Income Tax Expense

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements [Abstract]

Income Taxes

NOTE 2:  INCOME TAX EXPENSE

Under ASC 740, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. From time to time, the Company is assessed interest and penalties by taxing authorities.  In those cases, the charges would appear on the Other line item on the Income Statement.  There were no such charges for the years ending December 31, 2011, 2010 and 2009.  Additionally, there were no accruals relating to interest, penalties, or uncertain tax positions as of December 31, 2011 and 2010.  The Company remains subject to examination by federal authorities for the 2008 and 2010 tax years, and the state authorities for the 2008 through 2010 tax years.  The Internal Revenue Service commenced an examination of the Company’s federal income tax return for the 2009 tax year during the second quarter of 2011.  The Company received notification in December of 2011 that no change will be made to the 2009 federal tax liability.

F-8

CONNECTICUT WATER SERVICE, INC.

Income Tax Expense for the years ended December 31, is comprised of the following:

(in thousands)	2011			2010			2009
Federal Classified as Operating Expense	$	6,709		$	5,513		$	3,566
Federal Classified as Other Utility Income		424			368			342
Federal Classified as Other Income
Land Sales and Donations		(176	)		(230	)		409
Non-Water Sales		558			487			469
Other		(276	)		(257	)		(162	)
Total Federal Income Tax Expense		7,239			5,881			4,624
State Classified as Operating Expense		257			(190	)		(1,100	)
State Classified as Other Utility Income		112			97			90
State Classified as Other Income
Land Sales and Donations		--			--			27
Non-Water Sales		143			120			123
Other		(75	)		(43	)		(17	)
Total State Income Tax Expense		437			(16	)		(877	)
Total Income Tax Expense	$	7,676		$	5,865		$	3,747

The components of the Federal and State income tax provisions are:

(in thousands)	2011			2010			2009
Current Income Taxes
Federal	$	5,002		$	3,902		$	2,338
State		428			338			154
Total Current		5,430			4,240			2,492
Deferred Income Taxes, Net
Federal
Investment Tax Credit		(63	)		(61	)		(63	)
Deferred Revenue		(75	)		(75	)		(75	)
Land Donations		392			201			272
Depreciation		1,990			1,909			2,254
Other		(7	)		5			(102	)
Total Federal		2,237			1,979			2,286
State
Land Donations		--			--			35
Other (A)		9			(354	)		(1,066	)
Total State		9			(354	)		(1,031	)
Total Deferred Income Taxes		2,246			1,625			1,255
Total Income Tax	$	7,676		$	5,865		$	3,747

(A)   – Fixed capital credits account for $(1,089) of Other in 2009.

Deferred income tax (assets) and liabilities are categorized as follows on the Consolidated Balance Sheets:

(in thousands)	2011			2010
Unrecovered Income Taxes	$	(29,255	)	$	(23,684	)
Deferred Federal and State Income Taxes		31,075			29,024
Unfunded Future Income Taxes		29,255			23,684
Unamortized Investment Tax Credit		1,313			1,376
Other		(185	)		(185	)
Net Deferred Income Tax Liability	$	32,203		$	30,215

F-9

CONNECTICUT WATER SERVICE, INC.

Deferred income tax (assets) and liabilities are comprised of the following:

(in thousands)	2011			2010
Charitable Contribution Carryforward (1)	$	--		$	(1,778	)
Valuation Allowance		--			1,386
Tax Credit Carryforward (2)		(2,533	)		(2,551	)
Prepaid Income Taxes on CIAC		4			(66	)
Prepaid Federal Income Tax on Services		(168	)		(159	)
Other Comprehensive Income		(486	)		(234	)
Accelerated Depreciation		34,438			32,520
Net of AFUDC and Capitalized Interest		278			264
Unamortized Investment Tax Credit		1,313			1,376
Other		(643	)		(543	)
Net Deferred Income Tax Liability	$	32,203		$	30,215

(1)   Charitable contribution carryover expired at December 31, 2011.

(2)   State tax credit carry-forwards expire beginning 2013 and ending in 2032.

The calculation of Pre-Tax Income is as follows:

(in thousands)	2011		2010		2009
Pre-Tax Income
Net Income	$	11,300	$	9,798	$	10,209
Income Taxes		7,676		5,865		3,747
Total Pre-Tax Income	$	18,976	$	15,663	$	13,956

In accordance with required regulatory treatment, deferred income taxes are not provided for certain timing differences. This treatment, along with other items, causes differences between the statutory income tax rate and the effective income tax rate.  The differences between the effective income tax rate recorded by the Company and the statutory federal tax rate are as follows:

	2011			2010			2009
Federal Statutory Tax Rate		34.0	%		34.0	%		34.0	%
Tax Effect Differences:
State Income Taxes Net of Federal Benefit		1.5	%		--			(4.3	)%
Depreciation		0.4	%		0.4	%		1.7	%
Charitable Contributions – Land Donation (Net of Valuation Allowance)		(0.9	)%		(1.5	)%		(1.3	)%
Pension Costs		3.5	%		1.8	%		(4.1	)%
Allowance for Funds Used During Construction		(0.3	)%		(0.4	)%		(0.6	)%
Rate Case Expense		0.3	%		(0.7	)%		0.4	%
Other		2.0	%		3.8	%		1.1	%
Effective Income Tax Rate		40.5	%		37.4	%		26.9	%

In 2009, the generation of current year state income tax credits, as well as the recording of the 2008 state income tax credits through the return to accrual, resulted in the decrease of the effective rate related to State Income Taxes Net of Federal Benefit.  The difference between book and tax depreciation on pre-1981 assets has decreased due to retirements of old assets through the WICA program and expiring depreciable lives.  The tax deductible contribution to the pension plan is less than the book expense in 2011 and 2010, while the tax deductible contribution to the pension plan was larger than book expense in 2009.  The increase in Other Tax Effect differences is primarily driven by book and tax differences for bad debt expense and post-retirement benefits other than pension (PBOP).  The decrease in direct write offs of bad debt between 2010 and 2009 resulted in a 1.1% increase in the effective rate from year to year.  The Company resumed bad debt collection and write offs in late 2011.  The contribution to the PBOP was significantly lower in 2011 and 2010 compared to 2009, resulting in a 1.4% increase in the effective rate from 2009 to 2010 and from 2009 to 2011.