UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 0-8084

Connecticut Water Service, Inc.

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

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

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

Common Stock, without par value
(Title of Class)

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

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act. Yes þ No o

     The aggregate market value of the registrant’s voting Common Stock held by non-affiliates, computed on the price of such stock at the close of business on June 30, 2004 was $202,693,016.

7,988,524

Number of shares of Common Stock outstanding, March 1, 2005
(excluding 51,550 common stock equivalent shares)

DOCUMENTS INCORPORATED BY REFERENCE

INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2004

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This Form 10-K contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements should be read in conjunction with the cautionary statements included in this Form 10-K in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Forward Looking Information”.

PART I

ITEM 1. BUSINESS

The Company

The Registrant, Connecticut Water Service, Inc. (referred to as “the Company”, “we” or “our”) was organized in 1956. Connecticut Water Service, Inc. is a non-operating holding company, whose income is derived from the earnings of its eleven wholly-owned subsidiary companies. In 2004 approximately 77% of the Company’s earnings were attributable to water activities carried out within its five regulated water companies: The Connecticut Water Company (Connecticut Water), The Gallup Water Service, Incorporated (Gallup), The Crystal Water Company of Danielson (Crystal), The Barnstable Water Company (Barnstable Water), and The Unionville Water Company (Unionville). These five companies supply water to 87,767 customers in 42 towns throughout Connecticut and Massachusetts. Each of these companies is subject to state regulation regarding financial issues, rates, and operating issues, and to various other state and federal regulatory agencies concerning water quality and environmental standards. In addition to its regulated utilities, the Company owns six unregulated companies: Chester Realty, Inc., a real estate company in Connecticut; New England Water Utility Services, Inc., which provides contract water and sewer operations and other water related services; Connecticut Water Emergency Services, Inc., a provider of drinking and pool water by tanker truck; Crystal Water Utilities Corporation, a holding company which owns Crystal Water and three small rental properties; BARLACO Inc. (BARLACO), a real estate company in Massachusetts; and Barnstable Holding Company, a holding company which owns Barnstable Water and BARLACO. In 2004, these unregulated companies, in conjunction with the regulated water companies, contributed the remaining 23% of the Company’s earnings through real estate transactions as well as services and rentals.

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

Our corporate headquarters are located at 93 West Main Street, Clinton, Connecticut 06413. Our telephone number is 860.669.8636, and our Internet address is www.ctwater.com.

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On January 26, 2005, Gallup and Crystal submitted a joint application to the Connecticut Department of Public Utility Control (DPUC) pursuant to which Gallup would be merged with and into Crystal. If the merger is approved and completed, the combined entity would be a wholly-owned subsidiary of the Company, as they both are currently. A decision is expected by April 27, 2005.

The request to merge Crystal and Gallup stems from the Company’s plan to seek rate relief for these entities in 2005. The operations were consolidated in 1999 and the service territories are geographically connected in various locations.

At this time, the Company is planning to apply to the DPUC in 2006 to merge all of its Connecticut-based, regulated utilities with and into Connecticut Water. If, and when, these combinations are completed, the resulting entity, Connecticut Water, would consist of the current subsidiaries Gallup, Crystal, Unionville, and Connecticut Water. It is expected that future rate relief applications would propose rate equalization steps, which, if approved would result, over time, in equalized rates for the Company’s customers in Connecticut. The Company believes its is likely that it will apply for rate increases for one or more of its Connecticut subsidiaries during the next 18 months.

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

	•	Code of Conduct – Board of Directors
	•	Code of Conduct — Employees
	•	Audit Committee Charter
	•	Compensation Committee Charter
	•	Corporate Governance Committee Charter

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

Our Regulated Business

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

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

Costs to comply with environmental and water quality regulations are substantial. Since the 1974 enactment of the Safe Drinking Water Act, we have spent approximately $51,900,000 in constructing facilities and conducting aquifer mapping necessary to comply with the requirements of the Safe Drinking Water Act, and other federal and state regulations, of which $2,443,000 was expended in the last five years. We are presently in compliance with current regulations, but the regulations are subject to change at any time. The costs to comply with future changes in state or federal regulations, which could require us to modify existing filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial.

Our water companies derive their rights and franchises to operate from special state acts that are subject to alteration, amendment or repeal and do not grant us exclusive rights to our service areas. Our franchises are free from burdensome restrictions, are unlimited as to time, and authorize us to sell potable water in all the towns we now serve. There is the possibility that a state could revoke our franchises and allow a governmental entity to take over some or all of our systems. While we vigorously oppose any such attempt, from time to time such legislation is contemplated.

The rates we charge our water customers are established under the jurisdiction of and are approved by a state regulatory agency. It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return. The following table shows information related to each of our water companies’ most recent general rate filing.

**      Unionville’s rates were based on a return on equity methodology, not a rate base methodology.

***    Beginning mid-2003, Unionville began imposing a 30% surcharge on its customers’ water bills to recover financing and operating costs related to the construction and use of a water interconnection with a neighboring water supplier. Annually the surcharge is subject to a retroactive refund to ratepayers if total revenue for Unionville exceeds certain stipulated amounts. To date, we have not been required to provide any such refunds. As part of the decision authorizing the surcharge, the Connecticut Department of Public Utility Control (DPUC) also limited the conditions upon which Unionville may seek a rate increase prior to September 1, 2005.

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Our Water Systems

Our water infrastructure consists of 30 noncontiguous water systems in the State of Connecticut and one water system in Massachusetts. Our system, in total, consists of 1,385 miles of water main and reservoir storage capacity of 7.0 billion gallons. The safe, dependable yield from our 131 active wells and 19 reservoirs is approximately 52 million gallons per day. Water sources vary among the individual systems, but overall approximately 42% of the total dependable yield comes from reservoirs and 58% from wells.

We supply water, and in most cases, fire protection to all or portions of 42 towns in Connecticut and Massachusetts. The following table lists the customer count, operating revenues and customer water consumption for each of our water companies as of December 31, 2004.

The following table breaks down the above total figures by customer class:

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Disposition of Property

Our water companies own various small, discrete parcels of land that are no longer required for water supply purposes. At December 31, 2004, this land totaled approximately 350 acres. Over the past years we have been slowly disposing of such excess land. The largest transaction to date has been the donation of land by Crystal to the Town of Killingly, CT for protected open space purposes over a three-year period, 2002 — 2004. In January 2004, the final parcel of land was transferred to the Town. Over the three-year period the following acreage was donated to the Town under this agreement:

In December 2004, Connecticut Water made a donation of 56 acres of land to the Town of Plymouth, CT for a new school. As a result of legislation passed in 2004, this donation was eligible for the Connecticut corporate tax credit in the same manner as a donation for open space purposes. The after tax profit from this transaction was $498,000.

Primarily due to a Connecticut corporate tax credit, which was legislatively enacted in 2000, the donation of land for protected open space purposes results in a greater after-tax profit to the Company than a sale of the land would provide.

We also have a limited amount of land held by our unregulated companies. Included in this category is approximately 100 acres of land held by BARLACO, which we acquired in February 2001 in conjunction with the Company’s acquisition of The Barnstable Holding Company.

Additional information on Disposition of Property can be found in Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operation – Commitments and Contingencies.

Competition

Our water companies face competition, presently not material, from a few private water systems operating within, or adjacent to, their franchise areas and from municipal and public authority systems whose service areas in some cases overlap portions of our water companies’ franchise areas.

Employees

As of December 31, 2004, we employed a total of 193 persons. Our employees are not covered by collective bargaining agreements. We believe that our relations with our employees are good.

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Segments of Our Business

For management purposes we divide our business into three Business segments: Water Activities, Real Estate Transactions, and Services and Rentals.

The Water Activities segment is comprised of our core regulated water activities to supply public drinking water to our customers. This segment encompasses all transactions of all our regulated companies with the exception of real estate transactions and services and rental activities.

Our Real Estate Transactions segment involves the sale or donation for income tax benefits of our limited excess real estate holdings. These transactions can be effected by either our regulated or unregulated companies. A breakdown of the net income of this segment between our regulated and unregulated companies for the past three years is as follows:

Our Services and Rentals segment provides contracted services to water and wastewater utilities and other clients and also leases certain of our properties to third parties. Both our regulated and unregulated companies offer these transactions. The types of services provided include contract operations of water and wastewater facilities; Linebacker^®, our service line protection plan for public drinking water customers; and providing bulk deliveries of emergency drinking water to businesses and residences via tanker truck. Our lease and rental income comes primarily from telecommunication antennas placed on our water storage tanks by telecommunication companies, as well as from the renting of residential and commercial property.

Some of the services listed above, including the service line protection plan and antenna leases, have little or no competition. But there can be considerable competition for contract operations of large water and wastewater facilities and systems. However, we have sought to develop a niche market by seeking to serve smaller facilities and systems in our service areas where there is less competition. The services and rentals segment, while relatively new and a small portion of our overall business, has grown significantly over the past five years and now provides nearly 10 percent of our overall net income. The table below describes the net income generated by this segment of our business from our regulated and unregulated companies for the past three years:

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ITEM 2. PROPERTIES

The properties of our water companies consist of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, treatment plants, pumping plants, transmission and distribution mains and conduits, mains and other facilities and equipment used for the collection, purification, storage and distribution of water. Although, our regulated water companies own their principal properties in fee, substantially all of the properties owned by Barnstable, Crystal, and Unionville companies are subject to liens as security for outstanding debt. In addition, in certain cases, our water companies are parties to limited contractual arrangements for the provision of water supply from neighboring utilities. We believe that our properties are in good operating condition. Water mains are located, for the most part, in public streets and, in a few instances, are located on land that we own in fee and land utilized pursuant to easement right, most of which are perpetual and adequate for the purpose for which they are held.

The net utility plant balances of the water companies at December 31, 2004 were as follows:

Sources of water supply owned, maintained, and operated by our regulated water companies include eighteen reservoirs and fifty-five well fields. In addition, Connecticut Water has an agreement with the Metropolitan District Commission (MDC) (a public water and sewer authority presently serving the City of Hartford and portions of surrounding towns), which provides, among other things, for the operation and maintenance by MDC of a filtration plant to supply up to 650,000 gallons of treated water per day for Connecticut Water’s Collinsville System. Collectively, these sources have the capacity to deliver approximately fifty-one million gallons of potable water daily to the sixteen major operating systems in the following table. In addition to the principal systems identified, our regulated water companies own, maintain, and operate fifteen small, non-interconnected satellite and consecutive water systems that, combined have the ability to deliver about one million gallons of additional water per day to their respective systems. For some small consecutive water systems, purchased water may comprise substantially all of the total available supply of the system.

Our regulated water companies own and operate fifteen water filtration facilities, having a combined treatment capacity of approximately 26.33 million gallons per day. Of these facilities, twelve are owned by Connecticut Water, two by Unionville, and one by Crystal, Gallup and Barnstable Water do not have, or require, water filtration facilities.

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The companies’ estimated available water supply, not including water purchases or non-principal systems, is as follows:

As of December 31, 2004, the transmission and distribution systems of our five water companies consisted of approximately 1,385 miles of main. On that date, approximately 75 percent of our mains were eight-inch diameter or larger. Substantially all new main installations are cement-lined ductile iron pipe of eight-inch diameter or larger.

The size of each company’s system(s) in terms of miles of mains is as follows:

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

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ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

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PART II

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

Our Common Stock is traded on the NASDAQ exchange under the symbol “CTWS”. Our quarterly high and low stock prices as reported by NASDAQ and the cash dividends we paid during 2004 and 2003 are listed as follows:

As of March 1, 2005, there were approximately 4,700 holders of record of our common stock.

We presently have paid or intend to pay quarterly cash dividends in 2005 on March 15, June 15, September 15 and December 15 subject to our earnings and financial condition, regulatory requirements and other factors our Board of Directors may deem relevant.

Purchases of Equity Securities by the Company – The Company has not established any share repurchase plans and thus has not repurchased any shares of its common stock during the last three months of the fiscal year ended December 31, 2004.

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ITEM 6. SELECTED FINANCIAL INFORMATION

SUPPLEMENTAL INFORMATION (Unaudited)

SELECTED FINANCIAL DATA

Years Ended December 31, (thousands of dollars except per share
amounts and where otherwise indicated)

*     Not restated for acquisitions accounted for under the pooling-of-interests accounting method.

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

FINANCIAL CONDITION

Overview

The Company is a non-operating holding company, whose income is derived from the earnings of its eleven wholly-owned subsidiary companies. In 2004, approximately 77% of the Company’s earnings were attributable to water activities carried out within its five regulated water companies: Connecticut Water, Gallup, Crystal, Barnstable Water, and Unionville. The rates charged for service by these regulated water companies are subject to regulation by the Connecticut DPUC and the Massachusetts Department of Telecommunications and Energy (DTE). Over 96% of this water activity income comes from Connecticut Water, our largest subsidiary and water company. Connecticut Water has not had an increase in its rates since 1991. Primarily due to the construction of six major water treatment plants during the late 1970s and throughout the 1980s, our overall investment in gross utility plant increased by $122,881,000, or 270%, from 1978 to 1991, which resulted in our water rates being amongst the highest in Connecticut. In 1991, we began developing opportunities to increase revenues and earnings without raising regulated water rates. Through these efforts we have successfully:

     We believe that it is likely that we will have to seek regulatory approval to increase rates charged at some or all of our Connecticut regulated water companies during the next 18 months. The material factors that will affect our decision to consider filing for additional rate increases in the future are:

On a year-to-year basis our earnings are primarily influenced by weather patterns that affect our customers’ water usage and thereby our revenues. Our revenues may fluctuate by as much as $1.5 million (or 3.0%) over or under a normal year because customers use more water in hot, dry years and less water in cool, rainy years.

Regulatory Matters and Inflation

The Company, like all other businesses, is affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand its service capabilities. The cumulative effect of inflation over time results in significantly higher operating costs and facility replacement costs, which must be recovered from future cash flows.

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Our water companies are also subject to environmental and water quality regulations. Costs to comply with environmental and water quality regulations are substantial. We are currently in compliance with current regulations, but the regulations are subject to change at any time. The costs to comply with future changes in state or federal regulations, which could require us to modify current filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial.

Our water companies’ ability to recover their increased expenses and/or investment in utility plant is dependent on the regulatory rates they charge their customers. Changes to these rates must be approved by the appropriate regulatory authority through formal rate proceedings. The rates of our four Connecticut based water companies are regulated by the Connecticut DPUC and our Massachusetts water company’s rates are regulated by the Massachusetts DTE. Due to the subjectivity of certain items involved in the process of establishing rates such as future customer growth, inflation and allowed return on investment, we have no assurance that our water companies will be able to raise their rates to a level we consider appropriate, or to raise their rates at all, through any future rate proceeding.

The Company believes that it is likely that it will apply for rate increases for one or more of its Connecticut subsidiaries during the next 18 months.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in conformity with Generally Accepted Accounting Principles in the United States of America (GAAP) and as directed by the regulatory commissions to which the Company’s subsidiaries are subject. (See Note 1 to the Consolidated Financial Statements for a discussion of our significant accounting policies.) The Company believes the following policies and estimates are critical to the presentation of its consolidated financial statements.

Public Utility Regulation - Statement of Financial Accounting Standards – Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation” (FAS 71), requires cost based, rate-regulated enterprises such as the Company’s water companies to reflect the impact of regulatory decisions in their financial statements. The state regulators, through the rate regulation process, can create regulatory assets that result when costs are allowed for ratemaking purposes in a period after the period in which costs would be charged to expense by an unregulated enterprise. The balance sheet includes regulatory assets and liabilities as appropriate, primarily related to income taxes and post-retirement benefit costs. The Company believes, based on current regulatory circumstances, that the regulatory assets recorded are likely to be recovered and that its use of regulatory accounting is appropriate and in accordance with the provisions of FAS 71. Material regulatory assets are earning a return.

Revenue Recognition – Revenue from metered customers includes billings to customers based on quarterly meter readings plus an estimate of water used between the customer’s last meter reading and the end of the accounting period. The unbilled revenue amount is listed as a current asset on the balance sheet. The amount recorded as unbilled revenue is generally higher during the summer months when water sales are higher. Based upon historical experience, management believes the Company’s estimate of unbilled revenues is reasonable.

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Pension Plan Accounting – The discount rate assumption we use to value our pension benefit obligations has a material impact on the amount of pension expense we record in a given period. Our 2003 and 2004 pension expense was calculated using assumed discount rates of 6.5% and 6.25%, respectively. In 2005, our pension expense will be calculated with an assumed discount rate of 5.75%. The following table shows how much a one percent change in our assumed discount rate would have changed our reported 2004 pension expense:

Outlook

The Company’s earnings and profitability are primarily dependent upon the sale and distribution of water, the amount of which is dependent on seasonal weather fluctuations, particularly during the summer months when water demand will vary with rainfall and temperature levels. The Company’s earnings and profitability in future years will also depend upon a number of other factors, such as the ability to maintain our operating costs at lower levels, customer growth in the Company’s core regulated water utility business, growth in revenues attributable to non-water sales operations, and the timing and adequacy of rate relief if and when requested, from time to time, by our regulated water companies.

The Company believes that the factors described above and those described in detail below under the heading “Commitments and Contingencies” may have significant impact, either alone or in the aggregate, on the Company’s earnings and profitability in fiscal years 2005 and beyond. Please also review carefully the risks and uncertainties described under the heading “Forward Looking Information”.

Based on the Company’s current projections, the Company believes that its net income for the years 2005, 2006 and 2007, excluding the expected gain from the sale of Barnstable Water and BARLACO assets in 2005 and 2006 may be materially reduced from the levels reported for the years 2003 and 2004. Any such reductions would be primarily attributable to lower net income (reduced tax benefits) related to the Company’s land disposition program during 2005-07, excluding BARLACO. In addition, following the completion of the expected sale of the assets of Barnstable Water to the Town of Barnstable in 2005, it is uncertain if the net income realized from a management contract with the Town to provide full operating and management services to Barnstable’s customers, combined with any return generated from the investment of the proceeds of the sale, will be greater or less than the net income produced historically through the ownership of the Barnstable Water and BARLACO assets. During 2006 and subsequent years, the ability of the Company to maintain and increase its net income comparable to historical levels will principally depend upon the effect on the Company of the factors described above in this “Outlook” section, those factors described in the section entitled “Commitments and Contingencies” and the risks and uncertainties described in “Forward Looking Information”.

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FINANCIAL CONDITION
Liquidity and Capital Resources

In recent years, we have attempted to limit our investment in utility plant to the amount of funds generated from our consolidated operations. Under this policy, the Company has not been required to significantly increase its long-term debt obligations in order to fund its annual construction program. The following table shows the total construction expenditures for each of the last three years and what we expect to invest on construction projects in 2005.

We currently fund our working capital requirements through our lines of credit with four banks, which provide liquidity to satisfy ongoing cash needs. We consider the current aggregate $15,500,000 lines of credit to be adequate to finance any expected short-term borrowing requirements that may arise in 2005. All the lines have one-year lives and will expire on different dates in 2005. We expect to renew the lines in 2005. The interest rates payable are variable and fluctuate over time based on financial conditions. The weighted average interest rate on the $5,650,000 balance outstanding at December 31, 2004 was 2.832%.

During 2003, interest rates fell to historically low levels. We took advantage of the low rates and refinanced a portion of our long-term debt in the fourth quarter of 2003. In October 2003, Connecticut Water borrowed $22.93 million from the issuance of Water Facilities Refunding Revenue Bonds by the Connecticut Development Authority (Authority). The bonds were sold in two series with the following terms:

The proceeds of the transaction were used to redeem the Series R and S first mortgage bonds of Connecticut Water and paid for a portion of the expenses associated with the issuance.

During the first quarter of 2004, Connecticut Water refinanced an additional portion of its long-term debt through the issuance of $12,500,000 of variable rate, taxable debenture bonds Series 2004 with a maturity date of January 4, 2029. The bonds were secured by an irrevocable direct pay letter of credit issued by a financial institution, with a five-year term expiring in March 2009. The proceeds of the sale of the bonds, which are general debt obligations of Connecticut Water, were used to redeem the $12,050,000 aggregate principal amount of Connecticut Water’s First Mortgage Bonds (Series V) and to pay a portion of the expenses associated with the bonds’ refunding.

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In connection with the issuance of the bonds, Connecticut Water entered into an interest rate swap transaction with a counterparty in the notional principal amount of $12,500,000. The interest rate swap agreement provides that, beginning in April 2004 and thereafter on a monthly basis, Connecticut Water will pay the counterparty a fixed interest rate of 3.73% on the notional amount for a period of five years. In exchange, the counterparty will, beginning in April 2004 and thereafter on a monthly basis, pay Connecticut Water a floating interest rate (based on 105% of the U.S. Dollar one-month LIBOR rate) on the notional amount for a period of five years. The purpose of the interest rate swap is to manage the Company’s exposure to fluctuations in prevailing interest rates.

In June 2004, Unionville secured $1.6 million through the Drinking Water State Revolving Fund for costs incurred in developing a water interconnection with a neighboring water supplier. The funds were used to pay off a portion of the balances outstanding under bank lines of credit.

On September 1, 2004, Connecticut Water refinanced a portion of its existing bond indebtedness. Connecticut Water borrowed $9.55 million in sale proceeds from the issuance of Water Facilities Refunding Revenue Bonds by the Authority. The bonds were sold in two series with the following terms:

The proceeds of the transaction were used to redeem prior obligations to the Authority that were secured by the Series T and Series U first mortgage bonds of Connecticut Water.

The Company is currently in the process of negotiating additional fixed-rate, long-term borrowings from the Authority to fund ongoing and planned capital improvement projects. The Company plans to submit applications to the Connecticut DPUC with respect to these anticipated borrowings in the near future. The ability of the Company to complete these borrowing transactions will depend upon the receipt of final decisions of the DPUC with terms acceptable to the Company, which have not yet been issued, and the successful completion of negotiations with the Authority and the execution of definitive borrowing agreements.

Off-Balance Sheet Arrangements and Contractual Obligations

We do not use off-balance sheet arrangements such as securitization of receivables with any unconsolidated entities or other parties. The Company does not engage in trading or risk management activities and does not have material transactions involving related parties other than the interest rate swap agreement discussed above.

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The following table summarizes the Company’s future contractual cash obligations as of December 31, 2004:

Payments due by Periods
(in thousands of dollars)

Interim Bank Loans Payable at year-end 2004 was $5,650,000, which is $4,050,000 lower than at the end of 2003.

During 2004, the Company incurred approximately $12.7 million of construction expenditures. The Company financed such expenditures through internally generated funds, customers’ advances, contributions in aid of construction and short-term borrowings.

The Board of Directors has approved a $14.0 million construction budget for 2005, net of amounts to be financed by customer advances and contributions in aid of construction. Funds primarily provided by operating activities are expected to finance this entire construction program given normal weather patterns and related operating revenue billings.

RESULTS OF OPERATIONS

Overview of 2004 Results

Earnings for 2004 in total were $184,000, or $0.02 per share, higher than in 2003. The increase in earnings was due to higher net income in our ‘Real Estate’ and ‘Services and Rentals’ business segments, which more than offset a reduction in net income from our ‘Water Activities’ segment.

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Real Estate

The net income generated by the real estate segment increased from 2003 primarily due to the tax benefits of a 2004 donation of 56 acres of land to the Town of Plymouth, CT in addition to the donation of the final parcel of land to the Town of Killingly, CT under our 3-year agreement with the Town. The 2004 and 2003 net income in this business segment were generated from the following:

Net income from this business segment are dependent on donations/sales of available land. This typically occurs when utility-owned land is deemed to be not necessary to protect water sources. The Company currently does not project completing any material land transactions in 2005.

Services and Rentals

Net income generated from the services and rental segment in 2004 increased $172,000, or 23%, over 2003 levels. The increased net income is primarily due to a 19% increase in customer enrollment in our service line maintenance program plus an increased number of leases and higher lease rates charged to the telecommunications companies that lease space on our water storage tanks for their antenna sites. The table below summarizes the net income from these two lines of business in this business segment for 2004 and 2003.

Water Activities

The net income from water activities in 2004 was $165,000 lower than it was in 2003. A breakdown of the components of this decrease is as follows:

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The 2.9% increase in Operating Revenues is primarily due to:

The $1,189,000 or 5.2% increase in Operation and Maintenance expense is primarily due to the following expense increases:

The increase in Depreciation expense is due to the Company’s investment in new utility plant.

Income tax expense increased in 2004 due to the $613,000 increase in book pre-tax income plus a higher 2004 effective income tax rate due to flow through accounting related to book/tax timing differences and a 2003 reduction in estimated tax liabilities associated with non-current periods.

The increase in Taxes Other Than Income taxes is primarily due to increased municipal taxes related to our increased investment in utility plant.

The 16% decrease in interest and debt expense is primarily due to the lowering of our interest rates through the long-term debt refinancings that were completed in 2003 and 2004.

Overview of 2003 Results

Earnings for 2003 were higher than 2002 due to increased net income in our ‘Real Estate’ and ‘Services and Rentals’ business segments, which more than offset a reduction in net income from our ‘Water Activities’ segment.

The net income generated by the real estate segment increased from 2002 primarily because the most valuable parcel of the three parcels being donated to the Town of Killingly, CT over a three-year period was donated in 2003. The net income (tax benefits) by year from donations under this agreement are:

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The net income generated from the services and rental segment increased by 65% from 2002. In 2003, we increased the profit margins generated by our service contract operations, increased customer enrollment in our service line maintenance program and increased the number of leases we have with telecommunications companies that lease space on our water storage tanks for their antenna sites.

Net income from our core ‘Water Activities’ segment declined in 2003. The unusually rainy and cool weather experienced during 2003 caused our customers on average to use less water than they would normally use. Operating revenues overall were approximately $1.3 million lower in 2003 than they would have been in a ‘normal’ weather year. This segment also experienced a 16.5% increase in operation and maintenance expense in 2003. In addition to the fact that 2003 included 10 additional months of expenses associated with Unionville, which was acquired on October 31, 2002, this segment experienced higher wages, medical, pension, insurance, and power costs. There was also a higher than normal incidence of weather related main breaks in addition to the normal increases in depreciation and property tax expense related to the Company’s increased investment in utility plant. Somewhat offsetting these negative impacts on net income was a 1.5% increase in the number of utility customers plus a lower 2003 effective income tax rate due to book/tax timing differences, lower pre-tax income and a reduction in estimated tax liabilities associated with non-current periods.

Results on a comparable basis

Because we acquired Unionville on October 31, 2002, and because we accounted for the acquisition of Unionville under the purchase method of accounting, our consolidated income statements include different amounts of Unionville operating results in years 2002 and 2003.

To assist us and our investors in analyzing operating results by income statement line, Company management internally looks at our consolidated results without Unionville to measure performance on a comparable company basis. The following are comparable income statements with the results of Unionville removed.

23

2003 Results Compared with 2002

     INCOME STATEMENTS
     For the years ended, December 31, (in thousands)

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COMMITMENTS AND CONTINGENCIES

Security – The Bioterrorism Response Act of 2001 required every public water system serving over 3,300 people to prepare Vulnerability Assessments (VA) of their critical utility assets. The last of these assessments required to be filed by our companies were submitted to the U.S. Environmental Protection Agency in June 2004 and was followed by updated Emergency Response Plans in December 2004, per statutory requirements. The information within the VA is not subject to release to the public and is protected from Freedom of Information Act inquiries.

Investment in security-related improvements is a continuing process and management believes that the costs associated with any such improvements would be chargeable for recovery in future rate proceedings.

Reverse Privatization – Our water companies derive their rights and franchises to operate from state laws that are subject to alteration, amendment or repeal, and do not grant permanent exclusive rights to our service areas. Our franchises are free from burdensome restrictions, are unlimited as to time, and authorize us to sell potable water in all towns we now serve. There is the possibility that states could revoke our franchises and allow a governmental entity to take over some or all of our systems. From time to time such legislation is contemplated.

As previously disclosed on March 11, 2005, the Company entered into an agreement to sell the assets of its Massachusetts’ subsidiary, The Barnstable Water Company, and the assets of its BARLACO real estate subsidiary to the Town of Barnstable, Massachusetts. The total value of the transaction is $11 million, with $10 million to be received by Barnstable Water in 2005 for the water utility assets and associated liabilities. A separate real estate transaction for the BARLACO assets will take place in 2006 with additional proceeds of $1 million. Assuming that the Company completes the sales of the assets of Barnstable Water and BARLACO during 2005 and 2006 as described above, the Company estimates that it will record after tax gains of approximately $2.7 million and $1.4 million, respectively, from the sale of those companies’ assets in those years. At the closing of the sale of the water utility assets, the Company will also enter into a management contract with the Town to provide full operating and management services for the Barnstable Water utility operation. Under this full service contract, the customers will continue to receive the same full range of field and customer service presently provided by Barnstable Water.

25

Environmental and Water Quality Regulation – The Company is subject to environmental and water quality regulations. Costs to comply with environmental and water quality regulations are substantial. We are currently in compliance with current regulations, but the regulations are subject to change at any time. The costs to comply with future changes in state or federal regulations, which could require us to modify current filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial.

Moratorium on Land Sales – On December 4, 2002, the Company entered into a Memorandum of Understanding (MOU) with the State of Connecticut Department of Environmental Protection (DEP). The MOU provides for a voluntary two-year moratorium on the sale of approximately 7,100 acres of undeveloped Class I, II, and III water company lands held by the Company’s Connecticut water company subsidiaries. Class I and II water company lands, as defined by Public Health Code regulations, are those that are within the watershed or drainage area of a public water supply. Class III lands are those that are not located within the watershed. Under the terms of the MOU, the DEP in cooperation with the Company’s Connecticut water companies assessed and evaluated all undeveloped Class I, II and III land holdings to determine the desirability of the State of Connecticut’s acquiring the land for open space and to develop strategies to fund the acquisitions of such properties in fee or by easement from the Company.

During the quarter ended March 31, 2004, the Company received notice from the State of Connecticut Department of Environmental Protection (DEP) that its review of our approximately 7,600 acres of Class I, II, and III land was complete. The DEP notice indicated that the DEP had identified 240 parcels representing 6,823 acres of land and land underwater as land that the State of Connecticut would be interested in acquiring as open space, by either fee ownership or a conservation easement. During October 2004, the Company received notice from the DEP indicating that the State of Connecticut does not have sufficient funds available for the possible acquisition of Company lands by the State. The DEP also requested that the Company extend the sales moratorium set forth in the MOU entered into by the DEP and the Company in December 2002 beyond its current expiration date of December 31, 2004. The Company chose not to extend the MOU, thus causing it to expire on December 31, 2004. The Company is now free to consider disposition of lands to other interested parties, subject to the applicable statutory and regulatory requirements.

Rate Relief – Our four Connecticut operating subsidiaries, Connecticut Water, Crystal, Gallup, and Unionville, are regulated public utilities, which provide water services to their customers. The rates that these companies charge their water customers are subject to the jurisdiction of the regulatory authority of the Connecticut DPUC, which sets water rates for each company independently because the systems are not interconnected. Similarly, the Massachusetts DTE regulates the operations and rates of the Barnstable Water.

The DPUC and DTE may authorize the Company’s operating subsidiaries to charge rates which the DPUC and the DTE consider to be sufficient to recover the normal operating expenses of our operating subsidiaries, to provide funds for adding new or replacing water infrastructure, and to allow our operating subsidiaries to earn what the DPUC and the DTE consider to be a fair and reasonable return on our invested capital.

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The Company believes it is likely that it will apply for rate increases for one or more of its Connecticut subsidiaries during the next 18 months.

Land Dispositions – In the past, the Company has engaged in a program of land donations to municipalities in Connecticut, which has resulted in net income (tax benefits) to the Company of approximately $4.2 million. As previously disclosed, the land donation program under the Company’s agreement with the Town of Killingly, CT was completed in January 2004 with the donation of the remaining parcel to the Town. The donation of this final parcel resulted in a net profit (tax benefit) to the Company of $707,000 during the first quarter of 2004. The donation of land to the Town of Plymouth, CT in December 2004 resulted in an additional $498,000 net income.

The Company and its subsidiaries own additional parcels of land in Connecticut and Massachusetts which may be suitable in the future for disposition, either by sale or by donation to municipalities, other local governments or private charitable entities. These additional parcels would include certain Class I and II parcels previously identified by the Connecticut DEP in the DEP notice noted above, as well as certain lands owned by BARLACO in Barnstable, Massachusetts.

During 2003 and 2004, the Company donated approximately 370 acres of land to municipalities in Connecticut for public and/or open space purposes. These donations contributed approximately $.9 million and $1.2 million, respectively to net income in those years, as a result of favorable tax treatment under federal and Connecticut tax laws. The Company currently anticipates that it will continue to pursue selected land sales and/or donations during fiscal years 2005, 2006 and 2007, but at a reduced level. The Company currently does not project completing any material land transactions in 2005. The Company is unable to predict if and when any sales or donations of some or all of these parcels may occur in the future and, if so, what amount of net income (tax benefits) may result from any such sales or donations.

Taxes – Due to the current environment of state budget deficits, the Company and its subsidiaries may be subject to a higher tax burden through changes in state legislation. Also, the Company’s future property tax burden may increase as state aid to towns is decreased.

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FORWARD LOOKING INFORMATION

This report, including management’s discussion and analysis, contains certain forward-looking statements regarding the Company’s results of operations and financial position. These forward looking statements are based on current information and expectations, and are subject to risks and uncertainties, which could cause the Company’s actual results to differ materially from expected results.

Our water companies are subject to various federal and state regulatory agencies concerning water quality and environmental standards. Generally, the water industry is materially dependent on the adequacy of approved rates to allow for a fair rate of return on the investment in utility plant. The ability to maintain our operating costs at the lowest possible level, while providing good quality water service, is beneficial to customers and stockholders. Profitability is also dependent on the timeliness of rate relief, when necessary, and numerous factors over which we have little or no control, such as the quantity of rainfall and temperature, industrial demand, financing costs, energy rates, tax rates, and stock market trends which may affect the return earned on pension assets, and compliance with environmental and water quality regulations. The profitability of our other revenue sources is subject to the amount of land we have available for sale and/or donation, the demand for the land, the continuation of the current state tax benefits relating to the donation of land for open space purposes, regulatory approval of land dispositions, the demand for telecommunications antenna site leases and the successful extensions and expansion of our service contract work. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The primary market risk faced by the Company is interest rate risk. As of December 31, 2004, the Company had no exposure to derivative financial instruments or financial instruments with significant credit risk or off-balance sheet risks. In addition, the Company is not subject in any material respect to any currency or other commodity risk.

     The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company’s exposure to interest fluctuations is managed at the Company and subsidiary operations levels through the use of a combination of fixed rate long-term debt (and variable rate borrowings) under financing arrangements entered into by the Company and its subsidiaries and the use of the interest rate swap agreement discussed below. The Company has $15,500,000 current lines of credit with four banks, under which interim bank loans payable at December 31, 2004 were $5,650,000.

     During the first quarter of 2004, Connecticut Water entered into a five-year interest rate swap transaction in connection with the refunding of its First Mortgage Bonds (Series V). The swap agreement provides for Connecticut Water’s exchange of floating rate interest payment obligations for fixed rate interest payment obligations on a notional principal amount of $12,500,000. The purpose of the interest rate swap is to manage the Company’s exposure to fluctuations in prevailing interest rates. See “Liquidity and Capital Resources” section of Item 7 – “Management’s Discussion and Analysis and Results of Operations” above for further information. The Company does not enter into derivative financial contracts for trading or speculative purposes and does not use leveraged instruments.

     Management believes that changes in interest rates will not have a material effect on income or cash flow during 2005, although there can be no assurances that interest rates will not significantly change.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of Connecticut Water Service, Inc., and the Notes to Consolidated Financial Statements together with the report of PricewaterhouseCoopers LLP are included herein on pages F-3 through F-28.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

     None

 29

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures – As of December 31, 2004, 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 Rule 13a-14(c) and 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 disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting – Internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15(d) – 15(f)) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. We have used the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in conducting our evaluation of the effectiveness of the internal control over financial reporting. Based on our evaluation, we concluded that the Company’s internal control over financial reporting is effective as of December 31, 2004. Our management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting – During the past 18 months, the Company has implemented a comprehensive plan to review, document, test the operational effectiveness, and evaluate the processes and systems of internal controls over financial reporting, as required under Section 404 of the Act and Public Accounting Oversight Board Standard No. 2, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction With An Audit of Financial Statements” (Standard No. 2), which was adopted in June 2004.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 30

ITEM 9B. OTHER INFORMATION

On December 2, 2004, the Company entered into an amended and restated employment agreement with Thomas R. Marston, the Company’s Vice President of Planning and Treatment. The terms of Mr. Marston’s agreement are identical to those of the Company’s other executive officers. For a complete description of the material terms of these agreements, please see the description to be included in the Company’s proxy statement to be dated March 31, 2005, under the heading “Employment Contracts, Change-in-Control, and Termination Arrangement.” A copy of Mr. Marston’s employment agreement is being filed with this annual report on Form 10-K as Exhibit 10.9.2.

 31

PART III

Pursuant to General Instruction G(3), the information called for by Items 10, (except for information concerning the executive officers of the Company) 11, 12, 13 and 14 is hereby incorporated by reference to the Company’s definitive proxy statement to be filed on EDGAR on or about March 31, 2005. Information concerning the executive officers of the Company is included as Item 10 of this report.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following is a list of the executive officers of the Company:

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For further information regarding the executive officers see the Company’s Proxy Statement dated March 31, 2005.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 33

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

 34

(b)

Exhibits:

 F-1

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

 F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Connecticut Water Service, Inc.:

We have completed an integrated audit of Connecticut Water Service, Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Connecticut Water Service, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting, appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control

 F-2

over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 31, 2005

 F-3

Connecticut Water Service, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

 F-4

Connecticut Water Service, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS