CONNECTICUT WATER SERVICE INC / CT - FORM 10-Q

Attached files

file	filename
EX-31.1 - CEO SOX CERTIFICATION - CONNECTICUT WATER SERVICE INC / CT	exhibit311q12017.htm
EX-32 - SOX CERTIFICATION - CONNECTICUT WATER SERVICE INC / CT	exhibit32q12017.htm
EX-31.2 - CFO SOX CERTIFICATION - CONNECTICUT WATER SERVICE INC / CT	exhibit312q12017.htm
EX-10.1 - DEFERRED COMPENSATION AGREEMENT - CONNECTICUT WATER SERVICE INC / CT	exhibit101-richardknowlton.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017 or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________

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 offices)		06413 (Zip Code)

(860) 669-8636

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 12 months (or 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 x No ¨

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 x No ¨

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



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date

11,564,346

Number of shares of common stock outstanding, April 1, 2016

(Includes 228,109 common stock equivalent shares awarded under the Performance Stock Programs)

Table of Contents

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

Financial Report

March 31, 2017

TABLE OF CONTENTS



Part I, Item 1: Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	3

Condensed Consolidated Statements of Income for the three months ended March 31, 2017 and 2016	4

Condensed Consolidated Statements of Comprehensive Income for the three ended March 31, 2017 and 2016	5

Condensed Consolidated Statements of Retained Earnings for the three months ended March 31, 2017 and 2016	6

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016	7

Notes to Condensed Consolidated Financial Statements	8

Part I, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Part I, Item 3: Quantitative and Qualitative Disclosures About Market Risk	29

Part I, Item 4: Controls and Procedures	30

Part II, Item 1: Legal Proceedings	30

Part II, Item 1A: Risk Factors	30

Part II, Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	30

Part II, Item 6: Exhibits	31

Signature Page Exhibit 31.1 Exhibit 31.2 Exhibit 32 Exhibit 101.INS Exhibit 101.SCH Exhibit 101.CAL Exhibit 101.DEF Exhibit 101.LAB Exhibit 101.PRE	32

Table of Contents

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)



ASSETS	March 31, 2017			December 31, 2016
Utility Plant	$	817,897		$	777,860
Construction Work in Progress	40,679			33,748
	858,576			811,608
Accumulated Provision for Depreciation	(221,966		)	(210,212		)
Net Utility Plant	636,610			601,396
Other Property and Investments	9,445			9,071
Cash and Cash Equivalents	2,955			1,564
Accounts Receivable (Less Allowance, 2017 - $1,155; 2016 - $1,100)	11,648			13,024
Accrued Unbilled Revenues	8,000			8,171
Materials and Supplies, at Average Cost	1,708			1,536
Prepayments and Other Current Assets	6,797			5,069
Total Current Assets	31,108			29,364
Unrecovered Income Taxes - Regulatory Asset	97,386			93,264
Pension Benefits - Regulatory Asset	11,826			12,266
Post-Retirement Benefits Other Than Pension - Regulatory Asset	205			265
Goodwill	43,045			30,427
Deferred Charges and Other Costs	8,924			8,449
Total Regulatory and Other Long-Term Assets	161,386			144,671
Total Assets	$	838,549		$	784,502
CAPITALIZATION AND LIABILITIES
Common Stockholders’ Equity:
Common Stock Without Par Value: Authorized - 25,000,000 Shares
Issued and Outstanding: 2017 - 11,564,346; 2016 - 11,248,458	$	163,139		$	145,739
Retained Earnings	92,007			91,213
Accumulated Other Comprehensive (Loss)	(821		)	(924		)
Common Stockholders’ Equity	254,325			236,028
Preferred Stock	772			772
Long-Term Debt	205,589			197,047
Total Capitalization	460,686			433,847
Current Portion of Long-Term Debt	5,185			4,859
Interim Bank Loans Payable	35,089			32,953
Accounts Payable and Accrued Expenses	8,412			13,116
Accrued Interest	1,486			1,012
Current Portion of Refund to Customers - Regulatory Liability	501			855
Other Current Liabilities	3,165			2,330
Total Current Liabilities	53,838			55,125
Advances for Construction	22,844			19,127
Deferred Federal and State Income Taxes	52,083			50,558
Unfunded Future Income Taxes	95,279			90,977
Long-Term Compensation Arrangements	34,097			33,540
Unamortized Investment Tax Credits	1,170			1,189
Refund to Customers - Regulatory Liability	43			108
Other Long-Term Liabilities	4,887			5,074
Total Long-Term Liabilities	210,403			200,573
Contributions in Aid of Construction	113,622			94,957
Commitments and Contingencies	—			—
Total Capitalization and Liabilities	$	838,549		$	784,502

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

Table of Contents

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended March 31, 2017 and 2016

(Unaudited)

(In thousands, except per share amounts)



	2017			2016
Operating Revenues	$	22,463		$	21,552
Operating Expenses
Operation and Maintenance	11,236			11,289
Depreciation	3,692			3,398
Income Tax Expense	(190		)	393
Taxes Other Than Income Taxes	2,605			2,449
Total Operating Expenses	17,343			17,529
Net Operating Revenues	5,120			4,023
Other Utility Income, Net of Taxes	165			155
Total Utility Operating Income	5,285			4,178
Other Income (Deductions), Net of Taxes
Gain on Real Estate Transactions	33			—
Non-Water Sales Earnings	258			395
Allowance for Funds Used During Construction	336			232
Other	(9		)	(32		)
Total Other Income, Net of Taxes	618			595
Interest and Debt Expense
Interest on Long-Term Debt	2,061			1,736
Other Interest Income, Net	(260		)	(142		)
Amortization of Debt Expense and Premium, Net	34			31
Total Interest and Debt Expense	1,835			1,625
Net Income	4,068			3,148
Preferred Stock Dividend Requirement	9			9
Net Income Applicable to Common Stock	$	4,059		$	3,139
Weighted Average Common Shares Outstanding:
Basic	11,139			10,992
Diluted	11,365			11,211
Earnings Per Common Share:
Basic	$	0.36		$	0.29
Diluted	$	0.36		$	0.28
Dividends Per Common Share	$	0.2825		$	0.2675

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

Table of Contents

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2017 and 2016

(Unaudited)

(In thousands)



	2017		2016
Net Income	$	4,068	$	3,148
Other Comprehensive Income/(Loss), net of tax
Reclassification to Pension and Post-Retirement Benefits Other than Pension, net of tax (expense) of $(25) and $(22) in 2017 and 2016	39		35
Unrealized gain (loss) on investments, net of tax (expense) benefit of $(41) and $10 in 2017 and 2016	64		(15		)
Other Comprehensive Income, net of tax	103		20
Comprehensive Income	$	4,171	$	3,168

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

Table of Contents

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

For the Three Months Ended March 31, 2017 and 2016

(Unaudited)

(In thousands, except per share amounts)



	2017		2016
Balance at Beginning of Period	$	91,213	$	80,378
Net Income	4,068		3,148
	95,281		83,526
Dividends Declared:
Cumulative Preferred, Class A, $0.20 per share	3		3
Cumulative Preferred, Series $0.90, $0.225 per share	6		6
Common Stock - 2017 $0.2825 per share; 2016 $0.2675 per share	3,265		2,996
	3,274		3,005
Balance at End of Period	$	92,007	$	80,521

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

Table of Contents

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2017 and 2016

(Unaudited)

(In thousands)



	2017			2016
Operating Activities:
Net Income	$	4,068		$	3,148
Adjustments to Reconcile Net Income to Net Cash and Cash Equivalents Provided by
Operating Activities:
Deferred Revenues	(513		)	(340		)
Provision for Deferred Income Taxes and Investment Tax Credits, Net	(528		)	710
Allowance for Funds Used During Construction	(336		)	(232		)
Depreciation and Amortization (including $271 and $243 in 2017 and 2016, respectively, charged to other accounts)	3,963			3,641
Gain on Real Estate Transactions	(33		)	—
Change in Assets and Liabilities:
Decrease in Accounts Receivable and Accrued Unbilled Revenues	1,892			1,408
Increase in Prepaid Income Taxes and Prepayments and Other Current Assets	(1,068		)	(2,536		)
(Increase) Decrease in Other Non-Current Items	909			(532		)
Decrease in Accounts Payable, Accrued Expenses and Other Current Liabilities	(1,692		)	(3,513		)
Total Adjustments	2,594			(1,394		)
Net Cash and Cash Equivalents Provided by Operating Activities	6,662			1,754
Investing Activities:
Net Additions to Utility Plant Used	(10,163		)	(11,753		)
Proceeds from the Sale of Land	212			—
Cash Acquired	1,336			—
Release of Restricted Cash	—			649
Net Cash and Cash Equivalents Used in Investing Activities	(8,615		)	(11,104		)
Financing Activities:
Net Proceeds from Interim Bank Loans	35,089			29,472
Net Repayment of Interim Bank Loans	(32,953		)	(16,085		)
Proceeds from the Issuance of Long-Term Debt	5,000			—
Costs to Issue Long-Term Debt and Common Stock	(2		)	—
Proceeds from Issuance of Common Stock	339			425
Repayment of Long-Term Debt Including Current Portion	(808		)	(762		)
Advances (to) from Others for Construction	(47		)	114
Cash Dividends Paid	(3,274		)	(3,005		)
Net Cash and Cash Equivalents Provided by Financing Activities	3,344			10,159
Net Increase in Cash and Cash Equivalents	1,391			809
Cash and Cash Equivalents at Beginning of Period	1,564			731
Cash and Cash Equivalents at End of Period	$	2,955		$	1,540
Non-Cash Investing and Financing Activities:
Stock-for-stock acquisition of The Heritage Village Water Company	$	16,903		$	—
Non-Cash Contributed Utility Plant	$	2,152		$	431
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest	$	1,384		$	871
State and Federal Income Taxes	$	190		$	130

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

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.	Basis of Preparation of Financials

The condensed consolidated financial statements included herein have been prepared by Connecticut Water Service, Inc. (the “Company”) and its wholly-owned subsidiaries, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that are of a normal recurring nature which are, in the opinion of management, necessary to a fair statement of the results for interim periods. Certain information and footnote disclosures have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The Company’s primary operating subsidiaries are: The Connecticut Water Company (“Connecticut Water”) and The Heritage Village Water Company (“HVWC”) in the State of Connecticut and The Maine Water Company (“Maine Water”) in the State of Maine. The Condensed Consolidated Balance Sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “10-K”).

The results for interim periods are not necessarily indicative of results to be expected for the year since the consolidated earnings are subject to seasonal factors. Effective February 27, 2017, the Company acquired HVWC, discussed further in Note 11 below. As a result, the Company’s Condensed Consolidated Balance Sheet at December 31, 2016 and the Condensed Consolidated Statements of Net Income, Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements Retained Earnings and Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 do not include HVWC. The Condensed Consolidated Statements of Net Income, Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements Retained Earnings and Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 do include HVWC’s results for the approximate one month the Company owned HVWC during the period. HVWC’s assets and liabilities are included in the Condensed Consolidated Balance Sheet as of March 31, 2017.

As noted in Note 11 below, 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 results of the wastewater line of business are included in the Company’s Water Operations segment.

Regulatory Matters

The rates we charge our water customers in Connecticut and Maine are established under the jurisdiction of and are approved by the Connecticut Public Utilities Regulatory Authority (“PURA”) and the Maine Public Utilities Commission (“MPUC”), respectively. 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 March 31, 2017, were 9.75% and 7.32%, respectively. HVWC’s blended waster and wastewater allowed returns on equity and returns on rate base, effective March 31, 2017, were 10.10% and 7.19%, respectively. Maine Water’s average allowed return on equity and return on rate base, effective March 31, 2017, were 9.50% and 7.96%, respectively. The PURA establishes rates in Connecticut on a company-wide basis while the MPUC approves Maine Water’s rates on a division-by-division basis. Both Connecticut Water and Maine Water are allowed to add surcharges to customers’ bills in order to recover certain approved capital projects in between full rate cases, as well as approved surcharges for Water Revenue Adjustments, as discussed in more detail below, in Connecticut. HVWC has not added surcharges to customers’ bills in order to recover certain approved capital projects as of March 31, 2017, however, HVWC has begun to utilize Water Revenue Adjustments as of March 31, 2017.

Avon Water Company Acquisition

On October 11, 2016, the Company entered into an Agreement and Plan of Merger (the “Avon Agreement”) with The Avon Water Company, a specially-chartered Connecticut corporation (“Avon Water”). Founded in 1911, Avon Water serves about 4,800 customers in the Farmington Valley communities of Avon, Farmington, and Simsbury, Connecticut, and is located near Connecticut Water’s existing operations in Avon and Farmington.

The Boards of Directors of the Company and Avon Water have each unanimously approved the Avon Agreement and the transactions contemplated thereby. Consummation of the merger is subject to regulatory, Avon Water shareholder and other specified approvals described below and is expected to be consummated by the end of the third quarter of 2017.

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

payment of $50.37; and (ii) a stock consideration component, consisting of 4.38 shares of Company Common Stock, provided that the Company’s Share Price (as defined below) over a specified period prior to the closing date of the merger is equal to or greater than $45.00 but less than or equal to $52.00. If the Company’s Share Price is less than $45.00 as of the closing date, each share of Avon Water common stock issued and outstanding at the time of the closing of the merger will be exchanged and converted into the right to receive that number of shares of Company Common Stock equal to 197.10 divided by the Company’s Share Price, rounded to the nearest hundredth. If the Company’s Share Price is more than $52.00 as of the closing date, each share of Avon Water common stock issued and outstanding at the time of the closing of the merger will be exchanged and converted into the right to receive that number of shares of Company Common Stock equal to 227.76 divided by the Company’s Share Price, rounded to the nearest hundredth. The “Company’s Share Price” is determined by calculating an average of the closing prices for shares of the Company’s Common Stock on the Nasdaq Stock Market, LLC for the twenty trading days immediately preceding the third business day prior to the closing of the Merger. Holders of Avon Water common stock prior to the Merger will receive cash in lieu of fractional shares of Company Common Stock.

The Avon Agreement contains customary representations and warranties regarding, on the one hand, Avon Water, its business and operations and related matters, and, on the other hand, the Company, made by the parties as of specified dates, and customary affirmative and negative covenants with respect to the conduct of Avon Water’s business prior to the closing. In the Avon Agreement, Avon Water has agreed that its Board of Directors will, subject to certain exceptions, recommend adoption of the Avon Agreement by Avon Water shareholders and the transactions contemplated by the Avon Agreement. Avon Water has also agreed: (i) to cause a special meeting of shareholders of Avon Water to be held to consider the approval and adoption of the Agreement and the transactions contemplated thereby; and (ii) not to solicit proposals relating to alternative business combination transactions or, subject to certain exceptions, enter into discussions concerning confidential information in connection with alternative business combination transactions.

The obligation of the parties to complete the merger is subject to the satisfaction or waiver on or prior to the closing date of certain specified conditions, including the following: (i) receipt of final and non-appealable orders from each of PURA and the MPUC approving the merger in form and substance reasonably acceptable to the parties; (ii) approval of the merger by the affirmative vote of the holders of not less than two-thirds (66 2/3^rd %) Avon Water’s issued and outstanding shares of common stock as required under the Connecticut Business Corporation Act; (iii) the receipt of all other necessary consents or approvals to the merger; (iv) approval for listing of the Company Common Stock to be issued in the merger on the Nasdaq Stock Market, LLC; (v) the absence of laws, orders, judgments and injunctions that restrain, enjoin or otherwise prohibit consummation of the Merger; (vi) effectiveness under the Securities Act of the Company’s registration statement on Form S-4 relating to the issuance of the Company Common Stock in the merger and absence of any stop order in respect thereof or proceedings by the SEC for that purpose; (vii) the receipt of a legal opinion from counsel to Avon Water regarding certain corporate law matters; (viii) the receipt of a customary tax opinion from counsel to the Company that will state that the merger will qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986; (ix) the accuracy of representations and warranties with respect to the businesses of Avon Water and the Company and compliance by Avon Water and the Company with their respective covenants contained in the Avon Agreement; (xi) no event(s) occurring that could reasonably be expected to result in either a “Company Material Adverse Effect” or a “CWS Material Adverse Effect” (each, as defined in the Avon Agreement) and (xii) holders of no more than 5% of Avon Water’s common stock have exercised appraisal rights under Connecticut law.

The Avon Agreement contains certain termination rights for both the Company and Avon Water and further provides that, in connection with the termination of the Avon Agreement under specified circumstances, Avon Water may be required to pay to the Company, or the Company may be required to pay to Avon Water, a termination fee of $200,000 in cash, as liquidated damages.

On March 29, 2017, the parties amended the Avon Agreement to extend the End Date (as defined in the Avon Agreement) from March 31, 2017 to June 30, 2017. The Amendment also amends the Avon Agreement to permit Avon Water to pay additional cash dividends prior to June 30, 2017.

During the fourth quarter of 2016, Connecticut Water filed an application with PURA seeking approval of the transaction. On April 12, 2017, PURA approved the transaction.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Maine Water Land Sale

On March 11, 2016, Maine Water entered into a purchase and sale agreement with the Coastal Mountains Land Trust, a Maine nonprofit corporation (the “Land Trust”) pursuant to which Maine Water agreed to sell two conservation easements to the Land Trust on approximately 1,300 acres of land located in the towns of Rockport, Camden and Hope, in Knox County, Maine valued in the aggregate at $3.1 million. The land had a book value of approximately $600,000 at March 31, 2017 and December 31, 2016 and is included in “Utility Plant” on the Company’s “Condensed Consolidated Balance Sheets”. The easements and purchase prices are as follows:

1.Ragged Mountain Mirror Lake Conservation Easement: $1,875,000; and

2.Grassy Pond conservation Easement: $600,000.

The two easement sale and donation transactions are expected to close no later than December 31, 2017 and December 31, 2019, respectively. Maine Water will make a $200,000 contribution to the Land Trust upon completion of the closing of the first easement sale. Maine Water also expects to claim a charitable deduction for the $600,000 in excess of the fair market value of the second easement over the $600,000 sale price.

Connecticut Rates

Connecticut Water’s Water Infrastructure Conservation Adjustment (“WICA”) was 7.13% and 4.19% at March 31, 2017 and 2016, respectively. On January 26, 2017, Connecticut Water filed a WICA application with the PURA requesting a 1.09% surcharge to customers’ bills, representing approximately $8.5 million in WICA related projects. Additionally, on February 9, 2017, Connecticut Water filed its annual WICA reconciliation which requested a 0.06% surcharge, which would replace the 0.03% reconciliation adjustment filed in January 2016. During March 2017, PURA approved both applications as filed, and, effective April 1, 2017, Connecticut Water’s cumulative WICA surcharge was 8.25%. As of March 31, 2017, HVWC has not filed for a WICA surcharge.

Since 2013, Connecticut law has authorized a Water Revenue Adjustment (“WRA”) to reconcile actual water demands with the demands projected in the last general rate case and allows companies to adjust rates as necessary to recover the revenues approved by PURA in the last general rate case. The WRA removes the financial disincentive for water utilities to develop and implement effective water conservation programs. The WRA allows water companies to defer on the balance sheet, as a regulatory asset or liability, for later collection from or crediting to customers the amount by which actual revenues deviate from the revenues allowed in the most recent general rate proceedings, including WICA proceedings. Additionally, projects eligible for WICA surcharges were expanded to include energy conservation projects, improvements required to comply with streamflow regulations, and improvements to acquired systems.

Connecticut Water and HVWC’s allowed revenues for the three months ended March 31, 2017, as approved by PURA during each company’s most recent general rate case and including subsequently approved WICA surcharges, are approximately $17.8 million. Through normal billing for the three months ended March 31, 2017, revenue for Connecticut Water and HVWC would have been approximately $17.2 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water and HVWC recorded $0.6 million in additional revenue for the three months ended March 31, 2017.

Maine Rates

In Maine, the overall, cumulative Water Infrastructure Charge (“WISC”) for all divisions was 6.6% and 3.1% as of March 31, 2017 and 2016, respectively.

A water revenue adjustment mechanism law in Maine became available to regulated water utilities in Maine on October 15, 2015. Maine Water is currently precluded from seeking new rates due to various agreements with the MPUC, but is evaluating how and when this new mechanism can be implemented.


2.	Pension and Other Post-Retirement Benefits

The following tables set forth the components of pension and other post-retirement benefit costs for the three months ended March 31, 2017 and 2016.

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Pension Benefits

Components of Net Periodic Cost (in thousands):



	Three Months
Period ended March 31,	2017			2016
Service Cost	$	514		$	521
Interest Cost	794			794
Expected Return on Plan Assets	(1,101		)	(979		)
Amortization of:
Prior Service Cost	4			4
Net Recognized Loss	545			511
Net Periodic Benefit Cost	$	756		$	851

The Company anticipates making a total contribution of approximately $2,971,000 in 2017 for the 2016 plan year during the three months ended March 31, 2017.

Post-Retirement Benefits Other Than Pension (PBOP)

Components of Net Periodic Cost (in thousands):



	Three Months
Period ended March 31,	2017			2016
Service Cost	$	93		$	103
Interest Cost	133			136
Expected Return on Plan Assets	(88		)	(85		)
Other	56			56
Amortization of:
Prior Service Credit	(45		)	(100		)
Recognized Net Loss	(9		)	8
Net Periodic Benefit Cost	$	140		$	118


3.	Earnings per Share

Earnings per weighted average common share are calculated by dividing net income applicable to common stock by the weighted average number of shares of common stock outstanding during the respective periods as detailed below (diluted shares include the effect of stock awards):



Three months ended March 31,	2017		2016
Common Shares Outstanding End of Period:	11,564,346		11,218,582
Weighted Average Shares Outstanding (Days Outstanding Basis):
Basic	11,139,110		10,992,486
Diluted	11,364,879		11,211,283

Basic Earnings per Share	$	0.36	$	0.29
Dilutive Effect of Stock Awards	—		(0.01		)
Diluted Earnings per Share	$	0.36	$	0.28

Total unrecognized compensation expense for all stock awards was approximately $0.7 million as of March 31, 2017 and will be recognized over a weighted average period of 1.4 years.


4.	Recently Adopted and New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“No. 2014-09”) which amends its guidance related to revenue recognition. ASU No. 2014-09 requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. ASU No. 2014-09 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2016, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, however early adoption is not permitted. On April 1, 2015, the FASB voted for a one-year deferral of the effective date of ASU No. 2014-09, making ASU No. 2014-09 effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently determining its implementation approach, retrospectively to each prior reporting period presented or retrospectively with a cumulative effect adjustment to retained earnings for initial application, and assessing the impact that this guidance may have on our consolidated financial position, including its impact on the Company’s contracted services provided to water utilities and the impact ASU No. 2014-09 will have on the Company’s accounting surrounding Contributions in Aid of Construction.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” (“ASU No. 2015-11”) which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged under the updated guidance for inventory that is measured using last-in, last-out (“LIFO”). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company uses average cost to value its inventory and, therefore, ASU No. 2015-11 did not have an impact on the Company.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, (“ASU No. 2016-02”), which will require lessees to recognize the following for all leases at the commencement date of a lease: a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Public business entities should apply the amendments in ASU No. 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact of this standard on its consolidated financial statements and footnote disclosures, but does not expect that the adoption of this guidance will materially impact our consolidated financial position.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU No. 2016-15”). The amendments ASU No. 2016-15 clarify the classification for eight different types of activities, including debt prepayment and extinguishment costs, proceeds from insurance claims and distributions from equity method investees. For public business entities, ASU No. 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company is currently assessing the impact of this standard on its Consolidated Statements of Cash Flows, but does not expect that the adoption of this guidance will materially impact our consolidated financial position or results of operation.

In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," (“ASU 2017-07”) which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under ASU 2017-07, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line item that includes the service cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period in which the financial statements have not been issued. Entities must use a retrospective transition method to adopt the requirement for separate presentation of the income statement service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The Company is currently evaluating the impact of adopting this guidance.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


5.	Accumulated Other Comprehensive Income

The changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the three months ended March 31, 2017 and 2016 are as follows (in thousands):



Three months ended March 31, 2017	Unrealized Gains on Investments			Defined Benefit Items			Total
Beginning Balance (a)	$	235		$	(1,159	)	$	(924	)
Other Comprehensive Income Before Reclassification	64			—			64
Amounts Reclassified from AOCI	—			39			39
Net current-period Other Comprehensive Income	64			39			103
Ending Balance	$	299		$	(1,120	)	$	(821	)

Three months ended March 31, 2016	Unrealized Gains on Investments			Defined Benefit Items			Total
Beginning Balance (a)	$	200		$	(1,135	)	$	(935	)
Other Comprehensive (Loss) Income Before Reclassification	(15		)	—			(15		)
Amounts Reclassified from AOCI	—			35			35
Net current-period Other Comprehensive (Loss) Income	(15		)	35			20
Ending Balance	$	185		$	(1,100	)	$	(915	)

(a) All amounts shown are net of tax. Amounts in parentheses indicate loss.

The following table sets forth the amounts reclassified from AOCI by component and the affected line item on the Condensed Consolidated Statements of Income for the three months ended March 31, 2017 and 2016 (in thousands):



Details about Other AOCI Components	Amounts Reclassified from AOCI Three Months Ended March 31, 2017(a)			Amounts Reclassified from AOCI Three Months Ended March 31, 2016(a)			Affected Line Items on Income Statement
Realized Gains on Investments	$	—		$	—		Other Income
Tax expense	—			—			Other Income
	—			—

Amortization of Recognized Net Gain from Defined Benefit Items	64			57			Other Income (b)
Tax expense	(25		)	(22		)	Other Income
	39			35

Total Reclassifications for the period, net of tax	$	39		$	35

(a) Amounts in parentheses indicate loss/expense.
(b) Included in computation of net periodic pension cost (see Note 2 for additional details).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


6.	Long-Term Debt

Long-Term Debt at March 31, 2017 and December 31, 2016 consisted of the following (in thousands):



		2017			2016
Connecticut Water Service, Inc.:
4.09%	Term Loan Note	$	13,171		$	13,437
The Connecticut Water Company:
Var.	2004 Series Variable Rate, Due 2029	12,500			12,500
Var.	2004 Series A, Due 2028	5,000			5,000
Var.	2004 Series B, Due 2028	4,550			4,550
5.00%	2011 A Series, Due 2021	23,067			23,115
3.16%	CoBank Note Payable, Due 2020	8,000			8,000
3.51%	CoBank Note Payable, Due 2022	14,795			14,795
4.29%	CoBank Note Payable, Due 2028	17,020			17,020
4.72%	CoBank Note Payable, Due 2032	14,795			14,795
4.75%	CoBank Note Payable, Due 2033	14,550			14,550
4.36%	CoBank Note Payable, Due June 2036	30,000			30,000
4.04%	CoBank Note Payable, Due July 2036	19,930			19,930
Total The Connecticut Water Company		164,207			164,255
The Heritage Village Water Company
4.75%	2011 Farmington Bank Loan, Due 2034	4,569			—
The Maine Water Company:
8.95%	1994 Series G, Due 2024	7,200			7,200
2.68%	1999 Series J, Due 2019	170			254
0.00%	2001 Series K, Due 2031	574			615
2.58%	2002 Series L, Due 2022	60			67
1.53%	2003 Series M, Due 2023	321			341
1.73%	2004 Series N, Due 2024	371			371
0.00%	2004 Series O, Due 2034	113			120
1.76%	2006 Series P, Due 2026	361			391
1.57%	2009 Series R, Due 2029	207			217
0.00%	2009 Series S, Due 2029	560			583
0.00%	2009 Series T, Due 2029	1,572			1,634
0.00%	2012 Series U, Due 2042	148			154
1.00%	2013 Series V, Due 2033	1,310			1,335
2.52%	CoBank Note Payable, Due 2017	1,965			1,965
4.24%	CoBank Note Payable, Due 2024	4,500			4,500
4.18%	CoBank Note Payable, Due 2026	5,000			—
7.72%	Series L, Due 2018	2,250			2,250
2.40%	Series N, Due 2022	1,026			1,101
1.86%	Series O, Due 2025	790			790
2.23%	Series P, Due 2028	1,264			1,294
0.01%	Series Q, Due 2035	1,678			1,771
1.00%	Series R, Due 2025	2,250			2,250
Various	Various Capital Leases	6			8
Total The Maine Water Company		33,696			29,211
Add: Acquisition Fair Value Adjustment		311			321
Less: Current Portion		(5,185		)	(4,859		)
Less: Unamortized Debt Issuance Expense		(5,180		)	(5,318		)
Total Long-Term Debt		$	205,589		$	197,047

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

There are no mandatory sinking fund payments required on Connecticut Water’s outstanding bonds. However, certain fixed rate Unsecured Water Facilities Revenue Refinancing Bonds provide for an estate redemption right whereby the estate of deceased bondholders or surviving joint owners may submit bonds to the trustee for redemption at par, subject to a $25,000 per individual holder and a 3% annual aggregate limitation.

In April 2016, Connecticut Water filed an application with PURA to issue promissory notes in the aggregate principal amount of up to $49,930,000 with CoBank, ACB (“CoBank”) under its existing Master Loan Agreement by and between Connecticut Water and CoBank dated October 29, 2012, in order for Connecticut Water to redeem its $19,930,000 2009A Series of outstanding Water Facility Revenue Bonds previously issued by the Connecticut Development Authority (the “2009A Bonds”) and to provide $30,000,000 to partially fund its ongoing construction program. On June 1, 2016, Connecticut Water issued $30,000,000, at 4.36%, in debt under its existing Master Loan Agreement with CoBank, with a maturity date of May 20, 2036. On July 7, 2016, Connecticut Water issued $19,930,000, at 4.04%, in debt under its existing Master Loan Agreement with CoBank, with a maturity date of July 7, 2036. Connecticut Water used the proceeds to immediately pay off the $19,930,000 2009A Series of outstanding Water Facility Revenue Bonds.

On January 10, 2017, Maine Water executed and delivered to CoBank a new Promissory Note and Single Advance Term Loan Supplement, dated January 10, 2017 (the “Third Promissory Note”). On the terms and subject to the conditions set forth in the Third Promissory Note issued pursuant to the Agreement, CoBank agreed to make an unsecured loan (the “Loan”) to Maine Water in the principal amount of $5,000,000 at 4.18%, due December 30, 2026. The proceeds of the Loan will be used to finance new capital expenditures and refinance existing debt owed to the Company, incurred in connection with general water system improvements.

During the first three months of 2017, the Company paid approximately $266,000 related to Connecticut Water Service’s Term Note Payable issued as part of the 2012 acquisition of Maine Water and approximately $515,000 in sinking funds related to Maine Water’s outstanding bonds.

Financial Covenants – The Company and its subsidiaries are required to comply with certain covenants in connection with various long term loan agreements. The most restrictive of these covenants is to maintain a consolidated debt to capitalization ratio of not more than 60%. Additionally, Maine Water has restrictions on cash dividends paid based on restricted net assets. The Company and its subsidiaries were in compliance with all covenants at March 31, 2017.


7.	Fair Value Disclosures

FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“FASB ASC 820”) provides enhanced guidance for using fair value to measure assets and liabilities and expands disclosure with respect to fair value measurements.

FASB ASC 820 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels, as follows:

Level 1 – Quoted market prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are either directly or indirectly observable.

Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that the Company believes market participants would use.

The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of March 31, 2017 (in thousands):



	Level 1		Level 2		Level 3		Total
Asset Type:
Money Market Fund	$	56	$	—	$	—	$	56
Mutual Funds:
Equity Funds (1)	1,774		—		—		1,774
Fixed Income Funds (2)	541		—		—		541
Total	$	2,371	$	—	$	—	$	2,371

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2016 (in thousands):



	Level 1		Level 2		Level 3		Total
Asset Type:
Money Market Fund	$	122	$	—	$	—	$	122
Mutual Funds:
Equity Funds (1)	1,662		—		—		1,662
Fixed Income Funds (2)	534		—		—		534
Total	$	2,318	$	—	$	—	$	2,318


(1)	Mutual funds consist primarily of equity securities and are presented on the Other Property and Investments line item of the Company’s Condensed Consolidated Balance Sheets.


(2)	Mutual funds consist primarily of fixed income securities and are presented on the Other Property and Investments line item of the Company’s Condensed Consolidated Balance Sheets.

The fair value of Company Owned Life Insurance is based on the cash surrender value of the contracts. These contracts are based principally on a referenced pool of investment funds that actively redeem shares and are observable and measurable and are presented on the Other Property and Investments line item of the Company’s Condensed Consolidated Balance Sheets.

The following methods and assumptions were used to estimate the fair value of each of the following financial instruments, which are not recorded at fair value on the financial statements.

Cash and cash equivalents – Cash equivalents consist of highly liquid instruments with original maturities at the time of purchase of three months or less. The carrying amount approximates fair value. Under the fair value hierarchy the fair value of cash and cash equivalents is classified as a Level 1 measurement.

Company Owned Life Insurance – The fair value of Company Owned Life Insurance is based on the cash surrender value of the contracts. These contracts are based principally on a referenced pool of investment funds that actively redeem shares and are observable and measurable and are presented on the “Other Property and Investments” line item of the Company’s Consolidated Balance Sheets. The value of Company Owned Life Insurance at March 31, 2017 and December 31, 2016 was $3,181,000 and $3,075,000, respectively.

Long-Term Debt – The fair value of the Company’s fixed rate long-term debt is based upon borrowing rates currently available to the Company. As of March 31, 2017 and December 31, 2016, the estimated fair value of the Company’s long-term debt was $221,078,000 and $210,463,000, respectively, as compared to the carrying amounts of $210,769,000 and $202,365,000, respectively. The estimated fair value of long term debt was calculated using a discounted cash flow model that uses comparable interest rates and yield curve data based on the A-rated MMD (Municipal Market Data) Index which is a benchmark of current municipal bond yields. Under the fair value hierarchy, the fair value of long term debt is classified as a Level 2 measurement.

Advances for Construction – Customer advances for construction had a carrying amount of $22,844,000 and $19,127,000 at March 31, 2017 and December 31, 2016, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.

The fair values shown above have been reported to meet the disclosure requirements of FASB ASC 825, “Financial Instruments” (“FASB ASC 825”) and do not purport to represent the amounts at which those obligations would be settled.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


8.	Segment Reporting

The Company operates principally in three business segments: Water Operations, Real Estate Transactions, and Services and Rentals. Financial data for the segments is as follows (in thousands):



Three months ended March 31, 2017
Segment	Revenues		Pre-Tax Income		Income Tax Expense(Benefit)			Net Income
Water Operations	$	22,786	$	3,495	$	(282	)	$	3,777
Real Estate Transactions	212		55		22			33
Services and Rentals	1,210		491		233			258
Total	$	24,208	$	4,041	$	(27	)	$	4,068



Three months ended March 31, 2016
Segment	Revenues		Pre-Tax Income		Income Tax Expense		Net Income
Water Operations	$	21,855	$	2,950	$	197	$	2,753
Real Estate Transactions	—		—		—		—
Services and Rentals	1,231		537		142		395
Total	$	23,086	$	3,487	$	339	$	3,148

The revenues shown in Water Operations above consisted of revenues from water customers of $22,274,000 and $21,552,000 for the three months ended March 31, 2017 and 2016, respectively, and wastewater revenues of $189,000 for the three months ended March 31, 2017. There were no wastewater revenues in 2016. Additionally, there were revenues associated with utility plant leased to others of $323,000 and $303,000 for the three months ended March 31, 2017 and 2016, respectively. The revenues from water and wastewater customers for the three months ended March 31, 2017 and 2016 include $573,000 and $400,000 in additional revenues related to the application of the WRA, respectively.

The Company owns various small, discrete parcels of land that are no longer required for water supply purposes. From time to time, the Company may sell or donate these parcels, depending on various factors, including the current market for land, the amount of tax benefits received for donations and the Company’s ability to use any benefits received from donations.

Assets by segment (in thousands):



	March 31, 2017		December 31, 2016
Total Plant and Other Investments:
Water Operations	$	645,028	$	609,508
Non-Water	1,027		959
	646,055		610,467
Other Assets:
Water Operations	190,055		171,674
Non-Water	2,439		2,361
	192,494		174,035
Total Assets	$	838,549	$	784,502


9.	Income Taxes

FASB ASC 740 Income Taxes (“FASB ASC 740”) addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FASB ASC 740, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company adopted the Internal Revenue Service (“IRS”) temporary tangible property regulations on the Company’s 2012 Federal tax return. Since that time, the Company has been recording a provision for any possible disallowance of a portion of the repair deduction if the Company’s Federal tax return were to be reviewed by the IRS. While the Company maintains the belief that the deduction taken on its tax return is appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. During the Company’s review of the position through the quarter ended March 31, 2017, new information caused management to reassess the previously recorded provision. This reassessment resulted in the reversal of a portion of the provision related to the Maine subsidiary, in the amount of $1,164,000 in the first quarter of 2017. The impact of the new information on the Connecticut subsidiary’s provision is still being evaluated. Through March 31, 2017, the Company has recorded, as required by FASB ASC 740, a provision of $310,000 for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. The Company had previously recorded a provision of $9.4 million in the prior year for a cumulative total of $8.6 million.

From time to time, the Company may be assessed interest and penalties by taxing authorities. In those cases, the charges would appear on the Other line item within the Other Income (Deductions), Net of Taxes section of the Company’s Condensed Consolidated Statements of Income. There were no such charges for the three months ended March 31, 2017 and 2016. Additionally, there were no accruals relating to interest or penalties as of March 31, 2017 and December 31, 2016. The Company remains subject to examination by federal tax authorities for the 2013 through 2015 tax years; the State of Maine’s tax authorities for the 2013 through 2015 tax years; and the State of Connecticut’s tax authorities for the 2014 and 2015 tax years.

The Company is currently engaged in an analysis to determine the amount of expenditures related to tangible property that will be reflected on its 2016 Federal Tax Return to be filed in September 2017. As a result, through the first quarter of 2017, the Company has estimated the portion of its infrastructure investment that will qualify as a repair deduction for 2017 and has reflected that deduction in its effective tax rate, net of any reserves. Consistent with other differences between book and tax expenditures, the Company is required to use the flow-through method to account for any timing differences not required by the IRS to be normalized.

The Company’s effective income tax rate for the three months ended March 31, 2017 and 2016 was (0.7)% and 9.7%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the three months ended March 31, 2017, was 20.5%. These discrete items include adjustments related to uncertain tax positions for the repair deduction in both Connecticut and Maine. The blended Federal and State statutory income tax rates during each period were 41%. In determining its annual estimated effective tax rate for interim periods, the Company reflects its estimated permanent and flow-through tax differences for the taxable year, including the basis difference for the adoption of the tangible property regulations.


10.	Lines of Credit

As of March 31, 2017, the Company maintained a $15.0 million line of credit agreement with CoBank, that is currently scheduled to expire on July 1, 2020. The Company maintained an additional line of credit of $45.0 million with RBS Citizens, N.A., with an expiration date of April 25, 2021. As of March 31, 2017, the total lines of credit available to the Company were $60.0 million. As of March 31, 2017 and December 31, 2016, the Company had $35.1 million and $33.0 million, respectively, of Interim Bank Loans Payable. As of March 31, 2017, the Company had $24.9 million in unused lines of credit. Interest expense charged on lines of credit will fluctuate based on market interest rates.

11. Acquisition

On May 10, 2016, the Company announced that it had reached an agreement to acquire The Heritage Village Water Company ("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 that certain Agreement and Plan of Merger dated May 10, 2016 between and among HVWC, the Company, and HAC, Inc., the Company’s wholly-owned Maine 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.

Under the Merger Agreement, the acquisition was agreed to be executed through a stock-for-stock merger transaction valued at approximately $16.9 million. Holders of HVWC common stock will receive shares of the Company’s common stock in a tax-free exchange. In addition, the transaction reflects a total enterprise value of HVWC of approximately $21.5 million.

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On February 27, 2017, the Company completed the acquisition of HVWC by completing the merger of Connecticut Water’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 became entitled to receive an aggregate of 300,445 shares of the Company’s common stock in a tax-free exchange, which exchange was commenced promptly by the issuance of a letter of transmittal and related materials by Connecticut Water’s exchange agent.

The Company is still in the process of finalizing the purchase price allocation of HVWC as additional information becomes available. The following table summarizes the fair value of the net assets acquired, based on the best information available, on February 27, 2017, the date of the acquisition (in thousands):



Net Utility Plant	$	28,861
Cash and Cash Equivalents	1,336
Accounts Receivable, net	345
Prepayments and Other Current Assets	63
Materials and Supplies, at Average Cost	200
Goodwill	12,618
Deferred Charges and Other Costs	343
Total Assets Acquired	$	43,766
Advances for Construction
Long-Term Debt, including current portion	$	4,642
Accounts Payable and Accrued Expenses	21
Other Current Liabilities	228
Advances for Construction	1,897
Deferred Federal and State Income Taxes	1,623
Total Liabilities Assumed	$	8,411

Contributions in Aid of Construction	18,452

Net Assets Acquired	$	16,903

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 long term debt. 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 acquisition of HVWC is a part of the Company’s Water Operations segment.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following unaudited pro forma summary for the three months ended March 31, 2017 presents information as if HVWC had 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 business since January 1, 2016, nor is it necessarily indicative of the future results of operations of the combined companies (in thousands):



Three months ended March 31,	2017		2016
Operating Revenues	$	23,069	$	22,421
Other Water Activities Revenues	323		304
Real Estate Revenues	212		—
Service and Rentals Revenues	1,210		1,231
Total Revenues	$	24,814	$	23,956

Net Income	$	4,092	$	3,216

Basic Earnings per Average Share Outstanding	$	0.36	$	0.28
Diluted Earnings per Average Share Outstanding	$	0.35	$	0.28

The following table summarizes the results of HVWC for the period from February 27, 2017, the date of acquisition, to March 31, 2017 and is included in the Consolidated Statement of Income for the period (in thousands):



Period ending March 31, 2017
Operating Revenues	$	336
Other Water Activities Revenues	—
Real Estate Revenues	—
Service and Rentals Revenues	—
Total Revenues	$	336

Net Income	$	85

Basic Earnings per Average Share Outstanding	$	0.01
Diluted Earnings per Average Share Outstanding	$	0.01

Part I, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the accompanying unaudited financial statements and related notes thereto and the audited financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

General Information

Persistent dry weather and continued drought conditions in 2016 in the State of Connecticut recently prompted Connecticut Water to join other major water utilities in the state and request that all customers voluntarily reduce their water usage by 10% in July 2016 in an effort to extend the availability of existing supplies and to support the rivers and streams in the state. While supplies in our reservoirs are lower than normal, Connecticut Water also has groundwater sources in nearly all of its water systems that provide operational flexibility so we are not solely dependent on our reservoirs for water supply. Connecticut Water continues to encourage all customers to reduce their water usage by 10% and, in October 2016, began asking customers in the shoreline communities of Guilford, Madison, Clinton, Westbrook and Old Saybrook to reduce their water usage by 15%. On April 21, 2017, the Company announced that all of our reservoirs in the State of Connecticut had returned to full capacity and that the previously announced water supply advisory has been lifted.

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Regulatory Matters

The rates we charge our water customers in Connecticut and Maine are established under the jurisdiction of and are approved by the Connecticut Public Utilities Regulatory Authority (“PURA”) and the Maine Public Utilities Commission (“MPUC”), respectively. 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 March 31, 2017, were 9.75% and 7.32%, respectively. The Heritage Village Water Company’s (“HVWC”) blended allowed return on equity and return on rate base, effective March 31, 2017, were 10.10% and 7.19%, respectively. Maine Water’s average allowed return on equity and return on rate base, effective March 31, 2017, were 9.50% and 7.96%, respectively. The PURA establishes rates in Connecticut on a company-wide basis while the MPUC approves Maine Water’s rates on a division-by-division basis. Both Connecticut Water and Maine Water are allowed to add surcharges to customers’ bills in order to recover certain approved capital projects in between full rate cases, as well as approved surcharges for Water Revenue Adjustments, as discussed in more detail below, in Connecticut. HVWC has not added surcharges to customers’ bills in order to recover certain approved capital projects as of March 31, 2017, however, HVWC has begun to utilize Water Revenue Adjustments as of March 31, 2017.

Heritage Village Water Company Acquisition

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 that certain Agreement and Plan of Merger dated May 10, 2016 between and among HVWC, the Company, and HAC, Inc., the Company’s wholly-owned Maine 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.

Under the Merger Agreement, the acquisition was agreed to be executed through a stock-for-stock merger transaction valued at approximately $16.9 million. Holders of HVWC common stock will receive shares of the Company’s common stock in a tax-free exchange. In addition the transaction reflects a total enterprise value of HVWC of approximately $21.5 million.

Avon Water Company Acquisition

Under the terms of the Avon Agreement, each of the 121,989 Avon Water common stock shares outstanding at the time of the closing of the merger will be exchanged and converted into the right to receive the following merger consideration: (i) a cash payment of $50.37; and (ii) a stock consideration component, consisting of 4.38 shares of Company Common Stock, provided that the Company’s Share Price (as defined below) over a specified period prior to the closing date of the merger is equal to or greater than $45.00 but less than or equal to $52.00. If the Company’s Share Price is less than $45.00 as of the closing date, each share of Avon Water common stock issued and outstanding at the time of the closing of the merger will be exchanged and converted into the right to receive that number of shares of Company Common Stock equal to 197.10 divided by the Company’s Share Price, rounded to the nearest hundredth. If the Company’s Share Price is more than $52.00 as of the closing date, each share of Avon Water common stock issued and outstanding at the time of the closing of the merger will be exchanged and converted into the right to receive that number of shares of Company Common Stock equal to 227.76 divided by the Company’s Share Price, rounded to the nearest hundredth. The “Company’s Share Price” is determined by calculating an

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average of the closing prices for shares of the Company’s Common Stock on the Nasdaq Stock Market, LLC for the twenty trading days immediately preceding the third business day prior to the closing of the Merger. Holders of Avon Water common stock prior to the Merger will receive cash in lieu of fractional shares of Company Common Stock.

During the fourth quarter of 2016, Connecticut Water filed an application with PURA seeking approval of the transaction. On April 12, 2017, PURA approved the transaction.

Maine Water Land Sale

1.Ragged Mountain Mirror Lake Conservation Easement: $1,875,000; and

2.Grassy Pond conservation Easement: $600,000.

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Connecticut Rates

Maine Rates

In Maine, the overall, cumulative Water Infrastructure Charge (“WISC”) for all divisions was 6.6% and 3.1% as of March 31, 2017 and 2016, respectively.

Critical Accounting Policies and Estimates

The Company maintains its accounting records in accordance with accounting principles generally accepted in the United States of America and as directed by the PURA and the MPUC to which Connecticut Water and Maine Water, respectively, the Company’s regulated water utility subsidiaries, are subject. Significant accounting policies employed by the Company, including the use of estimates, were presented in the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Critical accounting policies are those that are the most important to the presentation of the Company’s financial condition and results of operations. The application of such accounting policies requires management’s most difficult, subjective, and complex judgments and involves uncertainties and assumptions. The Company’s most critical accounting policies pertain to public utility regulation related to ASC 980 “Regulated Operations”, revenue recognition (including the WRA), goodwill impairment, income taxes and accounting for pension and other post-retirement benefit plans. Each of these accounting policies and the application of critical accounting policies and estimates were discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Management must use informed judgments and best estimates to properly apply these critical accounting policies. Because of the uncertainty in these estimates, actual results could differ from estimates used in applying the critical accounting policies. The Company is not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect its financial condition or results of operations.

Outlook

The following modifies and updates the “Outlook” section of the Company’s 2016 Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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The Company’s earnings and profitability are primarily dependent upon the sale and distribution of water. In Maine, water revenues can be dependent on seasonal weather fluctuations, particularly during the summer months when water demand will vary with rainfall and temperature levels. This risk has been mitigated in Connecticut with the implementation of the WRA. The Company’s earnings and profitability in future years will also depend upon a number of other factors, such as the ability to control our operating costs, 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 expects Net Income from its Water Operations segment to increase in 2017 over 2016 levels, primarily due to the accretive effects of the HVWC acquisition and the pending Avon Water acquisition, revenue increases resulting from the continued utilization of WISC in Maine and WICA in Connecticut, continued cost containment efforts. Additionally, Maine Water expects to complete the first portion of the previously announced sale of a conservation easement, which is expected to positively impact the Real Estate Transactions segment during the year ending December 31, 2017.

The Company believes that the factors described above and those described in detail under the heading “Commitments and Contingencies” below may have significant impact, either alone or in the aggregate, on the Company’s earnings and profitability in fiscal years 2017 and beyond. Please also review carefully the risks and uncertainties described in the sections entitled Item 1A – Risk Factors, “Commitments and Contingencies” in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and the risks and uncertainties described in the “Forward-Looking Information” section below.

Liquidity and Capital Resources

The Company is not aware of 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

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Credit Rating

In March 2017, Standard & Poor’s Ratings Services (“S&P”) affirmed its ‘A’ corporate credit rating on the Company. Additionally, S&P also affirmed the Company’s ratings outlook as stable.

Stock Plans

The Company offers a dividend reinvestment and stock purchase plan (“DRIP”) for all registered shareholders and for the customers and employees of our regulated water companies, whereby participants can opt to have cash dividends directly reinvested into additional shares of the Company. In August 2011, the Board of Directors approved amendments to the DRIP (effective as of January 1, 2012) that permit the Company to add, at the Company’s discretion, an “up to 5.00% purchase price discount” feature to the DRIP which is intended to encourage greater shareholder, customer and employee participation in the DRIP. In August 2014, the Board of Directors approved further amendments to the DRIP to reflect the Company’s appointment of a new common stock transfer agent. During the three months ended March 31, 2017 and 2016, plan participants invested $339,000 and $425,000, respectively, in additional shares as part of the DRIP.

2017 Construction Budget

The Board of Directors approved a $55.4 million construction budget for 2017, 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, borrowing under its available lines of credit and proceeds from a potential debt issuance in the second half of 2017.

As the Company looks forward to the remainder of 2017 and 2018, it anticipates continued reinvestment to replace aging infrastructure and to seek recovery of these costs through periodic WICA and WISC applications. The total cost of that investment may exceed the amount of internally generated funds. The Company expects to rely upon its internally generated funds and short-term borrowing facilities and proceeds from a potential debt issuance in the second half of 2017.

Results of Operations

Three months ended March 31

Net Income for the three months ended March 31, 2017 increased from the same period in the prior year by $920,000 to $4,068,000. Earnings per basic average common share were $0.36 and $0.29 during the three months ended March 31, 2017 and 2016, respectively.

This increase in Net Income is broken down by business segment as follows (in thousands):



Business Segment	March 31, 2017		March 31, 2016		Increase/(Decrease)
Water Operations	$	3,777	$	2,753	$	1,024
Real Estate Transactions	33		—		33
Services and Rentals	258		395		(137		)
Total	$	4,068	$	3,148	$	920

See the discussion below for details on the increase in the Water Operations Net Income:

Revenue

Revenue from our regulated customers increased by $911,000, or 4.2%, to $22,463,000 for the three months ended March 31, 2017 when compared to the same period in 2016. Approximately $336,000 of the increase in revenues was related to the acquisition of HVWC on February 27, 2017. The primary driver for the remaining $575,000 increase was the higher WISC and WICA surcharges in Maine and Connecticut, respectively.

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Operation and Maintenance Expense

Operation and Maintenance (“O&M”) expense decreased by $53,000, or 0.5%, for the three months ended March 31, 2017 when compared to the same period of 2016, including O&M expense incurred after the acquisition of HVWC which contributed $123,000 of incremental O&M expense during the period. The following table presents the components of O&M expense for the three months ending March 31, 2017 and 2016, both including and excluding the impact of the HVWC acquisition (in thousands):



Expense Components	March 31, 2017			March 31, 2016		Increase / (Decrease)			HVWC O&M		Adjusted Increase/(Decrease)
Mark-to-market	$	(29	)	$	996	$	(1,025	)	$	—	$	(1,025	)
Pension	759			849		(90		)	—		(90		)
Customer	355			400		(45		)	1		(46		)
Investor relations	203			243		(40		)	—		(40		)
Water treatment (including chemicals)	578			587		(9		)	8		(17		)
Medical	853			806		47			4		43
Utility costs	1,035			956		79			25		54
Vehicles	403			339		64			3		61
Purchased water	371			306		65			—		65
Maintenance	834			716		118			15		103
Outside services	740			598		142			2		140
Payroll	3,994			3,771		223			52		171
Other benefits	320			63		257			—		257
Other	820			659		161			13		148
Total	$	11,236		$	11,289	$	(53	)	$	123	$	(176	)

The decrease in O&M expenses excluding the incremental expense as a result of the acquisition of HVWC, was approximately $176,000, or approximately 1.6%, in the three months ended March 31, 2017 when compared to the same period in 2016. The changes in individual items, excluding the impact of HVWC, are described below:

•

The decrease in mark-to-market expense was related to an out-of-period adjustment made during the second quarter of 2016 related to stock-based performance awards previously granted to officers of the Company. Prior to the correction made in the second quarter of 2016, the Company had mistakenly marked certain stock-based performance awards classified as equity awards to the market price of the Company’s common stock price at the end of each reporting period, including in the first quarter of 2016. Since the share price of the Company’s common stock increased in the period between December 31, 2015 and March 31, 2016, the Company saw a large mark-to-market expense in the first quarter of 2016. From December 31, 2016 through March 31, 2017 there was a slight decline in the price of the Company’s common stock, therefore the share awards classified as liabilities, which still require mark-to-market accounting, generated a credit in the three months ended March 31, 2017;

•

Pension costs decreased primarily due to the plan’s 2016 asset returns which were higher than expected and the Company’s $5.5 million contribution to the pension plan in the first half of 2016. The higher asset value led to a higher expected return component in the 2017 expense as well as a lower recognized gain/loss component. This decrease was partially offset by a decrease in the discount rate used in determining 2017 expense compared to the discount rate used to determine the 2016 expense;


•	Customer costs decreased primarily due to a reduction in customer communications, a decrease in outside collection efforts and fewer uncollectible accounts in the first quarter of 2017 when compared to the same period of 2016. These decreases were partially offset by costs associated with a new voluntary water conservation program that rewards customers for reducing their consumption by 10%; and


•	Investor relations costs decreased in the three months ended March 31, 2017 when compared to the same period in 2016 primarily due to a reduction in directors’ fees and costs associated with investor outreach efforts by senior leadership.

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


•	Other benefits increased primarily due to costs associated with the Company’s performance stock plans;


•	Payroll costs increased primarily due to higher wages;


•	The increase in Outside services was primarily due to an increase in the use of consultants services and higher auditing

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fees during the three months ended March 31, 2017 when compared to the same period in 2016; and


•	Purchased water costs increased primarily due to an increase in the amount of water purchased from neighboring utilities, particularly in the Company’s Shoreline Region in Connecticut which has experienced drought conditions continuing in to 2017.

The Company saw an approximate $294,000, or 8.7%, increase in its Depreciation expense for the three months ended March 31, 2017 compared to the same period in 2016. Of this increase, approximately $35,000 was attributable to the acquisition of HVWC. The remaining increase was primarily due to higher Utility Plant in Service as of March 31, 2017 compared to March 31, 2016, driven by spending on WICA and WISC projects in Connecticut and Maine, respectively.

The Company had Income Tax income of $190,000 in three months ended March 31, 2017 compared to $393,000 of expense in the same period of 2016. The primary reason for the change in the three months ended March 31, 2017 was due to the Company’s review of the provision recorded related to tangible property regulations through the quarter ended March 31, 2017, new information caused management to change its previously estimated reserve for uncertain tax positions related to the adoption of the new tangible property regulation. This change in estimate resulted in the reversal of a portion of the provision in the amount of $1,164,000 in the first quarter of 2017. Partially offsetting this decrease was approximately $54,000 of Income Tax expense related to HVWC for the three months ended March 31, 2017.

Total Interest and Debt Expense increased by $210,000 in the three months ended March 31, 2017 when compared to the same period in 2016. Of this increase, approximately $37,000 was attributable to the acquisition of HVWC. The remaining increase was primarily due to higher debt balances outstanding at March 31, 2017 when compared to March 31, 2016.

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Commitments and Contingencies

The Company remains subject to examination by federal tax authorities for the 2013 through 2015 tax years; the State of Maine’s tax authorities for the 2013 through 2015 tax years; and the State of Connecticut’s tax authorities for the 2014 and 2015 tax years.

There were no material changes under this subheading to any of the other items previously disclosed by the Company in its Annual Report on Form 10-K for the year December 31, 2016.

Forward-Looking Information

Certain statements made in this Quarterly Report on Form 10-Q, (“10-Q”) 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, as amended (“Exchange Act”) that are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on us. 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-Q, 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;

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•	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;


•	the amount of repair tax deductions and the Internal Revenue Service’s ultimate acceptance of the deduction methodology;


•	delays in completing the merger with Avon Water, or difficulties in achieving anticipated benefits or cost savings from the merger; 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;


•	the determination of what qualifies for a repair expense tax deduction;


•	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;


•	our ability to manage the expansion of our business;


•	the continuous reliable operation of our information technology systems, including the impact of cyber security attacks or other cyber-related events;


•	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;


•	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-Q, the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (“10-K”) and the documents that we incorporate by reference into the 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-Q. 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” found in the 10-K. We qualify all of our forward-looking statements by these cautionary statements.

Part I, Item 3: Quantitative and Qualitative Disclosure About Market Risk

The primary market risk faced by the Company is interest rate risk. The Company has 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, variable long-term debt and short-term variable borrowings under financing arrangements entered into by the Company and its subsidiaries. As of March 31, 2017, the Company had $60.0 million of variable rate lines of credit with two banks, under which the Company had $35.1 million of interim bank loans payable at March 31, 2017.

As of March 31, 2017, the Company had $22.05 million of variable-rate long-term debt outstanding. Holding other variables constant, including levels of indebtedness, a one-percentage point change in interest rates would impact pre-tax earnings by approximately $0.2 million, annually. The Company monitors its exposure to variable rate debt and will make future financing decisions as the need arises.

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Part I, Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2017, 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.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2017, other than changes resulting from the acquisition of HVWC discussed below, there have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

On February 27, 2017, the acquisition of HVWC closed. The Company is currently in the process of integrating HVWC’s operations, processes, and internal controls. See Note 11 to the consolidated financial statements in Part I, Item I for additional information relating to the acquisition.

Part II, Item 1: 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 the subject that presents a reasonable likelihood of a material adverse impact on the Company.

Part II, Item 1A: Risk Factors

Except as set forth below, information about the material risks related to our business, financial condition and results of operations for the three months ended March 31, 2017 does not materially differ from that set out under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. You should carefully consider the risk factors and other information discussed in our Annual Report on Form 10-K for the year ended December 31, 2016, as well as the information provided elsewhere in this report. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair the Company’s business operations, financial condition or operating results.

The failure to consummate the pending acquisition of The Avon Water Company could adversely affect our business.

During 2016, the Company entered into acquisition agreements to acquire The Avon Water Company (“Avon Water”). The completion of this transaction is subject to risks and uncertainties. First, if the required conditions and regulatory approvals are not satisfied or waived, then the acquisition likely would not be completed. Second, if the closing of the acquisition is substantially delayed or the closing does not occur at all, or if the terms of the acquisition are required to be modified substantially due to regulatory concerns, we may not be able to realize the anticipated benefits of the acquisition fully or at all. Third, under certain circumstances specified in the purchase agreement, we may be required to pay a termination fee under if the agreements are terminated. Fourth, the failure to consummate the pending acquisition may result in negative publicity and a negative impression of us in the investment community. There can be no assurance that our business, the price of our common stock or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the acquisition, if the acquisition is not consummated.

Part II, Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

No stock repurchases were made during the quarter ended March 31, 2017.

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Part II, Item 6: Exhibits



Exhibit Number		Description

2.1		Amendment No. 1 to Merger Agreement, dated March 29, 2017, between and among, Connecticut Water Service, Inc., WC-A I, Inc. and The Avon Water Company. (Exhibit 2.1 to Form 8-K filed on April 3, 2017).

3.1		Amended and Restated Certificate of Incorporation of Connecticut Water Service, Inc. dated May 11, 1998 (Exhibit 3.1 to Form 10-K for the year ended 12/31/98).

3.2		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Connecticut Water Service, Inc. dated August 27, 1998 (Exhibit 3 to Form 8-K filed on September 25, 1998).

3.3		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Connecticut Water Service, Inc. dated August 6, 2001 (Exhibit 3.3 to Form 10-K for the year ended 12/31/14).

3.4		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Connecticut Water Service, Inc. dated April 23, 2004. (Exhibit 3.5 to Form 10-Q for the quarter ended 3/31/04).

3.5		Certification of Incorporation of The Connecticut Water Company effective April, 1998. (Exhibit 3.3 to Form 10-K for the year ended 12/31/98).

3.6		By-Laws, as amended, of Connecticut Water Service, Inc. as amended and restated as of August 16, 2007. (Exhibit 3.1 to Form 8-K filed on August 21, 2007).

10.1*		Deferred Compensation agreement between Connecticut Water Service, Inc. and Richard Knowlton, dated December 8, 2011, effective January 1, 2012.

10.2		Promissory Note and Single Advance Term Loan Supplement between the Maine Water Company and CoBank, ACB, dated as of January 10, 2017. (Exhibit 10.3 to Form 8-K filed on January 11, 2017).

31.1*		Rule 13a-14 Certification of Eric W. Thornburg, Chief Executive Officer.

31.2*		Rule 13a-14 Certification of David C. Benoit, Chief Financial Officer.

32**		Certification of Eric W. Thornburg, Chief Executive Officer, and David C. Benoit, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase

101.DEF**		XBRL Taxonomy Extension Definition Linkbase

101.LAB**		XBRL Taxonomy Extension Label Linkbase

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

* filed herewith
** furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		Connecticut Water Service, Inc. (Registrant)

Date:	May 8, 2017	By: /s/ David C. Benoit
		David C. Benoit Senior Vice President – Finance and Chief Financial Officer

Date:	May 8, 2017	By: /s/ Robert J. Doffek
		Robert J. Doffek Controller

CONNECTICUT WATER SERVICE INC / CT - FORM 10-Q - May 8, 2017

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CONNECTICUT WATER SERVICE INC / CT Reports