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 the equity method of accounting for investments in common stock. This method requires recognition of a loss on an equity investment that is other than temporary, and indicates that a current fair value of an equity investment that is less than its carrying amount may indicate a loss in the value of the investment. OC-BVI's on-going dispute with the BVI government 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 by (i) identifying various possible outcomes of the Baughers Bay dispute and negotiations for a definitive contract for OC-BVI's new Bar Bay plant; (ii) estimating the cash flows associated with each possible outcome, and (iii) assigning 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. After considering the September and October 2009 rulings of the Eastern Caribbean Supreme Court with respect to the litigation for the Baughers Bay dispute, we determined that the carrying value of our investment in OC-BVI exceeded the estimated fair value for our investment in OC-BVI by approximately $160,000 as of September 30, 2009 and we have therefore recognized an impairment loss of this amount on this investment, which is included in the loss of approximately $(1.6 million) we recognized for our equity in the loss of OC-BVI for the three months ended September 30, 2009. As a result of further developments, we could be required to record further such impairment losses on our investment in OC-BVI in the future.

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 used in determining OC-BVI's fair value as of September 30, 2009. OC-BVI may be unable to negotiate a new operating agreement for the Baughers Bay plant. An appellate court may overturn the October 2009 ruling of the Eastern Caribbean Supreme Court. 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 current estimate. In such case, we could be required to record further impairment losses to reduce the carrying value of our investment in OC-BVI. Such impairment losses 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. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. 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. 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 September 30, 2009 Compared to Three Months Ended September 30, 2008

Consolidated Results

Net income attributable to controlling interests for the three months ended September 30, 2009 was $657,900 ($0.05 per share on a fully-diluted basis) as compared to $1,780,017 ($0.12 per share on a fully-diluted basis) for the three months ended September 30, 2008. Our results for both of these periods were adversely affected by the losses we recorded for our equity investment in OC-BVI (discussed below) which amounted to $(1,582,248) and $(639,546) for the three months ended September 30, 2009 and 2008, respectively.

Total revenues for the three months ended September 30, 2009 and 2008 were $13,526,059 and $17,204,593, respectively. The decrease in consolidated revenues from 2008 to 2009 reflects lower revenues for all three of our business segments. Gross profit for the three months ended September 30, 2009 was $5,036,068, or 37% of total revenues, as compared to $4,625,261 or 27%, for the three months ended September 30, 2008. Our retail and bulk segments reported increased gross profits for 2009 as compared to 2008 while gross profit for our service segment declined. For further discussion of revenues and gross profit for the three months ended September 30, 2009, see the analysis in the "Results by Segment" section that follows.

General and administrative ("G&A") expenses on a consolidated basis were $2,671,169 for the three months ended September 30, 2009 as compared to $2,128,654 for same quarter of 2008. Increases in (i) employee costs of approximately $108,000 attributable to salary increases; (ii) professional fees of approximately $148,000; (iii) bank charges of $87,000 incurred by our Bahamas subsidiary to convert Bahamian dollars to U.S. dollars and subsequently transfer such dollars to other Company bank accounts; and (iv) costs incurred of approximately $69,000 to bid new projects constituted the majority of the additional G&A expense for 2009.

We reported losses from our investment in OC-BVI for the three months ended September 30, 2009 and 2008 of approximately $(1,582,000) and $(640,000), respectively. The increase in the loss from our investment in OC-BVI for 2009 as compared to 2008 reflects the recent rulings of the Eastern Caribbean Supreme Court with respect to the litigation between OC-BVI and the British Virgin Islands government and impairment losses recorded by us and OC-BVI during 2009 as a result of these rulings. 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 $1,070,885 to our income from operations for the three months ended September 30, 2009, as compared to $1,267,070 for the three months ended September 30, 2008.

Revenues generated by our retail water operations were $5,659,390 and $5,833,347 for the three months ended September 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 $469,000 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 $3,237,650 (57% of revenues) and $2,971,277 (51% of revenues) for the three months ended September 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 September 30, 2009 were $2,166,765 up $462,558 from the $1,704,207 in G&A expenses for the three months ended September 30, 2008. The increase in G&A expenses for the three months ended September 30, 2009 as compared to the comparable prior year period is primarily due to increases in (i) employee costs of approximately $94,000 attributable to salary increases; (ii) professional fees of approximately $135,000; and (iii) costs incurred of approximately $69,000 to bid new projects.

Bulk Segment:

The bulk segment contributed $933,441 and $680,684 to our income from operations for the three months ended September 30, 2009 and 2008, respectively.

Bulk segment revenues were $6,687,836 and $8,002,586 for the three months ended September 30, 2009 and 2008, respectively. Total gallons of water sold increased by 7.0% 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 $1,385,301 and $1,034,039 for the three months ended September 30, 2009 and 2008, respectively. Gross profit as a percentage of bulk revenues was 21% for the three months ended September 30, 2009 and 13% for the three months ended September 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 $125,000 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 50% of our production trains at our Windsor plant effective September 2008 and replaced the reverse osmosis membranes on the remaining production trains at the Windsor plant during the quarter ended June 30, 2009. 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 September 30, 2009 increased to $451,860 from $353,355 for the same period in 2008 due to an increase in bank charges of approximately $87,000 incurred by our Bahamas subsidiary to convert Bahamian dollars to U.S. dollars and subsequently transfer such dollars to other Company bank accounts.

Services Segment:

The services segment contributed $360,573 and $548,853 to our income from operations for the three months ended September 30, 2009 and 2008, respectively.

Revenues from services provided in 2009 were $1,178,833 as compared to $3,368,660 in 2008. Services revenues decreased from 2008 to 2009 due to relatively lower project construction activity in 2009.

The decrease in gross profit for the services segment to $413,117 in 2009 from $619,945 in 2008 reflects lower construction revenues, which were partially offset by fees earned on our services contract for the Tynes Bay, Bermuda plant.

G&A expenses for the services segment were $52,544 and $71,092 for 2009 and 2008, respectively.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Consolidated Results

Net income attributable to controlling interests for the nine months ended September 30, 2009 was $7,075,657 ($0.49 per share on a fully-diluted basis) as compared to $5,433,513 ($0.37 per share on a fully-diluted basis) for the nine months ended September 30, 2008. Our results for both of these periods were adversely affected by the losses we recorded for our equity investment in OC-BVI (discussed below) which amounted to $(2,780,270) and $(1,772,570) for 2009 and 2008, respectively.

Total revenues for the nine months ended September 30, 2009 and 2008 were $44,845,112 and $49,338,739, respectively. The decrease in consolidated revenues from 2008 to 2009 reflects lower revenues for our bulk and services segment. Gross profit for the nine months ended September 30, 2009 was $18,603,611, or 41% of total revenues, as compared to $14,068,496, or 29%, for the nine months ended September 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 nine months ended September 30, 2009, see the "Results by Segment" analysis that follows.

General and administrative ("G&A") expenses on a consolidated basis were $7,842,434 for the nine months ended September 30, 2009 as compared to $6,754,902 for same period of 2008. Increases in (i) employee costs of approximately $153,000 attributable to salary increases; (ii) professional fees of approximately $141,000; (iii) insurance expenses of $96,000 due to higher premiums; (iv) bank charges of approximately $164,000 resulting from our Bahamas subsidiary's conversion of Bahamian dollars to U.S. dollars and the subsequent transfer of such dollars to other Company bank accounts; and (v) costs incurred of approximately $128,000 to bid new projects constituted the majority of the additional G&A expense for 2009. Our G&A expense for 2009 also includes approximately $183,000 in penalties and interest assessed against our Belize operations for delinquent business taxes.

Interest income decreased substantially, from approximately $1,097,000 in 2008 to approximately $621,000 for 2009, as a result of a reduction in the rates of interest earned on the average balances invested in interest bearing deposit accounts.

We reported losses from our investment in OC-BVI for the nine months ended September 30, 2009 and 2008 of $(2,780,270) and $(1,772,570), respectively. The increase in the loss from our investment in OC-BVI for 2009 as compared to 2008 reflects the recent rulings of the Eastern Caribbean Supreme Court with respect to the litigation between OC-BVI and the British Virgin Islands government and impairment losses recorded by us and OC-BVI during the three months ended September 30, 2009 as a result of these rulings.. 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 $4,762,059 to our income from operations for the nine months ended September 30, 2009, as compared to $4,163,275 for the nine months ended September 30, 2008.

Revenues generated by our retail water operations were $18,418,103 and $17,855,530 for the nine months ended September 30, 2009 and 2008, respectively. The volume of water sold increased by 2% 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 $913,000 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 $11,027,852 (60% of revenues) and $9,646,017 (54% of revenues) for the nine months ended September 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 nine months ended September 30, 2009 were $6,265,793, up $783,051 from the $5,482,742 in G&A expenses for the nine months ended September 30, 2008. Employee costs for 2009 exceeded those for 2008 by approximately $234,000 due to salary increases. Costs incurred in connection with bidding for new projects in 2009 exceeded such costs for 2008 by approximately $128,000 and professional fees for 2009 were approximately $127,000 higher than for 2008.

Bulk Segment:

The bulk segment contributed $2,874,356 and $1,973,353 to our income from operations for the nine months ended September 30, 2009 and 2008, respectively.

Bulk segment revenues were $19,526,044 and $22,648,443 for the nine months ended September 30, 2009 and 2008, respectively. Total gallons of water sold increased by 3.0% 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 $4,286,786 and $3,028,013 for the nine months ended September 30, 2009 and 2008, respectively. Gross profit as a percentage of bulk revenues was 22% for the nine months ended September 30, 2009 and 13% for the nine months ended September 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 $400,000 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 50% of our production trains at our Windsor plant effective September 2008 and replaced the reverse osmosis membranes on the remaining production trains at the Windsor plant during the quarter ended June 30, 2009. 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 nine months ended September 30, 2009 increased to $1,412,430 from $1,054,661 for the same period in 2008 primarily as a result of approximately $183,000 in penalties and interest assessed to our Belize operations during the first quarter of 2009 relating to delinquent business taxes and an increase in bank charges of approximately $164,000 resulting from our Bahamas subsidiary's conversion of Bahamian dollars to U.S. dollars and the subsequent transfer of such dollars to other Company bank accounts

Services Segment:

. . .