NOTE 16: ACQUISITIONS

The Heritage Village Water Company Acquisition

As previously announced on May 10, 2016, the Company announced that it had reached an agreement to acquire HVWC, pending a vote of HVWC shareholders, approval by PURA and MPUC and the satisfaction of other various closing conditions, pursuant to the terms of Agreement and Plan of Merger dated May 10, 2016 between and among HVWC, the Company, and HAC, Inc., the Company’s wholly-owned Connecticut subsidiary (the “Merger Agreement”). HVWC serves approximately 4,700 water customers in the Towns of Southbury, Middlebury, and Oxford, Connecticut and approximately 3,000 wastewater customers in the Town of Southbury, Connecticut.

The acquisition was executed through a stock-for-stock merger transaction valued at approximately $16.9 million. Holders of HVWC common stock received shares of the Company’s common stock in a tax-free exchange. In addition, the transaction reflected a total enterprise value of HVWC of approximately $21.5 million, with the $16.9 million paid to shareholders in a stock exchange and the assumption by the Company of approximately $4.6 million of debt held by HVWC at the time of the acquisition.

The Company received regulatory approval from MPUC on September 28, 2016 and from PURA on December 5, 2016, to proceed with the transaction. The shareholders of HVWC voted to approve the acquisition at a special meeting of HVWC’s shareholders held on February 27, 2017.

On February 27, 2017, the Company completed the acquisition of HVWC by completing the merger of the Company’s wholly-owned subsidiary HAC, Inc. with and into HVWC, with HVWC as the surviving corporation, pursuant to the terms of the Merger Agreement and Connecticut corporate law. Upon the effective time of the Merger, the holders of HVWC’s 1,620 issued and outstanding shares of common stock to receive an aggregate of 300,445 shares of the Company’s common stock in a tax-free exchange.

The Avon Water Company Acquisition

As previously announced on October 12, 2016, the Company announced that it had reached an agreement to acquire Avon Water, pending a vote of Avon Water shareholders, approval by PURA and the MPUC and the satisfaction of other various closing conditions, pursuant to the terms of that certain Agreement and Plan of Merger dated October 11, 2016 as amended on March 29, 2017 between and among Avon Water, the Company, and WC-A I, Inc., the Company’s wholly-owned Connecticut subsidiary (the “Merger Agreement”). Avon Water serves approximately 4,800 customers in the Farmington Valley communities of Avon, Farmington, and Simsbury, Connecticut.

On February 10, 2017, Connecticut Water received regulatory approval from MPUC and on April 12, 2017, Connecticut Water received regulatory approval from PURA to proceed with the transaction. The shareholders of Avon Water voted to approve the acquisition at a special meeting of Avon Water’s shareholders held on June 16, 2017.

Effective July 1, 2017, the Company completed the acquisition of Avon Water by completing the merger of Connecticut Water’s wholly-owned subsidiary WC-A I, Inc. with and into Avon Water, with Avon Water as the surviving corporation, pursuant to the terms of the Merger Agreement and Connecticut corporate law. Upon the effective time of the Merger, the holders of Avon Water’s 122,289 issued and outstanding shares of common stock became entitled to receive the following merger consideration for each share of Avon Water common stock held: (i) a cash payment of $50.11; and (ii) a stock consideration component, consisting of 3.97 shares of the Company’s common stock.

The transaction was completed through a stock-for-stock exchange where Avon Water shareholders received the Company’s common stock valued at approximately $26.9 million, in a tax-free exchange, and a cash payment of $6.1 million for a total payment to shareholders of $33.0 million. The transaction reflects a total enterprise value of approximately $39.1 million, with the $33.0 million paid to shareholders and the assumption by the Company of approximately $6.1 million of debt of Avon Water.

The following table summarizes the fair value of the HVWC assets acquired on February 27, 2017 and the Avon Water assets on July 1, 2017, the dates of the acquisitions (in thousands):



	HVWC		Avon Water
Net Utility Plant	$	28,861	$	28,330
Cash and Cash Equivalents	1,336		455
Accounts Receivable, net	355		379
Prepayments and Other Current Assets	179		243
Accrued Unbilled Revenues	47		467
Materials and Supplies, at Average Cost	63		151
Goodwill	12,777		23,472
Unrecovered Income Taxes - Regulatory Asset	—		3,619
Deferred Charges and Other Costs	343		799
Total Assets Acquired	$	43,961	$	57,915

Long-Term Debt, including current portion	$	4,642	$	3,145
Accounts Payable and Accrued Expenses	149		584
Interim Bank Loans Payable	—		2,500
Other Current Liabilities	238		32
Advances for Construction	1,897		1,537
Deferred Federal and State Income Taxes	1,680		1,880
Unfunded Future Income Taxes	—		3,619
Other Long-Term Liabilities	—		314
Total Liabilities Assumed	$	8,606	$	13,611

Contributions in Aid of Construction	18,452		11,560

Net Assets Acquired	$	16,903	$	32,744

The estimated fair values of the assets acquired and the liabilities assumed were determined based on the accounting guidance for fair value measurement under GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value analysis assumes the highest and best use of the assets by market participants. The allocation of the purchase price includes an adjustment to fair value related to the fair value of HVWC’s and Avon Water’s long term debt and any associated deferred taxes. Additionally, adjustments were made to deferred taxes based on the Company’s ability to utilize net operating loss carryforwards that had valuation allowances at the acquired companies. The excess of the purchase price paid over the estimated fair value of the assets acquired and the liabilities assumed was recognized as goodwill, none of which is deductible for tax purposes. Goodwill recognized as part of the acquisitions of HVWC and Avon Water are a part of the Company’s Water Operations segment.

The following unaudited pro forma summary for the years ended December 31, 2018, 2017, and 2016 presents information as if HVWC and Avon Water had each been acquired on January 1, 2016 and assumes that there were no other changes in our operations. The following pro forma information does not necessarily reflect the actual results that would have occurred had the Company operated the businesses since January 1, 2016, nor is it necessarily indicative of the future results of operations of the combined companies (in thousands):



	2018		2017		2016
Operating Revenues	$	116,665	$	109,715	$	107,309
Other Water Activities Revenues	1,639		1,554		1,498
Real Estate Revenues	1,350		212		8
Service and Rentals Revenues	5,182		5,121		5,417
Total Revenues	$	124,836	$	116,602	$	114,232

Net Income	$	16,695	$	25,040	$	24,300

Basic Earnings per Average Share Outstanding	$	1.40	$	2.12	$	2.06
Diluted Earnings per Average Share Outstanding	$	1.38	$	2.08	$	2.02

The following table summarizes the results of HVWC and Avon Water from the dates of acquisition to December 31, 2018 (from February 27, 2017 for HVWC and July 1, 2017 for Avon Water) and is included in the Consolidated Statement of Income for the period (in thousands):



	2018		2017
Operating Revenues	$	8,616	$	5,802
Other Water Activities Revenues	133		74
Real Estate Revenues	—		—
Service and Rentals Revenues	83		28
Total Revenues	$	8,832	$	5,904

Net Income	$	355	$	1,519

Basic Earnings per Average Share Outstanding	$	0.03	$	0.13
Diluted Earnings per Average Share Outstanding	$	0.03	$	0.13