Executive Summary / Key Takeaways

• Consolidated Water is a diversified water solutions provider leveraging specialized desalination and treatment technologies to address growing water scarcity in niche markets like the Caribbean and water-stressed regions of the U.S.
• The company is poised for significant growth driven by major projects like the $204 million Hawaii desalination plant (construction starting early 2026) and expansions in its core retail and manufacturing segments, alongside increasing recurring revenue from O&M contracts.
• A robust balance sheet with over $107 million in cash and minimal debt provides substantial financial flexibility for strategic investments, capital expenditures, and potential shareholder returns, including evaluating increased dividends.
• While facing risks from ongoing retail license renegotiations in the Cayman Islands and persistent accounts receivable delays in The Bahamas, the company's diversified business model and strong liquidity help mitigate these challenges.
• CWCO's competitive edge lies in its operational efficiency, cost-effective project delivery models, and specialized reverse osmosis technology, positioning it favorably against larger, more generalized competitors in targeted high-growth areas.

The Rising Tide of Water Scarcity and CWCO's Strategic Response

The global challenge of water scarcity is no longer a distant threat but a present reality, driving urgent demand for innovative and reliable water solutions. Consolidated Water Co. Ltd. stands at the forefront of this critical industry, specializing in turning the seemingly inexhaustible resource of seawater into potable water and treating wastewater for reuse. Operating across the Caribbean and increasingly in the United States, CWCO has built a business model centered on providing essential water services through a combination of regulated utilities, long-term bulk water supply contracts, and specialized design-build and operational services.

CWCO's journey, beginning in 1973, has evolved from a regional water utility into a diversified player leveraging its core expertise in reverse osmosis (RO) desalination. This strategic evolution, marked by expansions into bulk water supply, manufacturing, and the acquisition of U.S.-based services firms like PERC Water and REC, reflects a deliberate effort to capitalize on the growing global need for clean water beyond its traditional Caribbean base. The company's strategic focus is now firmly set on expanding its footprint in water-stressed regions, particularly in the western United States, and diversifying its service offerings to include advanced wastewater treatment and specialized industrial water solutions.

In a competitive landscape featuring larger, more diversified players like Pentair plc (PNR), Xylem Inc. (XYL), and regulated utilities such as American Water Works Company, Inc. (AWK), CWCO carves out its niche through specialized expertise and a full-service project delivery model. While competitors like Xylem excel in digital integration and Pentair boasts a broader manufacturing portfolio, CWCO differentiates itself with a focus on the entire project lifecycle – from design and construction to long-term operation and maintenance. This allows CWCO to offer potentially lower upfront costs for new plants due to streamlined construction processes and build long-term recurring revenue streams.

CWCO's core technological advantage lies in its specialized reverse osmosis desalination systems. While RO is a widely used technology, CWCO emphasizes the development and deployment of "superefficient" solutions. These systems are designed for enhanced energy efficiency, which translates directly into lower operating costs per unit of water produced for its clients. This focus on operational efficiency provides a tangible benefit in cost-sensitive markets and contributes to the company's competitive moat, particularly in regions where energy costs are a significant factor in water production.

Beyond its core RO technology, CWCO is actively engaged in strategic initiatives to expand its technological capabilities and market reach. The acquisition of PERC Water brought expertise in advanced wastewater treatment and water reuse, while REC provided a foothold in the Colorado market with its O&M and technical services. The company is also exploring opportunities in specialized high-pressure RO equipment for industrial water treatment and lithium mining applications, forming a joint venture to pursue this potentially high-growth area. These efforts aim to diversify the company's offerings and tap into new non-municipal markets, leveraging its engineering and manufacturing capabilities, including the planned expansion of the Aerex manufacturing facility to increase throughput and take on more complex projects.

Performance Reflecting Strategic Shifts and Market Dynamics

Consolidated Water's recent financial performance reflects both the successful execution of its diversification strategy and the inherent variability associated with large design-build projects. For the three months ended March 31, 2025, total revenue decreased to $33.72 million from $39.69 million in the prior-year quarter. This decline was primarily attributable to a significant decrease in the Services segment revenue, which fell from $17.42 million in Q1 2024 to $10.08 million in Q1 2025. This was an expected consequence of the substantial completion of major construction projects, including the Liberty Utilities project and the Red Gate 2 plant, in the second quarter of 2024.

Despite the overall revenue decrease, the underlying performance across other segments demonstrated strength. Retail segment revenue increased by 9.2% to $9.41 million, driven by a 13% increase in water volume sold, reflecting robust population growth and business activity in Grand Cayman. The Bulk segment saw a slight revenue increase to $8.41 million, benefiting from new and amended contracts in the Cayman Islands, which offset lower energy pass-through charges in The Bahamas. Manufacturing revenue grew by 9.6% to $5.81 million, attributed to higher production activity and a favorable, higher-margin product mix.

Profitability metrics showed resilience and improvement in key areas. Consolidated gross profit was $12.31 million in Q1 2025, down from $13.88 million in Q1 2024, but the gross profit margin improved to 37% from 35%. This margin expansion was largely due to the reduced contribution from lower-margin construction revenue in the Services segment and improved margins in the retail and manufacturing segments. The Services segment, impacted by the construction slowdown, reported a loss from operations of $180,488 compared to income of $3.15 million in the prior year. However, recurring Operations and Maintenance (O&M) revenue within the Services segment increased by 9% ($626,000), highlighting the growing stability of this revenue stream, bolstered by contributions from both PERC and the recently acquired REC.

Consolidated General and Administrative (G&A) expenses increased to $7.72 million in Q1 2025 from $6.56 million, primarily due to higher legal and professional fees, increased employee costs, and a larger provision for credit losses. However, other income, net, saw a significant jump to $688,891 from $418,184, largely due to increased interest income on the company's substantial cash balance. Net income from continuing operations attributable to CWCO stockholders was $4.92 million ($0.31 per diluted share) in Q1 2025, compared to $6.94 million ($0.43 per diluted share) in Q1 2024, reflecting the impact of the Services segment's performance. Including discontinued operations (related to the Mexico project dissolution), net income was $4.79 million ($0.30 per diluted share) versus $6.47 million ($0.40 per diluted share).

Financially, CWCO maintains an exceptionally strong position. As of March 31, 2025, cash and cash equivalents totaled $107.85 million, an increase from $99.35 million at the end of 2024. Working capital stood at $136.2 million. The balance sheet carries minimal long-term debt ($56,838), providing significant financial flexibility. Operating cash flow remained robust at $11.76 million for the first three months of 2025. This strong liquidity position is a key asset, enabling the company to fund capital expenditures, pursue strategic growth initiatives, and evaluate potential increases in shareholder distributions.

Outlook and Growth Catalysts on the Horizon

Looking ahead, Consolidated Water's outlook is anchored by several key growth catalysts, most notably the impending construction phase of the Hawaii desalination project. This $204 million project, which commenced its development phase in June 2023, is a transformative opportunity for the Services segment. Following the successful approval of pilot test reports in April 2025, confirming water quality suitability, the project is moving closer to the construction phase, expected to begin early in 2026, pending final permits. Management anticipates this two-year construction period will be the primary driver of revenue and earnings growth for the Services segment in 2026 and 2027. A critical feature of this contract is the inflation adjustment mechanism on approximately 80% of the construction costs, designed to protect profitability against rising material and labor expenses.

While waiting for the Hawaii construction to ramp up, the Services segment anticipates an improvement in design-build revenues in the second half of 2025 from three smaller projects, with a combined value of approximately $20 million, expected to begin construction. These projects, including a wastewater scalping plant in California, demonstrate continued demand for PERC's expertise. Furthermore, the O&M business is expected to continue its growth trajectory, benefiting from the integration of REC and opportunities in water-stressed regions like Colorado and Arizona. The company is also actively pursuing new opportunities, including a sizable international wastewater design-build project, leveraging its expanded capabilities.

In the Retail segment, the outlook remains positive, driven by the ongoing growth in Grand Cayman. To meet increasing demand, CWCO is expanding its West Bay desalination plant, aiming to add 1 million gallons per day capacity by summer 2025, and planning additional storage tanks. These investments are expected to support future retail revenue growth. The Bulk segment is expected to maintain its stable performance, with the new $7 million, 15-year Cat Island project in The Bahamas representing a strategic expansion into the "family islands" market, historically served by competitors, and potentially opening doors for further opportunities in the region. The Manufacturing segment is also projected to continue its positive trend of stable revenues and improved margins, supported by the Aerex facility expansion, which is expected to be completed in June 2025 and increase throughput capacity.

Management is actively evaluating the best use of the company's significant cash balance to enhance shareholder value, with potential increases in quarterly dividends under consideration. This reflects confidence in the company's financial health and future cash flow generation capabilities.

Risks and Challenges

Despite the positive outlook and strong financial position, Consolidated Water faces several notable risks. The ongoing renegotiation of the exclusive retail license in the Cayman Islands with the utility regulator, OfReg, remains a significant uncertainty. OfReg has indicated a desire to restructure the license terms, which could materially reduce the operating income and cash flows historically generated by this segment. While a new concession received in February 2025 maintains the existing terms during negotiations, the final outcome is unpredictable and could potentially necessitate impairment losses on retail segment assets.

Another persistent challenge is the delay in collecting accounts receivable from the Water and Sewerage Corporation (WSC) in The Bahamas. As of March 31, 2025, $25.50 million was outstanding, with approximately 78% delinquent. While historically these amounts have been paid, including accrued interest, the delays impact the liquidity of the CW-Bahamas subsidiary. The B1 credit rating of The Bahamas by Moodys highlights the sovereign risk associated with these receivables. A failure to collect a sufficient portion of these delinquent amounts could impact the subsidiary's liquidity, potentially require cessation of revenue recognition, or necessitate a material allowance for credit losses, adversely affecting consolidated results.

The profitability of CWCO's construction and manufacturing contracts, particularly fixed-price agreements, is subject to the risk of cost overruns. Increases in material, labor, or subcontractor costs beyond initial estimates could reduce gross margins. Similarly, O&M contract profitability relies on accurate estimates of future operating costs. While some contracts have inflation adjustments, limitations (e.g., 3% annual cap on some O&M contracts) or delays in rate adjustments (as seen with Cayman Water retail rates since 2018) can expose the company to inflationary pressures. Furthermore, changes in fiscal, regulatory, and trade policies, particularly in the U.S., could impact the business, including potential effects from tariffs or trade disputes.

Conclusion

Consolidated Water operates in a fundamentally attractive market driven by increasing global water scarcity. The company has strategically diversified its business beyond its traditional Caribbean utility operations into higher-growth U.S. services and manufacturing segments, leveraging its core expertise in desalination and water treatment. While the Services segment experienced a temporary dip in revenue following the completion of major projects, the impending construction start of the transformative Hawaii project in early 2026 positions the company for significant future growth.

Supported by a robust balance sheet and strong cash flow generation, CWCO possesses the financial strength to pursue its strategic initiatives, invest in expanding its operational capacity in key markets like Grand Cayman and The Bahamas, and potentially enhance shareholder returns. Although risks related to the Cayman Islands retail license negotiations and Bahamas receivables persist, the company's diversified revenue streams and solid liquidity provide a buffer. CWCO's competitive advantages in operational efficiency, specialized technology, and a full-service project delivery model, particularly in niche desalination and water treatment markets, offer a compelling investment thesis for investors seeking exposure to the critical and growing water sector. The successful execution of the Hawaii project and continued expansion in the U.S. and other targeted regions will be key determinants of the company's long-term value creation.