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
1934





For
the quarterly period ended September 30, 2010





OR





 ̈         TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF
1934





For 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
              
              98-0619652(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 5, 2010, 14,549,893 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, 2010 (Unaudited) and
      December 31, 2009
                    
                    4Condensed
      Consolidated Statements of Income (Unaudited) for the Three and Nine
      Months Ended September 30, 2010 and 2009
                    
                    5Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
      Ended September 30, 2010 and 2009
                    
                    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
      INFORMATIONItem
      1
                    Legal
      Proceedings
                    
                    25Item
      1A
                    Risk
      Factors
                    
                    25Item
      6
                    Exhibits
                    
                    28SIGNATURES
                    
                    
                    29


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 Bahamas dollars (B$) into US$, as determined by
the Central Bank of The Bahamas, has been fixed since 1973 at US$1.00 per
B$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.





The
functional currency for our Netherlands subsidiary and Mexico affiliate is the
US$.


3


PART
I — FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





CONSOLIDATED
WATER CO. LTD.


CONDENSED
CONSOLIDATED BALANCE SHEETS





September 30,
                
                
                December 31,2010
                
                
                2009(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                45,472,336
                
                
                $
                44,429,190Accounts
      receivable, net
                
                
                10,541,055
                
                
                
                9,980,928Inventory
                
                
                1,899,541
                
                
                
                1,832,564Prepaid
      expenses and other current assets
                
                
                2,684,975
                
                
                
                1,689,874Current
      portion of loans receivable
                
                
                1,644,268
                
                
                
                1,216,098Total
      current assets
                
                
                62,242,175
                
                
                
                59,148,654Property,
      plant and equipment, net
                
                
                57,038,909
                
                
                
                60,876,276Construction
      in progress
                
                
                483,887
                
                
                
                370,131Costs
      and estimated earnings in excess of billings - construction
      project
                
                
                -
                
                
                
                1,872,552Inventory
      non-current
                
                
                3,342,660
                
                
                
                3,352,054Loans
      receivable
                
                
                13,107,855
                
                
                
                10,875,848Investment
      in affiliate
                
                
                8,871,980
                
                
                
                9,157,995Intangible
      assets, net
                
                
                1,762,967
                
                
                
                1,919,656Goodwill
                
                
                3,587,754
                
                
                
                3,587,754Other
      assets
                
                
                3,138,660
                
                
                
                3,314,861Total
      assets
                
                $
                153,576,847
                
                
                $
                154,475,781LIABILITIES
      AND EQUITYCurrent
      liabilitiesAccounts
      payable and other current liabilities
                
                $
                5,207,298
                
                
                $
                6,187,606Dividends
      payable
                
                
                1,151,971
                
                
                
                1,152,702Current
      portion of long term debt
                
                
                1,400,995
                
                
                
                1,322,483Total
      current liabilities
                
                
                7,760,264
                
                
                
                8,662,791Long
      term debt
                
                
                17,245,546
                
                
                
                19,806,784Other
      liabilities
                
                
                448,541
                
                
                
                465,408Total
      liabilities
                
                
                25,454,351
                
                
                
                28,934,983EquityConsolidated
      Water Co. Ltd. stockholders' equityRedeemable
      preferred stock, $0.60 par value. Authorized 200,000 shares; issued and
      outstanding 19,394 and 17,192 shares, respectively
                
                
                11,636
                
                
                
                10,315Class
      A common stock, $0.60 par value. Authorized 24,655,000 shares; issued and
      outstanding14,549,893 and 14,541,878 shares, respectively
                
                
                8,729,936
                
                
                
                8,725,127Class
      B common stock, $0.60 par value. Authorized 145,000 shares; none issued or
      outstanding
                
                
                -
                
                
                
                -Additional
      paid-in capital
                
                
                81,282,102
                
                
                
                80,990,686Retained
      earnings
                
                
                36,466,797
                
                
                
                34,365,640Total
      Consolidated Water Co. Ltd. stockholders' equity
                
                
                126,490,471
                
                
                
                124,091,768Noncontrolling
      interests
                
                
                1,632,025
                
                
                
                1,449,030Total
      equity
                
                
                128,122,496
                
                
                
                125,540,798Total
      liabilities and equity
                
                $
                153,576,847
                
                
                $
                154,475,781





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 30,2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010
                                  
                                  
                                  2009Retail
      water revenues
                                  
                                  $
                                  4,631,368
                                  
                                  
                                  $
                                  5,659,390
                                  
                                  
                                  $
                                  17,056,601
                                  
                                  
                                  $
                                  18,418,103Bulk
      water revenues
                                  
                                  
                                  6,312,326
                                  
                                  
                                  
                                  6,687,836
                                  
                                  
                                  
                                  18,766,546
                                  
                                  
                                  
                                  19,526,044Services
      revenues
                                  
                                  
                                  756,108
                                  
                                  
                                  
                                  1,178,833
                                  
                                  
                                  
                                  3,253,451
                                  
                                  
                                  
                                  6,900,965Total
      revenues
                                  
                                  
                                  11,699,802
                                  
                                  
                                  
                                  13,526,059
                                  
                                  
                                  
                                  39,076,598
                                  
                                  
                                  
                                  44,845,112Cost
      of retail revenues
                                  
                                  
                                  2,310,307
                                  
                                  
                                  
                                  2,421,740
                                  
                                  
                                  
                                  7,817,030
                                  
                                  
                                  
                                  7,390,251Cost
      of bulk revenues
                                  
                                  
                                  5,250,494
                                  
                                  
                                  
                                  5,302,535
                                  
                                  
                                  
                                  15,178,925
                                  
                                  
                                  
                                  15,239,258Cost
      of services revenues
                                  
                                  
                                  366,486
                                  
                                  
                                  
                                  765,716
                                  
                                  
                                  
                                  2,590,597
                                  
                                  
                                  
                                  3,611,992Total
      cost of revenues
                                  
                                  
                                  7,927,287
                                  
                                  
                                  
                                  8,489,991
                                  
                                  
                                  
                                  25,586,552
                                  
                                  
                                  
                                  26,241,501Gross
      profit
                                  
                                  
                                  3,772,515
                                  
                                  
                                  
                                  5,036,068
                                  
                                  
                                  
                                  13,490,046
                                  
                                  
                                  
                                  18,603,611General
      and administrative expenses
                                  
                                  
                                  3,296,593
                                  
                                  
                                  
                                  2,671,169
                                  
                                  
                                  
                                  8,912,276
                                  
                                  
                                  
                                  7,842,434Income
      from operations
                                  
                                  
                                  475,922
                                  
                                  
                                  
                                  2,364,899
                                  
                                  
                                  
                                  4,577,770
                                  
                                  
                                  
                                  10,761,177Other
      income (expense):Interest
      income
                                  
                                  
                                  386,562
                                  
                                  
                                  
                                  311,990
                                  
                                  
                                  
                                  990,777
                                  
                                  
                                  
                                  620,663Interest
      expense
                                  
                                  
                                  (392,711
                                  )
                                  
                                  
                                  (417,316
                                  )
                                  
                                  
                                  (1,196,346
                                  )
                                  
                                  
                                  (1,287,369
                                  )Other
      income
                                  
                                  
                                  35,918
                                  
                                  
                                  
                                  50,337
                                  
                                  
                                  
                                  113,875
                                  
                                  
                                  
                                  143,600Equity
      in earnings (loss) of affiliate
                                  
                                  
                                  777,406
                                  
                                  
                                  
                                  (1,582,248
                                  )
                                  
                                  
                                  1,072,517
                                  
                                  
                                  
                                  (2,780,270
                                  )Other
      income (expense), net
                                  
                                  
                                  807,175
                                  
                                  
                                  
                                  (1,637,237
                                  )
                                  
                                  
                                  980,823
                                  
                                  
                                  
                                  (3,303,376
                                  )Net
      income
                                  
                                  
                                  1,283,097
                                  
                                  
                                  
                                  727,662
                                  
                                  
                                  
                                  5,558,593
                                  
                                  
                                  
                                  7,457,801Income
      attributable to noncontrolling interests
                                  
                                  
                                  17,504
                                  
                                  
                                  
                                  69,762
                                  
                                  
                                  
                                  182,995
                                  
                                  
                                  
                                  382,144Net
      income attributable to Consolidated Water Co. Ltd.
      stockholders
                                  
                                  $
                                  1,265,593
                                  
                                  
                                  $
                                  657,900
                                  
                                  
                                  $
                                  5,375,598
                                  
                                  
                                  $
                                  7,075,657Basic
      earnings per common share attributable to Consolidated Water Co. Ltd.
      common stockholders
                                  
                                  $
                                  0.09
                                  
                                  
                                  $
                                  0.05
                                  
                                  
                                  $
                                  0.37
                                  
                                  
                                  $
                                  0.49Diluted
      earnings per common share attributable to Consolidated Water Co. Ltd.
      common stockholders
                                  
                                  $
                                  0.09
                                  
                                  
                                  $
                                  0.05
                                  
                                  
                                  $
                                  0.37
                                  
                                  
                                  $
                                  0.49Dividends
      declared per common share
                                  
                                  $
                                  0.075
                                  
                                  
                                  $
                                  0.075
                                  
                                  
                                  $
                                  0.225
                                  
                                  
                                  $
                                  0.205Weighted
      average number of common shares used in the determination
    of:Basic
      earnings per share
                                  
                                  
                                  14,549,189
                                  
                                  
                                  
                                  14,537,041
                                  
                                  
                                  
                                  14,545,555
                                  
                                  
                                  
                                  14,533,097Diluted
      earnings per share
                                  
                                  
                                  14,592,665
                                  
                                  
                                  
                                  14,611,601
                                  
                                  
                                  
                                  14,600,210
                                  
                                  
                                  
                                  14,583,250





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)





Nine Months Ended
                    September 30,2010
                  
                  
                  2009Net
      cash provided by operating activities
                  
                  $
                  5,742,055
                  
                  
                  $
                  10,022,016Cash
      flows from investing activitiesAdditions
      to property, plant and equipment and construction in
    progress
                  
                  
                  (1,099,842
                  )
                  
                  
                  (2,326,401
                  )Distribution
      from affiliate
                  
                  
                  1,234,725
                  
                  
                  
                  -Collections
      of loans receivable
                  
                  
                  1,010,892
                  
                  
                  
                  1,117,357Net
      cash provided by (used in) investing activities
                  
                  
                  1,145,775
                  
                  
                  
                  (1,209,044
                  )Cash
      flows from financing activitiesDividends
      paid
                  
                  
                  (3,275,777
                  )
                  
                  
                  (2,835,702
                  )Proceeds
      from issuance of preferred stock
                  
                  
                  6,122
                  
                  
                  
                  10,350Principal
      repayments of long term debt
                  
                  
                  (2,575,029
                  )
                  
                  
                  (1,013,375
                  )Net
      cash (used in) financing activities
                  
                  
                  (5,844,684
                  )
                  
                  
                  (3,838,727
                  )Net
      increase in cash and cash equivalents
                  
                  
                  1,043,146
                  
                  
                  
                  4,974,245Cash
      and cash equivalents at beginning of period
                  
                  
                  44,429,190
                  
                  
                  
                  36,261,345Cash
      and cash equivalents at end of period
                  
                  $
                  45,472,336
                  
                  
                  $
                  41,235,590Interest
      paid in cash
                  
                  $
                  1,065,500
                  
                  
                  $
                  1,127,156Non-cash
      investing and financing activitiesConversion
      of 2,921 (2009: 5,784) redeemable preferred shares into 2,921 (2009:
      5,784) ordinary shares
                  
                  $
                  1,753
                  
                  
                  $
                  3,470Issuance
      of ordinary shares to executive management for services
      rendered
                  
                  $
                  72,793
                  
                  
                  $
                  38,750Issuance
      of 5,379 (2009: 4,197) preferred shares for services
    rendered
                  
                  $
                  67,130
                  
                  
                  $
                  73,660Dividends
      declared but not paid
                  
                  $
                  1,092,916
                  
                  
                  $
                  1,091,587Loan
      receivable issued for plant facility sold
                  
                  $
                  3,670,963
                  
                  
                  $
                  10,996,290Conversion
      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.
Accounting policies





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”), Consolidated Water
Cooperatief, U.A. (“CW-Coop”);  (ii) majority-owned subsidiary Consolidated
Water (Bahamas) Ltd. (“CW-Bahamas”); and (iii) affiliates Consolidated Water
(Bermuda) Limited (“CW-Bermuda”) and N.S.C. Agua, S.A. de C.V. (“NSC”), which
are consolidated because the Company has a controlling financial interest in
these companies. The Company’s investment in its other 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, 2010 and
the condensed consolidated statements of income and cash flows for the three and
nine months ended September 30, 2010 and 2009 are unaudited. These condensed
consolidated 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, 2010.





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 SEC rules and regulations, although the Company
believes that the disclosures made are adequate to make the information not
misleading.  These condensed consolidated 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, 2009.




Plant construction revenue and cost
of plant construction revenue:    The Company recognizes
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.  The Company follows this method since it can
make reasonably dependable estimates of the revenue and costs applicable to
various stages of a contract.  Under the percentage-of-completion
method, the Company records revenue and recognizes profit or loss as work on the
contract progresses.  The Company estimates total project costs and
profit to be earned on each long term, fixed price contract prior to
commencement of work on the contract and updates 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.  If, as work progresses, the actual contract costs exceed
estimates, the profit recognized on revenue from that contract
decreases.  The Company recognizes the full amount of any estimated
loss on a contract at the time the estimates indicate such a
loss.  Any costs and estimated earnings in excess of billings are
classified as current assets.  Billings in excess of costs and
estimated earnings on uncompleted contracts, if any, are classified as current
liabilities.





The
balance of costs and estimated earnings in excess of billings - construction
project of approximately $1.9 million as of December 31, 2009 represented
revenues earned to date on the construction of the Red Gate plant for the Water
Authority – Cayman (“WAC”).  The receivable balance of $3.7 million
was converted to a long term loan receivable from the WAC upon the commissioning
of the plant in July 2010.  As of September 30, 2010, the remaining
balance of this loan receivable is approximately $3.6 million.





Fair value
measurements: As of September 30, 2010 and December 31, 2009,
the carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and other liabilities and dividends payable approximate their fair
values due to the short term maturities of these
instruments.  Management considers that the carrying amounts for loans
receivable and long term debt as of September 30, 2010 and December 31, 2009
approximate their fair value.





Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants as of the measurement date.  The guidance also
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when
available.  Observable inputs are inputs market participants would use
in valuing the asset or liability and are developed based on market data
obtained from sources independent of the Company.  Unobservable inputs
are inputs that reflect the Company’s assumptions about the factors market
participants would use in valuing the asset or liability.  The
guidance establishes three levels of inputs that may be used to measure fair
value:





Level 1 —
Quoted prices in active markets for identical assets or
liabilities.




Level 2 —
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.




Level 3 —
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.


7


Assets
and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurements.  The Company
reviews the fair value hierarchy classification on a quarterly
basis.  Changes in the observability of valuation inputs may result in
a reclassification of levels for certain securities within the fair value
hierarchy.





The
following table presents the Company’s fair value hierarchy for assets and
liabilities measured at fair value as of September 30, 2010 and December 31,
2009:





September 30, 2010Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                TotalAssets:RecurringCash
      equivalents
                
                $
                27,198,372
                
                
                $
                -
                
                
                $
                -
                
                
                $
                27,198,372NonrecurringInvestment
      in affiliate
                
                $
                -
                
                
                $
                -
                
                
                $
                8,871,980
                
                
                $
                8,871,980





December 31, 2009Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                TotalAssets:RecurringCash
      equivalents
                
                $
                32,854,708
                
                
                $
                -
                
                
                $
                -
                
                
                $
                32,854,708NonrecurringInvestment
      in affiliate
                
                $
                -
                
                
                $
                -
                
                
                $
                9,157,995
                
                
                $
                9,157,995





A
reconciliation of the beginning and ending balances for Level 3 investments for
the nine months ended September 30, 2010:




Balance
      as of December 31, 2009
                
                $
                9,157,995Equity
      in earnings (loss) of affiliate
                
                
                1,072,517Distribution
      of earnings from affiliate
                
                
                (1,234,725
                )Payments  received
      on  loan receivable
                
                
                (375,000
                )Other
                
                
                251,193Balance
      as of September 30, 2010
                
                $
                8,871,980




Reclassifications: Certain
prior period amounts have been reclassified to conform to the current period’s
presentation.  These reclassifications had no effect on consolidated
net income.





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 $57,728 and $95,687 for the three months ended September
30, 2010 and 2009, respectively, and $199,880 and $330,393 for the nine months
ended September 30, 2010 and 2009, respectively, and is included in general and
administrative expenses in the condensed consolidated statements of
income.





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.





A summary
of stock option activity under the Company’s share-based compensation plans for
the nine months ended September 30, 2010 is presented in the following
table:





Options
                                    
                                    
                                    Weighted
                                      Average
                                      Exercise Price
                                    
                                    
                                    Weighted Average
                                      Remaining
                                      Contractual Life
                                      (Years)
                                    
                                    
                                    Aggregate
                                      Intrinsic
                                      Value (1)Outstanding
      at beginning of period
                                    
                                    
                                    215,052
                                    
                                    
                                    $
                                    18.76Granted
                                    
                                    
                                    8,544
                                    
                                    
                                    
                                    11.62Exercised
                                    
                                    
                                    (520
                                    )
                                    
                                    
                                    11.78Forfeited
                                    
                                    
                                    (10,009
                                    )
                                    
                                    
                                    11.78Outstanding
      as of September 30, 2010
                                    
                                    
                                    213,067
                                    
                                    
                                    $
                                    18.49
                                    
                                    
                                    
                                    2.86
                                    
                                    
                                    $
                                    160,681Exercisable
      as of September 30, 2010
                                    
                                    
                                    101,669
                                    
                                    
                                    $
                                    22.14
                                    
                                    
                                    
                                    2.01
                                    
                                    
                                    $
                                    53.560





(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 $9.48 in the NASDAQ Global Select Market on September 30, 2010, exceeds
      the exercise price of the
option.





As of
September 30, 2010, 111,398 non-vested options and 101,669 vested options were
outstanding, with weighted average exercise prices of $15.15 and $22.14,
respectively, and average remaining contractual lives of 3.65 years and 2.01
years, respectively.  The total remaining unrecognized compensation
costs related to unvested stock-based arrangements were $133,069 as of September
30, 2010 and are expected to be recognized over a weighted average period of
3.65 years.





As of
September 30, 2010, unrecognized compensation costs relating to convertible
preference shares outstanding were $109,634, and are expected to be recognized
over a weighted average period of 1.30 years.


8


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, 2010Retail
                    
                    
                    Bulk
                    
                    
                    Services
                    
                    
                    TotalRevenues
                    
                    $
                    4,631,368
                    
                    
                    $
                    6,312,326
                    
                    
                    $
                    756,108
                    
                    
                    $
                    11,699,802Cost
      of revenues
                    
                    
                    2,310,307
                    
                    
                    
                    5,250,494
                    
                    
                    
                    366,486
                    
                    
                    
                    7,927,287Gross
      profit
                    
                    
                    2,321,061
                    
                    
                    
                    1,061,832
                    
                    
                    
                    389,622
                    
                    
                    
                    3,772,515General
      and administrative expenses
                    
                    
                    2,024,690
                    
                    
                    
                    356,167
                    
                    
                    
                    915,736
                    
                    
                    
                    3,296,593Income
      from operations
                    
                    
                    296,371
                    
                    
                    
                    705,665
                    
                    
                    
                    (526,114
                    )
                    
                    
                    475,922Other
      income (expense), net
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    807,175Consolidated
      net income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,283,097Income attributable
      to noncontrolling interests
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    17,504Net
      income attributable to controlling interests
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    1,265,593





Nine Months Ended September 30, 2010Retail
                    
                    
                    Bulk
                    
                    
                    Services
                    
                    
                    TotalRevenues
                    
                    $
                    17,056,601
                    
                    
                    $
                    18,766,546
                    
                    
                    $
                    3,253,451
                    
                    
                    $
                    39,076,598Cost
      of revenues
                    
                    
                    7,817,030
                    
                    
                    
                    15,178,925
                    
                    
                    
                    2,590,597
                    
                    
                    
                    25,586,552Gross
      profit
                    
                    
                    9,239,571
                    
                    
                    
                    3,587,621
                    
                    
                    
                    662,854
                    
                    
                    
                    13,490,046General
      and administrative expenses
                    
                    
                    6,486,689
                    
                    
                    
                    935,667
                    
                    
                    
                    1,489,920
                    
                    
                    
                    8,912,276Income
      from operations
                    
                    
                    2,752,882
                    
                    
                    
                    2,651,954
                    
                    
                    
                    (827,066
                    )
                    
                    
                    4,577,770Other
      income (expense), net
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    980,823Consolidated
      net income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,558,593Income attributable
      to noncontrolling interests
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    182,995Net
      income attributable to controlling interests
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    5,375,598As
      of September 30, 2010:Property
      plant and equipment, net
                    
                    $
                    26,764,829
                    
                    
                    $
                    29,066,389
                    
                    
                    $
                    1,207,691
                    
                    
                    $
                    57,038,909Construction
      in progress
                    
                    
                    311,795
                    
                    
                    
                    172,092
                    
                    
                    
                    -
                    
                    
                    
                    483,887Goodwill
                    
                    
                    1,170,511
                    
                    
                    
                    2,328,526
                    
                    
                    
                    88,717
                    
                    
                    
                    3,587,754Total
      assets
                    
                    
                    79,174,771
                    
                    
                    
                    69,430,983
                    
                    
                    
                    4,971,093
                    
                    
                    
                    153,576,847




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
      attributable to noncontrolling interests
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                69,762Net
      income attributable to controlling interests
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                657,900


9





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 attributable
      to noncontrolling interests
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                382,144Net
      income attributable to controlling interests
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                7,075,657As
      of September 30, 2009:Property
      plant and equipment, net
                
                $
                22,603,863
                
                
                $
                32,886,407
                
                
                $
                1,453,976
                
                
                $
                56,944,246Construction
      in progress
                
                
                5,575,692
                
                
                
                45,332
                
                
                
                -
                
                
                
                5,621,024Goodwill
                
                
                1,170,511
                
                
                
                2,328,526
                
                
                
                88,717
                
                
                
                3,587,754Total
      assets
                
                
                83,640,898
                
                
                
                64,287,265
                
                
                
                8,768,996
                
                
                
                156,697,159





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, 2010 and
2009.





Three Months Ended
                                            September 30,
                                          
                                          
                                          Nine Months Ended
                                            September 30,2010
                                          
                                          
                                          2009
                                          
                                          
                                          2010
                                          
                                          
                                          2009Net
      income attributable to controlling interests
                                          
                                          $
                                          1,265,593
                                          
                                          
                                          $
                                          657,900
                                          
                                          
                                          $
                                          5,375,598
                                          
                                          
                                          $
                                          7,075,657Less:Dividends
      declared and earnings attributable to preferred shares
                                          
                                          
                                          (1,507)
                                          
                                          
                                          
                                          (1,202
                                          )
                                          
                                          
                                          (4,999)
                                          
                                          
                                          
                                          (4,387
                                          )Net
      income available to holders of common shares in the determination of basicand
      diluted earnings per share
                                          
                                          $
                                          1,264,086
                                          
                                          
                                          $
                                          656,698
                                          
                                          
                                          $
                                          5,370,599
                                          
                                          
                                          $
                                          7,071,270Weighted
      average number of common shares used in the determination of basic
      earnings per common share
                                          
                                          
                                          14,549,189
                                          
                                          
                                          
                                          14,537,041
                                          
                                          
                                          
                                          14,545,555
                                          
                                          
                                          
                                          14,533,097Plus:Weighted
      average number of preferred shares outstanding during the
      period
                                          
                                          
                                          20,216
                                          
                                          
                                          
                                          17,914
                                          
                                          
                                          
                                          18,497
                                          
                                          
                                          
                                          17,812Potential
      dilutive effect of unexercised options
                                          
                                          
                                          23,260
                                          
                                          
                                          
                                          56,646
                                          
                                          
                                          
                                          36,158
                                          
                                          
                                          
                                          32,341Weighted
      average number of common shares used in the determination of dilutedearnings
      per common share
                                          
                                          
                                          14,592,665
                                          
                                          
                                          
                                          14,611,601
                                          
                                          
                                          
                                          14,600,210
                                          
                                          
                                          
                                          14,583,250





5.
Impact of recent accounting pronouncements





Adoption of New Accounting
Standards:





Fair Value Measurements and
Disclosures


In
January 2010, the Financial Accounting Standards Board (“FASB”) issued new
accounting guidance that amends the disclosure requirements related to recurring
and nonrecurring fair value measurements and requires new disclosures on the
transfers of assets and liabilities between Level 1 (quoted prices in active
market for identical assets or liabilities) and Level 2 (significant other
observable inputs) of the fair value measurement hierarchy, including the
reasons and the timing of the transfers. Additionally, the guidance requires a
roll forward of activities on purchases, sales, issuance and settlements of the
assets and liabilities measured using significant unobservable inputs (Level 3
fair value measurements). The guidance became effective for the fiscal year
beginning January 1, 2010, except for the disclosure on the roll forward
activities for Level 3 fair value measurements, which will become effective for
the fiscal year beginning January 1, 2011. The adoption of this Level 1 and
Level 2 guidance did not have an effect on the Company’s condensed consolidated
financial statements. The Company does not expect the adoption of the Level 3
guidance to have a material impact on its condensed consolidated financial
statements.





Accounting for Transfers of
Financial Assets


In June
2009, the FASB issued new accounting guidance to improve the information
provided in financial statements concerning transfers of financial assets,
including the effects of transfers on financial position, financial performance
and cash flows, and any continuing involvement of the transferor with the
transferred financial assets. The provisions of this guidance are effective for
the Company’s financial statements for the fiscal year beginning January 1,
2010. The adoption of this guidance did not have a material effect on
the Company’s condensed consolidated financial statements.





Variable Interest
Entities


In June
2009, the FASB issued new accounting guidance requiring an enterprise to perform
an analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest entity. This
guidance also requires enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprise’s involvement
in a variable interest entity. The provisions of this guidance are effective for
the Company’s financial statements for the fiscal year beginning January 1,
2010. The adoption of this guidance did not have a material effect on the
Company’s condensed consolidated financial statements.





Effect of Newly Issued But
Not Yet Effective Accounting Standards:





In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13,
“Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a
consensus of the FASB Emerging Issues Task Force,” which amends the criteria for
when to evaluate individual delivered items in a multiple deliverable
arrangement and how to allocate consideration received.  This ASU is
effective for fiscal years beginning on or after June 15, 2010, which is
January 1, 2011 for the Company. The Company is currently evaluating the
impact of adopting the guidance.


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 cumulative profits of OC-BVI to approximately 45%. Pursuant to a
management services agreement, OC-BVI pays the Company monthly fees for certain
management, engineering, procurement 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 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. Principal on this
loan was payable in quarterly installments of $125,000 with a final balloon
payment due on August 31, 2009 and interest on the loan was due quarterly at the
rate of LIBOR plus 3.5%. In August 2009, the Company amended the terms of this
loan with OC-BVI, increasing its balance to $2.8 million 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 LIBOR plus
5.5% and the maturity date for the amended final balloon payment of $1,550,000
extended to August 31, 2011. The Company further amended this loan in January
2010 to increase the interest rate to LIBOR plus 7.5%. On March 4, 2010, OC-BVI
and the BVI government executed a definitive seven-year contract for the Bar Bay
plant (the “Bar Bay Agreement”). Under the terms of the Bar Bay Agreement,
OC-BVI delivers up to 600,000 U.S. gallons of water per day to the BVI
government from the Bar Bay plant and the BVI government is obligated to pay for
this water at a specified price as adjusted by a monthly energy factor. The Bar
Bay Agreement requires OC-BVI to complete a storage reservoir on the BVI
government site by no later than March 4, 2011 and includes a seven-year
extension option exercisable by the BVI government.


11


Summarized
financial information for OC-BVI is presented below:





September 30,
                
                
                December 31,2010
                
                
                2009Current
      assets
                
                $
                3,316,229
                
                
                $
                3,433,427Non-current
      assets
                
                
                8,456,806
                
                
                
                9,454,460Total
      assets
                
                $
                11,773,035
                
                
                $
                12,887,887





September 30,
                
                
                December 31,2010
                
                
                2009Current
      liabilities
                
                $
                4,423,919
                
                
                $
                3,474,797Non-current
      liabilities
                
                
                2,549,607
                
                
                
                5,259,756Total
      liabilities
                
                $
                6,973,526
                
                
                $
                8,734,553





Three Months Ended
                  September 30,
                
                
                Nine Months Ended
                  September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Water
      sales
                
                $
                3,101,952
                
                
                $
                353,844
                
                
                $
                6,251,534
                
                
                $
                104,615Gross
      profit (loss)
                
                $
                2,573,267
                
                
                $
                (3,001,543
                )
                
                $
                3,987,820
                
                
                $
                (3,028,817
                )Income
      (loss) from operations
                
                $
                1,872,170
                
                
                $
                (3,184,181
                )
                
                $
                2,771,141
                
                
                $
                (3,829,172
                )Net
      income (loss)
                
                $
                1,867,915
                
                
                $
                (4,571,973
                )
                
                $
                2,709,805
                
                
                $
                (3,957,780
                )





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





September 30,
                
                
                December 31,2010
                
                
                2009Equity
      investment (including profit sharing rights)
                
                $
                6,571,980
                
                
                $
                6,482,995Loan
      receivable  (secured by Bar Bay plant with a net book value of
      $7.3 million)
                
                
                2,300,000
                
                
                
                2,675,000$
                8,871,980
                
                
                $
                9,157,995





The
Company recognized earnings of $777,406 and $1,072,517 on its equity investment
in OC-BVI for the three and nine months ended September 30, 2010,
respectively.  The Company recognized losses of $(1,582,248) and
$(2,780,270) on its equity investment in OC-BVI for the three and nine months
ended September 30, 2009, respectively. For the three and nine months ended
September 30, 2010, the Company recognized revenues of $406,147 and
$562,715, respectively, from its management services agreement with
OC-BVI.  For the three and nine months ended September 30, 2009, the
Company recognized revenues of $60,423 and $341,406, respectively, from its
management services agreement with OC-BVI.  In addition to the
Company’s loans to, and equity investment in, OC-BVI of approximately $8.9
million as of September 30, 2010 and $9.2 million as of December 31, 2009, the
Company’s recorded value of the OC-BVI management services agreement, which is
reflected as an intangible asset on the Company’s condensed consolidated balance
sheet, was approximately $749,000 as of September 30, 2010 and $856,000 as of
December 31, 2009.  As a result of the signing of the Bar Bay
Agreement and the loss of its operating contract for the Baughers Bay plant (see
discussion below), the Company began amortization of this intangible asset over
the seven year life of the Bar Bay Agreement during the three months ended March
31, 2010.




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 OC-BVI and the Ministry that was signed in
1990 (the “1990 Agreement”).





Under the
terms of the 1990 Agreement, upon the expiration of the initial term in May
1999, the 1990 Agreement would automatically be extended for another seven years
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 was prepared to exercise the option
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 from early 2000 to early
2007 without resolution of the matter while OC-BVI continued to supply water to
the Ministry. OC-BVI expended approximately $4.7 million in 2003 to
significantly expand the production capacity of the plant beyond that
contemplated in the 1990 Agreement.


12


Early in
2007, the Ministry unilaterally took the position that until such time as a new
agreement is 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 were
sporadic and as of December 31, 2007, OC-BVI had received payment for less than
22% of the amounts it billed the Ministry for the year then ended. 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 believed represented
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, and on April 22, 2009 amended and
increased this claim, seeking payment for water sold and delivered to the BVI
government through March 31, 2009 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 in July 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 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 amounted to a total recovery for OC-BVI of $10.4 million as of September
17, 2009.  The BVI government made a payment of $2.0 million to OC-BVI
under the Court order during the fourth quarter of 2009 and a second payment of
$2 million under the Court order in July 2010.





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.





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 relevant revenue recognition
criteria under US GAAP. As a result of this adjustment to its revenues, OC-BVI
incurred operating losses for the first three quarters of 2009. 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 had been
received from the BVI government as of September 30, 2009 to repay the remaining
accounts receivable balances relating to periods prior to December 31,
2007.  However, OC-BVI continues to apply the equivalent of the cash
method with respect to the recognition of revenues from Baughers Bay
and does not recognize as revenues any amounts due to OC-BVI as a
result of the Court ruling until such amounts are paid by the BVI government.
The BVI government made a $2.0 million payment under the Court order during the
fourth quarter of 2009 and made a second payment of $2 million under the Court
order in July 2010. OC-BVI also applied the equivalent of the cash method of
accounting for revenue recognition for its Bar Bay plant through December 31,
2009. As a result of the signing of the Bar Bay Agreement in March 2010, OC-BVI
began recognizing revenues from the Bar Bay plant on the accrual basis and
recognized all revenues previously deferred under the cash method of
accounting.  However, as of September 30, 2010, the BVI government
owed OC-BVI $1.7 million for water delivered from the Bar Bay plant, of which
$1.4 million remained unpaid and past due as of November 9, 2010.  If
the BVI government does not pay these overdue balances in the near future,
OC-BVI may be required to cease the production and delivery of water by the Bar
Bay plant and file a claim against the BVI government to collect its outstanding
receivable balances.  Such actions could adversely affect the earnings
the Company derives from, and the carrying value of, its investment in
OC-BVI.





In
February 2010, the BVI government announced that it had signed a 16-year
contract with another company for the construction and operation of a water
plant with a production capacity of 2.75 million U.S. gallons per day. This new
plant will provide potable water to the greater Tortola area. On March 29, 2010,
OC-BVI vacated the Baughers Bay plant and the BVI government assumed direct
responsibility for the plant’s operations.


13


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 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 its investment in OC-BVI, the Company estimates its
fair value as of the end of each fiscal quarter. In making this estimate, the
Company calculates the expected cash flows from its investment in OC-BVI by (i)
identifying various possible outcomes of the Baughers Bay litigation; (ii)
estimating the cash flows associated with the Bar Bay plant and each possible
outcome for the Baughers Bay litigation, and (iii) assigning a probability to
each possible Baughers Bay 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 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 during the three months ended
September 30, 2009. As a result of the decision by the BVI government to enter
into the agreement with another company to build a new plant to provide water to
Tortola, the Company believes it unlikely that OC-BVI will derive any
significant future cash flows from an operating contract for the Baughers Bay
plant.  Consequently, the Company determined that an additional
impairment loss of $(4,500,000) was required (and was recorded) during the
fourth quarter of 2009 to reduce its investment in OC-BVI to its estimated fair
value.





Based
upon the estimated fair value determined as of December 31, 2009 and the
developments since that date to the date of this filing, the Company concluded
that no impairment loss was required to be recognized on its investment in
OC-BVI during the nine months ended September 30, 2010. This conclusion assumes
that the BVI government will fulfill its obligations under the Bar Bay Agreement
and that OC-BVI will collect all of the $10.4 million awarded by the Court (of
which only $4.0 million has been received through September 30, 2010). The
Appellate Court could ultimately overturn the ruling of the Court which
currently requires the BVI government to pay OC-BVI at the rate of $13.91 per
thousand imperial gallons for water previously supplied, or the BVI government
could fail to honor the terms of the Bar Bay Agreement. If either of these
events occur the actual cash flows from OC-BVI could vary materially from the
expected cash flows the Company used in determining OC-BVI’s fair value as of
September 30, 2010 and the Company could be required to record an additional
impairment loss to reduce the carrying value of its investment in OC-BVI. Such
impairment loss would reduce the Company’s earnings and could have a material
adverse impact on its results of operations and financial
condition.




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 design, build, sale and operating agreement with the Government
of Bermuda for a desalination plant to be built in two phases at Tynes Bay along
the northern coast of Bermuda. Under the agreement, CW-Bermuda constructed the
plant and has been operating it since the second quarter of 2009.





The
Company has entered into a management 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.





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 significant 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 (“VIE”). The Company
is the primary beneficiary of CW-Bermuda and accordingly, consolidates the
results of CW-Bermuda in its financial statements. The assets and liabilities of
CW-Bermuda included in the Company’s condensed consolidated balance sheet
amounted to approximately $561,000 and $159,000 respectively, as of September
30, 2010. The Company has not provided any guarantees related to CW-Bermuda and
any creditors of the VIE do not have recourse to the general credit of
Consolidated Water Co. Ltd. as a result of including CW-Bermuda in the condensed
consolidated financial statements. The results of CW-Bermuda are reflected in
the Company’s services segment.





8.
Mexico Affiliate




In May,
2010, the Company acquired, through its recently organized wholly-owned
Netherlands subsidiary, Consolidated Water Cooperatief, U.A., a 50% interest in
N.S.C. Agua, S.A. de C.V., (“NSC”) a Mexican company. NSC has been formed to
pursue a project encompassing the construction, ownership and operation of a
large seawater reverse osmosis desalination plant to be located in Baja
California, Mexico and accompanying pipelines to deliver water to the Baja
region and to the U.S. border. The Company and its partners in NSC believe such
a project can be successful due to the anticipated growing need for a new
potable water supply for the areas of Baja California, Mexico and Southern
California, United States. NSC is in the early stages of the project
development, and is presently pursuing contracts for the purchase of land on
which to build the plant and for the electric power and feed water sources for
the plant’s operations. In addition to obtaining these contracts, NSC will be
required to complete various other steps before it can commence construction of
the plant and pipeline including, but not limited to, obtaining approvals and
permits from various governmental agencies in Mexico, securing contracts with
its proposed customers to sell water in sufficient quantities and at prices that
make the project financially viable, and obtaining equity and debt financing for
the project. NSC’s prospective customers in Mexico and the U.S will also be
required to obtain various governmental permits and approvals in order to
purchase water from NSC and sell this water to their customers.





For its
50% interest in NSC, the Company has agreed to provide all of the initial
funding (up to $4 million) in the form of equity for NSC’s development
activities. Because the Company exercises effective financial control over NSC
and the Company’s partners in NSC will not participate in funding the first $4
million in losses that NSC may incur, the Company consolidates NSC’s results of
operations. Included in the Company’s condensed consolidated results of
operations for the three and nine months ended September 30, 2010 are
approximately $873,000 and $1.4 million, respectively, in general and
administrative expenses, consisting of organizational, legal, accounting,
engineering, consulting and other costs relating to the business development
activities of NSC. The Company anticipates that substantially all of the funding
it provides for NSC’s development activities will be expensed.





The
Company estimates that it will take approximately one year for NSC to
purchase land for the plant, secure feed water and power supplies, complete the
engineering and feasibility studies, obtain the required permits and approvals
and arrange the project financing necessary to commence construction of the
plant. However, this process could take significantly longer than a year, and
NSC may ultimately be unable to accomplish all of the steps required to proceed
with the project.





9.
Subsequent events





The
Company has evaluated subsequent events for potential recording or disclosure in
these condensed consolidated financial statements through the date the financial
statements were issued.


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 2009 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 under 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. The final resolution of OC-BVI’s litigation with the BVI government
relating to the possession and operation of the Baughers Bay plant may result in
a decline in the current fair value of our investment in OC-BVI to an amount
that 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 litigation; (ii) estimating the cash flows
associated with the Bar Bay plant and each possible outcome of the Baughers Bay
litigation, and (iii) assigning a probability to each Baughers Bay 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.


15


The
identification of the possible outcomes for the Baughers Bay litigation, the
projections of cash flows for each outcome and for the Bar Bay plant, and the
assignment of relative probabilities to each Baughers Bay outcome all represent
significant estimates made by us. While we have used our best judgment to
identify the possible Baughers Bay outcomes and expected cash flows for these
outcomes and assign relative probabilities to each outcome, and to estimate the
expected cash flows from the Bar Bay plant, 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. After considering the September and October 2009 rulings of
the Eastern Supreme Court of the Caribbean relating to 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 therefore recognized an impairment loss of this
amount on this investment during the three months ended September 30,
2009.   In February 2010, the BVI government announced that it
had signed a 16-year contract with another company for the construction and
operation of a water plant with a production capacity of 2.75 million U.S.
gallons per day.  This new plant will provide potable water to the
greater Tortola area and we believe will replace the current production of the
Baughers Bay plant.  As a result of the decision by the BVI government
to enter into the agreement with another company to provide water to Tortola, we
believe it unlikely that OC-BVI will derive any significant future revenues from
an operating contract for the Baughers Bay plant.  Consequently, we
determined that an additional impairment loss of $(4,500,000) was required (and
was recorded) during the fourth quarter of 2009 to reduce our investment in
OC-BVI to its estimated fair value.




As of
September 30, 2010, the BVI government owed OC-BVI $1.7 million for water
delivered from the Bar Bay plant, of which $1.4 million remained unpaid and past
due as of November 9, 2010.  If the BVI government does not pay these
overdue balances in the near future, OC-BVI may be required to cease the
production and delivery of water by the Bar Bay plant and file a claim against
the BVI government to collect its outstanding receivable
balances.  Such actions could adversely affect the earnings we derive
from, and the carrying value of, our investment in OC-BVI.





Based
upon the estimated fair value determined as of December 31, 2009 and the
developments since that date to the date of this filing, we concluded that no
impairment loss was required to be recognized on our investment in OC-BVI during
the three and nine months ended September 30, 2010. This conclusion assumes that
the BVI government will fulfill its obligations under the Bar Bay Agreement and
that OC-BVI will collect all of the $10.4 million awarded by the Court (of which
only $4.0 million has been received as of September 30, 2010).  The
Appellate Court could 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, or the BVI government could fail to honor
the terms of the Bar Bay Agreement.   If either of these events
occurs, the actual cash flows from OC-BVI could vary materially from the
expected cash flows we used in determining OC-BVI’s fair value as of September
30, 2010, and we could be required to record an additional loss to reduce the
carrying value of our investment in OC-BVI. Such impairment loss 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. Generally accepted accounting principles require the amortization of
intangible assets with estimable useful lives over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment
periodically.  We evaluate the possible impairment of goodwill
annually.  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. During the second quarter ended June 30, 2010, we were required to reduce
the cumulative profit previously recognized for a construction project by
approximately $403,000 for liquidated damages and cost overruns not contemplated
in our prior cost estimates. These liquidated damages and cost overruns
represent the only material adverse variation from our cost estimates for plants
constructed for sale to third parties we have experienced to date.





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 hydro-geologic 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, 2009 (“2009 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 2009 Form 10-K.





Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009





Consolidated
Results





Net
income for the three months ended September 30, 2010 was $1,265,593 ($0.09 per
share on a fully-diluted basis) as compared to $657,900 ($0.05 per share on a
fully-diluted basis) for the three months ended September 30,
2009.  Our operating income decreased from 2009 to 2010, but this
decrease was more than offset by an improvement in the operating results of
OC-BVI, our equity investment affiliate, as discussed below.





Total
revenues for the three months ended September 30, 2010 were $11,699,802, a
decrease from the $13,526,059 in revenues for the three months ended September
30, 2009, as all three of our business segments generated lower revenues in 2010
than in 2009. Gross profit for the three months ended September 30, 2010 was
$3,772,515, or 32% of total revenues, as compared to $5,036,068, or 37% of total
revenues, for the three months ended September 30, 2009. Gross profit for all
three segments declined from 2009 to 2010.  For further discussion of
revenues and gross profit for the three months ended September 30, 2010, see the
“Results by Segment” analysis that follows.





General
and administrative (“G&A”) expenses increased to $3,296,593 on a
consolidated basis for the three months ended September 30, 2010, as compared to
$2,671,169 for the three months ended September 30, 2009.  This
increase in G&A expenses is attributable to incremental expenses of
approximately $873,000 relating to the business development activities of our
recently formed consolidated Mexico affiliate, N.S.C. Agua, S.A. de C.V.
(“NSC”).





Interest
income increased to $386,562 for 2010, as compared to $311,990 for 2009, due to
interest earned on the loan receivable from the Water Authority - Cayman arising
from the refurbishment of the Red Gate plant.





We
reported a loss from our investment in OC-BVI for the three months ended
September 30, 2009 of $(1,582,248) as a result of OC-BVI’s contractual dispute
with the BVI government relating to its Baughers Bay plant. During the
third quarter of 2010, we recognized earnings on our investment in OC-BVI of
$777,406 due to the (i) receipt by OC-BVI in July 2010 of a $2.0 million payment
under the Court award for the Baughers Bay dispute and (ii) revenues generated
by the Bar Bay plant.  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 $296,371 to our income from operations for the three
months ended September 30, 2010, as compared to $1,070,885 for the three months
ended September 30, 2009.





Revenues
generated by our retail water operations were $4,631,368 and $5,659,390 for the
three months ended September 30, 2010 and 2009, respectively.  The
decline in retail revenues from 2009 to 2010 reflects the annual adjustment made
during the first quarter to our base rates, which decreased in 2010 due to
a downward movement in the consumer price indices used to determine such
rates, and a decline in the volume of gallons sold from 2009 to 2010 of
approximately 19%.  We believe this decline in volume of water sold
resulted from rainfall amounts that were higher in 2010 than 2009 and weaker
economic conditions on Grand Cayman.





Retail
segment gross profit was $2,321,061 (50% of revenues) and $3,237,650 (57% of
revenues) for the three months ended September 30, 2010 and 2009,
respectively.  The decline in gross profit as a percentage of revenues
from 2009 to 2010 reflects the annual adjustment in our base rates during the
first quarter, which decreased in 2010 due to a downward movement in the
consumer price indices used to determine such rates, and the lower volume of
water sold, as a significant portion of our plant operating costs are fixed in
nature.




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, 2010 and 2009 were relatively consistent at $2,024,690 and
$2,166,765, respectively.


17


Bulk
Segment:





The bulk
segment contributed $705,665 and $933,441 to our income from operations for the
three months ended September 30, 2010 and 2009, respectively.





Bulk
segment revenues were $6,312,326 and $6,687,836 for the three months ended
September 30, 2010 and 2009, respectively.  The decline in bulk
revenues from 2009 to 2010 reflects (i) the annual adjustment made during the
first quarter to the base rates charged by Ocean Conversion Cayman, which
decreased in 2010 due to downward movement in the consumer price indices used to
determine such rates; (ii) a decrease in the volume of water sold of
approximately 9% from 2009 to 2010; and (iii) a lower rate charged for water
sold by the Red Gate plant under the new contract signed in connection with the
refurbishment of this plant.





Gross
profit for our bulk segment was $1,061,832 and $1,385,301 for the three months
ended September 30, 2010 and 2009, respectively.  Gross profit as a
percentage of bulk revenues was 17% for the three months ended September 30,
2010, down from 21% for 2009 due to the rate adjustments and the lower
volume of water sold, as a significant portion of our plant operating costs are
fixed in nature.





Bulk
segment G&A expenses for the three months ended September 30, 2010 decreased
to $356,167 from $451,860 for the same period in 2009, primarily due to a
$130,000 decrease in bank charges, which were incurred in 2009 to convert
Bahamas dollars into U.S. dollars and transfer such dollars from the Bahamas to
Grand Cayman.





Services
Segment:





The
services segment incurred a loss from operations of $(526,114) for the three
months ended September 30, 2010, while this segment contributed $360,573 to our
income for the three months ended September 30, 2009.





Revenues
from services provided in 2010 were $756,108 as compared to $1,178,833 in
2009.  Services revenues decreased from 2009 to 2010 due to
substantially lower plant sales revenues, which declined by approximately
$561,000 due to reduced construction activity and a decrease in fees earned for
management of the Bermuda plant.  These decreases in services revenue
were partially offset by an increase of approximately $346,000 in the management
fees OC-BVI was able to pay us as a result of OC-BVI’ s receipt during 2010 of
$2.0 million of the Court award for the Bar Bay dispute.





Services
segment gross profit decreased in 2010 to $389,622, as compared to $413,117 in
2009 due to the overall decrease in services revenues.  However,
services gross profit as a percentage of revenues improved from 2009 to 2010 as
a result of the additional management fees paid by to us by OC-BVI.





G&A
expenses for the services segment were $915,736 and $52,544 for the three months
ended September 30, 2010 and 2009, respectively.  The increase in
G&A expenses in 2010 reflects incremental legal, accounting, engineering,
consulting and other expenses aggregating approximately $873,000 that are
attributable to the business development activities of our recently formed
consolidated Mexico affiliate, NSC.





Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009





Consolidated
Results





Net
income for the nine months ended September 30, 2010 was $5,375,598 ($0.37 per
share on a fully-diluted basis) as compared to $7,075,657 ($0.49 per share on a
fully-diluted basis) for the nine months ended September 30,
2009.  Our results for the nine months ended September 30, 2010 as
compared to the same period in 2009 were significantly affected by a decline in
the results of our retail and services segments.





Total
revenues for the nine months ended September 30, 2010 were $39,076,598, a
decrease from the $44,845,112 in revenues for the nine months ended September
30, 2009, as all three of our business segments generated lower revenues in 2010
than in 2009. Gross profit for the nine months ended September 30, 2010 was
$13,490,046, or 35% of total revenues, as compared to $18,603,611, or 41% of
total revenues, for the nine months ended September 30, 2009. Gross profit
for all three segments declined in 2010 from 2009.  For further
discussion of revenues and gross profit for the nine months ended September 30,
2010, see the “Results by Segment” analysis that follows.





G&A expenses
on a consolidated basis were $8,912,276 and $7,842,434 for the nine months ended
September 30, 2010 and 2009, respectively. The increase in G&A expenses for
2010 reflects approximately $1.4 million in incremental expenses that are
attributable to the business development activities of our newly formed
consolidated Mexico affiliate, NSC.





Interest
income increased to $990,777 for the nine months ended September 30, 2010, as
compared to $620,663 for the same period in 2009, due to interest earned on the
loans receivable from the Water Authority - Cayman arising from the completion
and sale of the North Side Water Works plant and the refurbishment of the Red
Gate plant.





We
reported a loss from our investment in OC-BVI for the nine months ended
September 30, 2009 of $(2,780,270) as a result of  OC-BVI’s contractual
dispute with the BVI government relating to its Baughers Bay
plant.   For the nine months ended September 30, 2010 we
recognized earnings on our investment in OC-BVI of $1,072,517 due to the (i)
receipt by OC-BVI during July 2010 of a $2.0 million payment under the Court
award for the Baughers Bay dispute and (ii) revenues generated by the Bar Bay
plant.  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 $2,752,882 to our income from operations for the nine
months ended September 30, 2010, as compared to $4,762,059 for the nine months
ended September 30, 2009.





Revenues
generated by our retail water operations were $17,056,601 and $18,418,103 for
the nine months ended September 30, 2010 and 2009, respectively.  The
volume of gallons sold in 2010 by the retail segment increased by approximately
1% from 2009 to 2010 due to water sales made at bulk water rates to the WAC to
replace water previously supplied by the Red Gate plant while such plant was
under refurbishment.   The decline in retail revenues from 2009
to 2010 reflects the annual adjustment in our base rates made during the first
quarter, which decreased in 2010 due to a downward movement in the consumer
price indices used to determine such rates and the sales to the WAC at bulk
water rates.





Retail
segment gross profit was $9,239,571 (54% of revenues) and $11,027,852 (60% of
revenues) for the nine months ended September 30, 2010 and 2009,
respectively.  The decline in gross profit as a percentage of revenues
from 2009 to 2010 reflects the base rate adjustment discussed in the previous
paragraph.




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, 2010 and 2009 were relatively consistent at $6,486,689 and
$6,265,793, respectively.


18


Bulk
Segment:





The bulk
segment contributed $2,651,954 and $2,874,356 to our income from operations for
the nine months ended September 30, 2010 and 2009, respectively.





Bulk
segment revenues were $18,766,546 and $19,526,044 for the nine months ended
September 30, 2010 and 2009, respectively.  The volume of water sold
by our bulk segment decreased by approximately 3% from 2009 to
2010.





Gross
profit for our bulk segment was $3,587,621 and $4,286,786 for the nine months
ended September 30, 2010 and 2009, respectively.  Gross profit as a
percentage of bulk revenues was 19% and 22% for the nine months ended September
30, 2010 and 2009, respectively. The decline in bulk gross profit from 2009 to
2010 reflects the annual adjustment made during the first quarter to the base
rates charged by Ocean Conversion Cayman, which decreased in 2010 due to a
downward movement in the consumer price indices used to determine such rates,
and the lower sales volume, as a significant portion of our plant operating
costs are fixed in nature.





Bulk
segment G&A expenses were $935,667 and $1,412,430 for the nine months ended
September 30, 2010 and 2009, respectively.  The decrease is primarily
due to approximately $183,000 in penalties and interest assessed to our Belize
operations during the first quarter of 2009 relating to delinquent business
taxes and a decrease in bank charges of approximately $253,000 for our Bahamas
operations.  The Belize penalties and interest arose because we were
erroneously informed in the past that our Belize subsidiary was not subject to
these taxes.   The bank charges incurred in 2009
resulted from the conversion of Bahamas dollars into U.S. dollars and the
transfer of such dollars from the Bahamas to Grand Cayman.





Services
Segment:





The
services segment incurred a loss from operations of $(827,066) for the nine
months ended September 30, 2010.  The services segment contributed
$3,124,762 to our income from operations for the same period in
2009.





Services
segment revenues were $3,253,451 and $6,900,965 for the nine months ended
September 30, 2010 and 2009, respectively.  Services revenues
decreased from 2009 to 2010 due to substantially lower plant sales revenues,
which declined by approximately $3.5 million due to reduced construction
activity, and to a decrease of approximately $407,000 in management fees due to
the renegotiation of the management services agreement for the Bermuda
plant.





Gross
profit for our services segment was $662,854 and $3,288,973 for the nine months
ended September 30, 2010 and 2009, respectively.  The lower gross
profit for 2010 stems primarily from the decreased plant sales revenues and, to
a lesser extent, from liquidated damages of $260,000 assessed by the Water
Authority Cayman during the quarter ended June 30, 2010 as a result of our
inability (due to various factors including the failure of a key plant component
purchased from a third party) to complete the refurbishment and commissioning of
the Red Gate plant by its contract deadline, and construction cost overruns on
this plant.  We were required to reduce the cumulative gross profit on
the Red Gate plant by approximately $403,000 during 2010 as these liquidated
damages and cost overruns represented a significant variance from the
construction cost estimates we utilized under the percentage-of-completion
method to record our revenues and gross profit on the Red Gate plant
construction for previous quarters.





G&A
expenses for the services segment were $1,489,920 and $164,211 for the nine
months ended September 30, 2010 and 2009, respectively.  The increase
in G&A expenses in 2010 reflects incremental legal, accounting, engineering,
consulting and other expenses aggregating approximately $1.4 million that are
attributable to the business development activities of our recently formed
consolidated Mexico affiliate, NSC.





LIQUIDITY
AND CAPITAL RESOURCES





Overview





Our
sources of cash are (i) revenues generated from our retail license, plant
operating contracts and management agreements; (ii)  borrowings under
term loans, credit facilities and debt securities; and (iii) sales of equity
securities.





Our cash
flows from operations are affected by tourism, rainfall patterns, weather
conditions (such as hurricanes), 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.





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 other than for operations 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.





We
generated $5.7 million in net cash from our operating activities during the nine
months ended September 30, 2010.  As of September 30, 2010, we had
cash balances totaling approximately $45.5 million and working capital of
approximately $54.5 million.  We believe our cash on hand and cash to
be generated from operations will be sufficient to meet our liquidity
requirements for the next 12 months, and we are not presently aware of anything
that would lead us to believe that we will not have sufficient liquidity to meet
our needs through 2011.


19


Cash
Flows for the Nine Months Ended September 30, 2010





Our cash
and cash equivalents increased from $44.4 million as of December 31, 2009 to
$45.5 million as of September 30, 2010.





Cash
Flows from Operating Activities





Operating
activities provided net cash for the nine months ended September 30, 2010 of
$5.7 million.  This cash provided reflects net income generated for
the nine months ended September 30, 2010 as adjusted for (i) various items
included in the determination of net income that do not affect cash flows during
the year and (ii) changes in the other components of working
capital.




Cash
Flows Provided by Investing Activities




Our
investing activities provided $1.1 million in net cash during the nine months
ended September 30, 2010.  Approximately $1.1 million was used for
construction in progress and property, plant and equipment additions and we
collected $1.0 million on our loans receivable.  OC-BVI also paid us a
dividend of $1.2 million.




Cash
Flows Used in Financing Activities





Our
financing activities used $5.8 million in net cash during the nine months ended
September 30, 2010, which consisted of $2.6 million in scheduled payments on our
debt and dividends paid of $3.3 million.





Borrowings
Outstanding





As of
September 30, 2010, our borrowings outstanding consisted of long term bonds
payable with unpaid principal balances aggregating $18,646,541.





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, 2010, $10,551,505 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 $2.0 million 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, 2010,
we were in compliance with the covenants under the trust deed.


20


CW-Bahamas
Series A Bonds





In July
2005, CW-Bahamas sold B$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.  We elected to redeem $1.5 million of these bonds in
September 2010.  As of September 30, 2010, B$8,500,000 of the Series A
bonds were outstanding.





CW-Bahamas
Credit Facility





CW-Bahamas
has a credit facility with Scotiabank of Canada that consists of a B$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, 2010, no amounts were outstanding under this
facility.





The
credit facility contains certain covenants applicable to CW-Bahamas, including
restrictions on additional debt, guarantees and sale of assets.  All
obligations under the credit facility are repayable on demand.





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”).




Under the
terms of the 1990 Agreement, upon the expiration of the initial term in May
1999, the agreement would automatically be extended for another seven years
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 from early 2000 to early 2007 without
resolution of the matter while OC-BVI 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.





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 were
sporadic and as of December 31, 2007, OC-BVI had received payment for less than
22% of the amounts it billed for the year then ended.   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
believed represented 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, and on April 22, 2009 amended and
increased this claim, seeking payment for water sold and delivered to the BVI
government through May 31, 2009 at the contract prices in effect before the BVI
government asserted its purported right of ownership of the
plant.


21


The Court
held a three-day trial in July 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 amounted to a total recovery for OC-BVI of $10.4 million as of September
17, 2009. The BVI government made a payment of $2.0 million to OC-BVI under the
Court order during the fourth quarter of 2009 and made a second payment of $2
million under the Court order during July 2010.





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.





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 criteria required under U.S.
generally accepted accounting principles to recognized revenue on the accrual
basis. As a result of this adjustment to OC-BVI’s revenues, we recorded losses
from our equity in OC-BVI’s results of operations for the first three quarters
of 2009. 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 had been
received from the BVI government as of September 30, 2009 to repay the remaining
accounts receivable balances relating to period prior to December 31, 2007.
However, OC-BVI continues to apply the equivalent of the cash method with
respect to the recognition of revenues from Baughers Bay and does not recognize
as revenues any amounts due to OC-BVI as a result of the Court ruling until
such amounts are paid by the BVI government. The BVI government made a $2.0
million payment under the Court order during the fourth quarter of 2009 and a
second payment of $2 million under the Court order in July 2010. OC-BVI also
applied the equivalent of the cash method of accounting for revenue recognition
for its Bar Bay plant through December 31, 2009. As a result of the signing of
the Bar Bay Agreement in March 2010, OC-BVI began recognizing revenues from the
Bar Bay plant on the accrual basis and recognized all revenues previously
deferred under the cash method of accounting.  However, as of
September 30, 2010 the BVI government owed OC-BVI $1.7 million for water
delivered from the Bar Bay plant, of which $1.4 million remained unpaid and past
due as of November 9, 2010.  If the BVI government does not pay these
overdue balances in the near future, OC-BVI may be required to cease the
production and delivery of water by the Bar Bay plant and file a claim against
the BVI government to collect its outstanding receivable
balances.  Such actions could adversely affect the earnings we derive
from, and the carrying value of, our investment in OC-BVI.


22


In
February 2010, the BVI government announced that it had signed a 16 year
contract with another company for the construction and operation of a water
plant with a production capacity of 2.75 million U.S. gallons per day. This new
plant will provide potable water to the greater Tortola area and we believe will
replace the current production of the Baughers Bay plant. On March 29, 2010,
OC-BVI vacated the Baughers Bay plant and the BVI government assumed direct
responsibility for this plant’s operations.




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 estimate its fair value as of the end
of each fiscal quarter. In making this estimate, we calculate the expected cash
flows from our investment in OC-BVI by (i) identifying various possible outcomes
of the Baughers Bay litigation; (ii) estimating the cash flows associated with
the Bar Bay plant and each possible Baughers Bay outcome, and (iii) assigning a
probability to each Baughers Bay 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 during the three months ended September 30, 2009. As a result
of the decision by the BVI government to enter into the agreement with another
company to build a new plant to serve Tortola, we believe it unlikely that
OC-BVI will derive any significant future revenues from an operating contract
for the Baughers Bay plant. Consequently, we determined that an additional
impairment loss of $(4,500,000) was required (and was recorded) during the
fourth quarter of 2009 to reduce our investment in OC-BVI to its estimated fair
value.





Based
upon the estimated fair value determined as of December 31, 2009 and the
developments since that date to the date of this filing, we concluded that no
impairment loss was required to be recognized on our investment in OC-BVI during
the nine months ended September 30, 2010.  This conclusion assumes
that the BVI government will fulfill its obligations under the Bar Bay Agreement
and that OC-BVI will collect all of the $10.4 million awarded by the Court (of
which only $4 million has been received to date).   The Appellate
Court could ultimately overturn the ruling of the Court, which currently
requires the BVI government to pay OC-BVI at the rate of $13.91 per
thousand imperial gallons for water previously supplied, or the BVI government
could fail to honor the terms of the Bar Bay Agreement.  If either of
these events occur the actual cash flows from OC-BVI could vary materially from
the expected cash flows we used in determining OC-BVI’s fair value as of
September 30, 2010 and we could be required to record an additional impairment
loss to reduce the carrying value of our investment in OC-BVI.  Such
impairment loss would reduce our earnings and could have a material adverse
impact on our results of operations and financial condition.





Mexico
Affiliate





In May,
2010, we acquired, through our recently organized wholly-owned Netherlands
subsidiary, Consolidated Water Cooperatief, U.A., a 50% interest
in N.S.C. Agua, S.A. de C.V., (“NSC”) a Mexican company.  NSC has
been formed to pursue a project encompassing the construction, ownership and
operation of a large seawater reverse osmosis desalination plant to be located
in Baja California, Mexico and accompanying pipelines to deliver water to the
Baja region and to the U.S. border.   We and our partners in NSC
believe such a project can  be successful due to what we anticipate
will be a growing need for a new potable water supply for the areas of Baja
California, Mexico and Southern California, United States.  NSC is in
the early stages of the project development, and is presently pursuing contracts
for the purchase of land on which to build the plant and for the electric power
and feed water sources for the plant’s operations.  In addition to
obtaining these contracts, NSC will be required to complete various other
activities before it can commence construction of the plant and pipeline
including, but not limited to, obtaining approvals and permits from various
governmental agencies in Mexico, securing contracts with its proposed customers
to sell water in sufficient quantities and at prices that make the project
financially viable, and obtaining equity and debt financing for the
project.  NSC’s prospective customers in Mexico and the U.S. will also
be required to obtain various governmental permits and approvals in order to
purchase water from NSC and sell this water to their customers.





For our
50% interest in NSC, we have agreed to provide all of the initial funding (up to
$4 million) in the form of equity for NSC’s development
activities.  Because we exercise effective financial control over NSC
and our partners in NSC will not participate in funding the first $4 million in
losses that NSC may incur, we consolidate NSC’s results of
operations.  Included in our condensed consolidated results of
operations for the three and nine months ended September 30, 2010 are
approximately $873,000 and $1.4 million in general and administrative expenses,
consisting of organizational, legal, accounting, engineering, consulting and
other costs relating to the project development activities of NSC.  We
anticipate that substantially all of the funding we provide for NSC’s
development activities will be expensed.





We
estimate that it will take approximately one year for NSC to purchase
land for the plant, secure feed water and power supplies, complete the
engineering and feasibility studies, obtain the required permits and approvals
and arrange the project financing necessary to commence construction of the
plant.  However, this process could take significantly longer
than one year, and NSC may ultimately be unable to accomplish all of steps
required to proceed with the project.





CW-Bahamas
Liquidity





As of
September 30, 2010, CW-Bahamas was due approximately $5.9 million from the
WSC.  We have been informed previously by representatives of the
Bahamas government that the delay in paying our accounts receivables is due to
operating issues within the WSC, that the delay does not reflect any type of
dispute with us with respect to the amounts owed, and that the amounts will
ultimately be paid in full.  Although WSC was able to reduce its
delinquent receivable balances to CW-Bahamas in the prior fiscal quarters, we
have been informed by WSC representatives that monthly payments to CW-Bahamas
for the immediate future will continue in amounts of approximately $1.3
million.  The total amount of delinquent receivables from the WSC
is expected to remain consistent for the remainder of 2010.





Transfers
of U.S. dollars from CW-Bahamas to our other subsidiaries require authorization
in advance from the Central Bank of the Bahamas.





CW-Belize




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.  On November 1, 2010, CW-Belize received a formal
complaint from the PUC alleging that CW-Belize was operating without a license
under the terms of the Water Industry Act.  CW-Belize plans to apply
for this license in the near future.  We are presently unable to
determine what impact the resolution of this complaint or PUC’s future
regulation of CW-Belize will have on its results of operations, financial
position or cash flows.





Dividends





·
            On January 31, 2010, we paid a
      dividend of $0.075 to shareholders of record on January 1,
      2010.


23


·
            On
      May 31, 2010, we paid a dividend of $0.075 to shareholders of record on
      May 1, 2010.


·
            On July 31, 2010, we paid a
      dividend of $0.075 to shareholders of record on July 1,
      2010.


·
            As
      of September 30, 2010, we declared a dividend of $0.075 payable on October
      31, 2010 to shareholders of record on October 1,
  2010.





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,
2009 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, is involved in litigation with the BVI government 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, 2009 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, 2009 and in our other periodic reports on
Form 10-Q and Form 8-K.





We
have committed up to $4 million to fund the developmental costs for a possible
project in Mexico.  We could decide in the future, after expending some or
all of these funds, that the project is not viable.





In May,
2010, we acquired, through our recently organized wholly-owned Netherlands
subsidiary, Consolidated Water Cooperatief, U.A., a 50% interest in N.S.C. Agua,
S.A. de C.V., (“NSC”) a Mexican company.  NSC has been formed to
pursue a project encompassing the construction, ownership and operation of a
seawater reverse osmosis desalination plant to be located in Baja California,
Mexico and an accompanying pipeline to deliver water to the U.S.
border.   We and our partners in NSC believe such a project
can  be successful due to what we anticipate will be a growing need
for a new potable water supply for the areas of Baja California, Mexico and
Southern California, United States.  NSC is in the early stages of its
development, and is presently involved in seeking contracts for the purchase of
land on which to build the plant and for the electric power and feed water
sources for the plant’s proposed operations.  In addition to obtaining
these contracts, NSC will be required to complete various other steps before it
can commence construction of the plant and pipeline including, but not limited
to, obtaining approvals and permits from various governmental agencies in Mexico
and the United States, securing contracts with its proposed customers to sell
water in sufficient quantities and at prices that make the project financially
viable, and obtaining equity and debt financing for the project. NSC’s potential
customers will also be required to obtain various governmental permits and
approvals in order to purchase water from NSC.





For our
50% interest in NSC, we have agreed to provide all of the initial funding (up to
$4 million) in the form of equity for NSC’s development
activities.  Because we exercise effective financial control over NSC
and our partners in NSC will not participate in funding the first $4 million in
losses that NSC may incur, we consolidate NSC’s results of
operations.  Included in our condensed consolidated results of
operations for the three and nine months ended September 30, 2010 are
approximately $873,000 and $1.4 million in general and administrative expenses,
consisting of organizational, legal, accounting, engineering, consulting and
other costs relating to the project development activities of NSC.  We
anticipate that substantially all of the funding we provide for NSC’s
development activities will be expensed.





We
estimate that it will take approximately one year for NSC to purchase the
land for the plant, secure feed water and power supplies, complete the
engineering and feasibility studies, obtain the required permits and arrange the
project financing necessary to commence construction of the plant. However, this
process could take significantly longer than a year, and NSC may ultimately be
unable to accomplish all the steps required to proceed with the
project.





Our exclusive license to provide
water to retail customers in the Cayman Islands may not be renewed in the
future.





In the
Cayman Islands, we provide water to retail customers under a 20 year license
issued to us in July 1990 by the Cayman Islands government that grants us
the exclusive right to provide water to retail customers within our licensed
service area. Our service area is comprised of an area on Grand Cayman that
includes the Seven Mile Beach and West Bay areas, two of the three most
populated areas in the Cayman Islands. For the year ended December 31, 2009, we
generated approximately 40% of our consolidated revenues and 58% of our
consolidated gross profits from the retail water operations conducted pursuant
to our exclusive license.  For the nine months ended September 30,
2010, we generated approximately 44% of our consolidated revenues and 54% of our
consolidated gross profits from these retail water operations. If we are not in
default of any terms of the license, we have a right of first refusal to renew
the license on terms that are no less favorable than those that the government
offers to any third party.  This license was set to expire on July 10,
2010, however we obtained   extensions of the license through
November 10, 2010.





We have
been informed during our retail license renewal negotiations conducted with
representatives of the Cayman Island government that the Cayman Island
government seeks to restructure the terms of our license to employ a “rate of
return on invested capital model’ similar to that governing the sale of water to
many U.S. municipalities. We have formally objected to the implementation of a
“rate of return on invested capital model” on the basis that we believe that
such a model would not promote the efficient operation of our water utility and
could ultimately increase water rates to our customers. We believe such a model,
if ultimately implemented, could significantly reduce the operating income we
have historically generated from our retail license and could require us to
reduce the $1.2 million carrying value of our retail segment’s
goodwill.


25


If we are
unable to renew our license or if we obtain a new license on terms that are less
favorable to us, we could lose a significant portion of our current revenues and
our results of operations, cash flows and financial condition could be adversely
affected.





The
value of our investment in our affiliate OC-BVI is dependent upon the collection
of amounts recently awarded by the Eastern Supreme Court of the
Caribbean.





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 purports constitutes
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 were sporadic. 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 pays OC-BVI approximately $4.7 million, which it
believed represented 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 Court, and on April 22, 2009 amended and
increased this claim, seeking recovery of amounts for water sold and delivered
to the BVI government from the Baughers Bay plant through May 31, 2009 based
upon the contract prices in effect before the BVI government asserted its
purported right of ownership of the plant.





The Court
held a trial in July 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 in October 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 amounted to a total recovery for
OC-BVI of $10.4 million as of September 17, 2009. The BVI government made a
payment of $2.0 million to OC-BVI under the Court order during the fourth
quarter of 2009 and a second payment of $2 million under the Court order in July
2010.





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.


26


After
considering the September and October 2009 rulings of the Court of the Caribbean
relating to 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 therefore
recognized an impairment loss of this amount on this investment during the three
months ended September 30, 2009. In February 2010, the BVI government announced
it had signed a long term contract with another company for the construction of
a new water plant to serve Tortola. We believe this new contract with another
company makes it unlikely that OC-BVI will be able to obtain a new long-term
operating contract for Baughers Bay. Accordingly, our calculation of the
estimated fair value of our equity investment in OC-BVI as of December 31, 2009
did not include any future cash flows to OC-BVI from a long term operating
contract for the Baughers Bay plant and as a result we recorded an additional
impairment loss for our equity investment in OC-BVI of $(4,500,000) during the
fourth quarter of 2009.  The remaining carrying value of our
investment in OC-BVI of $8.9 million as of September 30, 2010 assumes OC-BVI
will collect in full the remaining $6.24 million awarded by the Court and will
not be required to return any of the $4.0 million paid to date by the BVI
government under the Court order.  Should the BVI government be
successful in its appeal to reduce the $10.4 million award, we will be required
to record an additional impairment charge in an amount equal to any reduction in
the amount previously awarded. Such impairment loss would reduce our earnings
and could have a significant adverse impact on our results of operations,
financial condition and cash flows.


27


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


28


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, 2010


29