constructive quarter for CWCO. I still await tangible evidence of the renewal of the company’s operating license in the Caymans and also hope for some movement toward the same in Belize.

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