10-Q: Consolidated Water Q3 2025: Retail & Manufacturing Drive Growth

Consolidated Water Co. Ltd. reports increased net income and revenue for Q3 2025, driven by strong performance in its retail and manufacturing segments, despite a decline in services revenue for the nine-month period.

Summary

• Net income attributable to Consolidated Water Co. Ltd. stockholders for the three months ended September 30, 2025, increased to $5,532,344 ($0.34 diluted EPS) from $4,454,464 ($0.28 diluted EPS) in the prior year period.
• Total revenue for the three months ended September 30, 2025, increased to $35,118,706 from $33,390,557 in the prior year period.
• Gross profit for the three months ended September 30, 2025, was $12,945,909 (37% of total revenue), up from $11,634,658 (35% of total revenue) in the prior year period.
• For the nine months ended September 30, 2025, net income attributable to stockholders was $15,419,578 ($0.96 diluted EPS), compared to $26,779,069 ($1.68 diluted EPS) in the prior year, which included a significant gain from the Mexico project settlement.
• Total revenue for the nine months ended September 30, 2025, decreased to $102,425,170 from $105,559,105 in the prior year, primarily due to a significant decrease in services segment revenue.
• Retail segment revenue increased by 6% for the three months and 9% for the nine months, driven by higher water volume sales due to lower rainfall and increased customer connections.
• Manufacturing segment revenue increased to $4,664,433 for the three months and $15,708,527 for the nine months, attributed to increased production activity and a higher margin product mix.
• Services segment construction revenue declined by $3.1 million for the nine months due to the completion of the pilot plant testing phase of the Hawaii project and other contracts.
• Cash and cash equivalents stood at $123,554,648 as of September 30, 2025, an increase from $99,350,121 as of December 31, 2024.
• Working capital was $141.7 million as of September 30, 2025.
• CW-Bahamas accounts receivable from the Water and Sewerage Corporation of The Bahamas (WSC) amounted to $16.8 million as of September 30, 2025, with approximately 66% being delinquent.

Sentiment

Score: 7

Explanation: The company shows strong Q3 performance with increased revenue and net income, improved gross margins, and a healthy cash position. However, significant risks remain with the ongoing Cayman retail license negotiations, the potential loss of a major PERC contract, and persistent delinquent receivables in The Bahamas. The YTD results are skewed by a prior-year one-time gain, but continuing operations are stable.

Positives

• Net income attributable to stockholders for the three months ended September 30, 2025, increased by 24.2% to $5,532,344 from $4,454,464 in the prior year.
• Diluted earnings per share for the three months ended September 30, 2025, increased to $0.34 from $0.28 in the prior year.
• Total revenue for the three months ended September 30, 2025, increased by 5.2% to $35,118,706 from $33,390,557 in the prior year.
• Gross profit margin improved to 37% for the three months ended September 30, 2025, from 35% in the prior year.
• Retail segment revenue increased by 6% for the three months and 9% for the nine months, driven by higher water volume sales and an increase in customer service connections.
• Manufacturing segment revenue increased due to increased production activity and a higher margin product mix, contributing to a 40% gross profit margin for the three months.
• Services segment operations and maintenance revenue increased to $7,715,000 for the three months and $23,695,704 for the nine months, partly due to an amended contract with a US federal client.
• Net loss from discontinued operations significantly reduced to ($37,220) for the three months ended September 30, 2025, from ($502,854) in the prior year.
• Cash and cash equivalents increased to $123,554,648 as of September 30, 2025, from $99,350,121 as of December 31, 2024, indicating strong liquidity.
• The company has a strong working capital position of $141.7 million as of September 30, 2025.
• All previous delinquent accounts receivable from the Water and Sewerage Corporation of The Bahamas (WSC), including accrued interest, were eventually paid in full, providing a historical precedent for collection.

Negatives

• Net income attributable to stockholders for the nine months ended September 30, 2025, decreased to $15,419,578 from $26,779,069 in the prior year, primarily due to a one-time gain from the Mexico project settlement in 2024.
• Diluted earnings per share for the nine months ended September 30, 2025, decreased to $0.96 from $1.68 in the prior year.
• Total revenue for the nine months ended September 30, 2025, decreased to $102,425,170 from $105,559,105 in the prior year, mainly due to a significant decline in services segment revenue.
• Bulk segment revenue decreased for both the three and nine months ended September 30, 2025, due to lower diesel fuel prices reducing the energy pass-through component of CW-Bahamas rates.
• Services segment construction revenue declined significantly for the nine months ended September 30, 2025, to $11,404,500 from $17,632,772, due to the substantial completion of major contracts and the pilot plant testing phase for the Hawaii contract.
• Services segment design and consulting revenue decreased significantly for both the three and nine months ended September 30, 2025, due to the completion of a major plant commissioning and startup project in Q4 2024.
• One significant operations and maintenance customer is unlikely to extend its existing contract with PERC beyond March 2026, which generated approximately $1.4 million in revenue and $474,000 in gross profit for Q3 2025, and $3.7 million in revenue and $1.2 million in gross profit for YTD 2025.
• General and administrative expenses increased for both the three and nine months ended September 30, 2025, driven by higher employee costs, professional fees, and information technology expenses.
• CW-Bahamas has $16.8 million in accounts receivable from the WSC, with approximately 66% delinquent as of September 30, 2025, which has adversely impacted the subsidiary's liquidity.

Risks

• The ongoing renegotiation of the exclusive retail license for Cayman Water with OfReg could significantly reduce or eliminate the operating income and cash flows historically generated from retail operations, potentially requiring impairment losses on retail segment assets.
• CW-Bahamas periodically experiences substantial delays in collecting accounts receivable from the Water and Sewerage Corporation of The Bahamas (WSC), with $16.8 million outstanding and 66% delinquent as of September 30, 2025, which could lead to insufficient liquidity for the subsidiary, cessation of revenue recognition, or a material allowance for credit losses.
• The profitability of construction and manufacturing contracts is highly dependent on the ability to accurately estimate costs for fixed-price contracts, with risks of significant increases in material, labor, and subcontractor costs after contract signing.
• Significant changes in legislation, regulation, government policy, and economic conditions, including international trade policy (e.g., tariffs) and environmental regulation, could adversely affect the business, especially in countries at risk for escalating trade disputes.
• While bulk water rates are adjusted for inflation, Cayman Water's retail rates have not been increased since January 2018, and the denial of future rate adjustments or approval of insufficient increases could adversely affect retail segment profitability.
• Manufacturing and services segments could be adversely impacted by significant increases in raw material costs, and operations and maintenance contracts often have inflation adjustment caps (e.g., 3% annually).
• Increases in fuel and energy costs and other items could create additional credit risks for customers, adversely affecting their ability to pay invoices.

Future Outlook

The company expects to continue incurring expenses for the legal termination and dissolution of its Mexico subsidiaries (CW-Cooperatief, NSC, and AdR). It anticipates earning approximately $4.6 million in revenue from unsatisfied performance obligations for contracts in progress during the remainder of 2025 and approximately $134.2 million thereafter. A significant operations and maintenance contract with PERC is unlikely to be extended beyond its current expiration date of March 2026. The company is currently evaluating the impact of newly issued FASB accounting standards, including ASU 2024-03, ASU 2025-01, and ASU 2025-06, which will become effective in future periods.

Management Comments

• "We believe significantly lower rainfall in 2025 on Grand Cayman as compared to 2024 and an increase in total number of customer service connections were the principal reasons for the increase in the volume of water sold in 2025."
• "We have been informed by one of our significant operations and maintenance customers that it is unlikely such customer will extend its existing contract with PERC beyond the current expiration date of this contract in March 2026."
• "We continue to be in frequent contact with officials of The Bahamas government, who continue to express their intention to eliminate CW-Bahamas delinquent accounts receivable balances in the near future. However, we are unable to determine when such reduction will occur."
• "Based upon our review of this Moodys correspondence, we continue to believe that no material allowance for credit losses is required for CW-Bahamas accounts receivable from the WSC."

Industry Context

The company operates in the essential water utility and infrastructure sector, which is characterized by long-term contracts, significant capital investments, and exposure to local government regulation and economic conditions. The continued growth in retail water sales in Grand Cayman, driven by environmental factors like lower rainfall and increased customer connections, highlights the consistent demand for potable water. The challenges in the services segment, particularly with the completion of major construction projects and delays in new ones like the Hawaii desalination plant, reflect the project-based nature and inherent variability of infrastructure development. The ongoing regulatory negotiations for the Cayman Water retail license and the persistent issues with delinquent receivables from a government utility in The Bahamas underscore the unique operational and financial risks associated with public-private partnerships in the water sector.

Comparison to Industry Standards

• Moody's Investor Services downgraded The Bahamas' long-term issuer and senior unsecured ratings to B1 from Ba3 in October 2022, and maintained these ratings through April 2025. This provides a credit risk benchmark for CW-Bahamas' primary customer, the Water and Sewerage Corporation of The Bahamas (WSC), indicating a speculative and high-risk credit environment.
• The Kalaeloa Desalco project in Oahu, Hawaii, involves the design, construction, and operation of a 1.7 million gallons per day seawater reverse osmosis desalination plant with a $147 million construction price. Approximately 80% of this price is subject to adjustment based on inflation indices from September 29, 2022, until construction commencement, illustrating a common risk mitigation strategy for large-scale, long-term infrastructure projects in the desalination industry.

Corporate Governance

Legal Proceedings

• CW-Cooperatief, a Netherlands subsidiary, filed a Request for Arbitration with the International Centre for Settlement of International Disputes (ICSID) in February 2022, seeking damages in excess of US$51 million plus MXN$137 million from the United Mexican States following the termination of the APP Contract for the Mexico Project. This arbitration was discontinued on May 31, 2024, as part of a settlement agreement.

Stakeholder Impact

• Shareholders: Positive impact from increased Q3 net income and diluted EPS, continued dividend payments, and a dividend reinvestment plan. Potential negative impact from risks related to retail license renegotiation, WSC receivables, and loss of PERC contract.
• Employees: Incremental employee costs due to new hires and salary increases, along with stock-based compensation and stock option grants.
• Customers: Retail customers in Grand Cayman benefit from continued water supply under existing license terms. The Water and Sewerage Corporation of The Bahamas (WSC) is a key customer with persistent delinquent payments. A US federal client's operations and maintenance contract scope increased.
• Suppliers/Creditors: Potential impact from delays in WSC payments affecting CW-Bahamas' liquidity. Inflationary pressures on raw material costs could affect suppliers.
• Government/Regulators: Ongoing negotiations with OfReg in the Cayman Islands regarding the retail license. Relationship with WSC and the government of The Bahamas. Successful settlement with the State of Baja California, Mexico, resolving a significant dispute.

Next Steps

• Continue negotiations with OfReg for a new retail license for Cayman Water in the Cayman Islands.
• Proceed with the legal termination and dissolution of the Mexico subsidiaries (CW-Cooperatief, NSC, and AdR).
• Address the delinquent accounts receivable from the Water and Sewerage Corporation of The Bahamas (WSC).
• Commence the construction phase of the Kalaeloa Desalco plant in Oahu, Hawaii, following the completion of pilot plant testing.
• Evaluate the impact of new FASB accounting standards (ASU 2024-03, ASU 2025-01, ASU 2025-06) on future financial reporting.
• The Board of Directors will determine the amount and timing of any future quarterly dividends.

Key Dates

Recommendation

While the company demonstrated strong Q3 financial performance with increased revenue and net income, and improved gross margins, several material uncertainties warrant caution. The ongoing, protracted negotiations for the Cayman Water retail license pose a significant risk to a substantial portion of future operating income and cash flows. The potential non-renewal of a key PERC operations and maintenance contract by March 2026 represents a notable revenue and gross profit headwind. Furthermore, the persistent delinquency of accounts receivable from the WSC in The Bahamas, despite historical collection, remains a liquidity concern for that subsidiary. The company's healthy cash position and the successful resolution of the Mexico project arbitration provide a solid foundation, but these unresolved operational and regulatory risks suggest a "hold" position until there is greater clarity on these critical issues.

Keywords

Water utility, Desalination, Water treatment, Reverse osmosis, Cayman Islands, Bahamas, SEC filing, 10-Q, Financial results, Water infrastructure, PERC Water, Aerex Industries, Regulatory risk, Accounts receivable, Liquidity, Manufacturing, Services, Retail water