Rick McTaggart - President and CEO David Sasnett - CFO.

John Bair - Ascend Wealth Advisors Gerry Sweeney - ROTH Capital Steven Percoco - Lark Research Katherine Burke - Janney Montgomery Scott Blake Todd - Two Oaks.

Good day everyone and welcome to the Consolidated Water Company’s Year-End 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] And please note that the event is being recorded.

The information that will be provided in this conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to the statements regarding the Company’s future revenues, future plans, objectives, expectations, events, assumptions, and estimates.

Forward-looking statements can be identified by the use of the word or phrases will, will likely result, are expected to, will continue, estimate, project, potential, belief, plan, anticipate, expect, intend, or similar expressions and variations of such words.

Statements that are not historical facts are based on the Company’s current expectations, beliefs, assumptions, estimates, forecasts, and projections for its business and the industry and markets related to its business.

Any forward-looking statements made during this conference call are not guarantees of future performance and involves certain risks, uncertainties, and assumptions which may be difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward-looking statements.

Important factors which may affect the actual outcomes, results include without limitation, tourism and weather conditions in the areas the Company serves, the economies of the U.S.

and other countries in which the Company conducts businesses, the Company’s relationships with the government it serves, regulatory matters including resolution of the highest negotiations for the renewal of the Company’s retail license on Grand Cayman.

The Company’s ability to successfully enter new markets including Mexico, Asia and the United States, and other factors including those Risk Factors set forth under Part one item 1a Risk Factors in the Company’s Annual Report on Form 10-K. Any forward-looking statements made during this conference call will speak of today’s date.

The Company expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made during this conference call to reflect any change in its expectations with regard there to or any change in events, conditions or circumstances on which any forward looking statement is based except may be required by law.

I would now like to turn the conference over to Rick McTaggart, CEO and President. Please go ahead..

Good morning, ladies and gentlemen. David Sasnett, our CFO is also on the call with me in this morning. Full year revenues for 2016 were up slightly by approximately $750,000 compared to last year due to higher revenues in our retail and services segment, which was partially offset by a decrease in our bulk segment revenues.

Net income declined from $7.5 million or $0.51 per fully diluted share last year to $3.9 million or $0.27 per fully diluted share in 2016, primarily due to the impact of non-cash impairment losses we recorded for our Bali and Aerex businesses and our equity investment in our BBI affiliate.

G&A expenses on a consolidated basis increased from $14.8 million in 2015 to $18.7 million in 2016.

And this increase was primarily due to the addition of approximately $2.3 million in expenses for Aerex and an increase of approximately $1 million in expenses incurred in connection with our project development activities in Mexico, which I’ll discuss in a bit more detail later in the call.

We spent approximately $3.6 million on these development activities in 2016. And we expect these expenses to end later this year, if we are successful in closing the financing for our $100 million gallon per day desalination project in Rosarito, Mexico.

Revenues generated by our retail segment increased slightly from $23.25 million in 2015 to 2323.5 million last year.

Our sales volume in Grand Cayman increased by 12% but this increase was offset by a decline in energy pass-through charges, due to lower electricity costs in Grand Cayman as well as the reduction in the Cayman Water base rates under our current license, which equated to 4.4% compared to 2015 rates, so a reduction of 2015 rates by 4.4%.

And it was also related to a decline in sales in our Bali subsidiary. Retail segment gross profit increased from $12.7 million in 2015 to $13.2 million in 2016. We believe that volume sales increased year-over-year due to much dryer weather conditions in Grand Cayman.

Total rainfall in our service area in Grand Cayman was only 64% of 2015 totals and 54% of the 30-year average that was for the year. Drought conditions continued to worsen in the fourth quarter of 2016, with rainfall totaling only 34% of the prior year’s fourth quarter, equated to 42% of the 30-year average.

So, the remarkable thing about this is really that most people on Grand Cayman are completely unaware of the severity of this drought. Unlike other areas of the world, the population in Grand Cayman has been immune to any interruption or reduction in water supply because of its complete reliance on our desalination plants.

Also in Grand Cayman, the 260-room Kimptom Seafire hotel opened its doors on November 1st, and we expect this new property to have a meaningful impact on our water sales going forward.

We previously reported that the government in the Cayman Islands had recently established an independent utilities regulator which actually began operation in February.

While regulatory responsibility for the water utility sector in the Cayman Islands has not yet been transferred to the new regulator from the water authority, we expect this to happen any day since the relevant legislation is now being debated in the Cayman Islands parliament.

We’ve also been notified by the water authority that they will soon begin transferring responsibility for our license negotiations over to the new regulator, which is called Off Reg, Office of Regulation.

We cannot predict at this time when impact these regulatory and legislative changes will have on the revolution of our retail license negotiations, but we are pleased that the government has chosen to establish an independent regulator going forward.

2016 results for our retail segment were adversely impacted by the operating loss we reported for our Bali subsidiary, which included a $2 million impairment loss we recorded in the third quarter.

Based upon greatly reduced expectations for the cash flows this business will generate, we continue to seek a strategic partner for this operation that can help us grow its sales, improve its local operating costs and make CW-Bali a viable company.

While we’ve had discussion with several potential partners to-date, we’ve not been presented yet with the partnership or a JV agreement that’s on terms acceptable to us. We may formally decide to exit this business later in 2017, if we cannot find a partner or otherwise greatly improve the prospects for this subsidiary.

Bulk segment revenues declined year-over-year by approximately $2.2 million due to a significant decrease in the prices for diesel fuel and electricity from 2015 to 2016, which reduced the pass-through energy component of the bulk water rates charged to the customers in the Cayman Islands and the Bahamas primarily.

Bulk segment gross profit in 2016 was flat at approximately $10.2 million compared to 2015.

As previously reported, I think in January, the government in the Bahamas signed a 15-year extension of the Windsor contract with our Bahamian subsidiary in late December in exchange for an 18% reduction in the base rate of water supplied from our Windsor desalination plant.

We’re required to refurbish the Windsor plant in order to ensure that we can meet water quality and quantity guarantees over the extension period and consequently expect to invest about $8.9 million in this plant over the next 18 months.

Services segment results for the past quarter and for the full year reflect the addition of our Aerex subsidiary to the consolidated financial statements as of February 2016. Our service segment revenues increased to approximately $4.7 million in 2016 compared to $2 million in 2015, due to the $3.9 million addition of revenues from Aerex.

Partially offsetting the revenues from Aerex was a decline of approximately $1.2 million in revenues from plant construction and refurbishment contracts that affected our income statement in 2015.

The general and administrative expenses incurred for our Mexico project development activities were approximately $1 million, greater in 2016 than 2015, reflecting incremental expenses required to prepare our winning bid for the Rosarito project, negotiate the contract and ancillary agreements for the project, raise the debt and equity funding required, and complete the remaining tasks necessary to take this project to financial closing stage and commence its construction.

As previously disclosed, Aerex’s sales and results to-date have fallen short of the projections we used to determine our purchase price for the 51% interest in this Company. And as a result of that shortfall, we determined it’s appropriate to test for goodwill we recorded for the Aerex acquisition or impairment on September 30th of last year.

As a result of such impairment testing, we recorded a $1.75 million impairment loss to reduce the carrying value of our Aerex goodwill for the three months ended September 30, 2016.

The shortfall in Aerex’s results stem from a major decline in orders from its largest customer, which we believe had nothing to do with Aerex’s pricing, quality or customer service. This customer’s now started purchasing again from Aerex and consequently, we expect performance in 2017 to improve as compared to 2016.

Our net income in 2016 was also adversely affected by $925,000 in impairment losses we recorded to reduce the carrying value of our investment in our BVI affiliate. In February 2017 this year, OC-BVI, our affiliate, executed a 14-year extension to its Bar Bay plant contract at a reduced water rate.

While we expect this lower rig will result in a reduction at the equity and profit sharing earnings we’ve historically reported from OC-BVI, we do not expect to record any further impairment losses for this equity investment, unless something unforeseen occurs which reduces expected cash flows from that business.

Now, just looking at our Mexico project, in accordance with Baja California’s public-private partnership law and the terms of our contract, we submitted proposals to our client requesting an increase to the water tariff to compensate for significant changes in foreign exchange rates, lending rates and certain changes in law which have impacted our 100 million gallon per day desalination plant project in Rosarito, Mexico, subsequent to the Presidential election in November.

We are currently discussing these proposals with our client. And while nothing yet has been finalized, we are encouraged by their initial responses to our proposals.

We continue to work closely with our partners, advisors and financing institutions with the goal of commencing construction on this very important project in the third quarter of this year. Now, William, I’d like to turn the call over to questions..

Thank you, sir. We’ll now begin the question-and-answer session. [Operator Instructions] And the first questioner is John Bair with Ascend Wealth Advisors. Please go ahead..

Two questions. I noticed your accounts receivable and inventory numbers were considerably higher. I wish -- I would like you to shed some light on that.

And the second question is with regards to Bali, if you can’t find a partner or someone to join up with you on that and you would end up having to I assume write that off further, what kind of impairment charge do you think that would result in?.

David, do you want to take that?.

Yes. The accounts receivable balance for our company is up primarily due to receivables that are due in the Bahamas. And this receivable increase follows a pattern that our Company has exhibited in previous years. The government of the Bahamas and the Water and Sewage Corporation, the case they allow their receivable balance is to grow with us.

But after they complete their budgeting process they historically have always given us substantial payments to bring those things current. We never had to record any allowance for doubtful accounts, and we believe those amounts are fully collectible. But as is the case this year, consistent with some prior years, they’ve delayed their payments to us.

But, we’re fully confident, those receivables are fully collectible. [Multiple speakers] Normally, they pay us sometime after their budgeting process that’s finished in July. And we also believe they’ll be sending us some interim payments before they enter or lower the balance.

I mean, they are little slow in paying, but they have always paid us a 100% of everything they owed us. And then, the other question regarding inventory. Our inventory’s up a little bit due to the acquisition of Aerex. But our inventory is a little bit different from other companies because our inventory is not really stuff that we resell.

These are consumable products and fixed asset type items that we buy for using our operations. So, there is never really an impairment issue or anything like that. It will be -- all the stuff will eventually be consumed in operations. With respect to Bali, look, we have about $1.8 million net investment in that subsidiary as of December 31st.

And that’s the potential maximum amount of the write-off. If we do decide, if our Board or management does decide to exit that business, there will be some charges necessary to or some cost that would be incurred to get out of there. I can’t give you an exact amount of the potential write-off at the moment, but we are losing money there.

So, in theory, if we close this operation, those operating losses will be discontinued. But, the maximum amount that we think -- the potential impairment would be the full $1.8 million balance. And we may be able to sell some of the equipment in tense salvage [ph] or transfer to some of our other operations.

But, I can’t say that we won’t be writing off the full $1.8 million at this point in time, we just don’t know..

Our next questioner today is Gerry Sweeney with ROTH Capital. Please go ahead. .

So, going back to Mexico, any timeline on the discussion with the Bali government for the State of Bali -- or Bahamas sorry, on the tariff increase? And how does that play into the timing of some of other hurdles that you’ve got?.

The negotiations are active now. So, I can’t say too much about when there’ll be finished. We’re optimistic [indiscernible] these ideas and things [ph] have occurred that are outside of our control. As I mentioned in the notes there, we’re still executing for the third quarter in each [ph] year to close.

And we think that we can get all of these conditions [ph] -- before then and be in a position to close..

Can you discuss the magnitude of the change in tariff?.

No, I mean I’d prefer not to since the negotiations are ongoing and it’s something that hasn’t been nailed down exactly..

Okay. Fair enough. I get that. And then, switching to the Grand Cayman retail, I suspect, when there is a drought in the other areas, people slow down using water just because of supply.

But is there any issue with drought and providing supply to the retail sector on your end, do you have enough capacity et cetera and how does that play into just that?.

We presently have sufficient capacity. I mean, obviously, after many years of low growth or even negative sales velocity I suppose there, drops in volume sales, we’re now looking at move going forward. And I’m sure that there’ll be some capital spending in the next year or two to keep pace with this growth..

Yes. Rick, I agree that CapEx would probably be in -- close to 2018..

And then on the growth [ph] profitability, what’s driving that.

I think you’ve been trending up, maybe you can remind us what’s driving that and then if there is an opportunity for increase, continuing improvements?.

Well, I mean, just I think in Cayman on the retail side, we will have more water with the same asset. So, we got some kind -- on the bulk side I think it’s just cost controls. We’ve just been very attentive keeping things running efficiently at these plants. And there’s -- on the bulk side, it’s been smaller changes in profitability and gross profit.

As I mentioned, it was flat this year because sales declined pretty significantly because of the energy component pass-through drops..

Our next questioner today is Steven Percoco with Lark Research. Please go ahead..

Could you go over the contract renewals in the Bahamas and in BVI? Specifically, I’d like to know what’s the relationship of base rates to the total rates, I assume the difference is the volume charge; how that works, what impact that’s going to have on margins and your investment returns in both Bahamas and BVI? And in the Bahamas, lower rates and higher CapEx sounds like you’re going to have a pretty significant drop in investment returns, if you could confirm that, give us a sense of the magnitude.

And likewise, in BVI, you really haven’t been spending any money there on CapEx, are you going to have pick up the spending there as well?.

Well, I’ll start with the last question. In BVI, we only report an equity pickup, so we do spend CapEx there year-to-year to keep things running, and replacing pumps and that sort of thing, we probably don’t see them, because it’s not consolidated in the income statement and the balance sheet.

The drop there -- that rate in BVI was an all-in rate for power and for all other [indiscernible] to the customer. And then once power cost exceed a certain number, the rate increases, and we recover that power cost from the customer. So that’s basically how that works. On the Bahamas project, that plant was really depreciated a few years ago.

And we mentioned in previous filing that we were waiting for the government to decide whether they wanted to extend the contract that they’ve committed to basically a full refurbishment of that facility.

So, because we’ve the 15-year contract, we think that that project will continue to be profitable, obviously not at levels that we saw in this interim period, but it’s not an unusual amount of CapEx to be spent on a plant like this over a 15-year period..

Right.

You get to spend it all up front, right?.

Yes. And then, we own the asset so, it’s a cash flow issue upfront but then, we’ll depreciate that asset over the 15 years..

And can you give us a sense for the impact on margins or investment returns there with….

We’ve not -- we’ve never disclosed that information. You could draw your own conclusion….

Just a sense of magnitude even….

Well, it’s fair to say -- we try to -- you have the sales volumes, they’re fully available, sales numbers are fully available on our 10-K for both operations. It’s fair to say that the margins we’re going to make on both of those operations are obviously going to be less for lowering the sales price.

I think you’ll see the biggest impact in the British Virgin Islands. But, since as is the case, typically our businesses improve their margins over time as we continue to get inflationary adjustments, while we hold the portion of the cost fixed and improve the -- actually the operating efficiency of the plant.

But without quantifying it, both of these new contracts were lower, what we made these plants in the previous year, from previous years. The most significant one will be the impact on the British Virgin Islands..

Okay. Thank you..

[Operator Instructions] The next questioner today is Katherine Burke with Janney Montgomery Scott. Please go ahead..

Just a quick question on the transfer of authority from the WAC to Off Reg.

Is it likely to change the scope of negotiations as it pertains the RCAM model or do you think they’ll stick with this structure that you have in place now?.

We really don’t know at this point. I mean, they’re still staffing the office and it’s a brand new thing there. So, as soon as we -- the indication of whether it will change in course, I mean obviously we’ll discuss that down the road. But, I don’t expect to actually meet with anybody from the office until it’s released to next month.

So, we’ll get a better feel of that. .

Our next question today is Blake Todd Two Oaks. Please go ahead..

Maybe you could give a little bit update or little color on the lawsuit on NSC, the transfer that was recorded in Mexico?.

I think it’s pretty specific about that in the 10-K, the Mexico litigation has essentially been resolved to the point where it doesn’t impede the project. And we haven’t got any further developments on that, I think probably in the last three or four months.

So, we reported [technical difficulty] from that lawsuit and [technical difficulty] resolved satisfactorily for us..

Okay. Thank you..

[Operator Instructions] We seem to have no further questioner. So, this will conclude the question-and-answer session. I would like to turn the conference back over to Rick McTaggart for any closing remarks..

I just want to thank everybody again for joining us today. And I look forward to speaking with you in May when we release our first quarter 2017 results. Thank you..

The conference has now concluded. Thank you all for attending today’s presentation. You may now disconnect..