UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q


(Mark One)





R
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended March 31, 2009


OR





£
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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
            
            N/A(State
      or other jurisdiction of
            
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)





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





(345)
945-4277


(Registrant’s
telephone number, including area code)





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





Yes R 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 R
                    
                    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 R





As of May
5, 2009, 14,531,913 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 March 31, 2009 (Unaudited) and December
      31, 2008
            
            4Condensed
      Consolidated Statements of Income (Unaudited) for the Three Months Ended
      March 31, 2009 and 2008
            
            5Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the Three Months
      Ended March 31, 2009 and 2008
            
            6Notes
      to Condensed Consolidated Financial Statements (Unaudited)
            
            7Item
      2
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            15Item
      3
            Quantitative
      and Qualitative Disclosures about Market Risk
            
            24Item
      4
            Controls
      and Procedures
            
            24PART
      II
            OTHER
      INFORMATIONItem
      1
            Legal
      Proceedings
            
            24Item
      1A
            Risk
      Factors
            
            24Item
      2
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            25Item
      6
            Exhibits
            
            26SIGNATURES
            
            27





2





NOTE
REGARDING CURRENCY AND EXCHANGE RATES





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





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





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





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





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





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




3




PART
I — FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





CONSOLIDATED
WATER CO. LTD.


CONDENSED
CONSOLIDATED BALANCE SHEETS




March
      31,
                        
                        
                        December
      31,2009
                        
                        
                        2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                        
                        $
                        34,839,674
                        
                        
                        $
                        36,261,345Accounts
      receivable, net
                        
                        
                        15,863,303
                        
                        
                        
                        13,911,312Inventory
                        
                        
                        1,945,810
                        
                        
                        
                        1,617,484Prepaid
      expenses and other current assets
                        
                        
                        1,099,147
                        
                        
                        
                        1,444,445Current
      portion of loans receivable
                        
                        
                        657,053
                        
                        
                        
                        768,803Total
      current assets
                        
                        
                        54,404,987
                        
                        
                        
                        54,003,389Property,
      plant and equipment, net
                        
                        
                        58,451,133
                        
                        
                        
                        58,937,980Construction
      in progress
                        
                        
                        6,109,782
                        
                        
                        
                        6,157,958Costs
      and estimated earnings in excess of billings - construction
      project
                        
                        
                        9,244,392
                        
                        
                        
                        7,377,554Inventory
      non-current
                        
                        
                        2,915,223
                        
                        
                        
                        2,971,949Loans
      receivable
                        
                        
                        1,471,952
                        
                        
                        
                        1,560,420Investment
      in and loan to affiliate
                        
                        
                        13,788,381
                        
                        
                        
                        14,371,312Intangible
      assets, net
                        
                        
                        2,051,634
                        
                        
                        
                        2,144,162Goodwill
                        
                        
                        3,587,754
                        
                        
                        
                        3,587,754Other
      assets
                        
                        
                        3,491,037
                        
                        
                        
                        3,544,096Total
      assets
                        
                        $
                        155,516,275
                        
                        
                        $
                        154,656,574LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable and other current liabilities
                        
                        $
                        6,674,765
                        
                        
                        $
                        7,310,327Dividends
      payable
                        
                        
                        1,006,583
                        
                        
                        
                        1,006,414Current
      portion of long term debt
                        
                        
                        1,251,787
                        
                        
                        
                        1,229,071Total
      current liabilities
                        
                        
                        8,933,135
                        
                        
                        
                        9,545,812Long
      term debt
                        
                        
                        20,807,673
                        
                        
                        
                        21,129,269Other
      liabilities
                        
                        
                        413,633
                        
                        
                        
                        430,717Total
      liabilities
                        
                        
                        30,154,441
                        
                        
                        
                        31,105,798Stockholders’
      equityControlling
      interests:Redeemable
      preferred stock, $0.60 par value. Authorized 200,000
    shares;issued
      and outstanding 17,366 and 17,366 shares, respectively
                        
                        
                        10,420
                        
                        
                        
                        10,420Class
      A common stock, $0.60 par value. Authorized 24,655,000
    shares;issued
      and outstanding 14,531,913 and 14,529,360 shares,
    respectively
                        
                        
                        8,719,148
                        
                        
                        
                        8,717,616Class
      B common stock, $0.60 par value. Authorized 145,000
shares;none
      issued or outstanding
                        
                        
                        -
                        
                        
                        
                        -Additional
      paid-in capital
                        
                        
                        80,568,872
                        
                        
                        
                        80,461,942Retained
      earnings
                        
                        
                        33,945,051
                        
                        
                        
                        32,340,077123,243,491
                        
                        
                        
                        121,530,055Noncontrolling
      interests
                        
                        
                        2,118,343
                        
                        
                        
                        2,020,721Total
      stockholders’ equity
                        
                        
                        125,361,834
                        
                        
                        
                        123,550,776Total
      liabilities and stockholders’ equity
                        
                        $
                        155,516,275
                        
                        
                        $
                        154,656,574




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




4




CONSOLIDATED
WATER CO. LTD.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(UNAUDITED)




Three
      Months Ended March 31,2009
                
                
                2008Retail
      water revenues
                
                $
                6,537,328
                
                
                $
                5,816,938Bulk
      water revenues
                
                
                6,406,993
                
                
                
                6,916,730Services
      revenues
                
                
                2,919,734
                
                
                
                1,557,894Total
      revenues
                
                
                15,864,055
                
                
                
                14,291,562Cost
      of retail revenues
                
                
                2,549,119
                
                
                
                2,550,597Cost
      of bulk revenues
                
                
                4,986,569
                
                
                
                5,888,691Cost
      of services revenues
                
                
                2,347,867
                
                
                
                1,316,216Total
      cost of revenues
                
                
                9,883,555
                
                
                
                9,755,504Gross
      profit
                
                
                5,980,500
                
                
                
                4,536,058General
      and administrative expenses
                
                
                2,501,203
                
                
                
                2,466,592Income
      from operations
                
                
                3,479,297
                
                
                
                2,069,466Other
      income (expense):Interest
      income
                
                
                158,304
                
                
                
                452,690Interest
      expense
                
                
                (426,229
                )
                
                
                (446,558
                )Other
      income
                
                
                45,407
                
                
                
                24,282Equity
      in earnings (loss) of affiliate
                
                
                (608,999
                )
                
                
                (497,497
                )Other
      income (expense), net
                
                
                (831,517
                )
                
                
                (467,083
                )Consolidated
      net income
                
                
                2,647,780
                
                
                
                1,602,383Income
      (loss) attributable to noncontrolling interests
                
                
                97,622
                
                
                
                (71,484
                )Net
      income attributable to controlling interests
                
                $
                2,550,158
                
                
                $
                1,673,867Basic
      earnings per common share
                
                $
                0.18
                
                
                $
                0.12Diluted
      earnings per common share
                
                $
                0.18
                
                
                $
                0.12Dividends
      declared per common share
                
                $
                0.065
                
                
                $
                0.130Weighted
      average number of common shares used in the determination
    of:Basic
      earnings per share
                
                
                14,530,183
                
                
                
                14,507,897Diluted
      earnings per share
                
                
                14,550,733
                
                
                
                14,532,303




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)





Three Months Ended March
      31,2009
                
                
                2008Net
      cash flows provided by operating activities
                
                $
                662,134
                
                
                $
                3,118,722Cash
      flows provided by (used in) investing activitiesPurchases
      of property, plant and equipment and construction in
    progress
                
                
                (1,006,192
                )
                
                
                (1,202,395
                )Collections
      on loans receivable
                
                
                200,218
                
                
                
                489,341Net
      cash used in investing activities
                
                
                (805,974
                )
                
                
                (713,054
                )Cash
      flows provided by (used in) financing activitiesDividends
      paid
                
                
                (945,015
                )
                
                
                (868,052
                )Principal
      repayments of long term debt
                
                
                (332,816
                )
                
                
                (313,729
                )Net
      cash used in financing activities
                
                
                (1,277,831
                )
                
                
                (1,181,781
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                (1,421,671
                )
                
                
                1,223,887Cash
      and cash equivalents at beginning of period
                
                
                36,261,345
                
                
                
                38,529,383Cash
      and cash equivalents at end of period
                
                $
                34,839,674
                
                
                $
                39,753,270Interest
      paid in cash
                
                $
                389,304
                
                
                $
                399,791Non-cash
      investing and financing activitiesConversion
      of redeemable preferred shares into ordinary shares
                
                $
                —
                
                
                $
                487Issuance
      of ordinary shares to executive management for services
      rendered
                
                $
                33,748
                
                
                $
                266,461Dividends
      declared but not paid
                
                $
                945,703
                
                
                $
                945,043





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




6




CONSOLIDATED
WATER CO. LTD.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.  Basis
of presentation





The
accompanying condensed consolidated financial statements of Consolidated Water
Co. Ltd. (the “Company”) include the accounts of the Company’s (i) wholly-owned
subsidiaries Aquilex, Inc., Cayman Water Company Limited (“Cayman Water”),
Consolidated Water (Belize) Limited (“CW-Belize”), Ocean Conversion (Cayman)
Limited (“OC-Cayman”), DesalCo Limited (“DesalCo”); (ii) majority-owned
subsidiary Consolidated Water (Bahamas) Ltd. (“CW-Bahamas”); and (iii)
affiliate, Consolidated Water (Bermuda) Limited (“CW-Bermuda”), which is
consolidated pursuant to the provisions of FASB Interpretation 46(R). The
Company’s investment in its affiliate, Ocean Conversion (BVI) Ltd. (“OC-BVI”),
is accounted for using the equity method of accounting. All significant
intercompany balances and transactions have been eliminated in
consolidation.





The
accompanying condensed consolidated balance sheet as of March 31, 2009 and the
condensed consolidated statements of income and cash flows for the three months
ended March 31, 2009 and 2008 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 present fairly the
Company’s financial position, results of operations and cash flows as of and for
the periods presented. The results of operations for these interim periods are
not necessarily indicative of the operating results for future periods,
including the fiscal year ending December 31, 2009.





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





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





Three
      Months Ended
                          March
      31, 2008Revenues,
      as previously reported
                        
                        $
                        12,735,729Reclassification
      of energy recovery
                        
                        
                        1,555,833Revenues,
      as adjusted
                        
                        $
                        14,291,562





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





Certain
other immaterial amounts presented in the 2008 financial statements included in
the Form 10-Q for the quarterly period ended March 31, 2008 have been
reclassified to conform to the presentation used for these amounts in
the  2009 financial statements.





7




2.  Stock-based
compensation





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





Stock-based
compensation totaled $68,435 and $175,121 for the three months ended March 31,
2009 and 2008, respectively, and is included in general and administrative
expenses in the condensed consolidated statements of income.





In March
2009, the Company granted options to purchase 101,697 ordinary shares to certain
employees under the 2008 Equity Incentive Plan.  The March 2009
options began vesting on March 19, 2009 and vest in three equal tranches of
33,899 on March 19, 2010, 2011 and 2012.  All of these 101,697 options
expire three years from the respective vesting date of each
tranche.





Under
Statement of Financial Accounting Standards (“SFAS”) No. 123(R) Share-Based Payment(“SFAS No. 123(R)”),
the Company estimated the fair value of the stock options granted and rights to
acquire stock using the Black-Scholes option pricing model. The Company makes a
number of estimates and assumptions related to SFAS No. 123(R) 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 “plain vanilla options” as described by the
SEC’s Staff Accounting Bulletin No. 107 (“SAB No. 107”), the Company used the
“simplified method” for determining the expected life of the options granted.
Originally, under SAB No. 107, this method was allowed until December 31, 2007.
However, on December 21, 2007, the SEC issued Staff Accounting Bulletin No. 110
(“SAB No. 110”), which will allow a company to continue to use the “simplified
method” under certain circumstances, which the Company will continue to use as
the Company does not have sufficient, historical data to estimate the expected
term of equity awards.





The
significant weighted average assumptions for the 101,697 ordinary share options
for the three months ended March 31, 2009 were as follows: Risk free interest
rate of 1.3%; Expected option life of 3.50 years; Expected volatility of 70.2%;
Expected dividend yield of 3.29%.





A summary
of stock option activity under the Company’s SFAS No. 123(R) share-based
compensation plans for the three months ended March 31, 2009 is presented in the
following table:





Options
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life
      (Years)
                      
                      
                      Aggregate
                        Intrinsic
                        Value
      (1)Outstanding
      as of beginning of period
                      
                      
                      118,115
                      
                      
                      $
                      28.30Granted
                      
                      
                      101,697
                      
                      
                      
                      7.90Exercised
                      
                      
                      —
                      
                      
                      
                      —Forfeited
      and expired
                      
                      
                      —
                      
                      
                      
                      —Outstanding
      as of March 31, 2009
                      
                      
                      219,812
                      
                      
                      $
                      18.86
                      
                      
                      
                      4.13
                      
                      
                      $
                      101,718Exercisable
      as of March 31, 2009
                      
                      
                      33,885
                      
                      
                      $
                      29.27
                      
                      
                      
                      2.77
                      
                      
                      $
                      —


____________


(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 $10.85 in the NASDAQ Global Select Market on
      March 31, 2009, exceeds the exercise price of the
  option.




8




As of
March 31, 2009, 185,927 non-vested options and 33,885 vested options were
outstanding, with a weighted average exercise price of $18.86 and an average
remaining contractual life of 4.13 years. The total remaining unrecognized
compensation costs related to unvested stock-based arrangements was $432,039 as
of March 31, 2009 and is expected to be recognized over a weighted average
period of 4.37 years.





As of
March 31, 2009, unrecognized compensation costs relating to convertible
preference shares outstanding were $64,360, and are expected to be recognized
over a weighted average period of 0.83 years.





3.  Segment
information





Under
SFAS No. 131, “Disclosure about Segments of an Enterprise and Related
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 March 31, 2009Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  6,537,328
                  
                  
                  $
                  6,406,993
                  
                  
                  $
                  2,919,734
                  
                  
                  $
                  15,864,055Cost
      of revenues
                  
                  
                  2,549,119
                  
                  
                  
                  4,986,569
                  
                  
                  
                  2,347,867
                  
                  
                  
                  9,883,555Gross
      profit
                  
                  
                  3,988,209
                  
                  
                  
                  1,420,424
                  
                  
                  
                  571,867
                  
                  
                  
                  5,980,500General
      and administrative expenses
                  
                  
                  1,892,970
                  
                  
                  
                  550,555
                  
                  
                  
                  57,678
                  
                  
                  
                  2,501,203Income
      from operations
                  
                  
                  2,095,239
                  
                  
                  
                  869,869
                  
                  
                  
                  514,189
                  
                  
                  
                  3,479,297Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (831,517
                  )Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,647,780Income
      (loss) attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  97,622Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  2,550,158As
      of March 31, 2009:Property
      plant and equipment, net
                  
                  $
                  22,340,896
                  
                  
                  $
                  34,372,774
                  
                  
                  $
                  1,737,463
                  
                  
                  $
                  58,451,133Construction
      in progress
                  
                  
                  5,734,038
                  
                  
                  
                  375,744
                  
                  
                  
                  -
                  
                  
                  
                  6,109,782Total
      assets
                  
                  
                  82,201,398
                  
                  
                  
                  67,539,652
                  
                  
                  
                  5,775,225
                  
                  
                  
                  155,516,275







Three
      Months Ended March 31, 2008Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  5,816,938
                  
                  
                  $
                  6,916,730
                  
                  
                  $
                  1,557,894
                  
                  
                  $
                  14,291,562Cost
      of revenues
                  
                  
                  2,550,597
                  
                  
                  
                  5,888,691
                  
                  
                  
                  1,316,216
                  
                  
                  
                  9,755,504Gross
      profit
                  
                  
                  3,266,341
                  
                  
                  
                  1,028,039
                  
                  
                  
                  241,678
                  
                  
                  
                  4,536,058General
      and administrative expenses
                  
                  
                  2,039,853
                  
                  
                  
                  376,186
                  
                  
                  
                  50,553
                  
                  
                  
                  2,466,592Income
      from operations
                  
                  
                  1,226,488
                  
                  
                  
                  651,853
                  
                  
                  
                  191,125
                  
                  
                  
                  2,069,466Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (467,083
                  )Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,602,383Income
      (loss) attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (71,484
                  )Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,673,867As
      of March 31, 2008:Property
      plant and equipment, net
                  
                  $
                  23,212,707
                  
                  
                  $
                  33,831,795
                  
                  
                  $
                  2,185,376
                  
                  
                  $
                  59,229,878Construction
      in progress
                  
                  
                  3,080,446
                  
                  
                  
                  2,101,111
                  
                  
                  
                  -
                  
                  
                  
                  5,181,557Total
      assets
                  
                  
                  89,334,605
                  
                  
                  
                  55,304,688
                  
                  
                  
                  3,878,761
                  
                  
                  
                  148,518,054





9




4.  Earnings
per share





Basic
earnings per common share (“EPS”) is calculated by dividing net income available
to common stockholders 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 months ended March 31, 2009 and 2008.





Three Months Ended March
      31,2009
                  
                  
                  2008Net
      income attributable to controlling interests
                  
                  $
                  2,550,158
                  
                  
                  $
                  1,673,867Less:Dividends
      declared and earnings attributable to preferred shares
                  
                  
                  (1,307
                  )
                  
                  
                  (2,612
                  )Net
      income available to holders of common shares in the determination of basic
      and diluted earnings per share
                  
                  $
                  2,548,851
                  
                  
                  $
                  1,671,255Weighted
      average number of common shares used in the determination of basic
      earnings per common share
                  
                  
                  14,530,183
                  
                  
                  
                  14,507,897Plus:Weighted
      average number of preferred shares outstanding during the
      period
                  
                  
                  17,366
                  
                  
                  
                  20,904Potential
      dilutive effect of unexercised options
                  
                  
                  3,184
                  
                  
                  
                  3,502Weighted
      average number of common shares used in the determination of diluted
      earnings per common share
                  
                  
                  14,550,733
                  
                  
                  
                  14,532,303





5.  Impact
of recent accounting pronouncements





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No.
141(R)”). SFAS No. 141(R) retains the fundamental acquisition method of
accounting established in Statement 141; however, among other things, SFAS No.
141(R) requires recognition of assets and liabilities of noncontrolling
interests acquired, fair value measurement of consideration and contingent
consideration, expense recognition for transaction costs and certain integration
costs, recognition of the fair value of contingencies, and adjustments to income
tax expense for changes in an acquirer’s existing valuation allowances or
uncertain tax positions that result from the business combination. SFAS No.
141(R) is effective for annual reporting periods beginning after December 15,
2008 and shall be applied prospectively. The adoption of SFAS No. 141(R) did not
have an effect on the Company’s financial statements.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial
Statements(“SFAS No. 160”).This Standard changes the
way consolidated net income is presented, requiring consolidated net income to
report amounts attributable to both the parent and the noncontrolling interest
but earnings per share will be based on amounts attributable to the parent. It
also establishes protocol for recognizing certain ownership changes as equity
transactions or gain or loss and requires presentation of noncontrolling
ownership interest as a component of consolidated equity. SFAS No. 160 is
effective for annual reporting periods beginning after December 15, 2008 and
shall be applied prospectively. The Company adopted SFAS No. 160 during the
three months ended March 31, 2009.





In April
2008, the FASB issued FSP 142-3, Determination of the Useful Life
of Intangible Assets(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. FSP 142-3 is effective for fiscal years beginning after December 15,
2008. The adoption of FSP 142-3 did not have a material impact on the Company’s
financial condition, results of operations or cash flows.


In June
2008, the FASB issued FASB Staff Position (“FSP”) EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities(“FSP EITF No. 03-6-1”).  FSP EITF No. 03-6-1 clarified that
all outstanding non-vested share-based payment awards that contain rights to
non-forfeitable dividends are considered “participating securities,” as defined
by FSP EITF No. 03-6-1, which require the two-class method of computing basic
and diluted earnings per share to be applied.  FSP EITF No. 03-6-1 is
effective for fiscal years beginning after December 15, 2008.  The
adoption of FSP EITF No. 03-6-1 did not have a material impact on the Company’s
financial condition, results of operations or cash flows.




10




6.  Investment
in and loan to affiliate





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





OC-BVI’s
sole customer is the Ministry of Communications and Works of the Government of
the British Virgin Islands (the “Ministry”) to which it sells bulk water under
the terms of the Water Supply Agreement between the parties dated May 1990 (the
“1990 Agreement”). Through December 31, 2008, substantially all of the water
sold to the Ministry was produced by OC-BVI’s 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
million loan to fund part of this plant’s construction costs, of which
$2,250,000 remained outstanding as of March 31, 2009. Principal on this loan is
payable in quarterly installments of $125,000 with a final balloon payment of $2
million due on August 31, 2009 and interest on the loan is due quarterly at the
rate of LIBOR plus 3.5%. OC-BVI constructed this plant in response to what it
believes is an extreme shortage of, and a pressing demand for, potable water on
the eastern end of Tortola and anticipated entering into a bulk water supply
agreement with the Ministry. On December 19, 2008, OC-BVI and the BVI government
executed a binding term sheet (the “Bar Bay Agreement”) for the purchase of
water by the BVI government from OC-BVI’s seawater desalination plant located at
Bar Bay. The parties intend this Bar Bay Agreement to govern the terms of sale
of water by OC-BVI to the BVI government until the parties execute a definitive
contract. Under the terms of the Bar Bay Agreement, OC-BVI will deliver up to
600,000 U.S. gallons of water per day to the BVI government from the Bar Bay
plant and the BVI government will be obligated to pay for this water at a
specified price, as adjusted by a monthly energy factor.  Until
completion of the construction of the first phase of certain additional
facilities by OC-BVI, the BVI government is not obligated to purchase any
minimum volumes of water from OC-BVI. After completion of this first phase the
BVI government will be obligated to purchase at least 600,000 U.S. gallons of
water per day from the plant.  The first phase of such facilities
construction involves the installation of water pipes from the plant to a BVI
government-owned reservoir site and from this site to the BVI government’s piped
water distribution system. This phase must be completed within six months of the
signing of the proposed definitive contract.  A second phase of
construction requires OC-BVI to complete a storage reservoir on the BVI
government site within twelve months of the signing of the proposed seven-year
definitive contract. The proposed seven-year definitive contract is expected to
include a seven-year extension option exercisable by the BVI
government.  During the three months ended March 31, 2009 OC-BVI began
selling water from the Bar Bay plant to the BVI government.





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





March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008Equity
      investment (including profit sharing rights)
                      
                      $
                      11,538,381
                      
                      
                      $
                      12,121,312Loan
      receivable - Bar Bay plant construction
                      
                      
                      2,250,000
                      
                      
                      
                      2,250,000$
                      13,788,381
                      
                      
                      $
                      14,371,312





11




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





Three
      Months Ended March 31,2009
                  
                  
                  2008Water
      revenues
                  
                  $
                  2,660,576
                  
                  
                  $
                  2,615,130Adjustment
      for revenue deferral
                  
                  
                  (2,598,954
                  )
                  
                  
                  (2,580,002
                  )Total
      adjusted revenues
                  
                  
                  61,622
                  
                  
                  
                  35,128Gross
      profit (loss)
                  
                  
                  (1,087,509
                  )
                  
                  
                  (884,725
                  )Income
      (loss) from operations
                  
                  
                  (1,338,051
                  )
                  
                  
                  (1,083,300
                  )Net
      income (loss)
                  
                  $
                  (1,366,465
                  )
                  
                  $
                  (1,132,728
                  )




The
Company recognized losses of $608,999 and $497,497 on its equity investment in
OC-BVI for the three months ended March 31, 2009 and 2008, respectively. In
addition to the Company’s loan to and equity investment in OC-BVI of $13,788,381
million as of March 31, 2009, the Company’s recorded value of its OC-BVI
management services agreement, which is reflected as an intangible asset on the
Company’s consolidated balance sheet, was approximately $856,000 as of March 31,
2009.





Baughers
Bay dispute:





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





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





In
correspondence between the parties from late 1998 through early 2000, the
Ministry indicated that the BVI government 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 since 2000 without
resolution of the matter. OC-BVI has continued to supply water to the Ministry
and expended approximately $4.7 million between 1995 and 2003 to significantly
expand the production capacity of the plant beyond that set forth under the 1990
Agreement.





OC-BVI
submitted a proposal to the Ministry in late 2006 to continue to supply water
from the Baughers Bay plant. The Ministry held discussions with OC-BVI regarding
a new contract but did not formally respond to OC-BVI’s proposal. Early in 2007
the Ministry unilaterally took the position that until such time as a new
agreement 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 purports constitutes OC-BVI’s costs of producing the
water. At its proposed interim price, the Ministry would pay only approximately
30% of the amounts billed by OC-BVI pending a new agreement. OC-BVI responded to
the Ministry that the amount the Ministry proposed to pay was significantly less
than OC-BVI’s production costs. Payments made by the Ministry to OC-BVI since
the Ministry’s assumption of this reduced price have been
sporadic.  On November 15, 2007, OC-BVI issued a demand letter to the
BVI government for approximately $6.2 million representing amounts that OC-BVI
claimed were due by the BVI government for water sold and delivered plus
interest and legal fees. In response to OC-BVI’s demand for payment, the BVI
government issued a letter dated November 19, 2007, that reasserted its claim
that ownership of the Baughers Bay plant has passed to the BVI government and
rejected OC-BVI’s claim for payment. On November 22, 2007, OC-BVI’s management
was informed that the BVI government had filed a lawsuit with the Eastern
Caribbean Supreme Court seeking ownership of the Baughers Bay plant. The Court
has established a trial window of June to July of 2009 for this
litigation.




12




On July
4, 2008 OC-BVI filed a claim with the Eastern Caribbean Supreme Court seeking
recovery of $7,806,629, representing amounts owed to OC-BVI for water sold and
delivered to the BVI government from the Baughers
Bay  plant  through May 31, 2008, $842,188 for interest
accrued on amounts owed as of May 31, 2008 and future interest and
costs.  This claim was amended and increased on April 22, 2009 to
$13,773,954 for amounts owed for water delivered through March 31, 2009 plus
accrued interest of $2,537,334 on amounts owed as of March 31, 2009 plus future
interest and costs.  The $13,773,954 amount represents amounts billed
at the contract prices in effect before the BVI government asserted its
purported right of ownership of the plant.  The Court has scheduled a
case management hearing for this claim for May 14, 2009.





Consistent
with the guidance set forth in U.S, Securities and Exchange Commission Staff
Accounting Bulletin No. 104, “Revenue Recognition,” effective January 1, 2008,
OC-BVI changed its policy for the recording of revenues from the Baughers Bay
plant from the accrual to the equivalent of the cash method. All amounts billed
by OC-BVI to the BVI government relating to Baughers Bay during the three months
ended March 31, 2009 and 2008, which totaled approximately $2.6 million for each
of these periods, have been recorded as deferred revenues by OC-BVI. As a result
of this adjustment to OC-BVI’s revenues, the Company recorded a loss from its
equity in OC-BVI’s results of operations of $608,999 and $497,497 for the three
months ended March 31, 2009 and 2008, respectively. Any cash payments made by
the BVI government on Baughers Bay-related invoices are applied first by OC-BVI
to the remaining balance of OC-BVI’s outstanding accounts receivable that arose
from billings for periods prior to and including December 2007. As of March 31,
2009, such remaining December 31, 2007 accounts receivable balances totaled
$568,056.





The
Company accounts for its investment in OC-BVI in accordance with Accounting
Principles Board Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock.” This accounting pronouncement requires recognition
of a loss on an equity investment that is other than temporary, and indicates
that the fair value of an equity investment that is less than its carrying
amount may indicate a loss in the value of the investment. To test for possible
impairment of its investment in OC-BVI, the Company estimated its fair value as
of December 31, 2008. In making this estimate, Company management calculated the
expected cash flow from its investment in OC-BVI using the guidance set forth
under the FASB Statement of Financial Accounting Concepts No. 7, “Using Cash
Flow Information and Present Value in Accounting Measurements.” In accordance
with this FASB statement the Company (i) identified various possible outcomes of
the Baughers Bay dispute and negotiations for a definitive contract on the new
Bar Bay plant; (ii) estimated the cash flows associated with each possible
outcome, and (iii) assigned a probability to each outcome based upon discussions
held to date by OC-BVI’s management with the BVI government and OC-BVI’s legal
counsel. The resulting probability-weighted sum represents the expected cash
flows, and the Company’s best estimate of future cash flows, to be derived from
its investment in OC-BVI. The Company determined that the fair value of its
investment in OC-BVI, as based upon these expected cash flows, exceeded its
carrying value for its investment in OC-BVI as of December 31, 2008 and
therefore no loss was recognized on this investment. Based upon the estimate the
Company performed as of December 31, 2008 and the developments since that date,
the Company has concluded that no impairment loss should be recognized on its
investment in OC-BVI as of March 31, 2009.  However, as a result of
further developments, the Company could be required to record such an impairment
loss at a future date.





The
identification of the possible outcomes for the Baughers Bay dispute and Bar Bay
negotiations, the projections of cash flows for each outcome, and the assignment
of relative probabilities to each outcome all represent significant estimates
made by the Company’s management. The ultimate resolution of the Baughers Bay
dispute and Bar Bay definitive contract negotiations may differ significantly
from management’s estimates and may result in actual cash flows from OC-BVI that
vary materially from the expected cash flows used by Company management in
determining OC-BVI’s fair value as of March 31, 2009. If OC-BVI and the BVI
government are unable to agree on a new contract for Baughers Bay and this
matter proceeds to resolution through the Courts, the Ministry’s right of
ownership under the 1990 Agreement could be found to be enforceable, in which
case OC-BVI could lose its Baughers Bay water supply arrangement with the
Ministry or may be forced to accept a water supply arrangement with the Ministry
on terms less favorable to OC-BVI than the prior agreement, and if the BVI
government exercises its purported right of ownership, OC-BVI could lose
ownership of the Baughers Bay plant. Even if OC-BVI is able to refute the
Ministry’s purported right of ownership, OC-BVI may elect to accept a new
contract on less favorable terms. OC-BVI may be unsuccessful in finalizing a
definitive contract for the Bar Bay plant on terms it finds acceptable. Any of
these or other possible outcomes could result in actual cash flows from the
Company’s investment in OC-BVI that are significantly lower than management’s
estimate. In such case, the Company could be required to record an impairment
charge to reduce the carrying value of its investment in OC-BVI. Such impairment
charge would reduce the Company’s earnings and could have a material adverse
impact on its results of operations and financial condition.





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




13




7.  Consolidated
Water (Bermuda) Limited





In June
2006, the Company formed a Bermuda-based affiliate, Consolidated Water (Bermuda)
Limited (“CW-Bermuda”) with two other shareholders. The Company owns 40% of the
equity interest and voting rights of CW-Bermuda. In January 2007, CW-Bermuda
entered into a contract with the Government of Bermuda for the design,
construction and sale of a 600,000 U.S. gallons per day desalination plant to be
located on Tynes Bay along the northern coast of Bermuda and in March 2008 the
Government of Bermuda agreed to a second phase of construction that would expand
the plant’s capacity to 1.2 million U.S. gallons per day. Under the agreement,
CW-Bermuda will construct the plant and operate it for 12 months after its
commissioning and sale to the Government of Bermuda. CW-Bermuda will receive
approximately $10.7 million in revenues under the contract for the construction
of the plant and its operation. CW-Bermuda completed the construction of the
first phase of the plant in late 2008 and expects to complete the second phase
by mid 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”) as defined by
FIN 46(R). The Company is the primary beneficiary of CW-Bermuda and accordingly,
consolidates the results of CW-Bermuda in its financial statements as required
under FIN 46(R). The assets and liabilities (all of which are current) of
CW-Bermuda included in the Company’s condensed consolidated balance sheet
amounted to approximately $2,269,000 and $1,053,000, respectively, as of March
31, 2009.  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
consolidated financial statements. The results of CW-Bermuda are reflected in
the Company’s services segment.





8.  Litigation
settlement





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




14




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





Cautionary
Note Regarding Forward-Looking Statements





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





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





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





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





Critical
Accounting Estimates





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





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





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





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





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





Valuation of Equity Investment in
Affiliate. We account for our investment in OC-BVI in accordance with
Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock.” This accounting pronouncement requires recognition
of a loss on an equity investment that is other than temporary, and indicates
that a current fair value of an equity investment that is less than its carrying
amount may indicate a loss in the value of the investment. OC-BVI’s on-going
dispute with the BVI government over the ownership of its Baughers Bay plant may
indicate that the current fair value of our investment in OC-BVI is less than
our carrying value for this investment.





As a
quoted market price for OC-BVI’s stock is not available, to test for possible
impairment of our investment in OC-BVI we estimate its fair value by calculating
the expected cash flows from our investment in OC-BVI using the guidance set
forth under the FASB Statement of Financial Accounting Concepts No. 7, “Using
Cash Flow Information and Present Value in Accounting Measurements.” In
accordance with this FASB statement we (i) identify various possible outcomes of
the Baughers Bay dispute and negotiations for a definitive contract for OC-BVI’s
new Bar Bay plant; (ii) estimate the cash flows associated with each possible
outcome, and (iii) assign a probability to each outcome based upon discussions
held to date by OC-BVI’s management with the BVI government and OC-BVI’s legal
counsel. The resulting probability weighted sum represents the expected cash
flows, and our best estimate of future cash flows, to be derived from our
investment in OC-BVI.




15




The
identification of the possible outcomes for the Baughers Bay dispute, the
projections of cash flows for each outcome, and the assignment of relative
probabilities to each outcome all represent significant estimates made by us.
While we have used our best judgment to identify the possible outcomes and
expected cash flows for these outcomes and assign relative probabilities to each
outcome, these estimates are by their nature highly subjective and are also
subject to material change by our management over time based upon additional
information from OC-BVI’s management and legal counsel, a change in the status
of negotiations and/or OC-BVI’s litigation with the BVI government. The ultimate
resolutions of the Baughers Bay issue and the negotiations for a definitive
contract for the Bar Bay plant may differ significantly from our estimates and
may result in actual cash flows from OC-BVI that vary materially from the
expected cash flows we use in determining OC-BVI’s fair value. If OC-BVI and the
BVI government are unable to agree on a new contract for Baughers Bay and this
matter proceeds to resolution through the Courts, the BVI government’s right of
ownership under the 1990 Agreement could be found to be enforceable, in which
case OC-BVI could lose its Baughers Bay water supply arrangement with the BVI
government or may be forced to accept a water supply arrangement with the BVI
government on terms less favorable to OC-BVI, and if the BVI government
exercises its purported right, OC-BVI could lose ownership of the Baughers Bay
plant. Even if OC-BVI is able to refute the BVI government’s purported right of
ownership, OC-BVI may elect to accept a new contract on less favorable terms.
OC-BVI may be unsuccessful in negotiating a definitive contract for the Bar Bay
plant on terms it finds acceptable. Any of these or other possible outcomes
could result in actual cash flows from our investment in OC-BVI that are
significantly lower than our estimate. In such case, we could be required to
record an impairment charge to reduce the carrying value of our investment in
OC-BVI. Such impairment charge 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 in accordance with the provisions of SFAS No. 142, “Goodwill and Other
Intangible Assets.” SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”
We periodically evaluate the possible impairment of goodwill. Management
identifies our reporting units and determines the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units. We determine the fair
value of each reporting unit by calculating the expected cash flows from each
reporting unit and compare the fair value to the carrying amount of the
reporting unit. To the extent the carrying amount of the reporting unit exceeds
the fair value of the reporting unit; we are required to perform the second step
of the impairment test, as this is an indication that the reporting unit
goodwill may be impaired. In this step, we compare the implied fair value of the
reporting unit goodwill with the carrying amount of the reporting unit goodwill.
The implied fair value of goodwill is determined by allocating the fair value of
the reporting unit to all the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141, “Business Combinations.” The
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. If the implied fair value is less than its carrying
amount, the impairment loss is recorded. Based upon our annual tests to date, we
have not experienced any impairment losses on our recorded amounts of
goodwill.





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





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




16




RESULTS
OF OPERATIONS





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





Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008





Consolidated
Results





Net
income for the three months ended March 31, 2009 was $2,550,158 ($0.18 per share
on a fully-diluted basis) as compared to $1,673,867 ($0.12 per share on a
fully-diluted basis) for the three months ended March 31, 2008. Our results for
the three months ended March 31, 2009 and 2008 were adversely affected by the
losses we recorded in those periods from our equity investment in OC-BVI, as
discussed below.





Total
revenues for the three months ended March 31, 2009 were $15,864,055, a
significant increase from the $14,291,562 in revenues for the three months ended
March 31, 2008 due to incremental revenues generated by our retail and services
segments. Gross profit for the three months ended March 31, 2009 was $5,980,500,
or 38% of total revenues, as compared to $4,536,058, or 32%, for the three
months ended March 31, 2008. All three segments reported increased gross profits
for 2009 as compared to 2008.  For further discussion of revenues and
gross profit for the three months ended March 31, 2009, see the “Results by
Segment” analysis that follows.





General
and administrative (“G&A”) expenses remained consistent on a consolidated
basis at $2,501,203 and $2,466,592 for the first quarter of 2009 and 2008,
respectively. Decreases in employee costs for 2009 of approximately $172,000
served to offset minor increases in various other G&A accounts.





Interest
income decreased substantially, from approximately $453,000 for the three months
ended March 31, 2008 to approximately $158,000 for the three months ended March
31, 2009. This decrease reflects a reduction in the rate of interest earned on
the average balances invested in interest bearing deposit accounts from 2008 to
2009.





Due to
OC-BVI’s inability to resolve its on-going contractual dispute with the BVI
Government relating to its Baughers Bay plant, we changed our policy for
recognizing the financial results of this affiliate effective January 1, 2008.
Consequently, we reported losses from our investment in OC-BVI for the three
months ended March 31, 2009 and 2008 of approximately $609,000 and $497,000,
respectively. 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 $2,095,239 to our income from operations for the
three months ended March 31, 2009, as compared to $1,226,488 for the three
months ended March 31, 2008.





Revenues
generated by our retail water operations were $6,537,328 and $5,816,938 for the
three months ended March 31, 2009 and 2008, respectively. The increase in 2009
retail revenues is attributable to an increase in the volume of water sold of 7%
from 2008 to 2009 and to annual price increases resulting from inflationary
factors impacting our operating and production costs other than
energy.  The added volume of sales and the price increases more than
offset a small decrease in revenues attributable to our pass-through of energy
costs, which declined slightly from 2008 to 2009.





Retail
segment gross profit was $3,988,209 (61% of revenues) and $3,266,341 (56% of
revenues) for the three months ended March 31, 2009 and 2008,
respectively.  The improvement in gross profit percentage from 2008 to
2009 reflects higher plant utilization, as a significant portion of our retail
operating costs is 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 March
31, 2009 were $1,892,970, down $146,883 from the $2,039,853 in G&A expenses
for the three months ended March 31, 2008. The decrease in G&A expenses for
the three months ended March 31, 2009 as compared to the comparable prior year
period is primarily attributable to decreases in employee costs.




17




Bulk Segment:





The bulk
segment contributed $869,869 and $651,853 to our income from operations for the
three months ended March 31, 2009 and 2008, respectively.





Bulk
segment revenues were $6,406,993 and $6,916,730 for the three months ended March
31, 2009 and 2008, respectively. Revenues from the bulk segment decreased from
2008 to 2009 due to a 2% decline in the volume of water sold by our bulk
segment, and a reduction in energy costs passed through to our customers, as
diesel and electricity costs were significantly lower in the first quarter of
2009 as compared to the first quarter of 2008.





Gross
profit for our bulk segment was $1,420,424 and $1,028,039 for the three months
ended March 31, 2009 and 2008, respectively. Gross profit as a percentage of
bulk revenues was 22% for the three months ended March 31, 2009 and 15% for the
three months ended March 31, 2008. The improvement in bulk gross profit as a
percentage of sales from 2008 to 2009 reflects improved operating efficiencies
for our Windsor operations located in Nassau, New Providence. We constructed and
commissioned new feed water wells and replaced the reverse osmosis membranes on
two of four of our production trains at our Windsor plant effective September
2008.  These capital expenditures have improved the energy efficiency
of the Windsor plant.  We are currently replacing the reverse osmosis
membranes on the last two production trains and this work is expected to be
completed in the second quarter of 2009.





Bulk
segment G&A expenses for the three months ended March 31, 2009 increased to
$550,555 from $376,186 for the same period in 2008, primarily due to
approximately $178,000 in penalties and interest assessed to our Belize
operations relating to delinquent business taxes.





Included
in our condensed consolidated balance sheet as of March 31, 2009 are
approximately $9.5 million in accounts receivable due to our Bahamas subsidiary
from the Water and Sewerage Corporation of the Bahamas (“WSC”). We have been
informed by Bahamian Government representatives that the delay in paying our
accounts receivable 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. Based upon these
communications, we believe that the accounts receivable from the WSC are fully
collectible and therefore have not provided any allowance for possible
non-payment of these receivables as of March 31, 2009. See further discussion of
this matter at “Liquidity and Capital Resources — Material Commitments,
Expenditures and Contingencies — CW-Bahamas Liquidity.”








Services
Segment:





The
services segment contributed $514,189 and $191,125 to our income from operations
for the three months ended March 31, 2009 and 2008, respectively.





Revenues
from services provided in 2009 were $2,919,734 as compared to $1,557,894 in
2008. Services revenues increased from 2008 to 2009 due to higher relative
project construction expenditures in 2009.





The
increase in gross profit for the services segment to $571,867 in 2009 from
$241,678 in 2008 is primarily due to higher relative project construction
expenditures in 2009.





G&A
expenses for the services segment were $57,678 and $50,553 for 2009 and 2008,
respectively.








LIQUIDITY
AND CAPITAL RESOURCES





Overview





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





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




18




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





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





Cash Flows for the Three Months Ended
March 31, 2009





Our cash and cash equivalents decreased
from $36,261,345 as of December 31, 2008 to $34,839,674 as of March 31,
2009.





Cash Flows from Operating
Activities





Operating activities provided net cash
for the three months ended March 31, 2009 of $662,134. This cash provided reflects net income
generated for thethreemonths ended of approximately $2.7
million, as adjusted for various items which impact net income but do not impact
cash during the period, such as depreciation and amortization, stock
compensation, and other items.The largest item impacting
cash flows from operating activities forthe three months ended March 31,
2009was an increase in
accounts receivable of approximately $3.7 million from year end, due to the
delay in payment of amounts due from the WSC to our Bahamas
subsidiary.





Cash Flows from Investing
Activities





Our investing activities used $805,974
in net cash during the three months ended March 31, 2009. Of the approximately
$1.0 million in capital expenditures for the period, approximately $280,000 was
spent on the expansion of the Governor’s Harbour plantin Grand Caymanand $396,000 was spent on purchases of
plant and equipment.We collected $200,218 on our loans
receivableduring the
period.





Cash Flows from Financing
Activities





We used $1,277,831in net cash from our financing
activities during the three months ended March 31, 2009. We made $332,816 inscheduled payments on our bonds payable and paid dividends of $945,015
during the three months ended March 31, 2009.





Financial
Position





Our total
assets increased from approximately $154.7 million as of December 31, 2008 to
$155.5 million as of March 31, 2009.





Current
accounts receivable increased approximately $2.0 million from December 31, 2008
to March 31, 2009 due to (i) the WSC’s delay in paying amounts invoiced by
CW-Bahamas which has increased CW-Bahamas’ accounts receivable balances by
approximately $1.4 million since year end (ii) an increase of approximately $1.4
million in the accounts receivable balance due from the Government of Bermuda
(iii) a decrease of approximately $826,000 in revenues recognized in excess of
amounts collected on our Bermuda construction project.





The
balance of costs and estimated earnings in excess of billings – construction
project of approximately $9.2 million as of March 31, 2009 represents revenues
earned to date on the construction of the Frank Sound plant for the Water
Authority – Cayman. This receivable balance is non-current as it will be paid by
the Water Authority — Cayman through the issuance of a long term note to us upon
the commissioning of the plant.





Prepaid
expenses and other current assets decreased by approximately $345,000 due to the
amortization of prepaid expenses.





19




Borrowings
Outstanding





As of
March 31, 2009 we had borrowings outstanding aggregating $22,059,460 that
consisted of bonds payable.





5.95% Secured
Bonds





In August
2006, we issued $15,771,997 principal amount secured fixed rate bonds in a
private offering and received net proceeds (excluding issuance costs and after
the offering discount) of $14,445,720. These bonds bear interest at a rate of
5.95%, are repayable in quarterly principal and interest installments of
$526,010 and mature in 2016. We have the right to redeem the bonds in full at
any time after August 4, 2009 at a premium of 1.5% of the outstanding principal
and accrued interest on the bonds on the date of redemption. As of March 31,
2009, $12,654,983 in principal amount was outstanding on these secured bonds.
Our obligations under the bonds are secured by fixed and floating charges (i) on
all of our assets, including an equitable charge of all of the shares of Cayman
Water, and (ii) on all of Cayman Water’s assets including its real estate.
Cayman Water has also guaranteed our payment obligations under the
bonds.





The trust
deed for these bonds restricts our ability to enter into new borrowing
agreements or any new guarantees without prior approval of the trustee and
limits our capital expenditures, with the exception of capital expenditures to
be incurred on certain defined projects, to $2,000,000 annually without prior
approval by the trustee. The trust deed also contains financial covenants that
require us to maintain a debt service coverage ratio of not less than 1.25 to 1,
a ratio of long term debt to EBITDA (i.e. earnings before interest, taxes,
depreciation and amortization for the 12 months preceding the ratio calculation
date) not greater than 2.5 to 1 and a ratio of long term debt to equity equal to
or less than 1.5 to 1. As of March 31, 2009, we were in compliance with the
covenants under the trust deed.





CW-Bahamas
Series A Bonds





In July
2005, CW-Bahamas sold BAH$10,000,000 Series A bonds to Bahamian citizens and
permanent resident investors in The Bahamas to finance a portion of the
construction cost of its Blue Hills plant. These bonds mature on June 30, 2015
and accrue interest at the annual fixed rate of 7.5%. Interest is payable
quarterly. CW-Bahamas has the option to redeem the bonds in whole or in part
without penalty commencing after June 30, 2008. We have guaranteed CW-Bahamas
repayment obligations upon an “event of default” as defined in the guarantee
agreement. If we pay any amounts pursuant to the guarantee, we will be
subrogated to all rights of the bondholders in respect of any such payments. The
guarantee is a general unsecured obligation junior to our other secured
obligations. As of March 31, 2009, BAH$10,000,000 of the Series A bonds was
outstanding.




CW-Bahamas
Credit Facility





CW-Bahamas
has a credit facility with Royal Bank of Canada that consists of a BAH$500,000
revolving working capital loan. The obligations under the credit facility are
secured by the assets of CW-Bahamas. Borrowings under the working capital loan
accrue interest at the Nassau Prime rate plus 1.50% per annum. As of March 31,
2009, 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. The credit
facility limits the payment of dividends by CW-Bahamas to available cash flow
(as defined in the governing loan agreement). 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”) and had invited OC-BVI to submit a
proposal for its continued involvement in the production of water at the
Baughers Bay plant in light of the Ministry’s planned assumption of
ownership.




20




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





In
correspondence between the parties from late 1998 through early 2000, the
Ministry indicated that the BVI government 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 since 2000 without
resolution of the matter. OC-BVI has continued to supply water to the Ministry
and expended approximately $4.7 million between 1995 and 2003 to significantly
expand the production capacity of the plant beyond that contemplated in the 1990
Agreement.





OC-BVI
submitted a proposal to the Ministry in late 2006 to continue to supply water
from the Baughers Bay plant. The Ministry held discussions with OC-BVI regarding
a new contract but did not formally respond to OC-BVI’s proposal. Early in 2007
the Ministry unilaterally took the position that until such time as a new
agreement 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 purports constitutes OC-BVI’s costs of producing the
water. OC-BVI responded to the Ministry that the amount the Ministry proposed to
pay was significantly less than OC-BVI’s production costs. Payments made by the
Ministry to OC-BVI since the Ministry’s assumption of this reduced price have
been sporadic.  On November 15, 2007, OC-BVI issued a demand letter to
the BVI government for approximately $6.2 million representing amounts that
OC-BVI claimed were due by the BVI government for water sold and delivered plus
interest and legal fees. In response to OC-BVI’s demand for payment, the BVI
government issued a letter dated November 19, 2007 that reasserted its claim
that ownership of the Baughers Bay plant has passed to the BVI government and
rejected OC-BVI’s claim for payment. On November 22, 2007 OC-BVI’s management
was informed that the BVI government had filed a lawsuit with the Eastern
Caribbean Supreme Court seeking ownership of the Baughers Bay plant. The Court
has established a trial window of June to July of 2009 for this
litigation.





On July
4, 2008, OC-BVI filed a claim with the Eastern Caribbean Supreme Court seeking
recovery of $7,806,629, representing amounts owed to OC-BVI for water sold and
delivered to the BVI government through May 31, 2008, $842,188 for interest
accrued on amounts owed as of May 31, 2008, and future interest and
costs.  This claim was amended and increased on April 22, 2009 to
$13,773,954 for amounts owed for water delivered through March 31, 2009 plus
accrued interest of $2,537,334 on amounts owed as of March 31, 2009 plus future
interest and costs.  The $13,773,954 amount represents amounts billed
at the contract prices in effect before the BVI government asserted its
purported right of ownership of the plant.  The Court has scheduled a
case management hearing for this claim for May 14, 2009.





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”). We provided OC-BVI with a $3 million loan to
fund part of this plant’s construction costs, of which $2.5 million remained
outstanding as of September 30, 2008. Principal on this loan is payable in
quarterly installments of $125,000 with a final balloon payment of $2 million
due on August 31, 2009 and interest on the loan is due quarterly at the rate of
LIBOR plus 3.5%. OC-BVI constructed this plant in response to what it believes
is an extreme shortage of, and a pressing demand for, potable water on the
eastern end of Tortola and anticipated entering into a bulk water supply
agreement with the Ministry. On December 19, 2008 OC-BVI and the BVI government
executed a binding term sheet (the “Bar Bay Agreement”) for the purchase of
water by the BVI government from OC-BVI’s seawater desalination plant located at
Bar Bay. The parties intend the Bar Bay Agreement to govern the terms of sale of
water by OC-BVI to the BVI government until the parties execute a definitive
contract. Under the terms of the Bar Bay Agreement, OC-BVI will deliver up to
600,000 U.S. gallons of water per day to the BVI government from the Bar Bay
plant and the BVI government will be obligated to pay for this water at a
specified price as adjusted by a monthly energy factor. Until completion of the
construction of the first phase of certain additional facilities by OC-BVI, the
BVI government is not obligated to purchase any minimum volumes of water from
OC-BVI. After completion of this first phase the BVI government will be
obligated to purchase at least 600,000 gallons of water per day from the plant.
The first phase of such facilities construction involves the installation of
water pipes from the plant to a BVI government-owned reservoir site and from
this site to the BVI government’s piped water distribution system. This phase
must be completed within six months of the signing of the proposed definitive
contract. A second phase of construction requires OC-BVI to complete a storage
reservoir on the BVI government site within twelve months of the signing of the
proposed seven-year definitive contract. The proposed seven-year definitive
contract is expected to include a seven-year extension option exercisable by the
BVI government.




21




The U. S.
Securities and Exchange Commission, in Staff Accounting Bulletin No. 104 Revenue Recognition(“SAB No.
104”), has provided its guidance on revenue recognition. As stated in SAB No.
104, the SEC believes that revenue is generally realized or realizable and
earned when all of the following criteria are met:





•
            Persuasive
      evidence of an arrangement exists.





•
            Delivery
      has occurred or services have been
rendered.





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





•
            Collectability
      is reasonably assured.





OC-BVI’s
Board of Directors continues to believe that OC-BVI is contractually entitled to
full payment of all amounts billed to date for water supplied to the BVI
government and that OC-BVI will ultimately collect all amounts billed. However,
the lack of progress with respect to the resolution of the dispute and the
initiation of legal proceedings by OC-BVI to collect the accounts receivable
balances indicate that, with respect to revenues from its Baughers Bay plant,
OC-BVI cannot clearly meet all of the revenue recognition criteria set forth in
SAB No. 104. Accordingly, 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. As a result of this adjustment to OC-BVI’s
revenues, we have recorded losses from our equity in OC-BVI’s results of
operations of $608,999 and $497,497 for the three months ended March 31, 2009
and 2008, respectively Any cash payments made by the BVI government on Baughers
Bay related invoices are applied first by OC-BVI to the remaining balance of
outstanding accounts receivable that arose from billings for periods prior to
and including December 2007. As of March 31, 2009 such remaining December 31,
2007 accounts receivable balances totaled $568,056.





We
account for our investment in OC-BVI in accordance with Accounting Principles
Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common
Stock.” This accounting pronouncement requires recognition of a loss on an
equity investment that is other than temporary, and indicates that a current
fair value of an equity investment that is less than its carrying amount may
indicate a loss in the value of the investment. To test for possible impairment
of our investment in OC-BVI, we estimated its fair value as of December 31,
2008. In making this estimate, we calculated the expected cash flows from our
investment in OC-BVI using the guidance set forth under the FASB Statement of
Financial Accounting Concepts No. 7, “Using Cash Flow Information and Present
Value in Accounting Measurements.” In accordance with this FASB statement we (i)
identified various possible outcomes of the Baughers Bay dispute and
negotiations for a definitive contract on the new Bar Bay plant; (ii) estimated
the cash flows associated with each possible outcome, and (iii) assigned a
probability to each outcome based upon discussions held to date by OC-BVI’s
management with the BVI government and OC-BVI’s legal counsel. The resulting
probability-weighted sum represents the expected cash flows, and our best
estimate of future cash flows, to be derived from our investment in OC-BVI. We
determined that the fair value of our investment in OC-BVI, as based upon these
expected cash flows, exceeded our carrying value for its investment in OC-BVI as
of December 31, 2008 and therefore no loss was required to be recognized on this
investment. Based upon the estimate we performed as of December 31, 2008 and the
developments since that date to the date of this filing, we have concluded that
no loss was required to be recognized on our investment in OC-BVI as of March
31, 2009. However, as a result of further developments, we could be required
record such an impairment loss in the future.





The
identification of the possible outcomes for the Baughers Bay dispute and Bar Bay
definitive contract negotiations, the projections of cash flows for each
outcome, and the assignment of relative probabilities to each outcome all
represent significant estimates made by us. The ultimate resolution of the
Baughers Bay dispute and Bar Bay definitive contract negotiations may differ
significantly from our estimates and may result in actual cash flows from OC-BVI
that vary materially from the expected cash flows we used in determining
OC-BVI’s fair value as of March 31, 2009. If OC-BVI and the BVI government are
unable to agree on a new contract for Baughers Bay and this matter proceeds to
resolution through the Courts, the Ministry’s right of ownership under the 1990
Agreement could be found to be enforceable, in which case OC-BVI could lose its
water supply arrangement with the Ministry or may be forced to accept a water
supply arrangement with the Ministry on terms less favorable to OC-BVI, and if
the BVI government exercises its purported right, OC-BVI could lose ownership of
the Baughers Bay plant. Even if OC-BVI is able to refute the Ministry’s
purported right of ownership, OC-BVI may elect to accept a new contract on less
favorable terms. OC-BVI may be unsuccessful in negotiating a definitive contract
for the Bar Bay plant on terms it finds acceptable. Any of these or other
possible outcomes could result in actual cash flows from our investment in
OC-BVI that are significantly lower than our estimate as of March 31, 2009. In
such case, we could be required to record a material impairment charge to reduce
the carrying value of our investment in OC-BVI. Such impairment charge could
have a material adverse impact on our results of operations and financial
condition.




22




CW-Bahamas
Liquidity





Since
early 2008 CW-Bahamas has experienced significant delays in the receipt of
payments on its outstanding accounts receivable from the Water and Sewerage
Corporation of the Bahamas.  As of March 31, 2009, CW-Bahamas was due
approximately $9.5 million from the WSC. During April 2009 WSC paid $4.35
million on these receivables.





We have
met with representatives of the WSC and Bahamas government (most recently on May
1, 2009) to inquire as to the reasons for the delinquency in their accounts
receivables payments. We have been informed by these government representatives
that (i) the WSC’s payment delinquencies are due to operating issues within the
WSC; (ii) that such delinquencies do not reflect any type of dispute with
CW-Bahamas with respect to the amounts owed; and (iii) the amounts will
ultimately be paid in full. We have been informed by these representatives that
another payment from the WSC of $4.35 million will be forthcoming prior to June
30, 2009.  Based upon these communications, we believe that the
accounts receivable from the WSC are fully collectible and therefore have not
provided any allowance for possible non-payment of these receivables as of March
31, 2009.  However, we have been informed by these representatives
that the WSC expects to continue to be significantly in arrears on its payments
to CW-Bahamas for the remainder of 2009.





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





CW-Belize
Liquidity





In
January 2009, we were informed by officials of Belize Water Services Ltd.
(“BWSL”) of potential financial difficulties at BWSL. Although BWSL was current
with respect to its payments to CW-Belize as of March 31, 2009, such
difficulties could affect the amount and timing of BWSL’s payments for water
supplied by CW-Belize in the future. We are presently unable to determine what
impact BWSL’s current financial condition will have on CW-Belize’s results of
operations, financial position or cash flows.





Dividends





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





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





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.




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ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





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





Changes
in Internal Controls





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





PART
II — OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





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





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





ITEM 1A. RISK
FACTORS





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





The
British Virgin Islands government has asserted a purported right of ownership of
OC-BVI’s Baughers Bay plant. If this right is found to be enforceable and is
exercised by the government, OC-BVI will lose ownership of the Baughers Bay
plant.





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




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





On
November 15, 2007, OC-BVI issued a demand letter to the BVI government for
approximately $6.2 million representing amounts that OC-BVI claimed were due by
the BVI government for water sold and delivered plus interest and legal fees. In
response to OC-BVI’s demand for payment, the BVI government issued a letter
dated November 19, 2007 that reasserted its claim that ownership of the Baughers
Bay plant has passed to the BVI government and rejected OC-BVI’s claim for
payment. On November 22, 2007, OC-BVI’s management was informed that the BVI
government had filed a lawsuit with the Eastern Caribbean Supreme Court seeking
ownership of the Baughers Bay plant.





Due to
the on-going dispute and the lack of payments on OC-BVI’s accounts receivable
balances by the BVI government, effective January 1, 2008, we changed our policy
for the recording of our equity in the financial results of OC-BVI to reflect
our equity in OC-BVI’s results as if revenues were recognized by this affiliate
under the equivalent of the cash, rather than accrual, method. As a result of
this accounting change, we recorded losses from our equity investment in OC-BVI
of $608,999 and $497,497 for the three months ended March 31, 2009 and 2008,
respectively. As of March 31, 2009, our loan to, and equity investment in,
OC-BVI totaled approximately $13.8 million and the recorded value of our
management services agreement, which is reflected on our balance sheet as an
intangible asset, was approximately $856,000.





If the
BVI government’s right of ownership under the 1990 Agreement is found to be
enforceable, OC-BVI may lose its Baughers Bay water supply arrangement or be
forced to accept a water supply arrangement on less favorable terms, and if the
BVI government exercises its purported right, OC-BVI could lose ownership of the
Baughers Bay plant. In either case, the value of our OC-BVI-related assets would
decline, and we could be required to record impairment charges to reduce the
carrying values of these assets. Such impairment charges would reduce our
earnings and could have a significant adverse impact on our results of
operations, financial condition and cash flows.








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





OC-BVI
has constructed a new desalination plant located on Bar Bay, Tortola, in the
British Virgin Islands. The total cost for this plant is approximately $8.0
million. We have a loan receivable outstanding from OC-BVI of $2,250,000 for the
construction of this plant as of December 31, 2008. OC-BVI constructed this
plant in response to what it believes is an extreme shortage of, and a pressing
demand for, potable water on the eastern end of Tortola and in anticipation of
entering into a bulk water supply agreement with the British Virgin Islands
government. In December 2008, OC-BVI executed a binding term sheet with the BVI
government for the sale of water from the Bar Bay plant; however this term sheet
remains subject to the execution of definitive contract between the parties. If
such a definitive contract is ultimately not obtained, or is not obtained on
sufficiently favorable terms, OC-BVI may not be able to recover the cost of its
investment in this plant, in which case we may be required to record an
impairment charge to reduce the carrying value of our loan to OC-BVI and our
investment in OC-BVI. Such an impairment charge would reduce our earnings and
could have a significant adverse impact on our results of operations and
financial condition.





ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





During
the quarter ended March 31, 2009, we issued 2,553 common shares to two of our
executive officers under the terms of their executive compensation agreements.
The issuance of the shares was exempt from registration under Section 4(2) of
the Securities Act of 1933 because the executive officers have knowledge of all
material information relating to us.




25




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




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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: May
11, 2009




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