ctws_form10-k.htm

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ITEM 6. SELECTED FINANCIAL INFORMATION

SUPPLEMENTAL INFORMATION (Unaudited)

SELECTED FINANCIAL DATA

Years Ended December 31, (thousands of dollars except per share
amounts and where otherwise indicated)	2011			2010			2009			2008			2007
CONSOLIDATED STATEMENTS OF INCOME
Continuing Operations
Operating Revenues	$	69,402		$	66,408		$	59,391		$	61,270		$	59,026
Operating Expenses	$	53,842		$	52,573		$	47,003		$	47,874		$	46,324
Other Utility Income, Net of Taxes	$	847		$	742		$	704		$	579		$	552
Total Utility Operating Income	$	16,407		$	14,577		$	13,092		$	13,975		$	13,254
Interest and Debt Expense	$	5,674		$	5,853		$	4,744		$	5,198		$	4,411
Net Income	$	11,300		$	9,798		$	10,209		$	9,424		$	8,781
Cash Common Stock Dividends Paid	$	8,196		$	7,942		$	7,671		$	7,373		$	7,146
Dividend Payout Ratio from Continuing Operations		73	%		81	%		75	%		78	%		81	%
Weighted Average Common Shares Outstanding		8,610,070			8,531,741			8,447,950			8,377,428			8,270,494
Basic Earnings Per Common Share from Continuing Operations	$	1.31		$	1.14		$	1.20		$	1.12		$	1.06
Number of Shares Outstanding at Year End		8,755,398			8,676,849			8,573,744			8,463,269			8,376,842
ROE on Year End Common Equity		9.6	%		8.7	%		9.4	%		9.1	%		8.8	%
Declared Common Dividends Per Share	$	0.940		$	0.920		$	0.900		$	0.880		$	0.865


CONSOLIDATED BALANCE SHEET
Common Stockholders' Equity	$	118,189		$	113,191		$	108,569		$	103,476		$	100,098
Long-Term Debt (Consolidated, Excluding Current Maturities)		135,256			111,675			111,955			92,227			92,285
Preferred Stock		772			772			772			772			772
Total Capitalization	$	254,217		$	225,638		$	221,296		$	196,475		$	193,155
Stockholders' Equity (Includes Preferred Stock)		47	%		51	%		49	%		53	%		52	%
Long-Term Debt		53	%		49	%		51	%		47	%		48	%
Net Utility Plant	$	360,027		$	344,219		$	325,202		$	299,233		$	277,662
Total Assets	$	464,831		$	424,199		$	415,276		$	372,431		$	360,813
Book Value - Per Common Share	$	13.50		$	13.05		$	12.66		$	12.23		$	11.95

OPERATING REVENUES BY
REVENUE CLASS
Residential	$	43,656		$	42,103		$	36,471		$	37,963		$	38,354
Commercial		8,621			7,725			6,729			7,150			6,762
Industrial		1,817			1,755			1,459			1,822			1,764
Public Authority		2,253			2,280			1,926			2,027			1,924
Fire Protection		11,890			11,430			10,958			10,606			9,482
Other (Including Non-Metered Accounts)		1,165			1,115			1,848			1,702			740
Total Operating Revenues	$	69,402		$	66,408		$	59,391		$	61,270		$	59,026

Number of Customers (Average)		89,812			88,895			88,390			87,028			84,023
Billed Consumption (Millions of Gallons)		6,616			6,958			6,472			6,895			7,257
Number of Employees		198			204			225			226			206

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

Executive Overview

The Company is a non-operating holding company, whose income is derived from the earnings of its three active wholly-owned subsidiary companies, as of December 31, 2011: The Connecticut Water Company (Connecticut Water), New England Water Utility Services, Inc. (NEWUS), and Chester Realty Company (Chester Realty). Additionally, on January 1, 2012, the Company completed the acquisition of Aqua Maine from Aqua America. Upon completion of the acquisition, Aqua Maine renamed The Maine Water Company (Maine Water).

On July 27, 2011, the Company announced that it had entered into an agreement on July 26, 2011 with Aqua America, Inc. (“AA”) to purchase all of the outstanding shares of Aqua Maine, Inc. (“AM”), a wholly-owned subsidiary of AA, for approximately $35.8 million (subject to certain adjustments at closing), including approximately $17.7 million of long-term debt as of December 31, 2010, reflecting a total enterprise value of approximately $53.5 million. AM is a public water utility regulated by the Maine Public Utilities Commission (“MPUC”) that serves approximately 16,000 customers in 11 water systems in the State of Maine. The acquisition is consistent with the Company’s growth strategy and will make the Company the largest U.S. based publicly-traded water utility company in New England. The acquisition expanded the Company’s footprint into another New England state, providing some diversity with respect to weather and regulatory climate and ratemaking. The Company will account for the acquisition in accordance with Accounting Standards Codification (ASC) 805 “Business Combinations”. On November 22, 2011, the MPUC issued an Order approving a Settlement Agreement that gave regulatory approval for the acquisition by the Company. Effective January 1, 2012, the Company completed the acquisition of AM from AA for a total cash purchase price, adjusted at closing, of $35.8 million. Subsequent to the closing, the name of AM was changed to The Maine Water Company (“Maine Water”). The Company is still in the process of completing the purchase price allocation as required by ASC 805.

In 2011, approximately 90% of the Company’s net income was attributable to the water activities of its largest subsidiary, Connecticut Water, a regulated water utility with 90,023 customers throughout 55 Connecticut towns, as of December 31, 2011. The rates charged for service by Connecticut Water are subject to review and approval by the Connecticut Public Utilities Regulatory Authority (PURA), formerly the Connecticut Department of Public Utility Control.

In the mid 1990s, Connecticut Water made a conscious decision to minimize its reliance on rate increase requests to drive its financial performance. Instead, it relied upon unregulated operations and cost containment to grow the earnings of the Company without seeking higher rates. After a successful extended period of meeting these objectives, it became clear in 2006 that a rate increase was needed to continue to provide shareholder value through increased earnings. The Company decided to return to the more traditional model of recurring rate increase filings to efficiently collect its cost of both annual expenses and its investment in the infrastructure of the regulated business. In 2006, Connecticut Water communicated to its customers, regulators and shareholders that it expected to seek rate relief on a more recurring basis.

Recognizing the importance of timely infrastructure replacement and improvement, the Company, along with other investor-owned regulated water companies in the state, campaigned for the passage of the Water Infrastructure and Conservation Adjustment (WICA) Act in the Connecticut General Assembly, which was adopted in 2007. WICA allows Connecticut Water to add a surcharge to customers’ bills, subject to an expedited review and approval by the PURA and no more than twice a year, to reflect the replacement of certain types of aging utility plant; principally water mains, meters, service lines and water conservation related investments.

On July 14, 2010, the PURA issued its Final Decision in a rate case filed by Connecticut Water on January 6, 2010, granting an increase in revenues of $8.0 million, or approximately 13%, over pro forma test year revenues. The PURA approved a return on equity of 9.75%. The new rates became effective for services rendered on or after July 14, 2010, at which point all previously approved WICA surcharges were folded into customers’ base charges. Connecticut Water is not precluded from seeking increased rates for future years as part of a new general rate filing should it choose to do so.

On October 29, 2010, Connecticut Water filed a WICA application with the PURA requesting a 1.58% surcharge to customer bills representing investments of approximately $9.4 million in WICA related projects. On December 28, 2010, the PURA approved the 1.58% surcharge effective for all bills issued after January 1, 2011. Additionally, due to under-collection of previously approved WICA surcharges during 2010, Connecticut Water was granted a 0.11% additional surcharge on bills issued after April 1, 2011 to make up the short fall. This surcharge will expire on March 31, 2012. It should be noted if Connecticut Water were to over-collect on WICA surcharges, we would be required to include a surcredit on customer bills.

On July 28, 2011, Connecticut Water filed a WICA application with the PURA requesting an additional 1.42% surcharge to customer bills representing approximately $7.7 million in WICA related projects. On September 21, 2011, the PURA approved a 1.40% increase to customers’ bills effective October 1, 2011, for a cumulative 3.09% WICA surcharge. The surcharge was effective for bills rendered on or after October 1, 2011.

On January 26, 2012, Connecticut Water filed a WICA application with the PURA requesting an additional 1.17% surcharge to customer bills, related to approximately $7.0 million spending on WICA projects. This application also reduced the surcharge by 0.11% for the prior year reconciliation adjustment which expires April 1, 2012. If approved, the total cumulative surcharge on customer bills will be 4.15%, beginning April 1, 2012. On January 30, Connecticut Water filed for a 0.09% reconciliation adjustment for the 2011 shortfall in WICA, to become effective April 1, 2012. If approved, the cumulative surcharge for all WICA applications will be 4.24%.

The Company has and will continue to focus on minimizing operating costs that are passed along to its customers without sacrificing the quality service it values and the customers demand. At the same time, the Company will continue to employ its current strategy of timely collection of appropriate costs and a fair rate of return for its shareholders through appropriate rates for its regulated water service. As part of a broader organizational review, beginning in July 2010, the Company examined both its regulated and unregulated operations in Connecticut to ensure that it is maximizing the Company’s financial results while maintaining the high quality water and service our customers have come to expect. During the third quarter of 2010, the Company conducted a targeted reduction in workforce that eliminated approximately 15 positions that centered on traditional managerial, officer and overhead positions. The Company did not eliminate positions in direct service of its customers. The Company recorded a one-time pre-tax charge of approximately $786,000 related to this organizational review in 2010. This charge represents the aggregate severance benefit provided to the employees leaving the Company, legal costs associated with the review and out placement services provided to the effected employees. The Company will continue to evaluate all segments of its business and will make additional changes if warranted.

Connecticut Water has previously announced that it had reached an agreement to acquire a water system in Old Lyme, Connecticut for $216,000. This acquisition added approximately 100 customers and additional water supply to Connecticut Water. The PURA issued a final decision approving the acquisition on July 21, 2011. Connecticut Water completed the acquisition on August 18, 2011. Additionally, during the first quarter of 2011, Connecticut Water completed the acquisition of a water company serving approximately 25 customers in the Town of Madison, Connecticut for a nominal amount.

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In 2011, Connecticut Water added 54 private well owners in our existing service territories. In 2012 and beyond, the Company will continue its efforts to tie-in private well owners whose homes are in close proximity to our mains. Additionally, the Company will continue to work with developers to encourage public water use for new residential construction within Connecticut Water and Maine Water’s service areas.

While the Company plans to file timely rate cases, continue to make acquisitions and, in the future, utilize the WICA adjustment to allow for more timely recovery of investment in utility plant, it will also look to NEWUS and its new subsidiary Maine Water to increase its earnings in the unregulated business. The Company will continue to seek out maintenance and service contracts with new customers and renew existing contracts that have proven to be beneficial to the Company, as well as to continue the expansion of the Linebacker® program. In January 2010, NEWUS acquired the assets of Home Service USA. Prior to the acquisition, Home Service USA offered Connecticut Water customers coverage for failure of home plumbing and septic drainage lines. NEWUS agreed to purchase the right to provide the service to Connecticut Water customers and began offering its own comparable coverage. As part of the agreement, Home Service USA will not offer its products to Connecticut Water customers for a period of ten years. The new products offered by NEWUS have been integrated into the Linebacker® program.

During 2010, the Company entered into discussions to sell approximately 175 acres of land to the Town of Plymouth, CT for open space purposes. The Town was awarded a Watershed and Open Space Grant from the Connecticut Department of Environmental Protection to assist in purchasing the land. This transaction will allow the Company to receive financial benefit by disposing of property that is no longer needed for public water supply purposes while at the same time supporting environmental stewardship by ensuring the property is permanently maintained as open space. The Company is finalizing a land sale with the Town of Plymouth, Connecticut to sell approximately 175 acres of land for open space and recreational purposes, pending the approval of a Conservation Easement by the State of Connecticut Attorney General Office. The Company and Town have agreed on a sale price of $1.45 million for the parcel that is valued at $1.615 million. If approved, the Company expects the transaction to be completed in 2012.

Regulatory Matters and Inflation

The Company, like all other businesses, is affected by inflation, most notably by the continually increasing costs required to maintain, improve, and expand its service capabilities. The cumulative effect of inflation over time results in significantly higher operating costs and facility replacement costs, which must be recovered from future cash flows.

Our regulated water companies’ ability to recover its increased expenses and/or investment in utility plant is dependent on the rates we charge our customers. Changes to these rates must be approved by the appropriate regulatory agency through formal rate proceedings. Due to the subjectivity of certain items involved in the process of establishing rates such as customer usage, future customer growth, inflation, and allowed return on investment, we have no assurance that we will be able to raise our rates to a level we consider appropriate, or to raise rates at all, through any future rate proceeding.

Our regulated water utilities are also subject to environmental and water quality regulations, which are continually modified and refined to ensure the safety of the Company’s water sources and, ultimately, the public’s health. Costs to comply with environmental and water quality regulations are substantial. The costs to comply with future changes in state or federal regulations, which could require us to modify current filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial. While there can be no guarantee that all expenditures related to increased regulation will be recoverable in rate proceedings, the Company believes that the regulatory environment in Connecticut and Maine would allow prudent expenditures to be recovered in rates. To date, the Company has never had any costs associated with water quality and environmental spending refused in a general rate proceeding. The Company believes that it is in compliance with current regulations, but the regulations are subject to change at any time. During 2011, the Company incurred approximately $1.7 million in capital expenditures on Safe Drinking Water Act projects. The Company expects to spend approximately $1.2 million on Safe Drinking Water Act projects in 2012, primarily to bring newly acquired systems up to the Company’s standards.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and as directed by the regulatory commissions to which the Company’s subsidiaries are subject. (See Note 1 to the Consolidated Financial Statements for a discussion of our significant accounting policies). The Company believes the following policies and estimates are critical to the presentation of its consolidated financial statements.

Public Utility Regulation – Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 980 “Regulated Operations” (“FASB ASC 980”), requires cost-based, rate-regulated enterprises such as Connecticut Water and Maine Water to reflect the impact of regulatory decisions in their financial statements. The state regulators, through the rate regulation process, can create regulatory assets that result when costs are allowed for ratemaking purposes in a period after the period in which costs would be charged to expense by an unregulated enterprise. The balance sheet includes regulatory assets and liabilities as appropriate, primarily related to income taxes and post-retirement benefit costs. The Company believes, based on current regulatory circumstances, that the regulatory assets recorded are likely to be recovered and that its use of regulatory accounting is appropriate and in accordance with the provisions of FASB ASC 980.

Revenue Recognition – The Company’s accounting policies regarding revenue recognition by segment are as follows:

Water Activities – Most of our water customers are billed quarterly, with the exception of larger commercial and industrial customers, as well as public and private fire protection customers who are billed monthly. Most customers, except fire protection customers, are metered. Revenues from metered customers are based on their water usage multiplied by approved, regulated rates and are earned when water is delivered. Public fire protection revenues are based on the length of the water main, and number of hydrants in service and are earned on a monthly basis. Private fire protection charges are based on the diameter of the connection to the water main. The Company accrues an estimate for metered customers for the amount of revenues earned relating to water delivered but unbilled at the end of each quarter.

Real Estate Transactions – Revenues are recorded when a sale or other transaction has been completed and title to the real estate has been transferred.

Services and Rentals – Revenues are recorded when the Company has delivered the services called for by contractual obligation.

Employee Benefit Plan Accounting – Management evaluates the appropriateness of the discount rate through the modeling of a bond portfolio which approximates the pension and postretirement plan liabilities. Management further considers rates of high quality corporate bonds of approximate maturities as published by nationally recognized rating agencies consistent with the duration of the Company’s pension and postretirement plans.

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The discount rate assumption we use to value our pension and postretirement benefit obligations has a material impact on the amount of expense we record in a given period. Our 2011 and 2010 pension expense was calculated using assumed discount rates of 5.50% and 5.95%, respectively. Our 2011 and 2010 post-retirement welfare expense was calculated using assumed discount rates of 5.35% and 5.80%, respectively. In 2012, our pension and postretirement welfare expense will be calculated using assumed discount rates of 4.60% and 4.40%, respectively. The following table shows how much a one percent change in our assumed discount rate would have changed our reported 2011 pension and postretirement expense:

	Increase (Decrease) in Pension Expense			Increase (Decrease) in Postretirement Expense
1% Increase in the discount rate	$	(370,000	)	$	(187,000	)
1% Decrease in the discount rate	$	430,000		$	223,000

Other assumptions that affect the costs associated with our benefit plans include the assumed rate of return on plan assets and the expected rate of compensation increase. The Company has assumed an 7.25% and 8.00% return on plan investments for 2011 and 2010, respectively, and a 3.5% rate of compensation increase for our pension and post-retirement welfare plans, in 2011 and 2010. The assumed health care trend rate was 10% at December 31, 2011 and 2010, respectively.

Outlook

The Company’s earnings and profitability are primarily dependent upon the sale and distribution of water, the amount of which is dependent on seasonal weather fluctuations, particularly during the summer months when water demand will vary with rainfall and temperature levels. The Company’s earnings and profitability in future years will also depend upon a number of other factors, such as the ability to maintain our operating costs at current or lower levels, customer growth in the Company’s core regulated water utility businesses, growth in revenues attributable to non-water sales operations, availability and desirability of land no longer needed for water delivery for land sales, and the timing and adequacy of rate relief when requested, from time to time, by our regulated water companies.

The Company believes that the factors described above and those described in detail below under the heading “Commitments and Contingencies” may have significant impact, either alone or in the aggregate, on the Company’s earnings and profitability in fiscal years 2012 and beyond. Please also review carefully the risks and uncertainties described in Item 1A – Risk Factors and those described above under the heading “Special Note Regarding Forward Looking Statements”.

The Company expects Net Income from its Water Activities and Real Estate segments to increase in 2012 over 2011 levels, based on the acquisition of Maine Water and the completion of the land sale with the Town of Plymouth, Connecticut, along with modest growth in its Services and Rentals segment. During 2012 and subsequent years, the ability of the Company to maintain and increase its Net Income will principally depend upon the effect on the Company of the factors described above in this “Outlook” section, those factors described in the section entitled “Commitments and Contingencies” and the risks and uncertainties described in the “Special Note Regarding Forward-Looking Statements” and Item 1A “Risk Factors”.

FINANCIAL CONDITION

Liquidity and Capital Resources

The Company is not aware of any demands, events, or uncertainties that will result in a decrease of liquidity or a material change in the mix or relative cost of its capital resources, other than those outlined below.

Borrowing Facilities

In November 2008, the Company was authorized by its Board of Directors to increase the available lines of credit from $21 million to $40 million. On June 30, 2009, the Company let expire one line of credit totaling $6 million and entered into a new $15 million line of credit agreement with CoBank, ACB, which was amended in May 2010 and July 2011 and is currently scheduled to mature on June 25, 2013. On August 12, 2009, the Company replaced an existing $3 million line of credit with a $10 million line of credit, which expires on August 10, 2013. Finally, on September 15, 2009, the Company increased a third line of credit from $12 million to $15 million, with an expiration date of June 1, 2013. On December 30, 2011, the Company terminated its $10 million line of credit. The Company expects to maintain the two remaining lines of credit totaling $30 million and to renew the lines of credit annually, with a rolling two year expiration date. Interim Bank Loans Payable at December 31, 2011 and 2010 was approximately $21.4 million and $26.3 million, respectively, and represents the outstanding aggregate balance on these lines of credit. As of December 31, 2011, the Company had $8.6 million in unused lines of credit. Interest expense charged on interim bank loans will fluctuate based on market interest rates.

At December 31, 2011 and 2010, the weighted average interest rates on these short-term borrowings outstanding were 2.19% and 2.33%, respectively.

On January 1, 2012, the Company and CoBank entered into an amendment to the CoBank Agreement (the “Amendment”) and two additional Promissory Note and Single Advance Term Loan Supplements providing for two additional Term Loans to the Company (the “Term Loan Notes and Supplements”). Under the terms of the Amendment and the Term Loan Notes and Supplements, on January 3, 2012 the Company borrowed from CoBank, in the aggregate, an additional $36.1 million of an available $40 million to be applied to the Company’s acquisition of the issued and outstanding capital stock of Aqua Maine, Inc. from Aqua America, Inc., as more fully described in Item 1 and the executive summary of this Item 7 above.

Under the CoBank Agreement, as amended, the Company is required to maintain together with its consolidated subsidiaries at all times a ratio of Total Debt to Capitalization (as defined in the Agreement) of not more than .65 to 1.00. In addition to the foregoing, the two regulated water subsidiaries, Connecticut Water and Maine Water are each required to maintain at all times a ratio of Total Debt to Capitalization of not more than .60 to 1.00.

Under one Term Loan Note and Supplement, CoBank loaned the Company $18.0 million, which Term Loan shall be repaid by the Company in 60 equal quarterly installments of principal and interest over a 15-year amortizing term, with the first installment due on April 20, 2012 and the last installment due on January 20, 2027. Under the other Term Loan Note and Supplement, CoBank loaned the Company $18.1, which Term Loan shall be repaid by the Company in quarterly interest payments and repayment of the principal balance in full on the earlier of July 30, 2013 or upon the Company raising equity capital, in the aggregate, up to the outstanding amount owed under the second Term Note and Supplement.

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Under the initial Promissory Note and each of the Term Loan Notes and Supplements, the Company will pay interest on any Loans made by CoBank in accordance with one of more of the following interest rate options, as selected periodically by the Company: (1) at a weekly quoted variable rate, a rate per annum equal to the rate of interest established by CoBank on the first business day of each week; (2) at a fixed rate per annum to be quoted by CoBank in its sole discretion in each instance for periods of 180 days or more; or (3) at a fixed rate per annum equal to LIBOR plus 1.75% for 1, 2, 3, 6, 9 or 12 month interest periods. Interest shall be calculated on the actual number of days each Loan is outstanding on the basis of a year consisting of 360 days.

Capital Budget

In 2011, the Company spent $22.9 million on capital projects. The Company used a combination of its internally generated funds, borrowing under its available lines of credit, and a long term debt issuance to fund this construction budget. On December 20, 2011, Connecticut Water completed the issuance of $22,050,000 aggregate principal amount of 5.00% fixed rate Water Facilities Revenue Bonds – Series 2011A with a maturity date of December 1, 2021 (the “Bonds”). The Bonds are tax-exempt notes and were issued by the Connecticut Development Authority (the “Authority”). The proceeds of issuance were loaned to Connecticut Water to be used by Connecticut Water to fund various water facilities projects. The Bonds were issued under a Bond Purchase Agreement, a Loan Agreement and an Indenture. Both of the Loan Agreement and the Indenture for the Bonds contain provisions that provide for the acceleration of the indebtedness upon the occurrence of an event of default (as defined in the Loan Agreement). The Company received approximately $24,000,000 in cash in exchange for the issuance of bonds with an aggregate principal amount of $22,050,000 for a 10-year term and a 5% coupon.

Future Plans

The Company expects to issue equity at some point between the fourth quarter of 2012 and the third quarter of 2013, depending on market conditions and other Company activities. The Company has a target capital structure that is equally balanced with equity and debt. As noted above, the interim financing utilized in completing the acquisition of Maine Water included two similar sized debt facilities – an $18 million fifteen-year fixed loan with an interest rate of 4.09% and a variable rate debt facility with a borrowing of $18.1 million and an initial interest rate of 2.06%. The latter facility is expected to be paid off with the proceeds of the equity issuance. The Company has not determined the specific structure nor the specific amount of equity that it will seek to raise. It currently estimates raising equity of between $35.0 and $45.0 million depending on the Board’s determination of the Company’s needs and market conditions.

The following table shows the total construction expenditures excluding non-cash contributed utility plant for each of the last three years and what we expect to invest on construction projects in 2012.

	Gross Construction Expenditures		Construction Funded by Developers & Others		Construction Funded by Company
2011	$	24,012,000	$	1,154,000	$	22,858,000
2010	$	26,692,000	$	452,000	$	26,240,000
2009	$	28,349,000	$	751,000	$	27,598,000

2012 (Projected)	$	25,100,000		**	$	25,100,000

** – The Company cannot predict the amount of construction funded by others.

Credit Rating

On October 28, 2011, Standard & Poor's Ratings Services (S&P) affirmed its 'A' corporate credit rating on the Company, however, S&P revised the Company’s ratings outlook from stable to negative. The negative outlook reflects S&P’s expectation of weaker credit metrics as a result of the debt the Company planned to incur to complete the acquisition of AM as well as additional near-term debt funding of the Company’s capital expenditure program. S&P also indicated that if the Company were to issue a material amount of common equity in the future, this step could lead S&P to revise the outlook to stable.

Stock Plans

The Company offers a dividend reinvestment plan (DRIP) to all registered shareholders, whereby shareholders can elect to have cash dividends directly reinvested into additional shares of the Company’s common stock. During the years ended December 31, 2011 and 2010, shareholders reinvested $1,346,000 and $1,358,000, respectively, as part of the DRIP.

From 1999 through 2003, the Company issued stock options to certain employees of the Company. No stock options have been issued by the Company since 2003. During the year ended December 31, 2011, 5,671 options were exercised resulting in approximately $146,000 in proceeds to the Company. During the year ended December 31, 2010, 14,074 options were exercised resulting in approximately $287,000 in proceeds to the Company. For the same period in 2009, 17,498 options were exercised resulting in approximately $390,000 in proceeds to the Company.

Enterprise Resource Planning Implementation

With the implementation of the Company’s new Enterprise Resource Planning (ERP) system, the Company delayed customer billings in order to verify the integrity of the system and the accuracy of those bills prior to mailing. As a result, some billings and consequently, cash receipts were delayed. The Company has increased its utilization of its lines of credit during this period. Its operations, including plans to continue investment in new infrastructure, are not impacted.

The Company has returned to normal billing and collection processes and does not anticipate delays in billing or collection in subsequent periods. The delay in billing contributed to the increase in the Company’s bad debt expense for the year due to the reserve policy based upon aging of the receivables. During 2011, the Company has seen progress towards resolving the collection issues, primarily through the ability to charge interest and shut off customers for non-payment and expects continued improvement throughout 2012. The Company fully anticipates that the reserve will return to more historical levels during 2012.

During 2011, the Company incurred approximately $24.0 million of construction expenditures, including approximately $1,154,000 funded by developers and others. The Company financed the expenditures through internally generated funds, long-term debt issuances, proceeds from its dividend reinvestment plan, customers’ advances, contributions in aid of construction and short-term borrowings.

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Our Board of Directors has approved a $25.1 million construction budget for 2012, net of amounts to be financed by customer advances and contributions in aid of construction. The Company will use a combination of its internally generated funds and borrowing under its available lines of credit.

As the Company looks forward to 2012 and 2013, it anticipates continued reinvestment to replace aging infrastructure and to seek recovery through periodic WICA applications. The total cost of that investment is expected to exceed the amount of internally generated funds. The Company expects that it will require external financing over the next two years. In order to maintain a balanced capital structure, we expect to consider both debt and equity issuances. As the capital investment planning process is completed in the coming periods, the Company expects to provide a reasonable range of these potential financings.

Off-Balance Sheet Arrangements and Contractual Obligations

We do not use off-balance sheet arrangements such as securitization of receivables with any unconsolidated entities or other parties. The Company does not engage in trading or risk management activities and does not have material transactions involving related persons.

The following table summarizes the Company’s future contractual cash obligations as of December 31, 2011:

Payments due by Periods
(in thousands)
Contractual Obligations	Total		Less than 1 year		Years 2 and 3		Years 4 and 5		More than 5 years
Long-Term Debt (LTD)	$	135,256	$	--	$	--	$	--	$	135,256
Interest on LTD		107,002		5,942		11,884		11,884		77,292
Operating Lease Obligations		264		229		35		--		--
Purchase Obligations (1) (2)		95,906		1,070		2,127		2,291		90,418
Long-Term Compensation Agreement(3)		38,885		304		5,581		4,258		28,742
Total (4) (5)	$	377,313	$	7,545	$	19,627	$	18,433	$	331,708

(1) Connecticut Water has an agreement with the South Central Connecticut Regional Water Authority (RWA) to purchase water from RWA. The agreement was signed on April 24, 2006 and will remain in effect for a minimum of fifty (50) years from that date. Connecticut Water has agreed to purchase a maximum of one million (1,000,000) gallons of water per day from RWA. The Company is required to pay $75,000 per year for access to this water.

(2) Connecticut Water has an agreement with The Metropolitan District (MDC) to purchase water from MDC. The agreement became effective on October 6, 2000 for a term of fifty (50) years beginning May 19, 2003, the date the water supply facilities related to the agreement were placed in service.

(3) Pension and post retirement contributions cannot be reasonably estimated beyond 2012 and may be impacted by such factors as return on pension assets, changes in the number of plan participants and future salary increases. The amounts included for pension and post retirement contributions are management’s best estimate.

(4) We pay refunds on Advances for Construction over a specific period of time based on operating revenues related to developer-installed water mains or as new customers are connected to and take service from such mains. After all refunds are paid, any remaining balance is transferred to Contributions in Aid of Construction. The refund amounts are not included in the above table because the refund amounts and timing are dependent upon several variables, including new customer connections, customer consumption levels and future rate increases, which cannot be accurately estimated. Portions of these refund amounts are payable annually through 2020 and amounts not paid by the contract expiration dates become non-refundable.

(5) We intend to fund these contractual obligations with cash flows from operations and liquidity sources held by or available to us.

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RESULTS OF OPERATIONS

Overview of 2011 Results from Operations

Net Income for 2011 was $11,300,000, or $1.31 basic earnings per share, an increase of $1,502,000, or $0.17 basic earnings per share, compared to 2010. The increase in earnings was principally due to higher net income in our Water Activities and Services and Rentals segments partially offset by lower net income in our Real Estate segment. Changes in net income for our segments were as follows:

Business Segment	2011 Net Income		2010 Net Income		Increase (Decrease)
Water Activities	$	10,123,000	$	8,669,000	$	1,454,000
Real Estate		176,000		230,000		(54,000	)
Services and Rentals		1,001,000		899,000		102,000
Total	$	11,300,000	$	9,798,000	$	1,502,000

Water Activities

The increase in net income from Water Activities for 2011 over 2010 was $1,454,000 or 16.8%. A breakdown of the components of this increase was as follows:

	2011			2010			Increase (Decrease)
Operating Revenues	$	69,402,000		$	66,408,000		$	2,994,000
Operation and Maintenance		32,662,000			33,105,000			(443,000	)
Depreciation		7,773,000			7,088,000			685,000
Income Taxes		6,966,000			5,323,000			1,643,000
Taxes Other than Income Taxes		6,441,000			6,271,000			170,000
Organizational Review Charge		--			786,000			(786,000	)
Other Utility Income		847,000			742,000			105,000
Other Deductions		(798,000	)		(226,000	)		(572,000	)
Interest and Debt Expense (net of AFUDC)		5,486,000			5,682,000			(196,000	)
Total Income from Water Activities	$	10,123,000		$	8,669,000		$	1,454,000

Revenue from our water customers increased by $2,994,000, or 4.5%, to $69,402,000 for the year ended December 31, 2011 when compared to the same period in 2010. The primary reasons for the increase in revenues were an approximate 13% increase in rates as approved by the PURA in July 2010 (which folded in previously approved WICA surcharges of 2.1%) and various WICA surcharges not in effect during 2010, which totaled 3.09% beginning in the fourth quarter of 2011. Offsetting these increases, the Company saw a decrease of approximately 4.9% in the amount of water produced at its treatment plants and pump stations. The reduction in water production was attributable to the wet weather experienced in the second and third quarters of 2011. During the second and third quarters of 2011, there was a nearly 150% increase in rainfall while the average temperature was 2 degrees cooler in the Town of Windsor Locks, CT, which is located in our largest service area, when compared to the same periods in 2010. The second and third quarters are typically the period during which there is the most fluctuation in water usage due to changes in weather.

The factors detailed above led to a net increase in revenue from residential customers of $1,553,000 or 3.7%. Residential customers represent our largest customer class and the group whose usage is most dependent on favorable weather.

Operation and Maintenance (O&M) expense decreased in 2011 by $443,000 due to the following changes in expenses:

Components of O&M	2011		2010		Increase (Decrease)
Maintenance	$	2,185,000	$	1,783,000	$	402,000
Other employee benefit costs		645,000		351,000		294,000
Medical expense		1,964,000		1,714,000		250,000
Vehicle		1,636,000		1,481,000		155,000
Post-retirement medical costs		1,128,000		983,000		145,000
Investor relations		555,000		475,000		80,000
Customer		1,154,000		1,075,000		79,000
Regulatory commission expense		232,000		301,000		(69,000	)
Property & liability insurance		978,000		1,071,000		(93,000	)
Water treatment (including chemicals)		2,389,000		2,553,000		(164,000	)
Utility costs		3,269,000		3,527,000		(258,000	)
Outside services		1,028,000		1,404,000		(376,000	)
Labor		11,187,000		12,093,000		(906,000	)
Other		4,312,000		4,294,000		18,000
Total O&M Expense	$	32,662,000	$	33,105,000	$	(443,000	)

Operation and Maintenance costs for the year ended December 31, 2011 saw a decrease of 1.3%, primarily due to the Company’s continued focus on cost containment. The following items contributed to the decrease in O&M expense as a result of that focus:

-	Labor costs decreased in 2011 primarily due to the workforce reduction as part of the Organizational Review conducted in the third quarter of 2010. The Company’s headcount decreased by approximately 25 people as compared to the beginning of 2010;

-	Outside services decreased by $376,000 during 2011 due primarily to a reduction in consulting and legal fees. The reduction in consulting costs was primarily due to training services provided prior to the launch of the Company’s Enterprise Resource Planning (ERP) system in early 2010;

-	Utility costs decreased by approximately 7% when compared to 2010 due to reduced electrical costs. In December 2010, the Company received lower rates on its electricity through new suppliers and improved efficiency at many of our facilities through the completion of energy audits; and

-	Property and liability insurance expense decreased by $93,000 due to cost reductions in our package and workers’ compensation policies. Workers’ compensation decreased primarily due to the Organizational Review and the corresponding headcount reduction.

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Non-cost containment O&M decreases consisted of the following:

-	Water treatment costs decreased by 6% primarily due to a decrease in water production in 2011 when compared to 2010; and

-	Regulatory commission expense decreased by $69,000 due to the deferral of costs associated with a PURA docket examining the feasibility of uniform methodology for determining return on equity for water companies.

The decreases detailed above were offset by the following increases to O&M expense:

-	Maintenance expense increased by $402,000 in 2011 when compared to 2010 primarily due to an increase in the cost to repair main breaks and increased computer maintenance costs, including the costs to maintain the ERP system implemented in 2010;

Other employee benefit costs increased by $294,000 primarily due to the introduction of a non-officer incentive program offered to certain managers for enacting cost reducing measures that will return savings in future years. Additionally, costs related to certain stock based compensation increased during 2011;

-	The Company saw an increase in its Medical expense primarily as a result of an increase in the cost of claims and the administration of the plan, offset by a decrease in dental claims and administration;

The $145,000 increase in Post-retirement medical costs from 2010 to 2011 was primarily due to a decrease in the discount rate used to determine the future liabilities of the plans and the decline in the market value of the plans’ assets in prior years. During the second quarter of 2011, the Company made a change to its Post-retirement medical plan to limit the life-time benefits of the participants to $100,000;

-	Investor relations costs increased by $80,000 primarily due to increases in directors’ fees and expenses and an increase in the cost to prepare and print the Company’s proxy statement; and

Customer costs increased by 7% primarily due to an increase in uncollectible accounts. During 2011, the Company has seen progress towards resolving the collection issues, primarily through the ability to charge interest and shut off customers for non-payment and expects continued improvement throughout 2012.

The Company’s Depreciation expense increased $685,000 or 9.7% from 2010 to 2011. The primary driver of the increase in Depreciation expense is a higher Utility Plant balance in 2011.

The increase in Income Tax expense associated with the Water Activities segment of $1,643,000 was due primarily to higher pre-tax income and a higher effective income tax rate in 2011 when compared to 2010. The drivers of the higher effective tax rate are attributable to a change in pension and post-retirement medical costs contribution assumptions along with the effect of incremental federal tax rates. This increase is partially offset by a change in assumptions regarding the future utilization of our charitable contribution carryforwards.

As described above, the Company underwent an Organizational Review in July 2010. The Company experienced a one-time charge associated with the Organizational Review of $786,000, in the third quarter of 2010. The majority of that charge, approximately $583,000, related to severance packages offered to the employees affected by this review. The remainder was split among fees related to legal and out-placement services and costs associated with the accelerated vesting of certain executive benefits. As of December 31, 2010, all payments related to the Organizational Review had been made.

The increase in Other Deductions was primarily due to costs associated with the acquisition of Maine Water from Aqua America. In accordance with accounting principles generally accepted in the United States, including Accounting Standards Codification (ASC) 805 “Business Combinations”, acquisition costs are expensed in the period incurred.

Real Estate

While the Company did not complete any land transactions during the year ending December 31, 2011, adjustments were made to valuation allowances recorded in earlier years which produced Net Income of $176,000 in 2011. Through land donations and discount land sales in previous years, the Company earned tax credits to use in future years. The Company is limited by time and the amount of taxable income when using these credits. Each year, the Company assesses its ability to use these credits going forward and makes adjustments to its valuation allowances, accordingly.

Income from the Real Estate segment is largely dependent on the tax deductions received on donations and, or, sales of available land. This typically occurs when utility-owned land is deemed to be unnecessary to protect water sources. The Company plans to continue to utilize land donations and sales in 2012, and beyond, to generate income for this segment of our business, including the sale of land to the Town of Plymouth discussed above.

Services and Rentals

Net income generated from the Services and Rental segment increased in 2011 by $102,000, over 2010 levels. The increased net income was primarily due to decreases in general and administrative expenses in 2011.

Overview of 2010 Results from Operations

Net Income for 2010 was $9,798,000, or $1.14 basic earnings per share, a decrease of $411,000, or $0.06 basic earnings per share, compared to 2009. The decrease in earnings was principally due to lower net income in our Real Estate and Services and Rentals segments partially offset by higher net income in our Water Activities segment. Changes in net income for our segments were as follows:

Business Segment	2010 Net Income		2009 Net Income		Increase (Decrease)
Water Activities	$	8,669,000	$	7,831,000	$	838,000
Real Estate		230,000		1,449,000		(1,219,000	)
Services and Rentals		899,000		929,000		(30,000	)
Total	$	9,798,000	$	10,209,000	$	(411,000	)

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Water Activities

The increase in net income from Water Activities for 2010 over 2009 was $838,000 or 10.7%. A breakdown of the components of this increase was as follows:

	2010			2009			Increase (Decrease)
Operating Revenues	$	66,408,000		$	59,391,000		$	7,017,000
Operation and Maintenance		33,105,000			32,181,000			924,000
Depreciation		7,088,000			6,403,000			685,000
Income Taxes		5,323,000			2,466,000			2,857,000
Taxes Other than Income Taxes		6,271,000			5,953,000			318,000
Organizational Review Charge		786,000			--			786,000
Other Utility Income		742,000			704,000			38,000
Other Deductions		(226,000	)		(784,000	)		558,000
Interest and Debt Expense (net of AFUDC)		5,682,000			4,477,000			1,205,000
Total Income from Water Activities	$	8,669,000		$	7,831,000		$	838,000

Revenues from our water customers increased $7,017,000 or 11.8% to $66,408,000 for the year ended December 31, 2010 when compared to 2009. The primary reasons for the increased revenues in 2010 were higher water production and consumption and rate increases approved by the PURA during 2010.

Water production increased by 6.2% for the year ended December 31, 2010. The increase in production was due to more favorable weather during the second and third quarters of 2010 when compared to the same periods of 2009. During these two quarters, when the weather is warm and dry, residential customers are more likely to use more water. During 2009, the Town of Windsor Locks, CT, part of our largest service area, saw 102 days of rain compared to 77 days in 2010. During the six month period of April through September 2010, the Company’s water production increased by approximately 13%, when compared to the same six month period of 2009.

-	During the first six months of 2010, customers were charged a 2.1% cumulative WICA surcharge that was not in effect during 2009.

-	Effective July 14, 2010, the WICA surcharge was folded into the Company’s approximate 13% rate increase to customers.

The factors detailed above led to an increase in revenue from residential customers of $5,632,000 or 15.4%. Residential customers represent our largest customer class and the group whose usage is most dependent on favorable weather. For the year ended December 31, 2010, revenues from all other customer classes increased by approximately 10%. Offsetting the increases described above was a decrease in revenues related to miscellaneous services, interest charged on late payments and turn-on/turn-off charges.

Operation and Maintenance (O&M) expense increased in 2010 by $924,000 due to the following changes in expenses:

Components of O&M	2010		2009		Increase (Decrease)
Labor	$	12,093,000	$	11,637,000	$	456,000
Water treatment (including chemicals)		2,553,000		2,253,000		300,000
Pension costs		2,010,000		1,718,000		292,000
Post-retirement medical costs		984,000		725,000		259,000
Vehicle		1,481,000		1,351,000		130,000
Customer		1,075,000		947,000		128,000
Utility costs		3,527,000		3,433,000		94,000
Regulatory commission expense		301,000		324,000		(23,000	)
Other employee benefit costs		351,000		414,000		(63,000	)
Outside services		1,404,000		1,590,000		(186,000	)
Medical expense		1,714,000		2,220,000		(506,000	)
Other		5,612,000		5,569,000		43,000
Total O&M Expense	$	33,105,000	$	32,181,000	$	924,000

Operation and Maintenance costs for the year ended December 31, 2010 saw an increase of 2.9%, primarily due to items as follows:

-	Labor costs increased in 2010 primarily due to a larger component of 2009 labor costs being capitalized as part of the implementation of a new Enterprise Resource Planning (ERP) system;

-	Water treatment costs increased due to higher costs associated with laboratory testing and waste disposal. Additionally, the costs of chemicals increased when compared to 2009 due to higher prices and an increase in water production;

-	Pension and post-retirement medical costs increased due primarily to a decrease in the discount rate used to determine the future liabilities of the plans and, partially, to a decline in the market value of the plans’ assets in prior periods; and

Customer costs increased due to higher bad debt expense. This was driven by a higher Accounts Receivable balance at December 31, 2010, when compared to 2009, due to higher consumption and higher rates in effect during the second half of 2010 and due to an increase in accounts receivable aged over 180 days, due in part to employees focusing on bill integrity with the implementation of the ERP system in the first quarter of 2010. These increases to Customer costs were partially offset by a decrease in customer communication and postage costs.

The increases in O&M discussed above were partially offset by the following decreases:

-	Outside services decreased due to a reduction in legal fees associated with the favorable resolution of an on-going legal matter in our Unionville decision during 2010 and a reduction in temporary labor used as part of cost containment; and

Medical costs decreased 23% due to a reduction in claims and administrative expense as well as an increase in the amount contributed by employees through payroll deductions. While the Company has taken steps to manage its medical costs by offering a wider variety of plans, including a high-deductible health plan, and passing some cost increases on to employees, it is difficult to project future costs as they are primarily dependant on claims made by employees in any given year.

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The Company’s Depreciation expense increased $685,000 or 10.7% from 2009 to 2010. The primary driver of the increase in Depreciation expense is a higher Utility Plant balance in 2010. A portion of this higher Utility Plant balance is related to the implementation of the Company’s new ERP system that went into service in the first quarter of 2010 which is depreciated at a higher rate than our typical water delivery infrastructure. The Company’s prior ERP system was fully depreciated prior to the implementation of the new system.

The increase in Income Tax expense associated with the Water Activities segment of $2,857,000 was due primarily to higher pre-tax income and a higher effective income tax rate in 2010 when compared to 2009. The drivers of the higher effective tax rate are decreases to flow through timing differences, including planned pension contributions, and the utilization of state tax credits associated with infrastructure investment made by the Company.

The increase in Taxes Other Than Income Taxes was primarily due to both higher payroll tax and property taxes due to higher utility plant balances.

As described above, the Company underwent an Organizational Review in July 2010. The Company experienced a one-time third quarter of 2010 charge associated with the Organizational Reviews of $786,000. The majority of that charge, approximately $583,000, related to severance packages offered to the employees affected by this review. The remainder was split among fees related to legal and out-placement services and costs associated with the accelerated vesting of certain executive benefits. As of December 31, 2010, all payments related to the organizational review have been made. The Company expects that the Organizational Review undertaken during 2010 will provide savings in future periods related to labor and employee benefit expenses.

The decrease in Other Deductions was primarily due to lower executive employee benefit costs in 2010 when compared to the same period in 2009.

Interest and Debt Expense increased primarily due to the issuance of $20 million of debt in December 2009.

Real Estate

While the Company did not complete any land transactions during the year ending December 31, 2010, adjustments were made to valuation allowances recorded in earlier years which produced Net Income of $230,000 in 2010. Through land donations and discount land sales in previous years, the Company earned tax credits to use in future years. The Company is limited by time and the amount of taxable income when using these credits. Each year, the Company assesses its ability to use these credits going forward and makes adjustments to its valuation allowances, accordingly.

During 2009, the Company completed the sale of a conservation easement to the Town of Windsor Locks, CT for $2 million. The transaction generated $1.2 million in net income for the Company. The Company also adjusted tax valuation allowances associated with land donations made in previous years generating approximately $207,000 in net income in the Real Estate segment in 2009. Additionally, Chester Realty, sold a rental property in Killingly, CT during the third quarter of 2009, generating a small profit.

Income from the Real Estate segment is largely dependent on the tax deductions received on donations and, or, sales of available land. This typically occurs when utility-owned land is deemed to be unnecessary to protect water sources. The Company plans to continue to utilize land donations and sales to generate income for this segment of our business, including the potential sale of land to the Town of Plymouth discussed above.

Services and Rentals

Net income generated from the Services and Rental segment decreased in 2010 by $30,000 over 2009 levels, while earnings per basic share remained flat. The decreased net income was primarily due to increases in general and administrative expenses in 2010.

COMMITMENTS AND CONTINGENCIES

Security – Investment in security-related improvements is a continuing process and management believes that the costs associated with any such improvements will be eligible for recovery in future rate proceedings.

Reverse Privatization – Connecticut Water derives its rights and franchises to operate from state laws that are subject to alteration, amendment or repeal, and do not grant permanent exclusive rights to our service areas. Our franchises are free from burdensome restrictions, are unlimited as to time, and authorize us to sell potable water in all towns we now serve. There is the possibility that states could revoke our franchises and allow a governmental entity to take over some or all of our systems. From time to time such legislation is contemplated.

Environmental and Water Quality Regulation – The Company is subject to environmental and water quality regulations. Costs to comply with environmental and water quality regulations are substantial. We are presently in compliance with current regulations, but the regulations are subject to change at any time. The costs to comply with future changes in state or federal regulations, which could require us to modify current filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial.

On January 6, 2012, Connecticut Water issued a “Do Not Drink Advisory” to 181 year round customers in the Amston Lake water system when elevated levels of copper were detected in samples from some customers’ homes. While there was not a violation of any state or federal water quality standard, copper levels in samples from some customers’ homes were found above the Environmental Protection Agency (EPA) action level of 1.3 mg/L. The "Do Not Drink Advisory" was lifted on January 18, 2012. The Company is following an action plan approved by the Department of Public Health. The resulting copper levels have been below the EPA Action Level.

Rate Relief – Connecticut Water is a regulated public utility, which provides water services to its customers. The rates that regulated companies charge their water customers are subject to the jurisdiction of the regulatory authority of the PURA. Connecticut Water’s allowed rate of return on equity and return on rate base are currently 9.75% and 7.32%, respectively.

In 2007, the State of Connecticut adopted legislation which permits regulated water companies to recapture money spent on eligible infrastructure improvements without a full rate case proceeding. The PURA may authorize regulated water companies to use a rate adjustment mechanism, such as a Water Infrastructure and Conservation Adjustment (WICA), for eligible projects completed and in service for the benefit of the customers. Regulated water companies may only charge customers such an adjustment to the extent allowed by the PURA based on a water company’s infrastructure assessment report, as approved by the PURA and upon semiannual filings which reflect plant additions consistent with such report.

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Land Dispositions – The Company and its subsidiaries own additional parcels of land in Connecticut, which may be suitable in the future for disposition, either by sale or by donation to municipalities, other local governments or private charitable entities. These additional parcels would include certain Class I and II parcels previously identified for long term conservation by the Connecticut Department of Energy and Environmental Protection (DEEP), which have restrictions on development and resale based on provisions of the Connecticut General Statutes.

The Company is finalizing a land sale with the Town of Plymouth, Connecticut to sell approximately 175 acres of land for open space and recreational purposes, pending the approval of a Conservation Easement by the State of Connecticut Attorney General Office. The Company and Town have agreed on a sale price of $1.45 million for the parcel that is valued at $1.615 million. The Company expects the transaction to be completed in 2012.

Capital Expenditures – The Company has received approval from its Board of Directors to spend $25.1 million on capital expenditures in 2012, in part due to increased spending primarily for infrastructure improvements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The primary market risk faced by the Company is interest rate risk. As of December 31, 2011, the Company had no exposure to derivative financial instruments or financial instruments with significant credit risk or off-balance-sheet risks. In addition, the Company is not subject in any material respect to any currency or other commodity risk.

The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company's exposure to interest fluctuations is managed at the Company and subsidiary operations levels through the use of a combination of fixed rate long-term debt (and variable rate borrowings) under financing arrangements entered into by the Company and its subsidiaries and the use of the interest rate swap agreement discussed below. In November 2008, the Company was authorized by its Board of Directors to increase the available lines of credit from $21 million to $40 million. On June 30, 2009, the Company let expire one line of credit totaling $6 million and entered into a new $15 million line of credit agreement, which was to expire on June 25, 2011 but was extended in late June 2011 until August 25, 2011. On July 26, 2011, the Company extended the maturity date of this line to June 25, 2013. On August 12, 2009, the Company replaced an existing $3 million line of credit with a $10 million line of credit, which expires on August 10, 2013. Finally, on September 15, 2009, the Company increased a third line of credit from $12 million to $15 million, with an expiration date of June 1, 2013. On December 30, 2011, the Company terminated its $10 million line of credit. The Company expects to maintain the two remaining lines of credit totaling $30 million and to renew the lines of credit annually, with a rolling two year expiration date. Interim Bank Loans Payable at December 31, 2011 and 2010 was approximately $21.4 million and $26.3 million, respectively, and represents the outstanding aggregate balance on these lines of credit. As of December 31, 2011, the Company had $8.6 million in unused lines of credit. Interest expense charged on interim bank loans will fluctuate based on market interest rates.

During the first quarter of 2004, Connecticut Water entered into a five-year interest rate swap transaction in connection with the refunding of its First Mortgage Bonds (Series V). The swap agreement provides for Connecticut Water’s exchange of floating rate interest payment obligations for fixed rate interest payment obligations on a notional principal amount of $12,500,000. The purpose of the interest rate swap was to manage the Company’s exposure to fluctuations in prevailing interest rates. The interest rate swap expired on March 3, 2009. The Company does not enter into derivative financial contracts for trading or speculative purposes and does not use leveraged instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of Connecticut Water Service, Inc., and the Notes to Consolidated Financial Statements together with the report of PricewaterhouseCoopers LLP, independent registered public accounting firm are included herein on pages F-2 through F-25.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures – As of December 31, 2011, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting – Internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. We have used the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in conducting our evaluation of the effectiveness of the internal control over financial reporting. Based on our evaluation, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2011. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting – There were no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

On March 13, 2012, the Company reported its results of operations for the fiscal year and for the quarterly period ended December 31, 2011. Details of this announcement are contained in the press release of the Company dated March 13, 2012, and furnished with this annual report on Form 10-K as Exhibit 99.1.

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PART III

Pursuant to General Instruction G(3), the information called for by Items 10, 11, 12, 13 and 14 is hereby incorporated by reference to the Company’s definitive proxy statement to be filed in EDGAR on or about March 23, 2012. Certain information concerning the executive officers of the Company is included in Item 1 of this report.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)	1.	Financial Statements:
		The report of independent registered public accounting firm and the Company’s Consolidated Financial Statements listed in the Index to Consolidated Financial Statements on page F-1 hereof are filed as part of this report, commencing on page F-2
			Page
		Index to Consolidated Financial Statements and Schedule		F-1

		Report of Independent Registered Pubic Accounting Firm		F-2

		Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009		F-3

		Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2010 and 2009		F-3

		Consolidated Balance Sheets at December 31, 2011 and 2010		F-4

		Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009		F-5

		Notes to Consolidated Financial Statements		F-6

	2.	Financial Statement Schedule:

		The following schedule of the Company is included on the attached page as indicated

		Schedule II Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2011, 2010 and 2009		S-1

		All other schedules provided for in the applicable regulations of the Securities and Exchange Commission have been omitted because of the absence of conditions under which they are required or because the required information is set forth in the financial statements or notes thereto.

(b)		Exhibits

		Exhibits for Connecticut Water Service Inc., are in the Index to Exhibits		E-1

		Exhibits heretofore filed with the Securities and Exchange Commission as indicated below are incorporated herein by reference and made a part hereof as if filed herewith. Exhibits marked by asterisk (* or **) are being filed or furnished herewith.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

	Page
Index to Consolidated Financial Statements and Schedule		F-1

Report of Independent Registered Pubic Accounting Firm		F-2

Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009		F-3

Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2010 and 2009		F-3

Consolidated Balance Sheets at December 31, 2011 and 2010		F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009		F-5

Notes to Consolidated Financial Statements		F-6

Schedule II – Valuation Accounts		S-1

F-1

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Connecticut Water Service, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of comprehensive income present fairly, in all material respects, the financial position of Connecticut Water Service, Inc. and its subsidiaries (the “Company”) at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, appearing on Management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

/s/ PricewaterhouseCoopers, LLP

Stamford, Connecticut

March 14, 2012

F-2

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CONNECTICUT WATER SERVICE, INC.


CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, (in thousands, except per share data)	2011			2010			2009

Operating Revenues	$	69,402		$	66,408		$	59,391

Operating Expenses
Operation and Maintenance		32,662			33,105			32,181
Depreciation		7,773			7,088			6,403
Income Taxes		6,966			5,323			2,466
Taxes Other Than Income Taxes		6,441			6,271			5,953
Organizational Review Charge		--			786			--

Total Operating Expenses		53,842			52,573			47,003

Net Operating Revenues		15,560			13,835			12,388

Other Utility Income, Net of Taxes		847			742			704

Total Utility Operating Income		16,407			14,577			13,092

Other Income (Deductions), Net of Taxes
Gain (Loss) on Real Estate Transactions		176			230			1,449
Non-Water Sales Earnings		1,001			899			929
Allowance for Funds Used During Construction		188			171			267
Other		(798	)		(226	)		(784	)

Total Other Income (Deductions), Net of Taxes		567			1,074			1,861

Interest and Debt Expenses
Interest on Long-Term Debt		4,602			4,628			3,937
Other Interest Charges		651			784			393
Amortization of Debt Expense		421			441			414

Total Interest and Debt Expenses		5,674			5,853			4,744

Net Income		11,300			9,798			10,209

Preferred Stock Dividend Requirement		38			38			38

Total Net Income Applicable to Common Stock	$	11,262		$	9,760		$	10,171


Weighted Average Common Shares Outstanding:
Basic		8,610			8,532			8,448
Diluted		8,720			8,633			8,523

Earnings Per Common Share:
Basic	$	1.31		$	1.14		$	1.20
Diluted	$	1.29		$	1.13		$	1.19


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, (in thousands)		2011			2010			2009

Net Income Applicable to Common Stock	$	11,262		$	9,760		$	10,171

Other Comprehensive Income, net of tax
Qualified cash flow hedging instrument net of tax (benefit) expense
of $(1), $(1), and $48 in 2011, 2010, and 2009, respectively		3			3			4
Adjustment to post-retirement benefit plans, net of tax (benefit)
expense of $(231), $12 and $(49) in 2011, 2010 and 2009, respectively		(361	)		16			(140	)
Unrealized Investment loss, net of tax expense (benefit) of $31,
$30 and $(158) in 2011, 2010 and 2009, respectively		(31	)		47			247

Comprehensive Income	$	10,873		$	9,826		$	10,282

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

F-3

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CONNECTICUT WATER SERVICE, INC.

Connecticut (State or other jurisdiction of incorporation or organization)	06-0739839 (I.R.S. Employer Identification No.)

93 West Main Street, Clinton, CT (Address of principal executive office)	06413 (Zip Code)

Large Accelerated Filer o	Accelerated Filer x
Non-Accelerated Filer o	Smaller Reporting Company o

Document		Part of Form 10-K Into Which Document is Incorporated

Definitive Proxy Statement, to be filed on or about March 23, 2012, for Annual Meeting of Shareholders to be held on May 10, 2012.		Part III

	INDEX TO ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 2011
		Page Number
	Special Note Regarding Forward-Looking Statements	3
Part I
Item 1.	Business	4
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	10
Item 2.	Properties	10
Item 3.	Legal Proceedings	11
Item 4.	Mine Safety Disclosures	11

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosure about Market Risk	23
Item 8.	Financial Statements and Supplementary Data	23
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	23
Item 9A.	Controls and Procedures	23
Item 9B.	Other Information	23

Part III
Item 10.	Directors, Executive Officers and Corporate Governance	24
Item 11.	Executive Compensation	24
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24
Item 13.	Certain Relationships and Related Transactions, and Director Independence	24
Item 14.	Principal Accounting Fees and Services	24

Part IV
Item 15.	Exhibits, Financial Statement Schedules	25
	Signatures	26

Name	Age in 2012*	Office	Period Held or Prior Position	Term of Office Expires
E. W. Thornburg	51	Chairman, President, and Chief Executive Officer	Held position since March 2006	2012 Annual Meeting
D. C. Benoit	55	Vice President – Finance, Chief Financial Officer and Treasurer	Held current position or other executive position with the Company since April 1996	2012 Annual Meeting
T. P. O’Neill	57	Vice President – Service Delivery	Held current position or other engineering position with the Company since February 1980	2012 Annual Meeting
M. P. Westbrook	53	Vice President – Customer and Regulatory Affairs	Held current position or other management position with the Company since September 1988	2012 Annual Meeting
K. A. Johnson	45	Vice President – Human Resources and Corporate Secretary	Held current position or other human resources position with the Company since May 2007. Ms. Johnson previously served as the senior vice president, Human Resources and Organizational Development Officer for Rockville Bank.	2012 Annual Meeting
J. E. Wallingford	55	Division President – The Maine Water Company	President of The Maine Water Company (and its predecessor companies) since 1993	2012 Annual Meeting

	Income (Loss) from Real Estate Transactions from Continuing Operations
	Regulated			Unregulated		Total

2011	$	--		$	176,000	$	176,000
2010	$	(7,000	)	$	237,000	$	230,000
2009	$	1,427,000		$	22,000	$	1,449,000

System	Estimated Available Supply (million gallons per day)
Chester System		1.69
Collinsville System		1.65
Danielson System		3.76
Gallup System		0.60
Guilford System		10.10
Naugatuck System		7.07
Northern Western System		16.53
Plainfield System		1.01
Stafford System		1.00
Terryville System		0.91
Thomaston System		1.73
Thompson System		0.29
Unionville System		6.02
Total		52.36

	Price				Dividends
Period	High		Low		Paid
2011
First Quarter	$	28.27	$	23.27	$	.2325
Second Quarter		26.64		24.01		.2325
Third Quarter		28.15		24.77		.2375
Fourth Quarter		29.10		24.76		.2375

2010
First Quarter	$	25.12	$	21.57	$	.2275
Second Quarter		24.28		20.00		.2275
Third Quarter		24.15		20.80		.2325
Fourth Quarter		27.90		23.60		.2325


CONSOLIDATED BALANCE SHEETS


December 31, (in thousands, except share amounts)		2011			2010

ASSETS
Utility Plant		$	487,540		$	467,589
Construction Work in Progress			6,160			4,013
			493,700			471,602
Accumulated Provision for Depreciation			(133,673	)		(127,383	)
Net Utility Plant			360,027			344,219
Other Property and Investments			5,563			5,568
Cash and Cash Equivalents			1,012			952
Accounts Receivable (Less Allowance, 2011 - $1,088; 2010 - $1,061)			8,436			10,135
Accrued Unbilled Revenues			6,477			6,344
Materials and Supplies, at Average Cost			1,126			1,248
Prepayments and Other Current Assets			1,830			1,749
Total Current Assets			18,881			20,428
Restricted Cash			15,930			1,226
Unamortized Debt Issuance Expense			7,296			7,334
Unrecovered Income Taxes - Regulatory Asset			29,255			23,684
Pension Benefits - Regulatory Asset			13,862			6,296
Post-Retirement Benefits Other Than Pension - Regulatory Asset			3,967			5,451
Goodwill			3,608			3,608
Deferred Charges and Other Costs			6,442			6,385
Total Regulatory and Other Long-Term Assets			80,360			53,984
Total Assets		$	464,831		$	424,199

CAPITALIZATION AND LIABILITIES
Common Stockholders' Equity:
Common Stock Without Par Value:
Authorized - 25,000,000 Shares - Issued and Outstanding:
	2011 - 8,755,398; 2010 - 8,676,849	$	72,345		$	70,024
Retained Earnings			46,669			43,603
Accumulated Other Comprehensive Loss			(825	)		(436	)
Common Stockholders' Equity