Business Overview and History

Consolidated Water Co. Ltd. (NASDAQ:CWCO) is a leading designer, builder, and operator of advanced water supply and treatment plants in the Caribbean region. Founded in 1973, the company has established a strong presence in key markets such as the Cayman Islands, The Bahamas, and the British Virgin Islands, providing reliable and sustainable water solutions to both public utilities and private entities.

Consolidated Water Co. Ltd. was founded in 1973 and is headquartered in George Town, Cayman Islands. The company develops and operates advanced water supply and treatment plants and water distribution systems. Consolidated Water began by designing, constructing and operating seawater desalination facilities in the Cayman Islands.

In the 1990s, the company expanded its operations to The Bahamas, constructing and operating seawater desalination plants to supply bulk water to government utilities. This expansion into The Bahamas market was an important milestone for Consolidated Water as it diversified its geographic footprint beyond the Cayman Islands.

One of the key challenges the company faced in the early 2000s was the cancellation of its contract for a desalination project in Mexico in 2020 after the State of Baja California terminated the public-private partnership agreement. This setback required Consolidated Water to record significant impairment charges and initiate international arbitration proceedings to recover its costs, which was a difficult period for the company.

Despite this challenge in Mexico, Consolidated Water continued to grow its core business in the Cayman Islands and The Bahamas throughout the 2000s and 2010s. The company also diversified its operations by acquiring subsidiaries that design, construct and operate water infrastructure and provide water-related products and services in the United States. These acquisitions, such as the purchases of PERC Water Corporation in 2015 and REC Water Corporation in 2023, allowed Consolidated Water to expand its geographic reach and service offerings beyond its traditional seawater desalination focus.

Financial Performance and Ratios

Consolidated Water's financial performance has been characterized by steady growth and resilience. Over the past three years, the company has reported the following key financial metrics:

- Revenue:

• 2022: $94.10 million - 2023: $180.21 million - 2024: $205.43 million (estimated based on provided information)

• Net Income: - 2022: $5.86 million - 2023: $29.59 million - 2024: $31.32 million (estimated based on provided information)

• Operating Cash Flow: - 2022: $21.33 million - 2023: $7.97 million - 2024: $37.26 million (estimated based on provided information)

• Free Cash Flow: - 2022: $13.79 million - 2023: $2.92 million - 2024: $29.96 million (estimated based on provided information)

The company's financial ratios further highlight its strong financial position and liquidity:

• Current Ratio: 7.66 (as of September 30, 2024)

• Quick Ratio: 7.47 (as of September 30, 2024)
• Debt-to-Equity Ratio: 0.017 (as of September 30, 2024)

These ratios demonstrate Consolidated Water's ability to meet its short-term obligations, maintain a low debt burden, and generate solid returns on its assets and equity.

In the most recent quarter (Q3 2024), Consolidated Water reported revenue of $33.39 million and net income of $4.45 million. This represents a 33% decrease in revenue compared to Q3 2023, primarily due to a $20.6 million decrease in construction revenue as major projects were completed. Net income also decreased by 48% from $8.61 million in Q3 2023, reflecting the decline in higher-margin construction revenue.

As of September 30, 2024, the company maintained a strong liquidity position with $104.87 million in cash and cash equivalents.

Diversified Service Offerings and Geographical Footprint

Consolidated Water's business model is characterized by a diversified service offering and a strategic geographical presence. The company operates four main business segments: retail, bulk, services, and manufacturing.

1. Retail Segment: - Consolidated Water operates an exclusive retail water utility in the Seven Mile Beach and West Bay areas of Grand Cayman, serving residential, commercial, and governmental customers. - This segment accounted for approximately 23% of the company's consolidated revenue and 36% of its consolidated gross profit for the nine months ended September 30, 2024. - The company continues to operate under the terms of the 1990 license, which has not been formally extended beyond January 2018, as negotiations with the Cayman Islands government for a new retail license are ongoing.

2. Bulk Segment: - The company designs, constructs, and operates large-scale desalination plants to provide potable water to government-owned utilities in the Cayman Islands and The Bahamas under long-term contracts. - For the nine months ended September 30, 2024, this segment contributed $6.84 million to income from operations and generated $25.56 million in revenue, representing 24% of total revenue. - Gross profit for the bulk segment remained consistent at around 31% of bulk revenue.

3. Services Segment: - Consolidated Water provides design, engineering, construction, and operation services for water infrastructure projects. - Revenue for this segment decreased significantly to $12.68 million in Q3 2024 from $29.43 million in Q3 2023, primarily due to a decline in construction revenue as the large Liberty Utilities project neared completion. - Revenue from operations and maintenance contracts increased to $7.49 million in Q3 2024 from $5.02 million in Q3 2023, partly due to the acquisition of REC in October 2023.

4. Manufacturing Segment: - This segment manufactures and services a wide range of custom and specialized water-related products for commercial, municipal, and industrial water production, supply, and treatment. - Manufacturing revenue was relatively consistent at $4.36 million in Q3 2024 compared to $4.72 million in Q3 2023. - Gross profit increased to $1.59 million (36% of manufacturing revenue) in Q3 2024 from $863,950 (18% of revenue) in the prior year period, due to a higher margin product mix.

Geographically, Consolidated Water's operations are primarily focused on the Caribbean region, with a strong presence in the Cayman Islands, The Bahamas, and the British Virgin Islands. The company has also expanded its footprint into the United States, primarily through the acquisition of water infrastructure businesses in regions such as Arizona and Colorado.

This diversified service offering and geographical footprint have been instrumental in Consolidated Water's ability to navigate various market conditions and economic cycles, ensuring a steady stream of revenue and resilient financial performance.

Regulatory Environment and Challenges

Consolidated Water's operations are subject to a complex regulatory environment, particularly in its core Caribbean markets. The company's retail water utility in the Cayman Islands, for example, operates under an exclusive license granted by the Cayman Islands government. While this license has been periodically extended since its initial issuance in 1990, the company is currently engaged in ongoing negotiations with the Cayman Islands government regarding the terms of a new license agreement.

The outcome of these negotiations could have a significant impact on Consolidated Water's retail water operations in the Cayman Islands, which have historically contributed a substantial portion of the company's revenue and gross profit. The Cayman Islands government has indicated a desire to restructure the terms of the license in a manner that could potentially reduce the operating income and cash flows generated by Consolidated Water's retail segment.

Additionally, the company's bulk water supply contracts in the Caribbean region are subject to various regulatory requirements and approvals, which can create uncertainties and challenges. For example, Consolidated Water has experienced periodic delays in the collection of accounts receivable from the Water and Sewerage Corporation (WSC) in The Bahamas, which has at times adversely impacted the liquidity of its Bahamian subsidiary.

To mitigate these regulatory risks, Consolidated Water has strengthened its relationships with government entities and local authorities, actively engaging in dialogue and negotiations to ensure the continued viability of its operations. The company's diversified business model and geographic reach also help to offset the potential impact of regulatory challenges in any single market.

Outlook and Growth Opportunities

Consolidated Water's future outlook remains promising, with the company well-positioned to capitalize on the growing global demand for water-related solutions and infrastructure.

One key driver of the company's growth is the ongoing water scarcity and quality challenges faced by many regions around the world, particularly in the Caribbean and other island nations. As these challenges intensify, the demand for advanced water treatment and desalination technologies is expected to increase, playing to Consolidated Water's core competencies.

The company has actively invested in developing innovative water treatment and management solutions, including its proprietary seawater reverse osmosis (SWRO) technology. This technological edge, combined with Consolidated Water's extensive project management and engineering expertise, positions the company as a preferred partner for governments and utilities seeking reliable and sustainable water supplies.

Moreover, the company's recent expansion into the United States, particularly through the acquisition of water infrastructure businesses in regions like Arizona and Colorado, opens up additional growth opportunities. The company is well-positioned to leverage its proven track record and expertise to serve the evolving water needs of municipal and industrial clients in water-stressed areas of the United States.

Consolidated Water's strong financial position, with a healthy balance sheet and robust liquidity, provides the necessary resources to pursue strategic initiatives and capitalize on emerging opportunities. The company's management team has demonstrated a consistent track record of prudent capital allocation and disciplined execution, further enhancing its ability to drive long-term sustainable growth.

Looking ahead, Consolidated Water expects to begin the construction phase of the $147 million Honolulu, Hawaii desalination project in late 2025, which represents the largest portion of revenue they expect to generate from this project. The Hawaii project is comprised of a 2-year development phase ($27 million) followed by a 2-year construction phase, and then a 20-year operations and maintenance agreement with options for two additional 5-year extensions.

The company also anticipates completing the formal dissolution of their Mexico subsidiaries by the end of Q1 2025, which will eliminate the losses from discontinued operations. For the remainder of 2024, Consolidated Water expects capital expenditures of approximately $3.8 million, including $872,000 for their new West Bay plant and $3.1 million for the Cat Island project in the Bahamas.

The seawater desalination industry has seen steady growth, with a compound annual growth rate of around 7-8% over the past 5 years, driven by increasing water scarcity and demand for reliable water supplies, particularly in coastal regions. This industry trend bodes well for Consolidated Water's core business and future growth prospects.

Conclusion

Consolidated Water Co. Ltd. (NASDAQ:CWCO) has established itself as a resilient and innovative water solutions provider in the Caribbean region and beyond. With its diversified service offerings, strategic geographical presence, and commitment to technological advancements, the company is well-positioned to navigate the evolving water challenges faced by its clients and capitalize on the growing global demand for reliable and sustainable water infrastructure.

Despite the regulatory complexities and occasional liquidity challenges in certain markets, Consolidated Water's strong financial performance, healthy balance sheet, and experienced management team instill confidence in the company's ability to continue delivering value to its shareholders. As the world grapples with the pressing issue of water scarcity, Consolidated Water stands as a leading provider of innovative and cost-effective water solutions, poised to play a pivotal role in shaping the future of the global water industry.

The company's focus on expanding its operations and maintenance contracts, as evidenced by the recent acquisition of REC and the upcoming Hawaii desalination project, provides a stable foundation for future growth. While the completion of major construction projects has led to a temporary decline in revenue, the shift towards long-term operations and maintenance agreements is expected to provide more predictable and sustainable income streams in the coming years.

As Consolidated Water continues to navigate the complex regulatory environment in its core markets and pursues new opportunities in the United States and beyond, investors should closely monitor the outcome of the ongoing retail license negotiations in the Cayman Islands and the progress of the Hawaii desalination project. These factors, along with the company's ability to maintain its strong liquidity position and capitalize on industry growth trends, will be key determinants of Consolidated Water's long-term success and shareholder value creation.