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 SECURITIESEXCHANGE ACT
      OF 1934
 
 For
the quarterly period ended June 30, 2009
 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
                
                N/A(State
      or other jurisdiction of
                
                (I.R.S.
      Employer Identification No.)incorporation
      or organization)





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





(345)
945-4277


(Registrant’s
telephone number, including area code)





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





Yes x No  ̈





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




Yes  ̈ No  ̈




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





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





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





As of
August 3, 2009, 14,537,530 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 June 30, 2009 (Unaudited) and December
      31, 2008
                            
                            4Condensed
      Consolidated Statements of Income (Unaudited) for the Three and Six Months
      Ended June 30, 2009 and 2008
                            
                            5Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
      June 30, 2009 and 2008
                            
                            6Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                            
                            7Item
      2
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            
                            15Item
      3
                            Quantitative
      and Qualitative Disclosures about Market Risk
                            
                            25Item
      4
                            Controls
      and Procedures
                            
                            25PART
      II
                            OTHER
      INFORMATION
                            
                            25Item
      1
                            Legal
      Proceedings
                            
                            25Item
      1A
                            Risk
      Factors
                            
                            25Item
      2
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            
                            26Item
      6
                            Exhibits
                            
                            27SIGNATURES
                            
                            28




2




NOTE
REGARDING CURRENCY AND EXCHANGE RATES





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





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





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





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





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





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


3




PART
I — FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS




CONSOLIDATED
WATER CO. LTD.


CONDENSED
CONSOLIDATED BALANCE SHEETS





June
      30,
                          
                          
                          December
      31,2009
                          
                          
                          2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                          
                          $
                          40,996,302
                          
                          
                          $
                          36,261,345Accounts
      receivable, net
                          
                          
                          10,612,600
                          
                          
                          
                          13,911,312Inventory
                          
                          
                          1,946,191
                          
                          
                          
                          1,617,484Prepaid
      expenses and other current assets
                          
                          
                          1,663,548
                          
                          
                          
                          1,444,445Current
      portion of loans receivable
                          
                          
                          1,357,253
                          
                          
                          
                          768,803Total
      current assets
                          
                          
                          56,575,894
                          
                          
                          
                          54,003,389Property,
      plant and equipment, net
                          
                          
                          57,628,141
                          
                          
                          
                          58,937,980Construction
      in progress
                          
                          
                          5,908,723
                          
                          
                          
                          6,157,958Costs
      and estimated earnings in excess of billings - construction
      project
                          
                          
                          27,422
                          
                          
                          
                          7,377,554Inventory
      non-current
                          
                          
                          3,385,530
                          
                          
                          
                          2,971,949Loans
      receivable
                          
                          
                          11,129,526
                          
                          
                          
                          1,560,420Investment
      in and loan to affiliate
                          
                          
                          12,957,711
                          
                          
                          
                          14,371,312Intangible
      assets, net
                          
                          
                          2,004,186
                          
                          
                          
                          2,144,162Goodwill
                          
                          
                          3,587,754
                          
                          
                          
                          3,587,754Other
      assets
                          
                          
                          3,432,312
                          
                          
                          
                          3,544,096Total
      assets
                          
                          $
                          156,637,199
                          
                          
                          $
                          154,656,574LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable and other current liabilities
                          
                          $
                          5,414,709
                          
                          
                          $
                          7,310,327Dividends
      payable
                          
                          
                          1,006,854
                          
                          
                          
                          1,006,414Current
      portion of long term debt
                          
                          
                          1,274,917
                          
                          
                          
                          1,229,071Total
      current liabilities
                          
                          
                          7,696,480
                          
                          
                          
                          9,545,812Long
      term debt
                          
                          
                          20,480,096
                          
                          
                          
                          21,129,269Other
      liabilities
                          
                          
                          396,547
                          
                          
                          
                          430,717Total
      liabilities
                          
                          
                          28,573,123
                          
                          
                          
                          31,105,798Stockholders’
      equityControlling
      interests:Redeemable
      preferred stock, $0.60 par value. Authorized 200,000
    shares;issued
      and outstanding 21,563 and 17,366 shares, respectively
                          
                          
                          12,938
                          
                          
                          
                          10,420Class
      A common stock, $0.60 par value. Authorized 24,655,000
    shares;issued
      and outstanding 14,532,166 and 14,529,360 shares,
    respectively
                          
                          
                          8,719,300
                          
                          
                          
                          8,717,616Class
      B common stock, $0.60 par value. Authorized 145,000
shares;none
      issued or outstanding
                          
                          
                          -
                          
                          
                          
                          -Additional
      paid-in capital
                          
                          
                          80,736,373
                          
                          
                          
                          80,461,942Retained
      earnings
                          
                          
                          36,867,163
                          
                          
                          
                          32,340,077126,335,774
                          
                          
                          
                          121,530,055Noncontrolling
      interests
                          
                          
                          1,728,302
                          
                          
                          
                          2,020,721Total
      stockholders’ equity
                          
                          
                          128,064,076
                          
                          
                          
                          123,550,776Total
      liabilities and stockholders’ equity
                          
                          $
                          156,637,199
                          
                          
                          $
                          154,656,574




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


4




CONSOLIDATED
WATER CO. LTD.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(UNAUDITED)





Three Months Ended June 30,
                
                
                Six Months Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Retail
      water revenues
                
                $
                6,221,384
                
                
                $
                6,268,688
                
                
                $
                12,758,714
                
                
                $
                12,085,626Bulk
      water revenues
                
                
                6,431,215
                
                
                
                7,665,685
                
                
                
                12,838,209
                
                
                
                14,582,416Services
      revenues
                
                
                2,802,399
                
                
                
                3,908,212
                
                
                
                5,722,133
                
                
                
                5,466,107Total
      revenues
                
                
                15,454,998
                
                
                
                17,842,585
                
                
                
                31,319,056
                
                
                
                32,134,149Cost
      of retail revenues
                
                
                2,419,393
                
                
                
                2,822,460
                
                
                
                4,968,514
                
                
                
                5,373,057Cost
      of bulk revenues
                
                
                4,950,144
                
                
                
                6,737,581
                
                
                
                9,936,718
                
                
                
                12,626,271Cost
      of services revenues
                
                
                498,408
                
                
                
                3,375,369
                
                
                
                2,846,276
                
                
                
                4,691,585Total
      cost of revenues
                
                
                7,867,945
                
                
                
                12,935,410
                
                
                
                17,751,508
                
                
                
                22,690,913Gross
      profit
                
                
                7,587,053
                
                
                
                4,907,175
                
                
                
                13,567,548
                
                
                
                9,443,236General
      and administrative expenses
                
                
                2,670,059
                
                
                
                2,159,658
                
                
                
                5,171,266
                
                
                
                4,626,248Income
      from operations
                
                
                4,916,994
                
                
                
                2,747,517
                
                
                
                8,396,282
                
                
                
                4,816,988Other
      income (expense):Interest
      income
                
                
                150,373
                
                
                
                317,550
                
                
                
                308,673
                
                
                
                770,239Interest
      expense
                
                
                (443,824
                )
                
                
                (442,551
                )
                
                
                (870,052
                )
                
                
                (889,107
                )Other
      income
                
                
                47,856
                
                
                
                24,912
                
                
                
                93,262
                
                
                
                44,767Equity
      in earnings (loss) of affiliate
                
                
                (589,022
                )
                
                
                (639,954
                )
                
                
                (1,198,021
                )
                
                
                (1,133,024
                )Other
      income (expense), net
                
                
                (834,617
                )
                
                
                (740,043
                )
                
                
                (1,666,138
                )
                
                
                (1,207,125
                )Consolidated
      net income
                
                
                4,082,377
                
                
                
                2,007,474
                
                
                
                6,730,144
                
                
                
                3,609,863Income
      (loss) attributable to non-controlling interests
                
                
                214,761
                
                
                
                27,851
                
                
                
                312,383
                
                
                
                (43,632
                )Net
      income attributable to controlling interests
                
                $
                3,867,616
                
                
                $
                1,979,623
                
                
                $
                6,417,761
                
                
                $
                3,653,495Basic
      earnings per common share
                
                $
                0.27
                
                
                $
                0.14
                
                
                $
                0.44
                
                
                $
                0.25Diluted
      earnings per common share
                
                $
                0.26
                
                
                $
                0.14
                
                
                $
                0.44
                
                
                $
                0.25Dividends
      declared per common share
                
                $
                0.065
                
                
                $
                0.065
                
                
                $
                0.13
                
                
                $
                0.195Weighted
      average number of common shares used in the determination
    of:Basic
      earnings per share
                
                
                14,531,991
                
                
                
                14,519,625
                
                
                
                14,531,092
                
                
                
                14,513,761Diluted
      earnings per share
                
                
                14,596,670
                
                
                
                14,540,671
                
                
                
                14,570,033
                
                
                
                14,536,513





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)





SixMonths Ended June
      30,2009
                    
                    
                    2008Net
      cash flows provided by operating activities
                    
                    $
                    8,129,814
                    
                    
                    $
                    4,872,895Cash
      flows provided by (used in) investing activitiesPurchases
      of property, plant and equipment, and construction in
    progress
                    
                    
                    (1,525,907
                    )
                    
                    
                    (3,209,531
                    )Collections
      on loans receivable
                    
                    
                    691,869
                    
                    
                    
                    729,738Net
      cash used in investing activities
                    
                    
                    (834,038
                    )
                    
                    
                    (2,479,793
                    )Cash
      flows provided by (used in) financing activitiesDividends
      paid
                    
                    
                    (1,890,235
                    )
                    
                    
                    (1,812,536
                    )Principal
      repayments of long term debt
                    
                    
                    (670,583
                    )
                    
                    
                    (632,125
                    )Net
      cash used in financing activities
                    
                    
                    (2,560,819
                    )
                    
                    
                    (2,444,661
                    )Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    4,734,957
                    
                    
                    
                    (51,559
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    36,261,345
                    
                    
                    
                    38,529,383Cash
      and cash equivalents at end of period
                    
                    $
                    40,996,302
                    
                    
                    $
                    38,477,824Interest
      paid in cash
                    
                    $
                    756,436
                    
                    
                    $
                    794,866Non-cash
      investing and financing activitiesConversion
      of 1,460 redeemable preferred shares into 1,460ordinary
      shares in 2008
                    
                    $
                    -
                    
                    
                    $
                    876Issuance
      of 2,806 (2008: 10,942) ordinary shares to executivemanagement
      for services rendered
                    
                    $
                    38,750
                    
                    
                    $
                    306,619Dividends
      declared but not paid
                    
                    $
                    946,030
                    
                    
                    $
                    945,184Loan
      receivable issued for plant facility sold
                    
                    $
                    10,624,425
                    
                    
                    $
                    -





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


6




CONSOLIDATED WATER CO.
LTD.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.  Basis
of presentation





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





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





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





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





Three
      Months Ended
                        
                        
                        Six
      Months EndedJune 30, 2008
                        
                        
                        June 30, 2008Revenues,
      as previously reported
                        
                        $
                        16,037,848
                        
                        
                        $
                        28,773,579Reclassification
      of energy recovery
                        
                        
                        1,804,737
                        
                        
                        
                        3,360,570Revenues,
      as adjusted
                        
                        $
                        17,842,585
                        
                        
                        $
                        32,134,149Three
      Months Ended
                        
                        
                        Six
      Months EndedJune 30, 2008
                        
                        
                        June 30, 2008Cost
      of revenues, as previously reported
                        
                        $
                        11,130,673
                        
                        
                        $
                        19,330,343Reclassification
      of energy recovery
                        
                        
                        1,804,737
                        
                        
                        
                        3,360,570Cost
      of revenues, as adjusted
                        
                        $
                        12,935,410
                        
                        
                        $
                        22,690,913





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





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




7




2.  Stock-based
compensation





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





Stock-based
compensation totaled $166,271 and $13,725 for the three months ended June 30,
2009 and 2008, respectively, and $234,706 and $188,847 for the six months ended
June 30, 2009 and 2008, respectively and is included in general and
administrative expenses in the condensed consolidated statements of
income.





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





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





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





Under
Statement of Financial Accounting Standards (“SFAS”) No. 123(R) Share-Based Payment (“SFAS No. 123(R)”),
the Company estimated the fair value of the stock options granted and rights to
acquire stock using the Black-Scholes option pricing model. The Company makes a
number of estimates and assumptions related to SFAS No. 123(R) including
forfeiture rate, volatility and expected life. The Company does not expect any
forfeitures and therefore expects to recognize the full compensation costs for
these equity awards. The Company calculated expected volatility based primarily
upon the historical volatility of the Company’s common stock.





The
expected life of options granted represents the period of time that options
granted are expected to be outstanding, which incorporates the contractual
terms, grant vesting schedules and terms and expected employee behaviors. As the
Company has so far only awarded “plain vanilla options” as described by the
SEC’s Staff Accounting Bulletin No. 107 (“SAB No. 107”), the Company used the
“simplified method” for determining the expected life of the options granted.
Originally, under SAB No. 107, this method was allowed until December 31, 2007.
However, on December 21, 2007, the SEC issued Staff Accounting Bulletin No. 110
(“SAB No. 110”), which will allow a company to continue to use the “simplified
method” under certain circumstances, which the Company will continue to use as
the Company does not have sufficient, historical data to estimate the expected
term of equity awards.





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





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





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





A summary
of stock option activity under the Company’s SFAS No. 123(R) share-based
compensation plans for the six months ended June 30, 2009 is presented in the
following table:




Options
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Life (Years)
                
                
                Aggregate
                  Intrinsic
                  Value (1)Outstanding
      as of beginning of period
                
                
                118,115
                
                
                $
                28.30
                
                
                3.66
                
                
                $                    _Granted
                
                
                109,564
                
                
                
                8.20
                
                
                4.52Exercised
                
                
                —
                
                
                
                —Forfeited
      and expired
                
                
                —
                
                
                
                —Outstanding
      as of June 30, 2009
                
                
                227,679
                
                
                $
                18.63
                
                
                
                3.82
                
                
                $
                838,264Exercisable
      as of June 30, 2009
                
                
                38,082
                
                
                $
                27.06
                
                
                
                2.25
                
                
                $
                27,828





(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 $15.85 in the NASDAQ Global Select Market on
      June 30, 2009, exceeds the exercise price of the
  option.




8




As of
June 30, 2009, 189,597 non-vested options and 38,082 vested options were
outstanding, with a weighted average exercise price of $18.63 and an average
remaining contractual life of 3.82 years. The total remaining unrecognized
compensation costs related to unvested stock-based arrangements was $660,329 as
of June 30, 2009 and are expected to be recognized over a weighted average
period of 4.13 years.





As of
June 30, 2009, unrecognized compensation costs relating to convertible
preference shares outstanding were $117,034, and are expected to be recognized
over a weighted average period of 1.34 years.





3.  Segment
information





Under
SFAS No. 131, “Disclosure about Segments of an Enterprise and Related
Information,” the Company considers its (i) operations to supply water to retail
customers, (ii) operations to supply water to bulk customers, and (iii)
providing of engineering, management and construction services, as separate
business segments. Financial information for each of these segments is as
follows:





Three Months Ended June 30,
      2009Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  6,221,384
                  
                  
                  $
                  6,431,215
                  
                  
                  $
                  2,802,399
                  
                  
                  $
                  15,454,998Cost
      of revenues
                  
                  
                  2,419,393
                  
                  
                  
                  4,950,144
                  
                  
                  
                  498,408
                  
                  
                  
                  7,867,945Gross
      profit
                  
                  
                  3,801,991
                  
                  
                  
                  1,481,071
                  
                  
                  
                  2,303,991
                  
                  
                  
                  7,587,053General
      and administrative expenses
                  
                  
                  2,206,055
                  
                  
                  
                  410,013
                  
                  
                  
                  53,991
                  
                  
                  
                  2,670,059Income
      from operations
                  
                  
                  1,595,936
                  
                  
                  
                  1,071,058
                  
                  
                  
                  2,250,000
                  
                  
                  
                  4,916,994Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (834,617
                  )Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,082,377Income
      (loss) attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  214,761Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  3,867,616





Six Months Ended June 30,
    2009Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  12,758,714
                  
                  
                  $
                  12,838,209
                  
                  
                  $
                  5,722,133
                  
                  
                  $
                  31,319,056Cost
      of revenues
                  
                  
                  4,968,514
                  
                  
                  
                  9,936,718
                  
                  
                  
                  2,846,276
                  
                  
                  
                  17,751,508Gross
      profit
                  
                  
                  7,790,200
                  
                  
                  
                  2,901,491
                  
                  
                  
                  2,875,857
                  
                  
                  
                  13,567,548General
      and administrative expenses
                  
                  
                  4,099,029
                  
                  
                  
                  960,569
                  
                  
                  
                  111,668
                  
                  
                  
                  5,171,266Income
      from operations
                  
                  
                  3,691,171
                  
                  
                  
                  1,940,922
                  
                  
                  
                  2,764,189
                  
                  
                  
                  8,396,282Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,666,138
                  )Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,730,144Income
      (loss) attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  312,383Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  6,417,761As
      of June 30, 2009:Property
      plant and equipment, net
                  
                  $
                  22,107,844
                  
                  
                  $
                  33,852,236
                  
                  
                  $
                  1,668,061
                  
                  
                  $
                  57,628,141Construction
      in progress
                  
                  
                  5,855,951
                  
                  
                  
                  52,772
                  
                  
                  
                  -
                  
                  
                  
                  5,908,723Total
      assets
                  
                  
                  83,817,265
                  
                  
                  
                  67,079,025
                  
                  
                  
                  5,740,909
                  
                  
                  
                  156,637,199





Three Months Ended June 30,
      2008Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  6,268,688
                  
                  
                  $
                  7,665,685
                  
                  
                  $
                  3,908,212
                  
                  
                  $
                  17,842,585Cost
      of revenues
                  
                  
                  2,822,460
                  
                  
                  
                  6,737,581
                  
                  
                  
                  3,375,369
                  
                  
                  
                  12,935,410Gross
      profit
                  
                  
                  3,446,228
                  
                  
                  
                  928,104
                  
                  
                  
                  532,843
                  
                  
                  
                  4,907,175General
      and administrative expenses
                  
                  
                  1,740,196
                  
                  
                  
                  323,606
                  
                  
                  
                  95,856
                  
                  
                  
                  2,159,658Income
      from operations
                  
                  
                  1,706,032
                  
                  
                  
                  604,498
                  
                  
                  
                  436,987
                  
                  
                  
                  2,747,517Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (740,043
                  )Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,007,474Income
      (loss) attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  27,851Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,979,623





Six Months Ended June 30,
    2008Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  12,085,626
                  
                  
                  $
                  14,582,416
                  
                  
                  $
                  5,466,107
                  
                  
                  $
                  32,134,149Cost
      of revenues
                  
                  
                  5,373,057
                  
                  
                  
                  12,626,271
                  
                  
                  
                  4,691,585
                  
                  
                  
                  22,690,913Gross
      profit
                  
                  
                  6,712,569
                  
                  
                  
                  1,956,145
                  
                  
                  
                  774,522
                  
                  
                  
                  9,443,236General
      and administrative expenses
                  
                  
                  3,780,047
                  
                  
                  
                  699,792
                  
                  
                  
                  146,409
                  
                  
                  
                  4,626,248Income
      from operations
                  
                  
                  2,932,522
                  
                  
                  
                  1,256,353
                  
                  
                  
                  628,113
                  
                  
                  
                  4,816,988Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,207,125
                  )Consolidated
      net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,609,863Income
      (loss) attributable to noncontrolling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (43,632
                  )Net
      income attributable to controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  3,653,495As
      of June 30, 2008:Property
      plant and equipment, net
                  
                  $
                  23,512,308
                  
                  
                  $
                  33,366,176
                  
                  
                  $
                  1,936,493
                  
                  
                  $
                  58,814,977Construction
      in progress
                  
                  
                  3,261,747
                  
                  
                  
                  2,583,964
                  
                  
                  
                  -
                  
                  
                  
                  5,845,711Total
      assets
                  
                  
                  88,647,760
                  
                  
                  
                  59,009,069
                  
                  
                  
                  5,534,736
                  
                  
                  
                  153,191,565


9


4.  Earnings per
share





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





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





Three Months Ended June 30,
                    
                    
                    Six Months Ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      income attributable to controlling interests
                    
                    $
                    3,867,616
                    
                    
                    $
                    1,979,623
                    
                    
                    $
                    6,417,761
                    
                    
                    $
                    3,653,495Less:Dividends
      declared and earnings attributable to preferred shares
                    
                    
                    (3,174
                    )
                    
                    
                    (1,456
                    )
                    
                    
                    (5,549
                    )
                    
                    
                    (4,224
                    )Net
      income available to holders of common shares in the determination of basic
      and diluted earnings per share
                    
                    $
                    3,864,442
                    
                    
                    $
                    1,978,167
                    
                    
                    $
                    6,412,212
                    
                    
                    $
                    3,649,271Weighted
      average number of common shares used in the determination of basic
      earnings per common share
                    
                    
                    14,531,991
                    
                    
                    
                    14,519,625
                    
                    
                    
                    14,531,092
                    
                    
                    
                    14,513,761Plus:Weighted
      average number of preferred shares outstanding during the
      period
                    
                    
                    18,150
                    
                    
                    
                    19,934
                    
                    
                    
                    17,760
                    
                    
                    
                    20,419Potential
      dilutive effect of unexercised options
                    
                    
                    46,529
                    
                    
                    
                    1,112
                    
                    
                    
                    21,181
                    
                    
                    
                    2,333Weighted
      average number of common shares used in the determination of diluted
      earnings per common share
                    
                    
                    14,596,670
                    
                    
                    
                    14,540,671
                    
                    
                    
                    14,570,033
                    
                    
                    
                    14,536,513





5.  Impact
of recent accounting pronouncements





Adoption of New Accounting
Standards





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





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





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





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


In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No.
165”). SFAS No. 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. SFAS No. 165 is
effective for financial statements issued for interim periods ending after June
15, 2009 and must be applied prospectively. The Company adopted this standard as
of June 30, 2009 and considered the accounting and disclosure of events
occurring after the balance sheet date through the date and time the Company’s
financial statements were issued on August 7, 2009. The adoption of SFAS No. 165
did not have a material impact on the Company’s results of operations or
financial position.


Effect of Newly Issued But
Not Yet Effective Accounting Standards





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles (“SFAS No. 168”). SFAS No. 168 establishes the FASB Accounting
Standards Codification (“Codification”) as the source of authoritative U.S.
generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative U.S. GAAP for SEC
registrants.  SFAS No. 168 and the Codification are effective for
financial statements issued for interim and annual periods ending after
September 15, 2009.  When effective, the Codification will supersede
all existing non-SEC accounting and reporting standards.  All other
nongrandfathered, non-SEC accounting literature not included in the Codification
will become nonauthoritative.  Following SFAS No. 168, the FASB will
not issue new standards in the form of Statements, FASB Staff Positions, or
Emerging Issues Task Force Abstracts.  Instead, the FASB will issue
Accounting Standards Updates, which will serve only to: (a) update the
Codification; (b) provide background information about the guidance; and (c)
provide the bases for conclusions on the change(s) in the
Codification.  The content of the Codification will carry the same
level of authority when effective.  The U.S. GAAP hierarchy will be
modified to include only two levels of U.S. GAAP, authoritative and
nonauthoritative.  In the FASB’s view, the Codification will not
change U.S. GAAP.  The Company does not believe the adoption of SFAS
No. 168 will have a material impact on its financial position or results of
operations.  It will, however, change the references to specific U.S.
GAAP contained within the consolidated financial statements, notes thereto and
information contained in the Company’s filings with the SEC.





In June
2009, the FASB issued SFAS No. 167, Amendment to Interpretation
46(R) (“SFAS No. 167”).  SFAS No. 167 amends Interpretation
46(R) to replace the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which
enterprise has the power to direct the activities of a variable interest entity
that most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits
from the entity.  An approach that is expected to be primarily
qualitative will be more effective for identifying which enterprise has a
controlling financial interest in a variable interest entity.  SFAS
No. 167 requires an additional reconsideration event when determining whether an
entity is a variable interest entity when any changes in facts and circumstances
occur such that the holders of the equity investment at risk, as a group, lose
the power from voting rights or similar rights of those investments to direct
the activities of the entity that most significantly impact the entity’s
economic performance.  It also requires ongoing assessments of whether
an enterprise is the primary beneficiary of a variable interest
entity.  These requirements will provide more relevant and timely
information to users of financial statements.  SFAS No. 167 amends
Interpretation 46(R) to require enhanced disclosures that will provide users of
financial statements with more transparent information about an enterprise’s
involvement in a variable interest entity.  The enhanced disclosures
are required for any enterprise that holds a variable interest in a variable
interest entity.  SFAS No. 167 is effective for fiscal years beginning
after November 15, 2009.  The Company is in the process of evaluating
the effect, if any, the adoption of SFAS No. 167 will have on its financial
statements.  10




6.  Investment in and loan
to affiliate





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





OC-BVI’s
sole customer is the Ministry of Communications and Works of the Government of
the British Virgin Islands (the “Ministry”) to which it sells bulk water under
the terms of the Water Supply Agreement between the parties dated May 1990 (the
“1990 Agreement”). Through December 31, 2008, substantially all of the water
sold to the Ministry was produced by OC-BVI’s desalination plant located at
Baughers Bay, Tortola (the “Baughers Bay plant”), which has a capacity of 1.7
million U.S. gallons per day.





During
2007, OC-BVI completed, for a total cost of approximately $8 million, the
construction of a 700,000 U.S. gallons per day desalination plant located at Bar
Bay, Tortola (the “Bar Bay plant”).  The Company provided OC-BVI with
a $3.0 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 is
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 is due quarterly at
the rate of LIBOR plus 3.5%.  OC-BVI constructed this plant in
response to what it believes is an extreme shortage of, and a pressing demand
for, potable water on the eastern end of Tortola and anticipated entering into a
bulk water supply agreement with the Ministry. On December 19, 2008, OC-BVI and
the BVI government executed a binding term sheet (the “Bar Bay Agreement”) for
the purchase of water by the BVI government from OC-BVI’s seawater desalination
plant located at Bar Bay. The parties intend the Bar Bay Agreement to govern the
terms of sale of water by OC-BVI to the BVI government until the parties execute
a definitive contract. Under the terms of the Bar Bay Agreement, OC-BVI will
deliver up to 600,000 U.S. gallons of water per day to the BVI government from
the Bar Bay plant and the BVI government will be obligated to pay for this water
at a specified price, as adjusted by a monthly energy factor.  Until
completion of the construction of the first phase of certain additional
facilities by OC-BVI, the BVI government is not obligated to purchase any
minimum volumes of water from OC-BVI. After completion of this first phase the
BVI government will be obligated to purchase at least 600,000 U.S. gallons of
water per day from the plant.  The first phase of such facilities
construction involves the installation of water pipes from the plant to a BVI
government-owned reservoir site and from this site to the BVI government’s piped
water distribution system. This phase must be completed within six months of the
signing of the proposed definitive contract.  A second phase of
construction requires OC-BVI to complete a storage reservoir on the BVI
government site within twelve months of the signing of the proposed seven-year
definitive contract. The proposed seven-year definitive contract is expected to
include a seven-year extension option exercisable by the BVI
government.  Negotiations
on the definitive contract continued to be in-progress through the date of this
filing.OC-BVI began selling water from the Bar Bay plant to the
BVI government during the first quarter of 2009.





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





June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Equity
      investment (including profit sharing rights)
                  
                  $
                  10,957,711
                  
                  
                  $
                  12,121,312Loan
      receivable - Bar Bay plant construction
                  
                  
                  2,000,000
                  
                  
                  
                  2,250,000$
                  12,957,711
                  
                  
                  $
                  14,371,312


11




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





Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Water
      revenues
                  
                  $
                  2,743,599
                  
                  
                  $
                  2,868,450
                  
                  
                  $
                  5,404,174
                  
                  
                  $
                  5,483,581Adjustment
      for revenue deferral (seeBaughers Bay disputebelow)
                  
                  
                  ( 2,578,668
                  )
                  
                  
                  ( 2,834,256
                  )
                  
                  
                  ( 5,177,622
                  )
                  
                  
                  ( 5,414,259
                  )Total
      adjusted revenues
                  
                  
                  164,931
                  
                  
                  
                  34,194
                  
                  
                  
                  226,552
                  
                  
                  
                  69,322Gross
      profit (loss)
                  
                  
                  ( 1,026,577
                  )
                  
                  
                  ( 1,072,153
                  )
                  
                  
                  ( 2,114,089
                  )
                  
                  
                  ( 1,956,694
                  )Income
      (loss) from operations
                  
                  
                  ( 1,299,713
                  )
                  
                  
                  ( 1,294,479
                  )
                  
                  
                  ( 2,631,250
                  )
                  
                  
                  ( 2,451,985
                  )Net
      income (loss)
                  
                  $
                  (
      1,325,937
                  )
                  
                  $
                  (
      1,333,185
                  )
                  
                  $
                  (
      2,685,889
                  )
                  
                  $
                  (
      2,540,117
                  )





The
Company recognized losses of $(589,022) and $(639,954) on its equity investment
in OC-BVI for the three months ended June 30, 2009 and 2008, respectively, and
$(1,198,021) and $(1,133,024) for the six months ended June 30, 2009 and 2008,
respectively.  In addition to the Company’s loan to and equity
investment in OC-BVI of $12,957,711 the Company’s recorded value of its OC-BVI
management services agreement, which is reflected as an intangible asset on the
Company’s consolidated balance sheet, was approximately $856,000 as of June 30,
2009.





Baughers
Bay dispute:





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





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





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





OC-BVI
submitted a proposal to the Ministry in late 2006 to continue to supply water
from the Baughers Bay plant. The Ministry held discussions with OC-BVI regarding
a new contract but did not formally respond to OC-BVI’s proposal. Early in 2007,
the Ministry unilaterally took the position that until such time as a new
agreement is reached on the ownership of the plant and the price for the water
produced by the plant, the Ministry would only pay that amount of OC-BVI’s
billings that the Ministry purports constitutes OC-BVI’s costs of producing the
water. At its proposed interim price, the Ministry would pay only approximately
30% of the amounts billed by OC-BVI pending a new agreement. OC-BVI responded to
the Ministry that the amount the Ministry proposed to pay was significantly less
than OC-BVI’s production costs. Payments made by the Ministry to OC-BVI since
the Ministry’s assumption of this reduced price have been
sporadic.  On November 15, 2007, OC-BVI issued a demand letter to the
BVI government for approximately $6.2 million representing amounts that OC-BVI
claimed were due by the BVI government for water sold and delivered plus
interest and legal fees. In response to OC-BVI’s demand for payment, the BVI
government issued a letter dated November 19, 2007, that reasserted its claim
that ownership of the Baughers Bay plant has passed to the BVI government and
rejected OC-BVI’s claim for payment.  On November 22, 2007, OC-BVI’s
management was informed that the BVI government had filed a lawsuit with the
Eastern Caribbean Supreme Court seeking ownership and possession of the Baughers
Bay plant.  OC-BVI counterclaimed that it was entitled to continued
possession and operation of the Baughers Bay plant until the BVI government pays
OC-BVI approximately $4.7 million, which it believes represents the value of the
Baughers Bay plant at its present expanded production
capacity.  OC-BVI has also taken the legal position that since the BVI
government never paid the $1.42 million to purchase the Baughers Bay plant, the
1990 agreement terminated on May 31, 1999, which was eight months after the date
that the Ministry provided written notice of its intention to purchase the
plant.




12




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





The
Eastern Caribbean Supreme Court held a three-day trial from July 22 through July
24, 2009 to address both the Baughers Bay ownership issue and OC-BVI’s claim for
payment of amounts owed for water sold and delivered to the BVI
government.  Although the Court heard considerable testimony regarding
the matters in dispute, the trial was adjourned until mid-September 2009, when
expert testimony concerning the cost of water production and other information
will be presented to the Court.  The Court is expected to issue a
preliminary ruling on these disputes in August 2009 and its final ruling at the
conclusion of the trial in September or October 2009.





Consistent
with the guidance set forth in U.S, Securities and Exchange Commission Staff
Accounting Bulletin No. 104, “Revenue Recognition,” effective January 1, 2008,
OC-BVI changed its policy for the recording of revenues from the Baughers Bay
plant from the accrual to the equivalent of the cash method. All amounts billed
by OC-BVI to the BVI government relating to Baughers Bay for water delivered
subsequent to December 31, 2007 have been recorded as deferred revenues by
OC-BVI. As a result of this adjustment to OC-BVI’s revenues, the Company has
recorded losses from its equity in OC-BVI’s results of operations for all fiscal
quarters subsequent to December 31, 2007.   Any cash payments
made by the BVI government on Baughers Bay-related invoices are applied first by
OC-BVI to the remaining balance of OC-BVI’s outstanding accounts receivable that
arose from billings for periods prior to and including December 2007. As of June
30, 2009, such remaining December 31, 2007 accounts receivable balances totaled
$215,648.





The
Company accounts for its investment in OC-BVI in accordance with Accounting
Principles Board Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock.” This accounting pronouncement requires recognition
of a loss on an equity investment that is other than temporary, and indicates
that the fair value of an equity investment that is less than its carrying
amount may indicate a loss in the value of the investment. To test for possible
impairment of its investment in OC-BVI, the Company estimated its fair value as
of June 30, 2009. In making this estimate, Company management calculated the
expected cash flow from its investment in OC-BVI using the guidance set forth
under the FASB Statement of Financial Accounting Concepts No. 7, “Using Cash
Flow Information and Present Value in Accounting Measurements.” In accordance
with this FASB statement the Company (i) identified various possible outcomes of
the Baughers Bay dispute and negotiations for a definitive contract on the new
Bar Bay plant; (ii) estimated the cash flows associated with each possible
outcome, and (iii) assigned a probability to each outcome based upon discussions
held to date by OC-BVI’s management with the BVI government and OC-BVI’s legal
counsel. The resulting probability-weighted sum represents the expected cash
flows, and the Company’s best estimate of future cash flows, to be derived from
its investment in OC-BVI. The Company determined that the fair value of its
investment in OC-BVI, as based upon these expected cash flows, exceeded its
carrying value for its investment in OC-BVI as of June 30, 2009 and
therefore no impairment loss was recognized on this investment. However, as a
result of further developments, the Company could be required to record such an
impairment loss at a future date.





The
identification of the possible outcomes for the Baughers Bay dispute and Bar Bay
negotiations, the projections of cash flows for each outcome, and the assignment
of relative probabilities to each outcome all represent significant estimates
made by the Company’s management. The ultimate resolution of the Baughers Bay
dispute and Bar Bay definitive contract negotiations may differ significantly
from management’s estimates and may result in actual cash flows from OC-BVI that
vary materially from the expected cash flows used by Company management in
determining OC-BVI’s fair value as of June 30, 2009.  The Ministry’s
right of ownership under the 1990 Agreement could be found to be enforceable by
the Court, in which case OC-BVI could lose its Baughers Bay water supply
arrangement with the Ministry or may be forced to accept a water supply
arrangement with the Ministry on terms less favorable to OC-BVI than the prior
agreement, and if the BVI government exercises its purported right of ownership,
OC-BVI could lose possession of, and its right to operate, the Baughers Bay
plant. The Court could order OC-BVI to give up possession of the Baughers Bay
plant without ordering the BVI government to adequately compensate OC-BVI for
its additional investment in the plant.  Even if OC-BVI is able to
refute the Ministry’s purported right of ownership, OC-BVI may elect to accept a
new contract on less favorable terms. OC-BVI may be unsuccessful in finalizing a
definitive contract for the Bar Bay plant on terms it finds
acceptable.  Any of these or other possible outcomes could result in
actual cash flows from the Company’s investment in OC-BVI that are significantly
lower than management’s estimate.  In such case, the Company could be
required to record an impairment charge to reduce the carrying value of its
investment in OC-BVI. Such impairment charge would reduce the Company’s earnings
and could have a material adverse impact on its results of operations and
financial condition.





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


13




7.  Consolidated
Water (Bermuda) Limited





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





The
Company has entered into a 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.  The Company began earning revenues under this agreement
in January 2009.





Because
(i) the equity investment in CW-Bermuda is not sufficient to permit it to
finance its activities without the loan from the Company; (ii) the other
investors in CW-Bermuda have no obligation to absorb any 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 as defined by FIN
46(R). The Company is the primary beneficiary of CW-Bermuda and accordingly,
consolidates the results of CW-Bermuda in its financial statements as required
under FIN 46(R). The assets and liabilities (all of which are current) of
CW-Bermuda included in the Company’s condensed consolidated balance sheet
amounted to approximately $1,446,000 and $515,000, respectively, as of June 30,
2009.  The Company has not provided any guarantees related to
CW-Bermuda and any creditors of CW-Bermuda do not have recourse to the general
credit of Consolidated Water Co. Ltd. as a result of including CW-Bermuda in the
Company’s consolidated financial statements. The results of CW-Bermuda are
reflected in the Company’s services segment.





8.  Litigation
settlement





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


14




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





Cautionary
Note Regarding Forward-Looking Statements





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





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





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





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





Critical
Accounting Estimates





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





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





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





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





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





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





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


15




The
identification of the possible outcomes for the Baughers Bay dispute, the
projections of cash flows for each outcome, and the assignment of relative
probabilities to each outcome all represent significant estimates made by us.
While we have used our best judgment to identify the possible outcomes and
expected cash flows for these outcomes and assign relative probabilities to each
outcome, these estimates are by their nature highly subjective and are also
subject to material change by our management over time based upon additional
information from OC-BVI’s management and legal counsel, a change in the status
of negotiations and/or OC-BVI’s litigation with the BVI
government.  The ultimate resolutions of the Baughers Bay issue and
the negotiations for a definitive contract for the Bar Bay plant may differ
significantly from our estimates and may result in actual cash flows from OC-BVI
that vary materially from the expected cash flows we use in determining OC-BVI’s
fair value.  The BVI government’s right of ownership under the 1990
Agreement could be found to be enforceable by the Eastern Caribbean Supreme
Court, in which case OC-BVI could lose its Baughers Bay water supply arrangement
with the BVI government or may be forced to accept a water supply arrangement
with the BVI government on terms less favorable to OC-BVI, and if the BVI
government exercises its purported right, OC-BVI could lose possession of, and
its right to operate, the Baughers Bay plant. The Court could order OC-BVI to
give up possession of the Baughers Bay plant without ordering the BVI government
to adequately compensate OC-BVI for its additional investment in the
plant.  Even if OC-BVI is able to refute the BVI government’s
purported right of ownership, OC-BVI may elect to accept a new contract on less
favorable terms. OC-BVI may be unsuccessful in negotiating a definitive contract
for the Bar Bay plant on terms it finds acceptable.  Any of these or
other possible outcomes could result in actual cash flows from our investment in
OC-BVI that are significantly lower than our estimate.  In such case,
we could be required to record an impairment charge to reduce the carrying value
of our investment in OC-BVI.  Such impairment charge would reduce our
earnings and could have a material adverse impact on our results of operations
and financial condition.





Goodwill and other intangible
assets. Goodwill represents the excess costs over fair value of the
assets of an acquired business. Goodwill and intangible assets acquired in a
business combination accounted for as a purchase and determined to have an
indefinite useful life are not amortized, but are tested for impairment at least
annually in accordance with the provisions of SFAS No. 142, “Goodwill and Other
Intangible Assets.” SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”
We periodically evaluate the possible impairment of goodwill. Management
identifies our reporting units and determines the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units. We determine the fair
value of each reporting unit by calculating the expected cash flows from each
reporting unit and compare the fair value to the carrying amount of the
reporting unit. To the extent the carrying amount of the reporting unit exceeds
the fair value of the reporting unit, we are required to perform the second step
of the impairment test, as this is an indication that the reporting unit
goodwill may be impaired. In this step, we compare the implied fair value of the
reporting unit goodwill with the carrying amount of the reporting unit goodwill.
The implied fair value of goodwill is determined by allocating the fair value of
the reporting unit to all the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141, “Business Combinations.” The
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. If the implied fair value is less than its carrying
amount, the impairment loss is recorded. Based upon our annual tests to date, we
have not experienced any impairment losses on our recorded amounts of
goodwill.





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





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




16




RESULTS
OF OPERATIONS





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





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





Consolidated
Results





Net
income for the three months ended June 30, 2009 was $3,867,616 ($0.26 per share
on a fully-diluted basis) as compared to $1,979,623 ($0.14 per share on a
fully-diluted basis) for the three months ended June 30, 2008.  Our
results for both of these periods were adversely affected by losses recorded for
our equity investment in OC-BVI, as discussed below.





Total
revenues for the three months ended June 30, 2009 and 2008 were $15,454,998 and
$17,842,585, respectively.  The decrease in consolidated revenues from
2008 to 2009 reflects lower revenues for our bulk and services segments. Gross
profit for the three months ended June 30, 2009 was $7,587,053, or 49% of total
revenues, as compared to $4,907,175, or 28%, for the three months ended June 30,
2008. All three segments reported increased gross profits for 2009 as compared
to 2008.  For further discussion of revenues and gross profit for the
three months ended June 30, 2009, see the “Results by Segment” analysis that
follows.





General
and administrative (“G&A”) expenses on a consolidated basis were $2,670,059
for the three months ended June 30, 2009 as compared to $2,159,658 for same
quarter of 2008. Increases in employee costs of approximately $204,000
attributable to salary increases and employee stock option costs, the provision
for doubtful retail accounts of approximately $114,000 and professional fees of
approximately $72,000 constituted the majority of the additional G&A expense
for 2009.





Interest
income decreased substantially, from approximately $318,000 in 2008 to
approximately $150,000 for 2009, as a result of a reduction in the rates of
interest earned on the average balances invested in interest bearing deposit
accounts.





Due to
OC-BVI’s inability to resolve its on-going contractual dispute with the BVI
government relating to its Baughers Bay plant, we reported losses from our
investment in OC-BVI for the three months ended June 30, 2009 and 2008 of
approximately $(589,000) and $(640,000), respectively. See further discussion of
the OC-BVI situation at “Liquidity and Capital Resources — Material Commitments,
Contingencies and Expenditures — OC-BVI Contract
Dispute.”





Results
by Segment





Retail
Segment:





The
retail segment contributed $1,595,936 to our income from operations for the
three months ended June 30, 2009, as compared to $1,706,032 for the three months
ended June 30, 2008.





Revenues
generated by our retail water operations were $6,221,384 and $6,268,688 for the
three months ended June 30, 2009 and 2008, respectively.  The volume
of water sold remained relatively unchanged from 2008 to 2009.  Price
increases related to inflation adjustments which went into effect during the
first quarter of 2009 served to offset a decrease of approximately $408,000 in
revenues attributable to our pass-through billing of energy costs to our
customers, as energy prices declined significantly from 2008 to
2009.





Retail
segment gross profit was $3,801,991 (61% of revenues) and $3,446,228 (55% of
revenues) for the three months ended June 30, 2009 and 2008,
respectively. The
retail segment’s gross profit percentage in 2009 benefited from a reduction in
certain operating and maintenance costs, lower energy prices and,
inflation-related adjustments to base water rates made in the first quarter of
2009.





Consistent
with prior periods, we record all non-direct G&A expenses in our retail
business segment and do not allocate any of these non-direct costs to our other
two business segments. Retail G&A expenses for the three months ended June
30, 2009 were $2,206,055, up $465,859 from the $1,740,196 in G&A expenses
for the three months ended June 30, 2008.  The increase in G&A
expenses for the three months ended June 30, 2009 as compared to the comparable
prior year period is primarily due to increases in (i) employee costs of
approximately $172,000 attributable to employee stock option expenses; (ii)
professional fees of approximately $91,000; and (iii) the provision for doubtful
accounts of $114,000.


17


Bulk
Segment:





The bulk
segment contributed $1,071,058 and $604,498 to our income from operations for
the three months ended June 30, 2009 and 2008, respectively.





Bulk
segment revenues were $6,431,215 and $7,665,685 for the three months ended June
30, 2009 and 2008, respectively. Total gallons of water sold increased by 1.5%
in 2009 from 2008.  However, revenues from the bulk segment decreased
from 2008 to 2009 due to a reduction in energy costs passed through to our
customers, as diesel and electricity prices were significantly lower in 2009
than in 2008.





Gross
profit for our bulk segment was $1,481,071 and $928,104 for the three months
ended June 30, 2009 and 2008, respectively. Gross profit as a percentage of bulk
revenues was 23% for the three months ended June 30, 2009 and 12% for the three
months ended June 30, 2008. The improvement from 2008 to 2009 in bulk gross
profit dollars and bulk gross profit as a percentage of sales is attributable to
our Cayman operations and, to a lesser extent, our Bahamas operations. Our
Cayman gross profits benefited from (i) the expiration of the original contract
for the Red Gate plant and the elimination of approximately $137,000 in
amortization expense for the intangible asset associated with this contract; and
(ii) the annual inflation-related increases in base water rates that went into
effect during the first quarter of 2009.  The higher gross profits for
our Bahamas operations reflect improved operating efficiencies for both our
Windsor and Blue Hills operations located in Nassau, New Providence. We
constructed and commissioned new feed water wells and replaced the reverse
osmosis membranes on two of four of our production trains at our Windsor plant
effective September 2008 and
replaced the reverse osmosis membranes on our other two production trains at the
Windsor plant during the current quarter.These capital expenditures have
improved the energy efficiency of the Windsor plant. In
addition, last year we implemented an improved feed water pretreatment regime at
our Blue Hills plant in Nassau which has reduced electrical power consumption at
that plant.Our bulk segment gross profit percentage for 2009 also
benefited from a reduction in diesel and electricity prices.





Bulk
segment G&A expenses for the three months ended June 30, 2009 increased to
$410,013 from $323,606 for the same period in 2008.





Services
Segment:





The
services segment contributed $2,250,000 and $436,987 to our income from
operations for the three months ended June 30, 2009 and 2008,
respectively.





Revenues
from services provided in 2009 were $2,802,399 as compared to $3,908,212 in
2008. Services revenues decreased from 2008 to 2009 due to relatively lower
project construction activity in 2009.





The
increase in gross profit for the services segment to $2,303,991 in 2009 from
$532,843 in 2008 reflects commencement during the current quarter of our
management contract for the Tynes Bay, Bermuda plant and downward adjustments of
our estimated costs to complete the Frank Sound and Bermuda
plants.  These downward adjustments of estimated costs to complete
increased the percentages of completion to date on these projects, thus we
recorded a cumulative upward adjustment to construction revenues in the 2009
quarter.  Both the Frank Sound and Bermuda projects were accepted by
the customers as of June 30, 2009 and any remaining construction revenues
from these projects will be insignificant.





G&A
expenses for the services segment were $53,991 and $95,856 for 2009 and 2008,
respectively.





Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30,
2008





Consolidated
Results





Net
income for the six months ended June 30, 2009 was $6,417,761 ($0.44 per share on
a fully-diluted basis) as compared to $3,653,495 ($0.25 per share on a
fully-diluted basis) for the six months ended June 30, 2008. Our results for
both of these periods were adversely affected by losses recorded for our equity
investment in OC-BVI, as discussed below.





Total
revenues for the six months ended June 30, 2009 and 2008 were $31,319,056 and
$32,134,149, respectively.  The decrease in consolidated revenues from
2008 to 2009 primarily reflects lower revenues for our bulk segment. Gross
profit for the six months ended June 30, 2009 was $13,567,548, or 43% of total
revenues, as compared to $9,443,236, or 29%, for the six months ended June 30,
2008. All three segments reported increased gross profits for 2009 as compared
to 2008.  For further discussion of revenues and gross profit for the
six months ended June 30, 2009, see the “Results by Segment” analysis that
follows.





General
and administrative (“G&A”) expenses on a consolidated basis were $5,171,266
for the six months ended June 30, 2009 as compared to $4,626,248 for same period
of 2008. Insurance expenses for 2009 exceeded those for 2008 by approximately
$89,000 due to premium increases.  The special shareholders’ meeting
held in January 2009 resulted in incremental expense of approximately $50,000,
and we increased our provision for doubtful retail accounts by approximately
$96,000 during 2009.





Interest
income decreased substantially, from approximately $770,000 in 2008 to
approximately $309,000 for 2009, as a result of a reduction in the rates of
interest earned on the average balances invested in interest bearing deposit
accounts.





Due to
OC-BVI’s inability to resolve its on-going contractual dispute with the BVI
government relating to its Baughers Bay plant, we reported losses from our
investment in OC-BVI for the six months ended June 30, 2009 and 2008 of
approximately $(1,198,000) and $(1,133,000), respectively. See further
discussion of the OC-BVI situation at “Liquidity and Capital Resources —
Material Commitments, Contingencies and Expenditures — OC-BVI Contract
Dispute.”





Results
by Segment





Retail
Segment:





The
retail segment contributed $3,691,171 to our income from operations for the six
months ended June 30, 2009, as compared to $2,932,522 for the six months ended
June 30, 2008.





Revenues
generated by our retail water operations were $12,758,714 and $12,085,626 for
the six months ended June 30, 2009 and 2008, respectively.  The volume
of water sold increased by 4% in 2009 from 2008.  This increase in
volume and price increases related to inflation adjustments which went into
effect during the first quarter of 2009 served to offset a decrease of
approximately $444,000 in revenues attributable to our pass-through billing of
energy costs to our customers, as energy prices declined significantly from 2008
to 2009.





Retail
segment gross profit was $7,790,200 (61% of revenues) and $6,712,569 (56% of
revenues) for the six months ended June 30, 2009 and 2008,
respectively.  The retail segment’s gross profit percentage in 2009
benefited from a reduction in certain operating and maintenance costs, lower
energy prices and,
inflation-related adjustments to base water rates made in the first quarter
of 2009.





Consistent
with prior periods, we record all non-direct G&A expenses in our retail
business segment and do not allocate any of these non-direct costs to our other
two business segments. Retail G&A expenses for the six months ended June 30,
2009 were $4,099,029, up $318,982 from the $3,780,047 in G&A expenses for
the six months ended June 30, 2008. The special shareholders’ meeting held in
January 2009 resulted in incremental expense of approximately $50,000, and we
increased our provision for doubtful accounts by approximately $96,000 during
2009.


18


Bulk
Segment:





The bulk
segment contributed $1,940,922 and $1,256,353 to our income from operations for
the six months ended June 30, 2009 and 2008, respectively.





Bulk
segment revenues were $12,838,209 and $14,582,416 for the six months ended June
30, 2009 and 2008, respectively. Total gallons of water sold increased by 1.4%
in 2009 from 2008.  However, revenues from the bulk segment decreased
from 2008 to 2009 due to a reduction in energy costs passed through to our
customers, as diesel and electricity prices were significantly lower in 2009
than in 2008.





Gross
profit for our bulk segment was $2,901,491 and $1,956,145 for the six months
ended June 30, 2009 and 2008, respectively. Gross profit as a percentage of bulk
revenues was 23% for the six months ended June 30, 2009 and 13% for the six
months ended June 30, 2008. The improvement from 2008 to 2009 in bulk gross
profit dollars and bulk gross profit as a percentage of sales is attributable to
our Cayman operations and, to a lesser extent, our Bahamas operations. Our
Cayman gross profits benefited from (i) the expiration of the original contract
for the Red Gate plant and the elimination of approximately $275,000 in
amortization expense for the intangible asset associated with this contract; and
(ii) the annual inflation-related increases in base water rates that went into
effect during the first quarter of 2009.  The higher gross profits for
our Bahamas operations reflect improved operating efficiencies for our Windsor
operations located in Nassau, New Providence. We constructed and commissioned
new feed water wells and replaced the reverse osmosis membranes on two of four
of our production trains at our Windsor plant effective September 2008 and
replaced the reverse osmosis membranes on our other two production trains at the
Windsor plant during the current quarter.  These capital
expenditures have improved the energy efficiency of the Windsor plant. 
In
addition, last year we implemented an improved feed water pretreatment regime at
our Blue Hills plant in Nassau which has reduced electrical power consumption at
that plant.Our bulk segment gross profit percentage for 2009
also benefited from a reduction in diesel and electricity prices.





Bulk
segment G&A expenses for the six months ended June 30, 2009 increased to
$960,569 from $699,792 for the same period in 2008 primarily as a result of
approximately $178,000 in penalties and interest assessed to our Belize
operations during the first quarter of 2009


relating
to delinquent business taxes.





Services
Segment:





The
services segment contributed $2,764,189 and $628,113 to our income from
operations for the six months ended June 30, 2009 and 2008,
respectively.





Revenues
from services provided in 2009 were $5,722,133 as compared to $5,466,107 in
2008. Services revenues increased slightly from 2008 to 2009 due to fees
recorded for the management contract for Bermuda.  These fees were
offset by relatively lower project construction activity in 2009.





The
increase in gross profit for the services segment to $2,875,857 in 2009 from
$774,522 in 2008 reflects commencement during the current quarter of our
management contract for the Tynes Bay, Bermuda plant and downward adjustments of
our estimated costs to complete the Frank Sound and Bermuda
plants.  These downward adjustments of estimated costs to complete
increased the percentages of completion to date on these projects, thus we
recorded a cumulative upward adjustment to construction revenues in the 2009
period.  Both the Frank Sound and Bermuda projects were accepted by
the customers as of June 30, 2009 and any remaining construction revenues
from these projects will be insignificant.





G&A
expenses for the services segment were $111,668 and $146,409 for 2009 and 2008,
respectively.





LIQUIDITY
AND CAPITAL RESOURCES





Overview





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





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


19


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





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





Cash
Flows for the Six Months Ended June 30, 2009





Our cash
and cash equivalents increased from $36,261,345 as of December 31, 2008 to
$40,996,302 as of June 30, 2009.





Cash
Flows from Operating Activities





Operating
activities provided net cash for the six months ended June 30, 2009 of
$8,129,814.  This cash provided reflects net income generated for the
six months ended of approximately $6.4 million, as adjusted for various items
which impact net income but do not impact cash during the period, such as
depreciation and amortization, stock compensation, and other
items.  The largest items impacting cash flows from operating
activities for the six months ended June 30, 2009 were depreciation and
amortization of $3.2 million and a $1.9 million decrease in accounts payable and
other liabilities.





Cash
Flows from Investing Activities





Our
investing activities used $834,038 in net cash during the six months ended June
30, 2009.  Of the approximately $1.5 million in capital expenditures
for the period, approximately $351,000 was spent on the expansion of the
Governor’s Harbour plant in Grand Cayman and approximately $799,000 was spent on
purchases of other plant and equipment.  We collected $691,869 on our
loans receivable during the period.





Cash
Flows from Financing Activities





We used
$2,560,819 in net cash from our financing activities during the six months ended
June 30, 2009.  We made $670,583 in scheduled payments on our bonds
payable and paid dividends of $1,890,235.





Financial
Position





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





Current
accounts receivable decreased approximately $3.3 million from December 31, 2008
to June 30, 2009 due to the payment by the Water and Sewerage Corporation of the
Bahamas of previously overdue amounts during the three months ended June 30,
2009.





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


20


Borrowings
Outstanding





As of
June 30, 2009 we had borrowings outstanding aggregating $21,755,013 that
consisted of bonds payable.





5.95%
Secured Bonds





In August
2006, we issued $15,771,997 principal amount secured fixed rate bonds in a
private offering and received net proceeds (excluding issuance costs and after
the offering discount) of $14,445,720. These bonds bear interest at a rate of
5.95%, are repayable in quarterly principal and interest installments of
$526,010 and mature in 2016.  We have the right to redeem the bonds in
full at any time after August 4, 2009 at a premium of 1.5% of the outstanding
principal and accrued interest on the bonds on the date of redemption. As of
June 30, 2009, $12,317,216 in principal amount was outstanding on these secured
bonds. Our obligations under the bonds are secured by fixed and floating charges
(i) on all of our assets, including an equitable charge of all of the shares of
Cayman Water, and (ii) on all of Cayman Water’s assets including its real
estate. Cayman Water has also guaranteed our payment obligations under the
bonds.





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





CW-Bahamas
Series A Bonds





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





CW-Bahamas
Credit Facility





CW-Bahamas
had a credit facility with Royal Bank of Canada that consisted of a BAH$500,000
revolving working capital loan. The obligations under the credit facility were
secured by the assets of CW-Bahamas. Borrowings under the working capital loan
accrued interest at the Nassau Prime rate plus 1.50% per annum. As of June 30,
2009, no amounts were outstanding under this facility.  We cancelled
this facility on August 1, 2009 and expect to replace it with a comparable
facility with another bank in August 2009.





Material
Commitments, Expenditures and Contingencies





OC-BVI
Contract Dispute





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


21


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





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





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





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





The
Eastern Caribbean Supreme Court held a three-day trial from July 22 through July
24, 2009 to address both the Baughers Bay ownership issue and OC-BVI’s claim for
payment of amounts owed for water sold and delivered to the BVI
government.  Although the Court heard considerable testimony regarding
the matters in dispute, the trial was adjourned until mid-September, when expert
testimony concerning the cost of water production and other information will be
presented to the Court.  The Court is expected to issue a preliminary
ruling on these disputes in August 2009 and its final ruling at the conclusion
of the trial in September or October 2009.





During
2007, OC-BVI completed, for a total cost of approximately $8 million, the
construction of a 700,000 U.S. gallons per day desalination plant located at Bar
Bay, Tortola (the “Bar Bay plant”). We provided OC-BVI with a $3.0 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 is 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 is due quarterly at the rate of
LIBOR plus 3.5%. OC-BVI constructed this plant in response to what it believes
is an extreme shortage of, and a pressing demand for, potable water on the
eastern end of Tortola and anticipated entering into a bulk water supply
agreement with the Ministry. On December 19, 2008, OC-BVI and the BVI government
executed a binding term sheet (the “Bar Bay Agreement”) for the purchase of
water by the BVI government from OC-BVI’s seawater desalination plant located at
Bar Bay. The parties intend the Bar Bay Agreement to govern the terms of sale of
water by OC-BVI to the BVI government until the parties execute a definitive
contract. Under the terms of the Bar Bay Agreement, OC-BVI will deliver up to
600,000 U.S. gallons of water per day to the BVI government from the Bar Bay
plant and the BVI government will be obligated to pay for this water at a
specified price as adjusted by a monthly energy factor. Until completion of the
construction of the first phase of certain additional facilities by OC-BVI, the
BVI government is not obligated to purchase any minimum volumes of water from
OC-BVI. After completion of this first phase the BVI government will be
obligated to purchase at least 600,000 gallons of water per day from the plant.
The first phase of such facilities construction involves the installation of
water pipes from the plant to a BVI government-owned reservoir site and from
this site to the BVI government’s piped water distribution system. This phase
must be completed within six months of the signing of the proposed definitive
contract.  A second phase of construction requires OC-BVI to complete
a storage reservoir on the BVI government site within twelve months of the
signing of the proposed seven-year definitive contract. The proposed seven-year
definitive contract is expected to include a seven-year extension option
exercisable by the BVI government. Negotiations
on the definitive contract continued to be in-progress through the date of this
filing. OC-BVI
began selling water from the Bar Bay plant to the BVI government during the
first quarter of 2009.


22


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





•
            Persuasive evidence of an
      arrangement exists.





•
            Delivery has occurred or services
      have been rendered.





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





•
            Collectability is reasonably
      assured.





OC-BVI’s
Board of Directors continues to believe that OC-BVI is contractually entitled to
full payment of all amounts billed to date for water supplied to the BVI
government and that OC-BVI will ultimately collect all amounts billed. However,
the lack of progress with respect to the resolution of the dispute and the
initiation of legal proceedings by OC-BVI to collect the accounts receivable
balances indicate that, with respect to revenues from its Baughers Bay plant,
OC-BVI cannot clearly meet all of the revenue recognition criteria set forth in
SAB No. 104. Accordingly, effective January 1, 2008, OC-BVI changed its policy
for the recording of its revenues from the Baughers Bay plant from the accrual
to the equivalent of the cash method. As a result of this adjustment to OC-BVI’s
revenues, we have recorded losses from our equity in OC-BVI’s results of
operations of for all fiscal quarters subsequent to December 31,
2007.  Any cash payments made by the BVI government on Baughers Bay
related invoices are applied first by OC-BVI to the remaining balance of
outstanding accounts receivable that arose from billings for periods prior to
and including December 2007. As of June 30, 2009, such remaining December 31,
2007 accounts receivable balances totaled $215,648.





We
account for our investment in OC-BVI in accordance with Accounting Principles
Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common
Stock.” This accounting pronouncement requires recognition of a loss on an
equity investment that is other than temporary, and indicates that a current
fair value of an equity investment that is less than its carrying amount may
indicate a loss in the value of the investment. To test for possible impairment
of our investment in OC-BVI, we estimated its fair value as of June 30, 2009. In
making this estimate, we calculated the expected cash flows from our investment
in OC-BVI using the guidance set forth under the FASB Statement of Financial
Accounting Concepts No. 7, “Using Cash Flow Information and Present Value in
Accounting Measurements.” In accordance with this FASB statement we (i)
identified various possible outcomes of the Baughers Bay dispute and
negotiations for a definitive contract on the new Bar Bay plant; (ii) estimated
the cash flows associated with each possible outcome, and (iii) assigned a
probability to each outcome based upon discussions held to date by OC-BVI’s
management with the BVI government and OC-BVI’s legal counsel. The resulting
probability-weighted sum represents the expected cash flows, and our best
estimate of future cash flows, to be derived from our investment in OC-BVI. We
determined that the fair value of our investment in OC-BVI, as based upon these
expected cash flows, exceeded our carrying value for its investment in OC-BVI as
of June 30, 2009 and therefore no impairment loss was required to be
recognized on this investment. However, as a result of further developments, we
could be required record such an impairment loss in the future.





The
identification of the possible outcomes for the Baughers Bay dispute and Bar Bay
definitive contract negotiations, the projections of cash flows for each
outcome, and the assignment of relative probabilities to each outcome all
represent significant estimates made by us. The ultimate resolution of the
Baughers Bay dispute and Bar Bay definitive contract negotiations may differ
significantly from our estimates and may result in actual cash flows from OC-BVI
that vary materially from the expected cash flows we used in determining
OC-BVI’s fair value as of June 30, 2009. The Ministry’s right of ownership under
the 1990 Agreement could be found to be enforceable by the Court, in which case
OC-BVI could lose its water supply arrangement with the Ministry or may be
forced to accept a water supply arrangement with the Ministry on terms less
favorable to OC-BVI, and if the BVI government exercises its purported right,
OC-BVI could lose possession of, and its right to operate, the Baughers Bay
plant. The Court could order OC-BVI to give up possession of the Baughers Bay
plant without ordering the BVI government to adequately compensate OC-BVI for
its additional investment in the plant.  Even if OC-BVI is able to
refute the Ministry’s purported right of ownership, OC-BVI may elect to accept a
new contract on less favorable terms. OC-BVI may be unsuccessful in negotiating
a definitive contract for the Bar Bay plant on terms it finds acceptable. Any of
these or other possible outcomes could result in actual cash flows from our
investment in OC-BVI that are significantly lower than our estimate as of June
30, 2009. In such case, we could be required to record a material impairment
charge to reduce the carrying value of our investment in OC-BVI. Such impairment
charge could have a material adverse impact on our results of operations and
financial condition.


23




CW-Bahamas
Liquidity





Since
early 2008, CW-Bahamas has experienced significant delays in the receipt of
payments on its outstanding accounts receivable from the Water and Sewerage
Corporation of the Bahamas (the “WSC”).  As of June 30, 2009,
CW-Bahamas was due approximately $4.7 million from the WSC.





We have
met with representatives of the WSC and Bahamas government (most recently on May
1, 2009) to inquire as to the reasons for the delinquency in their accounts
receivables payments.  We have been informed by government
representatives of WSC and the Bahamas that (i) the WSC’s payment delinquencies
are due to operating issues within the WSC; (ii) that such delinquencies do not
reflect any type of dispute with CW-Bahamas with respect to the amounts owed;
and (iii) the amounts will ultimately be paid in full.  During the
three months ended June 30, 2009, CW-Bahamas received $8.7 million in payments
on its receivables from the WSC and CW-Bahamas’ accounts receivable from the WSC
were approximately $4.7 million as of June 30, 2009.  We believe that
the accounts receivable from the WSC are fully collectible and therefore have
not provided any allowance for possible non-payment of these receivables as of
June 30, 2009.  However, we have been informed by these
representatives that the WSC expects to continue to be in arrears on its
payments to CW-Bahamas for the remainder of 2009.





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





CW-Belize
Liquidity





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





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





Dividends





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





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





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





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





Dividend
Reinvestment and Common Stock Purchase Plan





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





Impact
of Inflation





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


24


ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





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





Changes
in Internal Controls





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





PART
II — OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





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





ITEM
1A. RISK FACTORS





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





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





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


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





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





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





The
Eastern Caribbean Supreme Court held a three-day trial from July 22 through July
24, 2009 to address both the Baughers Bay ownership issue and OC-BVI’s claim for
payment of amounts owed for water sold and delivered to the BVI
government.  Although the Court heard considerable testimony regarding
the matters in dispute, the trial was adjourned until mid-September, when expert
testimony concerning the cost of water production and other information will be
presented to the Court.  The Court is expected to issue a preliminary
ruling on these disputes in August 2009 and its final ruling at the conclusion
of the trial in September or October 2009.





Due to
the on-going dispute and the lack of payments on OC-BVI’s accounts receivable
balances by the BVI government, effective January 1, 2008, we changed our policy
for the recording of our equity in the financial results of OC-BVI to reflect
our equity in OC-BVI’s results as if revenues were recognized by this affiliate
under the equivalent of the cash, rather than accrual, method. As a result of
this accounting change, we have recorded losses from our equity investment in
OC-BVI for all quarters subsequent to December 31, 2007.  As of June
30, 2009, our loan to, and equity investment in, OC-BVI totaled approximately
$13.0 million and the recorded value of our management services agreement, which
is reflected on our balance sheet as an intangible asset, was approximately
$856,000.





If the
BVI government’s right of ownership under the 1990 Agreement is found to be
enforceable, OC-BVI may lose its Baughers Bay water supply arrangement or be
forced to accept a water supply arrangement on less favorable terms, and if the
BVI government exercises its purported right, OC-BVI could lose possession of,
and its right to operate, the Baughers Bay plant.  The Court could
order OC-BVI to give up possession of the Baughers Bay plant without ordering
the BVI government to adequately compensate OC-BVI for its additional investment
in the plant.  In any of these cases, the value of our OC-BVI-related
assets would decline, and we could be required to record impairment charges to
reduce the carrying values of these assets.  Such impairment charges
would reduce our earnings and could have a significant adverse impact on our
results of operations, financial condition and cash flows.





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





OC-BVI
has constructed a new desalination plant located on Bar Bay, Tortola, in the
British Virgin Islands. The total cost for this plant is approximately $8.0
million. We have a loan receivable outstanding from OC-BVI of $2.0 million for
the construction of this plant as of December 31, 2008. OC-BVI constructed this
plant in response to what it believes is an extreme shortage of, and a pressing
demand for, potable water on the eastern end of Tortola and in anticipation of
entering into a bulk water supply agreement with the British Virgin Islands
government. In December 2008, OC-BVI executed a binding term sheet with the BVI
government for the sale of water from the Bar Bay plant; however the agreement
between the parties remains subject to the execution of definitive contract
between the parties. If such a definitive contract is ultimately not obtained,
or is not obtained on sufficiently favorable terms, OC-BVI may not be able to
recover the cost of its investment in this plant, in which case we may be
required to record an impairment charge to reduce the carrying value of our loan
to OC-BVI and our investment in OC-BVI. Such an impairment charge would reduce
our earnings and could have a significant adverse impact on our results of
operations and financial condition.





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





During
the quarter ended June 30, 2009, we issued 253 common shares to one of our
executive officers under the terms of their executive compensation agreements.
The issuance of the shares was exempt from registration under Section 4(2) of
the Securities Act of 1933 because the executive officers have knowledge of all
material information relating to us.


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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:
August 7, 2009


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