The Tribune

By NEIL HARTNELL

Tribune Business Editor

BISX-listed Consolidated Water believes its Blue Hills facility has given the Bahamas the largest reverse osmosis plant of its type "in the Western Hemisphere", although its recent 4.8 million gallon expansion caught the Water & Sewerage Corporation "a little bit by surprise".

Senior Consolidated Water executives, discussing their 2012 first quarter results with Wall Street analysts, said the Corporation failed to anticipate that the 67 per cent expansion of the Blue Hills plant would lead to increased billings.

They added that the 100 per cent Government-owned Corporation's failure to make timely payments to its Bahamian operations was almost solely responsible for the 76.8 per cent rise in Consolidated Water's accounts receivables during the three months to end-March 2012.

And, elsewhere, Consolidated Water said the decision to redeem early $8.5 million worth of bonds, held by Bahamian investors, would save it $500,000 per annum in interest payments. The BISX-listed company is also eyeing opportunities to further improve margins at its Bahamas operations.

Speaking to analysts after Consolidated Water generated an 18 per cent year-over-year net income increase to $2.343 million for the 2012 first quarter, Rick McTaggert, its chief executive, attributed the improved bottom line - at least partly - to higher margins in its bulk water supply business.

The Bahamas accounts for the majority of Consolidated Water's bulk operations, and Mr McTaggert said: "Bulk water revenues increased by 41 per cent during the first quarter, primarily due to increased sales from our expanded Blue Hills plant in Nassau, Bahamas, and through the energy pass-through charge.

"Those higher revenues, as well as efficiency improvements, led to a 54 per cent increase in the gross profits of the bulk water compared to the first quarter of 2011. The gross profit margins tracked up nicely from 22 per cent last year to 24 per cent this year, reflecting more efficient operations."

And Mr McTaggert added: "In early November 2011, we completed a 4.8 million gallon per day expansion of the Blue Hills desalination plant in Nassau, Bahamas, in record time.

"The plant is now the largest seawater reverse osmosis plant in our portfolio, and the largest seawater desalination plant in the Western Hemisphere that utilises seawater intake wells."

Combining Blue Hills with Consolidated Water's other New Providence-based reverse osmosis plant, Windsor, and its operations in Bimini, Mr McTaggert said the BISX-listed company had a collective 15 million gallons per day water production capacity in the Bahamas.

This, he added, meant "the Bahamas now represents the company's largest geographical market when measured in terms of volume of water produced and delivered to customers".

Mr McTaggert explained that the 67 per cent Blue Hills expansion replaced the water barging operation from Andros, which was discontinued in December 2011, with the extra 4.8 million gallons per day volume designed to "take over that demand".

He added that unless the Water & Sewerage Corporation and the Government wanted to purchase extra volumes from Consolidated Water, the amount of water it supplied would remain "relatively fixed under the existing contracts".

Still, Mr McTaggert said: "I see some opportunities to improve the margins in the Bahamas a little bit more."

He acknowledged that Consolidated Water had struggled with membrane fouling in its Bahamian operations for a number of years, an issue that now appeared to have been resolved, with energy usage at its reverse osmosis plants an area that could provide more immediate improvements.

"That's shared with the Bahamian government; any improvements over the guaranteed energy pass through charge," Mr McTaggert added.

Assessing Consolidated Water's balance sheet, David Sasnett, its chief financial officer, attributed both the 33.6 per cent decline in the company's cash balances during the quarter, plus the 76.8 per cent accounts receivables increase, to factors impacting its Bahamas operations.

"If you look at our March 31 balance sheet, you'll notice we have a decline of cash from $37.624 million to just under $25 million at the end of March," Mr Sasnett said.

"This is attributable to the fact we paid off $8.5 million of bonds related to our Bahamas operations this quarter. This should save is approximately $500,000 a year in interest expense."

As for the other issue, Consolidated Water saw its accounts receivables increase from $8.537 million at year-end 2011 to $15.097 million at end-March 2012.

Mr Sasnett said: "Our cash receivables increased significantly from year-end, about $7 million. The expansion of our Blue Hills plant and increased billings that we're sending to the Water & Sewerage Corporation, it has caught them a little bit by surprise, and they fell a little bit behind in their payment to us, which created the increase in accounts receivables at the end of March.

"However, the Bahamas government has sent us an incremental payment in the area of $6 million in the month of April to catch them up, and we've been assured they'll continue these additional billings in their budget process for this year, so we expect our accounts receivables for the company and the Bahamas operations to return to more normal levels fairly quickly."

Tribune Business revealed back in March how Consolidated Water was owed $8.3 million by the Water & Sewerage Corporation at end-February 2012, almost $4 million of that balance having been run-up during the first two months of 2012.

The BISX-listed company said the debts owed to it increased from $4.4 million at year-end 2011 to $6.1 million at end-January 2012, and to $8.3 million at end-February 2012.

And, as a result, Glen Laville, the Water & Sewerage Corporation general manager, confirmed to Tribune Business that it would "definitely need" an increase to the $20 million taxpayer subsidy allocated to it in the 2011-2012 Budget last May to pay down the sum owed to Consolidated Water.

The Government spent $6.3 million of taxpayer monies last month to pay down the $8.3 million bill the Water & Sewerage Corporation had run-up with Consolidated Water, which had to use $1.9 million in net cash to support its operating activities in the Bahamas as a result.

Meanwhile, Mr Sasnett described Consolidated Water as having "one of the healthiest balance sheet", having deleveraged and given itself substantial cash resources for future investments and new reverse osmosis opportunities.

Mr McTaggert said the company had resolved outstanding issues with the Mexican investors, and now had a controlling 75 per cent equity stake in a project to develop a 100 million gallon per day reverse osmosis plant on Mexico's Baja peninsula.

And Consolidated Water had also spent $165,000 during the 2012 first quarter as it explored expansion/development opportunities in Asia. It is targeting economies similar in nature to the Bahamas; tourism-based, politically stable and with limited potable water supplies, and aims to announce its first Asian project by 2012 year-end.

If all this comes off, it promises potential greater earnings and returns for Bahamian investors who hold Consolidated Water's Bahamian Depository Receipts (BDRs).