Good day and welcome to the Consolidated Water Company’s Second Quarter 2015 Operating Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] This conference call may include statements that may constitute forward-looking statements usually containing the words believe, estimate, project, intend, expect or similar expressions. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to continued acceptance of the company’s products and services in the marketplace, changes in its relationship with the governments of the jurisdictions in which it operates, the ability to successfully secure contracts for water projects in other countries, the ability to develop and operate such projects profitably, and other risks detailed in the company’s periodic report filings with the Securities and Exchange Commission. By making these forward-looking statements, the company undertakes no obligation to update these statements for revisions or changes after the date of this conference call. Please note, this event is being recorded. I would now like to turn the conference over to Rick McTaggart, President and CEO. Please go ahead, sir.

Thank you, Denise. Good morning, ladies and gentlemen. David Sasnett, our CFO is also joining me on the call this morning. Our net income declined this past quarter from approximately $2.8 million in the second quarter of 2014 to $2.25 million this past quarter. This decline was primarily caused by $275,000 impairment charge to our investment in our BVI affiliate and by higher maintenance cost in our Bahamas bulk water operation. Revenues declined from $16.9 million in the second quarter 2014 to $14.5 million this past quarter. That was due to a reduction of energy-related charges that we passed through to our customers, which resulted from significantly lower prices for energy that we purchased from electrical utilities and fuel suppliers in the islands. These lower energy prices also resulted in comparable reductions of our operating costs, so the revenue decline was not in itself directly linked to our lower consolidated earnings. Retail segment revenues declined by 5% this past quarter compared to the second quarter of 2014 due to the lower energy pass-through charges to customers. The volume of water sold this past quarter was consistent with the second quarter of 2014 and year-to-date volume sales are up by about 3% over the first six months of 2014 due to higher volumes delivered to our Bali, Indonesia customers. Retail segment gross profit for the past – this past quarter was consistent in dollars with last year’s quarter at $3.4 million. The status of our negotiations for a new retail water licensing grant came and remained unchanged this past quarter, except that the Water Authority extended our existing operating license for an additional six months through December 31, 2015 to facilitate these ongoing negotiations. As previously discussed, we are currently waiting for the Water Authority to send us a draft license…

[Operator Instructions] The first question will come from Gerry Sweeney of ROTH Capital. Please go ahead.

Good morning, guys.

Hey, Gerry.

A couple of questions on the Mexico desal plant, could you – if the committee comes back with a positive response, could you outline the steps necessary after that for the project to move forward?

Yes, we have outlined that in previous filings. Basically, they will prepare tender documents for the project based on our proposal and they will have a tender process, a public tender process. They have a point system that’s specified in the APP law that gives us essentially a 10% advantage as the promoter of the project. So the next step would really be the state issuing the tender for the plant. If we are successful in the tender, then obviously there is a negotiation period on the final terms of the contract. And then we go into the financing phase, which we believe would take anywhere from four months to six months to finalize the financing before we could commence construction.

Okay. And so if they issue this tender, obviously I mean you have got this aqueducts permitting – moving along quite nicely, you have the environmental impact in your favor. And what if anything could another proposal or entity come out and sort of I guess usurp all the work you have done, is that a potential or is that become less and less likely as you get more and more permitting done?

Well, I mean anything could happen, but we think that we again, have a good advantage just by the fact that we get points advantage under the law as the promoter. We have been working on this project for over 5 years. As you mentioned, we have a lot of the permitting that’s taken multiple years to obtain, so it’s hard to say what sort of requirements the state is going to have, but I would think that probably the timing, the period that somebody could deliver a project of this magnitude to the state, which is very anxious to secure an alternate source of water for Northwest Mexico, I think that’s going to be very important. And obviously, we are way ahead of the curve on that. Somebody would really have to come in and propose very attractive price and also I think very attractive terms to actually build the project from a timing perspective. So I think these are the things that are going to figure into the final determination.

Okay, thank you. I will jump back in queue.

[Operator Instructions] The next question will come from Michael Heavner [ph] of ISS Securities. Please go ahead.

Yes. Just to comment, I don’t know if it was a typo on the press release where it says about the Mexican project until such time as such new management services or plant construction contracts are obtained, wouldn’t that be one and the same?

Well, not necessarily. I mean, we have – in the past, we have done projects where we build a plant, the customer pays for it and then we only operate it for a certain period of time like in Bermuda a few years ago. So in that case, it would be two separate contracts, an operating management services contract and a construction contract. In – on the Mexico project, it’s likely to just be the management services contract, building a plant of this magnitude is outside this – our ability, so we would be using an EPC contractor for that.

Now the other advantage you have, how big significant advantage of purchasing a land already, is that – so you got the 10% advantage, you have to be next to the power plant, is that a significant advantage owning that land next to the plant?

Well, we think so. We have been very strategic about the land that we bought the size of the land, the location. Again, that was something that took several years to finalize because of the ownership structure of that piece of land. So again, we think we are – we have made the right strategic moves to help us to win this contract, but there is not other land available of this size in the immediate area of the power plant. And somebody could always come and decide to do a separate ocean – open ocean intake and outfall for a plant, but the permitting involved in that and the timing may make them uncompetitive.

Our next question will come from John Bair of Ascend Wealth Advisors. Please go ahead.

Thank you and good morning. A couple of questions, could you shed any light on your sales trends in the Bali area?

They have been much better than last year, obviously. We only have a couple of customers there now. And the sales tend to be higher in the dry season, which would be typically from April until September or October. So third quarter should be – we would expect the sales to be consistent with second quarter and then it’s going to taper off at the end of the year and in the first quarter of 2016 as the rains come. I mean, our customers are primarily using the water for irrigation right now.

Yes. I would like to add something. This is David Sasnett.

Hi, David.

So, when we invested in Bali, especially in this area, it was based upon the conclusion that eventually that would be their choice, but for them to use diesel. Presently, the hotels are getting their fresh water from wells they have dug on their own properties. They have capped into the local aquifer. And the government is against this practice because long-term it will damage the environment. But the hotels are key to the local economy, so they have been able to resist government pressure to not use those wells. But eventually, the government is going to have to step in. If they don’t, the local aquifer will be depleted to the point where we will have seawater intrusion and that will ruin them, it will also impact the local ecology. The hotels in Bali are very cost cautious, and so I think most businesses in Indonesia and they have avoided buying water from us because the water they get from their wells is essentially free. And obviously, desalinated water is quite expensive in comparison. So the investment we have made in Bali was more of a long-term type of investment. We really thought the hotels would realize the value of buying or entering into a contract with us now before they have to because at some point in time, the demand in that area will exceed our ability to meet it. So, we figured I would build a plant, people would come in and buy the water almost immediately from us to secure guaranteed to our food supply. But now they have decided and at least to people who manage the hotels, not necessarily the investors in the hotels, but people who manage them on a daily basis decided to continue to try to save water as long as – I mean, save money as long as they could and avoid buying any desalinated water. So literally, our sales – what we expect to happen with our sales is a gradual increase over the years. But if the government steps in to enforce these incentives that we are using freshwater wells or to act before it becomes noticeably contaminated, we could literally sellout the 100% of the plants capacity overnight, but that will happen is not clear. So that’s why you will see we take – you will see over time a gradual increase in the utilization of the plant. But at some point in time, we really expect to sell all the plant’s capacity, but is that a year from now or 5 years from now, we just don’t know.

Is there any indication that the local population is coming to the realization that, that – the aquifer there is being depleted and the quality is going down and so forth to where there is or maybe some pressure on the government to do that and accelerate that at all?

I don’t want to speak disparagingly of the Indonesian government, but it doesn’t seem to be a lot of incentive to address what’s not only a problem and needs to do it, but a problem for the entire country of Bali. It’s not just the area in which we built a plant that has the water issue. The entire island has a water shortage, the government utility PDAM cannot meet existing demand. That’s what PDAM has just told the resorts in this [indiscernible] we built our plan. Don’t count on water from us. We have no plants of laying pipes and delivering water to this area because we can't meet the demands in the rest of the island. And you would think there would be a tremendous sense of urgency to address these problems, but there doesn’t seem to be things happening fast enough. And in a way, that’s one of the reasons that led us to invest in Bali because we didn’t see the government working on a solution. So long-term, I don’t think the government is going to enforce anything relative to the aquifer anytime soon. Maybe still seem to be inclined to address the general problem. But once it becomes obvious and there will probably be an immediate major reaction, but there won’t be a supply over there than ours. So we continue to incur these losses each quarter under the expectation that soon or later, it’s going to turnaround in a big way. We just don’t know when.

My other question was the – you said you got the permits for the aqueduct – 30-mile aqueduct, is that through the Otay water district, is that the U.S. approval or one was granted or am I talking about separate deals?

These are the – this is the Mexican Environmental Authority, the federal authority called SEMARNAT. We have obtained the environmental permit for the plant itself in the first quarter. And we have obtained the environmental permit now for the conveyance pipeline this past quarter. And we have also obtained – this is all within Mexico and we are just in the process of getting all the city permits to allow us to lay the aqueduct through the various municipalities that we pass through. The Otay permits are something completely different. I really can’t comment on the status of those right now other than what we have put in our filings. We are aware that they made applications for the State Department permit across from the United States into Mexico and that’s in process. Other than that, I am not aware of any progress on their side.

There is no time line on that or even a general time line, are we looking at maybe by the end of the year, or is it...?

No, I mean that permit we were told early on and the project could take up to 4 years to process. We are also working with Otay and with the Department of Drinking Water in California. We are doing regular testing of the source water for the plant and providing that data to Otay. The data is actually analyzed by California water lab and it’s been passed on to Otay and onto the Department of Drinking Water. And again, that permitting process for Otay is a multi-year process. I mean, they need I think at least 2 years of source water data before they can even apply for the permit. So we started that at the end of last year, actually in ‘14. So the way we see this project John, is that it’s a Mexican project. And then if there is an opportunity to sell water into California, it looks more likely that that’s going to be something that’s brokered by the Mexican and the U.S. authorities. And we are just going to be providing the water to the Mexicans. So although we are trying to facilitate the process by doing what we need to do to move the permitting ahead for Otay, it’s probably not something that we are going to be directly involved in at the end of the day.

Okay, thank you.

[Operator Instructions] The next question will come from Gerry Sweeney of ROTH Capital. Please go ahead.

Hi, guys. Just a follow-up question. On the North Sound upgrade, is that upgrade revenue, does fall into your services segment. And secondarily, do you have an idea of how much revenue that upgrade project will be?

Its actually, the plant rehabilitation work probably would be services revenues. The operating contract for the next two years will remain, I think a bulk item and we are not prepared to disclose any of the financial terms from that contract just for competitive reasons.

Okay, that’s fine. Understood. And then on the Bahamas side, I know that you have been working in the last couple of years on efficiencies and that pipes are reducing leakage. But on a year-over-year basis, they were down. But again, correct me if I am wrong, but I think as of the beginning of this year or Q1, they were pretty close to their minimum take-or-pay, so maybe on a year-over-year basis we see a little bit decline, but actually on a quarterly sequential basis, they are sort of at as low as they can go or pretty close to it, is that correct?

Yes, that’s correct. I think one of the plants is actually operating at the minimum take-or-pay volumes. And the other larger plant, to my knowledge is still slightly above the take-or-pay, but that’s a – we don't make a lot of margin on the incremental water over the take-or-pay amounts. So as we mentioned in the call earlier, the actual volumes from these plants don’t have a tremendous impact on the revenues.

Got it. And then one quick final question. I think in the Q you said $1.1 million in Mexico CapEx spending for the rest of the year, is that split about 50-50?

50-50 for what, I don’t understand the question.

There is one point in the queue where you said that I think you had about $1.1 million in spending on the Mexico project for the remainder of 2015, do you expect to spend about half of it in Q3 and half in Q4?

I don’t think we have actually done that analysis. We received the estimates from our engineering personnel as to what they plan to spend, but I don’t think this – I don’t recall exactly how that breaks out by quarter.

It’s not a big deal. I appreciate it. Thank you.

Sure, Gerry.

Our next question will come from Michael Heavner [ph] of ISS Securities. Please go ahead.

Yes. Just on the timeline of the Mexican project, average case, worst case, best case, since you filed in February, so don’t they have six months to get back or work the skin on that? And then the second part of that is a follow-up on one of your comments about the sense of urgency from the governments, are we feeling any urgency here from Mexico on this?

Yes. We filed at the end of March actually for the APP proposal. And my understanding is that there is a six month allowance for them to respond, give us a definitive response. So we are still within that. From the standpoint of urgency, I think there is some urgency there. I am pretty sure, it’s the known fact that the various agencies that administer the Colorado River were getting ready to declare a shortage this month and that was related to the Mexicans. It would also reduce their allotments on the river. They canceled that after there was unusually heavy rain in the upper basin in the Colorado. So things are very tenuous right now. I think obviously, California is having a major problem with their water supplies and that could have some ripple effect into Mexico soon. So there – the authorities are aware of that and there is other things that they are concerned about, the seismic risk. The aqueduct that brings water into Tijuana and Rosarito now crosses major earthquake fault and they had a lot of damage to that aqueduct 5 years ago this past April. And I think that’s caused them to rethink their water supply planning and they want to have an alternate reliable source of water for those cities’ multi-million people populations.

Now that EPA’s spill, would that affect this decision making or anything or is that too far north, or?

I actually don’t know where that river ends. I think it goes into New Mexico or something, that's.

Yes. Then back into Utah and that’s all. Anyway I can’t answer that.

Alright, thank you.

[Operator Instructions] The next question will come from Scott Phillips, a Private Investor. Please go ahead.

Yes. Hi, good morning. Thanks for taking the call.

Hi, good morning.

My question relates to the aqueduct and I am just wondering if even before the plant is constructed in Rosarito whether there could be any potential reason of use for the aqueduct itself?

Actually, we hadn’t planned on commissioning. I mean we are going to build that at the same time as the – are you talking about the existing aqueduct that they have?

No the water that you are planning to build to bring supply from Rosarito to California.

That will all be built concurrently with the plant. So, there is one purpose for that, it’s to deliver water from the desal plant.

Okay, thank you.

Yes.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Rick McTaggart for any closing remarks.

Thanks, Denise. I just like to thank everybody for joining us this morning and look forward to speaking with you again in November for our third quarter earnings call. Thank you.

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