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. 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.

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.

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.

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 . . .