UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q


(Mark
One)




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





For the quarterly period ended March
31, 2010





OR





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





For the transaction
period from ___________ to___________





Commission
File Number: 0-25248





CONSOLIDATED
WATER CO. LTD.


(Exact
name of Registrant as specified in its charter)





CAYMAN
      ISLANDS
                
                98-0619652(State
      or other jurisdiction of
                
                (I.R.S.
      Employer Identification No.)incorporation
      or organization)





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





(345)
945-4277


(Registrant’s
telephone number, including area code)





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





Yes x No  ̈





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





Yes  ̈ No  ̈





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





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





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





As of May
5, 2010, 14,546,972 shares of the registrant’s common stock, with US$0.60 par
value, were outstanding.








TABLE
OF CONTENTS





Description
                                              
                                              PagePART
      I
                                              FINANCIAL
      INFORMATION
                                              
                                              4Item
      1
                                              Financial
      Statements
                                              
                                              4Condensed
      Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December
      31, 2009
                                              
                                              4Condensed
      Consolidated Statements of Income (Unaudited) for the Three Months Ended
      March 31, 2010 and 2009
                                              
                                              5Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the Three Months
      Ended March 31, 2010 and 2009
                                              
                                              6Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                                              
                                              7Item
      2
                                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                              
                                              15Item
      3
                                              Quantitative
      and Qualitative Disclosures about Market Risk
                                              
                                              24Item
      4
                                              Controls
      and Procedures
                                              
                                              24PART
      II
                                              OTHER
      INFORMATION
                                              
                                              24Item
      1
                                              Legal
      Proceedings
                                              
                                              24Item
      1A
                                              Risk
      Factors
                                              
                                              24Item
      6
                                              Exhibits
                                              
                                              27SIGNATURES
                                              
                                              28




2


NOTE
REGARDING CURRENCY AND EXCHANGE RATES





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





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





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





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





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





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


3




PART
I — FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





CONSOLIDATED
WATER CO. LTD.


CONDENSED
CONSOLIDATED BALANCE SHEETS





March 31,
                            
                            
                            December 31,2010
                            
                            
                            2009(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                            
                            $
                            48,073,599
                            
                            
                            $
                            44,429,190Accounts
      receivable, net
                            
                            
                            9,794,613
                            
                            
                            
                            9,980,928Inventory
                            
                            
                            1,950,391
                            
                            
                            
                            1,832,564Prepaid
      expenses and other current assets
                            
                            
                            1,186,585
                            
                            
                            
                            1,689,874Current
      portion of loans receivable
                            
                            
                            1,216,139
                            
                            
                            
                            1,216,098Total
      current assets
                            
                            
                            62,221,327
                            
                            
                            
                            59,148,654Property,
      plant and equipment, net
                            
                            
                            59,024,253
                            
                            
                            
                            60,245,525Construction
      in progress
                            
                            
                            962,231
                            
                            
                            
                            1,000,882Costs
      and estimated earnings in excess of billings - construction
      project
                            
                            
                            3,354,470
                            
                            
                            
                            1,872,552Inventory
      non-current
                            
                            
                            3,240,555
                            
                            
                            
                            3,352,054Loans
      receivable
                            
                            
                            10,578,250
                            
                            
                            
                            10,875,848Investment
      in affiliate
                            
                            
                            8,644,341
                            
                            
                            
                            9,157,995Intangible
      assets, net
                            
                            
                            1,886,639
                            
                            
                            
                            1,919,656Goodwill
                            
                            
                            3,587,754
                            
                            
                            
                            3,587,754Other
      assets
                            
                            
                            3,256,135
                            
                            
                            
                            3,314,861Total
      assets
                            
                            $
                            156,755,955
                            
                            
                            $
                            154,475,781LIABILITIES
      AND EQUITYCurrent
      liabilitiesAccounts
      payable and other current liabilities
                            
                            $
                            6,607,242
                            
                            
                            $
                            6,187,606Dividends
      payable
                            
                            
                            1,152,662
                            
                            
                            
                            1,152,702Current
      portion of long term debt
                            
                            
                            1,350,639
                            
                            
                            
                            1,322,483Total
      current liabilities
                            
                            
                            9,110,543
                            
                            
                            
                            8,662,791Long
      term debt
                            
                            
                            19,457,033
                            
                            
                            
                            19,806,784Other
      liabilities
                            
                            
                            459,786
                            
                            
                            
                            465,408Total
      liabilities
                            
                            
                            29,027,362
                            
                            
                            
                            28,934,983EquityConsolidated
      Water Co. Ltd. stockholders' equityRedeemable
      preferred stock, $0.60 par value. Authorized 200,000
    shares;issued
      and outstanding 17,126 and 17,192 shares, respectively
                            
                            
                            10,275
                            
                            
                            
                            10,315Class
      A common stock, $0.60 par value. Authorized 24,655,000
    shares;issued
      and outstanding 14,541,878 shares, respectively
                            
                            
                            8,725,127
                            
                            
                            
                            8,725,127Class
      B common stock, $0.60 par value. Authorized 145,000
shares;none
      issued or outstanding
                            
                            
                            -
                            
                            
                            
                            -Additional
      paid-in capital
                            
                            
                            81,087,724
                            
                            
                            
                            80,990,686Retained
      earnings
                            
                            
                            36,351,252
                            
                            
                            
                            34,365,640Total
      Consolidated Water Co. Ltd. stockholders' equity
                            
                            
                            126,174,378
                            
                            
                            
                            124,091,768Noncontrolling
      interests
                            
                            
                            1,554,215
                            
                            
                            
                            1,449,030Total
      equity
                            
                            
                            127,728,593
                            
                            
                            
                            125,540,798Total
      liabilities and equity
                            
                            $
                            156,755,955
                            
                            
                            $
                            154,475,781





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


4





CONSOLIDATED
WATER CO. LTD.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(UNAUDITED)





Three Months Ended March 31,2010
                
                
                2009Retail
      water revenues
                
                $
                6,385,406
                
                
                $
                6,537,328Bulk
      water revenues
                
                
                6,257,942
                
                
                
                6,406,993Services
      revenues
                
                
                2,033,963
                
                
                
                2,919,734Total
      revenues
                
                
                14,677,311
                
                
                
                15,864,055Cost
      of retail revenues
                
                
                2,853,585
                
                
                
                2,549,119Cost
      of bulk revenues
                
                
                4,897,363
                
                
                
                4,986,569Cost
      of services revenues
                
                
                1,440,114
                
                
                
                2,347,867Total
      cost of revenues
                
                
                9,191,062
                
                
                
                9,883,555Gross
      profit
                
                
                5,486,249
                
                
                
                5,980,500General
      and administrative expenses
                
                
                2,465,066
                
                
                
                2,501,203Income
      from operations
                
                
                3,021,183
                
                
                
                3,479,297Other
      income (expense):Interest
      income
                
                
                302,175
                
                
                
                158,304Interest
      expense
                
                
                (404,813
                )
                
                
                (426,229
                )Other
      income
                
                
                50,867
                
                
                
                45,407Equity
      in earnings (loss) of affiliate
                
                
                212,709
                
                
                
                (608,999
                )Other
      income (expense), net
                
                
                160,938
                
                
                
                (831,517
                )Net
      income
                
                
                3,182,121
                
                
                
                2,647,780Income
      attributable to noncontrolling interests
                
                
                105,185
                
                
                
                97,622Net
      income attributable to Consolidated Water Co. Ltd.
      stockholders
                
                $
                3,076,936
                
                
                $
                2,550,158Basic
      earnings per common share attributable to Consolidated Water Co. Ltd.
      common stockholders
                
                $
                0.21
                
                
                $
                0.18Diluted
      earnings per common share attributable to Consolidated Water Co. Ltd.
      common stockholders
                
                $
                0.21
                
                
                $
                0.18Dividends
      declared per common share
                
                $
                0.075
                
                
                $
                0.065Weighted
      average number of common shares used in the determination
    of:Basic
      earnings per share
                
                
                14,541,878
                
                
                
                14,530,183Diluted
      earnings per share
                
                
                14,600,906
                
                
                
                14,550,733





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 EndedMarch 31,2010
                    
                    
                    2009Net
      cash flows from operating activities
                    
                    $
                    4,494,016
                    
                    
                    $
                    662,134Cash
      flows from investing activitiesPurchases
      of property, plant and equipment and construction in
    progress
                    
                    
                    (369,410
                    )
                    
                    
                    (1,006,192
                    )Distribution
      of earnings from affiliate
                    
                    
                    666,600
                    
                    
                    
                    —Collections
      on loans receivable
                    
                    
                    297,598
                    
                    
                    
                    200,218Net
      cash provided by (used in) investing activities
                    
                    
                    594,788
                    
                    
                    
                    (805,974
                    )Cash
      flows from financing activitiesDividends
      paid
                    
                    
                    (1,091,330
                    )
                    
                    
                    (945,015
                    )Principal
      repayments of long term debt
                    
                    
                    (353,065
                    )
                    
                    
                    (332,816
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    (1,444,395
                    )
                    
                    
                    (1,277,831
                    )Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    3,644,409
                    
                    
                    
                    (1,421,671
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    44,429,190
                    
                    
                    
                    36,261,345Cash
      and cash equivalents at end of period
                    
                    $
                    48,073,599
                    
                    
                    $
                    34,839,674Interest
      paid in cash
                    
                    $
                    360,445
                    
                    
                    $
                    389,304Non-cash
      investing and financing activitiesIssuance
      of ordinary shares to executive management for services
      rendered
                    
                    $
                    —
                    
                    
                    $
                    33,748Dividends
      declared but not paid
                    
                    $
                    1,091,925
                    
                    
                    $
                    945,703





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


6





CONSOLIDATED
WATER CO. LTD.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.
Accounting
policies





Basis of
presentation:





The
accompanying condensed consolidated balance sheet as of March 31, 2010 and the
condensed consolidated statements of income and cash flows for the three months
ended March 31, 2010 and 2009 are unaudited. These condensed consolidated
financial statements reflect all adjustments (which are of a normal recurring
nature) that, in the opinion of management, are necessary to fairly present the
Company’s financial position, results of operations and cash flows as of and for
the periods presented. The results of operations for these interim periods are
not necessarily indicative of the operating results for future periods,
including the fiscal year ending December 31, 2010.





These
condensed consolidated financial statements and notes are presented in
accordance with the rules and regulations of the United States Securities and
Exchange Commission (“SEC”) relating to interim financial statements and in
conformity with accounting principles generally accepted in the United States of
America (“US GAAP”). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with US GAAP have been
condensed or omitted pursuant to those rules and regulations, although the
Company believes that the disclosures made are adequate to make the information
not misleading.  These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009.




Plant construction revenue and cost
of plant construction revenue:  The Company recognizes revenue
and related costs as work progresses on fixed price contracts for the
construction of desalination plants to be sold to third parties using the
percentage-of-completion method, which relies on contract revenue and estimates
of total expected costs.  The Company follows this method since it can
make reasonably dependable estimates of the revenue and costs applicable to
various stages of a contract.  Under the percentage-of-completion
method, the Company records revenue and recognizes profit or loss as work on the
contract progresses.  The Company estimates total project costs and
profit to be earned on each long term, fixed price contract prior to
commencement of work on the contract and updates these estimates as work on the
contract progresses.  The cumulative amount of revenue recorded on a
contract at a specified point in time is that percentage of total estimated
revenue that incurred costs to date comprises of estimated total contract
costs.  If, as work progresses, the actual contract costs exceed
estimates, the profit recognized on revenue from that contract
decreases.  The Company recognizes the full amount of any estimated
loss on a contract at the time the estimates indicate such a
loss.  Any costs and estimated earnings in excess of billings are
classified as current assets.  Billings in excess of costs and
estimated earnings on uncompleted contracts, if any, are classified as current
liabilities.
 
 The
balance of costs and estimated earnings in excess of billings - construction
project of approximately $3.4 million and $1.9 million as of March 31, 2010 and
December 31, 2009, respectively, represent revenues earned to date on the
construction of the Red Gate plant for the Water Authority – Cayman
(“WAC”).  This receivable balance is non-current as it will be paid by
the WAC through the issuance of a long term note to the Company upon the
commissioning of the plant.
 
 Fair value
measurements:As of March 31, 2010 and December 31, 2009, the
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and other liabilities and dividends payable approximate their fair
values due to the short term maturities of these
instruments.  Management considers that the carrying amounts for loans
receivable and long term debt as of March 31, 2010 and December 31, 2009
approximate their fair value.
 
 Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants as of the measurement date.  The guidance also
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when
available.  Observable inputs are inputs market participants would use
in valuing the asset or liability and are developed based on market data
obtained from sources independent of the Company.  Unobservable inputs
are inputs that reflect the Company’s assumptions about the factors market
participants would use in valuing the asset or liability.  The
guidance establishes three levels of inputs that may be used to measure fair
value:
 
 Level 1 —
Quoted prices in active markets for identical assets or
liabilities.
 
 Level 2 —
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
 
 Level 3 —
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
 7
  Assets
and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurements.  The Company
reviews the fair value hierarchy classification on a quarterly
basis.  Changes in the observability of valuation inputs may result in
a reclassification of levels for certain securities within the fair value
hierarchy.
 
 The
following table presents the Company’s fair value hierarchy for assets and
liabilities measured at fair value as of March 31, 2010 and December 31,
2009:
 
 March
      31, 2010Level
      1
                
                
                Level
      2
                
                
                Level
      3
                
                
                TotalAssets:RecurringCash
      equivalents
                
                $
                33,017,280
                
                
                $
                -
                
                
                $
                -
                
                
                $
                33,017,280NonrecurringInvestment
      in affiliate
                
                $
                -
                
                
                $
                -
                
                
                $
                8,644,341
                
                
                $
                8,644,341December
      31, 2009Level
      1
                
                
                Level
      2
                
                
                Level
      3
                
                
                TotalAssets:RecurringCash
      equivalents
                
                $
                32,854,708
                
                
                $
                -
                
                
                $
                -
                
                
                $
                32,854,708NonrecurringInvestment
      in affiliate
                
                $
                -
                
                
                $
                -
                
                
                $
                9,157,995
                
                
                $
                9,157,995
 A
reconciliation of the beginning and ending balances for Level 3 investments for
the three months ended March 31, 2010:
  Balance
      as of December 31, 2009
                      
                      $
                      9,157,995Equity in earnings (loss) of affiliate
                      
                      
                      212,709Distribution of earnings from affiliate
                      
                      
                      (666,600
                      )Repayments of loan receivable - Bar Bay plant construction
                      
                      
                      (125,000
                      )Other
                      
                      
                      65,237Balance
      as of March 31, 2010
                      
                      $
                      8,644,341


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


2.
Stock-based compensation




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





The
Company measures and recognizes compensation expense at fair value for all
share-based payments, including stock options. Stock-based compensation totaled
$83,396 and $68,435 for the three months ended March 31, 2010 and 2009,
respectively, and is included in general and administrative expenses in the
condensed consolidated statements of income.





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





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





A summary
of stock option activity under the Company’s share-based compensation plans for
the three months ended March 31, 2010 is presented in the following
table:





Options
                                    
                                    
                                    Weighted
                                      Average
                                      Exercise Price
                                    
                                    
                                    Weighted Average
                                      Remaining
                                      Contractual Life
                                      (Years)
                                    
                                    
                                    
                                    Aggregate
                                      Intrinsic
                                      Value (1)Outstanding
      at beginning of period
                                    
                                    
                                    215,052
                                    
                                    
                                    $
                                    18.76Granted
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Exercised
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Forfeited
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Outstanding
      as of March 31, 2010
                                    
                                    
                                    215,052
                                    
                                    
                                    $
                                    18.76
                                    
                                    
                                    
                                    3.28
                                    
                                    years
                                    
                                    $
                                    577,639Exercisable
      as of March 31, 2010
                                    
                                    
                                    101,669
                                    
                                    
                                    $
                                    22.14
                                    
                                    
                                    
                                    2.51
                                    
                                    years
                                    
                                    $
                                    192,546







(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 $13.58 in the NASDAQ Global Select Market on March 31, 2010 exceeds the
      exercise price of the
option.





As of
March 31, 2010, 113,383 non-vested options and 101,669 vested options were
outstanding, with weighted average exercise prices of $15.73 and $22.14,
respectively, and average remaining contractual lives of 3.97 years and 2.51
years, respectively.  The total remaining unrecognized compensation
costs related to unvested stock-based arrangements were $214,270 as of March 31,
2010 and are expected to be recognized over a weighted average period of 3.97
years.





As of
March 31, 2010, unrecognized compensation costs relating to convertible
preference shares outstanding were $143,601, and are expected to be recognized
over a weighted average period of 1.5 years.


8


3.
Segment information





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





As of and for the three months ended March 31,
      2010Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  6,385,406
                  
                  
                  $
                  6,257,942
                  
                  
                  $
                  2,033,963
                  
                  
                  $
                  14,677,311Cost
      of revenues
                  
                  
                  2,853,585
                  
                  
                  
                  4,897,363
                  
                  
                  
                  1,440,114
                  
                  
                  
                  9,191,062Gross
      profit
                  
                  
                  3,531,821
                  
                  
                  
                  1,360,579
                  
                  
                  
                  593,849
                  
                  
                  
                  5,486,249General
      and administrative expenses
                  
                  
                  2,147,217
                  
                  
                  
                  287,668
                  
                  
                  
                  30,181
                  
                  
                  
                  2,465,066Income
      from operations
                  
                  
                  1,384,604
                  
                  
                  
                  1,072,911
                  
                  
                  
                  563,668
                  
                  
                  
                  3,021,183Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  160,938Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,182,121Income
      attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  105,185Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  3,076,936As
      of March 31, 2010:Property
      plant and equipment, net
                  
                  $
                  26,762,288
                  
                  
                  $
                  30,932,570
                  
                  
                  $
                  1,329,395
                  
                  
                  $
                  59,024,253Construction
      in progress
                  
                  
                  860,873
                  
                  
                  
                  101,358
                  
                  
                  
                  -
                  
                  
                  
                  962,231Goodwill
                  
                  
                  1,170,511
                  
                  
                  
                  2,328,526
                  
                  
                  
                  88,717
                  
                  
                  
                  3,587,754Total
      assets
                  
                  
                  79,626,854
                  
                  
                  
                  70,616,023
                  
                  
                  
                  6,513,078
                  
                  
                  
                  156,755,955





As of and for the 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
      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
                  
                  
                  
                  -
                  
                  
                  
                  6,109,782Goodwill
                  
                  
                  1,170,511
                  
                  
                  
                  2,328,526
                  
                  
                  
                  88,717
                  
                  
                  
                  3,587,754Total
      assets
                  
                  
                  82,201,398
                  
                  
                  
                  67,539,652
                  
                  
                  
                  5,775,225
                  
                  
                  
                  155,516,275




9


4.
Earnings per share





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





The
following summarizes information related to the computation of basic and diluted
EPS for the three months ended March 31, 2010 and 2009.





Three Months Ended
                    March 31,2010
                  
                  
                  2009Net
      income attributable to controlling interests
                  
                  $
                  3,076,936
                  
                  
                  $
                  2,550,158Less:Dividends
      declared and earnings attributable to preferred shares
                  
                  
                  (1,699
                  )
                  
                  
                  (1,307
                  )Net
      income available to holders of common shares in the determination of basic
      and diluted earnings per share
                  
                  $
                  3,075,237
                  
                  
                  $
                  2,548,851Weighted
      average number of common shares used in the determination of basic
      earnings per common share
                  
                  
                  14,541,878
                  
                  
                  
                  14,530,183Plus:Weighted
      average number of preferred shares outstanding during the
      period
                  
                  
                  17,131
                  
                  
                  
                  17,366Potential
      dilutive effect of unexercised options
                  
                  
                  41,897
                  
                  
                  
                  3,184Weighted
      average number of common shares used in the determination of diluted
      earnings per common share
                  
                  
                  14,600,906
                  
                  
                  
                  14,550,733





5.
Impact of recent accounting pronouncements





Fair Value Measurements and
Disclosures


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





Accounting for Transfers of
Financial Assets


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





Variable Interest
Entities


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


10





6.
Investment in and loan to affiliate





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





OC-BVI’s
sole customer is the Ministry of Communications and Works of the Government of
the British Virgin Islands (the “Ministry”). Through December 31, 2008,
substantially all of the water sold to the Ministry was produced by 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 $3.0
million loan to fund part of this plant’s construction costs. Principal on this
loan was payable in quarterly installments of $125,000 with a final balloon
payment of $2.0 million due on August 31, 2009 and interest on the loan was due
quarterly at the rate of LIBOR plus 3.5%. In August 2009, the Company amended
the terms of this loan with OC-BVI, increasing its balance to $2.8 million by
converting $800,000 in trade receivables due to the Company from
OC-BVI.  Under the terms of this amendment, the interest rate on the
loan was increased to LIBOR plus 5.5% and the maturity date for the final
balloon payment extended to August 31, 2011. The Company further amended this
loan in January 2010 to increase the interest rate to LIBOR plus 7.5%. On March
4, 2010, OC-BVI and the BVI government executed a definitive seven-year contract
for the Bar Bay plant (the “Bar Bay Agreement”). Under the terms of the Bar Bay
Agreement, OC-BVI will deliver up to 600,000 U.S. gallons of water per day to
the BVI government from the Bar Bay plant and the BVI government will be
obligated to pay for this water at a specified price as adjusted by a monthly
energy factor. Prior to the completion of the construction of the first phase of
certain additional facilities by OC-BVI, the BVI government was not obligated to
purchase any minimum volumes of water from OC-BVI. The first phase of such
facilities construction, which was completed in 2009, involved the installation
of water pipes from the plant to a BVI government-owned reservoir site and from
this site to the BVI government’s piped water distribution system. A second
phase of construction requires OC-BVI to complete a storage reservoir on the BVI
government site within twelve months of the signing of the Bar Bay Agreement.
The Bar Bay Agreement includes a seven-year extension option exercisable by the
BVI government.


11





Summarized
financial information of OC-BVI is presented as follows:





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009Current
      assets
                  
                  $
                  2,094,423
                  
                  
                  $
                  3,433,427Non-current
      assets
                  
                  
                  9,301,597
                  
                  
                  
                  9,454,460Total
      assets
                  
                  $
                  11,396,020
                  
                  
                  $
                  12,887,887





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009Current
      liabilities
                  
                  $
                  4,982,711
                  
                  
                  $
                  3,474,797Non-current
      liabilities
                  
                  
                  2,853,357
                  
                  
                  
                  5,259,756Total
      liabilities
                  
                  $
                  7,836,068
                  
                  
                  $
                  8,734,553




Three Months EndedMarch 31,2010
                  
                  
                  2009Water
      sales
                  
                  $
                  1,821,373
                  
                  
                  $
                  61,622Cost
      of water sales
                  
                  $
                  1,006,329
                  
                  
                  $
                  1,149,131Income
      (loss) from operations
                  
                  $
                  539,154
                  
                  
                  $
                  (1,338,051
                  )Net
      income (loss)
                  
                  $
                  526,482
                  
                  
                  $
                  (1,366,465
                  )





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





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009Equity
      investment (including profit sharing rights)
                  
                  $
                  6,094,341
                  
                  
                  $
                  6,482,995Loan
      receivable - Bar Bay plant construction
                  
                  
                  2,550,000
                  
                  
                  
                  2,675,000$
                  8,644,341
                  
                  
                  $
                  9,157,995





The
Company recognized earnings of $212,709 and a loss of $(608,999) on its equity
investment in OC-BVI for the three months ended March 31, 2010 and 2009,
respectively. For the three months ended March 31, 2010 and 2009, the Company
recognized approximately $80,200 and $135,700, respectively, in revenues from
its management services agreement with OC-BVI. In addition to the Company’s
loans to, and equity investment in, OC-BVI of approximately $8.6 million as of
March 31, 2010 and $9.2 million as of December 31, 2009, the Company’s recorded
value of the OC-BVI management services agreement, which is reflected as an
intangible asset on the Company’s condensed consolidated balance sheet, was
approximately $840,000 as of March 31, 2010 and $856,000 as of December 31,
2009. As a result of the signing of the Bar Bay Agreement, the Company began
amortization of this intangible asset over the seven year life of this contract
during the three months ended March 31, 2010.






Baughers
Bay dispute:





In
October 2006, OC-BVI notified the Company that the Ministry had asserted a
purported right of ownership of the Baughers Bay plant pursuant to the terms of
the Water Supply Agreement between OC-BVI and the Ministry that was signed in
1990 (the “1990 Agreement”) 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 term in May
1999, the 1990 Agreement would automatically be extended for another seven years
unless the Ministry provided notice, at least eight months prior to such
expiration, of its decision to purchase the plant from OC-BVI for approximately
$1.42 million.





In
correspondence between the parties from late 1998 through early 2000, the
Ministry indicated that the BVI government was prepared to exercise the option
to purchase the plant but would be amenable to negotiating a new water supply
agreement, and that it considered the 1990 Agreement to be in force on a monthly
basis until negotiations between the BVI government and OC-BVI were concluded.
Occasional discussions were held between the parties from early 2000 to early
2007 without resolution of the matter while OC-BVI continued to supply water to
the Ministry. OC-BVI expended approximately $4.7 million in 2003 to
significantly expand the production capacity of the plant beyond that
contemplated in the 1990 Agreement.


12





Early in
2007, the Ministry unilaterally took the position that until such time as a new
agreement is reached on the ownership of the plant and the price for the water
produced by the plant, the Ministry would only pay that amount of OC-BVI’s
billings that the Ministry purported constituted OC-BVI’s costs of producing the
water. OC-BVI responded to the Ministry that the amount the Ministry proposed to
pay was significantly less than OC-BVI’s production costs. Payments made by the
Ministry to OC-BVI since the Ministry’s assumption of this reduced price were
sporadic and as of December 31, 2007, OC-BVI had received payment for less than
22% of the amounts it billed the Ministry for the year then ended. On November
22, 2007, OC-BVI’s management was informed that the BVI government had filed a
lawsuit with the Eastern Caribbean Supreme Court (the “Court’) seeking ownership
of the Baughers Bay plant.  OC-BVI counterclaimed that it was entitled
to continued possession and operation of the Baughers Bay plant until the BVI
government paid OC-BVI approximately $4.7 million, which it believed represented
the value of the Baughers Bay plant at its present expanded production capacity.
OC-BVI took the legal position that since the BVI government never paid the
$1.42 million to purchase the Baughers Bay plant, the 1990 Agreement terminated
on May 31, 1999, which was eight months after the date that the Ministry
provided written notice of its intention to purchase the plant.





On July
4, 2008, OC-BVI filed a claim with the Court, and on April 22, 2009 amended and
increased this claim, seeking payment for water sold and delivered to the BVI
government through March 31, 2009 at the contract prices in effect before the
BVI government asserted its purported right of ownership of the
plant.





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





After
conducting hearings on October 12 and 16, 2009, on October 28, 2009, the Court
ordered the BVI government to pay OC-BVI at the rate of $13.91 per thousand
imperial gallons for water produced by OC-BVI from December 20, 2007 to present,
which amounted to a total recovery for OC-BVI of $10.24 million as of September
17, 2009.  The BVI government made a payment of $2.0 million to OC-BVI
under the Court order during the fourth quarter of 2009.





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





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





Effective
January 1, 2008, OC-BVI changed its policy for the recording of its revenues
from the Baughers Bay plant from the accrual to the equivalent of the cash
method due to an inability to meet all of the relevant revenue recognition
criteria under US GAAP. As a result of this adjustment to its revenues, OC-BVI
incurred operating losses for all fiscal quarters of 2008 and the first three
quarters of 2009. Any cash payments made by the BVI government on Baughers Bay
related invoices were applied by OC-BVI to the remaining balance of outstanding
accounts receivable that arose from billings for periods prior to and including
December 2007 and thus were not recognized as revenues.  Sufficient
payments were received from the BVI government during the three months ended
September 30, 2009 to repay the remaining accounts receivable balances relating
to periods prior to December 31, 2007.  OC-BVI continues to apply the
equivalent of the cash method with respect to the recognition of revenues from
Baughers Bay. Consequently, OC-BVI will not recognize as revenues any
amounts to be paid to OC-BVI as a result of the Court ruling until such
amounts are paid by the BVI government. The BVI government made a $2.0 million
payment on the Court award during the fourth quarter of 2009. OC-BVI also
applied the equivalent of the cash method of accounting for revenue recognition
for its Bar Bay plant through December 31, 2009. As a result of the signing of
the Bar Bay Agreement in March 2010, OC-BVI began recognizing revenues from the
Bar Bay plant on the accrual basis and recognized all revenues previously
deferred under the cash method of accounting.




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




13




The
Company accounts for its investment in OC-BVI in accordance with the equity
method of accounting for investments in common stock. This method requires
recognition of a loss on an equity investment that is other than temporary, and
indicates that a current fair value of an equity investment that is less than
its carrying amount may indicate a loss in the value of the investment. To test
for possible impairment of its investment in OC-BVI, the Company estimates its
fair value as of the end of each fiscal quarter. In making this estimate, the
Company calculates the expected cash flows from its investment in OC-BVI by (i)
identifying various possible outcomes of the Baughers Bay dispute; (ii)
estimating the cash flows associated with the Bar Bay plant and each possible
outcome for the Baughers Bay dispute, and (iii) assigning a probability to each
possible Baughers Bay outcome based upon discussions held to date by OC-BVI’s
management with the BVI government and OC-BVI’s legal counsel. The resulting
probability-weighted sum represents the expected cash flows, and the Company’s
best estimate of future cash flows, to be derived from its investment in OC-BVI.
After considering the September and October 2009 rulings of the Court, the
Company determined that the carrying value of its investment in OC-BVI exceeded
the estimated fair value for our investment in OC-BVI by approximately $160,000
as of September 30, 2009 and therefore recognized an impairment loss of this
amount on this investment during the three months ended September 30, 2009. As a
result of the decision by the BVI government to enter into the agreement with
another company to build a new plant to provide water to Tortola, the Company
believes it unlikely that OC-BVI will derive any significant future cash flows
from an operating contract for the Baughers Bay plant.  Consequently,
the Company determined that an additional impairment loss of $(4,500,000) was
required (and was recorded) during the fourth quarter of 2009 to reduce its
investment in OC-BVI to its estimated fair value. Based upon the estimated fair
value determined as of December 31, 2009 and the developments since that date to
the date of this filing, the Company concluded that no impairment loss was
required to be recognized on its investment in OC-BVI during the three months
ended March 31, 2010.





The
Appellate Court could ultimately overturn the ruling of the Court requiring the
BVI government to pay OC-BVI at the rate of $13.91 per thousand imperial gallons
for water previously supplied. If this occurs the actual cash flows from OC-BVI
could vary materially from the expected cash flows the Company used in
determining OC-BVI’s fair value as of March 31, 2010 and the Company would be
required to record an additional impairment loss to reduce the carrying value of
its investment in OC-BVI. Such impairment loss would reduce the Company’s
earnings and could have a material adverse impact on its results of operations
and financial condition.




7.
Consolidated Water (Bermuda) Limited





In June
2006, the Company formed a Bermuda-based affiliate, Consolidated Water (Bermuda)
Limited (“CW-Bermuda”) with two other shareholders. The Company owns 40% of the
equity interest and voting rights of CW-Bermuda. In January 2007, CW-Bermuda
entered into a design, build, sale and operating agreement with the Government
of Bermuda for a desalination plant to be built in two phases at Tynes Bay along
the northern coast of Bermuda. Under the agreement, CW-Bermuda constructed the
plant and has been operating it since the second quarter of 2009.





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





Because
(i) the equity investment in CW-Bermuda is not sufficient to permit it to
finance its activities without the loan from the Company; (ii) the other
investors in CW-Bermuda have no obligation to absorb any significant amount of
its losses should losses arise; and (iii) the Company expects economic benefits
from CW-Bermuda that are significantly greater than the Company’s voting rights
of 40%, CW-Bermuda constitutes a variable interest entity (“VIE”). The Company
is the primary beneficiary of CW-Bermuda and accordingly, consolidates the
results of CW-Bermuda in its financial statements. The assets and liabilities of
CW-Bermuda included in the Company’s condensed consolidated balance sheet
amounted to approximately $1,090,440 and $201,493 respectively, as of March 31,
2010. The Company has not provided any guarantees related to CW-Bermuda and any
creditors of the VIE do not have recourse to the general credit of Consolidated
Water Co. Ltd. as a result of including CW-Bermuda in the condensed consolidated
financial statements. The results of CW-Bermuda are reflected in the Company’s
services segment.





8.
Subsequent events





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


14





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





Cautionary
Note Regarding Forward-Looking Statements





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





The
forward-looking statements contained in this report are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Actual outcomes and results may differ materially from
what is expressed in such forward-looking statements. Important factors which
may affect these actual outcomes and results include, without limitation,
tourism and weather conditions in the areas we service, scheduled new
construction within our operating areas, the economies of the U.S. and the areas
we service, regulatory matters, the resolution of pending litigation,
availability of capital to repay debt and for expansion of our operations, and
other factors, including those “Risk Factors” set forth under Part II, Item 1A
in this Quarterly Report and in our 2009 Annual Report on Form
10-K.





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





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





Critical
Accounting Estimates





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





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





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





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





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





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





As a
quoted market price for OC-BVI’s stock is not available, to test for possible
impairment of our investment in OC-BVI we estimate its fair value by calculating
the expected cash flows from our investment in OC-BVI by (i) identifying various
possible outcomes of the Baughers Bay dispute; (ii) estimating the cash flows
associated with the Bar Bay plant and each possible outcome of the Baughers Bay
dispute, and (iii) assigning a probability to each Baughers Bay outcome based
upon discussions held to date by OC-BVI’s management with the BVI government and
OC-BVI’s legal counsel. The resulting probability weighted sum represents the
expected cash flows, and our best estimate of future cash flows, to be derived
from our investment in OC-BVI.


15





The
identification of the possible outcomes for the Baughers Bay dispute, the
projections of cash flows for each outcome and for the Bar Bay plant, and the
assignment of relative probabilities to each Baughers Bay outcome all represent
significant estimates made by us. While we have used our best judgment to
identify the possible Baughers Bay outcomes and expected cash flows for these
outcomes and assign relative probabilities to each outcome, and to estimate the
expected cash flows from the Bar Bay plant, these estimates are by their nature
highly subjective and are also subject to material change by our management over
time based upon additional information from OC-BVI’s management and legal
counsel, a change in the status of negotiations and/or OC-BVI’s litigation with
the BVI government. After considering the September and October 2009 rulings of
the Eastern Supreme Court of the Caribbean relating to the Baughers Bay dispute,
we determined that the carrying value of our investment in OC-BVI exceeded the
estimated fair value for our investment in OC-BVI by approximately $160,000 as
of September 30, 2009 and therefore recognized an impairment loss of this
amount on this investment during the three months ended September 30,
2009.   In February 2010, the BVI government announced that it
had signed a 16 year contract with another company for the construction and
operation of a water plant with a production capacity of 2.75 million U.S.
gallons per day.  This new plant will provide potable water to the
greater Tortola area and we believe will replace the current production of the
Baughers Bay plant.  As a result of the decision by the BVI government
to enter into the agreement with another company to provide water to Tortola, we
believe it unlikely that OC-BVI will derive any significant future revenues from
an operating contract for the Baughers Bay plant.  Consequently, we
determined that an additional impairment loss of $(4,500,000) was required (and
was recorded) during the fourth quarter of 2009 to reduce our investment in
OC-BVI to its estimated fair value.  Based
upon the estimated fair value determined as of December 31, 2009 and the
developments since that date to the date of this filing, we concluded that no
impairment loss was required to be recognized on our investment in OC-BVI during
the three months ended March 31, 2010.




The
Appellate Court could ultimately overturn the ruling of the Court requiring the
BVI government to pay OC-BVI at the rate of $13.91 per thousand imperial gallons
for water previously supplied.    If this occurs, the actual
cash flows from OC-BVI could vary materially from the expected cash flows we
used in determining OC-BVI’s fair value as of March 31, 2010, and we would be
required to record an additional loss to reduce the carrying value of our
investment in OC-BVI. Such impairment loss would reduce our earnings and could
have a material adverse impact on our results of operations and financial
condition.





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





Plant construction revenue and cost
of plant construction revenue. We recognize revenue and related costs as
work progresses on fixed price contracts for the construction of desalination
plants to be sold to third parties using the percentage-of-completion method,
which relies on contract revenue and estimates of total expected costs. We
follow this method since we can make reasonably dependable estimates of the
revenue and costs applicable to various stages of a contract. Under the
percentage-of-completion method, we record revenue and recognize profit or loss
as work on the contract progresses. Our engineering personnel estimate total
project costs and profit to be earned on each long term, fixed price contract
prior to commencement of work on the contract and update these estimates as work
on the contract progresses. The cumulative amount of revenue recorded on a
contract at a specified point in time is that percentage of total estimated
revenue that incurred costs to date comprise of estimated total contract costs.
As work progresses, if the actual contract costs exceed estimates, the profit
recognized on revenue from that contract decreases. We recognize the full amount
of any estimated loss on a contract at the time the estimates indicate such a
loss. 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 hydro-geologic conditions at the plant site that differ
materially from those we believed existed and relied upon when we submitted our
bid.


16


RESULTS
OF OPERATIONS





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and accompanying notes included under Part I,
Item 1 of this Quarterly Report and our consolidated financial statements and
accompanying notes included in our Annual Report on Form 10-K for our fiscal
year ended December 31, 2009 (“2009 Form 10-K”) and the information set forth
under Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” of our 2009 Form 10-K.





Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009





Consolidated
Results





Net
income for the three months ended March 31, 2010 was $3,076,936 ($0.21 per share
on a fully-diluted basis) as compared to $2,550,158 ($0.18 per share on a
fully-diluted basis) for the three months ended March 31, 2009. Our results for
the three months ended March 31, 2010 and 2009 were significantly affected by
the amounts we recorded in those periods from our equity investment in OC-BVI,
as discussed below.





Total
revenues for the three months ended March 31, 2010 were $14,677,311, a decrease
from the $15,864,055 in revenues for the three months ended March 31, 2009, as
all three of our business segments generated lower revenues in 2010 than in
2009. Gross profit for the three months ended March 31, 2010 was $5,486,249, or
37% of total revenues, as compared to $5,980,500, or 38%, for the three months
ended March 31, 2009. Gross profit for the bulk segment remained relatively
consistent from 2009 to 2010, while the gross profits for the retail and
services segments declined in 2010 from those generated in 2009. For further
discussion of revenues and gross profit for the three months ended March 31,
2010, see the “Results by Segment” analysis that follows.





General
and administrative (“G&A”) expenses in total remained consistent on a
consolidated basis at $2,465,066 and $2,501,203 for 2010 and 2009, respectively,
as did the major individual expense categories that comprise consolidated
G&A expenses.





Interest
income increased by approximately $144,000 to $302,175 for 2010, as compared to
$158,304 for 2009, primarily due to interest earned on the loan receivable from
the Water Authority - Cayman (“WAC”) recorded in the second quarter of 2009 as a
result of the completion and sale of the North Side Water Works
plant.





Due to
OC-BVI’s contractual dispute with the BVI Government relating to its Baughers
Bay plant, we reported a loss from our investment in OC-BVI for the three months
ended March 31, 2009 of approximately $(609,000). During the first quarter of
2010, we recognized earnings on our investment in OC-BVI of $212,709 primarily
due to revenues recognized on the accrual basis for the Bar Bay plant. See
further discussion of the OC-BVI situation at “Liquidity and Capital Resources —
Material Commitments, Contingencies and Expenditures — OC-BVI Contract
Dispute.”





Results
by Segment





Retail
Segment:





The
retail segment contributed $1,384,604 to our income from operations for the
three months ended March 31, 2010, as compared to $2,095,239 for the three
months ended March 31, 2009.





Revenues
generated by our retail water operations were $6,385,406 and $6,537,328 for the
three months ended March 31, 2010 and 2009, respectively. The volume of gallons
sold in 2010 by the retail segment increased by approximately 19% from 2009 to
2010 however substantially all of this increase relates to water sold to the WAC
while the Red Gate plant was being refurbished. The decline in retail revenues
from 2009 to 2010 reflects the annual adjustment in our base rates during the
first quarter, which decreased in 2010 due to downward movement in the consumer
price indices used to determine such rates.





Retail
segment gross profit was $3,531,821 (55% of revenues) and $3,988,209 (61% of
revenues) for the three months ended March 31, 2010 and 2009, respectively. The
decline in gross profit as a percentage of revenues from 2009 to 2010 reflects
the annual adjustment in our base rates during the first quarter, which
decreased in 2010 due to downward movement in the consumer price indices used to
determine such rates, and the incremental sales to the WAC, which were made at
bulk sale rates.




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, 2010 were $2,147,217, up $254,247 from the $1,892,970 in G&A expenses
for the three months ended March 31, 2009. The increase in G&A expenses for
2010 as compared to 2009 is primarily attributable to incremental business
development expenses of approximately $94,000 relating to travel and the bidding
of new projects and increase in employee costs of approximately $93,000 due to
added stock options expenses and incremental hires.




17


Bulk
Segment:





The bulk
segment contributed $1,072,911 and $869,869 to our income from operations for
the three months ended March 31, 2010 and 2009, respectively.





Bulk
segment revenues were $6,257,942 and $6,406,993 for the three months ended March
31, 2010 and 2009, respectively. The volume of water sold by our bulk segment
was approximately the same for 2010 and 2009.





Gross
profit for our bulk segment was $1,360,579 and $1,420,424 for the three months
ended March 31, 2010 and 2009, respectively. Gross profit as a percentage of
bulk revenues was 22% for the three months ended March 31, 2010 and 2009,
respectively.





Bulk
segment G&A expenses for the three months ended March 31, 2010 decreased to
$287,668 from $550,555 for the same period in 2009, primarily due to
approximately $183,000 in penalties and interest assessed to our Belize
operations during the first quarter of 2009 relating to delinquent business
taxes. These penalties and interest arose because we were erroneously informed
in the past that our Belize subsidiary was not subject to these
taxes.





Services
Segment:





The
services segment contributed $563,668 and $514,189 to our income from operations
for 2010 and 2009, respectively.





Revenues
from services provided in 2010 were $2,033,963 as compared to $2,919,734 in
2009.  Services revenues decreased from 2009 to 2010 due to relatively
lower project construction activity in 2010.  The decline in project
construction revenues in 2010 was partially offset by fees from our services
contract for the Tynes Bay, Bermuda plant, which commenced during the
second quarter of 2009.





The
increase in gross profit for the services segment, to $593,849 in 2010 from
$571,867 in 2009, results from the decrease in project construction costs from
2009 to 2010.





G&A
expenses for the services segment were $30,181 and $57,678 for 2010 and 2009,
respectively.





LIQUIDITY
AND CAPITAL RESOURCES





Overview





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





Our cash
flows from operations are affected by tourism, rainfall patterns, weather
conditions (such as hurricanes), changes in our customer base, the timing and
level of rate increases, overall economic conditions and other factors and the
timing of the collection of these revenues from our customers.





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





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





We have
generated approximately $32.5 million in net cash from our operating activities
during the three year period ended December 31, 2009 and we generated an
additional $4.5 million in net cash from our operating activities during the
current quarter. As of March 31, 2010, we had cash balances totaling
approximately $48.1 million and working capital of approximately $53.1 million.
We believe our cash on hand and cash to be generated from operations will be
sufficient to meet our liquidity requirements for the next 12 months, and we are
not presently aware of anything that would lead us to believe that we will not
have sufficient liquidity to meet our needs for 2011 and
thereafter.


18


Cash
Flows for the Three Months Ended March 31, 2010





Our cash
and cash equivalents increased from $44.4 million as of December 31, 2009 to
$48.1 million as of March 31, 2010.





Cash
Flows from Operating Activities





Operating
activities provided net cash for the three months ended March 31, 2010 of $4.5
million.  This cash provided reflects net income generated for the
quarter as adjusted for (i) various items included in the determination of net
income that do not affect cash flows during the year and (ii) changes in the
other components of working capital.




Cash
Flows Used in Investing Activities




Our
investing activities provided $594,788 in net cash during the three months ended
March 31, 2010. Approximately $369,000 was used for construction in progress and
property, plant and equipment additions and we collected approximately $298,000
on our loans receivable. OC-BVI also paid us a dividend of
$666,600.




Cash
Flows Used in Financing Activities




Our
financing activities used $1.4 million in net cash during the three months ended
March 31, 2010, which consisted of $353,000 in scheduled payments on our debt
and dividends paid of $1.1 million.




Financial
Position





Our total
assets increased from approximately $154.5 million as of December 31, 2009 to
approximately $156.8 million as of March 31, 2010.




Accounts
receivable as of March 31, 2010 were approximately $9.8 million, and consistent
with the balance of approximately $10.0 million as of December 31,
2009.




The
balance of costs and estimated earnings in excess of billings - construction
project of approximately $3.4 million as of March 31, 2010 represents revenues
earned to date on the construction of the Red Gate 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.




Borrowings
Outstanding





As of
March 31, 2010, our borrowings outstanding consisted of long term bonds payable
with unpaid principal balances aggregating $20,807,672.





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,
2010, $11,273,469 in principal amount was outstanding on these secured bonds.
Our obligations under the bonds are secured by fixed and floating charges (i) on
all of our assets, including an equitable charge of all of the shares of Cayman
Water, and (ii) on all of Cayman Water’s assets including its real estate.
Cayman Water has also guaranteed our payment obligations under the
bonds.





The trust
deed for these bonds restricts our ability to enter into new borrowing
agreements or any new guarantees without prior approval of the trustee and
limits our capital expenditures, with the exception of capital expenditures to
be incurred on certain defined projects, to $2.0 million annually without prior
approval by the trustee. The trust deed also contains financial covenants that
require us to maintain a debt service coverage ratio of not less than 1.25 to 1,
a ratio of long term debt to EBITDA (i.e. earnings before interest, taxes,
depreciation and amortization for the 12 months preceding the ratio calculation
date) not greater than 2.5 to 1 and a ratio of long term debt to equity equal to
or less than 1.5 to 1.  As of March 31, 2010, we were in compliance
with the covenants under the trust deed.


19


CW-Bahamas
Series A Bonds





In July
2005, CW-Bahamas sold B$10,000,000 Series A bonds to Bahamian citizens and
permanent resident investors in The Bahamas to finance a portion of the
construction cost of its Blue Hills plant. These bonds mature on June 30, 2015
and accrue interest at the annual fixed rate of 7.5%. Interest is payable
quarterly. CW-Bahamas has the option to redeem the bonds in whole or in part
without penalty commencing after June 30, 2008. We have guaranteed CW-Bahamas
repayment obligations upon an “event of default” as defined in the guarantee
agreement. If we pay any amounts pursuant to the guarantee, we will be
subrogated to all rights of the bondholders in respect of any such payments. The
guarantee is a general unsecured obligation junior to our other secured
obligations. As of March 31, 2010, B$10,000,000 of the Series A bonds was
outstanding.





CW-Bahamas
Credit Facility





CW-Bahamas
has a credit facility with Scotiabank of Canada that consists of a B$500,000
revolving working capital loan. The obligations under the credit facility are
secured by the assets of CW-Bahamas. Borrowings under the working capital loan
accrue interest at the Nassau Prime rate plus 1.50% per annum. As of March 31,
2010, no amounts were outstanding under this facility.





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





Material
Commitments, Expenditures and Contingencies





OC-BVI
Contract Dispute





In
October 2006, our affiliate OC-BVI notified us that the Ministry of
Communications and Works of the Government of the British Virgin Islands (the
“Ministry”) had asserted a purported right of ownership of the Baughers Bay
plant pursuant to the terms of the Water Supply Agreement between the parties
dated May 1990 (the “1990 Agreement”) 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 term in May
1999, the agreement would automatically be extended for another seven years
unless the Ministry provided notice, at least eight months prior to such
expiration, of its decision to purchase the plant from OC-BVI for approximately
$1.42 million.





In
correspondence between the parties from late 1998 through early 2000, the
Ministry indicated that the BVI government intended to purchase the plant but
would be amenable to negotiating a new water supply agreement, and that it
considered the 1990 Agreement to be in force on a monthly basis until
negotiations between the BVI government and OC-BVI were concluded. Occasional
discussions were held between the parties from early 2000 to early 2007 without
resolution of the matter while OC-BVI continued to supply water to the Ministry
and expended approximately $4.7 million between 1995 and 2003 to significantly
expand the production capacity of the plant beyond that contemplated in the 1990
Agreement.





Early in
2007, the Ministry unilaterally took the position that until such time as a new
agreement was reached on the ownership of the plant and the price for the
water produced by the plant, the Ministry would only pay that amount of OC-BVI’s
billings that the Ministry purported constituted OC-BVI’s costs of producing the
water. OC-BVI responded to the Ministry that the amount the Ministry proposed to
pay was significantly less than OC-BVI’s production costs. Payments made by the
Ministry to OC-BVI since the Ministry’s assumption of this reduced price were
sporadic and as of December 31, 2007 OC-BVI had received payment for less than
22% of the amounts it billed for the year then ended.   On
November 22, 2007, OC-BVI’s management was informed that the BVI government had
filed a lawsuit with the Eastern Caribbean Supreme Court (the “Court”) seeking
ownership of the Baughers Bay plant.  OC-BVI counterclaimed that it
was entitled to continued possession and operation of the Baughers Bay plant
until the BVI government paid OC-BVI approximately $4.7 million, which it
believed represented the value of the Baughers Bay plant at its present expanded
production capacity. OC-BVI took the legal position that since the BVI
government never paid the $1.42 million to purchase the Baughers Bay plant, the
1990 Agreement terminated on May 31, 1999, which was eight months after the date
that the Ministry provided written notice of its intention to purchase the
plant.





On July
4, 2008, OC-BVI filed a claim with the Court, and on April 22, 2009 amended and
increased this claim, seeking payment for water sold and delivered to the BVI
government through May 31, 2009 at the contract prices in effect before the BVI
government asserted its purported right of ownership of the
plant.


20





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





After
conducting hearings on October 12 and 16, 2009, on October 28, 2009, the Court
ordered the BVI government to pay OC-BVI at the rate of $13.91 per thousand
imperial gallons for water produced by OC-BVI from December 20, 2007 to present,
which amounts to a total recovery for OC-BVI of $10.24 million as of September
17, 2009. The BVI government made a payment of $2.0 million to OC-BVI under the
Court order during the fourth quarter of 2009.





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





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





During
2007, OC-BVI completed, for a total cost of approximately $8.2 million, the
construction of a 700,000 U.S. gallons per day desalination plant located at Bar
Bay, Tortola (the “Bar Bay plant”). We provided OC-BVI with a $3.0 million loan
to fund part of this plant’s construction costs, of which $2.0 million remained
outstanding as of June 30, 2009. Principal on this loan was payable in quarterly
installments of $125,000 with a final balloon payment of $2.0 million due on
August 31, 2009 and interest on the loan was due quarterly at the rate of LIBOR
plus 3.5%. In August 2009, we amended the terms of this loan with OC-BVI,
increasing its balance to $2.8 million by converting $800,000 in trade
receivables due to us from OC-BVI. Under the terms of this amendment, the
interest rate on the loan was increased to the rate of LIBOR plus 5.5% and the
maturity date for the final balloon payment extended to August 31,
2011. The terms for this loan were amended again in January 2010 to
increase the interest rate to LIBOR plus 7.5% as a result of OC-BVI’s inability
to comply with the loan covenant requiring OC-BVI to obtain a new contract for
Baughers Bay by December 31, 2009. On March 4, 2010, OC-BVI and the BVI
government executed the definitive contract for the Bar Bay plant (the “Bar Bay
Agreement”). Under the terms of the Bar Bay Agreement, OC-BVI will deliver up to
600,000 U.S. gallons of water per day to the BVI government from the Bar Bay
plant and the BVI government will be obligated to pay for this water at a
specified price as adjusted by a monthly energy factor. Prior to completion of
the construction of the first phase of certain additional facilities by OC-BVI
in August 2009, the BVI government was not obligated to purchase any minimum
volumes of water from OC-BVI. However, since completion of this first phase the
BVI government has been obligated to purchase at least 600,000 gallons of water
per day from the plant. The first phase of such facilities construction involved
the installation of water pipes from the plant to a BVI government-owned
reservoir site and from this site to the BVI government’s piped water
distribution system.  A second phase of construction requires OC-BVI
to complete a storage reservoir on the BVI government site within twelve months
of the signing of the Bar Bay agreement. The Bar Bay Agreement includes a
seven-year extension option exercisable by the BVI government.





Effective
January 1, 2008, OC-BVI changed its policy for the recording of its revenues
from the Baughers Bay plant from the accrual to the equivalent of the cash
method due to an inability to meet all of the criteria required under US
generally accepted accounting principles to recognized revenue on the accrual
basis. As a result of this adjustment to OC-BVI’s revenues, we recorded losses
from our equity in OC-BVI’s results of operations for all fiscal quarters of
2008 and for the first three quarters of 2009. Any cash payments made by the BVI
government on Baughers Bay related invoices were applied by OC-BVI to the
remaining balance of outstanding accounts receivable that arose from billings
for periods prior to and including December 2007 and thus were not recognized as
revenues. Sufficient payments were received from the BVI government during the
three months ended September 30, 2009 to repay the remaining accounts receivable
balances relating to period prior to December 31, 2007. OC-BVI continues to
apply the equivalent of the cash method with respect to the recognition of
revenues from Baughers Bay. Consequently, OC-BVI will not recognize as
revenues any amounts to be paid to OC-BVI as a result of the Court ruling
until such amounts are paid by the BVI government. The BVI government made
a $2.0 million payment on the Court award during the fourth quarter of 2009.
OC-BVI also applied the equivalent of the cash method of accounting for revenue
recognition for its Bar Bay plant through December 31, 2009. As a result of the
signing of the Bar Bay Agreement in March 2010, OC-BVI began recognizing
revenues from the Bar Bay plant on the accrual basis and recognized all revenues
previously deferred under the cash method of accounting.


21





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




We
account for our investment in OC-BVI in accordance with the equity method of
accounting for investments in common stock. This method requires recognition of
a loss on an equity investment that is other than temporary, and indicates that
a current fair value of an equity investment that is less than its carrying
amount may indicate a loss in the value of the investment. To test for possible
impairment of our investment in OC-BVI, we estimate its fair value as of the end
of each fiscal quarter. In making this estimate, we calculate the expected cash
flows from our investment in OC-BVI by (i) identifying various possible outcomes
of the Baughers Bay dispute; (ii) estimating the cash flows associated with the
Bar Bay plant and each possible Baughers Bay outcome, and (iii) assigning a
probability to each Baughers Bay outcome based upon discussions held to date by
OC-BVI’s management with the BVI government and OC-BVI’s legal counsel. The
resulting probability-weighted sum represents the expected cash flows, and our
best estimate of future cash flows, to be derived from our investment in OC-BVI.
After considering the September and October 2009 rulings of the Court, we
determined that the carrying value of our investment in OC-BVI exceeded the
estimated fair value for our investment in OC-BVI by approximately $160,000 as
of September 30, 2009 and therefore recognized an impairment loss of this amount
on this investment during the three months ended September 30, 2009. As a result
of the decision by the BVI government to enter into the agreement with another
company to build a new plant to serve Tortola, we now believe it unlikely that
OC-BVI will derive any significant future revenues from an operating contract
for the Baughers Bay plant. Consequently, we determined that an additional
impairment loss of $(4,500,000) was required (and was recorded) during the
fourth quarter of 2009 to reduce our investment in OC-BVI to its estimated fair
value. To date, the BVI government has paid OC-BVI only $2.0 million of the
$10.24 million awarded by the Court and has continued to pay OC-BVI for each
thousand gallons supplied from Baughers Bay at the rate of $6.88, rather than at
the $13.91 rate deemed equitable by the Court.  Based
upon the estimated fair value determined as of December 31, 2009 and the
developments since that date to the date of this filing, we concluded that no
impairment loss was required to be recognized on our investment in OC-BVI during
the three months ended March 31, 2010.




The
Appellate Court could ultimately overturn the ruling of the Court requiring the
BVI government to pay OC-BVI at the rate of $13.91 per thousand imperial gallons
for water previously supplied. If this occurs the actual cash flows from OC-BVI
could vary materially from the expected cash flows we used in determining
OC-BVI’s fair value as of March 31, 2010 and we would be required to record an
additional impairment loss to reduce the carrying value of our investment in
OC-BVI. Such impairment loss would reduce our earnings and could have a material
adverse impact on our results of operations and financial
condition.





We
recognized $212,709 in earnings from our investment in OC-BVI for the three
months ended March 31, 2010. These earnings are attributable to the signing of a
definitive agreement by OC-BVI with the BVI government for the operation of the
Bar Bay plant. As a result of this signing, OC-BVI adopted the accrual basis for
the recognition of revenues for this plant during the three months ended March
31, 2010 and recognized approximately $808,000 in revenues from the Bar Bay
plant for the quarter, which included approximately $276,000 in revenues
generated in the previous quarter which had been previously not recognized under
the cash method. As of March 31, 2010, OC-BVI’s accounts receivable for water
delivered from the Bar Bay plant amounted to approximately $808,000, of which
approximately 65% was past due.





CW-Bahamas
Liquidity





As of
March 31, 2010, CW-Bahamas was due approximately $4.6 million from the WSC. We
have been informed previously by representatives of the Bahamas government that
the delay in paying our accounts receivables is due to operating issues within
the WSC, that the delay does not reflect any type of dispute with us with
respect to the amounts owed, and that the amounts will ultimately be paid in
full. We have been informed by these representatives that monthly payments to
CW-Bahamas will continue through June 2010 in sufficient amounts to meet current
invoices and reduce the amount of the delinquent receivables. 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, 2010.





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





CW-Belize




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





Dividends





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


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As of
March 31, 2010, we declared a dividend of $0.075 payable on May 31, 2010 to
shareholders of record on May 1, 2010.





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




Dividend
Reinvestment and Common Stock Purchase Plan





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





Impact
of Inflation





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


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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,
2009 to the end of the period covered by this report.





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





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





Changes
in Internal Controls





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





PART
II — OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





Our
affiliate, OC-BVI, is involved in litigation with the BVI government as
described in “LIQUIDITY AND CAPITAL RESOURCES – Material Commitments,
Expenditures and Contingencies,” which description is incorporated herein by
reference.





ITEM
1A. RISK FACTORS





Our business faces significant
risks. These risks include those disclosed in Item 1A of our Annual Report on Form
10-K for the fiscal year ended December 31, 2009 as supplemented by the
additional risk factors included below. If any of the events or circumstances
described in the referenced risks actually occur, our business, financial
condition or results of operations could be materially adversely affected and
such events or circumstances could cause our actual results to differ materially
from the results contemplated by the forward-looking statements contained
in this report. These risks should be read in conjunction with the other
information set forth in this Quarterly Report as well as in our Annual Report on Form
10-K for the year ended December 31, 2009 and in our other periodic reports on
Form 10-Q and Form 8-K.





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





In the
Cayman Islands, we provide water to retail customers under a license, issued to
us in July 1990 by the Cayman Islands government that grants us the exclusive
right to provide water to retail customers within our licensed service area. Our
service area is comprised of an area on Grand Cayman that includes the Seven
Mile Beach and West Bay areas, two of the three most populated areas in the
Cayman Islands. For the year ended December 31, 2009, we generated approximately
40% of our consolidated revenues and 58% of our consolidated gross profits from
the retail water operations conducted pursuant to our exclusive license. For the
three months ended March 31, 2010, we generated approximately 43.5% of our
consolidated revenues and 64.4% of our consolidated gross profits from these
retail water operations. Our license expires in July 2010. If we are not in
default of any terms of the license, we have a right of first refusal to renew
the license on terms that are no less favorable than those that the government
offers to any third party.





During
our retail license renewal negotiations conducted with representatives of the
Cayman Island government during the fourth quarter of 2009 we were informed that
the Cayman Island government seeks to restructure the terms of our license to
employ a “rate of return on invested capital model’ similar to that governing
the sale of water to most U.S. municipalities. We have formally objected to the
implementation of a “rate of return on invested capital model” on the basis that
we believe that such a model would not promote the efficient operation of our
water utility, and could ultimately increase water rates to our customers. We
believe such a model, if ultimately implemented, could significantly reduce the
operating income we have historically generated from our retail license. Based
upon results to date, it is possible that our negotiations with the Cayman
Islands government will not be completed by July 2010, and we may be required to
enter into an interim license pending final resolution of our
negotiations.


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





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





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.





In
October 2006, the British Virgin Islands government notified OC-BVI that it was
asserting a purported right of ownership of OC-BVI’s desalination plant in
Baughers Bay, Tortola pursuant to the terms of the 1990 Agreement and invited
OC-BVI to submit a proposal for its continued involvement in the production of
water at the Baughers Bay plant. Early in 2007, the British Virgin Islands
government unilaterally took the position that until such time as a new
agreement is reached on the ownership of the Baughers Bay plant and for the
price of the water produced by the plant, the BVI government would only pay that
amount of OC-BVI’s invoices that the BVI government purports constitutes
OC-BVI’s costs of producing the water. OC-BVI responded to the BVI government
that the amount the Ministry proposed to pay was significantly less than
OC-BVI’s production costs. Payments made by the BVI government to OC-BVI since
the BVI government’s assumption of this reduced price were sporadic. On November
22, 2007, OC-BVI’s management was informed that the BVI government had filed a
lawsuit with the Eastern Caribbean Supreme Court (the “Court”) seeking ownership
and possession of the Baughers Bay plant.  OC-BVI counterclaimed that
it was entitled to continued possession and operation of the Baughers Bay plant
until the BVI government pays OC-BVI approximately $4.7 million, which it
believed represented the value of the Baughers Bay plant at its present expanded
production capacity.  OC-BVI also took the legal position that since
the BVI government never paid the $1.42 million to purchase the Baughers Bay
plant, the 1990 Agreement terminated on May 31, 1999, which was eight months
after the date that the Ministry provided written notice of its intention to
purchase the plant.





On July
4, 2008, OC-BVI filed a claim with the Court, and on April 22, 2009 amended and
increased this claim, seeking recovery of amounts for water sold and delivered
to the BVI government from the Baughers Bay plant through May 31, 2009 based
upon the contract prices in effect before the BVI government asserted its
purported right of ownership of the plant.





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





After
conducting hearings on October 12 and 16, 2009, on October 28, 2009, the Court
ordered the BVI government to pay OC-BVI at the rate of $13.91 per thousand
imperial gallons for water produced by OC-BVI from December 20, 2007 to present,
which amounted to a total recovery for OC-BVI of $10.24 million as of September
17, 2009. The BVI government made a payment of $2.0 million to OC-BVI under the
Court order during the fourth quarter of 2009.





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





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


25





After
considering the September and October 2009 rulings of the Court of the Caribbean
relating to the Baughers Bay dispute, we determined that the carrying value of
our investment in OC-BVI exceeded the estimated fair value for our investment in
OC-BVI by approximately $160,000 as of September 30, 2009 and therefore
recognized an impairment loss of this amount on this investment during the three
months ended September 30, 2009. In February 2010, the BVI government announced
it had signed a long term contract with another company for the construction of
a new water plant to serve Tortola. We believe this new contract with another
company makes it unlikely that OC-BVI will be able to obtain a new long-term
operating contract for Baughers Bay. Accordingly, our calculation of the
estimated fair value of our equity investment in OC-BVI as of December 31, 2009
did not include any future cash flows to OC-BVI from a long term operating
contract for the Baughers Bay plant and as a result we recorded an additional
impairment loss for our equity investment in OC-BVI of $(4,500,000) during the
fourth quarter of 2009. The remaining carrying value of our investment in OC-BVI
of $8.6 million as of March 31, 2010 assumes OC-BVI will collect in full the
remaining $8 million awarded by the Court and will not be required to return any
of the $2.0 million paid to date by the BVI government on the award. Should the
BVI government be successful in its appeal to reduce the $10 million award, we
will be required to record an additional impairment charge in an amount equal to
any reduction in the amount previously awarded. Such impairment loss would
reduce our earnings and could have a significant adverse impact on our results
of operations, financial condition and cash flows.


26


ITEM
6. EXHIBITS





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




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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
10, 2010





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