Summary of CONSOLIDATED WATER CO LTD

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.

The identification of the possible outcomes for the Baughers Bay dispute, the projections of cash flows for each outcome, and the assignment of relative probabilities to each outcome all represent significant estimates made by us. While we have used our best judgment to identify the possible outcomes and expected cash flows for these outcomes and assign relative probabilities to each outcome, these estimates are by their nature highly subjective and are also subject to material change by our management over time based upon additional information from OC-BVI's management and legal counsel, a change in the status of negotiations and/or OC-BVI's litigation with the BVI government. The ultimate resolutions of the Baughers Bay issue and the negotiations for a definitive contract for the Bar Bay plant may differ significantly from our estimates and may result in actual cash flows from OC-BVI that vary materially from the expected cash flows we use in determining OC-BVI's fair value. If OC-BVI and the BVI government are unable to agree on a new contract for Baughers Bay and this matter proceeds to resolution through the Courts, the BVI government's right of ownership under the 1990 Agreement could be found to be enforceable, in which case OC-BVI could lose its Baughers Bay water supply arrangement with the BVI government or may be forced to accept a water supply arrangement with the BVI government on terms less favorable to OC-BVI, and if the BVI government exercises its purported right, OC-BVI could lose ownership of the Baughers Bay plant. Even if OC-BVI is able to refute the BVI government's purported right of ownership, OC-BVI may elect to accept a new contract on less favorable terms. OC-BVI may be unsuccessful in negotiating a definitive contract for the Bar Bay plant on terms it finds acceptable. Any of these or other possible outcomes could result in actual cash flows from our investment in OC-BVI that are significantly lower than our estimate. In such case, we could be required to record an impairment charge to reduce the carrying value of our investment in OC-BVI. Such impairment charge would reduce our earnings and could have a material adverse impact on our results of operations and financial condition.

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

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

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

RESULTS OF OPERATIONS

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

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

Consolidated Results

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

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

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

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

Due to OC-BVI's inability to resolve its on-going contractual dispute with the BVI Government relating to its Baughers Bay plant, we changed our policy for recognizing the financial results of this affiliate effective January 1, 2008. Consequently, we reported losses from our investment in OC-BVI for the three months ended March 31, 2009 and 2008 of approximately $609,000 and $497,000, respectively. See further discussion of the OC-BVI situation at "Liquidity and Capital Resources - Material Commitments, Contingencies and Expenditures - OC-BVI Contract Dispute."

Results by Segment

Retail Segment:

The retail segment contributed $2,095,239 to our income from operations for the three months ended March 31, 2009, as compared to $1,226,488 for the three months ended March 31, 2008.

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

Retail segment gross profit was $3,988,209 (61% of revenues) and $3,266,341 (56% of revenues) for the three months ended March 31, 2009 and 2008, respectively. The improvement in gross profit percentage from 2008 to 2009 reflects higher plant utilization, as a significant portion of our retail operating costs is fixed in nature.

Consistent with prior periods, we record all non-direct G&A expenses in our retail business segment and do not allocate any of these non-direct costs to our other two business segments. Retail G&A expenses for the three months ended March 31, 2009 were $1,892,970, down $146,883 from the $2,039,853 in G&A expenses for the three months ended March 31, 2008. The decrease in G&A expenses for the three months ended March 31, 2009 as compared to the comparable prior year period is primarily attributable to decreases in employee costs.

Bulk Segment:

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

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

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

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

Included in our condensed consolidated balance sheet as of March 31, 2009 are approximately $9.5 million in accounts receivable due to our Bahamas subsidiary from the Water and Sewerage Corporation of the Bahamas ("WSC"). We have been informed by Bahamian Government representatives that the delay in paying our accounts receivable is due to operating issues within the WSC, that the delay does not reflect any type of dispute with us with respect to the amounts owed, and that the amounts will ultimately be paid in full. Based upon these communications, we believe that the accounts receivable from the WSC are fully collectible and therefore have not provided any allowance for possible non-payment of these receivables as of March 31, 2009. See further discussion of this matter at "Liquidity and Capital Resources - Material Commitments, Expenditures and Contingencies - CW-Bahamas Liquidity."

Services Segment:

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

Overview

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

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

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

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

Cash Flows for the Three Months Ended March 31, 2009

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

Cash Flows from Operating Activities

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

Cash Flows from Investing Activities

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

Cash Flows from Financing Activities

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

Financial Position

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

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

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

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

Borrowings Outstanding

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

5.95% Secured Bonds

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

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

CW-Bahamas Series A Bonds

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

CW-Bahamas Credit Facility

CW-Bahamas has a credit facility with Royal Bank of Canada that consists of a BAH$500,000 revolving working capital loan. The obligations under the credit facility are secured by the assets of CW-Bahamas. Borrowings under the working capital loan accrue interest at the Nassau Prime rate plus 1.50% per annum. As of March 31, 2009, no amounts were outstanding under this facility.

The credit facility contains certain covenants applicable to CW-Bahamas, including restrictions on additional debt, guarantees and sale of assets. The credit facility limits the payment of dividends by CW-Bahamas to available cash flow (as defined in the governing loan agreement). All obligations under the credit facility are repayable on demand.

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