Prospectus summary

 

This summary highlights key aspects of the information contained elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that you should consider before making an investment decision regarding our shares. You should read the entire prospectus carefully, including “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and the financial statements, including the accompanying notes to those statements.

 

Cascal

 

Introduction

 

We provide water and wastewater services to our customers in eight countries: the United Kingdom, South Africa, Indonesia, China, Chile, Panama, Mexico and The Philippines. In a typical water project, we collect raw water from surface and groundwater sources, treat the water to meet the required quality standards and then supply the treated water through a distribution network to our customers’ premises. In a typical wastewater project, we collect the wastewater from our customers’ premises, treat the wastewater to meet the required standards and return the treated water to the environment. We provide these services under long-term contracts or licenses that typically give us the exclusive right to provide our services within a defined territory. Our customers are predominantly homes and businesses representing a total population of approximately three million. For our fiscal year 2007, our revenue was $121.7 million and our operating profit was $36.2 million. For the six months ended September 30, 2007, our revenue was $79.4 million and our operating profit was $20.7 million. Since the end of our fiscal year 2006, we have acquired projects in Panama, China and South Africa and a non-regulated business in the United Kingdom. See “—Recent developments and acquisitions.”

 

In the future, we intend to focus primarily on project opportunities in China, which is the world’s fastest growing market for water and wastewater services, and in Europe, as well as pursuing opportunistic growth in other locations, such as Latin America and India.

 

Industry outlook

 

Historically, water and wastewater services have generally been provided by governmental entities. However, since the 1990s, a growing number of governments have moved toward the privatization or outsourcing of these services in an effort to meet more stringent water quality and environmental standards, control costs, respond to increased demand and improve service quality. As a result of these needs, the private sector’s role in the provision of water and wastewater services is expected to continue to increase from a global population served of approximately 707 million in 2007 to approximately 1.15 billion in 2015, according to Pinsent Masons Water Yearbook 2007-2008. We believe this growth in private-sector involvement will create significant business opportunities for us. We believe there are a significant number of new projects in the pipeline in our target markets and we are currently tracking a number of developing opportunities in China and Europe, as well as pursuing opportunistic growth in other locations, such as Latin America and India.

 

Some of the key factors driving governments to involve the private sector in water and wastewater projects are:

 

 

 

Our strengths

 

Stable revenue base with high visibility and growth prospects.  Due to the regulated nature of most of our business and the stable demand for water and wastewater services, we have a high degree of revenue predictability. Our rates are typically set either following periodic reviews by regulatory or client bodies based on a projected rate of return, or pursuant to an indexation formula. All of our projects are either perpetual or have contract terms scheduled to expire in 2020 or beyond, except for our project in Mexico where the contract is scheduled to expire in 2010. Approximately 75% of our fiscal year 2007 revenue was generated from rates that are scheduled for review every five years, and the remainder of our revenue was generated from rates that are typically reviewed annually. In addition, our stable customer base, which is primarily residential, provides steady demand for water and wastewater services, adding to the predictability of our revenue. Based on recent rate determinations, we expect to achieve revenue growth and further margin improvements across most of our existing projects.

 

Successful track record of high-quality operations.  Our ability to improve our existing operations and efficiently deliver water and wastewater services to our customers has been one of the principal factors in our success. For example, our water company in the United Kingdom was ranked second out of the 22 water companies in England and Wales in terms of overall performance in the most recent rankings published in 2007 by the independent water industry regulator for England and Wales, known as Ofwat. In most of the countries where we operate, we have received from the International Organization for Standardization (ISO) its ISO 9001 international quality certification in connection with our systems and procedures. For more information regarding ISO certifications, please see “Business — Our strengths.”

 

Well-established international platform with ability to respond effectively to growth opportunities in our target markets, which are primarily China and Europe.  We have an experienced business development capability, which is mainly based in Europe and China and can be supported by Biwater’s global resources as and when required. Our recent acquisition of a majority interest in a company that owns majority interests in four Chinese projects and maintains its own business development team complements our existing business development capabilities. This further enables us to capitalize on our track record and enhances our ability to respond effectively to project opportunities.

 

Expertise in identification, screening and negotiation of growth opportunities through acquisition and new project development.  We approach all new project opportunities with a systematic four-step approach that includes identification, screening, project approval and bidding. Once an opportunity is identified we subject it to a robust screening and approval process, mobilizing experienced internal resources and external advisors. We use our industry expertise to negotiate contracts that ensure a sufficient rate of return in light of the anticipated risks and to mitigate these risks where possible.

 

Diversified geographic exposure and growing customer base.  The United Kingdom represented 62% of our revenue during fiscal year 2007. Our remaining revenue was derived from our projects in South Africa, Indonesia, China, Chile, Panama, Mexico and The Philippines. We believe our geographic diversification reduces our exposure to regional economic, political and climatic issues. We expect that our recent acquisitions in China, Panama and South Africa, the expected growth from new projects and acquisitions and the organic growth of our existing operations will lead to further diversification of geographic exposure.

Experienced international management team.  Our executive officers average over 16 years of international water industry experience, both in operations and in the development of privatizations and other projects featuring private-sector participation. In order to manage our portfolio effectively, our executive officers focus on providing strategic direction, policies and control for the business while our local senior management ensures the implementation of these policies in the daily operations of the projects.

 

Our strategy

 

Our strategy is to provide high quality water and wastewater services to projects serving populations typically ranging from 100,000 to 1,000,000 that require efficiency improvements, are expected to generate revenue of at least $5 million per year and have a project term of at least 10 years. We believe that we have significant experience and a successful track record that enable us to compete most effectively for these projects. We prefer to invest in projects involving long-term contracts where we have the ability to demonstrate our value-added operational and management expertise over an extended period of time, as opposed to projects that provide participation only through fee-based contracts.

 

We are implementing a three-prong strategy, which includes two complementary growth components:

 

Continue to provide high quality water and wastewater services.  A key part of our success has been our ability to provide high quality water and wastewater services to our customers. We expect to continue our efforts to ensure that this quality is maintained or improved at all of our existing projects. We will bring our expertise to additional projects that we develop or acquire.

 

Improve and expand existing operations.  We expect revenue growth and margin improvement from our existing portfolio of projects as a result of (i) recent and expected rate determinations, (ii) growth of the customer base and volumes sold through demographic shifts and population migration into our service areas and (iii) further efficiency gains, including economies of scale. We hope to expand our area of operations in certain projects such as South Africa and expand the types of services that we provide in certain projects such as Indonesia.

 

Grow our business by bidding for new projects and through acquisitions, primarily in China and Europe.  We believe there are a significant number of new opportunities in our target markets, primarily China and Europe. We intend to use our recent acquisition in China as a platform to capitalize on the additional opportunities in the world’s fastest growing market for water and wastewater services. In Europe, more stringent water quality and environmental standards have led a number of municipalities, particularly in Central and Eastern Europe, to involve the private sector in the provision of water and wastewater services. In addition, we are pursuing opportunistic growth in other locations, such as Latin America and India.

 

Recent developments and acquisitions

 

On June 26, 2006, Biwater reacquired the 50% interest in us held by Nuon, thereby becoming our sole shareholder. We incurred debt totaling £38.0 million ($69.7 million), the proceeds of which, together with another $17.3 million of our existing cash resources, were used to make an $87.0 million pro rata distribution to Biwater and Nuon that facilitated Biwater’s purchase of our shares.

 

On June 30, 2006, we acquired Biwater’s 100% interest in Aguas de Panama, which supplies bulk potable water in part of Panama City, for $14.3 million. For its fiscal year ended December 31, 2005 prior to our ownership, Aguas de Panama’s revenue was $6.7 million and its operating profit was $3.4 million. The financial statements from which the revenue and operating profit were derived were prepared in accordance with International Financial Reporting Standards (IFRS). The acquisition has been included in our results of operations from June 26, 2006, which was the date on which Cascal B.V. and Aguas de

Panama came under the common control of Biwater as a result of Biwater’s acquisition of Nuon’s interest in us, and is included in our balance sheet at March 31 and September 30, 2007.

 

On November 15, 2006, we acquired for a total consideration of $25.1 million an 87% interest in The China Water Company Limited, a company that, at the date of acquisition by us, owned majority interests in four water projects in China. Prior to our acquisition, China Water rationalized its portfolio by selling three projects. China Water’s revenue for its fiscal year ended December 31, 2006 from the four projects acquired by us was $7.6 million. The financial statements from which the revenue was derived were prepared in accordance with IFRS. This acquisition has been accounted for as a business combination and has been included in our results of operations from November 15, 2006 and is included in our balance sheet at March 31 and September 30, 2007.

 

On February 1, 2007, we acquired 100% of Pre-Heat Limited, a business that supplies gas installation and maintenance services in the South of England and that complements our existing U.K. non-regulated business, for a total consideration of £4.6 million ($8.9 million), which consisted of initial consideration of £3.5 million ($6.9 million) plus contingent and deferred consideration of £1.0 million ($1.9 million) plus costs of £0.1 million ($0.1 million). For its fiscal year ended October 31, 2006 prior to our ownership, Pre-Heat’s revenue was $8.8 million and its operating profit was $1.4 million. The financial statements from which the revenue and operating profit were derived were prepared in accordance with accounting principles generally accepted in the United Kingdom (U.K. GAAP). This acquisition has been accounted for as a business combination and has been included in our results of operations from February 1, 2007 and is included in our balance sheet at March 31 and September 30, 2007.

 

On May 3, 2007, we acquired a 73.4% interest in Siza Water, a water and wastewater services company in South Africa for approximately $2.9 million. For its fiscal year ended December 31, 2006, this company’s revenue and operating profit were approximately $5.5 million and $1.3 million, respectively. The financial statements from which the revenue and operating profit were derived were prepared in accordance with South African generally accepted accounting principles. This acquisition has been accounted for as a business combination and is included in our results of operations from May 3, 2007 and is included in our balance sheet at September 30, 2007.

 

Subsequent events

 

After over a year of intermittent discussions we are in the advanced stages of negotiating an early termination of our operation and maintenance contract in Mexico. Under the terms under discussion, we would discontinue our involvement in this project in early 2008. We do not believe that we would realize either a material gain or loss on this transaction, but the exact amount of any gain or loss will be subject to the expenses we will incur in terminating our involvement in this project. If we enter into an early termination agreement, our financial statements and associated footnotes will reflect our operation and maintenance project in Mexico as a discontinued operation under Dutch GAAP and U.S. GAAP.

 

Prior to completion of this offering, Cascal B.V. will be converted to Cascal N.V. in accordance with the applicable laws of The Netherlands.

 

Corporate information and history

 

We are a part of the Biwater Group, and Biwater will own approximately 43.5% of our outstanding common shares following completion of this offering (or approximately 35% if the underwriters’ over-allotment option is exercised in full). The Biwater Group is dedicated to the water industry, operates on a worldwide basis and provides engineering and construction services, water asset management and consultancy services and, through us, long-term water and wastewater operating services.

We began our business in 1989 as the United Kingdom privatized its water industry. From our stable base in the United Kingdom, we expanded internationally throughout the 1990s as other governmental entities around the world sought private-sector involvement in their water industry, adding new projects to our portfolio between 1992 and 2002. Cascal was incorporated under the laws of The Netherlands on March 23, 1999 as a private limited liability company. In October 1999, Biwater transferred our business into Cascal. In April 2000, Cascal became a 50-50 joint venture when n.v. Nuon, or Nuon, an energy company based in The Netherlands, acquired a 50% equity interest in Cascal from Biwater. Nuon’s subsequent change in global strategy impaired our ability to acquire new projects. On June 26, 2006, Biwater reacquired Nuon’s interest in us and since then we have acquired four new projects. Prior to the completion of this offering, our Articles of Association will be amended to convert us from a private limited liability company (besloten vennootschap met beperkte aansprakelijkheid) to a public limited liability company (naamloze vennootschap). Our principal executive offices are located at Biwater House, Station Approach, Dorking, Surrey RH4 1TZ, United Kingdom, 44 (0) 1306 746080, and our registered address is Suite 6.1.24, Atrium, Strawinskylaan 3105, 1077 ZX, Amsterdam, The Netherlands. Our statutory seat (statutaire zetel) is Amsterdam, The Netherlands. Our internet address is www.cascal.co.uk. The information contained in our web site is not a part of this prospectus.

This offering

 

 

 

 

Use of proceeds

 

We expect to use the net proceeds from the sale of shares sold by us for the repayment of debt originally incurred in connection with the acquisition of our shares from Nuon, for the acquisition and development of new projects and for general working capital purposes. See “Use of proceeds.”

 

We will not receive any of the proceeds from the sale of shares sold by the selling shareholder. Biwater will use a portion of its net proceeds to make a $93.7 million payment to the trustees of its U.K. defined benefit pension plan, assuming that the initial public offering price for the shares sold in this offering is $18.00 per share (the midpoint of the range set forth on the cover page of this prospectus) or approximately $113.2 million if the underwriters exercise their over-allotment option in full. We expect the trustees to apply this payment to reduce Biwater’s deficit under the plan. For a description of the formula applied to calculate the size of the payment, see “Relationships and transactions with related parties—U.K. defined benefit pension plan.” Biwater has also agreed to reimburse us for its share of the offering expenses based on the number of shares sold by Biwater compared to the total size of this offering. The amount to be reimbursed is estimated to be approximately $7.0 million, or approximately $7.8 million if the underwriters exercise their over-allotment option in full.

 

Unless otherwise noted, the information in this prospectus:

 

Summary consolidated historical and unaudited pro forma financial data

 

The following summary consolidated historical financial data for fiscal years ended March 31, 2005, 2006 and 2007 and as of March 31, 2006 and 2007 have been derived from our audited consolidated financial statements included elsewhere in this prospectus and should be read in conjunction with, and are qualified in their entirety by reference to, those consolidated financial statements and related notes.

 

The summary historical financial data for the six months ended September 30, 2006 and 2007 and as of September 30, 2007 are derived from our unaudited consolidated interim financial statements included elsewhere in this prospectus and should be read in conjunction with, and are qualified in their entirety by reference to, those unaudited interim consolidated financial statements and related notes. The unaudited interim consolidated financial statements include all adjustments (consisting of only normal recurring items unless otherwise disclosed therein) that management considers necessary to present fairly our financial position and results of operations as of the date and for the period indicated. The results of operations for the six months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year.

 

The unaudited pro forma consolidated statement of income data for fiscal year ended March 31, 2007 and for the six months ended September 30, 2007 and the unaudited pro forma consolidated balance sheet data as of September 30, 2007 have been derived from our unaudited pro forma condensed consolidated financial data included elsewhere in this prospectus and should be read in conjunction with, and are qualified in their entirety by reference to, those unaudited pro forma condensed consolidated financial data and related notes.

 

The pro forma adjustments give effect to the following transactions as if they had occurred on April 1, 2006 for statement of income purposes: (i) our issuance and sale of 7,706,213 shares in this offering at an assumed initial offering price of $18.00 per share (the midpoint of the range set forth on the cover page of this prospectus); (ii) the repayment of £38.0 million ($77.4 million) of debt with net proceeds received by us from this offering; (iii) the effect of the acquisition of Nuon’s holdings in Cascal by Biwater, including the incurrence of £38 million ($69.7 million, using the exchange rate at the date of the transaction) of debt, the proceeds of which, together with another $17.3 million of our existing cash resources, were used to make an $87.0 million pro rata distribution to Biwater and Nuon that facilitated Biwater’s purchase of our shares owned by Nuon, (iv) the acquisition of Aguas de Panama, which was owned by Biwater prior to its acquisition by us, (v) the acquisition of China Water, (vi) the acquisition of Pre-Heat Limited, (vii) the acquisition of Siza Water, and (viii) the early termination of our contract in Mexico that is currently under discussion. The pro forma adjustments give effect to the issuance of shares, a distribution to our shareholder and the repayment of debt as if they had occurred on September 30, 2007 for balance sheet purposes. The pro forma condensed consolidated financial data are unaudited, are provided for informational purposes only and are not necessarily indicative of what our financial position or results of operations would have been had these transactions been completed as of the dates indicated. Furthermore, the unaudited pro forma condensed consolidated financial data do not purport to represent what our financial position or results of operations might be for any future period. For additional information on the pro forma adjustments, see “Unaudited pro forma condensed consolidated financial data.”

 

Our consolidated financial statements were prepared in accordance with generally accepted accounting principles in The Netherlands (Dutch GAAP), as required by Dutch law. Our reporting currency is the U.S. Dollar. For a discussion of significant differences between Dutch GAAP and U.S. GAAP, see “Management’s discussion and analysis of financial condition and results of operations—Reconciliation of Dutch GAAP to U.S. GAAP” and Note 27 to our consolidated financial statements, and Note 20 to our unaudited interim consolidated financial statements.

You should read the following information with our consolidated financial statements and related notes, “Unaudited pro forma condensed consolidated financial data,” “Selected consolidated financial data,” “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations” included elsewhere in this prospectus.