UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q


(Mark
One)




x
                QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF
      1934For the quarterly period ended
      September 30, 2009




OR





 ̈
                TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF
      1934For the transaction period from
      ___________ to
___________





Commission
File Number: 0-25248





CONSOLIDATED
WATER CO. LTD.


(Exact
name of Registrant as specified in its charter)





CAYMAN
      ISLANDS
                
                N/A(State
      or other jurisdiction of
                
                (I.R.S.
      Employer Identification No.)incorporation
      or organization)





Regatta
      Office ParkWindward
      Three, 4th Floor, West Bay RoadP.O.
      Box 1114Grand
      Cayman KY1-1102Cayman
      Islands
                
                N/A(Address
      of principal executive offices)
                
                (Zip
      Code)





(345)
945-4277


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





Yes x No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).




Yes  ̈ No  ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filer  ̈
            
            Accelerated filer x
            
            Non-accelerated filer  ̈
            
            Smaller reporting company  ̈(Do not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈ No x





As of
November 3, 2009, 14,541,878 shares of the registrant’s common stock, with
US$0.60 par value, were outstanding.















TABLE
OF CONTENTS





Description
                  
                  PagePART
      I
                  FINANCIAL
      INFORMATIONItem
      1
                  Financial
      Statements
                  
                  4Condensed
      Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and
      December 31, 2008
                  
                  4Condensed
      Consolidated Statements of Income (Unaudited) for the Three and Nine
      Months Ended September 30, 2009 and 2008
                  
                  5Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
      Ended September 30, 2009 and 2008
                  
                  6Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                  
                  7Item
      2
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  15Item
      3
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  
                  25Item
      4
                  Controls
      and Procedures
                  
                  25PART
      II
                  OTHER
      INFORMATION
                  
                  25Item
      1
                  Legal
      Proceedings
                  
                  25Item
      1A
                  Risk
      Factors
                  
                  25Item
      6
                  Exhibits
                  
                  27SIGNATURES
                  
                  28


2


NOTE
REGARDING CURRENCY AND EXCHANGE RATES





Unless
otherwise indicated, all references to “$” or “US$” are to United States
dollars.





The
exchange rate for conversion of Cayman Island dollars (CI$) into US$, as
determined by the Cayman Islands Monetary Authority, has been fixed since April
1974 at US$1.20 per CI$1.00.





The
exchange rate for conversion of Belize dollars (BZE$) into US$, as determined by
the Central Bank of Belize, has been fixed since 1976 at US$ 0.50 per
BZE$1.00.





The
exchange rate for conversion of Bahamian dollars (BAH$) into US$, as determined
by the Central Bank of The Bahamas, has been fixed since 1973 at US$1.00 per
BAH$1.00.





The
official currency of the British Virgin Islands is the United States
dollar.





The
exchange rate for conversion of Bermuda dollars (BMD$) into US$ as determined by
the Bermuda Monetary Authority, has been fixed since 1970 at US$1.00 per
BMD$1.00.


3


PART
I — FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS




CONSOLIDATED
WATER CO. LTD.


CONDENSED
CONSOLIDATED BALANCE SHEETS


September
      30,
                
                
                December
      31,2009
                
                
                2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                41,235,590
                
                
                $
                36,261,345Accounts
      receivable, net
                
                
                11,574,653
                
                
                
                13,911,312Inventory
                
                
                1,592,494
                
                
                
                1,617,484Prepaid
      expenses and other current assets
                
                
                2,259,869
                
                
                
                1,444,445Current
      portion of loans receivable
                
                
                1,241,174
                
                
                
                768,803Total
      current assets
                
                
                57,903,780
                
                
                
                54,003,389Property,
      plant and equipment, net
                
                
                56,313,495
                
                
                
                58,937,980Construction
      in progress
                
                
                6,251,775
                
                
                
                6,157,958Costs
      and estimated earnings in excess of billings - construction
      project
                
                
                386,707
                
                
                
                7,377,554Inventory
      non-current
                
                
                3,585,856
                
                
                
                2,971,949Loans
      receivable
                
                
                11,216,982
                
                
                
                1,560,420Investment
      in and loan to affiliate
                
                
                12,120,482
                
                
                
                14,371,312Intangible
      assets, net
                
                
                1,956,742
                
                
                
                2,144,162Goodwill
                
                
                3,587,754
                
                
                
                3,587,754Other
      assets
                
                
                3,373,586
                
                
                
                3,544,096Total
      assets
                
                $
                156,697,159
                
                
                $
                154,656,574LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable and other current liabilities
                
                $
                5,751,299
                
                
                $
                7,310,327Dividends
      payable
                
                
                1,152,412
                
                
                
                1,006,414Current
      portion of long term debt
                
                
                1,298,484
                
                
                
                1,229,071Total
      current liabilities
                
                
                8,202,195
                
                
                
                9,545,812Long
      term debt
                
                
                20,146,542
                
                
                
                21,129,269Other
      liabilities
                
                
                508,280
                
                
                
                430,717Total
      liabilities
                
                
                28,857,017
                
                
                
                31,105,798Stockholders’
      equityControlling
      interests:Redeemable
      preferred stock, $0.60 par value. Authorized 200,000 shares; issued and
      outstanding 17,233  and 17,366  shares,
      respectively
                
                
                10,340
                
                
                
                10,420Class
      A common stock, $0.60 par value. Authorized 24,655,000 shares; issued and
      outstanding 14,537,950 and 14,529,360 shares, respectively
                
                
                8,722,770
                
                
                
                8,717,616Class
      B common stock, $0.60 par value. Authorized 145,000 shares; none issued or
      outstanding
                
                
                -
                
                
                
                -Additional
      paid-in capital
                
                
                80,874,934
                
                
                
                80,461,942Retained
      earnings
                
                
                36,434,034
                
                
                
                32,340,077126,042,078
                
                
                
                121,530,055Noncontrolling
      interests
                
                
                1,798,064
                
                
                
                2,020,721Total
      stockholders’ equity
                
                
                127,840,142
                
                
                
                123,550,776Total
      liabilities and stockholders’ equity
                
                $
                156,697,159
                
                
                $
                154,656,574





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


4


CONSOLIDATED
WATER CO. LTD.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(UNAUDITED)





Three Months Ended September
      30,
                            
                            
                            Nine Months Ended September
    30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Retail
      water revenues
                            
                            $
                            5,659,390
                            
                            
                            $
                            5,833,347
                            
                            
                            $
                            18,418,103
                            
                            
                            $
                            17,855,530Bulk
      water revenues
                            
                            
                            6,687,836
                            
                            
                            
                            8,002,586
                            
                            
                            
                            19,526,044
                            
                            
                            
                            22,648,443Services
      revenues
                            
                            
                            1,178,833
                            
                            
                            
                            3,368,660
                            
                            
                            
                            6,900,965
                            
                            
                            
                            8,834,766Total
      revenues
                            
                            
                            13,526,059
                            
                            
                            
                            17,204,593
                            
                            
                            
                            44,845,112
                            
                            
                            
                            49,338,739Cost
      of retail revenues
                            
                            
                            2,421,740
                            
                            
                            
                            2,862,070
                            
                            
                            
                            7,390,251
                            
                            
                            
                            8,209,513Cost
      of bulk revenues
                            
                            
                            5,302,535
                            
                            
                            
                            6,968,547
                            
                            
                            
                            15,239,258
                            
                            
                            
                            19,620,430Cost
      of services revenues
                            
                            
                            765,716
                            
                            
                            
                            2,748,715
                            
                            
                            
                            3,611,992
                            
                            
                            
                            7,440,300Total
      cost of revenues
                            
                            
                            8,489,991
                            
                            
                            
                            12,579,332
                            
                            
                            
                            26,241,501
                            
                            
                            
                            35,270,243Gross
      profit
                            
                            
                            5,036,068
                            
                            
                            
                            4,625,261
                            
                            
                            
                            18,603,611
                            
                            
                            
                            14,068,496General
      and administrative expenses
                            
                            
                            2,671,169
                            
                            
                            
                            2,128,654
                            
                            
                            
                            7,842,434
                            
                            
                            
                            6,754,902Income
      from operations
                            
                            
                            2,364,899
                            
                            
                            
                            2,496,607
                            
                            
                            
                            10,761,177
                            
                            
                            
                            7,313,594Other
      income (expense):Interest
      income
                            
                            
                            311,990
                            
                            
                            
                            326,880
                            
                            
                            
                            620,663
                            
                            
                            
                            1,097,120Interest
      expense
                            
                            
                            (417,316
                            )
                            
                            
                            (436,077
                            )
                            
                            
                            (1,287,369
                            )
                            
                            
                            (1,325,184
                            )Other
      income
                            
                            
                            50,337
                            
                            
                            
                            32,767
                            
                            
                            
                            143,600
                            
                            
                            
                            77,534Equity
      in earnings (loss) of affiliate
                            
                            
                            (1,582,248
                            )
                            
                            
                            (639,546
                            )
                            
                            
                            (2,780,270
                            )
                            
                            
                            (1,772,570
                            )Other income (expense), net
                            
                            
                            (1,637,237
                            )
                            
                            
                            (715,976
                            )
                            
                            
                            (3,303,376
                            )
                            
                            
                            (1,923,100
                            )Consolidated
      net income
                            
                            
                            727,662
                            
                            
                            
                            1,780,631
                            
                            
                            
                            7,457,801
                            
                            
                            
                            5,390,494Income
      (loss) attributable to non-controlling interests
                            
                            
                            69,762
                            
                            
                            
                            614
                            
                            
                            
                            382,144
                            
                            
                            
                            (43,019
                            )Net
      income attributable to controlling interests
                            
                            $
                            657,900
                            
                            
                            $
                            1,780,017
                            
                            
                            $
                            7,075,657
                            
                            
                            $
                            5,433,513Basic
      earnings per common share
                            
                            $
                            0.05
                            
                            
                            $
                            0.12
                            
                            
                            $
                            0.49
                            
                            
                            $
                            0.37Diluted
      earnings per common share
                            
                            $
                            0.05
                            
                            
                            $
                            0.12
                            
                            
                            $
                            0.49
                            
                            
                            $
                            0.37Dividends
      declared per common share
                            
                            $
                            0.075
                            
                            
                            $
                            0.065
                            
                            
                            $
                            0.205
                            
                            
                            $
                            0.195Weighted
      average number of common shares used in the determination
    of:Basic
      earnings per share
                            
                            
                            14,537,041
                            
                            
                            
                            14,523,016
                            
                            
                            
                            14,533,097
                            
                            
                            
                            14,516,869Diluted
      earnings per share
                            
                            
                            14,611,601
                            
                            
                            
                            14,543,485
                            
                            
                            
                            14,583,250
                            
                            
                            
                            14,538,785





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


5


CONSOLIDATED
WATER CO. LTD.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





NineMonths
Ended
                                                                                    September 30,2009
                                                                                  
                                                                                  
                                                                                  2008Net
      cash flows provided by operating activities
                                                                                  
                                                                                  $
                                                                                  10,022,016
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3,424,074Cash
      flows provided by (used in) investing activitiesPurchases
      of property, plant and equipment, and construction in
    progress
                                                                                  
                                                                                  
                                                                                  (2,326,401
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (5,144,540
                                                                                  )Collections
      on loans receivable
                                                                                  
                                                                                  
                                                                                  1,117,357
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,096,202Net
      cash used in investing activities
                                                                                  
                                                                                  
                                                                                  (1,209,044
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (4,048,338
                                                                                  )Cash
      flows provided by (used in) financing activitiesDividends
      paid
                                                                                  
                                                                                  
                                                                                  (2,835,702
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (2,757,307
                                                                                  )Proceeds
      from issuance of preferred stock
                                                                                  
                                                                                  
                                                                                  10,350
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Principal
      repayments of long term debt
                                                                                  
                                                                                  
                                                                                  (1,013,375
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (955,256
                                                                                  )Net
      cash used in financing activities
                                                                                  
                                                                                  
                                                                                  (3,838,727
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (3,712,563
                                                                                  )Net
      increase (decrease) in cash and cash equivalents
                                                                                  
                                                                                  
                                                                                  4,974,245
                                                                                  
                                                                                  
                                                                                  
                                                                                  (4,336,827
                                                                                  )Cash
      and cash equivalents at beginning of period
                                                                                  
                                                                                  
                                                                                  36,261,345
                                                                                  
                                                                                  
                                                                                  
                                                                                  38,529,383Cash
      and cash equivalents at end of period
                                                                                  
                                                                                  $
                                                                                  41,235,590
                                                                                  
                                                                                  
                                                                                  $
                                                                                  34,192,556Interest
      paid in cash
                                                                                  
                                                                                  $
                                                                                  1,127,156
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1,185,303Non-cash
      investing and financing activitiesConversion
      of 5,784 (2008: 5,451) redeemable preferred sharesinto
      5,784 (2008: 5,451) ordinary shares
                                                                                  
                                                                                  $
                                                                                  3,470
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3,271Issuance
      of 2,806 (2008: 11,197) ordinary shares to executive  management for
      services rendered
                                                                                  
                                                                                  $
                                                                                  38,750
                                                                                  
                                                                                  
                                                                                  $
                                                                                  279,795Issuance
      of 4,197 (2008: 1,774) preferred shares for services
    rendered
                                                                                  
                                                                                  
                                                                                  73,660
                                                                                  
                                                                                  
                                                                                  
                                                                                  30,158Dividends
      declared but not paid
                                                                                  
                                                                                  $
                                                                                  1,091,587
                                                                                  
                                                                                  
                                                                                  $
                                                                                  945,200Loan
      receivable issued for plant facility sold
                                                                                  
                                                                                  $
                                                                                  10,996,290
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Conversion
      of accounts receivable due from affiliate into loan
    receivable
                                                                                  
                                                                                  $
                                                                                  800,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


6


CONSOLIDATED WATER CO.
LTD.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.  Basis
of presentation





The
accompanying condensed consolidated financial statements of Consolidated Water
Co. Ltd. (the “Company”) include the accounts of the Company’s (i) wholly-owned
subsidiaries, Aquilex, Inc., Cayman Water Company Limited (“Cayman Water”),
Consolidated Water (Belize) Limited (“CW-Belize”), Ocean Conversion (Cayman)
Limited (“OC-Cayman”), DesalCo Limited (“DesalCo”); (ii) majority-owned
subsidiary Consolidated Water (Bahamas) Ltd. (“CW-Bahamas”); and (iii)
affiliate, Consolidated Water (Bermuda) Limited (“CW-Bermuda”), which is
consolidated because the Company is its primary financial beneficiary. The
Company’s investment in its affiliate, Ocean Conversion (BVI) Ltd. (“OC-BVI”),
is accounted for using the equity method of accounting. All significant
intercompany balances and transactions have been eliminated in
consolidation.





The
accompanying condensed consolidated balance sheet as of September 30, 2009 and
the condensed consolidated statements of income for the three and nine months
ended and cash flows for the nine months ended September 30, 2009 and 2008 are
unaudited. These consolidated condensed financial statements reflect all
adjustments (which are of a normal recurring nature) that, in the opinion of
management, are necessary to fairly present the Company’s financial position,
results of operations and cash flows as of and for the periods presented. The
results of operations for these interim periods are not necessarily indicative
of the operating results for future periods, including the fiscal year ending
December 31, 2009.





These
condensed consolidated financial statements and notes are presented in
accordance with the rules and regulations of the United States Securities and
Exchange Commission (“SEC”) relating to interim financial statements and in
conformity with accounting principles generally accepted in the United States of
America (“US GAAP”).  Certain information and note disclosures
normally included in annual financial statements prepared in accordance with US
GAAP have been condensed or omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made are adequate to make the
information not misleading.  These condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008.





Reclassifications: Pursuant to
the terms of its retail license and bulk water agreements, the Company adjusts
its monthly invoices to charge (or credit) customers for any increases (or
decreases) in the prices for the energy costs incurred to produce water. Prior
to 2008, the Company recorded a portion of these energy cost charges (or
credits) as an adjustment to the energy component of its cost of
revenues.  During the fourth quarter of 2008, the Company concluded
that since such amounts are ultimately paid by (or to) its customers, these
energy cost charges and credits would be more appropriately classified in its
consolidated results of operations as an adjustment to revenues rather than to
cost of revenues. Accordingly, revenue and cost of revenue amounts reported in
2008 have been adjusted in these 2009 financial statements for these
reclassifications, the effects of which on previously reported amounts are as
follows:





Three
      Months Ended
                    
                    
                    Nine
      Months EndedSeptember 30, 2008
                    
                    
                    September 30, 2008Revenues,
      as previously reported
                    
                    $
                    15,221,783
                    
                    
                    $
                    43,995,359Reclassification
      of energy recovery
                    
                    
                    1,982,810
                    
                    
                    
                    5,343,380Revenues,
      as adjusted
                    
                    $
                    17,204,593
                    
                    
                    $
                    49,338,739Three
      Months Ended
                    
                    
                    Nine
      Months EndedSeptember 30, 2008
                    
                    
                    September 30, 2008Cost
      of revenues, as previously reported
                    
                    $
                    10,596,522
                    
                    
                    $
                    29,926,863Reclassification
      of energy recovery
                    
                    
                    1,982,810
                    
                    
                    
                    5,343,380Cost
      of revenues, as adjusted
                    
                    $
                    12,579,332
                    
                    
                    $
                    35,270,243





These
reclassifications had no effect upon the previously reported amounts of gross
profit or net income.





Certain
other immaterial amounts presented in the 2008 financial statements included in
the Form 10-Q for the quarterly period ended September 30, 2008 have been
reclassified to conform to the presentation used for these amounts in
the 2009 financial statements.


7


2.  Stock-based
compensation





The
Company issues stock under incentive plans that form part of employees’ and
non-executive directors’ remuneration. The Company also grants options to
purchase common shares as part of remuneration for certain long-serving
employees.





Stock-based
compensation totaled $95,687 and $87,258 for the three months ended September
30, 2009 and 2008, respectively, and $330,393 and $276,105 for the nine months
ended September 30, 2009 and 2008, respectively and is included in general and
administrative expenses in the condensed consolidated statements of
income.





In March
2009, the Company granted options to purchase 101,697 ordinary shares to certain
employees under its 2008 Equity Incentive Plan.  The March 2009
options began vesting on March 19, 2009 and vest in three equal tranches on
March 19, 2010, 2011 and 2012.  All of these 101,697 options expire
three years from the respective vesting date of each tranche.





In June
2009, the Company granted options to purchase 3,670 ordinary shares to certain
employees under its 2001 Employee Share Option Plan.  The June 2009
options vest on June 29, 2013. All of these 3,670 options expire thirty days
from the vesting date.





In June
2009, the Company granted options to purchase 4,197 preference shares to certain
employees under its Employee Share Incentive Plan.  The June 2009
options began vesting on June 14, 2009 and expire thirty days from the vesting
date.





The
Company estimates the fair value of the stock options granted and rights to
acquire stock using the Black-Scholes option pricing model which requires the
Company to make a number of estimates and assumptions including forfeiture rate,
volatility and expected life. The Company does not expect any forfeitures and
therefore expects to recognize the full compensation costs for these equity
awards. The Company calculated expected volatility based primarily upon the
historical volatility of the Company’s common stock.





The
expected life of options granted represents the period of time that options
granted are expected to be outstanding, which incorporates the contractual
terms, grant vesting schedules and terms and expected employee behaviors. As the
Company has so far only awarded what the SEC has defined as “plain vanilla
options”, the Company uses the “simplified method” allowed by the SEC for
determining the expected life of the options granted.





The
significant weighted average assumptions for the 101,697 ordinary share options
issued in March 2009 were as follows: risk free interest rate of 1.3%; expected
option life of 3.50 years; expected volatility of 70.2%; expected dividend yield
of 3.29%.





The
significant weighted average assumptions for the 3,670 ordinary share options
were as follows: risk free interest rate of 2.08%; expected option life of 4.08
years; expected volatility of 76.3%; expected dividend yield of
1.7%.





The
significant weighted average assumptions for the 4,197 preference share options
were as follows: risk free interest rate of 0.08%; expected option life of 0.08
years; expected volatility of 24.1%; expected dividend yield of
1.48%.





A summary
of stock option activity under the Company’s share-based compensation plans for
the nine months ended September 30, 2009 is presented in the following
table:





WeightedAverageWeighted
                  
                  
                  Remaining
                  
                  
                  AggregateAverage
                  
                  
                  Contractual
      Life
                  
                  
                  IntrinsicOptions
                  
                  
                  Exercise Price
                  
                  
                  (Years)
                  
                  
                  Value (1)Outstanding
      as of beginning of period
                  
                  
                  118,115
                  
                  
                  $
                  28.30
                  
                  
                  
                  3.66
                  
                  
                  $
                  -Granted
                  
                  
                  109,564
                  
                  
                  
                  8.20
                  
                  
                  
                  4.27Exercised
                  
                  
                  (1,118
                  )
                  
                  
                  9.22Forfeited
      and expired
                  
                  
                  (3,079
                  )
                  
                  
                  9.22Outstanding
      as of September 30, 2009
                  
                  
                  223,482
                  
                  
                  $
                  18.80
                  
                  
                  
                  3.63
                  
                  
                  $
                  861,012Exercisable
      as of September 30, 2009
                  
                  
                  42,315
                  
                  
                  $
                  27.39
                  
                  
                  
                  1.83
                  
                  
                  $
                  -







(1)
            The
      intrinsic value of a stock option represents the amount by which the fair
      value of the underlying stock, measured by reference to the closing price
      of the ordinary shares of $16.33 in the NASDAQ Global Select Market on
      September 30, 2009, exceeds the exercise price of the
    option.


8


As of
September 30, 2009, 181,167 non-vested options and 42,315 vested options were
outstanding, with weighted average exercise prices of $18.80 and $27.39,
respectively, and average remaining contractual lives of 3.63 years and 1.83
years, respectively.  The total remaining unrecognized compensation
costs related to unvested stock-based arrangements were $276,173 as of September
30, 2009 and are expected to be recognized over a weighted average period of
4.05 years.





As of
September 30, 2009, unrecognized compensation costs relating to convertible
preference shares outstanding were $104,752, and are expected to be recognized
over a weighted average period of 1.30 years.





3.  Segment
information





The
Company considers its (i) operations to supply water to retail customers, (ii)
operations to supply water to bulk customers, and (iii) providing of
engineering, management and construction services, as separate business
segments. Financial information for each of these segments is as
follows:





Three Months Ended September 30,
      2009Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  5,659,390
                  
                  
                  $
                  6,687,836
                  
                  
                  $
                  1,178,833
                  
                  
                  $
                  13,526,059Cost
      of revenues
                  
                  
                  2,421,740
                  
                  
                  
                  5,302,535
                  
                  
                  
                  765,716
                  
                  
                  
                  8,489,991Gross
      profit
                  
                  
                  3,237,650
                  
                  
                  
                  1,385,301
                  
                  
                  
                  413,117
                  
                  
                  
                  5,036,068General
      and administrative expenses
                  
                  
                  2,166,765
                  
                  
                  
                  451,860
                  
                  
                  
                  52,544
                  
                  
                  
                  2,671,169Income
      from operations
                  
                  
                  1,070,885
                  
                  
                  
                  933,441
                  
                  
                  
                  360,573
                  
                  
                  
                  2,364,899Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,637,237
                  )Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  727,662Income
      (loss) attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  69,762Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  657,900





Nine Months Ended September 30,
      2009Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  18,418,103
                  
                  
                  $
                  19,526,044
                  
                  
                  $
                  6,900,965
                  
                  
                  $
                  44,845,112Cost
      of revenues
                  
                  
                  7,390,251
                  
                  
                  
                  15,239,258
                  
                  
                  
                  3,611,992
                  
                  
                  
                  26,241,501Gross
      profit
                  
                  
                  11,027,852
                  
                  
                  
                  4,286,786
                  
                  
                  
                  3,288,973
                  
                  
                  
                  18,603,611General
      and administrative expenses
                  
                  
                  6,265,793
                  
                  
                  
                  1,412,430
                  
                  
                  
                  164,211
                  
                  
                  
                  7,842,434Income
      from operations
                  
                  
                  4,762,059
                  
                  
                  
                  2,874,356
                  
                  
                  
                  3,124,762
                  
                  
                  
                  10,761,177Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,303,376
                  )Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7,457,801Income
      (loss) attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  382,144Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  7,075,657As
      of September 30, 2009:Property
      plant and equipment, net
                  
                  $
                  21,973,112
                  
                  
                  $
                  32,886,407
                  
                  
                  $
                  1,453,976
                  
                  
                  $
                  56,313,495Construction
      in progress
                  
                  
                  6,206,443
                  
                  
                  
                  45,332
                  
                  
                  
                  -
                  
                  
                  
                  6,251,775Total
      assets
                  
                  
                  83,640,898
                  
                  
                  
                  64,287,265
                  
                  
                  
                  8,768,996
                  
                  
                  
                  156,697,159





Three Months Ended September 30,
      2008Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  5,833,347
                  
                  
                  $
                  8,002,586
                  
                  
                  $
                  3,368,660
                  
                  
                  $
                  17,204,593Cost
      of revenues
                  
                  
                  2,862,070
                  
                  
                  
                  6,968,547
                  
                  
                  
                  2,748,715
                  
                  
                  
                  12,579,332Gross
      profit
                  
                  
                  2,971,277
                  
                  
                  
                  1,034,039
                  
                  
                  
                  619,945
                  
                  
                  
                  4,625,261General
      and administrative expenses
                  
                  
                  1,704,207
                  
                  
                  
                  353,355
                  
                  
                  
                  71,092
                  
                  
                  
                  2,128,654Income
      from operations
                  
                  
                  1,267,070
                  
                  
                  
                  680,684
                  
                  
                  
                  548,853
                  
                  
                  
                  2,496,607Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (715,976
                  )Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,780,631Income
      (loss) attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  614Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,780,017





Nine Months Ended September 30,
      2008Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  17,855,530
                  
                  
                  $
                  22,648,443
                  
                  
                  $
                  8,834,766
                  
                  
                  $
                  49,338,739Cost
      of revenues
                  
                  
                  8,209,513
                  
                  
                  
                  19,620,430
                  
                  
                  
                  7,440,300
                  
                  
                  
                  35,270,243Gross
      profit
                  
                  
                  9,646,017
                  
                  
                  
                  3,028,013
                  
                  
                  
                  1,394,466
                  
                  
                  
                  14,068,496General
      and administrative expenses
                  
                  
                  5,482,742
                  
                  
                  
                  1,054,660
                  
                  
                  
                  217,500
                  
                  
                  
                  6,754,902Income
      from operations
                  
                  
                  4,163,275
                  
                  
                  
                  1,973,353
                  
                  
                  
                  1,176,966
                  
                  
                  
                  7,313,594Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,923,100
                  )Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,390,494Income
      (loss) attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (43,019
                  )Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  5,433,513As
      of September 30, 2008:Property
      plant and equipment, net
                  
                  $
                  22,830,904
                  
                  
                  $
                  34,296,185
                  
                  
                  $
                  1,868,460
                  
                  
                  $
                  58,995,549Construction
      in progress
                  
                  
                  4,120,195
                  
                  
                  
                  2,012,533
                  
                  
                  
                  -
                  
                  
                  
                  6,132,728Total
      assets
                  
                  
                  85,233,947
                  
                  
                  
                  62,789,077
                  
                  
                  
                  6,013,658
                  
                  
                  
                  154,036,682


9


4.  Earnings
per share





Basic
earnings per common share (“EPS”) is calculated by dividing net income
attributable to controlling interests by the weighted average number of common
shares outstanding during the period. The computation of diluted EPS assumes the
issuance of common shares for all dilutive-potential common shares outstanding
during the reporting period. The dilutive effect of stock options is considered
in diluted EPS calculations using the treasury stock method.





The
following summarizes information related to the computation of basic and diluted
EPS for the three and nine months ended September 30, 2009 and
2008.





Three Months Ended
                                          September 30,
                                        
                                        
                                        Nine Months Ended
                                          September 30,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2009
                                        
                                        
                                        2008Net
      income attributable to controlling interests
                                        
                                        $
                                        657,900
                                        
                                        
                                        $
                                        1,780,017
                                        
                                        
                                        $
                                        7,075,657
                                        
                                        
                                        $
                                        5,433,513Less:Dividends
      declared and earnings attributable to preferred shares
                                        
                                        
                                        (1,202
                                        )
                                        
                                        
                                        (1,175
                                        )
                                        
                                        
                                        (4,387
                                        )
                                        
                                        
                                        (4,613
                                        )Net
      income available to holders of common shares in the determination of basic
      and diluted earnings per share
                                        
                                        $
                                        656,698
                                        
                                        
                                        $
                                        1,778,842
                                        
                                        
                                        $
                                        7,071,270
                                        
                                        
                                        $
                                        5,428,900Weighted
      average number of common shares used in the determination of basic
      earnings per common share
                                        
                                        
                                        14,537,041
                                        
                                        
                                        
                                        14,523,016
                                        
                                        
                                        
                                        14,533,097
                                        
                                        
                                        
                                        14,516,869Plus:Weighted
      average number of preferred shares outstanding during the
      period
                                        
                                        
                                        17,914
                                        
                                        
                                        
                                        18,320
                                        
                                        
                                        
                                        17,812
                                        
                                        
                                        
                                        19,714Potential
      dilutive effect of unexercised options
                                        
                                        
                                        56,646
                                        
                                        
                                        
                                        2,149
                                        
                                        
                                        
                                        32,341
                                        
                                        
                                        
                                        2,202Weighted
      average number of common shares used in the determination of diluted
      earnings per common share
                                        
                                        
                                        14,611,601
                                        
                                        
                                        
                                        14,543,485
                                        
                                        
                                        
                                        14,583,250
                                        
                                        
                                        
                                        14,538,785





5.  Impact
of recent accounting pronouncements





Adoption of New Accounting
Standards





In June
2009, the Company adopted The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles. This standard established the FASB Accounting
Standards Codification (“Codification”) as the source of authoritative U.S.
generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative U.S. GAAP for SEC
registrants.  The Codification became effective for financial
statements issued for interim and annual periods ending after September 15,
2009.  The Codification supersedes all existing non-SEC accounting and
reporting standards.  All other nongrandfathered, non-SEC accounting
literature not included in the Codification became
nonauthoritative.  As a result of this standard, the FASB will no
longer issue new standards in the form of Statements, FASB Staff Positions, or
Emerging Issues Task Force Abstracts.  Instead, the FASB will issue
Accounting Standards Updates, which will serve only to: (a) update the
Codification; (b) provide background information about the guidance; and (c)
provide the bases for conclusions on the change(s) in the
Codification.  The U.S. GAAP hierarchy has been modified to include
only two levels of U.S. GAAP, authoritative and nonauthoritative.  In
the FASB’s view, the Codification does not change U.S. GAAP.  The
adoption of this standard did not have a material impact on the Company’s
financial position or results of operations.  The Codification did,
however, result in the elimination of the references to specific U.S. GAAP
contained within the consolidated financial statements, notes thereto and
information included in the Company’s previous filings with the
SEC.





Effect of Newly Issued But
Not Yet Effective Accounting Standards





In June
2009, the FASB issued SFAS No. 167, Amendment to Interpretation
46(R) (“SFAS No. 167”), which has not yet been integrated into the
Codification.  SFAS No. 167 amends the consolidation guidance
applicable to variable interest entities to replace the quantitative-based risks
and rewards calculation for determining which enterprise, if any, has a
controlling financial interest in a variable interest entity with an approach
focused on identifying which enterprise has the power to direct the activities
of a variable interest entity that most significantly impact the entity’s
economic performance and (1) the obligation to absorb losses of the entity or
(2) the right to receive benefits from the entity.  An approach that
is expected to be primarily qualitative will be more effective for identifying
which enterprise has a controlling financial interest in a variable interest
entity.  SFAS No. 167 requires an additional reconsideration event
when determining whether an entity is a variable interest entity when any
changes in facts and circumstances occur such that the holders of the equity
investment at risk, as a group, lose the power from voting rights or similar
rights of those investments to direct the activities of the entity that most
significantly impact the entity’s economic performance.  It also
requires ongoing assessments of whether an enterprise is the primary beneficiary
of a variable interest entity.  These requirements will provide more
relevant and timely information to users of financial
statements.  SFAS No. 167 amends the consolidation guidance applicable
to variable interest entities to require enhanced disclosures that will provide
users of financial statements with more transparent information about an
enterprise’s involvement in a variable interest entity.  The enhanced
disclosures are required for any enterprise that holds a variable interest in a
variable interest entity.  SFAS No. 167 is effective for fiscal years
beginning after November 15, 2009.  The Company is in the process of
evaluating the effect, if any, the adoption of SFAS No. 167 will have on its
financial statements.


10


6.  Investment
in and loan to affiliate





The
Company owns 50% of the outstanding voting common shares and a 43.5% equity
interest in the profits of Ocean Conversion (BVI) Ltd. (“OC-BVI”). The Company
also owns certain profit sharing rights in OC-BVI that raise its effective
interest in the profits of OC-BVI to approximately 45%. Pursuant to a management
services agreement, OC-BVI pays the Company monthly fees for certain engineering
and administrative services.





OC-BVI’s
sole customer is the Ministry of Communications and Works of the Government of
the British Virgin Islands (the “Ministry”). Through December 31, 2008,
substantially all of the water sold to the Ministry was produced by a
desalination plant located at Baughers Bay, Tortola (the “Baughers Bay plant”),
which has a capacity of 1.7 million U.S. gallons per day.





During
2007, OC-BVI completed, for a total cost of approximately $8.2 million, the
construction of a 700,000 U.S. gallons per day desalination plant located at Bar
Bay, Tortola (the “Bar Bay plant”).  The Company provided OC-BVI with
a $3.0 million loan to fund part of this plant’s construction costs, of which
$2.0 million remained outstanding as of June 30, 2009. Principal on this loan
was payable in quarterly installments of $125,000 with a final balloon payment
of $2.0 million due on August 31, 2009 and interest on the loan was due
quarterly at the rate of LIBOR plus 3.5%.  On August 20, 2009, the
Company and OC-BVI amended the terms of this loan, increasing its balance to
$2,800,000 by converting $800,000 in trade receivables due to the Company from
OC-BVI.   Under the terms of this amendment, the interest rate on
the loan was increased to the rate of LIBOR plus 5.5% and the maturity date for
the final balloon payment extended to August 31, 2011.





On
December 19, 2008, OC-BVI and the BVI government executed a binding term sheet
(the “Bar Bay Agreement”) for the purchase of water by the BVI government from
OC-BVI’s Bar Bay plant. The parties intend the Bar Bay Agreement to govern the
terms of sale of water by OC-BVI to the BVI government until the parties execute
a definitive contract. Under the terms of the Bar Bay Agreement, OC-BVI will
deliver up to 600,000 U.S. gallons of water per day to the BVI government from
the Bar Bay plant and the BVI government will be obligated to pay for this water
at a specified price, as adjusted by a monthly energy factor.  Prior
to completion of the construction of the first phase of certain additional
facilities by OC-BVI in August 2009, the BVI government was not obligated to
purchase any minimum volumes of water from OC-BVI. However, since completion of
this first phase, the BVI government has been obligated to purchase at least
600,000 U.S. gallons of water per day from the plant.  The first phase
of such facilities construction involved the installation of water pipes from
the plant to a BVI government-owned reservoir site and from this site to the BVI
government’s piped water distribution system.  A second phase of
construction requires OC-BVI to complete a storage reservoir on the BVI
government site within twelve months of the signing of the proposed seven-year
definitive contract. The proposed seven-year definitive contract is expected to
include a seven-year extension option exercisable by the BVI
government.   Negotiations on the definitive contract continued to be
in-progress through the date of this filing.  OC-BVI began selling water
from the Bar Bay plant to the BVI government during the first quarter of
2009.





The
Company’s investment in and loan to OC-BVI are comprised of the
following:





September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Equity
      investment (including profit sharing rights)
                  
                  $
                  9,320,482
                  
                  
                  $
                  12,121,312Loan
      receivable - Bar Bay plant construction
                  
                  
                  2,800,000
                  
                  
                  
                  2,250,000$
                  12,120,482
                  
                  
                  $
                  14,371,312


11


Summarized
statement of income information for OC-BVI is presented below:





Three Months EndedSeptember
      30,
                  
                  
                  Nine Months EndedSeptember
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Water
      revenues
                  
                  $
                  (263,982
                  )
                  
                  $
                  1,531,170
                  
                  
                  $
                  5,140,192
                  
                  
                  $
                  4,762,494Adjustment
      for revenue deferral (see Baughers Bay dispute below)
                  
                  
                  617,826
                  
                  
                  
                  (1,495,877
                  )
                  
                  
                  (4,559,795
                  )
                  
                  
                  (4,657,879
                  )Total
      adjusted revenues
                  
                  
                  353,844
                  
                  
                  
                  35,293
                  
                  
                  
                  580,397
                  
                  
                  
                  104,615Gross
      profit (loss)
                  
                  
                  (3,001,543
                  )
                  
                  
                  (1,072,123
                  )
                  
                  
                  (5,115,631
                  )
                  
                  
                  (3,028,817
                  )Income
      (loss) from operations
                  
                  
                  (3,184,181
                  )
                  
                  
                  (1,314,412
                  )
                  
                  
                  (5,824,172
                  )
                  
                  
                  (3,829,172
                  )Net
      income (loss)
                  
                  $
                  (4,571,973
                  )
                  
                  $
                  (1,354,888
                  )
                  
                  $
                  (5,921,782
                  )
                  
                  $
                  (3,957,780
                  )





The
Company recognized losses of $(1,582,248) and $(639,546) on its equity
investment in OC-BVI for the three months ended September 30, 2009 and 2008,
respectively, and $(2,780,270) and $(1,772,570) for the nine months ended
September 30, 2009 and 2008, respectively.  The losses recognized by
the Company on its equity investment in OC-BVI for the three and nine months
ended September 30, 2009 include an impairment loss of $160,000 on the
carrying value of the Company’s equity investment in OC-BVI arising from the
Baughers Bay dispute (see further discussion below).





In
addition to the Company’s loan to and equity investment in OC-BVI of $12,120,482
as of September 30, 2009,  the Company’s recorded value of its OC-BVI
management services agreement, which is reflected as an intangible asset on the
Company’s consolidated balance sheet, was approximately $856,000 as of September
30, 2009.





Baughers
Bay dispute:





In
October 2006, OC-BVI notified the Company that the Ministry had asserted a
purported right of ownership of the Baughers Bay plant pursuant to the terms of
the Water Supply Agreement between the parties dated May 1990 (the “1990
Agreement”) and had invited OC-BVI to submit a proposal for its continued
involvement in the production of water at the Baughers Bay plant in light of the
Ministry’s planned assumption of ownership.





Under the
terms of the 1990 Agreement, upon the expiration of the initial seven year term
in May 1999, the agreement would automatically be extended for another seven
year term unless the Ministry provided notice, at least eight months prior to
such expiration, of its decision to purchase the plant from OC-BVI for
approximately $1.42 million.





In
correspondence between the parties from late 1998 through early 2000, the
Ministry indicated that the BVI government intended to purchase the plant but
would be amenable to negotiating a new water supply agreement, and that it
considered the 1990 Agreement to be in force on a monthly basis until
negotiations between the BVI government and OC-BVI were concluded. Occasional
discussions were held between the parties since 2000 without resolution of the
matter. OC-BVI has continued to supply water to the Ministry and expended
approximately $4.7 million between 1995 and 2003 to significantly expand the
production capacity of the plant beyond that set forth under the 1990
Agreement.





OC-BVI
submitted a proposal to the Ministry in late 2006 to continue to supply water
from the Baughers Bay plant. The Ministry held discussions with OC-BVI regarding
a new contract but did not formally respond to OC-BVI’s proposal. Early in 2007,
the Ministry unilaterally took the position that until such time as a new
agreement was reached on the ownership of the plant and the price for the water
produced by the plant, the Ministry would only pay that amount of OC-BVI’s
billings that the Ministry purported constituted OC-BVI’s costs of producing the
water. OC-BVI responded to the Ministry that the amount the Ministry proposed to
pay was significantly less than OC-BVI’s production costs. Payments made by the
Ministry to OC-BVI since the Ministry’s assumption of this reduced price have
been sporadic.  On November 15, 2007, OC-BVI issued a demand letter to
the BVI government for approximately $6.2 million representing amounts that
OC-BVI claimed were due by the BVI government for water sold and delivered plus
interest and legal fees. In response to OC-BVI’s demand for payment, the BVI
government issued a letter dated November 19, 2007, that reasserted its claim
that ownership of the Baughers Bay plant has passed to the BVI government and
rejected OC-BVI’s claim for payment.  On November 22, 2007, OC-BVI’s
management was informed that the BVI government had filed a lawsuit with the
Eastern Caribbean Supreme Court (the “Court”) seeking ownership and possession
of the Baughers Bay plant.  OC-BVI counterclaimed that it was entitled
to continued possession and operation of the Baughers Bay plant until the BVI
government paid OC-BVI approximately $4.7 million, which OC-BVI believes
represents the value of the Baughers Bay plant at its present expanded
production capacity.  OC-BVI took the legal position that since the
BVI government never paid the $1.42 million to purchase the Baughers Bay plant,
the 1990 agreement terminated on May 31, 1999, which was eight months after the
date that the Ministry provided written notice of its intention to purchase the
plant.


12


On July
4, 2008, OC-BVI filed a claim with the Court seeking recovery of $7,806,629,
representing amounts owed to OC-BVI for water sold and delivered to the BVI
government from the Baughers Bay  plant  through May 31,
2008, $842,188 for interest accrued on amounts owed as of May 31, 2008 and
future interest and costs.  This claim was amended and increased on
April 22, 2009 to $13,773,954 for amounts owed for water delivered through March
31, 2009 plus accrued interest of $2,537,334 on amounts owed as of March 31,
2009 plus future interest and costs.  The $13,773,954 amount
represented amounts billed at the contract prices in effect before the BVI
government asserted its purported right of ownership of the
plant.





The Court
held a three-day trial from July 22 through July 24, 2009 to address both the
Baughers Bay ownership issue and OC-BVI’s claim for payment of amounts owed for
water sold and delivered to the BVI government.  On September 17,
2009, the Court issued a preliminary ruling with respect to the litigation
between the BVI government and OC-BVI.  The Court determined that the
BVI government was entitled to immediate possession of the Baughers Bay plant
and dismissed OC-BVI’s claim for compensation of approximately $4.7 million for
the expenditures made to expand the production capacity of the
plant.  As a result of this determination by the Court, OC-BVI
recorded an impairment loss of approximately $2.1 million during the three
months ended September 30, 2009 for fixed assets associated with the Baughers
Bay plant. However, the Court determined that OC-BVI was entitled to full
payment of water invoices issued up to December 20, 2007, which had been
calculated under the terms of the original 1990 Agreement, and ordered the BVI
government to make an immediate interim payment of $5.0 million to OC-BVI for
amounts owed to OC-BVI.  The Court deferred deciding the entire
dispute between the parties until it could conduct a hearing to determine the
reasonable rate for water produced by OC-BVI for the period from December 20,
2007 to the present.





After
conducting hearings on October 12 and 16, 2009, on October 28, 2009, the Court
ordered the BVI government to pay OC-BVI at the rate of $13.91 per thousand
imperial gallons for water produced by OC-BVI from December 20, 2007 to present,
which amounts to a total recovery for OC-BVI of $10.1 million as of September
30, 2009, excluding any interest which may be due on this
balance.  OC-BVI intends to seek clarification from the Court on
November 13, 2009 with respect to the amount of interest, if any, which must be
paid on the monetary judgment.  The BVI government has not yet made
any payments to OC-BVI under the Court order.





On
October 28, 2009 OC-BVI filed an appeal with the Eastern Caribbean Court of
Appeals (the “Appellate Court”) asking the Appellate Court to review the
September 17, 2009 ruling by the Eastern Caribbean Supreme Court as it relates
to OC-BVI’s claim for compensation for the $4.7 million in expenditures made to
expand the production capacity of the Baughers Bay plant.





On
October 29, 2009, the BVI government filed an appeal with the Appellate Court
seeking the Appellate Court’s review of the September 17, 2009 ruling of the
Court that the BVI government pay OC-BVI the reasonable rate for water produced
by OC-BVI for the period from December 20, 2007 to the present.  The
BVI government is requesting a ruling from the Appellate Court that the BVI
government should only pay OC-BVI the actual cost of water produced at the
plant.





Effective
January 1, 2008, OC-BVI changed its policy for the recording of revenues from
the Baughers Bay plant from the accrual to the equivalent of the cash method.
All amounts billed by OC-BVI to the BVI government relating to Baughers Bay for
water delivered subsequent to December 31, 2007 have been recorded as deferred
revenues by OC-BVI. As a result of this adjustment to OC-BVI’s revenues, the
Company has recorded losses from its equity in OC-BVI’s results of operations
for all fiscal quarters subsequent to December 31, 2007.   Any
cash payments made by the BVI government on Baughers Bay-related invoices were
applied by OC-BVI to the remaining balance of OC-BVI’s outstanding accounts
receivable that arose from billings for periods prior to and including December
2007 and thus were not recognized as revenues.  Sufficient payments
were received from the BVI government during the three months ended September
30, 2009 to repay the remaining accounts receivable balance relating to periods
prior to December 31, 2007.  OC-BVI continues to apply the equivalent
of the cash method with respect to the recognition of revenues from Baughers
Bay.  Consequently, OC-BVI will not recognize as revenue any
amounts ordered by the Court to be paid until such amounts are paid by the
BVI government. OC-BVI is also applying the equivalent of the cash basis of
accounting for revenue recognition for its Bar Bay plant until such time as a
definitive contract is signed for this plant.





The
Company accounts for its investment in OC-BVI in accordance with the equity
method of accounting for investments in common stock. This method requires
recognition of a loss on an equity investment that is other than temporary, and
indicates that the fair value of an equity investment that is less than its
carrying amount may indicate a loss in the value of the investment. To test for
possible impairment of its investment in OC-BVI, the Company estimated its fair
value as of September 30, 2009. In making this estimate, Company management
calculated the expected cash flows from its investment in OC-BVI by (i)
identifying various possible outcomes of the Baughers Bay dispute and
negotiations for a definitive contract on the new Bar Bay plant; (ii) estimating
the cash flows associated with each possible outcome, and (iii) assigning a
probability to each outcome based upon discussions held to date by OC-BVI’s
management with the BVI government and OC-BVI’s legal counsel. The resulting
probability-weighted sum represents the expected cash flows, and the Company’s
best estimate of future cash flows, to be derived from its investment in OC-BVI.
After considering the September and October 2009 rulings of the Court, the
Company determined that the carrying value of its investment in OC-BVI exceeded
the estimated fair value for its investment in OC-BVI by approximately $160,000
as of September 30, 2009 and therefore recognized an impairment loss of
this amount on this investment for the three months ended September 30, 2009. As
a result of further developments, the Company could be required to record
further such impairment losses on its investment in OC-BVI in the
future.





The
identification of the possible outcomes for the Baughers Bay dispute and Bar Bay
negotiations, the projections of cash flows for each outcome, and the assignment
of relative probabilities to each outcome all represent significant estimates
made by the Company’s management. The ultimate resolution of the Baughers Bay
dispute and Bar Bay definitive contract negotiations may differ significantly
from management’s estimates and may result in actual cash flows from OC-BVI that
vary materially from the expected cash flows used by Company management in
determining OC-BVI’s fair value as of September 30, 2009.  OC-BVI may
be unable to negotiate a new operating agreement for the Baughers Bay plant. The
Appellate Court may ultimately overturn the ruling of the Court requiring the
BVI government to pay OC-BVI at the rate of $13.91 per thousand imperial gallons
for water previously supplied.  OC-BVI may be unsuccessful in
finalizing a definitive contract for the Bar Bay plant on terms it finds
acceptable.  Any of these or other possible outcomes could result in
actual cash flows from the Company’s investment in OC-BVI that are significantly
lower than management’s current estimate.  In such case, the Company
could be required to record further impairment losses to reduce the carrying
value of its investment in OC-BVI. Such impairment losses would reduce the
Company’s earnings and could have a material adverse impact on its results of
operations and financial condition.





The
Company is not presently able to determine what impact the ultimate resolution
of this matter may have on its results of operations or financial
condition.


13


7.  Consolidated
Water (Bermuda) Limited





In June
2006, the Company formed a Bermuda-based affiliate, Consolidated Water (Bermuda)
Limited (“CW-Bermuda”) with two other shareholders. The Company owns 40% of the
equity interest and voting rights of CW-Bermuda. In January 2007, CW-Bermuda
entered into a contract with the Government of Bermuda for the design,
construction and sale of a 600,000 U.S. gallons per day desalination plant to be
located on Tynes Bay along the northern coast of Bermuda and in March 2008 the
Government of Bermuda agreed to a second phase of construction that would expand
the plant’s capacity to 1.2 million U.S. gallons per day. Under the agreement,
CW-Bermuda constructed the plant and will operate it for 12 months after its
commissioning and sale to the Government of Bermuda. CW-Bermuda received a
Certificate of Substantial Completion for Phase 1 on April 13, 2009.  The
second phase is scheduled for completion by the end of 2009, pending the
provision by the Bermuda government of a sufficient energy supply for the second
phase.





The
Company has entered into a services agreement with CW-Bermuda for the design,
construction and operation of the Tynes Bay plant, under which it receives fees
for direct services, purchasing activities and proprietary
technology.  The Company began earning revenues under this agreement
in January 2009.





Because
(i) the equity investment in CW-Bermuda is not sufficient to permit it to
finance its activities without the loan from the Company; (ii) the other
investors in CW-Bermuda have no obligation to absorb any amount of its losses
should losses arise; and (iii) the Company expects economic benefits from
CW-Bermuda that are significantly greater than the Company’s voting rights of
40%, CW-Bermuda constitutes a variable interest entity in which the Company is
the primary beneficiary and accordingly, consolidates the results of CW-Bermuda
in its financial statements. The assets and liabilities (all of which are
current) of CW-Bermuda included in the Company’s condensed consolidated balance
sheet amounted to approximately $1,716,000 and $756,000, respectively, as of
September 30, 2009.  The Company has not provided any guarantees
related to CW-Bermuda and any creditors of CW-Bermuda do not have recourse to
the general credit of the Company as a result of including CW-Bermuda in the
Company’s consolidated financial statements. The results of CW-Bermuda are
reflected in the Company’s services segment.





8.  Litigation
settlement





On
November 17, 2006, Gruppozecca Bahamas Limited (“GBL”) filed a Statement of
Claim in the Supreme Court of the Commonwealth of The Bahamas against CW-Bahamas
seeking damages in excess of $950,000 for CW-Bahamas alleged breach of its
obligations under an agreement between GBL and CW-Bahamas relating to the
construction of our Blue Hills plant.  On April 2, 2009, this
litigation was settled and all claims against CW-Bahamas were dismissed in
exchange for a final progress payment under the construction agreement between
the parties in the amount of $480,000.





9.  Subsequent
events





The
Company considered the accounting and disclosure of events occurring after the
balance sheet date through the date and time the Company’s financial statements
were issued on November 9, 2009.


14


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Cautionary
Note Regarding Forward-Looking Statements





This
Quarterly Report on Form 10-Q contains forward-looking statements, including but
not limited to, statements regarding our future revenues, future plans,
objectives, expectations and events, assumptions and estimates. Forward-looking
statements can be identified by use of the words or phrases “will,” “will likely
result,” “are expected to,” “will continue,” “estimate,” “project,” “potential,”
“believe,” “plan,” “anticipate,” “expect,” “intend,” or similar expressions and
variations of such words. Statements that are not historical facts are based on
our current expectations, beliefs, assumptions, estimates, forecasts and
projections for our business and the industry and markets related to our
business.





The
forward-looking statements contained in this report are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Actual outcomes and results may differ materially from
what is expressed in such forward-looking statements. Important factors which
may affect these actual outcomes and results include, without limitation,
tourism and weather conditions in the areas we service, scheduled new
construction within our operating areas, the economies of the U.S. and the areas
we service, regulatory matters, the resolution of pending litigation,
availability of capital to repay debt and for expansion of our operations, and
other factors, including those “Risk Factors” set forth under Part II, Item 1A
in this Quarterly Report and in our 2008 Annual Report on Form
10-K.





The
forward-looking statements in this Quarterly Report speak as of its date. We
expressly disclaim any obligation or undertaking to update or revise any
forward-looking statement contained in this Quarterly Report to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any forward-looking statement is based,
except as may be required by law.





Unless
otherwise indicated, references to “we,” “our,” “ours” and “us” refer to
Consolidated Water Co. Ltd., its subsidiaries and consolidated
affiliate.





Critical
Accounting Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Our actual results could differ
significantly from such estimates and assumptions.





Certain
of our accounting estimates or assumptions constitute “critical accounting
estimates” for us due to the fact that:





•
            the nature of these estimates or
      assumptions is material due to the levels of subjectivity and judgment
      necessary to account for highly uncertain matters or the susceptibility of
      such matters to change; and





•
            the impact of the estimates and
      assumptions on financial condition and results of operations is
      material.





Our
critical accounting estimates relate to (i) the valuation of our equity
investment in our affiliate, OC-BVI; (ii) goodwill and intangible assets; and
(iii) plant construction revenues and costs.





Valuation of Equity Investment in
Affiliate. We account for our investment in OC-BVI in accordance with the
equity method of accounting for investments in common stock. This method
requires recognition of a loss on an equity investment that is other than
temporary, and indicates that a current fair value of an equity investment that
is less than its carrying amount may indicate a loss in the value of the
investment. OC-BVI’s on-going dispute with the BVI government over the ownership
of its Baughers Bay plant may indicate that the current fair value of our
investment in OC-BVI is less than our carrying value for this
investment.





As a
quoted market price for OC-BVI’s stock is not available, to test for possible
impairment of our investment in OC-BVI we estimate its fair value by calculating
the expected cash flows from our investment in OC-BVI by (i) identifying various
possible outcomes of the Baughers Bay dispute and negotiations for a definitive
contract for OC-BVI’s new Bar Bay plant; (ii) estimating the cash flows
associated with each possible outcome, and (iii) assigning a probability to each
outcome based upon discussions held to date by OC-BVI’s management with the BVI
government and OC-BVI’s legal counsel. The resulting probability weighted sum
represents the expected cash flows, and our best estimate of future cash flows,
to be derived from our investment in OC-BVI. After considering the September and
October 2009 rulings of the Eastern Caribbean Supreme Court with respect to the
litigation for the Baughers Bay dispute, we determined that the carrying value
of our investment in OC-BVI exceeded the estimated fair value for our investment
in OC-BVI by approximately $160,000 as of September 30, 2009 and we have
therefore recognized an impairment loss of this amount on this investment, which
is included in the loss of approximately $(1.6 million) we recognized for our
equity in the loss of OC-BVI for the three months ended September 30, 2009. As a
result of further developments, we could be required to record further such
impairment losses on our investment in OC-BVI in the future.


15


The
identification of the possible outcomes for the Baughers Bay dispute, the
projections of cash flows for each outcome and the assignment of relative
probabilities to each outcome all represent significant estimates made by us.
While we have used our best judgment to identify the possible outcomes and
expected cash flows for these outcomes and assign relative probabilities to each
outcome, these estimates are by their nature highly subjective and are also
subject to material change by our management over time based upon additional
information from OC-BVI’s management and legal counsel, a change in the status
of negotiations and/or OC-BVI’s litigation with the BVI
government.  The ultimate resolutions of the Baughers Bay issue and
the negotiations for a definitive contract for the Bar Bay plant may differ
significantly from our estimates and may result in actual cash flows from OC-BVI
that vary materially from the expected cash flows we used in determining
OC-BVI’s fair value as of September 30, 2009. OC-BVI may be unable to
negotiate a new operating agreement for the Baughers Bay plant. An appellate
court may overturn the October 2009 ruling of the Eastern Caribbean Supreme
Court. OC-BVI may be unsuccessful in negotiating a definitive contract for
the Bar Bay plant on terms it finds acceptable. Any of these or other
possible outcomes could result in actual cash flows from our investment in
OC-BVI that are significantly lower than our current estimate. In such
case, we could be required to record further impairment losses to reduce the
carrying value of our investment in OC-BVI.  Such impairment losses
would reduce our earnings and could have a material adverse impact on our
results of operations and financial condition.





Goodwill and other intangible
assets. Goodwill represents the excess costs over fair value of the
assets of an acquired business. Goodwill and intangible assets acquired in a
business combination accounted for as a purchase and determined to have an
indefinite useful life are not amortized, but are tested for impairment at least
annually.  Intangible assets with estimable useful lives are amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment.  We periodically evaluate the possible
impairment of goodwill. Management identifies our reporting units and determines
the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units. We determine the fair value of each reporting unit by
calculating the expected cash flows from each reporting unit and compare the
fair value to the carrying amount of the reporting unit. To the extent the
carrying amount of the reporting unit exceeds the fair value of the reporting
unit, we are required to perform the second step of the impairment test, as this
is an indication that the reporting unit goodwill may be impaired. In this step,
we compare the implied fair value of the reporting unit goodwill with the
carrying amount of the reporting unit goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit to all
the assets (recognized and unrecognized) and liabilities of the reporting unit
in a manner similar to a purchase price allocation.  The residual fair
value after this allocation is the implied fair value of the reporting unit
goodwill. If the implied fair value is less than its carrying amount, the
impairment loss is recorded. Based upon our annual tests to date, we have not
experienced any impairment losses on our recorded amounts of
goodwill.





Plant construction revenue and cost
of plant construction revenue. We recognize revenue and related costs as
work progresses on fixed price contracts for the construction of desalination
plants to be sold to third parties using the percentage-of-completion method,
which relies on contract revenue and estimates of total expected costs. We
follow this method since we can make reasonably dependable estimates of the
revenue and costs applicable to various stages of a contract. Under the
percentage-of-completion method, we record revenue and recognize profit or loss
as work on the contract progresses. Our engineering personnel estimate total
project costs and profit to be earned on each long term, fixed price contract
prior to commencement of work on the contract and update these estimates as work
on the contract progresses. The cumulative amount of revenue recorded on a
contract at a specified point in time is that percentage of total estimated
revenue that incurred costs to date comprise of estimated total contract costs.
As work progresses, if the actual contract costs exceed estimates, the profit
recognized on revenue from that contract decreases. We recognize the full amount
of any estimated loss on a contract at the time the estimates indicate such a
loss. To date we have not experienced a material adverse variation from our cost
estimates for plants constructed for sale to third parties.





We assume
the risk that the costs associated with constructing the plant may be greater
than we anticipated in preparing our bid. However, the terms of each of the
sales contracts with our customers require us to guarantee the sales price for
the plant at the bid amount. Because we base our contracted sales price in part
on our estimation of future construction costs, the profitability of our plant
sales is dependent on our ability to estimate these costs accurately. The cost
estimates we prepare in connection with the construction of plants to be sold to
third parties are subject to inherent uncertainties. The cost of materials and
construction may increase significantly after we submit our bid for a plant due
to factors beyond our control, which could cause the gross margin for a plant to
be less than we anticipated when the bid was made. The profit margin we
initially expect to generate from a plant sale could be further affected by
other factors, such as feed water supply and quality conditions at the plant
site that differ materially from those we believed existed and relied upon when
we submitted our bid.


16


RESULTS
OF OPERATIONS





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and accompanying notes included under Part I,
Item 1 of this Quarterly Report and our consolidated financial statements and
accompanying notes included in our Annual Report on Form 10-K for our fiscal
year ended December 31, 2008 (“2008 Form 10-K”) and the information set forth
under Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” of our 2008 Form 10-K.





Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008





Consolidated
Results





Net
income attributable to controlling interests for the three months ended
September 30, 2009 was $657,900 ($0.05 per share on a fully-diluted basis) as
compared to $1,780,017 ($0.12 per share on a fully-diluted basis) for the three
months ended September 30, 2008.  Our results for both of these
periods were adversely affected by the losses we recorded for our equity
investment in OC-BVI (discussed below) which amounted to $(1,582,248) and
$(639,546) for the three months ended September 30, 2009 and 2008,
respectively.





Total
revenues for the three months ended September 30, 2009 and 2008 were $13,526,059
and $17,204,593, respectively.  The decrease in consolidated revenues
from 2008 to 2009 reflects lower revenues for all three of our business
segments. Gross profit for the three months ended September 30, 2009 was
$5,036,068, or 37% of total revenues, as compared to $4,625,261 or 27%, for the
three months ended September 30, 2008. Our retail and bulk segments reported
increased gross profits for 2009 as compared to 2008 while gross profit for our
service segment declined.   For further discussion of revenues and
gross profit for the three months ended September 30, 2009, see the analysis in
the “Results by Segment” section that follows.





General
and administrative (“G&A”) expenses on a consolidated basis were $2,671,169
for the three months ended September 30, 2009 as compared to $2,128,654 for same
quarter of 2008. Increases in (i) employee costs of approximately $108,000
attributable to salary increases; (ii) professional fees of approximately
$148,000; (iii) bank charges of $87,000 incurred by our Bahamas subsidiary to
convert Bahamian dollars to U.S. dollars and subsequently transfer such dollars
to other Company bank accounts; and (iv) costs incurred of approximately $69,000
to bid new projects constituted the majority of the additional G&A expense
for 2009.





We
reported losses from our investment in OC-BVI for the three months ended
September 30, 2009 and 2008 of approximately $(1,582,000) and $(640,000),
respectively.  The increase in the loss from our investment in OC-BVI
for 2009 as compared to 2008 reflects the recent rulings of the Eastern
Caribbean Supreme Court with respect to the litigation between OC-BVI and the
British Virgin Islands government and impairment losses recorded by us and
OC-BVI during 2009 as a result of these rulings. See further discussion of the
OC-BVI situation at “Liquidity and Capital Resources — Material Commitments,
Contingencies and Expenditures — OC-BVI Contract
Dispute.”





Results
by Segment





Retail
Segment:





The
retail segment contributed $1,070,885 to our income from operations for the
three months ended September 30, 2009, as compared to $1,267,070 for the three
months ended September 30, 2008.





Revenues
generated by our retail water operations were $5,659,390 and $5,833,347 for the
three months ended September 30, 2009 and 2008, respectively.  The
volume of water sold remained relatively unchanged from 2008 to
2009.  Price increases related to inflation adjustments which went
into effect during the first quarter of 2009 served to offset a decrease of
approximately $469,000 in revenues attributable to our pass-through billing of
energy costs to our customers, as energy prices declined significantly from 2008
to 2009.





Retail
segment gross profit was $3,237,650 (57% of revenues) and $2,971,277 (51% of
revenues) for the three months ended September 30, 2009 and 2008,
respectively.   The retail segment’s gross profit percentage in 2009
benefited from a reduction in certain operating and maintenance costs, lower
energy prices and, inflation-related adjustments to base water rates made in the
first quarter of 2009.





Consistent
with prior periods, we record all non-direct G&A expenses in our retail
business segment and do not allocate any of these non-direct costs to our other
two business segments. Retail G&A expenses for the three months ended
September 30, 2009 were $2,166,765 up $462,558 from the $1,704,207 in G&A
expenses for the three months ended September 30, 2008.  The increase
in G&A expenses for the three months ended September 30, 2009 as compared to
the comparable prior year period is primarily due to increases in (i) employee
costs of approximately $94,000 attributable to salary increases; (ii)
professional fees of approximately $135,000; and (iii) costs incurred of
approximately $69,000 to bid new projects.


17


Bulk
Segment:





The bulk
segment contributed $933,441 and $680,684 to our income from operations for the
three months ended September 30, 2009 and 2008, respectively.





Bulk
segment revenues were $6,687,836 and $8,002,586 for the three months ended
September 30, 2009 and 2008, respectively. Total gallons of water sold increased
by 7.0% in 2009 from 2008.  However, revenues from the bulk segment
decreased from 2008 to 2009 due to a reduction in energy costs passed through to
our customers, as diesel and electricity prices were significantly lower in 2009
than in 2008.





Gross
profit for our bulk segment was $1,385,301 and $1,034,039 for the three months
ended September 30, 2009 and 2008, respectively. Gross profit as a percentage of
bulk revenues was 21% for the three months ended September 30, 2009 and 13% for
the three months ended September 30, 2008. The improvement from 2008 to 2009 in
bulk gross profit dollars and bulk gross profit as a percentage of sales is
attributable to our Cayman operations and, to a lesser extent, our Bahamas
operations. Our Cayman gross profits benefited from (i) the expiration of the
original contract for the Red Gate plant and the elimination of approximately
$125,000 in amortization expense for the intangible asset associated with this
contract; and (ii) the annual inflation-related increases in base water rates
that went into effect during the first quarter of 2009.  The higher
gross profits for our Bahamas operations reflect improved operating efficiencies
for both our Windsor and Blue Hills operations located in Nassau, New
Providence. We constructed and commissioned new feed water wells and replaced
the reverse osmosis membranes on 50% of our production trains at our Windsor
plant effective September 2008 and replaced the reverse osmosis membranes on the
remaining production trains at the Windsor plant during the quarter ended June
30, 2009.  These capital expenditures have improved the energy
efficiency of the Windsor plant. In addition, last year we implemented an
improved feed water pretreatment regime at our Blue Hills plant in Nassau which
has reduced electrical power consumption at that plant. Our bulk segment gross
profit percentage for 2009 also benefited from a reduction in diesel and
electricity prices.





Bulk
segment G&A expenses for the three months ended September 30, 2009 increased
to $451,860 from $353,355 for the same period in 2008 due to an increase in bank
charges of approximately $87,000 incurred by our Bahamas subsidiary to convert
Bahamian dollars to U.S. dollars and subsequently transfer such dollars to other
Company bank accounts.





Services
Segment:





The
services segment contributed $360,573 and $548,853 to our income from operations
for the three months ended September 30, 2009 and 2008,
respectively.





Revenues
from services provided in 2009 were $1,178,833 as compared to $3,368,660 in
2008. Services revenues decreased from 2008 to 2009 due to relatively lower
project construction activity in 2009.





The
decrease in gross profit for the services segment to $413,117 in 2009 from
$619,945 in 2008 reflects lower construction revenues, which were partially
offset by fees earned on our services contract for the Tynes Bay, Bermuda
plant.





G&A
expenses for the services segment were $52,544 and $71,092 for 2009 and 2008,
respectively.





Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008





Consolidated
Results





Net
income attributable to controlling interests for the nine months ended September
30, 2009 was $7,075,657 ($0.49 per share on a fully-diluted basis) as compared
to $5,433,513 ($0.37 per share on a fully-diluted basis) for the nine months
ended September 30, 2008. Our results for both of these periods were adversely
affected by the losses we recorded for our equity investment in OC-BVI
(discussed below) which amounted to $(2,780,270) and $(1,772,570) for 2009 and
2008, respectively.





Total
revenues for the nine months ended September 30, 2009 and 2008 were $44,845,112
and $49,338,739, respectively.  The decrease in consolidated revenues
from 2008 to 2009 reflects lower revenues for our bulk and services segment.
Gross profit for the nine months ended September 30, 2009 was $18,603,611, or
41% of total revenues, as compared to $14,068,496, or 29%, for the nine months
ended September 30, 2008. All three segments reported increased gross profits
for 2009 as compared to 2008.  For further discussion of revenues and
gross profit for the nine months ended September 30, 2009, see the “Results by
Segment” analysis that follows.





General
and administrative (“G&A”) expenses on a consolidated basis were $7,842,434
for the nine months ended September 30, 2009 as compared to $6,754,902 for same
period of 2008. Increases in (i) employee costs of approximately $153,000
attributable to salary increases; (ii) professional fees of approximately
$141,000; (iii) insurance expenses of $96,000 due to higher premiums; (iv) bank
charges of approximately $164,000 resulting from our Bahamas subsidiary’s
conversion of  Bahamian dollars to U.S. dollars and the subsequent
transfer of such dollars to other Company bank accounts; and (v) costs incurred
of approximately $128,000 to bid new projects constituted the majority of the
additional G&A expense for 2009. Our G&A expense for 2009 also includes
approximately $183,000 in penalties and interest assessed against our Belize
operations for delinquent business taxes.





Interest
income decreased substantially, from approximately $1,097,000 in 2008 to
approximately $621,000 for 2009, as a result of a reduction in the rates of
interest earned on the average balances invested in interest bearing deposit
accounts.





We
reported losses from our investment in OC-BVI for the nine months ended
September 30, 2009 and 2008 of $(2,780,270) and $(1,772,570),
respectively.  The increase in the loss from our investment in OC-BVI
for 2009 as compared to 2008 reflects the recent rulings of the Eastern
Caribbean Supreme Court with respect to the litigation between OC-BVI and the
British Virgin Islands government and impairment losses recorded by us and
OC-BVI during the three months ended September 30, 2009 as a result of these
rulings.. See further discussion of the OC-BVI situation at “Liquidity and
Capital Resources — Material Commitments, Contingencies and Expenditures — OC-BVI Contract
Dispute.”





Results
by Segment





Retail
Segment:





The
retail segment contributed $4,762,059 to our income from operations for the nine
months ended September 30, 2009, as compared to $4,163,275 for the nine months
ended September 30, 2008.





Revenues
generated by our retail water operations were $18,418,103 and $17,855,530 for
the nine months ended September 30, 2009 and 2008, respectively.  The
volume of water sold increased by 2% in 2009 from 2008.  This increase
in volume and price increases related to inflation adjustments which went into
effect during the first quarter of 2009 served to offset a decrease of
approximately $913,000 in revenues attributable to our pass-through billing of
energy costs to our customers, as energy prices declined significantly from 2008
to 2009.





Retail
segment gross profit was $11,027,852 (60% of revenues) and $9,646,017 (54% of
revenues) for the nine months ended September 30, 2009 and 2008,
respectively.  The retail segment’s gross profit percentage in 2009
benefited from a reduction in certain operating and maintenance costs, lower
energy prices and, inflation-related adjustments to base water rates made
in the first quarter of 2009.


18





Consistent
with prior periods, we record all non-direct G&A expenses in our retail
business segment and do not allocate any of these non-direct costs to our other
two business segments. Retail G&A expenses for the nine months ended
September 30, 2009 were $6,265,793, up $783,051 from the $5,482,742 in G&A
expenses for the nine months ended September 30, 2008. Employee costs for 2009
exceeded those for 2008 by approximately $234,000 due to salary increases. Costs
incurred in connection with bidding for new projects in 2009 exceeded such costs
for 2008 by approximately $128,000 and professional fees for 2009 were
approximately $127,000 higher than for 2008.


Bulk
Segment:





The bulk
segment contributed $2,874,356 and $1,973,353 to our income from operations for
the nine months ended September 30, 2009 and 2008, respectively.





Bulk
segment revenues were $19,526,044 and $22,648,443 for the nine months ended
September 30, 2009 and 2008, respectively. Total gallons of water sold increased
by 3.0% in 2009 from 2008.  However, revenues from the bulk segment
decreased from 2008 to 2009 due to a reduction in energy costs passed through to
our customers, as diesel and electricity prices were significantly lower in 2009
than in 2008.





Gross
profit for our bulk segment was $4,286,786 and $3,028,013 for the nine months
ended September 30, 2009 and 2008, respectively. Gross profit as a percentage of
bulk revenues was 22% for the nine months ended September 30, 2009 and 13% for
the nine months ended September 30, 2008. The improvement from 2008 to 2009 in
bulk gross profit dollars and bulk gross profit as a percentage of sales is
attributable to our Cayman operations and, to a lesser extent, our Bahamas
operations. Our Cayman gross profits benefited from (i) the expiration of the
original contract for the Red Gate plant and the elimination of approximately
$400,000 in amortization expense for the intangible asset associated with this
contract; and (ii) the annual inflation-related increases in base water rates
that went into effect during the first quarter of 2009.  The higher
gross profits for our Bahamas operations reflect improved operating efficiencies
for our Windsor operations located in Nassau, New Providence. We constructed and
commissioned new feed water wells and replaced the reverse osmosis membranes on
50% of our production trains at our Windsor plant effective September 2008 and
replaced the reverse osmosis membranes on the remaining production trains at the
Windsor plant during the quarter ended June 30, 2009.  These capital
expenditures have improved the energy efficiency of the Windsor plant.  In
addition, last year we implemented an improved feed water pretreatment regime at
our Blue Hills plant in Nassau which has reduced electrical power consumption at
that plant.   Our bulk segment gross profit percentage for 2009 also
benefited from a reduction in diesel and electricity prices.





Bulk
segment G&A expenses for the nine months ended September 30, 2009 increased
to $1,412,430 from $1,054,661 for the same period in 2008 primarily as a
result of approximately $183,000 in penalties and interest assessed to our
Belize operations during the first quarter of 2009 relating
to delinquent business taxes and an increase in bank charges of approximately
$164,000 resulting from our Bahamas subsidiary’s conversion
of  Bahamian dollars to U.S. dollars and the subsequent transfer of
such dollars to other Company bank accounts





Services
Segment:





The
services segment contributed $3,124,762 and $1,176,966 to our income from
operations for the nine months ended September 30, 2009 and 2008,
respectively.





Revenues
from services provided in 2009 were $6,900,965 as compared to $8,834,766 in
2008.  Services revenues decreased from 2008 to 2009 due to relatively
lower project construction activity in 2009.  The decline in service
revenues from 2009 was partially offset by fees from our services
contract for the Tynes Bay, Bermuda plant, which commenced during the
second quarter of 2009.





The
increase in gross profit for the services segment to $3,288,973 in 2009 from
$1,394,466 in 2008 reflects commencement during the second quarter of 2009 of
our contract to operate the Tynes Bay, Bermuda plant and downward adjustments
made during the second quarter of 2009 of our estimated costs to complete the
Frank Sound and Bermuda plants.  These downward adjustments of
estimated costs to complete increased the percentages of completion to date on
these projects, thus we recorded a cumulative upward adjustment to construction
revenues. Both the Frank Sound and Bermuda projects were accepted by the
customers as of June 30, 2009.





G&A
expenses for the services segment were $164,212 and $217,500 for 2009 and 2008,
respectively.





LIQUIDITY
AND CAPITAL RESOURCES





Overview





Our
sources of cash are operations, borrowings under term loans and credit
facilities and sales of debt and equity securities.





Cash
flows from our operations are dependent upon the revenue amounts generated,
which are affected primarily by tourism, weather conditions, changes in our
customer base, the timing and level of rate increases, overall economic
conditions and other factors and the timing of the collection of these revenues
from our customers.  Distributions from CW-Bahamas to our other
subsidiaries are subject to certain restrictions under the terms of its credit
facility.


19


Our
ability to access the debt and equity capital markets is impacted by our current
and anticipated financial results, financial condition; existing level of
borrowings; credit rating, and terms of debt agreements (including our
compliance therewith), and by conditions in the debt and equity
markets.





Our
primary uses of cash are construction costs and capital expenditures, including
plant expansion and new plant construction. Other significant uses include
payment of dividends, repayment of debt and pursuit of new business
opportunities.





Cash
Flows for the Nine Months Ended September 30, 2009





Our cash
and cash equivalents increased from $36,261,345 as of December 31, 2008 to
$41,235,590 as of September 30, 2009.





Cash
Flows from Operating Activities





Operating
activities provided net cash for the nine months ended September 30, 2009 of
$10,022,016.  This cash provided reflects net income generated for the
nine months ended September 30, 2009 of approximately $7.1 million, as adjusted
for various items which impact net income but do not impact cash during the
period, such as depreciation and amortization, stock compensation, and other
items. The largest items impacting cash flows from operating activities for the
nine months ended September 30, 2009 were depreciation of $4.6 million and
a decrease in undistributed income from affiliate of $2.8million. These were
offset by an increase in accounts receivable of $2.3 million and a decrease in
accounts payable and other liabilities of $1.5 million.





Cash
Flows from Investing Activities





Our
investing activities used $1,209,044 in net cash during the nine months ended
September 30, 2009.  Of the approximately $2.3 million in capital
expenditures for the period, approximately $640,000 was spent on the expansion
of the Governor’s Harbour plant in Grand Cayman and approximately $1.1 million
was spent on purchases of other plant and equipment.  We collected
$1,117,357 on our loans receivable during the period.





Cash
Flows from Financing Activities





We used
$3,838,727 in net cash for financing activities during the nine months ended
September 30, 2009.  We made $1,013,375 in scheduled payments on our
bonds payable and paid dividends of $2,835,702.





Financial
Position





Our total
assets increased from approximately $154.7 million as of December 31, 2008 to
approximately $156.7 million as of September 30, 2009.





Current
accounts receivable decreased approximately $2.3 million from December 31, 2008
to September 30, 2009 due to the payment by the Water and Sewerage Corporation
of the Bahamas of previously overdue amounts during the nine months ended
September 30, 2009.





The
decrease in the balance of costs and estimated earnings in excess of billings –
construction project and the increase in loans receivable from December 31, 2008
to September 30, 2009 results from the completion and sale of the Frank Sound
plant to the Water Authority-Cayman effective with its commissioning on June 4,
2009.


20


Borrowings
Outstanding





As of
September 30, 2009, we had borrowings outstanding aggregating $21,445,026 that
consisted of bonds payable.





5.95%
Secured Bonds





In August
2006, we issued $15,771,997 principal amount secured fixed rate bonds in a
private offering and received net proceeds (excluding issuance costs and after
the offering discount) of $14,445,720. These bonds bear interest at a rate of
5.95%, are repayable in quarterly principal and interest installments of
$526,010 and mature in 2016.  We have the right to redeem the bonds in
full at any time after August 4, 2009 at a premium of 1.5% of the outstanding
principal and accrued interest on the bonds on the date of redemption. As of
September 30, 2009, $11,974,424 in principal amount was outstanding on these
secured bonds. Our obligations under the bonds are secured by fixed and floating
charges (i) on all of our assets, including an equitable charge of all of the
shares of Cayman Water, and (ii) on all of Cayman Water’s assets including its
real estate. Cayman Water has also guaranteed our payment obligations under the
bonds.





The trust
deed for these bonds restricts our ability to enter into new borrowing
agreements or any new guarantees without prior approval of the trustee and
limits our capital expenditures, with the exception of capital expenditures to
be incurred on certain defined projects, to $2,000,000 annually without prior
approval by the trustee. The trust deed also contains financial covenants that
require us to maintain a debt service coverage ratio of not less than 1.25 to 1,
a ratio of long term debt to EBITDA (i.e. earnings before interest, taxes,
depreciation and amortization for the 12 months preceding the ratio calculation
date) not greater than 2.5 to 1 and a ratio of long term debt to equity equal to
or less than 1.5 to 1.  As of September 30, 2009, we were in
compliance with the covenants under the trust deed.





CW-Bahamas
Series A Bonds





In July
2005, CW-Bahamas sold BAH$10,000,000 Series A bonds to Bahamian citizens and
permanent resident investors in The Bahamas to finance a portion of the
construction cost of its Blue Hills plant. These bonds mature on June 30, 2015
and accrue interest at the annual fixed rate of 7.5%. Interest is payable
quarterly. CW-Bahamas has the option to redeem the bonds in whole or in part
without penalty commencing after June 30, 2008. We have guaranteed CW-Bahamas
repayment obligations upon an “event of default” as defined in the guarantee
agreement. If we pay any amounts pursuant to the guarantee, we will be
subrogated to all rights of the bondholders in respect of any such
payments.  The guarantee is a general unsecured obligation junior to
our other secured obligations. As of September 30, 2009, BAH$10,000,000 of the
Series A bonds was outstanding.





CW-Bahamas
Credit Facility





CW-Bahamas
has a credit facility with Scotiabank that consists of a BAH$500,000 revolving
working capital loan. The obligations under the credit facility are secured by
the assets of CW-Bahamas. Borrowings under the working capital loan accrue
interest at the Nassau Prime rate plus 1.50% per annum. As of September 30,
2009, no amounts were outstanding under this facility.





Material
Commitments, Expenditures and Contingencies





OC-BVI
Contract Dispute





In
October 2006, our affiliate OC-BVI notified us that the Ministry of
Communications and Works of the Government of the British Virgin Islands (the
“Ministry”) had asserted a purported right of ownership of the Baughers Bay
plant pursuant to the terms of the Water Supply Agreement between the parties
dated May 1990 (the “1990 Agreement”) and had invited OC-BVI to submit a
proposal for its continued involvement in the production of water at the
Baughers Bay plant in light of the Ministry’s planned assumption of
ownership.


21


Under the
terms of the 1990 Agreement, upon the expiration of the initial seven year term
in May 1999, the agreement would automatically be extended for another seven
year term unless the Ministry provided notice, at least eight months prior to
such expiration, of its decision to purchase the plant from OC-BVI for
approximately $1.42 million.





In
correspondence between the parties from late 1998 through early 2000, the
Ministry indicated that the BVI government intended to purchase the plant but
would be amenable to negotiating a new water supply agreement, and that it
considered the 1990 Agreement to be in force on a monthly basis until
negotiations between the BVI government and OC-BVI were concluded. Occasional
discussions were held between the parties since 2000 without resolution of the
matter. OC-BVI has continued to supply water to the Ministry and expended
approximately $4.7 million between 1995 and 2003 to significantly expand the
production capacity of the plant beyond that contemplated in the 1990
Agreement.





OC-BVI
submitted a proposal to the Ministry in late 2006 to continue to supply water
from the Baughers Bay plant.  The Ministry held discussions with
OC-BVI regarding a new contract but did not formally respond to OC-BVI’s
proposal.  Early in 2007, the Ministry unilaterally took the position
that until such time as a new agreement was reached on the ownership of the
plant and the price for the water produced by the plant, the Ministry would only
pay that amount of OC-BVI’s billings that the Ministry purported constituted
OC-BVI’s costs of producing the water. OC-BVI responded to the Ministry that the
amount the Ministry proposed to pay was significantly less than OC-BVI’s
production costs. Payments made by the Ministry to OC-BVI since the Ministry’s
assumption of this reduced price have been sporadic.  On November 15,
2007, OC-BVI issued a demand letter to the BVI government for approximately $6.2
million representing amounts that OC-BVI claimed were due by the BVI government
for water sold and delivered plus interest and legal fees. In response to
OC-BVI’s demand for payment, the BVI government issued a letter dated November
19, 2007 that reasserted its claim that ownership of the Baughers Bay plant has
passed to the BVI government and rejected OC-BVI’s claim for
payment.  On November 22, 2007, OC-BVI’s management was informed that
the BVI government had filed a lawsuit with the Eastern Caribbean Supreme Court
(the “Court”) seeking ownership of the Baughers Bay plant.  OC-BVI
counterclaimed that it was entitled to continued possession and operation of the
Baughers Bay plant until the BVI government paid OC-BVI approximately $4.7
million, which it believes represents the value of the Baughers Bay plant at its
present expanded production capacity. OC-BVI took the legal position that since
the BVI government never paid the $1.42 million to purchase the Baughers Bay
plant, the 1990 agreement terminated on May 31, 1999, which was eight months
after the date that the Ministry provided written notice of its intention to
purchase the plant.





On July
4, 2008, OC-BVI filed a claim with the Court seeking recovery of $7,806,629,
representing amounts owed to OC-BVI for water sold and delivered to the BVI
government through May 31, 2008, $842,188 for interest accrued on amounts owed
as of May 31, 2008, and future interest and costs.  This claim was
amended and increased on April 22, 2009 to $13,773,954 for amounts owed for
water delivered through March 31, 2009 plus accrued interest of $2,537,334 on
amounts owed as of March 31, 2009 plus future interest and costs.  The
$13,773,954 amount represents amounts billed at the contract prices in effect
before the BVI government asserted its purported right of ownership of the
plant.





The Court
held a three-day trial from July 22 through July 24, 2009 to address both the
Baughers Bay ownership issue and OC-BVI’s claim for payment of amounts owed for
water sold and delivered to the BVI government.  On September 17,
2009, the Court issued a preliminary ruling with respect to the litigation
between the BVI government and OC-BVI.  The Court determined that the
BVI government was entitled to immediate possession of the Baughers Bay plant
and dismissed OC-BVI’s claim for compensation of approximately $4.7 million for
of expenditures made to expand the production capacity of the
plant.  As a result of this determination by the Court, OC-BVI
recorded an impairment loss of approximately $2.1 million during the three
months ended September 30, 2009 for fixed assets associated with the Baughers
Bay plant.  However, the Court determined that OC-BVI was entitled to
full payment of water invoices issued up to December 20, 2007, which had been
calculated under the terms of the original 1990 Agreement, and ordered the BVI
government to make an immediate interim payment of $5.0 million to OC-BVI for
amounts owed to OC-BVI.  The Court deferred deciding the entire
dispute between the parties until it could conduct a hearing to determine the
reasonable rate for water produced by OC-BVI for the period from December 20,
2007 to the present.





After
conducting hearings on October 12 and 16, 2009, on October 28, 2009, the Court
ordered the BVI government to pay OC-BVI at the rate of $13.91 per thousand
imperial gallons for water produced by OC-BVI from December 20, 2007 to present,
which amounts to a total recovery for OC-BVI of $10.1 million as of September
30, 2009, excluding any interest which may be due on this
balance.  OC-BVI intends to seek clarification from the Court on
November 13, 2009 with respect to the amount of interest, if any, which must be
paid on the monetary judgment.  The BVI government has not yet made
any payments to OC-BVI under the Court order.





On
October 28, 2009 OC-BVI filed an appeal with the Eastern Caribbean Court of
Appeals (the “Appellate Court”) asking the Appellate Court to review the
September 17, 2009 ruling by the Eastern Caribbean Supreme Court as it relates
to OC-BVI’s claim for compensation for expenditures made to expand the
production capacity of the Baughers Bay plant.





On
October 29, 2009, the BVI government filed an appeal with the Appellate Court
seeking the Appellate Court’s review of the September 17, 2009 ruling of the
Court that the BVI government pay OC-BVI the reasonable rate for water produced
by OC-BVI for the period from December 20, 2007 to the present.  The
BVI government is requesting a ruling from the Appellate Court that the BVI
government should only pay OC-BVI the actual cost of water produced at the
plant.





During
2007, OC-BVI completed, for a total cost of approximately $8.2 million, the
construction of a 700,000 U.S. gallons per day desalination plant located at Bar
Bay, Tortola (the “Bar Bay plant”). We provided OC-BVI with a $3.0 million loan
to fund part of this plant’s construction costs, of which $2.0 million remained
outstanding as of June 30, 2009.  Principal on this loan was payable
in quarterly installments of $125,000 with a final balloon payment of $2.0
million due on August 31, 2009 and interest on the loan was due quarterly at the
rate of LIBOR plus 3.5%. On August 20, 2009, we amended the terms of this loan
with OC-BVI, increasing its balance to $2,800,000 by converting $800,000 in
trade receivables due to us from OC-BVI.   Under the terms of
this amendment, the interest rate on the loan was increased to the rate of LIBOR
plus 5.5% and the maturity date for the final balloon payment extended to August
31, 2011.  On December 19, 2008, OC-BVI and the BVI government
executed a binding term sheet (the “Bar Bay Agreement”) for the purchase of
water by the BVI government from OC-BVI’s Bar Bay plant. The parties intend the
Bar Bay Agreement to govern the terms of sale of water by OC-BVI to the BVI
government until the parties execute a definitive contract. Under the terms of
the Bar Bay Agreement, OC-BVI will deliver up to 600,000 U.S. gallons of water
per day to the BVI government from the Bar Bay plant and the BVI government will
be obligated to pay for this water at a specified price as adjusted by a monthly
energy factor. Prior to completion of the construction of the first phase of
certain additional facilities by OC-BVI in August 2009, the BVI government was
not obligated to purchase any minimum volumes of water from OC-BVI. However,
since completion of this first phase the BVI government has been obligated to
purchase at least 600,000 gallons of water per day from the plant. The first
phase of such facilities construction involves the installation of water pipes
from the plant to a BVI government-owned reservoir site and from this site to
the BVI government’s piped water distribution system.  A second phase
of construction requires OC-BVI to complete a storage reservoir on the BVI
government site within twelve months of the signing of the proposed seven-year
definitive contract. The proposed seven-year definitive contract is expected to
include a seven-year extension option exercisable by the BVI government. 
Negotiations on the definitive contract continued to be in-progress through the
date of this filing.  OC-BVI began selling water from the Bar Bay plant to
the BVI government during the first quarter of 2009.


22


Under
U.S. generally accepted accounting principles revenue is generally realized or
realizable and earned when all of the following criteria are met:





•
            Persuasive evidence of an
      arrangement exists.





•
            Delivery has occurred or services
      have been rendered.





•
            The seller’s price to the buyer
      is fixed and determinable;
and





•
            Collectability is reasonably
      assured.





Effective
January 1, 2008, OC-BVI changed its policy for the recording of its revenues
from the Baughers Bay plant from the accrual to the equivalent of the cash
method due to an inability to meet all of the above revenue recognition
criteria.  As a result of this adjustment to OC-BVI’s revenues, we
have recorded losses from our equity in OC-BVI’s results of operations for all
fiscal quarters subsequent to December 31, 2007.  Any cash payments
made by the BVI government on Baughers Bay related invoices were applied by
OC-BVI to the remaining balance of outstanding accounts receivable that arose
from billings for periods prior to and including December 2007 and thus were not
recognized as revenues.  Sufficient payments were received from the
BVI government during the three months ended September 30, 2009 to repay the
remaining accounts receivable balances relating to period prior to December 31,
2007.  OC-BVI continues to apply the equivalent of the cash method
with respect to the recognition of revenues from Baughers
Bay.  Consequently, OC-BVI will not recognize as revenues any
amounts to be paid by the Court until such amounts are paid by the BVI
government. OC-BVI is also applying the equivalent of the cash basis of
accounting for revenue recognition for its Bar Bay plant until such time as a
definitive contract is signed for this plant.





We
account for our investment in OC-BVI in accordance with the equity method of
accounting for investments in common stock. This method requires recognition of
a loss on an equity investment that is other than temporary, and indicates that
a current fair value of an equity investment that is less than its carrying
amount may indicate a loss in the value of the investment. To test for possible
impairment of our investment in OC-BVI, we estimated its fair value as of
September 30, 2009. In making this estimate, we calculated the expected cash
flows from our investment in OC-BVI by (i) identifying various possible outcomes
of the Baughers Bay dispute and negotiations for a definitive contract on the
new Bar Bay plant; (ii) estimating the cash flows associated with each possible
outcome, and (iii) assigning a probability to each outcome based upon
discussions held to date by OC-BVI’s management with the BVI government and
OC-BVI’s legal counsel. The resulting probability-weighted sum represents the
expected cash flows, and our best estimate of future cash flows, to be derived
from our investment in OC-BVI. After considering the September and October 2009
rulings of the Court, we determined that the carrying value of our investment in
OC-BVI exceeded the estimated fair value for our investment in OC-BVI by
approximately $160,000 as of September 30, 2009 and therefore recognized an
impairment loss of this amount on this investment, which is included in the loss
of approximately $(1.6) million we recognized from our equity in the loss of
OC-BVI for the three months ended September 30, 2009. As a result of further
developments, we could be required to record further such impairment losses on
its investment in OC-BVI in the future.





The
identification of the possible outcomes for the Baughers Bay dispute and Bar Bay
negotiations, the projections of cash flows for each outcome, and the assignment
of relative probabilities to each outcome all represent significant estimates
made by us. The ultimate resolution of the Baughers Bay dispute and Bar Bay
definitive contract negotiations may differ significantly from our estimates and
may result in actual cash flows from OC-BVI that vary materially from the
expected cash flows we used in determining OC-BVI’s fair value as of September
30, 2009.  OC-BVI may be unable to negotiate a new operating agreement
for the Baughers Bay plant. The Appellate Court may ultimately overturn the
ruling of the Court requiring the BVI government to pay OC-BVI at the rate of
$13.91 per thousand imperial gallons for water previously
supplied.  OC-BVI may be unsuccessful in finalizing a definitive
contract for the Bar Bay plant on terms it finds acceptable.  Any of
these or other possible outcomes could result in actual cash flows from our
investment in OC-BVI that are significantly lower than ours current
estimate.  In such case, we could be required to record further
impairment losses to reduce the carrying value of our investment in OC-BVI. Such
impairment losses would reduce our earnings and could have a material adverse
impact on our results of operations and financial condition.





We are
not presently able to determine what impact the ultimate resolution of this
matter may have on our results of operations or financial
condition.


23


CW-Bahamas
Liquidity





Since
early 2008, CW-Bahamas has experienced significant delays in the receipt of
payments on its outstanding accounts receivable from the Water and Sewerage
Corporation of the Bahamas (the “WSC”).





We have
been informed by representatives of WSC and the Bahamas government that (i) the
WSC’s payment delinquencies are due to operating issues within the WSC; (ii)
that such delinquencies do not reflect any type of dispute with CW-Bahamas with
respect to the amounts owed; and (iii) the amounts will ultimately be paid in
full.  CW-Bahamas’ accounts receivable from the WSC were approximately
$6.2 million as of September 30, 2009.  We believe that the accounts
receivable from the WSC are fully collectible and therefore have not provided
any allowance for possible non-payment of these receivables as of September 30,
2009.  We have been informed by these representatives that while the
WSC expects to pay us approximately $1.2 million each month (which approximates
CW-Bahamas’ monthly billings to WSC) the WSC will continue to be in arrears on
its payments to CW-Bahamas for the remainder of 2009.





CW-Bahamas
derives substantially all of its revenues from its contract with the WSC and is
dependent upon timely collection of its accounts receivable to fund its
operations.  If the WSC does not maintain the timeliness and/or
increase the amounts of its payments to CW-Bahamas, this subsidiary may not have
sufficient liquidity to adequately fund its operations. If this occurs,
CW-Bahamas may be required to decrease the amount of water it supplies the WSC
to the minimum required amount under the contract or, if liquidity problems
become too severe, cease its production of water altogether.  Such
developments could have a material adverse effect on our results of operation
and financial position.





CW-Belize
Liquidity





In
January 2009, we were informed by officials of Belize Water Services Ltd.
(“BWSL”) of potential financial difficulties at BWSL, which is CW-Belize’s sole
customer.  Although BWSL was current with respect to its payments to
CW-Belize as of September 30, 2009, such difficulties could affect the amount
and timing of BWSL’s payments for water supplied by CW-Belize in the future. We
are presently unable to determine what impact BWSL’s current financial condition
will have on CW-Belize’s results of operations, financial position or cash
flows.





By
Statutory Instrument No. 81 of 2009, the Minister of Public Utilities of the
government of Belize published an order, the Public Utility Provider Class
Declaration Order, 2009 (the “Order”), which as of May 1, 2009 designated
CW-Belize as public utility provider under the laws of Belize.  With
this designation, the Public Utilities Commission of Belize (the “PUC”) has the
authority to set the rates charged by CW-Belize and to otherwise regulate its
activities.  We are presently unable to determine what impact the
PUC’s future regulation of CW-Belize will have its results of operations,
financial position or cash flows.





Dividends





On
January 31, 2009, we paid a dividend of $0.065 to shareholders of record on
January 1, 2009.





On April
30, 2009, we paid a dividend of $0.065 to shareholders of record on April 1,
2009.





On July
31, 2009, we paid a dividend of $0.065 to shareholders of record on July 1,
2009.





On
October 31, 2009, we paid a dividend of $0.075 to shareholders of record on
October 1, 2009.





We have
paid dividends to owners of our ordinary shares and redeemable preference shares
since we began declaring dividends in 1985. Our payment of any future cash
dividends will depend upon our earnings, financial condition, cash flows,
capital requirements and other factors our Board deems relevant in determining
the amount and timing of such dividends.





Dividend
Reinvestment and Common Stock Purchase Plan





This
program is available to our shareholders, who may reinvest all or a portion of
their common cash dividends into shares of common stock at prevailing market
prices and may also invest optional cash payments to purchase additional shares
at prevailing market prices as part of this program.





Impact
of Inflation





Under the
terms of our Cayman Islands license and our water sales agreements in Belize,
Bahamas and the British Virgin Islands, our water rates are automatically
adjusted for inflation on an annual basis, subject to temporary exceptions. We,
therefore, believe that the impact of inflation on our gross profit, measured in
consistent dollars, will not be material. However, significant increases in
items such as fuel and energy costs could create additional credit risks for us,
as our customers’ ability to pay our invoices could be adversely affected by
such increases.


24


ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





There
have been no material changes in our exposure to market risk from December 31,
2008 to the end of the period covered by this report.





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Our
management has evaluated, with the participation of its principal executive
officer and principal financial officer, the effectiveness of its disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this report. Based upon that evaluation, our principal
executive officer and principal financial officer have concluded that, as of the
end of the period covered by this report, the Company’s disclosure controls and
procedures were effective.





Changes
in Internal Controls





There
were no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation of such internal control that
occurred during the Company’s last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.





PART
II — OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





Our
affiliate OC-BVI and the BVI government are engaged in litigation relating to a
contract dispute, as described in “LIQUIDITY AND CAPITAL RESOURCES – Material
Commitments, Expenditures and Contingencies,” which description is incorporated
herein by reference.





ITEM
1A. RISK FACTORS





Our business faces significant
risks. These risks include those disclosed in Item 1A of our Annual Report on Form
10-K for the fiscal year ended December 31, 2008 as supplemented by the
additional risk factors included below. If any of the events or circumstances
described in the referenced risks actually occur, our business, financial
condition or results of operations could be materially adversely affected and
such events or circumstances could cause our actual results to differ materially
from the results contemplated by the forward-looking statements contained
in this report. These risks should be read in conjunction with the other
information set forth in this Quarterly Report as well as in our Annual Report on Form
10-K for the year ended December 31, 2008 and in our other periodic reports on
Form 10-Q and Form 8-K.





On
September 17, 2009, the Eastern Caribbean Supreme Court ruled that the British
Virgin Islands government has the right of ownership and possession of OC-BVI’s
Baughers Bay plant.





Since
expiration in May 1999 of the initial term of their bulk water supply agreement
dated May 1990 (the “1990 Agreement”) OC-BVI has supplied water to the British
Virgin Islands Water and Sewerage Department under what OC-BVI considered to be
a month-to-month supply arrangement. Under this arrangement, the British Virgin
Islands government could cease purchasing water from OC-BVI at any time.
Subsequent to May 1999, OC-BVI continued to make attempts to negotiate a new
water supply agreement.


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In
October 2006, the British Virgin Islands government notified OC-BVI that it was
asserting a purported right of ownership of OC-BVI’s desalination plant in
Baughers Bay, Tortola pursuant to the terms of the 1990 Agreement and invited
OC-BVI to submit a proposal for its continued involvement in the production of
water at the Baughers Bay plant. Early in 2007, the British Virgin Islands
government unilaterally took the position that until such time as a new
agreement is reached on the ownership of the Baughers Bay plant and for the
price of the water produced by the plant, the BVI government would only pay that
amount of OC-BVI’s invoices that the BVI government purported constituted
OC-BVI’s costs of producing the water. OC-BVI responded to the BVI government
that the amount the Ministry proposed to pay was significantly less than
OC-BVI’s production costs. Payments made by the BVI government to OC-BVI since
the BVI government’s assumption of this reduced price have been
sporadic.





On
November 15, 2007, OC-BVI issued a demand letter to the BVI government for
approximately $6.2 million representing amounts that OC-BVI claimed were due by
the BVI government for water sold and delivered plus interest and legal
fees.  In response to OC-BVI’s demand for payment, the BVI government
issued a letter dated November 19, 2007 that reasserted its claim that ownership
of the Baughers Bay plant has passed to the BVI government and rejected OC-BVI’s
claim for payment.  On November 22, 2007, OC-BVI’s management was
informed that the BVI government had filed a lawsuit with the Eastern Caribbean
Supreme Court seeking ownership and possession of the Baughers Bay
plant.  OC-BVI counterclaimed that it was entitled to continued
possession and operation of the Baughers Bay plant until the BVI government pays
OC-BVI approximately $4.7 million, which it believes represents the value of the
Baughers Bay plant at its present expanded production
capacity.  OC-BVI also took the legal position that since the BVI
government never paid the $1.42 million to purchase the Baughers Bay plant, the
1990 agreement terminated on May 31, 1999, which was eight months after the date
that the Ministry provided written notice of its intention to purchase the
plant.





On July
4, 2008, OC-BVI filed a claim with the Eastern Caribbean Supreme Court seeking
recovery of $7,806,629, representing amounts owed to OC-BVI for water sold and
delivered to the BVI government from the Baughers Bay plant through May 31,
2008, $842,188 for interest accrued on amounts owed as of May 31, 2008 and
future interest and costs.  This claim was amended and increased on
April 22, 2009 to $13,773,954 for amounts owed for water delivered through March
31, 2009 plus accrued interest of $2,537,334 on amounts owed as of March 31,
2009 plus future interest and costs.  The $13,773,954 amount
represents amounts billed at the contract prices in effect before the BVI
government asserted its purported right of ownership of the plant.





The
Eastern Caribbean Supreme Court held a three-day trial from July 22 through July
24, 2009 to address both the Baughers Bay ownership issue and OC-BVI’s claim for
payment of amounts owed for water sold and delivered to the BVI
government.  On September 17, 2009, the Court issued a preliminary
ruling with respect to the litigation between the BVI government and
OC-BVI.  The Court determined that the BVI government was entitled to
immediate possession of the Baughers Bay plant and dismissed OC-BVI’s claim for
compensation of approximately $4.7 million for improvements to the
plant.  However, the Court determined that OC-BVI was entitled to full
payment of water invoices issued up to December 20, 2007, which had been
calculated under the terms of the original 1990 water supply agreement, and
ordered the BVI government to make an immediate interim payment of $5.0 million
to OC-BVI for amounts owed to OC-BVI.  The Court deferred deciding the
entire dispute between the parties until it could conduct a hearing to determine
the reasonable rate for water produced by OC-BVI for the period from December
20, 2007 to the present.





After
conducting hearings on October 12 and 16, 2009, on October 28, 2009, the Court
ordered the BVI government to pay OC-BVI at the rate of $13.91 per thousand
imperial gallons for water produced by OC-BVI from December 20, 2007 to present,
which amounts to a total recovery for OC-BVI of $10.1 million as of September
30, 2009, excluding any interest which may be due on this
balance.  OC-BVI intends to seek clarification from the Court on
November 13, 2009 with respect to the amount of interest, if any, which must be
paid on the monetary judgment.  The BVI government has not yet made
any payments to OC-BVI under the Court order.





On
October 28, 2009 OC-BVI filed an appeal with the Eastern Caribbean Court of
Appeals (the “Appellate Court”) asking the Appellate Court to review the
September 17, 2009 ruling by the Eastern Caribbean Supreme Court as it relates
to OC-BVI’s claim for compensation for improvements to the Baughers Bay
plant.





On
October 29, 2009, the BVI government filed an appeal with the Appellate Court
seeking the Appellate Court’s review of the September 17, 2009 ruling of the
Court that the BVI government pay OC-BVI the reasonable rate for water produced
by OC-BVI for the period from December 20, 2007 to the present.  The
BVI government is requesting a ruling from the Appellate Court that the BVI
government should only pay OC-BVI the actual cost of water produced at the
plant.





Due to
the on-going dispute and the lack of payments on OC-BVI’s accounts receivable
balances by the BVI government, effective January 1, 2008, we changed our policy
for the recording of our equity in the financial results of OC-BVI to reflect
our equity in OC-BVI’s results as if revenues were recognized by this affiliate
under the equivalent of the cash, rather than accrual, method. As a result of
this accounting change, we have recorded losses from our equity investment in
OC-BVI for all quarters subsequent to December 31, 2007.  As of
September 30, 2009, our loan to, and equity investment in, OC-BVI totaled
approximately $12.1 million and the recorded value of our management services
agreement, which is reflected on our balance sheet as an intangible asset, was
approximately $856,000.





OC-BVI
may be unable to negotiate a new operating agreement for the Baughers Bay plant.
The Appellate Court may ultimately overturn the ruling of the Court requiring
the BVI government to pay OC-BVI at the rate of $13.91 per thousand imperial
gallons for water previously supplied.  In either of these or other
cases, the value of our OC-BVI-related assets would decline, and we could be
required to record additional impairment losses to reduce the carrying
values of these assets.  Such impairment losses would reduce our
earnings and could have a significant adverse impact on our results of
operations, financial condition and cash flows.





If
OC-BVI does not obtain a definitive contract with the BVI government to sell
water to be produced at its Bar Bay plant, it may not be able to recover the
cost of its investment in the plant, which could adversely affect its operations
and in turn decrease the value of our investment in OC-BVI.





OC-BVI
has constructed a new desalination plant located on Bar Bay, Tortola, in the
British Virgin Islands. The total cost for this plant is approximately $8.2
million.  We have a loan receivable outstanding from OC-BVI of $2.8
million as of September 30, 2009 arising from the construction of this plant.
OC-BVI constructed this plant in response to what it believes is an extreme
shortage of, and a pressing demand for, potable water on the eastern end of
Tortola and in anticipation of entering into a bulk water supply agreement with
the British Virgin Islands government. In December 2008, OC-BVI executed a
binding term sheet with the BVI government for the sale of water from the Bar
Bay plant; however the agreement between the parties remains subject to the
execution of definitive contract between the parties. If such a definitive
contract is ultimately not obtained, or is not obtained on sufficiently
favorable terms, OC-BVI may not be able to recover the cost of its investment in
this plant, in which case we may be required to record an impairment loss to
reduce the carrying value of our loan to OC-BVI and our investment in OC-BVI.
Such an impairment charge would reduce our earnings and could have a significant
adverse impact on our results of operations and financial
condition.


26


ITEM
6. EXHIBITS





Exhibit
                Number
              
              Exhibit
      Description31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.1
              
              Section
      1350 Certification of Chief Executive Officer32.2
              
              Section
      1350 Certification of Chief Financial
Officer


27


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




CONSOLIDATED
      WATER CO. LTD.By:
                    /s/ Frederick
      W. McTaggartFrederick
      W. McTaggartChief
      Executive Officer(Principal
      Executive Officer)By:
                    /s/
      David W. SasnettDavid
      W. SasnettExecutive
      Vice President & Chief Financial Officer(Principal
      Financial and Accounting Officer)




Date:
November 9, 2009


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