Frederick McTaggart - CEO David Sasnett - CFO.

Gerry Sweeney - ROTH Capital John Bair - Ascend Wealth Advisors.

Good morning, and welcome to the Consolidated Water Company's Third Quarter 2014 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'd now like to turn the conference over to Rick McTaggart. Please go ahead..

Thank you, [Kate] (ph). Good morning, ladies and gentlemen, thank you for joining us on our third quarter earnings call this morning. David Sasnett, the CFO of Consolidated Water is also on the call with me this morning.

The company's net income this past quarter more than doubled to approximately 1.9 million or $0.13 per share compared with approximately 900,000 or $0.06 per share in the third quarter of 2013.

This increase in earnings was due to higher water volume sales in our retail business in Grand Cayman, and lower development cost for our project in Baja California, Mexico.

Retail segment revenues from our Grand Cayman operation increased by 18% to 5.9 million this past quarter, compared to 5 million in the third quarter of last year, due to a 17% increase in the volume of water sold.

We're encouraged that retail water sales have increased during the past two consecutive quarters relative to prior year periods, which reverse the three-year declining sales trend that began in 2010. Dry weather conditions and an increase in tourist arrival seem to have contributed to the turnaround.

According to a government statistics, the number of stay-over tourists in the Cayman Islands was up by more than 20% this past quarter compared with third quarter of 2013. Gross margin in our retail business increased by approximately 600,000 on these higher revenues.

As we reported last quarter, the judicial review hearing related to our retail license negotiations with the Water Authority and the Cayman Islands government was held on April 1st of this year.

Prior to the commencement of this hearing, the parties agree that the core should only be asked to interpret certain provisions, because of the Cayman Islands water legislation that was passed in early 2011, and as part of the agreement, the water authority also agree to consider our submissions on their RCAM model and/or alternative pricing models for our retail concession.

These submissions were made to the Authority on June 9th, and subsequently on September 11, we received a letter from the Authority which fully rejected our submissions and stated that Water Authority intends to provide the company with the draft RCAM license in due course.

We continue to believe that our RCAM license is not in the best interest of our customers, it so far concerns of falling on deaf ears. Therefore we expect to restart negotiations in near future with the Water Authority for a new license based on their RCAM model, and we'll keep investors informed as these negotiations progress.

Now, looking to group potential in our retail business; recent reports and the Cayman Islands press indicate that the former Hyatt hotel property, which has been closed since it was destroyed by hurricane Ivan in 2004, will soon be redeveloped as a 2024-room hotel and conference center.

Preliminary plans for this redevelopment project were submitted to the government central planning authority in September. In addition, the Dart Group has announced plans to construct a new five star resort in front of its flagship Camana Bay property on the Seven Mile Beach.

And both of these developments have completed with the welcome editions to our retail service area.

Now, looking at bulk segment performance; bulk segment revenues declined by about 3% to 9.9 million this past quarter, compared to 10.2 million in 2013, and this was on lower sales volumes in the Bahamas, which was partially offset by higher volume sales in Grand Cayman.

In 2013, our customer Water and Sewerage Corporation of Bahamas purchased water volumes from our Blue Hills plant and were significantly higher than the minimal amounts it was required to purchase under the Water Supply Agreement for that plant.

(Indiscernible) successful implementation of Water and Sewerage Corporations program to reduce the amount of water loses in its distribution system. It has been able to reduce the volume of water purchases from our Blue Hills plant and Windsor plant in Nassau.

We expect the corporation to continue to purchase the minimum volumes of water speculated in the contracts.

Bulk sales from our Cayman Islands operations increased by about 31% to 2.6 million this past quarter compared with 2 million in the third quarter of 2013, due to higher volume sales, and this partially offset the decrease as I mentioned in the bulk sales in our Bahamas bulk water business.

These higher Cayman Islands volume sales were partially the result of the temporary closure of the Water Authority's Lower Valley plant, while it is being refurbished by our engineering company.

The new Lower Valley plant is expected to begin operation early next year, albeit at a new production capacity, which is 75% of the plant's previous capacity. Gross profit from our bulk segment declined by about 6% to approximately 2.8 million this past quarter compared to 3 million in 2013 on the lower sales.

Service segment revenues increased to 1.2 million this past quarter, compared with a 175,000 in the year earlier quarter primarily due to construction revenues generated from contracts with the Water Authority of the Cayman Islands to refurbish the Lower Valley plant, and to build a new containerized plant for the island of Cayman Brac.

The service segment continue to generate a net loss due to costs we incur to develop our 100 million gallon per day desalination plant in Rosarito, Mexico. We expect this segment to continue to generate losses while we complete the development in the Mexico project, or until we secure new engineering services or plant construction contracts.

Now, looking at our Mexican projects specifically; we continue to make significant progress on the 100 million gallon per day plant in Mexico. During this past quarter, we received initial comments from the Mexican regulator on our environmental impact study in the desalination plant and the conveyance pipeline.

And we're pleased that the regulator did not identify any major issues in this first round of comments. We're working with our technical advisors to address all the regulators comments and hope to obtain the necessary permits in due course.

Also this last quarter we began the second stage of our feed water quality monitoring program, and are coordinating with Otay Water District, our potential customer in the United States to collect data that Otay requires to apply for its regulatory permits in United States, in California.

We noted in our most recent form 10-Q, that the government of Baja California, recently enacted new legislation, which regulates how the government can enter in the public/private partnership agreements.

The infrastructure projects, such as the one we're developing in Rosarito Beach, our legal advisors tell us that this new legislation is modeled after similar federal Mexican legislation.

And we believe that this development is generally positive, and creates a transparent and fair process by which we can pursue water contract with this state of Baja California. Now, I'd like to open up the call for questions.

Kate?.

(Operator Instructions) And the first question comes from Gerry Sweeney with ROTH Capital. Please go ahead..

Hi, good morning, guys..

Good morning, Gerry..

On the bulk side; when you're talking about the Bahamas, the Blue Hills plant and how much Bahamas government is taking in terms of volume, can you give us any insight as to some of the work that you're doing, I mean, are we going to see continual decrease 3% per year, or they've got similar low-hanging fruit out of the way? So maybe we'll see a gradual lessening up of water decline, just a little bit of maybe qualitative views and what's happening on that front?.

Yes. Well, first, this is a program that the government is undertaking our customer to reduce losses, and we have minimum take or pay volumes for those plants, which they are basically left out. So we wouldn't expect any further decreases in sales from that..

Okay..

Gerry ….

You're at the minimum sale right now?.

Yes. You have to understand previously (indiscernible) announced that were significantly in excess of the minimum..

Like 20% more..

And those incremental sales we deliver them to the Bahamas government, because that were good supplier, we didn't make a lot of money on the incremental sales. The majority of the profits drive from the minimum quantities, and they're [actually] (ph) committed to buy those, so ….

Okay, got it, guys. That makes sense. And then also on the retail side, on the Grand Cayman, how was this year versus last year? I think last year you thought there was a lot of wet weather.

Was this year overly dry or was it for a long historic (indiscernible)? I'm just trying to delineate how much is tourism versus weather, and why it's sort of a weather baseline if that's available..

Yes. I have to direct you to the -- just check the weather side Grand Cayman weather service, but I don't think it was unusually dry this year. We think that some of the golf courses have been using more water. There is a lot of variation in the local weather conditions.

So it's very difficult to say exactly what's driving this higher sales other than it seemed to correlate very well with the increase in tourist visitors, maybe hotels have more money to spend to keep the golf courses green or something to that effect, but certainly the tourism arrival figures are very positive indicator, mostly than the weather..

Okay, got it.

And then, following just on the retail side; as you move into negotiations with the Water Authority, can you give us a little bit of maybe a vision now that you have to look at this RCAM model, maybe what are the potential outcomes or how it may affect your strategy or anything along those fronts?.

I prefer not to comment on that really now. I think we've made it clear that we're not happy with that type of model; we don't think that it does any justice for the customers.

We just have to keep you guys updated as we progress through the negotiations, but we don't see when we're getting much traction to retain our existing license model with the government or the authority. I think that was the main point that I wanted to make in my comments.

But from the standpoint of what our strategy is in the negotiations, I mean, I prefer not to discuss that arena..

Okay. (Indiscernible) much, but I appreciate it. I'll jump back in queue. Thanks..

(Operator Instructions) And we have a question from John Bair..

Yes, hello?.

Ascend Wealth Advisors. Please go ahead..

Yes. Good morning.

I was wondering if you could give us some updates on your Bali operations, if I was reading the Q correctly, it looks like about a third capacity of your 750,000 gallons, and are you seeing a comparable -- well, "comparable" is not the right word, but seeing similar trends in tourism over there versus the Caymans, I mean, I know geographically it's a world apart, but could you update us on that?.

Well, the situation in Bali is a little bit different than what we're seeing in Grand Cayman because historically the people -- the resorts in Bali have been able to tap into freshwater wells, or (indiscernible) to the extent that the local utility (indiscernible).

The reason why we decided to enter the Bali market is because there is no main suppliers of freshwater puring there. And they're draining the (indiscernible) steadily.

At some point in time, they'll see sea water increasing or sewage increasing into the (indiscernible) have the ability to get freshwater from that source, but what we have seen in Bali, it's a bit of a surprise, it's a lack of recognition on the part of the resorts, the secure and the supply of drought free water.

We really thought we'll build the plan that would quickly become (indiscernible), but what's happened is they are still quite sensitive in that market. They're so used to paying great deal for water. They defer contracting with us as much as possible. And we still are very confident in the long-term our plants are going to do well there.

It will take a little bit of time for these people to realize, the resort owners that they really don't have an alternative. And it's better to go (indiscernible) now, and then wait two years to find out (indiscernible) last months in lining, we don't have any available test for them.

We are starting to negotiate with a couple of additional small hotels. So we would expect the utilization of the plant we hire in 2015, it was in 2014, are quickly newer range -- the level of capacity and that certainly that operation is profitable, isn't clear but eventually we will get there. We are very competent there..

Is there any kind of marking either at the government level or amongst the resorts as to the water quality, where I'm going with this is at some point you're going to get that encroachment for deterioration and so forth.

I don't know if that's a -- I'm not a resort operator obviously, but I'd certainly think I want to be able to promote that I have a reliable and clean source of water for my guests and you don't have to worry about that.

So, I guess the real point of this question is, at what point can be determined or would it be determined that you're having a significant deterioration in a potential health hazard from bad (indiscernible) for water?.

Well, what's amazing when you grab the Bali (indiscernible) you cannot drink the water that comes out in pipes.

The water that's supplied by the local facility, and the water they get from the ground wells is not palatable, it has to be created extensively by the hotels themselves through means of filtration and ultraviolet purification, just so it's suitable for use in the pools or for bathing. You certainly can't drink it.

And it's really surprising that we're spending $2000 a night in a hotel yet be careful not to brush your teeth with the water that's coming out of the tap, we could only use bottled water. That's the thing about Bali. They we never had a concern about (indiscernible) allocated. The ideal drinking pipe waters is alien to them (indiscernible).

Nowhere in Indonesia there are pipes that supply drinking water.

So gradually it's a -- the water we supply is that superior to anything they've had in the past, and eventually they're going to realize that if they buy our water they don't have to spend all this money on filtration equipment or purification equipment for water they're getting from other sources.

And it's going to be ultimately cost savings for them. But it's a matter of educating this market, because they never really had access to water (indiscernible) device. So the trends are on our favors. It's going to take a while for these people to realize that water is an issue..

Was there a cost -- (indiscernible) cost for them to convert basically say if they walked in and said, "You know what, we're going to do this." Is that part of the hindrance on their part to make that kind of conversion?.

Not really, but if you about it right now, they're playing practically nothing; well water. So the cost of our water is substantially higher, even though it's not in our opinion material to the operating cost of the resource, they are very cost conscious over there.

And they're looking at practically paying nothing for water at the moment, and are paying a lot for the water we provide, and if you're in front of a new budget or (indiscernible) significantly, eventually they're going to run out of resources that they're using now.

The government actually is trying to impose a huge tax on water going from these wells because they recognize that the use of these wells damages the ecology, brings the (indiscernible) as long-term adverse consequences to Bali, but it's sort of stuck because they can't eliminate these wells (indiscernible) heavily harming the economy because then the resource aren't successful.

They have the water (indiscernible). The government is sort of cash (indiscernible) situation. And we have actually had discussions with the government here about providing water to them. But it takes a long time to negotiate a deal with the government. So we really have it focused on that (indiscernible) at the moment.

We've just got a different situation in Bali, eventually they'll come around our asset..

Okay, I will get back in the queue. Thank you..

You're welcome..

(Operator instructions) There are no questions at this time. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. McTaggart for any closing remarks..

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