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EXCEL - IDEA: XBRL DOCUMENT - CONNECTICUT WATER SERVICE INC / CTFinancial_Report.xls
EX-32 - SOX CERTIFICATION - CONNECTICUT WATER SERVICE INC / CTexhibit32q32014.htm
EX-31.1 - CEO CERTIFICATION - CONNECTICUT WATER SERVICE INC / CTexhibit311q32014.htm
EX-31.2 - CFO CERTIFICATION - CONNECTICUT WATER SERVICE INC / CTexhibit312q32014.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 SEPTEMBER 30, 2014 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, accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date
11,112,589
Number of shares of common stock outstanding, November 1, 2014
(Includes 200,991 common stock equivalent shares awarded under the Performance Stock Programs) 



CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
 
Financial Report
September 30, 2014
 
TABLE OF CONTENTS

Part I, Item 1:  Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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



CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
ASSETS
 
September 30, 2014
 
December 31, 2013
Utility Plant
 
$
662,411

 
$
639,704

Construction Work in Progress
 
20,642

 
12,066

 
 
683,053

 
651,770

Accumulated Provision for Depreciation
 
(188,482
)
 
(179,894
)
Net Utility Plant
 
494,571

 
471,876

Other Property and Investments
 
7,691

 
7,388

Cash and Cash Equivalents
 
1,626

 
18,371

Accounts Receivable (Less Allowance, 2014 - $1,150; 2013 - $1,127)
 
12,968

 
12,340

Accrued Unbilled Revenues
 
9,521

 
7,624

Materials and Supplies, at Average Cost
 
1,632

 
1,633

Prepayments and Other Current Assets
 
13,553

 
6,928

Total Current Assets
 
39,300

 
46,896

Restricted Cash
 
1,291

 
5,777

Unamortized Debt Issuance Expense
 
6,428

 
6,841

Unrecovered Income Taxes - Regulatory Asset
 
52,554

 
47,135

Pension Benefits - Regulatory Asset
 
2,099

 
3,085

Post-Retirement Benefits Other Than Pension - Regulatory Asset
 
1,456

 
1,288

Goodwill
 
31,685

 
31,685

Deferred Charges and Other Costs
 
9,382

 
8,840

Total Regulatory and Other Long-Term Assets
 
104,895

 
104,651

Total Assets
 
$
646,457

 
$
630,811

CAPITALIZATION AND LIABILITIES
 
 

 
 

Common Stockholders' Equity:
 
 

 
 

Common Stock Without Par Value: Authorized - 25,000,000 Shares
 
 

 
 

     Issued and Outstanding: 2014 - 11,111,444; 2013 - 11,038,232
 
$
140,241

 
$
138,591

Retained Earnings
 
69,842

 
59,277

Accumulated Other Comprehensive Income (Loss)
 
45

 
(115
)
Common Stockholders' Equity
 
210,128

 
197,753

Preferred Stock
 
772

 
772

Long-Term Debt
 
173,395

 
175,042

Total Capitalization
 
384,295

 
373,567

Current Portion of Long-Term Debt
 
1,546

 
4,121

Interim Bank Loans Payable
 
693

 

Accounts Payable and Accrued Expenses
 
9,026

 
10,846

Accrued Interest
 
1,426

 
753

Current Portion of Refund to Customers - Regulatory Liability
 
6,087

 
4,650

Other Current Liabilities
 
2,297

 
2,359

Total Current Liabilities
 
21,075

 
22,729

Advances for Construction
 
26,874

 
28,718

Deferred Federal and State Income Taxes
 
53,742

 
47,470

Unfunded Future Income Taxes
 
52,314

 
46,723

Long-Term Compensation Arrangements
 
19,215

 
20,651

Unamortized Investment Tax Credits
 
1,358

 
1,414

Refund to Customers - Regulatory Liability
 
3,100

 
7,749

Other Long-Term Liabilities
 
1,010

 
1,018

Total Long-Term Liabilities
 
157,613

 
153,743

Contributions in Aid of Construction
 
83,474

 
80,772

Commitments and Contingencies
 

 

Total Capitalization and Liabilities
 
$
646,457

 
$
630,811


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

3


CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30, 2014 and 2013
(Unaudited)
(In thousands, except per share amounts)
 
2014
 
2013
Operating Revenues
$
27,554

 
$
27,632

Operating Expenses
 
 
 
Operation and Maintenance
10,871

 
11,099

Depreciation
2,947

 
2,684

Income Taxes
2,062

 
1,659

Taxes Other Than Income Taxes
2,169

 
2,135

Total Operating Expenses
18,049

 
17,577

Net Operating Revenues
9,505

 
10,055

Other Utility Income, Net of Taxes
177

 
194

Total Utility Operating Income
9,682

 
10,249

Other Income (Deductions), Net of Taxes
 
 
 
Gain (Loss) on Real Estate Transactions
4

 
(7
)
Non-Water Sales Earnings
378

 
381

Allowance for Funds Used During Construction
150

 
79

Other
(165
)
 
423

Total Other Income, Net of Taxes
367

 
876

Interest and Debt Expense
 
 
 
Interest on Long-Term Debt
1,766

 
1,827

Other Interest (Income) Charges, Net
(168
)
 
(142
)
Amortization of Debt Expense and Premium, Net
3

 
(2
)
Total Interest and Debt Expense
1,601

 
1,683

Net Income
8,448

 
9,442

Preferred Stock Dividend Requirement
10

 
10

Net Income Applicable to Common Stock
$
8,438

 
$
9,432

Weighted Average Common Shares Outstanding:
 
 
 
Basic
10,902

 
10,835

Diluted
11,102

 
11,006

Earnings Per Common Share:
 
 
 
Basic
$
0.78

 
$
0.87

Diluted
$
0.76

 
$
0.86

Dividends Per Common Share
$
0.2575

 
$
0.2475


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


4


CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 2014 and 2013
(Unaudited)
(In thousands, except per share amounts)
 
2014
 
2013
Operating Revenues
$
73,273

 
$
69,906

Operating Expenses
 

 
 

Operation and Maintenance
32,041

 
31,834

Depreciation
8,593

 
7,988

Income Taxes
4,396

 
5,306

Taxes Other Than Income Taxes
6,557

 
6,105

Total Operating Expenses
51,587

 
51,233

Net Operating Revenues
21,686

 
18,673

Other Utility Income, Net of Taxes
564

 
579

Total Utility Operating Income
22,250

 
19,252

Other Income (Deductions), Net of Taxes
 
 
 
Gain (Loss) on Real Estate Transactions
4

 
(7
)
Non-Water Sales Earnings
1,209

 
1,143

Allowance for Funds Used During Construction
417

 
209

Other
(96
)
 
251

Total Other Income, Net of Taxes
1,534

 
1,596

Interest and Debt Expense
 
 
 
Interest on Long-Term Debt
5,285

 
5,405

Other Interest (Income) Charges, Net
(490
)
 
(842
)
Amortization of Debt Expense and Premium, Net
65

 
(80
)
Total Interest and Debt Expense
4,860

 
4,483

Net Income
18,924

 
16,365

Preferred Stock Dividend Requirement
29

 
29

Net Income Applicable to Common Stock
$
18,895

 
$
16,336

Weighted Average Common Shares Outstanding:
 
 
 
Basic
10,886

 
10,819

Diluted
11,083

 
10,987

Earnings Per Common Share:
 
 
 
Basic
$
1.74

 
$
1.51

Diluted
$
1.70

 
$
1.49

Dividends Per Common Share
$
0.7525

 
$
0.7325


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


5


CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended September 30, 2014 and 2013
(Unaudited)
(In thousands)

 
2014
 
2013
Net Income
$
8,448

 
$
9,442

Other Comprehensive Income/(Loss), net of tax
 

 
 

Qualified Cash Flow Hedging Instrument Income, net of tax benefit of $0 and $12 in 2014 and 2013

 
40

Reclassification to Pension and Post-Retirement Benefits Other than Pension, net of tax expense of $61 and $34 in 2014 and 2013
14

 
22

Unrealized (loss) gain on investments, net of tax benefit (expense) of $9 and $(31) in 2014 and 2013
(14
)
 
54

Other Comprehensive Income, net of tax

 
116

Comprehensive Income
$
8,448

 
$
9,558



CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2014 and 2013
(Unaudited)
(In thousands)

 
2014
 
2013
Net Income
$
18,924

 
$
16,365

Other Comprehensive Income/(Loss), net of tax
 

 
 

Qualified Cash Flow Hedging Instrument Income, net of tax benefit of $0 and $12 in 2014 and 2013

 
41

Reclassification to Pension and Post-Retirement Benefits Other than Pension, net of tax expense of $87 and $80 in 2014 and 2013
136

 
89

Unrealized gain on investments, net of tax expense of $15 and $66 in 2014 and 2013
24

 
107

Other Comprehensive Income, net of tax
160

 
237

Comprehensive Income
$
19,084

 
$
16,602



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

6


CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Three Months Ended September 30, 2014 and 2013
(Unaudited)
(In thousands, except per share amounts)

 
2014
 
2013
Balance at Beginning of Period
$
64,259

 
$
53,395

Net Income
8,448

 
9,442

 
72,707

 
62,837

Dividends Declared:
 

 
 

Cumulative Preferred, Class A, $0.20 per share
3

 
3

Cumulative Preferred, Series $0.90, $0.225 per share
7

 
7

Common Stock - 2014 $0.2575 per share; 2013 $0.2475 per share
2,855

 
2,719

 
2,865

 
2,729

Balance at End of Period
$
69,842

 
$
60,108



CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Nine Months Ended September 30, 2014 and 2013
(Unaudited)
(In thousands, except per share amounts)

 
2014
 
2013
Balance at Beginning of Period
$
59,277

 
$
51,804

Net Income
18,924

 
16,365

 
78,201

 
68,169

Dividends Declared:
 

 
 

Cumulative Preferred, Class A, $0.60 per share
9

 
9

Cumulative Preferred, Series $0.90, $0.675 per share
20

 
20

Common Stock - 2014 $0.7525 per share; 2013 $0.7325 per share
8,330

 
8,032

 
8,359

 
8,061

Balance at End of Period
$
69,842

 
$
60,108


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


7


CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2014 and 2013
(Unaudited)
(In thousands)
 
2014
 
2013
Operating Activities:
 
 
 
Net Income
$
18,924

 
$
16,365

Adjustments to Reconcile Net Income to Net Cash and Cash Equivalents Provided by
 

 
 

Operating Activities:
 

 
 

Deferred Revenues
(4,291
)
 
(2,583
)
Provision for Deferred Income Taxes and Investment Tax Credits, Net
6,385

 
5,063

Allowance for Funds Used During Construction
(417
)
 
(209
)
Depreciation and Amortization (including $599 and $453 in 2014 and 2013 charged to other accounts)
9,192

 
8,441

(Gain) Loss on Real Estate Transactions
(4
)
 
7

Change in Assets and Liabilities:
 

 
 

Increase in Accounts Receivable and Accrued Unbilled Revenues
(2,525
)
 
(4,255
)
Increase in Prepaid Income Taxes and Prepayments and Other Current Assets
(6,625
)
 
(18,170
)
(Increase) Decrease in Other Non-Current Items
(1,336
)
 
11,509

Increase in Accounts Payable, Accrued Expenses and Other Current Liabilities
524

 
1,876

Total Adjustments
903

 
1,679

Net Cash and Cash Equivalents Provided by Operating Activities
19,827

 
18,044

Investing Activities:
 

 
 

Net Additions to Utility Plant Used in Continuing Operations
(31,069
)
 
(22,882
)
Proceeds from the Sale of Land
7

 
95

Release of Restricted Cash
4,488

 
1,295

Net Cash and Cash Equivalents Used in Investing Activities
(26,574
)
 
(21,492
)
Financing Activities:
 

 
 

Proceeds from Interim Bank Loans
693

 
1,324

Repayment of Interim Bank Loans

 
(1,660
)
Proceeds from the Issuance of Long-Term Debt

 
14,550

Costs to Issue Long-Term Debt and Common Stock

 
(42
)
Proceeds from Issuance of Common Stock
1,295

 
1,209

Repayment of Long-Term Debt Including Current Portion
(3,866
)
 
(15,613
)
Advances from Others for Construction
239

 
179

Cash Dividends Paid
(8,359
)
 
(8,061
)
Net Cash and Cash Equivalents Used in Financing Activities
(9,998
)
 
(8,114
)
Net Decrease in Cash and Cash Equivalents
(16,745
)
 
(11,562
)
Cash and Cash Equivalents at Beginning of Period
18,371

 
13,150

Cash and Cash Equivalents at End of Period
$
1,626

 
$
1,588

Non-Cash Investing and Financing Activities:
 

 
 

Non-Cash Contributed Utility Plant
$
768

 
$
438

Short-term Investment of Bond Proceeds Held in Restricted Cash
$
1,291

 
$
9,938

Supplemental Disclosures of Cash Flow Information:
 

 
 

Cash Paid for:
 

 
 

Interest
$
4,250

 
$
4,126

State and Federal Income Taxes
$
1,135

 
$
2,550


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

8


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 Maine Water Company (“Maine Water”). The Biddeford & Saco Water Company (“BSWC”) was merged with and into Maine Water, with Maine Water remaining as the surviving entity, effective January 1, 2014. The Condensed Consolidated Balance Sheet at December 31, 2013 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 year ended December 31, 2013 (the “10-K”) and as updated in the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 2014 and June 30, 2014.

Certain reclassifications have been made to the 2013 Condensed Consolidated Statement of Cash Flows to conform previously reported data to the current presentation.

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.

Regulatory Matters

The rates we charge our Connecticut water customers are established under the jurisdiction of and are approved by the Connecticut Public Utilities Regulatory Authority (“PURA”).  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 September 30, 2014 were 9.75% and 7.32%, respectively.

On January 25, 2013, Connecticut Water filed a Water Infrastructure Conservation Adjustment (“WICA”) application with the PURA requesting an additional 1.08% surcharge to customer bills related to approximately $6.5 million spending on WICA projects. This application also reduced the surcharge by 0.09% for the prior year reconciliation adjustment which expired April 1, 2013.  On January 30, 2013, Connecticut Water filed for a 0.10% reconciliation adjustment for the 2012 shortfall in WICA, to become effective April 1, 2013.  On March 25, 2013, the PURA approved an additional 1.06% surcharge, effective April 1, 2013. Additionally, on March 27, 2013, the PURA approved a 0.10% reconciliation adjustment, effective April 1, 2013. As of April 1, 2013, Connecticut Water's cumulative WICA surcharge was 6.80%.

On July 25, 2013, Connecticut Water filed a WICA application with the PURA requesting an additional 1.09% surcharge to customers' bills, representing approximately $5.6 million in WICA related projects. On September 18, 2013 the PURA approved the 1.09% surcharge with the new rates becoming effective on October 1, 2013. As of October 1, 2013, the cumulative WICA surcharge was 7.89%.

Effective April 1, 2014, in accordance with a settlement agreement with the Office of the Consumer Counsel of the State of Connecticut (the “OCC”) and the Office of the Attorney General for the State of Connecticut, discussed below, Connecticut Water's cumulative WICA surcharge of 7.89% was rolled into base rates charged to customers.

On July 29, 2014, Connecticut Water filed a WICA application with the PURA requesting a 1.59% surcharge to customers' bills, representing approximately $12.7 million in WICA related projects. On September 26, 2014, the PURA approved the 1.59% surcharge with the new rates becoming effective on October 1, 2014.

On June 5, 2013, the Connecticut's General Assembly passed Public Act 13-78, “An Act Concerning Water Infrastructure and Conservation, Municipal Reporting Requirements and Unpaid Utility Accounts at Multi-Family Dwellings” (“PA 13-78”), which 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

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, PA 13-78 raised the cap for WICA charges to 10%, from 7.5%, between general rate cases and expands the eligible projects to include energy conservation projects, improvements required to comply with streamflow regulations, and improvements to acquired systems.

On June 28, 2013, Connecticut Water entered into a settlement agreement with the OCC and the Office of the Attorney General for the State of Connecticut (the “Settlement Agreement”), whereby Connecticut Water adjusted the water rates charged to its customers effective April 1, 2014 in accordance with the elements of the Settlement Agreement (the “Connecticut Water Rate Reduction Plan”). On July 1, 2013, Connecticut Water submitted an application to the PURA seeking formal approval of the Settlement Agreement.

The Settlement Agreement contemplates that Connecticut Water would adopt regulations issued by the Internal Revenue Service (“IRS”) that allows the Company to adopt an alternative method for determining how expenditures related to tangible property can be treated for federal tax purposes for tax years beginning on or after January 1, 2012.  This tax accounting method change treats certain expenditures that the Company historically capitalized for tax purposes, as a deductible repair expense on its tax return.  The adoption of the tax accounting method change allows Connecticut Water to record a favorable “catch up adjustment” on the Company's consolidated 2012 federal tax return which was filed in September 2013. The Company filed for a tax refund of approximately $13.6 million by carrying back the net operating loss generated from this adjustment.

The Settlement Agreement includes, as a result of negotiated compromise of the parties' respective positions, the following key elements related to the Connecticut Water Rate Reduction Plan:

1)    Connecticut Water crediting its water customers with the amount of the catch up adjustment plus the amount by which 2012 federal income taxes are reduced by the repair deduction (the deduction amount filed on the Company's 2012 federal tax return was approximately $45 million) that would be offset in whole or in part by an anticipated rate increase arising from the WRA authorized by the State of Connecticut in Public Act No. 13-78 with any associated net change in rates reflected on Connecticut Water customers' bills as of April 1, 2014;

2)    Resetting Connecticut Water's adjustment under Connecticut's WICA mechanism to zero by integrating the present WICA surcharge of 7.89% into Connecticut Water's base rates; and

3)    Connecticut Water agreeing not to file for a general rate increase (except under extraordinary circumstances outside Connecticut Water's control) for new rates to be effective any sooner than October 1, 2015.

In the Settlement Agreement, the parties also requested that PURA approve an accounting treatment for Connecticut Water to: 1) allow for the deferral of the tax refund described above and a credit of the tax benefit to customers over a proposed two-year period through a credit on water bills issued which started on April 1, 2014 and 2) as discussed above, use the WRA to defer on the balance sheet as a regulatory asset or liability, for later collection from or crediting to customers of the amount by which actual revenues deviate from the revenues allowed in Connecticut Water's most recent general rate proceedings, including WICA proceedings.

On August 30, 2013, the PURA issued a final decision approving the Settlement Agreement. Connecticut Water began to issue a credit on customers' bills of approximately 8.5% on April 1, 2014, related to the repair deduction. Additionally, Connecticut Water began adding an approximate 4.5% surcharge to customer bills related to the WRA for a net surcredit of approximately 4.0%.

Connecticut Water's allowed revenues for the nine months ended September 30, 2014, as approved by PURA during our 2010 general rate case and including subsequently approved WICA surcharges, are approximately $57.9 million. Through normal billing for the nine months ended September 30, 2014, revenue for Connecticut Water would have been approximately $53.4 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water recorded $4.5 million in additional revenue for the nine months ended September 30, 2014. As of September 30, 2014, the Company has $6.1 million in deferred revenues as a regulatory asset to be recovered from customers found on the "Prepayments and Other Current Assets" and "Deferred Charges and Other Costs" lines on the Condensed Consolidated Balance Sheet.

The rates we charge our Maine water customers are established under the jurisdiction of and are approved by the Maine Public Utilities Commission (“MPUC”). It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

return.  Maine Water’s average allowed return on equity and return on rate base, effective September 30, 2014 were 9.50% and 7.96%, respectively.

In April 2013, Maine Water filed for rate increases in three of its ten divisions, totaling approximately $94,000 in additional revenue, driven primarily by declining consumption and small expense increases. On July 9, 2013, the MPUC approved rate increases totaling $88,000 for these divisions, which became effective on July 1, 2013. In June 2013, Maine Water filed for rate increases in three additional divisions, totaling approximately $554,000 in additional revenue, driven primarily by capital expenditures, declining consumption and small expense increases. Two of these cases were approved by the MPUC with additional annual revenue of $90,000 which became effective on November 1, 2013. The remaining case was approved by the MPUC during the first quarter of 2014 and granted an annual increase of $340,000, which became effective on March 25, 2014. Additionally, Maine Water filed for a general rate increase for its Biddeford and Saco division, its largest division, on November 5, 2014 requesting $1.7 million in additional revenues, offset by $700,000 in the first year due to the adoption of IRS Revenue Procedure 2012-19 (“Repair Regulations”).

Effective June 2013, a Water Infrastructure Charge (“WISC”) became available in Maine that allows for expedited recovery of investment in water system infrastructure replacement, both treatment and distribution. Because the MPUC sets rates for Maine Water on a division-by-division basis, the WISC must be implemented in the same manner. To date in 2014, Maine Water has implemented a WISC in six of its ten divisions with expected annual revenue totaling $212,000, with plans to implement additional WISCs in most of the remaining divisions by the end of 2014.

On October 30, 2014, Maine Water petitioned the MPUC for approval of an accounting order that would allow them to refund a federal income tax refund stemming from the adoption of Repair Regulations. If approved the petition would allow Maine Water to reduce customer rates by $1.8 million over a three year period, with no impact on the Company's earnings per share.

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 and nine months ended September 30, 2014 and 2013.

Pension Benefits
Components of Net Periodic Cost (in thousands):
 
Three Months
 
Nine Months
Period ended September 30,
2014
 
2013
 
2014
 
2013
Service Cost
$
395

 
$
550

 
$
1,371

 
$
1,650

Interest Cost
789

 
696

 
2,315

 
2,087

Expected Return on Plan Assets
(896
)
 
(799
)
 
(2,674
)
 
(2,397
)
Amortization of:
 

 
 

 
 
 
 
Prior Service Cost
19

 
19

 
55

 
56

Net Recognized Loss
443

 
563

 
989

 
1,689

Net Periodic Benefit Cost
$
750

 
$
1,029

 
$
2,056

 
$
3,085


The Company made a contribution to its defined benefit pension plan of $3,426,000 in 2014 for the 2013 plan year, as allowed by the current funding status.


11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Post-Retirement Benefits Other Than Pension (PBOP)
Components of Net Periodic Cost (in thousands):
 
Three Months
 
Nine Months
Period ended September 30,
2014
 
2013
 
2014
 
2013
Service Cost
$
63

 
$
169

 
$
371

 
$
506

Interest Cost
150

 
127

 
470

 
381

Expected Return on Plan Assets
(75
)
 
(73
)
 
(229
)
 
(218
)
Other
57

 
57

 
169

 
169

Amortization of:
 

 
 

 
 
 
 
Prior Service Credit
(203
)
 
(202
)
 
(605
)
 
(605
)
Recognized Net Loss
120

 
108

 
256

 
323

Net Periodic Benefit Cost
$
112

 
$
186

 
$
432

 
$
556


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 September 30,
2014
 
2013
Common Shares Outstanding End of Period:
11,111,444

 
11,016,494

Weighted Average Shares Outstanding (Days Outstanding Basis):
 

 
 

Basic
10,901,934

 
10,834,532

Diluted
11,101,610

 
11,006,240

 
 
 
 
Basic Earnings per Share
$
0.78

 
$
0.87

Dilutive Effect of Stock Awards
(0.02
)
 
(0.01
)
Diluted Earnings per Share
$
0.76

 
$
0.86

 
 
 
 
Nine months ended September 30,
 
 
 
Weighted Average Shares Outstanding (Days Outstanding Basis):
 
 
 
Basic
10,885,988

 
10,818,996

Diluted
11,082,812

 
10,986,731

 
 
 
 
Basic Earnings per Share
$
1.74

 
$
1.51

Dilutive Effect of Stock Awards
(0.04
)
 
(0.02
)
Diluted Earnings per Share
$
1.70

 
$
1.49


Total unrecognized compensation expense for all stock awards was approximately $1.2 million as of September 30, 2014 and will be recognized over a weighted average period of 1.4 years.

4.
Recently Adopted and New Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists.” ASU No. 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss carry-forward, or similar tax loss or tax credit carry-forward, rather than as a liability when (1) the uncertain tax position would reduce the Net Operating Loss or other carry-forward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. This ASU was effective prospectively for fiscal years beginning after December 15, 2013. The adoption of this guidance did not materially impact our consolidated financial position.


12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

In January 2014, the FASB issued ASU No. 2014-05, “Service Concession Arrangements.” The ASU clarifies that an operating entity should not account for a services concession arrangement with a public-sector grantor as a lease if: (1) the grantor controls or has the ability to modify or approve the services the operating entity must provide, to whom it must provide them, and at what price and (2) the grantor controls any residual interest in the infrastructure at the end of the arrangement. In addition, the infrastructure used in a service concession arrangement would not be recognized as property, plant and equipment of the operating entity. The ASU is to be applied on a modified retrospective basis to service concession arrangements outstanding upon adoption and will be effective for the Company beginning January 1, 2015. 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 May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which amends its guidance related to revenue recognition. ASU 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 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. The Company is currently determining its implementation approach and assessing the impact that this guidance may have on our consolidated financial position.

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU No. 2014-12 requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. As such, the performance target that affects vesting should not be reflected in estimating that fair value of the award at the grant date. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. 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 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” (“ASU 2014-15”). ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern for a one year period subsequent to the date of the financial statements. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The guidance is effective for all entities for the first annual period ending after December 15, 2016 and interim periods thereafter, with early adoption permitted. Adoption of this guidance is not expected to have any impact on the determination or reporting of the Company’s financial results.


13

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 September 30, 2014 and 2013 is as follows (in thousands):
Three months ended September 30, 2014
 
Interest Rate Swap
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$

 
$
297

 
$
(252
)
 
$
45

Other Comprehensive Income (Loss) Before Reclassification
 

 
(14
)
 

 
(14
)
Amounts Reclassified from AOCI
 

 

 
14

 
14

Net current-period Other Comprehensive Income
 

 
(14
)
 
14

 

Ending Balance
 
$

 
$
283

 
$
(238
)
 
$
45

 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
 
Interest Rate Swap
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
(40
)
 
$
122

 
$
(1,289
)
 
$
(1,207
)
Other Comprehensive Income Before Reclassification
 

 
54

 

 
54

Amounts Reclassified from AOCI
 
40

 

 
22

 
62

Net current-period Other Comprehensive Income
 
40

 
54

 
22

 
116

Ending Balance
 
$

 
$
176

 
$
(1,267
)
 
$
(1,091
)
 
 
 
 
 
 
 
 
 
(a) All amounts shown are net of tax. Amounts in parentheses indicate loss.

The changes in AOCI by component, net of tax, for the nine months ended September 30, 2014 and 2013 is as follows (in thousands):
Nine months ended September 30, 2014
 
Interest Rate Swap
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$

 
$
259

 
$
(374
)
 
$
(115
)
Other Comprehensive Income Before Reclassification
 

 
13

 

 
13

Amounts Reclassified from AOCI
 

 
11

 
136

 
147

Net current-period Other Comprehensive Income
 

 
24

 
136

 
160

Ending Balance
 
$

 
$
283

 
$
(238
)
 
$
45

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
Interest Rate Swap
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
(41
)
 
$
69

 
$
(1,356
)
 
$
(1,328
)
Other Comprehensive Income Before Reclassification
 

 
95

 

 
95

Amounts Reclassified from AOCI
 
41

 
12

 
89

 
142

Net current-period Other Comprehensive Income
 
41

 
107

 
89

 
237

Ending Balance
 
$

 
$
176

 
$
(1,267
)
 
$
(1,091
)
 
 
 
 
 
 
 
 
 
(a) All amounts shown are net of tax. Amounts in parentheses indicate loss.


14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 September 30, 2014 and 2013 (in thousands):
Details about Other AOCI Components
 
Amounts Reclassified from AOCI Three Months Ended September 30, 2014(a)
 
Amounts Reclassified from AOCI Three Months Ended September 30, 2013(a)
 
Affected Line Items on Income Statement
Amortization of Cash Flow Hedging Instrument
 
$

 
$
28

 
Other Income
Tax benefit
 

 
12

 
Other Income
 
 

 
40

 
 
 
 
 
 
 
 
 
Realized Gains on Investments
 
$

 
$

 
Other Income
Tax expense
 

 

 
Other Income
 
 

 

 
 
 
 
 
 
 
 
 
Amortization of Recognized Net Gain from Defined Benefit Items
 
75

 
56

 
Other Income (b)
Tax expense
 
(61
)
 
(34
)
 
Other Income
 
 
14

 
22

 
 
 
 
 
 
 
 
 
Total Reclassifications for the period, net of tax
 
$
14

 
$
62

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

The following table sets forth the amounts reclassified from AOCI by component and the affected line item on the Condensed Consolidated Statement of Income for the nine months ended September 30, 2014 and 2013 (in thousands):
Details about Other AOCI Components
 
Amounts Reclassified from AOCI Nine Months Ended September 30, 2014(a)
 
Amounts Reclassified from AOCI Nine Months Ended September 30, 2013(a)
 
Affected Line Items on Income Statement
Amortization of Cash Flow Hedging Instrument
 

 
29

 
Other Income
Tax benefit
 

 
12

 
Other Income
 
 

 
41

 
 
 
 
 
 
 
 
 
Realized Gains on Investments
 
$
18

 
$
21

 
Other Income
Tax expense
 
(7
)
 
(9
)
 
Other Income
 
 
11

 
12

 
 
 
 
 
 
 
 
 
Amortization of Recognized Net Gain from Defined Benefit Items
 
223

 
169

 
Other Income (b)
Tax expense
 
(87
)
 
(80
)
 
Other Income
 
 
136

 
89

 
 
 
 
 
 
 
 
 
Total Reclassifications for the period, net of tax
 
$
147

 
$
142

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


15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6.
Long-Term Debt

Long-Term Debt at September 30, 2014 and December 31, 2013 consisted of the following (in thousands):
 
2014
 
2013
Connecticut Water Service, Inc.:
 
 
 
4.09%
 
Term Loan Note
$
15,708

 
$
16,420

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

5.10%
 
2009 A Series, Due 2039
19,950

 
19,950

5.00%
 
2011 A Series, Due 2021
23,527

 
23,602

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

Total The Connecticut Water Company
134,687

 
134,762

The Maine Water Company:
 
 
 
8.95%
 
1994 Series G, Due 2024
9,000

 
9,000

2.68%
 
1999 Series J, Due 2019
424

 
474

0.00%
 
2001 Series K, Due 2031
697

 
739

2.58%
 
2002 Series L, Due 2022
83

 
90

1.53%
 
2003 Series M, Due 2023
381

 
401

1.73%
 
2004 Series N, Due 2024
431

 
451

0.00%
 
2004 Series O, Due 2034
133

 
140

1.76%
 
2006 Series P, Due 2026
431

 
451

1.57%
 
2009 Series R, Due 2029
237

 
242

0.00%
 
2009 Series S, Due 2029
672

 
717

0.00%
 
2009 Series T, Due 2029
1,886

 
2,012

0.00%
 
2012 Series U, Due 2042
166

 
171

1.00%
 
2013 Series V, Due 2033
1,385

 
1,410

2.52%
 
CoBank Note Payable, Due 2017
1,965

 
1,965

6.45%
 
BSWC Series M, Due 2014

 
2,700

7.72%
 
BSWC Series L, Due 2018
2,250

 
2,250

2.40%
 
BSWC Series N, Due 2022
1,251

 
1,297

1.86%
 
BSWC Series O, Due 2025
846

 
862

2.23%
 
BSWC Series P, Due 2028
1,354

 
1,354

Various
 
Various Capital Leases
43

 
70

Total The Maine Water Company
23,635

 
26,796

Add:  Acquisition Fair Value Adjustment
911

 
1,185

Less:  Current Portion
(1,546
)
 
(4,121
)
Total Long-Term Debt
$
173,395

 
$
175,042


There are no mandatory sinking fund payments required on Connecticut Water’s outstanding Water Facilities Revenue 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.

On March 5, 2013, Connecticut Water and CoBank, ACB (“CoBank”) entered into a Promissory Note and Single Advance Term Loan Supplement to an existing Master Loan Agreement (the “Note”) in which CoBank agreed to make an additional

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Loan to Connecticut Water in an aggregate principal amount of up to $14,550,000, with a maturity date of March 4, 2033. Additionally, the Company entered into an Amendment to the Guarantee dated March 5, 2013 (the “Guarantee Amendment”), pursuant to which the Company agreed to guarantee the payment of certain of Connecticut Water's obligations under the Note pursuant to the same terms of the Guarantee. Connecticut Water used substantially all of the proceeds of the Loans to refinance the 2007 A Series bonds then outstanding.

On June 3, 2013, Maine Water completed the issuance of $1,409,888 aggregate principal amount of its First Mortgage Bonds, Series V, 1.0% due April 1, 2033 (the “Bonds”). The Bonds were issued by Maine Water to the Maine Municipal Bond Bank (the “Bank”) and the proceeds of the issuance were loaned (the “Loan”) by the Bank to Maine Water pursuant to a Loan Agreement by and between Maine Water and the Bank dated as of June 3, 2013. The proceeds of the Loan are being used by Maine Water to fund various water facilities projects.

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 September 30, 2014.

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 September 30, 2014 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Asset Type:
 
 
 
 
 
 
 
Company Owned Life Insurance
$

 
$
2,902

 
$

 
$
2,902

Money Market Fund
90

 

 

 
90

Mutual Funds:
 

 
 

 
 

 
 

Equity Funds (1)
1,446

 

 

 
1,446

Total
$
1,536

 
$
2,902

 
$

 
$
4,438


The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2013 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Asset Type:
 
 
 
 
 
 
 
Company Owned Life Insurance
$

 
$
2,843

 
$

 
$
2,843

Money Market Fund
62

 

 

 
62

Mutual Funds:
 

 
 

 
 

 
 

Equity Funds (1)
1,528

 

 

 
1,528

Total
$
1,590

 
$
2,843

 
$

 
$
4,433

(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.


17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

Restricted Cash – As part of the Connecticut Water’s December 2011 and Maine Water's June 2013 bond offerings, the Company recorded unused proceeds from this bond issuance as restricted cash as the funds can only be used for certain capital expenditures.  The Company expects to use the remainder of the proceeds during 2014, as the approved capital expenditures are completed.  The carrying amount approximates fair value.  Under the fair value hierarchy the fair value of restricted cash is classified as a Level 1 measurement.

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 September 30, 2014 and December 31, 2013, the estimated fair value of the Company's long-term debt was $183,730,000 and $178,526,000, respectively, as compared to the carrying amounts of $173,395,000 and $175,042,000, 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 the 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 have a carrying amount of $26,874,000 and $28,718,000 at September 30, 2014 and December 31, 2013, 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.

8.
Segment Reporting

The Company operates principally in three business segments: Water Activities, Real Estate Transactions, and Services and Rentals. Financial data for the segments is as follows (in thousands):
Three months ended September 30, 2014
Segment
 
Revenues
 
Pre-Tax Income
 
Income Tax Expense
 
Net Income
Water Activities
 
$
27,895

 
$
10,054

 
$
1,988

 
$
8,066

Real Estate Transactions
 
7

 
7

 
3

 
4

Services and Rentals
 
1,503

 
634

 
256

 
378

Total
 
$
29,405

 
$
10,695

 
$
2,247

 
$
8,448

Three months ended September 30, 2013
Segment
 
Revenues
 
Pre-Tax Income
 
Income Tax Expense
 
Net Income
Water Activities
 
$
27,982

 
$
10,294

 
$
1,226

 
$
9,068

Real Estate Transactions
 
95

 
(8
)
 
(1
)
 
(7
)
Services and Rentals
 
1,491

 
588

 
207

 
381

Total
 
$
29,568

 
$
10,874

 
$
1,432

 
$
9,442


18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Nine months ended September 30, 2014
Segment
 
Revenues
 
Pre-Tax Income
 
Income Tax Expense
 
Net Income
Water Activities
 
$
74,325

 
$
21,809

 
$
4,098

 
$
17,711

Real Estate Transactions
 
7

 
7

 
3

 
4

Services and Rentals
 
4,391

 
1,999

 
790

 
1,209

Total
 
$
78,723

 
$
23,815

 
$
4,891

 
$
18,924

Nine months ended September 30, 2013
Segment
 
Revenues
 
Pre-Tax Income
 
Income Tax Expense
 
Net Income
Water Activities
 
$
70,964

 
$
20,223

 
$
4,994

 
$
15,229

Real Estate Transactions
 
95

 
(8
)
 
(1
)
 
(7
)
Services and Rentals
 
4,357

 
1,875

 
732

 
1,143

Total
 
$
75,416

 
$
22,090

 
$
5,725

 
$
16,365



The revenues shown in Water Activities above consisted of revenues from water customers of $27,554,000 and $27,632,000 for the three months ended September 30, 2014 and 2013, respectively. Additionally, there were revenues associated with utility plant leased to others of $341,000 and $350,000 for the three months ended September 30, 2014 and 2013, respectively. The revenues from water customers for the three months ended September 30, 2014 and 2013 include $1,678,000 and $2,762,000 in additional revenues related to the implementation of the WRA, respectively. Since the Company implemented the WRA in the period ended September 30, 2013, the amount recorded in the three months ended September 30, 2013 represents nine months of WRA. Approximately $532,000 of the revenue recorded in the period ending September 30, 2013 was associated with the three months ending September 30, 2013, and $2,230,000 was associated with the six month period ending June 30, 2013. The revenues shown in Water Activities above consisted of revenues from water customers of $73,273,000 and $69,906,000 for the nine months ended September 30, 2014 and 2013, respectively. Additionally, there were revenues associated with utility plant leased to others of $1,052,000 and $1,058,000 for the nine months ended September 30, 2014 and 2013, respectively. The revenues from water customers for the nine months ended September 30, 2014 and 2013 include $4,471,000 and $2,762,000 in additional revenues related to the implementation of the WRA, respectively. A PURA order that became effective in January of 2014 changed the methodology for calculating the WRA by requiring that only revenues for services that have already been billed be considered in determining the WRA. In 2013, as allowed in the Settlement Agreement, the WRA was based upon both the billed component as well as any accrued revenues for services not billed at the close of any quarter. While this is expected to have a minimal impact for the December 31, 2014 calculation of WRA, it did reduce the three and nine month September 30, 2013 by approximately $363,000 and $1,339,000 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):
 
September 30,
2014
 
December 31,
2013
Total Plant and Other Investments:
 
 
 
Water Activities
$
501,520

 
$
478,560

Non-Water
742

 
704

 
502,262

 
479,264

Other Assets:
 
 
 
Water Activities
140,776

 
136,246

Non-Water
3,419

 
15,301

 
144,195

 
151,547

Total Assets
$
646,457

 
$
630,811



19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

On June 11, 2013, the Company was notified by the Connecticut Department of Revenue Services that its state tax filings for the years 2009 through 2011 would be reviewed beginning in the fourth quarter of 2013.  The Company has provided requested information to the taxing authorities and is currently awaiting further correspondence. The Company is also aware that certain of its peers have been challenged on certain tax credits associated with fixed capital investment and believes that this may be a focus of the State's review.  While the Company firmly believes that all fixed capital investment credits are appropriate and conservatively measured, the Company believes, based on recent activities by taxing authorities, that it is more likely than not that the Company's fixed capital investment credits claimed in prior years may be challenged and ultimately disallowed. Through September 30, 2014, the Company has recorded, as required by FASB ASC 740, a provision of $2.0 million, or 100% of the credits recorded for transmission and distribution projects that would be subject to disallowance.

On the 2012 Federal tax return, filed in September 2013, Connecticut Water filed a change in accounting method to adopt the IRS' temporary tangible property regulations.  This method change allowed the Company to take a current year deduction for expenses that were previously capitalized for tax purposes. Since the filing of the 2012 tax return, the IRS has issued final regulations.  On February 11, 2014, the Company was notified by the IRS that its Federal tax filing for the 2012 would be reviewed. This review, which is still ongoing, began in the first quarter of 2014. While the Company believes that the deduction taken on its tax return is appropriate, the methodology for determining the deduction could be challenged by the taxing authorities.  On the 2013 Federal tax return, filed in September 2014, Maine Water filed the same change in accounting method. Through September 30, 2014, the Company has recorded, as required by FASB ASC 740, a provision of $3.6 million for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge.

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 nine months ended September 30, 2014 and 2013.  Additionally, there were no accruals relating to interest or penalties as of September 30, 2014 and December 31, 2013.  The Company remains subject to examination by federal tax authorities for the 2011 through 2013 tax years; and the state tax authorities for the 2009 through 2013 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 2014 Federal Tax Return to be filed in September 2015.  As a result, through the third quarter of 2014, the Company has estimated the portion of its infrastructure investment that will qualify as a repair deduction for 2014 and has reflected that deduction in its effective tax rate at 75% of the expected $15 million of infrastructure improvement.  Consistent with other differences between book and tax expenditures, the Company is required to flow-through any timing differences not required by the IRS to be normalized.

The Company’s effective income tax rate for the three months ended September 30, 2014 and 2013 was 21.0% and 13.2%, respectively.  The Company's effective tax rate, excluding discrete items booked during the quarter, was 18.8% for the three months ended September 30, 2014. These discrete items included an adjustment related to the recording of the provision for the repair deduction and the recording of the change in estimate of prior year income taxes. The 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 in the current year.

The Company’s effective income tax rate for the nine months ended September 30, 2014 and 2013 was 20.5% and 25.9%, respectively.  The Company's effective tax rate, excluding discrete items booked during the quarter, was 17.9% for the nine months ended September 30, 2014. These discrete items included an adjustment related to the recording in the first quarter of 2014, of a tax benefit associated with the amortization of the fair value of debt in connection with the purchases of Maine Water and BSWC, the recording of the change in estimate of prior year income taxes, and the recording of the provision for the repair deduction. The 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 in the current year.

20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


10.
Lines of Credit

The Company entered into a $15.0 million line of credit agreement with CoBank, that is currently scheduled to expire on July 1, 2016.  The Company maintains an additional line of credit of $20.0 million with RBS Citizens, N.A., with an expiration date of June 30, 2017.  As of September 30, 2014, the total lines of credit available to the Company was $35.0 million.  As of September 30, 2014 the Company had $0.7 million of Interim Bank Loans Payable. The Company did not have any Interim Bank Loans Payable as of December 31, 2013. As of September 30, 2014, the Company had $34.3 million in unused lines of credit.  Interest expense charged on lines of credit will fluctuate based on market interest rates.

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, 2013.

General Information

Regulated Companies

The Connecticut Water Company (“Connecticut Water”) and The Maine Water Company (“Maine Water”), the Company's regulated operating subsidiaries, derive their rights and franchises to operate from special state acts that are subject to alteration, amendment or repeal by their respective state legislatures and do not grant us exclusive rights to our service areas. Our franchises are free from burdensome restrictions, are unlimited as to time, and authorize us to sell potable water in all the towns we now serve.  There is the possibility that either the State of Connecticut or the State of Maine could attempt to revoke our franchises and allow a governmental entity to take over some or all of our systems.  While we would vigorously oppose any such attempts, from time to time such legislation is contemplated.

The rates we charge our Connecticut water customers are established under the jurisdiction of and are approved by the Connecticut Public Utilities Regulatory Authority (“PURA”).  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 September 30, 2014 were 9.75% and 7.32%, respectively.

On January 25, 2013, Connecticut Water filed a Water Infrastructure Conservation Adjustment (“WICA”) application with the PURA requesting an additional 1.08% surcharge to customer bills related to approximately $6.5 million spending on WICA projects. This application also reduced the surcharge by 0.09% for the prior year reconciliation adjustment which expired April 1, 2013.  On January 30, 2013, Connecticut Water filed for a 0.10% reconciliation adjustment for the 2012 shortfall in WICA, to become effective April 1, 2013.  On March 25, 2013, the PURA approved an additional 1.06% surcharge, effective April 1, 2013. Additionally, on March 27, 2013, the PURA approved a 0.10% reconciliation adjustment, effective April 1, 2013. As of April 1, 2013, Connecticut Water's cumulative WICA surcharge was 6.80%.

On July 25, 2013, Connecticut Water filed a WICA application with the PURA requesting an additional 1.09% surcharge to customers' bills, representing approximately $5.6 million in WICA related projects. On September 18, 2013 the PURA approved the 1.09% surcharge with the new rates becoming effective on October 1, 2013. As of October 1, 2013, the cumulative WICA surcharge was 7.89%.

Effective April 1, 2014, in accordance with a settlement agreement with the Office of the Consumer Counsel of the State of Connecticut (the “OCC”) and the Office of the Attorney General for the State of Connecticut, discussed below, Connecticut Water's cumulative WICA surcharge of 7.89% was rolled into base rates charged to customers.

On July 29, 2014, Connecticut Water filed a WICA application with the PURA requesting a 1.59% surcharge to customers' bills, representing approximately $12.7 million in WICA related projects. On September 26, 2014, the PURA approved the 1.59% surcharge with the new rates becoming effective on October 1, 2014.

On June 5, 2013, the Connecticut's General Assembly passed Public Act 13-78, “An Act Concerning Water Infrastructure and Conservation, Municipal Reporting Requirements and Unpaid Utility Accounts at Multi-Family Dwellings” (“PA 13-78”), which 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

21


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, PA 13-78 raised the cap for WICA charges to 10%, from 7.5%, between general rate cases and expands the eligible projects to include energy conservation projects, improvements required to comply with streamflow regulations, and improvements to acquired systems.

On June 28, 2013, Connecticut Water entered into a settlement agreement with the OCC and the Office of the Attorney General for the State of Connecticut (the “Settlement Agreement”), whereby Connecticut Water adjusted the water rates charged to its customers effective April 1, 2014 in accordance with the elements of the Settlement Agreement (the “Connecticut Water Rate Reduction Plan”). On July 1, 2013, Connecticut Water submitted an application to the PURA seeking formal approval of the Settlement Agreement.

The Settlement Agreement contemplates that Connecticut Water would adopt regulations issued by the Internal Revenue Service (“IRS”) that allows the Company to adopt an alternative method for determining how expenditures related to tangible property can be treated for federal tax purposes for tax years beginning on or after January 1, 2012.  This tax accounting method change treats certain expenditures that the Company historically capitalized for tax purposes, as a deductible repair expense on its tax return.  The adoption of the tax accounting method change allows Connecticut Water to record a favorable “catch up adjustment” on the Company's consolidated 2012 federal tax return which was filed in September 2013. The Company filed for a tax refund of approximately $13.6 million by carrying back the net operating loss generated from this adjustment.

The Settlement Agreement includes, as a result of negotiated compromise of the parties' respective positions, the following key elements related to the Connecticut Water Rate Reduction Plan:

1)    Connecticut Water crediting its water customers with the amount of the catch up adjustment plus the amount by which 2012 federal income taxes are reduced by the repair deduction (the deduction amount filed on the Company's 2012 federal tax return was approximately $45 million) that would be offset in whole or in part by an anticipated rate increase arising from the WRA authorized by the State of Connecticut in Public Act No. 13-78 with any associated net change in rates reflected on Connecticut Water customers' bills as of April 1, 2014;

2)    Resetting Connecticut Water's adjustment under Connecticut's WICA mechanism to zero by integrating the present WICA surcharge of 7.89% into Connecticut Water's base rates; and

3)    Connecticut Water agreeing not to file for a general rate increase (except under extraordinary circumstances outside Connecticut Water's control) for new rates to be effective any sooner than October 1, 2015.

In the Settlement Agreement, the parties also requested that PURA approve an accounting treatment for Connecticut Water to: 1) allow for the deferral of the tax refund described above and a credit of the tax benefit to customers over a proposed two-year period through a credit on water bills issued which started on April 1, 2014 and 2) as discussed above, use the WRA to defer on the balance sheet as a regulatory asset or liability, for later collection from or crediting to customers of the amount by which actual revenues deviate from the revenues allowed in Connecticut Water's most recent general rate proceedings, including WICA proceedings.

On August 30, 2013, the PURA issued a final decision approving the Settlement Agreement. Connecticut Water began to issue a credit on customers' bills of approximately 8.5% on April 1, 2014, related to the repair deduction. Additionally, Connecticut Water began adding an approximate 4.5% surcharge to customer bills related to the WRA for a net surcredit of approximately 4.0%.

Connecticut Water's allowed revenues for the nine months ended September 30, 2014, as approved by PURA during our 2010 general rate case and including subsequently approved WICA surcharges, are approximately $57.9 million. Through normal billing for the nine months ended September 30, 2014, revenue for Connecticut Water would have been approximately $53.4 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water recorded $4.5 million in additional revenue for the nine months ended September 30, 2014.

The rates we charge our Maine water customers are established under the jurisdiction of and are approved by the Maine Public Utilities Commission (“MPUC”). It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return.  Maine Water’s average allowed return on equity and return on rate base, effective September 30, 2014 were 9.50% and 7.96%, respectively. On September 3, 2013, an application was filed with the MPUC to merge Maine Water and the Biddeford

22


& Saco Water Company (“BSWC”), with Maine Water as the surviving entity. This application was approved by the MPUC and BSWC was merged with and into Maine Water effective January 1, 2014.

In April 2013, Maine Water filed for rate increases in three of its ten divisions, totaling approximately $94,000 in additional revenue, driven primarily by declining consumption and small expense increases. On July 9, 2013, the MPUC approved rate increases totaling $88,000 for these divisions, which became effective on July 1, 2013. In June 2013, Maine Water filed for rate increases in three additional divisions, totaling approximately $554,000 in additional revenue, driven primarily by capital expenditures, declining consumption and small expense increases. Two of these cases were approved by the MPUC with additional annual revenue of $90,000 which became effective on November 1, 2013. The remaining case was approved by the MPUC during the first quarter of 2014 and granted an annual increase of $340,000, which became effective on March 25, 2014. Additionally, Maine Water filed for a general rate increase for its Biddeford and Saco division, its largest division, on November 5, 2014 requesting $1.7 million in additional revenues, offset by $700,000 in the first year due to the adoption of IRS Revenue Procedure 2012-19 (“Repair Regulations”).

Effective June 2013, a Water Infrastructure Charge (“WISC”) became available in Maine that allows for expedited recovery of investment in water system infrastructure replacement, both treatment and distribution. Because the MPUC sets rates for Maine Water on a division-by-division basis, the WISC must be implemented in the same manner. To date in 2014, Maine Water has implemented a WISC in six of its ten divisions with expected annual revenue totaling $212,000, with plans to implement additional WISCs in most of the remaining divisions by the end of 2014.

On October 30, 2014, Maine Water petitioned the MPUC for approval of an accounting order that would allow them to refund a federal income tax refund stemming from the adoption of Repair Regulations. If approved the petition would allow Maine Water to reduce customer rates by $1.8 million over a three year period, with no impact on the Company's earnings per share.

Recognizing the increasing importance of managing and protecting electronic data, the Company, beginning in 2014, partnered with a consulting firm to evaluate the Company's cyber security strengths and vulnerabilities and to help in creating an evaluation of the Company's current information technology (“IT”) structure within the organization.  In April 2014, a cyber security assessment analysis identified and prioritized steps that the Company should take to enhance its security surrounding cyber security.  The Company is in the process of implementing recommendations contained in the cyber security assessment which it estimates will be completed in full by June 2016 and will require over $1 million in related internal and external labor costs and additional technological investments to complete.  In September 2014, the consultant delivered a report related to the IT structure which contained recommendations aimed at strengthening the IT organization.  The Company has recently begun the process of implementing these recommendations.  Combined, these consulting projects added approximately $330,000 in additional Operation & Maintenance costs during the nine months ended September 30, 2014.

UCONN and Town of Mansfield Water Supply Agreements

Beginning in June 2011, the University of Connecticut (“UCONN”), in partnership with the Town of Mansfield, initiated a process to identify and implement actions to secure a long-term water solution to meet the water supply needs for UCONN and the Town of Mansfield.  On June 7, 2013, Connecticut Water submitted information to UCONN and the Town on its proposal to bring a reliable supply of water to the UCONN's Storrs campus and to residents of Mansfield.  Connecticut Water's submission for this project was made as part of the Environmental Impact Evaluation (“EIE”) process under the Connecticut Environmental Policy Act.

As detailed in its proposal, Connecticut Water proposed to bring up to 2.2 million gallons of water a day with a water main extension of approximately 5 miles from its water system in the Town of Tolland to Mansfield to meet the UCONN campus and the Town of Mansfield's long term water supply needs.  On August 7, 2013, UCONN's Board of Trustees voted to recommend Connecticut Water's proposal.  On September 16, 2013, the State's Office of Policy and Management issued their approval of the Record of Decision of the EIE, allowing UCONN to proceed to implement the water supply solution.

UCONN Agreement
Connecticut Water and UCONN negotiated a definitive agreement for Connecticut Water to provide a long-term supply of potable water for UCONN’s Storrs campus facilities which was approved by the Board of Trustees at their December 11, 2013 meeting and executed on December 18, 2013. The definitive agreement is consistent with the requirements of the Project’s EIE and record of decision, as approved by the Office of Policy and Management that identified the Company as the preferred option to supply UCONN and the Town of Mansfield, Connecticut with up to 2.2 million gallons of water per day over the next 47 years.  Connecticut Water will fund a 5-mile pipeline from Tolland and other necessary infrastructure improvements at no cost to UCONN, the Town or the state’s taxpayers to serve the area. The Company is responsible for obtaining any required regulatory permits, licenses and approvals to implement the water supply solution, including but not limited to those from

23


PURA, the Connecticut Department of Energy and Environmental Protection and the Connecticut Department of Public Health. While there are specific timelines and milestones identified in the agreement that provide for the timely completion of the project, the agreement also recognizes that such completion is dependent upon the receipt of certain regulatory approvals. The Company anticipates completing the capital improvements within 18 months of receipt of all required permits and expects that regulatory approvals will be received by the end of 2014 or the first quarter of 2015.

Town of Mansfield Agreement
Connecticut Water and the Town of Mansfield have finalized a definitive written agreement for Connecticut Water to serve the Town of Mansfield community. On January 13, 2014, the Mansfield Town Council voted to authorize the Town Manager to execute the agreement with Connecticut Water and it was signed by the parties on January 21, 2014.

The key provisions of the agreement with the Town of Mansfield are as follows:
Current off-campus customers of UCONN will become customers of Connecticut Water at UCONN’s water rates in effect at that time (subject to any state-approved surcharges);
Future water customers in the Town of Mansfield will be served by Connecticut Water at the rates authorized by the PURA;
Connecticut Water will assume responsibility for maintaining, repairing and replacing the off-campus water system serving the Town of Mansfield;
Connecticut Water will make any source or system improvements to meet current and future water supply needs of the area;
A Water System Advisory Committee (“WSAC”) will be created with representatives of the Town of Mansfield, UCONN, regional representatives and other key stakeholders to advise Connecticut Water regarding water service and the system’s operations, expansion or integration as well as recommended best management practices, including water conservation programs. The WSAC has been established and has held two meeting since July 2014.

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, 2013.

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, 2013.

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 2013 Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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, the outcome of the review of the Company's Connecticut state and federal tax filings by the Connecticut Department of

24


Revenue Services and the IRS, respectively, 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 Activities segment to increase in 2014 over 2013 levels, based, in part, on the ability to take advantage of the WISC surcharge in Maine and the continued utilization of WICA in Connecticut, along with modest growth in its Services and Rentals segment.

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 2014 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, 2013 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

The Company entered into a $15.0 million line of credit agreement with CoBank, ACB (“CoBank”), that is currently scheduled to expire on July 1, 2016.  The Company maintains an additional line of credit of $20.0 million with RBS Citizens, N.A., with an expiration date of June 30, 2017.  As of September 30, 2014, the total lines of credit available to the Company was $35.0 million.  As of September 30, 2014 the Company had $0.7 million of Interim Bank Loans Payable. The Company did not have any Interim Bank Loans Payable as of December 31, 2013. As of September 30, 2014, the Company had $34.3 million in unused lines of credit.  Interest expense charged on lines of credit will fluctuate based on market interest rates.

On March 5, 2013, Connecticut Water and CoBank entered into a Promissory Note and Single Advance Term Loan Supplement to an existing Master Loan Agreement (the “Note”) in which CoBank agreed to make an additional Loan to Connecticut Water in an aggregate principal amount of up to $14,550,000, with a maturity date of March 4, 2033. Additionally, the Company entered into an Amendment to the Guarantee dated March 5, 2013 (the “Guarantee Amendment”), pursuant to which the Company agreed to guarantee the payment of certain of Connecticut Water's obligations under the Note pursuant to the same terms of the Guarantee. Connecticut Water used substantially all of the proceeds of the Loans to refinance the 2007 A Series bonds then outstanding.

On June 3, 2013, Maine Water completed the issuance of $1,409,888 aggregate principal amount of its First Mortgage Bonds, Series V, 1.0% due April 1, 2033 (the “Bonds”). The Bonds were issued by Maine Water to the Maine Municipal Bond Bank (the “Bank”) and the proceeds of the issuance were loaned (the “Loan”) by the Bank to Maine Water pursuant to a Loan Agreement by and between Maine Water and the Bank dated as of June 3, 2013. The proceeds of the Loan are being used by Maine Water to fund various water facilities projects.

During the third quarter of 2014, the Maine Water paid off $2,700,000 of the outstanding BSWC Series M bond upon maturity. Additionally, during the nine months ended September 30, 2014, the Company paid approximately $712,000 related to Connecticut Water Service's Term Note Payable issued as part of the acquisition of Maine Water Company and approximately $434,000 in sinking funds related to Maine Water Company's outstanding bonds.

Credit Rating

On January 17, 2014, Standard & Poor's Ratings Services (“S&P”) affirmed its 'A' corporate credit rating on the Company. Additionally, S&P revised the Company’s ratings outlook from negative to stable.  The stable outlook recognizes improvements in financial measures achieved through a combination of recovery of investments (including infrastructure surcharges in both Connecticut and Maine and the WRA in Connecticut) as well as a reduction in our debt to equity ratio through the issuance of equity in December 2012 and the repayment of debt.


25


Stock Plans

The Company offers a dividend reinvestment and stock purchase plan (“DRIP”) to all registered shareholders, and to 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 nine months ended September 30, 2014 and 2013, plan participants invested $1,295,000 and $1,209,000, respectively, in additional shares as part of the DRIP.

From 1999 through 2003, the Company issued stock options to certain employees of the Company. No stock options have been issued by the Company since 2003. As of December 31, 2013, the Company no longer had any outstanding stock options. During the nine months ended September 30, 2013, no stock options were exercised.

2014 Construction Budget

The Board of Directors approved a $45.6 million construction budget for 2014, net of amounts to be financed by customer advances and contributions in aid of construction.  The Company is using and will continue to use a combination of its internally generated funds, remaining proceeds from its December 2012 equity issuance, borrowings under its available lines of credit, and the funds remaining under Connecticut Water's 2011 and Maine Water's 2013 debt issuances to fund the 2014 construction budget.

As the Company looks forward to the remainder of 2014 and 2015, it anticipates continued reinvestment to replace aging infrastructure and to seek recovery through periodic WICA applications in Connecticut and WISC applications in Maine.  The total cost of that investment may exceed the amount of internally generated funds.  If so, the Company will consider external financing.  In order to maintain a balanced capital structure, we would consider both debt and equity issuances.

Results of Operations

Three months ended September 30
Net Income for the three months ended September 30, 2014 decreased from the same period in the prior year by $994,000 to $8,448,000. Earnings per basic average common share decreased by $0.09 to $0.78 during the three months ended September 30, 2014.

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

Business Segment
 
September 30, 2014
 
September 30, 2013
 
Increase/(Decrease)
Water Activities
 
$
8,066

 
$
9,068

 
$
(1,002
)
Real Estate Transactions
 
4

 
(7
)
 
11

Services and Rentals
 
378

 
381

 
(3
)
Total
 
$
8,448

 
$
9,442

 
$
(994
)

The decrease in the Water Activity segment’s Net Income was primarily due to the net effects of the variances listed below:


26


Revenue

Revenue from our water customers decreased by $78,000, or 0.3%, to $27,554,000 for the three months ended September 30, 2014 when compared to the same period in 2013.  The primary reason for the decrease in revenues was the timing and methodology of the implementation of the WRA in 2013. The WRA allows Connecticut Water to record a revenue adjustment, on a monthly basis, based upon our actual billing revenues compared to approved revenues serving as the basis for rates. During the three months ended September 30, 2014, the Company recorded approximately $1,678,000 in additional revenue related to the WRA, compared to $2,762,000 during the three months ended September 30, 2013. The higher WRA revenues during the three months ended September 30, 2013 is a result of the Company recording nine months of WRA revenues during the period, partially offset by a change in methodology for the calculation in 2014. The net effect of these two items had a approximate $1.2 million reduction in the revenue variance for the three months ended September 30, 2014 versus the same period in 2013. Offsetting the decrease in WRA revenues, the Company saw a benefit from increased WICA surcharges, which were rolled into base rates effective April, 1, 2014, in Connecticut and higher rates in certain Maine divisions.

Operation and Maintenance Expense

Operation and Maintenance (“O&M”) expense decreased by $228,000, or 2.1%, for the three months ended September 30, 2014 when compared to the same period of 2013. The following table presents the components of O&M expense (in thousands):

Expense Components
 
September 30, 2014
 
September 30, 2013
 
Increase / (Decrease)
Write-off of well development costs
 
$
346

 
$

 
$
346

Outside services
 
687

 
448

 
239

Medical
 
739

 
617

 
122

Payroll
 
3,658

 
3,549

 
109

Insurance costs
 
348

 
291

 
57

Investor relations
 
166

 
118

 
48

Customer
 
451

 
407

 
44

Water treatment (including chemicals)
 
836

 
856

 
(20
)
Other benefits
 
226

 
276

 
(50
)
Post-retirement medical
 
111

 
187

 
(76
)
Pension
 
757

 
1,075

 
(318
)
Mark-to-market
 
(216
)
 
446

 
(662
)
Other
 
2,762

 
2,829

 
(67
)
Total
 
$
10,871

 
$
11,099

 
$
(228
)

The changes in individual items are described below:
Mark-to-market represents the treatment of certain officers' benefits based on fluctuations in the stock market and the effect that has on non-vested share based compensation. The Company's stock price as of September 30, 2013 was higher than the stock price as of December 31, 2012, which increased mark-to-market expense for the period. In addition, the stock price as of September 30, 2014 was lower than December 31, 2013 causing a decrease in mark-to-market expense for the period;
Pension costs and post-retirement medical costs each decreased primarily due to an increase in the discount rates used in determining the 2014 expense; and
Other benefits decreased primarily due to a reduction in costs associated with benefits provided to certain management level employees.

The decreases described above were partially offset by the following increases to O&M expense:
During the third quarter of 2014, the Company recognized expenses related to the write-off of well development capital costs in the Town of Marlborough, Connecticut incurred in prior periods. The Company is currently negotiating with the Town in an effort to recover all or a portion of these costs;
Outside services costs increased primarily due to the use of a consulting firm to evaluate the Company's current IT structure within the organization, as discussed above, and additional consulting costs related to the preparation of the

27


repair tax deduction included in the Company's 2013 Federal income tax return. These increases to outside services were partially offset by decreases in internal and external auditing costs; and
Payroll costs increased primarily due to normal wage increases.

The Company saw an approximate $263,000, or 9.8%, increase in its Depreciation expense from the three months ended September 30, 2014 compared to the same period in 2013.  The primary driver of this increase was due to higher Utility Plant in Service as of September 30, 2014 compared to September 30, 2013.

Income Tax expense increased by $403,000 in the third quarter of 2014 when compared to the same period in 2013 due to a higher effective income tax rate. The Company's effective tax rate increased from 13.2% to 21.0% in the three months ended September 30, 2014 compared to the same period in 2013. The primary reason for the increase in the effective tax rate was the adoption of the tangible property regulations in the third quarter of 2013 which reflected the adoption of the tangible property regulations.

Other Income (Deductions), Net of Taxes decreased for the three months ended September 30, 2014 by $509,000. The primary drivers of this decrease was due to the tax benefits arising from the Company's income tax provision to income tax return analysis during the three months ended September 30, 2013, which resulted in a benefit to the Company. Additionally, there was an increase in costs related to the Company's supplemental executive retirement plan (“SERP”) and a decrease of investment income on assets held for the SERP. Offsetting these decreases to Other Income (Deductions), Net of Taxes was an increase in the Allowance for Funds Used During Construction (“AFUDC”) during the three months ended September 30, 2014.

Total Interest and Debt Expense decreased by $82,000 in the three months ended September 30, 2014 when compared to the same period in 2013. The primary reason for the decrease in Interest and Debt Expense was the lower interest expense incurred because of lower debt balances outstanding at September 30, 2014 when compared to September 30, 2013.

Nine months ended September 30
Net Income for the nine months ended September 30, 2014 increased from the same period in the prior year by $2,559,000 to $18,924,000. Earnings per basic average common share increased by $0.23 to $1.74 during the nine months ended September 30, 2014.

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

Business Segment
 
September 30, 2014
 
September 30, 2013
 
Increase/(Decrease)
Water Activities
 
$
17,711

 
$
15,229

 
$
2,482

Real Estate Transactions
 
4

 
(7
)
 
11

Services and Rentals
 
1,209

 
1,143

 
66

Total
 
$
18,924

 
$
16,365

 
$
2,559


The increase in the Water Activity segment’s Net Income was primarily due to the net effects of the variances listed below:

Revenue

Revenue from our water customers increased by $3,367,000, or 4.8%, to $73,273,000 for the nine months ended September 30, 2014 when compared to the same period in 2013.  The 2014 change in the methodology to base the WRA exclusively on revenues resulting from billed services resulted in approximately $2 million of the increase.  In addition, the Company saw an increase in revenues in Maine due to rate increases in certain Maine Water jurisdictions through regular rate increases and WISC surcharges.  Finally, revenues increased due to the benefit from increased WICA surcharges, which were rolled into base rates effective April, 1, 2014, in Connecticut.


28


Operation and Maintenance Expense

O&M expense increased by $207,000, or 0.7%, for the nine months ended September 30, 2014 when compared to the same period of 2013. The following table presents the components of O&M expense (in thousands):

Expense Components
 
September 30, 2014
 
September 30, 2013
 
Increase / (Decrease)
Payroll
 
$
11,326

 
$
10,586

 
$
740

Write-off of well development costs
 
346

 

 
346

Other benefits
 
996

 
726

 
270

Maintenance
 
2,256

 
2,007

 
249

Insurance costs
 
1,026

 
855

 
171

Water treatment (including chemicals)
 
2,275

 
2,141

 
134

Outside services
 
1,707

 
1,608

 
99

Customer
 
1,227

 
1,135

 
92

Utility costs
 
2,873

 
2,817

 
56

Medical
 
2,045

 
2,062

 
(17
)
Purchased water
 
1,102

 
1,128

 
(26
)
Regulatory and commission expense
 
266

 
311

 
(45
)
Investor relations
 
485

 
579

 
(94
)
Post-retirement medical
 
432

 
557

 
(125
)
Mark-to-market
 
(404
)