Pension and Other Post-Retirement Benefits

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements [Abstract]

Pension and Other Post-Retirement Benefits

NOTE 12:  LONG-TERM COMPENSATION ARRANGEMENTS

The Company has accrued for the following long-term compensation arrangements as of December 31, 2011 and 2010:

(in thousands)	2011		2010
Defined Benefit Pension Plan	$	12,319	$	3,768
Post Retirement Benefit Other than Pension		6,431		7,019
Supplemental Executive Retirement Plan		4,843		4,297
Deferred Compensation		1,411		1,409
Other Long-Term Compensation		227		254
Total Long-Term Compensation Arrangements	$	25,231	$	16,747

Investment Strategy – The Corporate Finance and Investment Committee (the Committee) reviews and approves the investment strategy of the investments made on behalf of various pension and post-retirement benefit plans existing under the Company and certain of its subsidiaries.  The Company uses a variety of mutual funds, managed by different fund managers, to achieve its investment goals.  The Committee wants to ensure that the plans establish a target mix that is expected to achieve investment objectives, by assuring a broad diversification of investment assets among investment types, while avoiding short-term changes to the target asset mix, unless unusual market conditions make such a move appropriate to reduce risk.

The targeted asset allocation ratios for those plans as set by the Committee at December 31, 2011 and 2010 were:

	2011			2010
Equity		65	%		65	%
Fixed Income		35	%		35	%
Total		100	%		100	%

The Committee recognizes that a variation of up to 5% in either direction from its targeted asset allocation mix is acceptable due to market fluctuations.

Our expected long-term rate of return on the various benefit plan assets is based upon the plan’s expected asset allocation, expected returns on various classes of plan assets as well as historical returns.  The expected long-term rate of return on the Company’s pension plan assets is 7.25%.

PENSION

Defined Benefit Plan – The Company and certain of its subsidiaries have a noncontributory defined benefit pension plan covering qualified employees.  In general, the Company’s policy is to fund accrued pension costs as permitted by federal income tax and Employee Retirement Income Security Act of 1974 regulations.  The Company amortizes actuarial gains and losses over the average remaining service period of active participants, without regard to a specified corridor of a percentage of the greater of the obligation or market-related value of assets.  A contribution of $1,200,000 was made in 2011 for the 2010 plan year.  The Company does not expect to make a contribution in 2012 for the 2011 plan year, as allowed by our current funding status.

The Company has amended its pension plan to exclude employees hired after January 1, 2009.

The following tables set forth the benefit obligation and fair value of the assets of the Company’s retirement plans at December 31, the latest valuation date:

Pension Benefits (in thousands)	2011			2010
Change in benefit obligation:
Benefit obligation, beginning of year	$	40,758		$	37,182
Service cost		1,523			1,668
Interest cost		2,134			2,175
Actuarial loss (gain)		5,878			1,462
Benefits paid		(1,191	)		(1,729	)
Benefit obligation, end of year	$	49,102		$	40,758
Change in plan assets:
Fair value, beginning of year	$	36,990		$	31,283
Actual return on plan assets		(216	)		4,036
Employer contributions		1,200			3,400
Benefits paid		(1,191	)		(1,729	)
Fair value, end of year	$	36,783		$	36,990
Funded Status	$	(12,319	)	$	(3,768	)
Amount Recognized in Consolidated Balance Sheets Consisted of:
Non-current asset	$	--		$	--
Current liability		--			--
Non-current liability		(12,319	)		(3,768	)
Net amount recognized	$	(12,319	)	$	(3,768	)

The accumulated benefit obligation for all defined benefit pension plans was approximately $41,855,000 and $34,345,000 at December 31, 2011 and 2010, respectively.

Weighted-average assumptions used to determine benefit obligations at December 31:	2011			2010
Discount rate		4.60	%		5.50	%
Rate of compensation increase		3.50	%		3.50	%

F-14

CONNECTICUT WATER SERVICE, INC.

Weighted-average assumptions used to determine net periodic cost for years ended December 31:	2011			2010			2009
Discount rate		5.50	%		5.95	%		6.25	%
Expected long-term return on plan assets		7.25	%		8.00	%		8.00	%
Rate of compensation increase		3.50	%		4.50	%		4.50	%

Prior to the 2007, the Company used Moody’s AA Corporate Bond Yields when selecting its Discount Rate for each of the pension plan.  Beginning with the year ended December 31, 2007, in an attempt to move away from generic yield curves and indices, the Company used a spot yield curve that attempts to mimic expected benefit payments.  Through December 31, 2010, the Company based its discount rate assumption on a single rate on the Citigroup Pension Discount Curve that approximated present value of the plan’s payment streams.  Beginning with the year ended December 31, 2011, the Company began to use the Citigroup Above Median AA Pension Discount Curve under the assumption it would more closely replicate the yields of bonds if the Company were to pick individual issuances that matched estimated payment streams of the plans.

The following table shows the components of periodic benefit costs:

Pension Benefits (in thousands)	2011			2010			2009
Components of net periodic benefit costs
Service cost	$	1,523		$	1,668		$	1,454
Interest cost		2,134			2,175			2,024
Expected return on plan assets		(2,456	)		(2,507	)		(2,229	)
Amortization of:
Net transition obligation		2			2			2
Net loss		69			69			69
Prior service cost		687			602			398
Net Periodic Pension Benefit Costs	$	1,959		$	2,009		$	1,718

The following table shows the other changes in plan assets and benefit obligations recognized as a regulatory asset (liability):

Pension Benefits (in thousands)	2011			2010
Change in net loss (gain)	$	8,550		$	(67	)
Amortization of transition obligation		(2	)		(2	)
Amortization of prior service cost		(69	)		(69	)
Amortization of net loss		(687	)		(602	)
Total recognized to Regulatory Asset (Liability)	$	7,792		$	(740	)

Amounts Recognized as a Regulatory Asset at December 31: (in thousands)	2011		2010
Transition obligation	$	--	$	2
Prior service cost		309		378
Net (gain) loss		13,553		5,916
Total Recognized as a Regulatory Asset	$	13,862	$	6,296

Amounts Recognized in Other Comprehensive Income at December 31: (in thousands)	2011		2010		2009
Transition obligation	$	--	$	--	$	--
Prior service cost		--		--		--
Net loss		554		327		466
Total Recognized in Other Comprehensive Income	$	554	$	327	$	466

Estimated Net Periodic Benefit Cost Amortizations for the periods January 1 - December 31,: (in thousands)	2012
Amortization of transition obligation	$	--
Amortization of prior service cost		69
Amortization of net loss		1,434
Total Estimated Net Periodic Benefit Cost Amortizations	$	1,503

Plan Assets

The Company’s pension plan weighted-average asset allocations at December 31, 2011 and 2010 by asset category were as follows:

	2011			2010
Equity		66	%		67	%
Fixed Income		34	%		33	%
Total		100	%		100	%

F-15

CONNECTICUT WATER SERVICE, INC.

See Note 6 for discussion on how fair value is determined.  The fair values of the Company’s pension plan assets at December 31, 2011 were as follows:

(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market Fund	$	172	$	--	$	--
Mutual Funds:
Fixed Income Funds (1)		12,491		--		--
Equity Funds (2)		24,120		--		--
Total	$	36,783	$	--	$	--

The fair values of the Company’s pension plan assets at December 31, 2010 were as follows:

(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market Fund	$	277	$	--	$	--
Mutual Funds:
Fixed Income Funds (1)		12,015		--		--
Equity Funds (2)		15,546		--		--
Index Funds (3)		9,152		--		--
Total	$	36,990	$	--	$	--

(1)   Mutual funds consisting primarily of fixed income securities.

(2)   Mutual funds consisting primarily of equity securities.

(3)   Mutual funds consisting primarily of funds linked to indices.

The Plan’s expected future benefit payments are:

(in thousands)
2012	$	3,113
2013		2,183
2014		2,517
2015		2,930
2016		3,124
Years 2017 – 2021		19,814

POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP) – In addition to providing pension benefits, Connecticut Water, provides certain medical, dental and life insurance benefits to retired employees partially funded by a 501(c)(9) Voluntary Employee Beneficiary Association Trust.  Substantially all of Connecticut Water’s employees may become eligible for these benefits if they retire on or after age 55 with 10 years of service.  The contribution for calendar years 2011 and 2010 was $235,000 and $258,000, respectively.

A regulatory asset has been recorded to reflect the amount which represents the future FASB ASC 715 costs expected to be recovered in customer rates.  In 1997, Connecticut Water requested and received approval from the PURA to include FASB ASC 715 costs in customer rates.  The PURA’s 1997 limited reopener of Connecticut Water’s general rate proceeding allowed it to increase customer rates $208,000 annually for FASB ASC 715 costs.  Prior to the January 2007 rate decision, Connecticut Water’s rates allowed for recovery of $473,100 annually for post-retirement benefit costs other than pension.  As a result of the January 2007 rate decision, the Company will follow the provisions of FASB ASC 715 for regulated companies that allows the creation of a regulatory asset for costs that will be recovered in the future under provisions of FASB ASC 980.

The Company has amended its PBOP to exclude employees hired after January 1, 2009.  In addition, effective April 1, 2009, the Company will no longer provide prescription drug coverage for its retirees age 65 and over.  Those retirees, who are entitled to Medicare coverage, will continue to receive the current non-prescription medical coverage.

On May 16, 2011, the Company notified participants in the PBOP plan of an amendment that would limit the life-time benefits of participants to $100,000, effective July 1, 2011.  As of the date of the notice, May 16, 2011, the Company and its actuary began to account for the change in life-time benefits.  The change in benefits resulted in a decrease in PBOP expense of approximately $488,000 from May 16 through December 31, 2011.

The Company amortizes actuarial gains and losses over the average remaining service period of active participants, without regard to a specified corridor of a percentage of the greater of the obligation or market-related value of assets.  Connecticut Water has elected to recognize the transition obligation on a delayed basis over a period equal to the plan participants' 21.6 years of average future service.

Another subsidiary company, Barnstable Water, also provides certain health care benefits to eligible retired employees.  Barnstable Water employees became eligible for these benefits if they retired on or after age 65 with at least 15 years of service.  Post-65 medical coverage is provided for retired employees up to a maximum coverage of $500 per quarter. Barnstable Water’s PBOP currently is not funded.  Barnstable Water no longer has any employees; therefore, no new participants will be entering Barnstable Water’s PBOP.  The tables below do not include Barnstable Water’s PBOP.  Barnstable Water’s PBOP had a Benefit Obligation of $54,000 and $52,000 at December 31, 2011 and 2010, respectively.  Additionally, this plan did not hold any assets as of December 31, 2011 and 2010.  Barnstable Water’s PBOP’s net periodic benefit costs were less than $1,000 in 2011 and 2010.

F-16

CONNECTICUT WATER SERVICE, INC.

The following tables set forth the benefit obligation and fair value of the assets of the Connecticut Water’s post-retirement health care benefits at December 31, the latest valuation date:

PBOP Benefits (in thousands)	2011			2010
Change in benefit obligation:
Benefit obligation, beginning of year	$	13,443		$	9,518
Service cost		599			567
Interest cost		623			574
Plan participant contributions		85			--
Plan amendments		(2,433	)		--
Actuarial (gain) loss		901			3,403
Benefits paid		(376	)		(619	)
Benefit obligation, end of year	$	12,842		$	13,443
Change in plan assets:
Fair value, beginning of year	$	6,475		$	6,230
Actual return on plan assets		46			606
Employer contributions		235			258
Plan participant contributions		85			--
Benefits paid		(376	)		(619	)
Fair value, end of year	$	6,465		$	6,475
Funded Status	$	(6,377	)	$	(6,968	)
Amount Recognized in Consolidated Balance Sheets Consisted of:
Non-current asset	$	--		$	--
Current liability		--			--
Non-current liability		(6,377	)		(6,968	)
Net amount recognized	$	(6,377	)	$	(6,968	)

Weighted-average assumptions used to determine benefit obligations at December 31:	2011			2010
Discount rate		4.40	%		5.35	%

Weighted-average assumptions used to determine net periodic cost for years ended December 31:	2011			2010			2009
Discount rate		5.35	%		5.80	%		6.20	%
Expected long-term return on plan assets		4.50	%		5.00	%		5.00	%

Prior to the 2007, the Company used Moody’s AA Corporate Bond Yields when selecting its Discount Rate for each of the PBOP.  Beginning with the year ended December 31, 2007, in an attempt to move away from generic yield curves and indices, the Company used a spot yield curve that attempts to mimic expected benefit payments.  Through December 31, 2010, the Company based its discount rate assumption on a single rate on the Citigroup Pension Discount Curve that approximated present value of the plan’s payment streams.  Beginning with the year ended December 31, 2011, the Company began to use the Citigroup Above Median AA Pension Discount Curve under the assumption it would more closely replicate the yields of bonds if the Company were to pick individual issuances that matched estimated payment streams of the plans.

The following table shows the components of periodic benefit costs:

PBOP Benefits (in thousands)	2011			2010			2009
Components of net periodic benefit costs
Service cost	$	599		$	567		$	473
Interest cost		623			574			488
Expected return on plan assets		(267	)		(306	)		(272	)
Other		225			225			225
Amortization of:
Prior service cost		(665	)		(406	)		(406	)
Recognized net loss		613			329			217
Net Periodic Post Retirement Benefit Costs	$	1,128		$	983		$	725

The following table shows the other changes in plan assets and benefit obligations recognized as a regulatory asset:

PBOP Benefits (in thousands)	2011			2010
Change in net loss (gain)	$	1,123		$	3,103
Change in transition credit		(2,433	)		--
Amortization of transition obligation		--			--
Amortization of prior service credit		665			406
Amortization of net loss		(613	)		(329	)
Total recognized to Regulatory Asset	$	(1,258	)	$	3,180

F-17

CONNECTICUT WATER SERVICE, INC.

Amounts Recognized as a Regulatory Asset at December 31: (in thousands)	2011			2010
Transition obligation	$	--		$	--
Prior service cost		(3,563	)		(1,794	)
Net (gain) loss		6,234			5,724
Total Recognized as a Regulatory Asset	$	2,671		$	3,930

There were no other changes in plan assets and benefit obligations recognized as a regulatory asset.

Estimated Benefit Cost Amortizations for the periods January 1 - December 31,: (in thousands)	2012
Amortization of transition obligation	$	--
Amortization of prior service cost		(805	)
Amortization of net loss (gain)		669
Total Estimated Net Periodic Benefit Cost Amortizations	$	(136	)

Assumed health care cost trend rates at December 31:	2011						2010
	Medical			Dental			Medical			Dental
Health care cost trend rate assumed for next year (1)		10.0	%		10.0	%		10.0	%		10.0	%
Rate to which the cost trend rate is assumed to decline		5.0	%		5.0	%		5.0	%		5.0	%
Year that the rate reaches the ultimate trend rate		2022			2022			2021			2021

(1) – Zero percent trend rate from 2010 to 2011.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.  A one-percentage-point change in assumed health care cost trend rates would have the following effects on Connecticut Water’s plan and would have no impact on the Barnstable Water plan:

(in thousands)	1 Percentage-Point
	Increase		Decrease
Effect on total of service and interest cost components	$	71	$	(68	)
Effect on post-retirement benefit obligation	$	692	$	(670	)

Plan Assets

Connecticut Water’s other post-retirement benefit plan weighted-average asset allocations at December 31, 2011 and 2010 by asset category were as follows:

	2011			2010
Equity		63	%		63	%
Fixed Income		37	%		37	%
Total		100	%		100	%

See Note 6 for discussion on how fair value is determined.  The fair value of the Company’s PBOP assets at December 31, 2011 are as follows:

(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market	$	160	$	--	$	--
Mutual Funds:
Fixed Income Funds (1)		2,234		--		--
Equity Funds (2)		4,071		--		--
Total	$	6,465	$	--	$	--

The fair value of the Company’s PBOP assets at December 31, 2010 are as follows:

(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market	$	492	$	--	$	--
Mutual Funds:
Fixed Income Funds (1)		1,897		--		--
Equity Funds (2)		2,601		--		--
Index Funds (3)		1,485		--		--
Total	$	6,475	$	--	$	--

(1)   Mutual funds consisting primarily of fixed income securities.

(2)   Mutual funds consisting primarily of equity securities.

(3)   Mutual funds consisting primarily of funds linked to indices.

F-18

CONNECTICUT WATER SERVICE, INC.

Cash Flows

Connecticut Water contributed $235,000 to its other post-retirement benefit plan in 2011 for plan year 2011.  The Company expects to make a contribution of approximately $500,000 in 2012 for plan year 2012.

Expected future benefit payments are:

(in thousands)
2012	$	516
2013		551
2014		582
2015		615
2016		687
Years 2017 – 2021		4,516

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP) – The Company and certain of its subsidiaries provide additional pension benefits to senior management through supplemental executive retirement contracts.  At December 31, 2011 and 2010, the actuarial present values of the projected benefit obligation of these contracts were $4,495,000 and $4,297,000, respectively.  Expense associated with these contracts was approximately $409,000 for 2011, $423,000 for 2010, and $354,000 for 2009 and is reflected in Other Income (Deductions) in the Statements of Income.

Included in Other Property and Investments at December 31, 2011 and 2010 is $3,149,000 and $3,074,000 of investments purchased by the Company to fund these obligations, primarily consisting of life insurance contracts.  The remaining assets are carried at fair value and are considered Level 1 within the fair value hierarchy as outlined under FASB ASC 820 and are included in the table shown in Note 6.

SAVINGS PLAN (401(k)) – The Company and certain of its subsidiaries maintain an employee savings plan which allows participants to contribute from 1% to 50% of pre-tax compensation plus for those aged 50 years and older, catch-up contributions as allowed by law.  Effective January 1, 2009, the Company changed its 401(k) plan to meet the requirements of a special IRS safe harbor.  Under the provisions of this safe harbor plan, the Company will make an automatic contribution of 3% of compensation for all eligible employees, even if the employee does not make their own contributions.  For employees hired after January 1, 2009 and ineligible to participate in the Company’s pension plan, the Company will contribute an additional 1.5% of compensation.  Prior to January 1, 2009, the Company matches 50 cents for each dollar contributed by the employee up to 4% of the employee’s compensation.  The Company contribution charged to expense in 2011, 2010, and 2009 was $419,000, $446,000, and $433,000, respectively.

The Plan creates the possibility for an “incentive bonus” contribution to the 401(k) plan tied to the attainment of a specific goal or goals to be identified each year.  If the specific goal or goals are attained by the end of the year, all eligible employees, except officers and certain key employees, may receive up to an additional 1% of their annual base salary as a direct contribution to their 401(k) account. No incentive bonus was awarded in 2011, 2010 or 2009.