10-K 1 ctws201210k.htm 10-K CTWS 2012 10K



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

Form 10-K
ý
Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2012 or

o
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period to
from

Commission File Number 0-8084


Connecticut Water Service, Inc.
(Exact name of registrant as specified in its charter)

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)

Registrant's telephone number, including area code (860) 669-8636
Registrant’s website:  www.ctwater.com

Securities registered pursuant to Section 12 (b) of the Act:

Title of each Class
Common Stock, without par value
Name of each exchange on which registered
The Nasdaq Stock Market, Inc.

Securities registered pursuant to Section 12 (g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o  No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o






Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý

As of June 30, 2012, the aggregate market value of the registrant's voting Common Stock held by non-affiliates of the registrant was $245,575,484 based on the closing sale price on such date as reported on the NASDAQ.

Number of shares of Common Stock, no par value, outstanding as of March 1, 2013 was 10,970,895, including 168,433 common stock equivalent shares.

DOCUMENTS INCORPORATED BY REFERENCE

Document
 
Part of Form 10-K Into Which Document is Incorporated
 
 
 
Definitive Proxy Statement, to be filed on or about March 29, 2013, for Annual Meeting of Shareholders to be held on May 9, 2013.
 
Part III





 
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2012
 
 
 
 
 
Page Number
 
Special Note Regarding Forward-Looking Statements
 
Part I
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
Part II
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
 
Part III
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
 
 
 
Part IV
 
 
 
Item 15.
 
 
 





SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K (“10-K”), or incorporated by reference into this 10-K, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”) that are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on Connecticut Water Service, Inc. (referred to as “the Company”, “we”, “us”, or “our”).  These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.  In some cases you can identify forward-looking statements where statements are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “continue” or the negative of such terms or similar expressions.  Forward-looking statements included in this 10-K, or incorporated by reference into this 10-K, include, but are not limited to, statements regarding:

projected capital expenditures and related funding requirements;
the availability and cost of capital;
developments, trends and consolidation in the water and wastewater utility industries;
dividend payment projections;
our ability to successfully acquire and integrate regulated water and wastewater systems, as well as unregulated businesses, that are complementary to our operations and the growth of our business;
the capacity of our water supplies, water facilities and wastewater facilities;
the impact of limited geographic diversity on our exposure to unusual weather;
the impact of conservation awareness of customers and more efficient plumbing fixtures and appliances on water usage per customer;
our capability to pursue timely rate increase requests;
our authority to carry on our business without unduly burdensome restrictions;
our ability to maintain our operating costs at the lowest possible level, while providing good quality water service;
our ability to obtain fair market value for condemned assets;
the impact of fines and penalties;
changes in laws, governmental regulations and policies, including environmental, health and water quality and public utility regulations and policies;
the decisions of governmental and regulatory bodies, including decisions to raise or lower rates;
our ability to successfully extend and expand our service contract work within our Service and Rentals Segment in both Connecticut and Maine;
the development of new services and technologies by us or our competitors;
the availability of qualified personnel;
the condition of our assets;
the impact of legal proceedings;
general economic conditions;
the profitability of our Real Estate Segment, which is subject to the amount of land we have available for sale and/or donation, the demand for any available land, the continuation of the current state tax benefits relating to the donation of land for open space purposes and regulatory approval for land dispositions; and
acquisition-related costs and synergies.

Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including but not limited to:

changes in general economic, business, credit and financial market conditions;
changes in environmental conditions, including those that result in water use restrictions;
abnormal weather conditions;
increases in energy and fuel costs;
unfavorable changes to the federal and/or state tax codes;
significant changes in, or unanticipated, capital requirements;
significant changes in our credit rating or the market price of our common stock;
our ability to integrate businesses, technologies or services which we may acquire, including the acquisition of The Maine Water Company in January 2012 and The Biddeford & Saco Water Company in December 2012;
our ability to manage the expansion of our business;
the extent to which we are able to develop and market new and improved services;
the continued demand by telecommunication companies for antenna site leases on our property;

4



the effect of the loss of major customers;
our ability to retain the services of key personnel and to hire qualified personnel as we expand;
labor disputes;
increasing difficulties in obtaining insurance and increased cost of insurance;
cost overruns relating to improvements or the expansion of our operations;
increases in the costs of goods and services;
civil disturbance or terroristic threats or acts; and
changes in accounting pronouncements.

Given these uncertainties, you should not place undue reliance on these forward-looking statements.  You should read this 10-K and the documents that we incorporate by reference into this 10-K completely and with the understanding that our actual future results, performance and achievements may be materially different from what we expect.  These forward-looking statements represent our assumptions, expectations and beliefs only as of the date of this 10-K.  Except for our ongoing obligations to disclose certain information under the federal securities laws, we are not obligated, and assume no obligation, to update these forward-looking statements, even though our situation may change in the future.  For further information or other factors which could affect our financial results and such forward-looking statements, see Part I, Item 1A “Risk Factors.”  We qualify all of our forward-looking statements by these cautionary statements.

5



PART I

ITEM 1.  BUSINESS

The Company

The Registrant, Connecticut Water Service, Inc. (referred to as “the Company”, “we”, “us”, or “our”) was incorporated in 1974, with The Connecticut Water Company (Connecticut Water) as its largest subsidiary which was organized in 1956.  Connecticut Water Service, Inc. is a non-operating holding company, whose income is derived from the earnings of its six wholly-owned subsidiary companies as of December 31, 2012.  In 2012, approximately 83% of the Company’s net income was attributable to water activities carried out within its regulated water companies, Connecticut Water, The Maine Water Company (Maine Water) and The Biddeford & Saco Water Company (BSWC), collectively the "Regulated Companies".  As of December 31, 2012, the Regulated Companies supplied water to 121,791 customers, representing a population of approximately 400,000, in 76 municipalities throughout Connecticut and Maine.  The Regulated Companies are subject to state regulation regarding financial issues, rates, and operating issues, and to various other state and federal regulatory agencies concerning water quality and environmental standards.

In addition to its Regulated Companies, the Company owns two active unregulated companies.  In 2012, these unregulated companies, together with real estate transactions within Connecticut Water, contributed the remaining 17% of the Company’s net income through real estate transactions as well as services and rentals.  The two active unregulated companies are Chester Realty, Inc., a real estate company in Connecticut; and New England Water Utility Services, Inc. (NEWUS), which provides contract water and sewer operations and other water related services.

Effective January 1, 2012, the Company completed the acquisition of Aqua Maine, Inc. (“AM”) from Aqua America, Inc. (“AA”) for a total cash purchase price, adjusted at closing, of $35.6 million.  Subsequent to the closing, the name of AM was changed to The Maine Water Company.  Maine Water 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 makes 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 accounted for the acquisition in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 805 Business Combinations ("FASB ASC 805"), including the purchase price allocation.

Additionally, in February 2012, Connecticut Water acquired a small water system in Hebron, Connecticut for $130,000.  The water system serves three multi-unit apartment buildings.

On July 19, 2012, the Company announced that it had reached an agreement to acquire The Biddeford & Saco Water Company, pending a vote of BSWC shareholders, approval by the MPUC and the satisfaction of other various conditions. This acquisition added approximately 15,500 additional customers in the State of Maine, in the communities of Biddeford, Saco, Old Orchard Beach and Scarborough. Under the terms of the agreement, the acquisition was executed through a stock-for-stock merger transaction valued at approximately $12.0 million. On November 7, 2012, the MPUC approved the transaction and the Company completed the transaction on December 10, 2012. Holders of BSWC common stock received an aggregate of 380,254 shares of the Company's common stock in a tax-free exchange. The Company is accounting for the acquisition in accordance with FASB ASC 805. The Company is still in the process of completing the purchase price allocation as required by FASB ASC 805.

On December 12, 2012, the Company completed an underwritten public offering of 1,696,250 shares of its common stock at a price to the public of $29.25 per share, including overallotments. Wells Fargo Securities served as sole book-runner for the offering. The offering was made pursuant to a “shelf” registration statement (including a prospectus) previously filed with and declared effective by the Securities and Exchange Commission in July 2012. The Company used the net proceeds of approximately $47.5 million to repay approximately $39 million of our short-term indebtedness, to fund capital expenditures and for other general corporate purposes.

Our mission is to provide high quality water service to our customers at a fair return to our shareholders while maintaining a work environment that attracts, retains and motivates our employees to achieve a high level of performance.

Our corporate headquarters are located at 93 West Main Street, Clinton, Connecticut 06413.  Our telephone number is (860) 669-8636, and our internet address is www.ctwater.com.  The references to our Web site and the Securities and Exchange Commission’s (SEC) Web site are intended to be inactive textual references only, and the contents of those Web sites are not

6



incorporated by reference herein and should not be considered part of this or any other report that we file with or furnish to the SEC.

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to these documents will be made available free of charge through the “INVESTORS” menu of the Company’s internet website (http://www.ctwater.com) as soon as practicable after such material is electronically filed with, or furnished to, the SEC. The following documents are also available through the “CORPORATE GOVERNANCE” section of our website:

Employee Code of Conduct
Audit Committee Charter
Board of Directors Code of Conduct
Compensation Committee Charter
Corporate Finance and Investment's Committee Charter
Corporate Governance Committee Charter
Bylaws of Connecticut Water Service, Inc.

Additionally, information concerning the Company’s 2013 Annual Meeting Materials (2012 Annual Report and 2013 Proxy Statement) can be found under the “INVESTORS” menu, under the “Annual Reports” tab.

Copies of each of the Company’s SEC filings (without exhibits) and corporate governance documents mentioned above will also be mailed to investors, upon request, by contacting the Company’s Corporate Secretary, Kristen A. Johnson, at Connecticut Water, 93 West Main Street, Clinton, CT 06413.

Our Regulated Companies

Our Regulated Companies are subject to seasonal fluctuations and weather variations.  The demand for water is generally greater during the warmer months than the cooler months due to customers’ incremental water consumption related to cooling systems and various outdoor uses such as private and public swimming pools and lawn sprinklers.  Demand will vary with rainfall and temperature levels from year to year and season to season, particularly during the warmer months.

In general, the profitability of the water utility industry is largely dependent on the timeliness and adequacy of rates allowed by utility regulatory commissions. In addition, profitability is affected by numerous factors over which we have little or no control, such as costs to comply with security, environmental, and water quality regulations. Inflation and other factors also impact costs for construction, materials and personnel related expenses.

The Company believes that we are presently in compliance with current environmental and water quality 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 existing 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.

Regulated Operations

Our Regulated Companies derive their rights and franchises to operate from special state acts that are subject to alteration, amendment or repeal and do not grant us 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 the towns we now serve.  There is the possibility that either the State of Connecticut or the State of Maine could attempt to revoke our franchises and allow a governmental entity to take over some or all of our systems.  While we would vigorously oppose any such attempts, from time to time such legislation is contemplated.

The rates we charge our Connecticut water customers are established under the jurisdiction of and are approved by the Connecticut Public Utilities Regulatory Authority (PURA), formerly the Connecticut Department of Public Utility Control.  It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return.  Connecticut Water’s allowed return on equity and return on rate base, effective as of July 14, 2010 are 9.75% and 7.32%, respectively.  Prior to July 14, 2010, Connecticut Water’s allowed return on equity and return on rate base were 10.125% and 8.07%, respectively.

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

7



previously approved Water Infrastructure Conservation Act (“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.  It should be noted if Connecticut Water were to over-collect on WICA surcharges, Connecticut Water 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 expired April 1, 2012.  On January 30, 2012, Connecticut Water filed for a 0.09% reconciliation adjustment for the 2011 shortfall in WICA, to become effective April 1, 2012.  In March 2012, the PURA approved an increase of 1.16% on Connecticut Water’s first WICA application and approved the 0.09% reconciliation surcharge from the second application, effective April 1, 2012.  As of April 1, 2012, Connecticut Water’s cumulative WICA surcharge was 4.23%.

On July 26, 2012, Connecticut Water filed a WICA application with the PURA requesting an additional 1.50% surcharge to customer bills, related to approximately $7.7 million spending on WICA projects. In September 2012, the PURA approved the 1.50% increase, effective October 1, 2012.  As of October 1, 2012, Connecticut Water’s cumulative WICA surcharge was 5.73%.

On January 25, 2013, Connecticut Water filed a WICA application with the PURA requesting an additional 1.08% surcharge to customer bills related to approximately $6.5 million spending on WICA projects. This application also reduced the surcharge by 0.09% for the prior year reconciliation adjustment which expires April 1, 2013.  On January 30, 2013, Connecticut Water filed for a 0.10% reconciliation adjustment for the 2012 shortfall in WICA, to become effective April 1, 2013.  If approved as filed, Connecticut Water’s cumulative WICA surcharge will be 6.82%.

The rates we charge our Maine water customers are established under the jurisdiction of and are approved by the MPUC.  It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return.  Maine Water’s average allowed return on equity and return on rate base, as of December 31, 2012 are 10.00% and 8.31%, respectively.  BSWC’s allowed return on equity, as of December 31, 2012 is 10.00%.

The Maine Legislature is currently in the process of formalizing a Temporary Surcharge for Infrastructure Replacement and Repairs ("TSIRR"), a WICA-like mechanism that will allow for expedited recovery of infrastructure improvements. The Company expects that our Regulated Companies in the State of Maine will be able to take advantage of the surcharge in late 2013 or early 2014.

Our Water Systems

As of December 31, 2012, our water infrastructure consists of 77 noncontiguous water systems in the States of Connecticut and Maine.  Our system, in total, consists of approximately 2,100 miles of water main and reservoir storage capacity of 8.5 billion gallons.  The safe, dependable yield from our 235 active wells and 25 surface water supplies is approximately 72 million gallons per day.  Water sources vary among the individual systems, but overall approximately 54% of the total dependable yield comes from surface water supplies and 46% from wells.

For the year-ended December 31, 2012, our Regulated Companies’ 121,791 customers consumed approximately 8.3 billion gallons of water generating $83,838,000 in operating revenues.  We supply water, and in most cases, fire protection to all or portions of 76 towns throughout Connecticut and Maine.


8



The following table breaks down the above total figures by customer class as of December 31, 2012, 2011, and 2010:

 
2012
 
2011
 
2010
Customers:
 
 
 
 
 
Residential
108,154

 
80,256

 
79,604

Commercial
8,539

 
5,679

 
5,692

Industrial
501

 
425

 
422

Public Authority
892

 
600

 
609

Fire Protection
2,763

 
1,746

 
1,724

Other (including non-metered accounts)
942

 
1,317

 
1,351

Total
121,791

 
90,023

 
89,402

Water Revenues (in thousands):
 

 
 

 
 

Residential
$
50,783

 
$
43,656

 
$
42,103

Commercial
10,138

 
8,621

 
7,725

Industrial
3,080

 
1,817

 
1,755

Public Authority
2,675

 
2,253

 
2,280

Fire Protection
15,592

 
11,890

 
11,430

Other (including non-metered accounts)
1,570

 
1,165

 
1,115

Total
$
83,838

 
$
69,402

 
$
66,408

Customer Water Consumption (millions of gallons):
 

 
 

 
 

Residential
5,622

 
4,821

 
5,124

Commercial
1,509

 
1,133

 
1,151

Industrial
780

 
339

 
335

Public Authority
421

 
323

 
348

Total
8,332

 
6,616

 
6,958


The Regulated Companies own various small, discrete parcels of land that are no longer required for water supply purposes.  At December 31, 2012, this land totaled over 750 acres.  Over the past several years, we have been disposing of these land parcels through sales and/or donations, primarily to towns and municipalities. For more information, please refer to Segments of Our Business below.

Additional information on land dispositions can be found in Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Commitments and Contingencies.

Competition

Our Regulated Companies face competition from a few small privately-owned water systems operating within, or adjacent to, our franchise areas and from municipal and public authority systems whose service areas in some cases overlap portions of our franchise areas.

Employees

As of December 31, 2012, we employed a total of 259 people.  Our employees are not covered by collective bargaining agreements.

Organizational Review

As part of a broader organizational review, beginning in July 2010, the Company examined both its Connecticut regulated and unregulated operations 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 determined that a targeted reduction in workforce was appropriate.  The Company 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 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 and other costs associated with the review.

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Executive Officers of the Registrant

The following is a list of the executive officers of the Company as of March 15, 2013:

Name
 
Age in 2013*
 
Offices
 
Period Held or Prior Position
 
Term of Office Expires
E. W. Thornburg
 
52
 
Chairman, President, and Chief Executive Officer
 
 
Held positions since March 2006
 
 
2013 Annual Meeting
D. C. Benoit
 
56
 
Vice President – Finance, Chief Financial Officer and Treasurer
 
Held current position or other executive position with the Company since April 1996
 
 
2013 Annual Meeting
T. P. O’Neill
 
58
 
Vice President – Service Delivery
 
 
Held current position or other engineering position with the Company since February 1980
 
 
2013 Annual Meeting
M. P. Westbrook
 
54
 
Vice President – Customer and Regulatory Affairs
 
Held current position or other management position with the Company since September 1988
 
 
2013 Annual Meeting
K. A. Johnson
 
46
 
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.
 
2013 Annual Meeting
J. E. Wallingford
 
56
 
Division President – The Maine Water Company, Director
 
President of The Maine Water Company (and its predecessor companies) since 1993, Director since 2012
 
2013 Annual Meeting

* - Age shown is as of filing date of March 15, 2013.

For further information regarding the executive officers see the Company’s Proxy Statement to be filed on or about March 29, 2013.

Segments of Our Business

For management and financial reporting purposes we divide our business into three segments: Water Activities (our regulated companies), Real Estate Transactions (through either our regulated or unregulated companies), and Services and Rentals (our unregulated companies).

Water Activities – The Water Activities segment is comprised of our core regulated water activities to supply public drinking water to our customers.  This segment encompasses all transactions of our Regulated Companies with the exception of certain real estate transactions.

Real Estate Transactions – Our Real Estate Transactions segment involves the sale or donation for income tax benefits of our real estate holdings.  These transactions can be effected by any of our subsidiary companies.  Through land donations and 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.  During 2010 and 2011, the Company did not make any land sales or donations; however, it did adjust its valuation allowances.  During 2012, the Company finalized a land sale with the Town of Plymouth, Connecticut to sell approximately 175 acres of land for open space and recreational purposes.  The Company and Town agreed on a sale price of $1.45 million, generating $982,000 in income in the Real Estate Transactions segment.


10



A breakdown of the net income of this segment between our regulated and unregulated companies for the past three years is as follows:

 
Income (Loss) from Real Estate Transactions from Continuing Operations
 
Regulated
 
Unregulated
 
Total
2012
$
982,000

 
$
(31,000
)
 
$
951,000

2011
$

 
$
176,000

 
$
176,000

2010
$
(7,000
)
 
$
237,000

 
$
230,000


Services and Rentals – Our Services and Rentals segment provides contracted services to water and wastewater utilities and other clients and also leases certain of our properties to third parties through our unregulated companies in the State of Connecticut and through Maine Water in the State of Maine.  The types of services provided include contract operations of water and wastewater facilities; Linebacker®, our service line protection plan for public drinking water customers; and providing bulk deliveries of emergency drinking water to businesses and residences via tanker truck.  Our lease and rental income comes primarily from the renting of residential and commercial property.

Linebacker® is an optional service line protection program offered by the Company to eligible residential customers through NEWUS covering the cost of repairs for leaking or broken water service lines which provide drinking water to a customer's home.  For customers who enroll in this program, the Company will repair or replace a leaking or broken water service line, curb box, curb box cover, meter pit, meter pit cover, meter pit valve plus in-home water main shut off valve before the meter.  For over two years, NEWUS has offered expanded coverage to Connecticut Water customers for failure of in-home plumbing, sewer and septic drainage lines and implemented modified terms and conditions with limitations on certain coverages. In 2012, the Company experienced nearly 20% enrollment growth in expanded coverage options, primarily due to customers upgrading from the basic water plan. As of December 31, 2012, the Company had 20,673 customers enrolled in its Linebacker® protection program. Depending on the coverage selected, Linebacker® prices range between $85 and $185 plus sales tax per year for residential customers.

Some of the services listed above, including the service line protection plan, have limited competition.  But there can be considerable competition for contract operations of large water and wastewater facilities and systems.  However, we have sought to develop a niche market by seeking to serve smaller facilities and systems in our service areas where there is less competition.  The Services and Rentals segment, while still a relatively small portion of our overall business, has grown over the past five years and has provided over 9% of our overall net income in 2012, 2011, and 2010, respectively.  Net income generated by this segment of our business was $1,424,000, $1,001,000 and $899,000 for the years 2012, 2011, and 2010, respectively.

ITEM 1A.  RISK FACTORS

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including, but not limited to, those set forth below, any one of which could cause our actual results to vary materially from recent results or anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, see the discussion in “Forward Looking Information” in Item 7 below – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements.”


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Because we incur significant capital expenditures annually, we depend on the rates we charge our customers, which are subject to regulation.

The water utility business is capital intensive. On an annual basis, we spend significant sums for additions to or replacement of property, plant and equipment. Our ability to maintain and meet our financial objectives is dependent upon the rates we charge our customers. These rates are subject to approval by the PURA in Connecticut and the MPUC in Maine.  The Company is entitled to file rate increase requests, from time to time, to recover our investments in utility plant and expenses. Currently, the Company anticipates that Connecticut Water may file with the PURA for its next general rate case in 2014. Maine Water expects that it will file a general rate case with the MPUC for at least three of its water systems at some point during 2013. BSWC expects that it will not file a rate case until 2014 at the earliest. Once a rate increase petition is filed with the respective agency, the ensuing administrative and hearing process may be lengthy and costly.  We can provide no assurances that any future rate increase requests will be approved by each agency; and, if approved, we cannot guarantee that any such rate increase requests will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.  Additionally, a regulatory agency may rule that a company must reduce its rates.

Under a 2007 Connecticut law, the PURA may authorize regulated water companies to use a rate adjustment mechanism, known as a Water Infrastructure and Conservation Adjustment (WICA), for eligible projects completed and in service for the benefit of the customers.  The Maine Legislature is currently in the process of formalizing a Temporary Surcharge for Infrastructure Replacement and Repairs ("TSIRR"), a WICA-like mechanism that will allow for expedited recovery of infrastructure improvements. The Company expects that our Regulated Companies in the State of Maine will be able to take advantage of the surcharge in late 2013 or early 2014.

If we are unable to pay the principal and interest on our indebtedness as it comes due, or we default under certain other provisions of our loan documents, our indebtedness could be accelerated and our results of operations and financial condition could be adversely affected.

As of December 31, 2012, we had $178.5 million in long-term debt outstanding and $1.7 million in bank loans payable.  Our ability to pay the principal and interest on our indebtedness as it comes due will depend upon our current and future performance.  Our performance is affected by many factors, some of which are beyond our control.  We believe that our cash generated from operations, and, if necessary, borrowing under our existing and planned credit facilities, will be sufficient to enable us to make our debt payments as they become due.  If, however, we do not generate sufficient cash, we may be required to refinance our obligations or sell additional equity, which may be on terms that are not favorable to the Company as current terms.

No assurance can be given that any refinancing or sale of equity will be possible when needed or that we will be able to negotiate acceptable terms.  In addition, our failure to comply with certain provisions contained in our trust indentures and loan agreements relating to our outstanding indebtedness could lead to a default on these documents, which could result in an acceleration of our indebtedness.

Credit market volatility may affect our ability to refinance our existing debt, borrow funds under our existing lines of credit or incur additional debt.

During certain periods of the Unites States credit and liquidity crisis of 2008-2009, the volatility and disruption in the credit and banking markets reached unprecedented levels.  In many cases, the markets contained limited credit capacity for certain issuers, and lenders had requested shorter terms.  The market for new debt financing was limited and in some cases not available at all.  In addition, the markets had increased the uncertainty that lenders will be able to comply with their previous commitments.  The Company noted improvements during the second half of 2009 and continuing through 2012.  If market disruption and volatility return, the Company may not be able to refinance our existing debt when it comes due, draw upon our existing lines of credit or incur additional debt, which may require us to seek other funding sources to meet our liquidity needs or to fund our capital expenditures budget.  We cannot assure you that we will be able to obtain debt or other financing on reasonable terms, or at all.


12



Failure to maintain our existing credit ratings could affect our cost of funds and related margins and liquidity position.

Since 2003, Standard & Poor's Ratings Services has rated our outstanding debt and has given credit ratings to us and our subsidiary The Connecticut Water Company.  Their evaluations are based on a number of factors, which include financial strength as well as transparency with rating agencies and timeliness of financial reporting.  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 reflected S&P’s expectation of weaker credit metrics as a result of the debt the Company planned to incur to complete the acquisition of Aqua Maine 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.  On October 24, 2012, S&P reaffirmed this rating and outlook. While the Company completed a common equity offering in December of 2012 raising approximately $47.5 million in net proceeds for the Company, S&P has not yet revised their outlook.

Our inability to comply with debt covenants under our credit facilities could result in prepayment obligations.

We are obligated to comply with debt covenants under our loan and debt agreements.  Failure to comply with covenants under our credit facilities could result in an event of default, which if not timely cured or waived, could result in us being required to repay or finance these borrowings before their due date, could limit future borrowings, and result in cross default issues and increase our borrowing costs.  The covenants are normal and customary in bank and loan agreements.  The Company was in compliance with all covenants at December 31, 2012.

Market conditions may unfavorably impact the value of our benefit plan assets and liabilities which then could require significant additional funding.

The performance of the capital markets affects the values of the assets that are held in trust to satisfy future obligations under the Company’s pension and postretirement benefit plans and could significantly impact our results of operations and financial position.  As detailed in the Notes to Consolidated Financial Statements, the Company has significant obligations in these areas and the Company holds significant assets in these trusts.  These assets are subject to market fluctuations, which may affect investment returns, which may fall below the Company’s projected return rates.  A decline in the market value of the pension and postretirement benefit plan assets will increase the funding requirements under the Company’s pension and postretirement benefit plans if the actual asset returns do not recover these declines in value.  Additionally, the Company’s pension and postretirement benefit plan liabilities are sensitive to changes in interest rates.  As interest rates decrease, the liabilities increase, potentially increasing benefit expense and funding requirements.  Further, changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions may also increase the funding requirements of the obligations related to the pension and other postretirement benefit plans.  Also, future increases in pension and other postretirement costs as a result of reduced plan assets may not be fully recoverable from our customers, and the results of operations and financial position of the Company could be negatively affected.

Our operating costs could be significantly increased because of state and federal environmental and health and safety laws and regulations.

Our water and wastewater operations are governed by extensive federal and state environmental protection and health and safety laws and regulations, including the federal Safe Drinking Water Act, the Clean Water Act and similar state laws, and federal and state regulations issued under these laws by the U.S. Environmental Protection Agency and state environmental regulatory agencies.  These laws and regulations establish, among other things, criteria and standards for drinking water and for discharges into the waters of the United States, the State of Connecticut and/or the State of Maine. Pursuant to these laws, we are required to obtain various environmental permits from environmental regulatory agencies for our operations.  We cannot assure that we have been or will be at all times in full compliance with these laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators.

Environmental laws and regulations are complex and change frequently.  These laws, and the enforcement thereof, have tended to become more stringent over time.  While we have budgeted for future capital and operating expenditures to maintain compliance with these laws and our permits, it is possible that new or stricter standards could be imposed that will raise our operating costs.  Although these costs may be recovered in the form of higher rates, there can be no assurance that either the PURA or the MPUC would approve rate increases to enable us to fully recover such costs.  In summary, we cannot be assured that our costs of complying with, or discharging liabilities under, current and future environmental and health and safety laws will not adversely affect our business, results of operations or financial condition.


13



Climate change laws and regulations may be adopted that could require compliance with greenhouse gas emissions standards and other climate change initiatives. Additional capital expenditures could be required and our operating costs could be increased in order to comply with new regulatory standards imposed by federal and state environmental agencies.

Climate change is receiving ever increasing attention worldwide.  Many scientists, legislators, and others attribute global warming to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions.  Possible new climate change laws and regulations, if enacted, may require us to monitor and/or change our utility operations.  It is possible that new standards could be imposed that will require additional capital expenditures or raise our operating costs.  Because it is uncertain what laws will be enacted, we cannot predict the potential impact of such laws on our future consolidated financial condition, results of operations, or cash flows.  Although these expenditures and costs may be recovered in the form of higher rates, there can be no assurance that either the PURA or the MPUC or other regulatory bodies that govern our business would permit us to recover such expenditures and costs.  We cannot assure you that our costs of complying with new standards or laws will not adversely affect our business, results of operations or financial condition.

New Streamflow Regulations in Connecticut could potentially impact our ability to serve our customers.

In December 2011, new regulations concerning the flow of water in Connecticut’s rivers and streams became law.  As promulgated, the regulations require that certain downstream releases be made from seven of the Connecticut Waters's eighteen active reservoirs no later than ten years following the adoption of stream classifications, a process which has recently been initiated by the Department of Energy and Environmental Protection (DEEP).  Currently, releases are made at two locations.  No groundwater supply wells are affected by the regulations.

Although significantly and favorably modified from prior versions, the regulations still have the potential to lower our safe yield, raise our capital and operating expenses and adversely affect our revenues and earnings.  Because they affect only a subset of the Company's supplies and allow for releases to be scaled back in response to drought events, however, the overall impact is anticipated to be manageable.  Costs associated with the regulations may be recovered in the form of higher rates, although there can be no assurance the PURA would approve rate increases to enable us to recover such costs.  Recently proposed legislation would expand the current WICA mechanism to allow for customer surcharges to recover the costs associated with the capital improvements necessary to achieve compliance with the streamflow regulations.

The State of Maine also has regulations that govern the flow of water in rivers and streams and also govern lake levels on great ponds. Code of Maine Rules Chapter 587 ("Chapter 587") regulates any activity that alters the flow or level of classified state waters after August 2007. Maine Water operates four water systems that use surface waters governed by this chapter. BSWC operates one water system that uses surface water governed by this chapter. Both companies have operated in full compliance with the chapter since its effective date and fully expect continued compliance. For public water systems, Chapter 587 allows the Maine Department of Environmental Protection ("MDEP") to impose site specific conditions in locations where Maine's water quality classifications are not being met. Any conditions proposed on a water withdrawal by a public water system must consider the provisions of any legislative charter, the watershed protection benefits provided by the utility and the financial viability of the utility. Further, any conditions imposed must be accommodated by the existing MPUC approved rate schedule for the utility and may not, in and of themselves, cause a utility to request a rate increase from their customers. To date, the MDEP has not imposed any withdrawal conditions on any public water system in Maine.

Our business is subject to seasonal fluctuations which could adversely affect demand for our water services and our revenues.

Demand for our water during the warmer months is generally greater than during cooler months due primarily to additional requirements for water in connection with irrigation systems, swimming pools, cooling systems and other outside water use. Throughout the year, and particularly during typically warmer months, demand will vary with temperature and rainfall levels. In the event that temperatures during the typically warmer months are cooler than normal, or if there is more rainfall than normal, the demand for our water may decrease and adversely affect our revenues.


14



Declining per customer residential water usage may reduce our revenues, financial condition and results of operations in future years.

A trend of declining per customer residential water usage in Connecticut and Maine has been observed for the last several years, which we would attribute to increased water conservation, including the use of more efficient household fixtures and appliances among residential users.  Our regulated business is heavily dependent on revenue generated from rates we charge to our residential customers for the volume of water they use.  The rate we charge for our water is regulated by the PURA in Connecticut and the MPUC in Maine and we may not unilaterally adjust our rates to reflect changes in demand.  Declining volume of residential water usage may have a negative impact on our operating revenues in the future if regulators do not reflect any usage declines in the rate setting design process.

Potential regulatory changes or drought conditions may impact our ability to serve our current and future customers’ demand for water and our financial results.

We depend on an adequate water supply to meet the present and future demands of our customers.  Changes in regulatory requirements could affect our ability to utilize existing supplies and/or secure new sources, as required.  Insufficient supplies or an interruption in our water supply could have a material adverse effect on our financial condition and results of operations.  Although not occurring in 2012, drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in sufficient quantities to our existing and future customers. An interruption in our water supply could have a material adverse effect on our financial condition and results of operations.  Moreover, governmental restrictions on water usage during drought conditions may result in a decreased demand for our water, even if our water reserves are sufficient to serve our customers during these drought conditions, which may adversely affect our revenues and earnings.

We are increasingly dependent on the continuous and reliable operation of our information technology systems.

We rely on our information technology systems in connection with the operation of our business, especially with respect to customer service and billing, accounting and, in some cases, the monitoring and operation of our treatment, storage and pumping facilities.  A loss of these systems or major problems with the operation of these systems could affect our operations and have a significant material adverse effect on our results of operations.

With the implementation of the Company’s new Enterprise Resource Planning ("ERP") system in the first quarter of 2010, Connecticut Water delayed customer billings in order to verify the integrity of the system and the accuracy of those bills prior to mailing.

Connecticut Water 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 years ending December 31, 2010 and 2011, due to the reserve policy based upon aging of the receivables.  During 2011 and 2012, Connecticut Water saw progress towards resolving the collection issues, primarily through the ability to charge interest and shut off customers for non-payment.  Connecticut Water has experienced a reduction in the age of its accounts receivable in 2012 due in part to the collection process changes referred to above.

The failure of, or the requirement to repair, upgrade or dismantle, any of our dams may adversely affect our financial condition and results of operations.

We own and operate numerous dams throughout the States of Connecticut and Maine.  While the Company maintains robust dam maintenance and inspection programs, a failure of any of those dams could result in injuries and damage to residential and/or commercial property downstream for which we may be responsible, in whole or in part.  The failure of a dam could also adversely affect our ability to supply water in sufficient quantities to our customers and could adversely affect our financial condition and results of operations.  Any losses or liabilities incurred due to the failure of one of our dams might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.


15



Any failure of our reservoirs, storage tanks, mains or distribution networks could result in losses and damages that may affect our financial condition and reputation.

Connecticut Water and Maine Water distribute water through an extensive network of mains and stores water in reservoirs and storage tanks located across Connecticut and Maine.  A failure of major mains, reservoirs, or tanks could result in injuries and damage to residential and/or commercial property for which we may be responsible, in whole or in part.  The failure of major mains, reservoirs or tanks may also result in the need to shut down some facilities or parts of our water distribution network in order to conduct repairs.  Such failures and shutdowns may limit our ability to supply water in sufficient quantities to our customers and to meet the water delivery requirements prescribed by governmental regulators, including the PURA and the MPUC, and adversely affect our financial condition, results of operations, cash flow, liquidity and reputation.  Any business interruption or other losses might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

We may encounter difficulties consolidating BSWC into our business and may not fully attain or retain, or achieve within a reasonable time frame, expected strategic objectives, cost savings and other expected benefits of the acquisition.

We recently completed the acquisition of BSWC on December 10, 2012, our second acquisition in the State of Maine.  This acquisition further increased the size of our regulated water utility business and further expanded our business operations in the State of Maine.  We expect to realize strategic and other benefits as a result of our acquisition of BSWC.  Our efforts at integrating BSWC into the Company have been ongoing and have been successful to date.  There can be no assurance that we will achieve higher revenues or benefit from any synergies as a result of the acquisition and our ability to fully realize the strategic benefits from consolidating BSWC’s business with ours, is subject to certain risks and uncertainties, including, among others:
the challenges of consolidating businesses, including workforces, processes and information systems;
the costs of consolidating BSWC and managing and enhancing its operations may be higher than we expect and may require more resources, capital investments and management attention than anticipated;
employees important to BSWC’s operations may decide not to continue employment with us; and
we may be unable to anticipate or manage risks that are unique to BSWC’s historical business, including those related to its workforce, customer base, local demographics and information systems.

If we fail to complete an effective integration of BSWC into the Company, our anticipated growth in revenue, profitability, and cash flow resulting from the purchase of BSWC could be adversely affected.

Any future acquisitions we may undertake may involve risks and uncertainties.

An important element of our growth strategy is the acquisition and integration of water systems in order to move into new service areas and to broaden our current service areas.  As of the date of this filing, our Regulated Companies serve more than 121,500 customers, or a population of approximately 400,000 people, in 76 municipalities throughout Connecticut and Maine.  We will be unable to acquire other businesses if we cannot identify suitable acquisition opportunities or reach mutually agreeable terms with acquisition candidates.  It is our intent, when practical, to integrate any businesses we acquire with our existing operations.  The negotiation of potential acquisitions as well as the integration of acquired businesses, including Maine Water and BSWC, could require us to incur significant costs and cause diversion of our management's time and resources.  Future acquisitions by us could result in:
dilutive issuances of our equity securities;
incurrence of debt and contingent liabilities;
failure to have effective internal control over financial reporting;
fluctuations in quarterly results; and
other acquisition-related expenses.

Some or all of these items could have a material adverse effect on our business as well as our ability to finance our business and comply with regulatory requirements.  The businesses we acquire in the future may not achieve sales and profitability that would justify our investment and any difficulties we encounter in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls.  In addition, as consolidation becomes more prevalent in the water and wastewater industries, the prices for suitable acquisition candidates may increase to unacceptable levels and limit our ability to grow through acquisitions.


16



Water supply contamination may adversely affect our business.

Our water supplies are subject to possible contamination, including contamination from the development of naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-made sources, such as Methyl Tertiary Butyl Ether (MTBE), and possible terrorist attacks. In the event that our water supply is contaminated, we may have to interrupt the use of that water supply until we are able to substitute the flow of water from an uncontaminated water source or provide additional treatment.  We may incur significant costs in order to treat the contaminated source through expansion of our current treatment facilities, or development of new treatment methods.  If we are unable to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner, there may be an adverse effect on our revenues, operating results and financial condition.  The costs we incur to decontaminate a water source or an underground water system could be significant and could adversely affect our business, operating results and financial condition and may not be recoverable in rates.  We could also be held liable for consequences arising out of human exposure to hazardous substances in our water supplies or other environmental damage.  For example, private plaintiffs have the right to bring personal injury or other toxic tort claims arising from the presence of hazardous substances in our drinking water supplies.  Our insurance policies may not be sufficient to cover the costs of these claims.

Increased security measures may continue to increase our operating costs.

In addition to the potential pollution of our water supply as described above, we have taken steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply.  We have also tightened our security measures regarding the delivery and handling of certain chemicals used in our business.  We have and will continue to bear increased costs for security precautions to protect our facilities, operations and supplies. These costs may be significant.  We are currently not aware of any specific threats to our facilities, operations or supplies; however, it is possible that we would not be in a position to control the outcome of terrorist events should they occur.

The accuracy of our judgments and estimates about financial and accounting matters will impact our operating results and financial condition.

We make certain estimates and judgments in preparing our financial statements regarding, among others:
the number of years to depreciate certain assets;
amounts to set aside for uncollectible accounts receivable and uninsured losses;
our legal exposure and the appropriate accrual for claims, including medical and workers’ compensation claims;
future costs for pensions and other post-retirement benefit obligations; and
possible tax allowances.

The quality and accuracy of those estimates and judgments will have an impact on our operating results and financial condition.

In addition, we must estimate unbilled revenues and costs at the end of each accounting period.  If our estimates are not accurate, we will be required to make an adjustment in a future period.

Key employee turnover may adversely affect our operating results.

Our success depends significantly on the continued individual and collective contributions of our management team. The loss of the services of any member of our senior management team or the inability to hire and retain experienced management personnel could harm our operating results.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None

ITEM 2.  PROPERTIES

At December 31, 2012, the properties of our Regulated Companies consisted of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, treatment plants, pumping plants, transmission and distribution mains and conduits, mains and other facilities and equipment used for the collection, purification, storage and distribution of water.  In certain cases, Connecticut Water is or may be a party to limited contractual arrangements for the provision of water supply from neighboring utilities.  We believe that our properties are in good operating condition.  Water mains are located, for the most part, in public streets and, in a few instances, are located on land that we own in fee simple and/or land utilized pursuant to easement right, most of which are perpetual and adequate for the purpose for which they are held.

17




The net utility plant of the Company at December 31, 2012 was solely owned by the Regulated Companies.  The Net Utility Plant balance as of December 31, 2012 was $447,911,000, approximately $88 million more than the balance of net utility plant as of December 31, 2011, due primarily to the acquisitions of Maine Water and BSWC, normal plant additions, and construction spending related to infrastructure improvements.

Sources of water supply owned, maintained, and operated by our Regulated Companies include twenty-five surface water supplies and ninety-nine well fields, as of December 31, 2012.  In addition, Connecticut Water has agreements with various neighboring water utilities to provide water, at negotiated rates, to our water systems.  Collectively, these sources have the capacity to deliver approximately seventy-four million gallons of potable water daily to the twenty-five major operating systems. The Regulated Companies own, maintain, and operate fifty-two small, non-interconnected satellite and consecutive water systems that, combined, have the ability to deliver about three million gallons of additional water per day to their respective systems. For some small consecutive water systems, purchased water may comprise substantially all of the total available supply of the system.

As of December 31, 2012, the Regulated Companies own and operate thirty water filtration facilities, having a combined treatment capacity of approximately fifty-two million gallons per day.

As of December 31, 2012, the transmission and distribution systems of the Regulated Companies consisted of approximately 2,100 miles of main.  On that date, approximately seventy-five percent of our mains were eight-inch diameter or larger.  Substantially all new main installations are cement-lined ductile iron pipe of eight-inch diameter or larger.

We believe that our properties are maintained in good condition and in accordance with current regulations and standards of good waterworks industry practice.

ITEM 3.  LEGAL PROCEEDINGS

We are involved in various legal proceedings from time to time. Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we, or any of our subsidiaries are a party, or to which any of our properties is subject, that presents a reasonable likelihood of a material adverse impact on the Company’s financial condition, results of operations or cash flows.

ITEM 4.  MINE SAFETY DISCLOSURES

Not Applicable

18



PART II

ITEM 5.  MARKET FOR THE REGISTRANTS’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is traded on the NASDAQ Global Select Market under the symbol “CTWS”.  Our quarterly high and low stock prices as reported by NASDAQ and the cash dividends we paid during 2012 and 2011 are listed as follows:

 
Price
 
Dividends
Period
High
 
Low
 
Paid
2012
 
 
 
 
 
First Quarter
$
32.84

 
$
26.15

 
$
0.2375

Second Quarter
29.98

 
26.69

 
0.2375

Third Quarter
32.31

 
28.98

 
0.2425

Fourth Quarter
32.24

 
28.36

 
0.2425

2011
 
 
 
 
 
First Quarter
$
28.27

 
$
23.27

 
$
0.2325

Second Quarter
26.64

 
24.01

 
0.2325

Third Quarter
28.15

 
24.77

 
0.2375

Fourth Quarter
29.10

 
24.76

 
0.2375


As of March 1, 2013, there were approximately 3,600 holders of record of our common stock.

We presently intend to pay quarterly cash dividends in 2013 on March 15, June 17, September 16 and December 16, subject to our earnings and financial condition, regulatory requirements and other factors our Board of Directors may deem relevant.

The Company’s Annual Meeting of Shareholders is scheduled for May 9, 2013 in Madison, Connecticut.

Purchases of Equity Securities by the Company – In May 2005, the Company adopted a common stock repurchase program (Share Repurchase Program).  The Share Repurchase Program allows the Company to repurchase up to 10% of its outstanding common stock, at a price or prices that are deemed appropriate.  As of December 31, 2012, no shares have been repurchased.  Currently, the Company has no plans to repurchase shares under the Share Repurchase Program.


19



Performance Graph – Set forth below is a line graph comparing the cumulative total shareholder return for each of the years 20082012 on the Company’s Common Stock, based on the market price of the Common Stock and assuming reinvestment of dividends, with the cumulative total shareholder return of companies in the Standard & Poor’s 500 Index and the Standard and Poor’s 500 Utility Index.



20



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)
 
 
 
 
 
 
 
 
 

2012
 
2011
 
2010
 
2009
 
2008
CONSOLIDATED STATEMENTS OF INCOME
 
 
 
 
 
 
 
 
 
Continuing Operations
 
 
 
 
 
 
 
 
 
Operating Revenues
$
83,838

 
$
69,402

 
$
66,408

 
$
59,391

 
$
61,270

Operating Expenses
$
64,229

 
$
53,842

 
$
52,573

 
$
47,003

 
$
47,874

Other Utility Income, Net of Taxes
$
812

 
$
847

 
$
742

 
$
704

 
$
579

Total Utility Operating Income
$
20,421

 
$
16,407

 
$
14,577

 
$
13,092

 
$
13,975

Interest and Debt Expense
$
8,581

 
$
5,674

 
$
5,853

 
$
4,744

 
$
5,198

Net Income
$
13,640

 
$
11,300

 
$
9,798

 
$
10,209

 
$
9,424

Cash Common Stock Dividends Paid
$
8,467

 
$
8,196

 
$
7,942

 
$
7,671

 
$
7,373

Dividend Payout Ratio from Continuing Operations
62
%
 
73
%
 
81
%
 
75
%
 
78
%
Weighted Average Common Shares Outstanding
8,763,418

 
8,610,070

 
8,531,741

 
8,447,950

 
8,377,428

Basic Earnings Per Common Share from Continuing Operations
$
1.55

 
$
1.31

 
$
1.14

 
$
1.20

 
$
1.12

Number of Shares Outstanding at Year End
10,939,486

 
8,755,398

 
8,676,849

 
8,573,744

 
8,463,269

ROE on Year End Common Equity
7.4
%
 
9.6
%
 
8.7
%
 
9.4
%
 
9.1
%
Declared Common Dividends Per Share
$
0.960

 
$
0.940

 
$
0.920

 
$
0.900

 
$
0.880

CONSOLIDATED BALANCE SHEET
 
 
 
 
 
 
 
 
 
Common Stockholders' Equity
$
185,349

 
$
118,189

 
$
113,191

 
$
108,569

 
$
103,476

Long-Term Debt (Consolidated, Excluding Current Maturities)
178,475

 
135,256

 
111,675

 
111,955

 
92,227

Preferred Stock
772

 
772

 
772

 
772

 
772

Total Capitalization
$
364,596

 
$
254,217

 
$
225,638

 
$
221,296

 
$
196,475

Stockholders' Equity (Includes Preferred Stock)
51
%
 
47
%
 
51
%
 
49
%
 
53
%
Long-Term Debt
49
%
 
53
%
 
49
%
 
51
%
 
47
%
Net Utility Plant
$
447,911

 
$
360,027

 
$
344,219

 
$
325,202

 
$
299,233

Total Assets
$
578,975

 
$
442,931

 
$
424,199

 
$
415,276

 
$
372,431

Book Value - Per Common Share
$
16.94

 
$
13.50

 
$
13.05

 
$
12.66

 
$
12.23

OPERATING REVENUES BY REVENUE CLASS
 
 
 
 
 
 
 
 
Residential
$
50,783

 
$
43,656

 
$
42,103

 
$
36,471

 
$
37,963

Commercial
10,138

 
8,621

 
7,725

 
6,729

 
7,150

Industrial
3,080

 
1,817

 
1,755

 
1,459

 
1,822

Public Authority
2,675

 
2,253

 
2,280

 
1,926

 
2,027

Fire Protection
15,592

 
11,890

 
11,430

 
10,958

 
10,606

Other (Including Non-Metered Accounts)
1,570

 
1,165

 
1,115

 
1,848

 
1,702

Total Operating Revenues
$
83,838

 
$
69,402

 
$
66,408

 
$
59,391

 
$
61,270

Number of Customers (End of Year)
121,791

 
90,023

 
89,402

 
88,534

 
87,361

Billed Consumption (Millions of Gallons)
8,332

 
6,616

 
6,958

 
6,472

 
6,895

Number of Employees
259

 
198

 
204

 
225

 
226



21



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

FINANCIAL CONDITION
Executive Overview

Connecticut Water Service, Inc. (the Company) is a non-operating holding company, whose income is derived from the earnings of its five active wholly-owned subsidiary companies, as of December 31, 2012: The Connecticut Water Company (Connecticut Water), The Maine Water Company (Maine Water), The Biddeford & Saco Water Company (BSWC), New England Water Utility Services, Inc. (NEWUS), and Chester Realty Company (Chester Realty). Connecticut Water, Maine Water, and BSWC are our regulated water companies (collectively, the Regulated Companies).

Effective January 1, 2012, the Company completed the acquisition of Aqua Maine, Inc. (“AM”) from Aqua America, Inc. (“AA”) for a total cash purchase price, adjusted at closing, of $35.6 million.  Subsequent to the closing, the name of AM was changed to The Maine Water Company (“Maine Water”).  Maine Water 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 makes 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 accounted for the acquisition in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 805 Business Combinations ("FASB ASC 805"), including the purchase price allocation.

In February 2012, Connecticut Water acquired a small water system in Hebron, Connecticut for $130,000.  The water system serves three multi-unit apartment buildings.

On July 18, 2012, the Company announced that it had reached an agreement to acquire The Biddeford & Saco Water Company, pending a vote of BSWC shareholders, approval by the MPUC and the satisfaction of other various conditions. This acquisition added approximately 15,500 additional customers in the State of Maine, in the communities of Biddeford, Saco, Old Orchard Beach and Scarborough. Under the terms of the agreement, the acquisition was executed through a stock-for-stock merger transaction valued at approximately $12.0 million. On November 7, 2012, the MPUC approved the transaction and the Company completed the transaction on December 10, 2012. Holders of BSWC common stock received an aggregate of 380,254 shares of the Company's common stock in a tax-free exchange. The Company is accounting for the acquisition in accordance with FASB ASC 805. The Company is still in the process of completing the purchase price allocation as required by FASB ASC 805.

As previously announced, the Company issued 1,696,250 shares of Common Stock on December 18, 2012 at a price to the public of $29.25 per share, generating gross proceeds of $49.6 million and net proceeds of $47.5 million. Wells Fargo Securities served as sole book-runner for the offering. The offering was made pursuant to a “shelf” registration statement (including a prospectus) previously filed with and declared effective by the Securities and Exchange Commission in July 2012. The Company used the net proceeds to pay down approximately $21.0 million of interim bank loans payable and approximately $18.0 million of debt issued to acquire The Maine Water Company. Additionally, the Company intends to use the remaining proceeds for capital expenditures and other general corporate purposes. The Company has a target capital structure that is equally balanced with equity and debt, this equity issuance has brought the Company closer to that target structure.

In 2012, approximately 83% of the Company’s net income was attributable to the water activities of the Regulated Companies, which combined had 121,791 customers throughout 76 municipalities in Connecticut and Maine, as of December 31, 2012.  The rates charged for service by Connecticut Water are subject to review and approval by the Connecticut Public Utilities Regulatory Authority (PURA). The rates charged for service by Maine Water and BSWC are subject to review and approval by the Maine Public Utilities Commission (MPUC).

Recognizing the importance of timely infrastructure replacement and improvement, the Company, along with other investor-owned regulated water companies in the State of Connecticut, 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. Similarly, the Maine Legislature is currently in the process of formalizing a Temporary Surcharge for Infrastructure Replacement and Repairs (TSIRR), a WICA-like mechanism that will allow for

22



expedited recovery of infrastructure improvements. The Company expects that our Regulated Companies in the State of Maine will be able to take advantage of the surcharge in late 2013 or early 2014.

On January 25, 2013, Connecticut Water filed a WICA application with the PURA requesting an additional 1.08% surcharge to customer bills related to approximately $6.5 million spending on WICA projects. This application also reduced the surcharge by 0.09% for the prior year reconciliation adjustment which expires April 1, 2013.  On January 30, 2013, Connecticut Water filed for a 0.10% reconciliation adjustment for the 2012 shortfall in WICA, to become effective April 1, 2013.  If approved as filed, Connecticut Water’s cumulative WICA surcharge will be 6.82%.

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 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.

In 2012, Connecticut Water added 56 private well owners in our existing service territories.  In 2013 and beyond, our Regulated Companies will continue its efforts to tie-in private well owners whose homes are in close proximity to our mains.  Additionally, our Regulated Companies will continue to work with developers to encourage public water use for new residential construction within our Regulated Companies' service areas.

While the Company plans to file timely rate cases, continue to make acquisitions and, in the future, utilize the WICA and TSIRR adjustments to allow for more timely recovery of investment in utility plant, it will also look to NEWUS and its Maine subsidiaries to increase its earnings in unregulated businesses.  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. Currently, the Company anticipates that Connecticut Water may file with the PURA for its next general rate case in 2014. Maine Water expects that it will file a general rate case with the MPUC for at least three of its water systems at some point during 2013. BSWC expects that it will not file a rate case until 2014 at the earliest.

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 allowed 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.  During 2012, the Company finalized the sale with the Town of Plymouth, Connecticut.  The Company and Town agreed on a sale price of $1.45 million, generating $982,000 in income in the Real Estate Transactions segment.

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

23



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.

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.  Our Regulated Companies accrue 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. Upon completion of any real estate transaction, the Company no longer has any continuing involvement in the property.

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.

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 2012 and 2011 pension expense was calculated using assumed discount rates of 4.60% and 5.50%, respectively. Our 2012 and 2011 post-retirement welfare expense was calculated using assumed discount rates of 4.40% and 5.35%, respectively.  In 2013, our pension and postretirement welfare expense will be calculated using assumed discount rates of 4.05% and 3.80%, respectively.  The following table shows how much a one percent change in our assumed discount rate would have changed our reported 2012 pension and postretirement expense:

 
Increase (Decrease) in Pension Expense
 
Increase (Decrease) in Postretirement Expense
1% Increase in the discount rate
$
(972,000
)
 
$
(177,000
)
1% Decrease in the discount rate
$
1,181,000

 
$
207,000


24




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% return on plan investments for 2012 and 2011, and a 3.50% rate of compensation increase for our pension and post-retirement welfare plans, in 2012 and 2011.  The assumed health care trend rate was 10% at December 31, 2012 and 2011, respectively.

Goodwill – As part of the purchase of regulated water companies, the Company recorded goodwill of $31.7 million representing the amount of the purchase price over net book value of the assets acquired.  The Company accounts for goodwill in accordance with Accounting Standards Codification 350 “Intangibles – Goodwill and Other” (“FASB ASC 350”). For a roll forward of the Company's goodwill balance, see Note 15.

As part of FASB ASC 350, the Company is required to perform an annual goodwill impairment test, which we perform as of December 31 each year. We update the test between the annual testing if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The analysis of a potential impairment of goodwill requires a two step process. Step one of the test involves comparing the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the reporting unit's fair value, step two must be performed to determine the amount, if any, of goodwill impairment loss. If the carrying value is less than fair value, further testing for goodwill impairment is not performed.

Step two of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill against the carrying value of the goodwill. In step two, determining the implied fair value of goodwill requires the valuation of a reporting unit's identifiable tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination on the testing date. The difference between the fair value of the entire reporting unit as determined in step one and the net fair value of all identifiable assets and liabilities represents the implied fair value of the goodwill. The goodwill impairment charge, if any, would be the difference between the carrying amount of goodwill and the implied fair value of goodwill upon the completion of step two.

In performing the annual goodwill impairment test, for purposes of the step one analysis, the Company bases the determination of the fair value of its reporting unit on the income approach, which estimates the fair value based on discounted future cash flows. Based on the completion of step one of the annual impairment analysis, management determined that the fair value of the Water Activities reporting unit was greater than its carrying value.

We may be required to recognize an impairment of goodwill in the future due to market conditions or other factors that are beyond our control and unrelated to our performance. Those market events could include a decline in the forecasted results in our business plan, significant adverse rate case results, changes in capital investment budgets or changes in interest rates that could permanently impair the fair value of a reporting unit. Recognition of impairments of a significant portion of goodwill would negatively impact our reported results of operation and total capitalization, the effects of which could be material and could make it more difficult to maintain our credit ratings, secure financing on favorable terms, maintain compliance with debt covenants and meet expectations of our regulators.

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 segment to increase in 2013 over 2012 levels, based on the acquisition of BSWC, along with modest growth in its Services and Rentals segment.  During 2013 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

25



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

On June 30, 2009, the Company entered into a $15 million line of credit agreement with CoBank, ACB, which was amended in May 2010, July 2011 and September 2012 and is currently scheduled to mature on July 1, 2014.  On October 12, 2012, the Company increased an additional line of credit from $15 million to $20 million, and extended its expiration date to June 30, 2014.  Due to the acquisition of BSWC, the total lines of credit available to the Company increased to $37.25 million due to BSWC's $2.25 million line of credit expiring June 30, 2013.  Interim Bank Loans Payable at December 31, 2012 and 2011 was approximately $1.7 million and $21.4 million, respectively, and represents the outstanding aggregate balances on these lines of credit.  As of December 31, 2012, the Company had $35.55 million in unused lines of credit.  Interest expense charged on interim bank loans will fluctuate based on market interest rates. As discussed below, the Company used a portion of the proceeds of a December 2012 equity issuance to pay down a portion of its outstanding balances on these lines of credit.

At December 31, 2012 and 2011, the weighted average interest rates on these short-term borrowings outstanding were 2.04% and 2.19%, 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 Note 15 below.

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 paid on April 20, 2012 and the last installment due on January 20, 2027.  Under the other Term Loan Note and Supplement, as amended in September 2012, CoBank loaned the Company $18.1 million, 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 January 2, 2014 or upon the Company raising equity capital, in the aggregate, up to the outstanding amount owed under the second Term Note and Supplement. On December 12, 2012, the Company issued approximately 1.7 million shares of common stock and used a portion of the proceeds to pay off the second Term Note. See "Equity Issuance" below for more detail.

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 or 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.

On August 3, 2012, Connecticut Water filed with PURA an application to refinance approximately $55 million of Connecticut Water's long-term debt. The application sought approval for Connecticut Water to issue four promissory notes in order to redeem five series of Connecticut Water's currently outstanding bonds. The Notes to be issued by Connecticut Water would have terms ranging from 8 to 20 years, will be unsecured and will have fixed interest rates, which would be lower than the rates on the currently outstanding bonds. On September 12, 2012, PURA issued a final decision allowing Connecticut Water to refinance the long-term debt.

On October 29, 2012, Connecticut Water entered into a Master Loan Agreement (the “Agreement”) with CoBank, ACB, (“CoBank”). Connecticut Water also delivered to CoBank four Promissory Note and Single Advance Term Loan Supplements, each dated October 29, 2012 (the “Promissory Notes”).  On the terms and subject to the conditions set forth in the Promissory Notes issued pursuant to the Agreement, CoBank agreed to make unsecured loans (each a “Loan,” and collectively the

26



“Loans”) to Connecticut Water from time to time, in an aggregate principal amount of up to $54,645,000. Connecticut Water used substantially all of the proceeds of the Loans to refinance the 1998 Series A, 1998 Series B, 2003A Series, 2003C Series and 2005A Series bonds outstanding.

The Agreement contains customary representations and warranties, which are in certain cases modified by “materiality” and “knowledge” qualifiers, and customary affirmative and negative covenants.  Subject to the payment of a surcharge described in the Agreement for Loans bearing interest at fixed rates, Connecticut Water may prepay the Loans in whole or in part at any time prior to each of the maturity dates of each Loan.

On December 7, 2012, Maine Water entered into an amended and restated Master Loan Agreement with CoBank, pursuant to which CoBank loaned Maine Water $1,965,000, which proceeds were used by Maine Water to reimburse itself for the repayment in full on November 29, 2012 of all principal, accrued interest, premiums, surcharges and other amounts owed by Maine Water pursuant to its long-term bonds previously issued in 1999.

Capital Budget

In 2012, the Company spent $24.7 million on capital projects.  The Company used a combination of its internally generated funds, borrowing under its available lines of credit, and the December 2011 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.

December 2012 Equity Issuance

As previously announced, the Company issued 1,696,250 shares of Common Stock on December 18, 2012 at a price to the public of $29.25 per share, generating gross proceeds of $49.6 million and net proceeds of $47.5 million. Wells Fargo Securities served as sole book-runner for the offering. The offering was made pursuant to a “shelf” registration statement (including a prospectus) previously filed with and declared effective by the Securities and Exchange Commission in July 2012. The Company used the net proceeds to pay down approximately $21.0 million of interim bank loans payable and approximately $18.0 million of debt issued to acquire The Maine Water Company. Additionally, the Company intends to use the remaining proceeds for capital expenditures and other general corporate purposes. The Company has a target capital structure that is equally balanced with equity and debt, this equity issuance has brought the Company closer to that target structure.

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 2013.

 
Gross Construction Expenditures
 
Construction Funded by Developers & Others
 
Construction Funded by Company
2012
$
25,933,000

 
$
1,280,000

 
$
24,653,000

2011
$
24,012,000

 
$
1,154,000

 
$
22,858,000

2010
$
26,692,000

 
$
452,000

 
$
26,240,000

2013 (Projected)
$
31,100,000

 
**

 
$
31,100,000


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


27



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 reflected S&P’s expectation of weaker credit metrics as a result of the debt the Company planned to incur to complete the acquisition of Aqua Maine 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.  On October 24, 2012, S&P reaffirmed this rating and outlook. While the Company completed a common equity offering in December of 2012 raising approximately $47.5 million of net proceeds for the Company, S&P has not yet revised their outlook.

Stock Plans

The Company offers a dividend reinvestment plan (DRIP) to all registered shareholders, customers and employees of our Regulated Companies, whereby participants can elect to have cash dividends directly reinvested into additional shares of the Company’s common stock.  During the years ended December 31, 2012 and 2011, participants reinvested $1,486,000 and $1,346,000, 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, 2012, 23,235 options were exercised resulting in approximately $631,000 in proceeds to the Company.  During the year ended December 31, 2011, 5,671 options were exercised resulting in approximately $146,000 in proceeds to the Company.  For the same period in 2010, 14,074 options were exercised resulting in approximately $287,000 in proceeds to the Company.

Enterprise Resource Planning Implementation

With the implementation of Connecticut Water’s new Enterprise Resource Planning ("ERP") system in the first quarter of 2010, Connecticut Water delayed customer billings in order to verify the integrity of the system and the accuracy of those bills prior to mailing.

Connecticut Water 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 Connecticut Water’s bad debt expense for the years ending December 31, 2010 and 2011, due to the reserve policy based upon aging of the receivables.  During 2011 and 2012, Connecticut Water saw progress towards resolving the collection issues, primarily through the ability to charge interest and shut off customers for non-payment.  Connecticut Water has experienced a reduction in the age of its accounts receivable in 2012 due in part to the collection process changes referred to above.

Construction Expenditures

During 2012, the Company incurred approximately $25.9 million of construction expenditures, including approximately $1,280,000 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.

Our Board of Directors has approved a $31.3 million construction budget for 2013, 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 2013 and 2014, it anticipates continued reinvestment to replace aging infrastructure and to seek recovery through periodic WICA and TSIRR applications.  The total cost of that investment is expected to exceed the amount of internally generated funds.  The Company expects to rely upon its internally generated funds and short-term borrowing facilities, to the extent required to meet any shortfall, over the next 12-24 months.

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.


28



The following table summarizes the Company’s future contractual cash obligations as of December 31, 2012:

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)
 
$
179,779

 
$
1,304

 
$
6,545

 
$
7,023

 
$
164,907

Interest on LTD
 
100,033

 
7,513

 
14,537

 
13,887

 
64,096

Operating Lease Obligations
 
146

 
96

 
28

 
20

 
2

Purchase Obligations (1) (2)
 
94,023

 
1,319

 
2,759

 
2,711

 
87,234

Long-Term Compensation Agreements (3)
 
58,017

 
4,259

 
12,215

 
12,125

 
29,418

Total (4) (5)
 
$
431,998

 
$
14,491

 
$
36,084

 
$
35,766

 
$
345,657


(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 2013 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.

RESULTS OF OPERATIONS

Overview of 2012 Results from Operations

Net Income for 2012 was $13,640,000, or $1.55 basic earnings per share, an increase of $2,340,000, or $0.24 basic earnings per share, compared to 2011.  The increase in earnings was principally due to higher net income in our Water Activities due to the acquisitions of Maine Water and BSWC.  Changes in net income for our segments were as follows (in thousands):

Business Segment
 
2012 Net Income
 
2011 Net Income
 
Increase (Decrease)
Water Activities
 
$
11,265

 
$
10,123

 
$
1,142

Real Estate
 
951

 
176

 
775

Services and Rentals
 
1,424

 
1,001

 
423

Total
 
$
13,640

 
$
11,300

 
$
2,340



29



Water Activities

The increase in net income from Water Activities for 2012 over 2011 was $1,142,000 or 11.5%.  A breakdown of the components of this increase, including and excluding the impact of the Maine Water and BSWC acquisitions, was as follows (in thousands):


Actual 2012
 
Actual 2011
 
Actual Increase (Decrease)
 
Maine Water and BSWC 2012
 
Adjusted Increase / (Decrease)
Operating Revenues
$
83,838

 
$
69,402

 
$
14,436

 
$
11,502

 
$
2,934

Operation and Maintenance
40,326

 
32,662

 
7,664

 
5,431

 
2,233

Depreciation
9,782

 
7,773

 
2,009

 
1,616

 
393

Income Taxes
6,422

 
6,966

 
(544
)
 
1,033

 
(1,577
)
Taxes Other than Income Taxes
7,699

 
6,441

 
1,258

 
937

 
321

Other Utility Income
812

 
847

 
(35
)
 
1

 
(36
)
Other Deductions
(813
)
 
(798
)
 
(15
)
 
(14
)
 
(1
)
Interest and Debt Expense (net of AFUDC)
8,343

 
5,486

 
2,857

 
998

 
1,859

Total Income from Water Activities
$
11,265

 
$
10,123

 
$
1,142

 
$
1,474

 
$
(332
)

Revenue from our water customers increased by $14,436,000, or 20.8%, to $83,838,000 for the year ended December 31, 2012 when compared to the same period in 2011.  The primary reasons for the increase in revenues was the added revenues associated with the acquisitions of Maine Water and BSWC which contributed $11,502,000 of revenue during the year ended December 31, 2012. Excluding those additional revenues, the Company saw an increase of $2,934,000, or 4.2%, for the year ended December 31, 2012. The primary drivers of higher revenues were the increased rates in 2012 associated with recurring WICA charges and an increase in customer late payment charges. The cumulative WICA surcharge effective at December 31, 2012 was 5.73% compared to 3.09% effective as at December 31, 2011.


30



Operation and Maintenance (O&M) expense increased in 2012 by $7,664,000, or 23.5%, during the year ended December 31, 2012 when compared to the same period in 2011 primarily due to the acquisitions of Maine Water and BSWC which contributed $5,431,000 of incremental O&M expense. The following table presents the components of O&M expense both including and excluding Maine Water and BSWC (in thousands):

Expense Components
 
Actual 2012
 
Actual 2011
 
Actual Increase (Decrease)
 
Maine Water and BSWC 2012
 
Adjusted Increase / (Decrease)
Pension
 
$
3,683

 
$
1,959

 
$
1,724

 
$
547

 
$
1,177

Other benefits
 
1,260

 
569

 
691

 
169

 
522

Labor
 
13,466

 
11,187

 
2,279

 
2,048

 
231

Maintenance
 
2,781

 
2,185

 
596

 
383

 
213

Vehicles
 
1,795

 
1,636

 
159

 
13

 
146

Amston Lake water quality monitoring costs (non-labor)
 
139

 

 
139

 

 
139

Regulatory commission expense
 
427

 
232

 
195

 
77

 
118

Purchased water
 
1,398

 
1,204

 
194

 
129

 
65

Investor relations
 
615

 
555

 
60

 

 
60

Outside services
 
1,531

 
1,028

 
503

 
451

 
52

Medical
 
2,453

 
2,040

 
413

 
384

 
29

Utility costs
 
3,605

 
3,269

 
336

 
356

 
(20
)
Property and liability insurance
 
1,020

 
977

 
43

 
108

 
(65
)
Customer
 
1,217

 
1,155

 
62

 
215

 
(153
)
Post retirement medical
 
851

 
1,129

 
(278
)
 
12

 
(290
)
Other
 
4,085

 
3,537

 
548

 
539

 
9

Total
 
$
40,326

 
$
32,662

 
$
7,664

 
$
5,431

 
$
2,233


The increase in O&M expenses excluding the incremental expense as a result of the acquisition of Maine Water and BSWC, was approximately $2,233,000, or approximately 6.8%, in 2012 when compared to the same period in 2011.  The changes in individual items, excluding the impact of the acquisitions, are described below:
Pension costs increased over the prior year primarily due to a reduction to the discount rate in 2012;
The increase in Other benefits was primarily attributable to an increase in costs associated with awards made under the Performance Stock Program and costs associated with the Company's non-officer incentive plan;
Labor costs increased by approximately 2.1% primarily due to regular wage and salary increases;
During the first quarter of 2012, the Company received notification of elevated copper levels observed in the homes of certain customers in our Amston Lake system.  As a result, Connecticut Water incurred costs associated with the monitoring of water sources and customer homes.  While copper levels have returned to normal, Connecticut Water continues to monitor the copper levels in the Amston Lake system; and
Regulatory commission expense increased primarily due to higher statutory fees and costs associated with cases heard before PURA.

The increases detailed above were offset by the following decreases to O&M expense:
Utility costs decreased primarily due to increased efficiency at our locations after conducting energy audits;
The decrease in Customer costs was primarily driven by the reduction in bad debt expense in the year ended December 31, 2012 compared to the same period of 2011 due to the progress made in resolving issues related to the 2010 ERP implementation discussed above.  Partially offsetting this decrease was an increase in collection costs; and
Post-retirement medical costs decreased primarily due to changes to the plan made in May 2011 that limited life time benefits to $100,000.

The Company’s Depreciation expense increased $2,009,000, or 25.8%, from 2012 to 2011.  Excluding the impact of the acquisitions of Maine Water and BSWC, the increase in depreciation expense was $393,000, or 5.1%. The primary driver of the increase in Depreciation expense was a higher Utility Plant balance in 2012.


31



Income Tax expense associated with Water Activities decreased by $544,000 in the year ended December 31, 2012 when compared to the same period in 2011 due to a lower effective tax rate. Excluding the impact of Maine Water and BSWC, Income Tax expense decreased by $1,577,000. The primary driver of the lower effective income tax rate was the flow-through benefit associated with the recently completed refinancing of $54.6 million of long-term debt.

Total Interest and Debt Expense increased by $2,857,000 in the year ended December 31, 2012 when compared to the same period in 2011. Excluding the impact of Maine Water and BSWC, Interest and Debt Expense increased by $1,859,000. The primary driver of this increase was the December 2011 Connecticut Water debt issuance of $24 million and interest costs associated with the approximately $36 million debt incurred to acquire Maine Water.

Real Estate

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.  During 2012, the Company completed a previously announced sale of approximately 175 acres of land for open space purposes to the Town of Plymouth, Connecticut. The transaction generated $1.45 million of revenue for the Real Estate segment and $982,000 in net income for the segment. During the third quarter of 2012, the Company made adjustments to tax reserves related to land sales in previous periods that lowered the Company's net income from this segment to $951,000 for the year ended December 31, 2012.

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.

Services and Rentals

Net income generated from the Services and Rental segment increased in 2012 by $423,000 over 2011 levels, approximately $134,000 of this increase was attributable to Maine Water.  The remainder of the increase was primarily due to an increase in revenues and decreases in general and administrative expenses in 2012.

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 (in thousands):

Business Segment
 
2011 Net Income
 
2010 Net Income
 
Increase (Decrease)
Water Activities
 
$
10,123

 
$
8,669

 
$
1,454

Real Estate
 
176

 
230

 
(54
)
Services and Rentals
 
1,001

 
899

 
102

Total
 
$
11,300

 
$
9,798

 
$
1,502



32



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 (in thousands):

 
2011
 
2010
 
Increase (Decrease)
Operating Revenues
$
69,402

 
$
66,408

 
$
2,994

Operation and Maintenance
32,662

 
33,105

 
(443
)
Depreciation
7,773

 
7,088

 
685

Income Taxes
6,966

 
5,323

 
1,643

Taxes Other than Income Taxes
6,441

 
6,271

 
170

Organizational Review Charge

 
786

 
(786
)
Other Utility Income
847

 
742

 
105

Other Deductions
(798
)
 
(226
)
 
(572
)
Interest and Debt Expense (net of AFUDC)
5,486

 
5,682

 
(196
)
Total Income from Water Activities
$
10,123

 
$
8,669

 
$
1,454


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 (in thousands):

Components of O&M
 
2011
 
2010
 
Increase (Decrease)
Maintenance
 
$
2,185

 
$
1,783

 
$
402

Other employee benefit costs
 
645

 
351

 
294

Medical expense
 
1,964

 
1,714

 
250

Vehicle
 
1,636

 
1,481

 
155

Post-retirement medical costs
 
1,128

 
983

 
145

Investor relations
 
555

 
475

 
80

Customer
 
1,154

 
1,075

 
79

Regulatory commission expense
 
232

 
301

 
(69
)
Property & liability insurance
 
978

 
1,071

 
(93
)
Water treatment (including chemicals)
 
2,389

 
2,553

 
(164
)
Utility costs
 
3,269

 
3,527

 
(258
)
Outside services
 
1,028

 
1,404

 
(376
)
Labor
 
11,187

 
12,093

 
(906
)
Other
 
4,312

 
4,294

 
18

Total O&M Expense
 
$
32,662

 
$
33,105

 
$
(443
)


33



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.

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.

34




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.

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 – Our Regulated Companies derive their 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.

Legal Proceedings – We are involved in various legal proceedings from time to time. Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we, or any of our subsidiaries are a party, or to which any of our properties is subject, that presents a reasonable likelihood of a material adverse impact on the Company’s financial condition, results of operations or cash flows.

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. Maine Water’s average allowed return on equity and return on rate base, as of December 31, 2012 were 10.00% and 8.31%, respectively.  BSWC’s allowed return on equity, as of December 31, 2012 was 10.00%.

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. Similarly, the Maine Legislature is currently in the process of formalizing a Temporary Surcharge for Infrastructure Replacement and Repairs, a WICA-like mechanism that will allow for expedited recovery of infrastructure improvements. The Company expects that our Regulated Companies in the State of Maine will be able to take advantage of the surcharge in late 2013 or early 2014.

Land Dispositions – The Company and its subsidiaries own additional parcels of land in Connecticut and Maine, which may be suitable in the future for disposition, either by sale or by donation to municipalities, other local governments or private

35



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.

Capital Expenditures – The Company has received approval from its Board of Directors to spend $31.3 million on capital expenditures in 2013, 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, 2012, 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.  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 entered into a $15 million line of credit agreement with CoBank, ACB, which was amended in May 2010, July 2011 and September 2012 and is currently scheduled to mature on July 1, 2014.  On October 12, 2012, the Company increased an additional line of credit from $15 million to $20 million, and extended its expiration date to June 30, 2014.  Due to the acquisition of BSWC, the total lines of credit available to the Company increased to $37.25 million due to BSWC's $2.25 million line of credit expiring June 30, 2013.  Interim Bank Loans Payable at December 31, 2012 and 2011 was approximately $1.7 million and $21.4 million, respectively, and represents the outstanding aggregate balances on these lines of credit.  As of December 31, 2012, the Company had $35.55 million in unused lines of credit.  Interest expense charged on interim bank loans will fluctuate based on market interest rates.

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, 2012, 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.  On January 1, 2012 and December 10, 2012, the Company acquired Maine Water and BSWC, respectively. While the company has completed the process of incorporating its controls and procedures into Maine Water, management did not complete documentation, evaluation and testing of internal controls over Maine Water's financial reporting as of December 31, 2012. As of December 31, 2012, the Company has begun the process of incorporating its controls and procedures into BSWC, however, management did not complete documentation, evaluation and testing of internal controls over BSWC's financial reporting. Therefore, the company did not include Maine Water or BSWC in its assessment of the

36



effectiveness of the company's internal controls over financial reporting as of December 31, 2012. Maine Water and BSWC represented approximately 10.8% and 3.7%, respectively, of the Company's total assets as of December 31, 2012 and approximately 12.4% and 0.2%, respectively, of the Company's total revenue for the year ended December 31, 2012. Based on our evaluation, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2012.  The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 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 – Other than the changes resulting from the acquisitions of Maine Water and BSWC discussed above, 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

None


37



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 29, 2013.  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

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
 
39
 
 
 

 
Report of Independent Registered Public Accounting Firm
 
40
 
 
 

 
Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010
 
41
 
 
 

 
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010
 
41
 
 
 

 
Consolidated Balance Sheets at December 31, 2012 and 2011
 
42
 
 
 

 
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
 
43
 
 
 

 
Notes to Consolidated Financial Statements
 
44
 
 
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, 2012, 2011 and 2010
 
79
 
 
 

 
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
 
73
 
 
 

 
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.
 
 


38



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

 
Page
 
Index to Consolidated Financial Statements and Schedule
 
39
 
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
40
 
 
 
 
 
Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010
 
41
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010
 
41
 
 
 
 
 
Consolidated Balance Sheets at December 31, 2012 and 2011
 
42
 
 
 
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
 
43
 
 
 
 
 
Notes to Consolidated Financial Statements
 
44
 
 
 
 
 
Schedule II Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2012, 2011 and 2010
 
79
 


39



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, comprehensive income and cash flows present fairly, in all material respects, the financial position of Connecticut Water Service, Inc. and its subsidiaries (the “Company”) at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 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, 2012, 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, included in Management's Report on Internal Control over Financial Reporting appearing 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.

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.

As described in Management's Report on Internal Control over Financial Reporting, management has excluded Maine Water Company and Biddeford and Saco Water Company from its assessment of internal control over financial reporting as of December 31, 2012 because they were acquired by the Company in purchase business combinations during 2012. We have also excluded Maine Water Company and Biddeford and Saco Water Company from our audit of internal control over financial reporting. Maine Water Company and Biddeford and Saco Water Company are wholly-owned subsidiaries whose total assets and total revenues represent 14.5% and 12.6%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2012.


/s/ PricewaterhouseCoopers, LLP

Florham Park, New Jersey
March 18, 2013



40



CONNECTICUT WATER SERVICE, INC.

CONSOLIDATED STATEMENTS OF INCOME
 
 
 
 
 
 
For the Years Ended December 31, (in thousands, except per share data)
 
2012

 
2011

 
2010

Operating Revenues
 
$
83,838

 
$
69,402

 
$
66,408

Operating Expenses
 
 

 
 

 
 

Operation and Maintenance
 
40,326

 
32,662

 
33,105

Depreciation
 
9,782

 
7,773

 
7,088

Income Taxes
 
6,422

 
6,966

 
5,323

Taxes Other Than Income Taxes
 
7,699

 
6,441

 
6,271

Organizational Review Charge
 

 

 
786

Total Operating Expenses
 
64,229

 
53,842

 
52,573

Net Operating Revenues
 
19,609

 
15,560

 
13,835

Other Utility Income, Net of Taxes
 
812

 
847

 
742

Total Utility Operating Income
 
20,421

 
16,407

 
14,577

Other Income (Deductions), Net of Taxes
 
 

 
 

 
 

Gain on Real Estate Transactions
 
951

 
176

 
230

Non-Water Sales Earnings
 
1,424

 
1,001

 
899

Allowance for Funds Used During Construction
 
238

 
188

 
171

Other
 
(813
)
 
(798
)
 
(226
)
Total Other Income (Deductions), Net of Taxes
 
1,800

 
567

 
1,074

Interest and Debt Expenses
 
 

 
 

 
 

Interest on Long-Term Debt
 
7,612

 
4,602

 
4,628

Other Interest Charges
 
575

 
651

 
784

Amortization of Debt Expense
 
394

 
421

 
441

Total Interest and Debt Expenses
 
8,581

 
5,674

 
5,853

Net Income
 
13,640

 
11,300

 
9,798

Preferred Stock Dividend Requirement
 
38

 
38

 
38

Total Net Income Applicable to Common Stock
 
$
13,602

 
$
11,262

 
$
9,760

Weighted Average Common Shares Outstanding:
 
 

 
 

 
 

Basic
 
8,763

 
8,610

 
8,532

Diluted
 
8,900

 
8,720

 
8,633

Earnings Per Common Share:
 
 

 
 

 
 

Basic
 
$
1.55

 
$
1.31

 
$
1.14

Diluted
 
$
1.53

 
$
1.29

 
$
1.13

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 

 
 

 
 

For the Years Ended December 31, (in thousands)
 
2012

 
2011

 
2010

 
 
 
 
 
 
 
Net Income Applicable to Common Stock
 
$
13,602

 
$
11,262

 
$
9,760

Other Comprehensive Income, net of tax
 
 

 
 

 
 

Qualified cash flow hedging instrument net of tax benefit of $1
 
 

 
 

 
 

in 2012, 2011, and 2010, respectively
 
3

 
3

 
3

Adjustment to post-retirement benefit plans, net of tax (benefit)
 
 

 
 

 
 

expense of $(389), $(231), and $12 in 2012, 2011 and 2010, respectively
 
(566
)
 
(361
)
 
16

Unrealized Investment gain (loss), net of tax expense of $40,
 
 

 
 

 
 

$31 and $30 in 2012, 2011 and 2010, respectively
 
60

 
(31
)
 
47

Other Comprehensive (Loss)/Income, net of tax
 
$
(503
)
 
$
(389
)
 
$
66

Comprehensive Income
 
$
13,099

 
$
10,873

 
$
9,826

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

41



CONNECTICUT WATER SERVICE, INC.

CONSOLIDATED BALANCE SHEETS
 
 
 
 
December 31, (in thousands, except share amounts)
 
2012

 
2011

ASSETS
 
 
 
 
Utility Plant
 
$
611,787

 
$
487,540

Construction Work in Progress
 
7,734

 
6,160


 
619,521

 
493,700

Accumulated Provision for Depreciation
 
(171,610
)
 
(133,673
)
Net Utility Plant
 
447,911

 
360,027

Other Property and Investments
 
6,394

 
5,563

Cash and Cash Equivalents
 
13,150

 
1,012

Accounts Receivable (Less Allowance, 2012 - $1,058; 2011 - $1,088)
 
11,526

 
8,436

Accrued Unbilled Revenues
 
7,233

 
6,477

Materials and Supplies, at Average Cost
 
1,629

 
1,126

Prepayments and Other Current Assets
 
2,824

 
1,830

Total Current Assets
 
36,362

 
18,881

Restricted Cash
 
9,820

 
15,930

Unamortized Debt Issuance Expense
 
7,411

 
7,296

Unrecovered Income Taxes - Regulatory Asset
 
9,871

 
7,355

Pension Benefits - Regulatory Asset
 
18,319

 
13,862

Post-Retirement Benefits Other Than Pension - Regulatory Asset
 
3,022

 
3,967

Goodwill
 
31,685

 
3,608

Deferred Charges and Other Costs
 
8,180

 
6,442

Total Regulatory and Other Long-Term Assets
 
88,308

 
58,460

Total Assets
 
$
578,975

 
$
442,931

CAPITALIZATION AND LIABILITIES
 
 

 
 

Common Stockholders' Equity:
 
 

 
 

Common Stock Without Par Value:
 
 

 
 

Authorized - 25,000,000 Shares - Issued and Outstanding:
 
 

2012 - 10,939,486; 2011 - 8,755,398
 
$
134,873

 
$
72,345

Retained Earnings
 
51,804

 
46,669

Accumulated Other Comprehensive Loss
 
(1,328
)
 
(825
)
Common Stockholders' Equity
 
185,349

 
118,189

Preferred Stock
 
772

 
772

Long-Term Debt
 
178,475

 
135,256

Total Capitalization
 
364,596

 
254,217

Current Portion of Long-Term Debt
 
1,304

 

Interim Bank Loans Payable
 
1,660

 
21,372

Accounts Payable and Accrued Expenses
 
10,016

 
7,166

Accrued Taxes
 

 
302

Accrued Interest
 
889

 
1,002

Other Current Liabilities
 
2,008

 
586

Total Current Liabilities
 
15,877

 
30,428

Advances for Construction
 
31,030

 
32,517

Contributions in Aid of Construction
 
77,372

 
60,679

Deferred Federal and State Income Taxes
 
40,869

 
31,075

Unfunded Future Income Taxes
 
8,992

 
7,355

Long-Term Compensation Arrangements
 
36,430

 
25,232

Unamortized Investment Tax Credits
 
1,490

 
1,313

Other Long-Term Liabilities
 
2,319

 
115

Total Long-Term Liabilities
 
198,502

 
158,286

Commitments and Contingencies
 


 


Total Capitalization and Liabilities
 
$
578,975

 
$
442,931

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

42



CONNECTICUT WATER SERVICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS