CONNECTICUT WATER SERVICE INC / CT, 10-Q filed on 8/8/2017
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2017
Entity Information [Line Items]
 
Entity Registrant Name
CONNECTICUT WATER SERVICE INC / CT 
Entity Central Index Key
0000276209 
Current Fiscal Year End Date
--12-31 
Entity Filer Category
Accelerated Filer 
Document Type
10-Q 
Document Period End Date
Jun. 30, 2017 
Document Fiscal Year Focus
2017 
Document Fiscal Period Focus
Q2 
Amendment Flag
false 
Entity Common Stock, Shares Outstanding
11,575,400 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2017
Dec. 31, 2016
ASSETS
 
 
Utility Plant
$ 859,295 
$ 777,860 
Construction Work in Progress
12,321 
33,748 
Gross Utility Plant
871,616 
811,608 
Accumulated Provision for Depreciation
(223,928)
(210,212)
Net Utility Plant
647,688 
601,396 
Other Property and Investments
9,894 
9,071 
Cash and Cash Equivalents
2,694 
1,564 
Accounts Receivable (Less Allowance, 2017 - $1,161; 2016 - $1,100)
12,875 
13,024 
Accrued Unbilled Revenues
9,153 
8,171 
Materials and Supplies
1,768 
1,536 
Prepayments and Other Current Assets
6,743 
5,069 
Total Current Assets
33,233 
29,364 
Unrecovered Income Taxes - Regulatory Asset
98,453 
93,264 
Pension Benefits - Regulatory Asset
11,439 
12,266 
Post-Retirement Benefits Other Than Pension - Regulatory Asset
146 
265 
Goodwill
43,045 
30,427 
Deferred Charges and Other Costs
11,118 
8,449 
Total Regulatory and Other Long-Term Assets
164,201 
144,671 
Total Assets
855,016 
784,502 
CAPITALIZATION AND LIABILITIES
 
 
Common Stock Without Par Value: Authorized - 25,000,000 Shares - Issued and Outstanding: 2017 - 11,575,400; 2016 - 11,248,458
163,808 
145,739 
Retained Earnings (Accumulated Deficit)
96,975 
91,213 
Accumulated Other Comprehensive Loss
(735)
(924)
Common Stockholders' Equity
260,048 
236,028 
Preferred Stock
772 
772 
Long-Term Debt
205,351 
197,047 
Total Capitalization
466,171 
433,847 
Debt, Current
5,196 
4,859 
Interim Bank Loans Payable
43,632 
32,953 
Accounts Payable and Accrued Expenses
9,640 
13,116 
Accrued Interest
1,045 
1,012 
Customer Refund Liability, Current
239 
855 
Other Current Liabilities
2,856 
2,330 
Total Current Liabilities
62,608 
55,125 
Advances for Construction
21,433 
19,127 
Deferred Federal and State Income Taxes
51,838 
50,558 
Unfunded Future Income Taxes
96,524 
90,977 
Long-Term Compensation Arrangements
34,686 
33,540 
Unamortized Investment Tax Credits
1,151 
1,189 
Refund to Customers - Regulatory Liability
108 
Other Long-Term Liabilities
4,647 
5,074 
Total Long-Term Liabilities
210,279 
200,573 
Contributions in Aid of Construction
115,958 
94,957 
Commitments and Contingencies
Total Capitalization and Liabilities
$ 855,016 
$ 784,502 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jun. 30, 2017
Dec. 31, 2016
Issued
11,575,400 
11,248,458 
Outstanding
11,575,400 
11,248,458 
ASSETS
 
 
Allowance
$ 1,161 
$ 1,100 
Capitalization, Long-term Debt and Equity [Abstract]
 
 
Common Stock, No Par Value
$ 0 
$ 0 
Common Stock, Shares Authorized
25,000,000 
25,000,000 
CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Operating Expenses
 
 
 
 
Operation and Maintenance
$ 11,626 
$ 8,840 
$ 22,862 
$ 20,129 
Depreciation
3,984 
3,359 
7,676 
6,757 
Income Taxes
(624)
589 
(814)
982 
Taxes Other Than Income Taxes
2,477 
2,238 
5,082 
4,687 
Total Operating Expenses
17,463 
15,026 
34,806 
32,555 
Net Operating Revenues
27,902 
26,055 
50,365 
47,607 
Net Regulated Operating Revenue
10,439 
11,029 
15,559 
15,052 
Other Utility Income, Net of Taxes
190 
188 
355 
343 
Total Utility Operating Income
10,629 
11,217 
15,914 
15,395 
Gain (Loss) on Disposition of Oil and Gas and Timber Property
 
 
33 
Other Income (Deductions), Net of Taxes
 
 
 
 
Non-Water Sales Earnings
332 
406 
590 
801 
Allowance for Funds Used During Construction
231 
289 
567 
521 
Other
(744)
(283)
(753)
(315)
Total Other Income, Net of Taxes
(181)
412 
437 
1,007 
Interest and Debt Expense
 
 
 
 
Interest on Long-Term Debt
2,106 
1,830 
4,167 
3,566 
Interest Income (Expense), Net
(111)
(174)
(371)
(316)
Amortization of Debt Expense
35 
30 
69 
61 
Total Interest and Debt Expense
2,030 
1,686 
3,865 
3,311 
Net Income
8,418 
9,943 
12,486 
13,091 
Preferred Stock Dividend Requirement
10 
10 
19 
19 
Net Income Applicable to Common Stock
$ 8,408 
$ 9,933 
$ 12,467 
$ 13,072 
Weighted Average Common Shares Outstanding:
 
 
 
 
Basic (in shares)
11,343,528 
11,004,331 
11,241,884 
10,998,408 
Diluted (in shares)
11,568,278 
11,222,989 
11,467,141 
11,217,136 
Earnings Per Common Share:
 
 
 
 
Basic (in dollars per share)
$ 0.75 
$ 0.90 
$ 1.11 
$ 1.19 
Diluted (in dollars per share)
$ 0.73 
$ 0.89 
$ 1.09 
$ 1.17 
Dividends Per Common Share (in dollars per share)
$ 0.2975 
$ 0.2825 
$ 0.5800 
$ 0.5500 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net Income
$ 8,418 
$ 9,943 
$ 12,486 
$ 13,091 
Other Comprehensive Income, net of tax
 
 
 
 
Reclassification to Pension and Post-Retirement Benefits Other Than Pension, net of tax (expense) of $(36) and $(27) for the three months ended June 30, 2017 and 2016, respectively, and $(61) and $(49) for the six months ended June 30, 2017 and 2017, respectively
57 
43 
96 
78 
Unrealized (loss) gain on investments, net of tax (expense) benefit of $(18) and $(2) for the three months ended June 30, 2017 and 2016, respectively, and $(59) and $8 for the six months ended June 30, 2017 and 2017, respectively
29 
93 
(13)
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Parent
86 
45 
189 
65 
Comprehensive Income
$ 8,504 
$ 9,988 
$ 12,675 
$ 13,156 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Other Comprehensive Income, net of tax
 
 
 
 
Reclassification to Pension and Post-Retirement Benefits Plans, net of tax (expense) benefit of
$ (36)
$ (27)
$ (61)
$ (49)
Unrealized Investment loss, net of tax expense of
$ (18)
$ (2)
$ (59)
$ 8 
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Mar. 31, 2016
Jun. 30, 2017
Jun. 30, 2016
Balance at Beginning of Period
$ 92,007 
$ 80,378 
$ 91,213 
$ 80,378 
Net Income
8,418 
9,943 
12,486 
13,091 
Retained Earnings before Dividends
100,425 
90,464 
103,699 
93,469 
Dividends Declared:
 
 
 
 
Cumulative Preferred, Class A, $0.20 per share for the three months ended June 30, 2017 and 2016, respectively, and $0.40 per share for the six months ended June 30, 2017 and 2016, respectively
10 
 
19 
19 
Common Stock - $0.2975 per share and $0.2825 per share for the three months ended June 30, 2017 and 2016, respectively, and $0.5800 per share and $0.5500 per share for the six months ended June 30, 2017 and 2016, respectively
3,440 
3,170 
6,705 
6,166 
Total Dividends Declared
3,450 
3,180 
6,724 
6,185 
Balance at End of Period
96,975 
80,521 
96,975 
87,284 
Series A Voting
 
 
 
 
Dividends Declared:
 
 
 
 
Cumulative Preferred, Class A, $0.20 per share for the three months ended June 30, 2017 and 2016, respectively, and $0.40 per share for the six months ended June 30, 2017 and 2016, respectively
Cumulative Preferred Stock
 
 
 
 
Dividends Declared:
 
 
 
 
Cumulative Preferred, Class A, $0.20 per share for the three months ended June 30, 2017 and 2016, respectively, and $0.40 per share for the six months ended June 30, 2017 and 2016, respectively
$ 7 
$ 7 
$ 13 
$ 13 
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Parenthetical)
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Dividends Declared:
 
 
 
 
Common Stock (in dollars per share)
$ 0.2975 
$ 0.2825 
$ 0.5800 
$ 0.5500 
Cumulative Preferred Stock
 
 
 
 
Dividends Declared:
 
 
 
 
Preferred Stock (in dollars per share)
$ 0.225 
$ 0.225 
$ 0.450 
$ 0.450 
Series A Voting
 
 
 
 
Dividends Declared:
 
 
 
 
Preferred Stock (in dollars per share)
$ 0.20 
$ 0.20 
$ 0.40 
$ 0.40 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Proceeds from Sale of Land Held-for-investment
$ 212 
$ 0 
Net Additions to Utility Plant Used in Continuing Operations
24,438 
28,627 
Cash Acquired from Acquisition
1,336 
Operating Activities:
 
 
Net Income
12,486 
13,091 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 
Deferred Revenues
(3,421)
(2,667)
Provision for Deferred Income Taxes and Investment Tax Credits, Net
(617)
2,125 
Allowance for Funds Used During Construction
(566)
(521)
Depreciation (including $351 and $571 in 2017 and 2016, respectively, charged to other accounts)
8,027 
7,328 
Gain (Loss) on Sale of Properties
33 
Change in Assets and Liabilities:
 
 
Increase in Accounts Receivable and Accrued Unbilled Revenues
(488)
(1,376)
Increase in Prepayments and Other Current Assets
(1,070)
(1,854)
(Increase) Decrease in Other Non-Current Items
2,369 
(5,049)
Increase in Accounts Payable, Accrued Expenses and Other Current Liabilities
(2,027)
(1,613)
Total Adjustments
2,174 
(3,627)
Net Cash and Cash Equivalents Provided by Operating Activities
14,660 
9,464 
Investing Activities:
 
 
Release of restricted cash
649 
Net Cash and Cash Equivalents Used in Investing Activities
(22,890)
(27,978)
Financing Activities:
 
 
Proceeds from Interim Bank Loans
43,632 
11,200 
Repayment of Interim Bank Loans
(32,953)
(16,085)
Proceeds from the Issuance of Long-Term Debt
5,000 
30,000 
Proceeds from Issuance of Common Stock
692 
852 
Costs to Issue Long-Term Debt and Common Stock
(2)
(27)
Repayment of Long-Term Debt Including Current Portion
(1,104)
(1,021)
Advances from Others for Construction
819 
192 
Cash Dividends Paid
(6,724)
(6,185)
Net Cash and Cash Equivalents (Used in) Provided by Financing Activities
9,360 
18,926 
Net (Decrease) Increase in Cash and Cash Equivalents
1,130 
412 
Cash and Cash Equivalents at Beginning of Period
1,564 
731 
Cash and Cash Equivalents at End of Year
2,694 
1,143 
Non-Cash Investing and Financing Activities:
 
 
Non-Cash Contributed Utility Plant
2,278 
558 
Cash Paid for:
 
 
Interest
3,825 
3,208 
State and Federal Income Taxes
$ 362 
$ 255 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 
Depreciation charged to other accounts
$ 351 
$ 571 
Basis of Preparation of Financials
Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]
1.
Basis of Preparation of Financials

The condensed consolidated financial statements included herein have been prepared by Connecticut Water Service, Inc. (the “Company”) and its wholly-owned subsidiaries, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that are of a normal recurring nature which are, in the opinion of management, necessary to a fair statement of the results for interim periods.  Certain information and footnote disclosures have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  The Company’s primary operating subsidiaries are: The Connecticut Water Company (“Connecticut Water”) and The Heritage Village Water Company (“HVWC”) in the State of Connecticut and The Maine Water Company (“Maine Water”) in the State of Maine. The Condensed Consolidated Balance Sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “10-K”) and as updated in the Company’s Quarterly Report on Form 10-Q for the period ending March 31, 2017.

The results for interim periods are not necessarily indicative of results to be expected for the year since the consolidated earnings are subject to seasonal factors.  Effective February 27, 2017, the Company acquired HVWC, discussed further in Note 11 below.  As a result, the Company’s Condensed Consolidated Balance Sheet at December 31, 2016, the Condensed Consolidated Statements of Net Income, Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements of Retained Earnings for the three and six months ended June 30, 2016 and Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 do not include HVWC.  The Condensed Consolidated Statements of Net Income, Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements Retained Earnings for the three months ended June 30, 2017 and the Condensed Consolidated Statements of Net Income, Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements of Retained Earnings and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 do include HVWC’s results for the approximate four months the Company owned HVWC during the period. HVWC’s assets and liabilities are included in the Condensed Consolidated Balance Sheet as of June 30, 2017.

As noted in Note 11 below, HVWC serves approximately 4,700 water customers in the Towns of Southbury, Middlebury, and Oxford, Connecticut and approximately 3,000 wastewater customers in the Town of Southbury, Connecticut. The results of the wastewater line of business are included in the Company’s Water Operations segment.

During the preparation of the Condensed Consolidated Financial Statements for the quarter ended June 30, 2016, the Company identified two errors related to the accounting treatment of stock based performance awards granted to officers of the Company. First, the Company had mistakenly classified all stock based performance awards as equity awards and, secondly, incorrectly marked those awards to the market price of the Company’s common stock price at the end of each reporting period. A portion of these awards should have been classified as liability awards and only those awards should have been marked-to-market based on the Company’s common stock price. During the second quarter of 2016, the Company reversed all of the incorrectly recorded mark-to-market expense as a cumulative out-of-period adjustment resulting in a one-time benefit of approximately $2.6 million on the Operation and Maintenance line item on its Condensed Consolidated Statements of Income for the three and six months ended June 30, 2016. Approximately $1.6 million of the out of period adjustment pertained to years prior to 2016, with the remaining $1.0 million related to the first quarter of 2016. Additionally, the Company decreased its Common Stock Without Par Value and increased its Long-Term Compensation Arrangement line items on the Condensed Consolidated Balance Sheet as of June 30, 2016 by approximately $0.6 million to reflect both the awards that should have been classified as liability awards and their corresponding mark-to-market adjustments.

Regulatory Matters

The rates we charge our water customers in Connecticut and Maine are established under the jurisdiction of and are approved by the Connecticut Public Utilities Regulatory Authority (“PURA”) and the Maine Public Utilities Commission (“MPUC”), respectively. It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return. Connecticut Water’s allowed return on equity and return on rate base, effective June 30, 2017, were 9.75% and 7.32%, respectively. HVWC’s blended water and wastewater allowed return on equity and return on rate base, effective June 30, 2017, were 10.10% and 7.19%, respectively. Maine Water’s average allowed return on equity and return on rate base, effective June 30, 2017, were 9.50% and 7.96%, respectively. The PURA establishes rates in Connecticut on a company-wide basis while the MPUC approves Maine Water’s rates on a division-by-division basis. Each of Connecticut Water, HVWC and Maine Water are allowed to add surcharges to customers’ bills in order to recover certain approved capital projects in between full rate cases, as well as approved surcharges for Water Revenue Adjustments, as discussed in more detail below, in Connecticut. HVWC has not added surcharges to customers’ bills in order to recover certain approved capital projects as of March 31, 2017, however, HVWC has begun to utilize Water Revenue Adjustments as of March 31, 2017.

Maine Water Land Sale
On March 11, 2016, Maine Water entered into a purchase and sale agreement with the Coastal Mountains Land Trust, a Maine nonprofit corporation (the “Land Trust”) pursuant to which Maine Water agreed to sell two conservation easements to the Land Trust on approximately 1,300 acres of land located in the towns of Rockport, Camden and Hope, in Knox County, Maine valued in the aggregate at $3.1 million.  The land had a book value of approximately $600,000 at June 30, 2017 and December 31, 2016 and is included in “Utility Plant” on the Company’s “Condensed Consolidated Balance Sheets”. The easements and purchase prices are as follows:

1.Ragged Mountain Mirror Lake Conservation Easement: $1,875,000; and
2.Grassy Pond conservation Easement: $600,000.

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

Connecticut Rates
Connecticut Water’s Water Infrastructure Conservation Adjustment (“WICA”) was 8.25% and 3.04% at June 30, 2017 and 2016, respectively. On July 26, 2017, Connecticut Water filed a WICA application with the PURA requesting a 1.56% surcharge to customers’ bills, representing approximately $8.2 million in WICA related projects. If approved as filed, Connecticut Water’s cumulative WICA surcharge will be 9.81%, effective October 1, 2017. As of June 30, 2017, HVWC has not filed for a WICA surcharge.

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

Connecticut Water and HVWC’s allowed revenues for the six months ended June 30, 2017, as approved by PURA during each company’s most recent general rate case and including subsequently approved WICA surcharges, are approximately $38.9 million. Through normal billing for the six months ended June 30, 2017, revenue for Connecticut Water and HVWC would have been approximately $35.3 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water and HVWC recorded $3.6 million in additional revenue for the six months ended June 30, 2017.

Maine Rates
In Maine, the overall, cumulative Water Infrastructure Charge (“WISC”) for all divisions was 5.66% and 4.08% as of June 30, 2017 and 2016, respectively.

On June 29, 2017, Maine Water filed for a rate increase in its Biddeford and Saco division. The rate request is for an approximate $1.6 million, or 25.1%, increase in revenues. The rate request is to recover higher operating expenses, depreciation and property taxes since Biddeford and Saco’s last rate increase in 2015. The Company expects a final decision to be issued by the MPUC in the fourth quarter of 2017 with new rates to be effective as of January 1, 2018.

A water revenue adjustment mechanism law in Maine became available to regulated water utilities in Maine on October 15, 2015. Maine Water is currently precluded from seeking new rates outside of the Biddeford and Saco division due to various agreements with the MPUC, but is evaluating how and when this new mechanism can be implemented.
Pension and Other Post-Retirement Benefits
Pension and Other Post-Retirement Benefits
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 six months ended June 30, 2017 and 2016.

Pension Benefits
Components of Net Periodic Cost (in thousands):
 
Three Months
 
Six Months
Period ended June 30,
2017
 
2016
 
2017
 
2016
Service Cost
$
450

 
$
426

 
$
964

 
$
947

Interest Cost
806

 
812

 
1,600

 
1,606

Expected Return on Plan Assets
(1,044
)
 
(1,061
)
 
(2,145
)
 
(2,040
)
Amortization of:
 

 
 

 
 
 
 
Prior Service Cost
4

 
4

 
8

 
8

Net Recognized Loss
486

 
514

 
1,031

 
1,025

Net Periodic Benefit Cost
$
702

 
$
695

 
$
1,458

 
$
1,546



The Company anticipates making a total contribution of approximately $2,971,000 in 2017 for the 2016 plan year by September 30, 2017.

Post-Retirement Benefits Other Than Pension (PBOP)
Components of Net Periodic Cost (in thousands):
 
Three Months
 
Six Months
Period ended June 30,
2017
 
2016
 
2017
 
2016
Service Cost
$
74

 
$
85

 
$
167

 
$
188

Interest Cost
123

 
135

 
256

 
271

Expected Return on Plan Assets
(89
)
 
(85
)
 
(177
)
 
(170
)
Other
56

 
56

 
112

 
112

Amortization of:
 

 
 

 
 
 
 
Prior Service Credit
(45
)
 
(100
)
 
(90
)
 
(200
)
Recognized Net Loss
(31
)
 
11

 
(40
)
 
19

Net Periodic Benefit Cost
$
88

 
$
102

 
$
228

 
$
220

Earnings per Share
Earnings per Share
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 June 30,
2017
 
2016
Common Shares Outstanding End of Period
11,575,400

 
11,231,037

Weighted Average Shares Outstanding (Days Outstanding Basis):
 

 
 

Basic
11,343,528

 
11,004,331

Diluted
11,568,278

 
11,222,989

 
 
 
 
Basic Earnings per Share
$
0.75

 
$
0.90

Dilutive Effect of Stock Awards
(0.02
)
 
(0.01
)
Diluted Earnings per Share
$
0.73

 
$
0.89

 
 
 
 
Six months ended June 30,
 
 
 
Weighted Average Shares Outstanding (Days Outstanding Basis):
 
 
 
Basic
11,241,884

 
10,998,408

Diluted
11,467,141

 
11,217,136

 
 
 
 
Basic Earnings per Share
$
1.11

 
$
1.19

Dilutive Effect of Stock Awards
(0.02
)
 
(0.02
)
Diluted Earnings per Share
$
1.09

 
$
1.17



Total unrecognized compensation expense for all stock awards was approximately $0.6 million as of June 30, 2017 and will be recognized over a weighted average period of 1.4 years.
New Accounting Pronouncements
Recently Adopted and New Accounting Pronouncements
4.
Recently Adopted and New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“No. 2014-09”) which amends its guidance related to revenue recognition. ASU No. 2014-09 requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. ASU No. 2014-09 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2016, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, however early adoption is not permitted. On April 1, 2015, the FASB voted for a one-year deferral of the effective date of ASU No. 2014-09, making ASU No. 2014-09 effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company continues to assess all potential impacts of adopting ASU No. 2014-09, however it does not believe the new standard will have an impact on the Company’s revenues from water and wastewater customers. In instances where operating contracts contain more than one distinct good or service, as defined by ASU No. 2014-09, the new standard may affect the timing of when the Company recognizes the related revenue. The Company additionally continues to assess the impact ASU No. 2014-09 will have on the Company’s accounting surrounding Contributions in Aid of Construction. The Company will complete its assessment of the expected impact of adoption, including selecting a transition method for adoption, in 2017, and continue to evaluate ASU No. 2014-09 through the date of adoption.

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

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

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

In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," (“ASU 2017-07”) which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under ASU 2017-07, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line item that includes the service cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period in which the financial statements have not been issued. Entities must use a retrospective transition method to adopt the requirement for separate presentation of the income statement service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The Company is currently evaluating the impact of adopting this guidance.
Accumulated Other Comprehensive Income (Loss) (Notes)
Comprehensive Income (Loss) Note [Text Block]
5.
Accumulated Other Comprehensive Income

The changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the three months ended June 30, 2017 and 2016 are as follows (in thousands):
Three months ended June 30, 2017
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
299

 
$
(1,120
)
 
$
(821
)
Other Comprehensive Income Before Reclassification
 
21

 

 
21

Amounts Reclassified from AOCI
 
8

 
57

 
65

Net current-period Other Comprehensive Income
 
29

 
57

 
86

Ending Balance
 
$
328

 
$
(1,063
)
 
$
(735
)
 
 
 
 
 
 
 
Three months ended June 30, 2016
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
185

 
$
(1,100
)
 
$
(915
)
Other Comprehensive (Loss) Income Before Reclassification
 
(8
)
 

 
(8
)
Amounts Reclassified from AOCI
 
10

 
43

 
53

Net current-period Other Comprehensive (Loss) Income
 
2

 
43

 
45

Ending Balance
 
$
187

 
$
(1,057
)
 
$
(870
)
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
235

 
$
(1,159
)
 
$
(924
)
Other Comprehensive Income Before Reclassification
 
85

 

 
85

Amounts Reclassified from AOCI
 
8

 
96

 
104

Net current-period Other Comprehensive Income
 
93

 
96

 
189

Ending Balance
 
$
328

 
$
(1,063
)
 
$
(735
)
 
 
 
 
 
 
 
Six months ended June 30, 2016
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
200

 
$
(1,135
)
 
$
(935
)
Other Comprehensive (Loss) Income Before Reclassification
 
(23
)
 

 
(23
)
Amounts Reclassified from AOCI
 
10

 
78

 
88

Net current-period Other Comprehensive (Loss) Income
 
(13
)
 
78

 
65

Ending Balance
 
$
187

 
$
(1,057
)
 
$
(870
)
 
 
 
 
 
 
 
(a) All amounts shown are net of tax. Amounts in parentheses indicate loss.

The following table sets forth the amounts reclassified from AOCI by component and the affected line item on the Condensed Consolidated Statements of Income for the three months ended June 30, 2017 and 2016 (in thousands):
Details about Other AOCI Components
 
Amounts Reclassified from AOCI Three Months Ended June 30, 2017(a)
 
Amounts Reclassified from AOCI Three Months Ended June 30, 2016(a)
 
Affected Line Items on Income Statement
Realized Gains on Investments
 
$
13

 
$
17

 
Other Income
Tax expense
 
(5
)
 
(7
)
 
Other Income
 
 
8

 
10

 
 
 
 
 
 
 
 
 
Amortization of Recognized Net Gain from Defined Benefit Items
 
93

 
71

 
Other Income (b)
Tax expense
 
(36
)
 
(28
)
 
Other Income
 
 
57

 
43

 
 
 
 
 
 
 
 
 
Total Reclassifications for the period, net of tax
 
$
65

 
$
53

 
 
 
 
 
 
 
 
 
Details about Other AOCI Components
 
Amounts Reclassified from AOCI Six Months Ended June 30, 2017(a)
 
Amounts Reclassified from AOCI Six Months Ended June 30, 2016(a)
 
Affected Line Items on Income Statement
Realized Gains on Investments
 
$
13

 
$
17

 
Other Income
Tax expense
 
(5
)
 
(7
)
 
Other Income
 
 
8

 
10

 
 
 
 
 
 
 
 
 
Amortization of Recognized Net Gain from Defined Benefit Items
 
157

 
128

 
Other Income (b)
Tax expense
 
(61
)
 
(50
)
 
Other Income
 
 
96

 
78

 
 
 
 
 
 
 
 
 
Total Reclassifications for the period, net of tax
 
$
104

 
$
88

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

Long-Term Debt at June 30, 2017 and December 31, 2016 consisted of the following (in thousands):
 
2017
 
2016
Connecticut Water Service, Inc.:
 
 
 
4.09%
 
Term Loan Note
$
12,903

 
$
13,437

The Connecticut Water Company:
 
 
 
Var.
 
2004 Series Variable Rate, Due 2029
12,500

 
12,500

Var.
 
2004 Series A, Due 2028
5,000

 
5,000

Var.
 
2004 Series B, Due 2028
4,550

 
4,550

5.00%
 
2011 A Series, Due 2021
23,051

 
23,115

3.16%
 
CoBank Note Payable, Due 2020
8,000

 
8,000

3.51%
 
CoBank Note Payable, Due 2022
14,795

 
14,795

4.29%
 
CoBank Note Payable, Due 2028
17,020

 
17,020

4.72%
 
CoBank Note Payable, Due 2032
14,795

 
14,795

4.75%
 
CoBank Note Payable, Due 2033
14,550

 
14,550

4.36%
 
CoBank Note Payable, Due May 2036
30,000

 
30,000

4.04%
 
CoBank Note Payable, Due July 2036
19,930

 
19,930

Total The Connecticut Water Company
164,191

 
164,255

The Heritage Village Water Company
 
 
 
4.75%
 
2011 Farmington Bank Loan, Due 2034
4,543

 

The Maine Water Company:
 
 
 
8.95%
 
1994 Series G, Due 2024
7,200

 
7,200

2.68%
 
1999 Series J, Due 2019
170

 
254

0.00%
 
2001 Series K, Due 2031
574

 
615

2.58%
 
2002 Series L, Due 2022
60

 
67

1.53%
 
2003 Series M, Due 2023
321

 
341

1.73%
 
2004 Series N, Due 2024
371

 
371

0.00%
 
2004 Series O, Due 2034
113

 
120

1.76%
 
2006 Series P, Due 2026
361

 
391

1.57%
 
2009 Series R, Due 2029
207

 
217

0.00%
 
2009 Series S, Due 2029
560

 
583

0.00%
 
2009 Series T, Due 2029
1,572

 
1,634

0.00%
 
2012 Series U, Due 2042
148

 
154

1.00%
 
2013 Series V, Due 2033
1,310

 
1,335

2.52%
 
CoBank Note Payable, Due 2017
1,965

 
1,965

4.24%
 
CoBank Note Payable, Due 2024
4,500

 
4,500

4.18%
 
CoBank Note Payable, Due 2026
5,000

 

7.72%
 
Series L, Due 2018
2,250

 
2,250

2.40%
 
Series N, Due 2022
1,026

 
1,101

1.86%
 
Series O, Due 2025
790

 
790

2.23%
 
Series P, Due 2028
1,264

 
1,294

0.01%
 
Series Q, Due 2035
1,678

 
1,771

1.00%
 
Series R, Due 2025
2,250

 
2,250

Various
 
Various Capital Leases
5

 
8

Total The Maine Water Company
33,695

 
29,211

Add: Acquisition Fair Value Adjustment
255

 
321

Less: Current Portion
(5,196
)
 
(4,859
)
Less: Unamortized Debt Issuance Expense
(5,040
)
 
(5,318
)
Total Long-Term Debt
$
205,351

 
$
197,047



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

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

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

On July 20, 2017, Connecticut Water filed an application with PURA to issue up to $35,000,000 in unsecured notes during the second half of 2017. Connecticut Water intends to use the $35,000,000 principal to repay amounts owed to the Company and to fund capital expenditures associated with the Connecticut Water’s ongoing construction program. The notes will be callable in whole or in part, subject to payment of a make-whole amount. The notes will have a bullet payment of the full principal amount due at maturity, unless they are prepaid in whole or in part prior to that maturity. Additionally, the notes will have fixed interest rates which will be based on current market rate at the time of the closing.

During the first six months of 2017, the Company paid approximately $534,000 related to Connecticut Water Service’s Term Note Payable issued as part of the 2012 acquisition of Maine Water, approximately $516,000 in sinking funds related to Maine Water’s outstanding bonds and approximately $54,000 in sinking funds related to HVWC’s bank loan.

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 June 30, 2017.
Fair Value Disclosures
Fair Value Disclosures
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 June 30, 2017 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Asset Type:
 
 
 
 
 
 
 
Money Market Fund
$
35

 
$

 
$

 
$
35

Mutual Funds:
 

 
 

 
 

 
 

Equity Funds (1)
1,787

 

 

 
1,787

Fixed Income Funds (2)
550

 

 

 
550

Total
$
2,372

 
$

 
$

 
$
2,372


The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2016 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Asset Type:
 
 
 
 
 
 
 
Money Market Fund
$
122

 
$

 
$

 
$
122

Mutual Funds:
 

 
 

 
 

 
 

Equity Funds (1)
1,662

 

 

 
1,662

Fixed Income Funds (2)
534

 

 

 
534

Total
$
2,318

 
$

 
$

 
$
2,318

(1)
Mutual funds consist primarily of equity securities and are presented on the Other Property and Investments line item of the Company’s Condensed Consolidated Balance Sheets.
(2)
Mutual funds consist primarily of fixed income securities and are presented on the Other Property and Investments line item of the Company’s Condensed Consolidated Balance Sheets.

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

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

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

Company Owned Life Insurance – The fair value of Company Owned Life Insurance is based on the cash surrender value of the contracts. These contracts are based principally on a referenced pool of investment funds that actively redeem shares and are observable and measurable and are presented on the “Other Property and Investments” line item of the Company’s Consolidated Balance Sheets. The value of Company Owned Life Insurance at June 30, 2017 and December 31, 2016 was $3,259,000 and $3,075,000, respectively.

Long-Term Debt – The fair value of the Company’s fixed rate long-term debt is based upon borrowing rates currently available to the Company.  As of June 30, 2017 and December 31, 2016, the estimated fair value of the Company’s long-term debt was $223,119,000 and $210,463,000, respectively, as compared to the carrying amounts of $210,391,000 and $202,365,000, respectively. The estimated fair value of long term debt was calculated using a discounted cash flow model that uses comparable interest rates and yield curve data based on the A-rated MMD (Municipal Market Data) Index which is a benchmark of current municipal bond yields. Under the fair value hierarchy, the fair value of long term debt is classified as a Level 2 measurement.

Advances for Construction – Customer advances for construction had a carrying amount of $21,433,000 and $19,127,000 at June 30, 2017 and December 31, 2016, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.

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

The Company operates principally in three business segments: Water Operations, Real Estate Transactions, and Services and Rentals. Financial data for the segments is as follows (in thousands):
Three months ended June 30, 2017
Segment
 
Revenues
 
Pre-Tax Income
 
Income Tax Expense(Benefit)
 
Net Income
Water Operations
 
$
28,220

 
$
7,117

 
$
(969
)
 
$
8,086

Real Estate Transactions
 

 

 

 

Services and Rentals
 
1,279

 
505

 
173

 
332

Total
 
$
29,499

 
$
7,622

 
$
(796
)
 
$
8,418

Three months ended June 30, 2016
Segment
 
Revenues
 
Pre-Tax Income
 
Income Tax Expense
 
Net Income
Water Operations
 
$
26,376

 
$
10,173

 
$
636

 
$
9,537

Real Estate Transactions
 

 

 

 

Services and Rentals
 
1,212

 
563

 
157

 
406

Total
 
$
27,588

 
$
10,736

 
$
793

 
$
9,943

Six months ended June 30, 2017
Segment
 
Revenues
 
Pre-Tax Income
 
Income Tax Expense(Benefit)
 
Net Income
Water Operations
 
$
51,006

 
$
10,612

 
$
(1,251
)
 
$
11,863

Real Estate Transactions
 
212

 
55

 
22

 
33

Services and Rentals
 
2,489

 
996

 
406

 
590

Total
 
$
53,707

 
$
11,663

 
$
(823
)
 
$
12,486


Six months ended June 30, 2016
Segment
 
Revenues
 
Pre-Tax Income
 
Income Tax Expense
 
Net Income
Water Operations
 
$
48,231

 
$
13,123

 
$
833

 
$
12,290

Real Estate Transactions
 

 

 

 

Services and Rentals
 
2,443

 
1,100

 
299

 
801

Total
 
$
50,674

 
$
14,223

 
$
1,132

 
$
13,091



The revenues shown in Water Operations above consisted of revenues from water customers of $27,370,000 and $26,055,000 for the three months ended June 30, 2017 and 2016, respectively, and wastewater revenues of $532,000 for the three months ended June 30, 2017. There were no wastewater revenues in 2016. Additionally, there were revenues associated with utility plant leased to others of $318,000 and $321,000 for the three months ended June 30, 2017 and 2016, respectively. The revenues from water and wastewater customers for the three months ended June 30, 2017 and 2016 include $2,980,000 and $2,386,000 in additional revenues related to the application of the WRA, respectively. The revenues shown in Water Operations above consisted of revenues from water customers of $49,644,000 and $47,607,000 for the six months ended June 30, 2017 and 2016, respectively, and wastewater revenues of $721,000 for the six months ended June 30, 2017. There were no wastewater revenues in 2016. Additionally, there were revenues associated with utility plant leased to others of $641,000 and $624,000 for the six months ended June 30, 2017 and 2016, respectively. The revenues from water and wastewater customers for the six months ended June 30, 2017 and 2016 include $3,553,000 and $2,786,000 in additional revenues related to the application of the WRA, respectively.

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

Assets by segment (in thousands):
 
June 30, 2017
 
December 31, 2016
Total Plant and Other Investments:
 
 
 
Water Operations
$
656,556

 
$
609,508

Non-Water
1,026

 
959

 
657,582

 
610,467

Other Assets:
 
 
 
Water Operations
194,609

 
171,674

Non-Water
2,825

 
2,361

 
197,434

 
174,035

Total Assets
$
855,016

 
$
784,502

Income Tax Expense
Income Taxes
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.

The Company adopted the Internal Revenue Service (“IRS”) temporary tangible property regulations on the Company’s 2012 Federal tax return. Since that time, the Company has been recording a provision for any possible disallowance of a portion of the repair deduction if the deductions were unable to be sustained on audit by the IRS. While the Company believes that the deductions taken on its tax returns are appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities.  During the Company’s review of the position through the quarter ended March 31, 2017, new information caused management to reassess the previously recorded provision. This reassessment resulted in the reversal of a portion of the provision related to the Maine subsidiary, in the amount of $1,164,000 in the first quarter of 2017. During the Company’s review of its position through the quarter ended June 30, 2017, the impact of new information on Connecticut Water caused management to reassess the previously recorded provision. The reassessment resulted in the reversal of a portion of the provision in the amount of $2,445,000. For the six months ended June 30, 2017, the Company has recorded, as required by FASB ASC 740, a provision of $725,000 for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. The Company had previously recorded a provision of $9.4 million in the prior year for a cumulative total of $6.6 million.

From time to time, the Company may be assessed interest and penalties by taxing authorities.  In those cases, the charges would appear on the Other line item within the Other Income (Deductions), Net of Taxes section of the Company’s Condensed Consolidated Statements of Income.  There were no such charges for the six months ended June 30, 2017 and 2016.  Additionally, there were no accruals relating to interest or penalties as of June 30, 2017 and December 31, 2016.  The Company remains subject to examination by federal tax authorities for the 2013 through 2015 tax years; the State of Maine’s tax authorities for the 2013 through 2015 tax years; and the State of Connecticut’s tax authorities for the 2014 and 2015 tax years.

The Company is currently engaged in an analysis to determine the amount of expenditures related to tangible property that will be reflected on its 2017 Federal Tax Return to be filed in September 2018.  As a result, through the second quarter of 2017, the Company has estimated the portion of its infrastructure investment that will qualify as a repair deduction for 2017 and has reflected that deduction in its effective tax rate, net of any reserves.  Consistent with other differences between book and tax expenditures, the Company is required to use the flow-through method to account for any timing differences not required by the IRS to be normalized.

The Company’s effective income tax rate for the three months ended June 30, 2017 and 2016 was (10.5)% and 7.4%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the three months ended June 30, 2017 and 2016, was 16.2% and 5.2%, respectively. In 2017, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut. In 2016, these discrete items include adjustments related to uncertain tax positions for the repair deduction in both Connecticut and Maine and a change in estimate of prior year tax expense. Excluding discrete items, there is an increase in the effective tax rate year over year for the three month period of approximately 11%. The increase in the effective tax rate for this period can be attributed to a lower estimated repair deduction and a lower tax deductible pension contribution in 2017 than in 2016. The Company’s effective income tax rate for the six months ended June 30, 2017 and 2016 was (7.1)% and 8.0%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the three months ended June 30, 2017 and 2016, was 17.7% and 3.4%, respectively. In 2017, these discrete items include adjustments related to uncertain tax positions for the repair deduction in both Connecticut and Maine. The blended Federal and State statutory income tax rates during each period were 41%. In 2016, these discrete items include adjustments related to uncertain tax positions for the repair deduction in both Connecticut and Maine and a change in estimate of prior year tax expense. Excluding discrete items, there is an increase in the effective tax rate year over year for the six month period of approximately 14%. The increase in the effective tax rate for this period can be attributed to a lower estimated repair deduction and a lower tax deductible pension contribution in 2017 than in 2016. The blended Federal and State statutory income tax rates during each period were 41%. In determining its annual estimated effective tax rate for interim periods, the Company reflects its estimated permanent and flow-through tax differences for the taxable year, including the basis difference for the adoption of the tangible property regulations.
Lines of Credit
Lines of Credit
Lines of Credit

As of June 30, 2017, the Company maintained a $15.0 million line of credit agreement with CoBank, that is currently scheduled to expire on July 1, 2020.  The Company maintained an additional line of credit of $45.0 million with Citizens Bank, N.A., with an expiration date of April 25, 2021.  As of June 30, 2017, the total lines of credit available to the Company were $60.0 million.  As of June 30, 2017 and December 31, 2016, the Company had $43.6 million and $33.0 million, respectively, of Interim Bank Loans Payable. As of June 30, 2017, the Company had $16.4 million in unused lines of credit.  Interest expense charged on lines of credit will fluctuate based on market interest rates.
Aquisitions
Business Combination Disclosure [Text Block]
11.    Acquisition

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

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

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

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

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

Net Utility Plant
$
28,861

Cash and Cash Equivalents
1,336

Accounts Receivable, net
345

Prepayments and Other Current Assets
63

Materials and Supplies, at Average Cost
200

Goodwill
12,618

Deferred Charges and Other Costs
343

Total Assets Acquired
$
43,766

Advances for Construction
 
Long-Term Debt, including current portion
$
4,642

Accounts Payable and Accrued Expenses
21

Other Current Liabilities
228

Advances for Construction
1,897

Deferred Federal and State Income Taxes
1,623

Total Liabilities Assumed
$
8,411

 
 
Contributions in Aid of Construction
18,452

 
 
Net Assets Acquired
$
16,903



The estimated fair values of the assets acquired and the liabilities assumed were determined based on the accounting guidance for fair value measurement under GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value analysis assumes the highest and best use of the assets by market participants. The allocation of the purchase price includes an adjustment to fair value related to the fair value of HVWC’s long term debt. The excess of the purchase price paid over the estimated fair value of the assets acquired and the liabilities assumed was recognized as goodwill, none of which is deductible for tax purposes. Goodwill recognized as part of the acquisition of HVWC is a part of the Company’s Water Operations segment.

The following unaudited pro forma summary for the three and six months ended June 30, 2017 presents information as if HVWC had been acquired on January 1, 2016 and assumes that there were no other changes in our operations.  The following pro forma information does not necessarily reflect the actual results that would have occurred had the Company operated the business since January 1, 2016, nor is it necessarily indicative of the future results of operations of the combined companies (in thousands):

Three months ended June 30,
2017
 
2016
Operating Revenues
$
27,902

 
$
27,039

Other Water Activities Revenues
318

 
320

Real Estate Revenues

 

Service and Rentals Revenues
1,279

 
1,212

Total Revenues
$
29,499

 
$
28,571

 
 
 
 
Net Income
$
8,418

 
$
9,950

 
 
 
 
Basic Earnings per Average Share Outstanding
$
0.75

 
$
0.89

Diluted Earnings per Average Share Outstanding
$
0.73

 
$
0.86

 
 
 
 
Six months ended June 30,
2017
 
2016
Operating Revenues
$
50,971

 
$
49,460

Other Water Activities Revenues
641

 
624

Real Estate Revenues
212

 

Service and Rentals Revenues
2,489

 
2,443

Total Revenues
$
54,313

 
$
52,527

 
 
 
 
Net Income
$
12,510

 
$
13,166

 
 
 
 
Basic Earnings per Average Share Outstanding
$
1.10

 
$
1.17

Diluted Earnings per Average Share Outstanding
$
1.08

 
$
1.14


The following table summarizes the results of HVWC for the three months ended June 30, 2017 and the period from February 27, 2017, the date of acquisition, to June 30, 2017 and is included in the Consolidated Statement of Income for the period (in thousands):

Three months ended June 30, 2017
 
Operating Revenues
$
1,017

Other Water Activities Revenues

Real Estate Revenues

Service and Rentals Revenues

Total Revenues
$
1,017

 
 

Net Income
$
132

 
 

Basic Earnings per Average Share Outstanding
$
0.01

Diluted Earnings per Average Share Outstanding
$
0.01

 
 
Period ending June 30, 2017
 
Operating Revenues
$
1,353

Other Water Activities Revenues

Real Estate Revenues

Service and Rentals Revenues

Total Revenues
$
1,353

 
 
Net Income
$
217

 
 
Basic Earnings per Average Share Outstanding
$
0.02

Diluted Earnings per Average Share Outstanding
$
0.02



On July 1, 2017, the Company completed the previously announced acquisition of The Avon Water Company (“Avon Water”). As of the date of this filing, the initial accounting for this acquisition is incomplete and therefore the above tables for Avon Water are not available. For more information about the acquisition of Avon Water, see Note 12 Subsequent Events.
Subsequent Events (Notes)
Subsequent Events [Text Block]
12.    Subsequent Events

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

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

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

The transaction was completed through a stock-for-stock exchange where Avon Water shareholders received the Company’s common stock valued at approximately $27.9 million, in a tax-free exchange, and a cash payment of $6.1 million for a total payment to shareholders of $34.0 million. The transaction reflects a total enterprise value of approximately $40.1 million, with the $34.0 million paid to shareholders and the assumption by the Company of approximately $6.1 million of debt of Avon Water.
Pension and Other Post-Retirement Benefits Pension and Post-Retirement Benefits (Tables)
Pension Benefits
Components of Net Periodic Cost (in thousands):
 
Three Months
 
Six Months
Period ended June 30,
2017
 
2016
 
2017
 
2016
Service Cost
$
450

 
$
426

 
$
964

 
$
947

Interest Cost
806

 
812

 
1,600

 
1,606

Expected Return on Plan Assets
(1,044
)
 
(1,061
)
 
(2,145
)
 
(2,040
)
Amortization of:
 

 
 

 
 
 
 
Prior Service Cost
4

 
4

 
8

 
8

Net Recognized Loss
486

 
514

 
1,031

 
1,025

Net Periodic Benefit Cost
$
702

 
$
695

 
$
1,458

 
$
1,546

Post-Retirement Benefits Other Than Pension (PBOP)
Components of Net Periodic Cost (in thousands):
 
Three Months
 
Six Months
Period ended June 30,
2017
 
2016
 
2017
 
2016
Service Cost
$
74

 
$
85

 
$
167

 
$
188

Interest Cost
123

 
135

 
256

 
271

Expected Return on Plan Assets
(89
)
 
(85
)
 
(177
)
 
(170
)
Other
56

 
56

 
112

 
112

Amortization of:
 

 
 

 
 
 
 
Prior Service Credit
(45
)
 
(100
)
 
(90
)
 
(200
)
Recognized Net Loss
(31
)
 
11

 
(40
)
 
19

Net Periodic Benefit Cost
$
88

 
$
102

 
$
228

 
$
220

Earnings per Share Earnings per Share (Tables)
Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]
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 June 30,
2017
 
2016
Common Shares Outstanding End of Period
11,575,400

 
11,231,037

Weighted Average Shares Outstanding (Days Outstanding Basis):
 

 
 

Basic
11,343,528

 
11,004,331

Diluted
11,568,278

 
11,222,989

 
 
 
 
Basic Earnings per Share
$
0.75

 
$
0.90

Dilutive Effect of Stock Awards
(0.02
)
 
(0.01
)
Diluted Earnings per Share
$
0.73

 
$
0.89

 
 
 
 
Six months ended June 30,
 
 
 
Weighted Average Shares Outstanding (Days Outstanding Basis):
 
 
 
Basic
11,241,884

 
10,998,408

Diluted
11,467,141

 
11,217,136

 
 
 
 
Basic Earnings per Share
$
1.11

 
$
1.19

Dilutive Effect of Stock Awards
(0.02
)
 
(0.02
)
Diluted Earnings per Share
$
1.09

 
$
1.17

Accumulated Other Comprehensive Income (Loss) (Tables)
Schedule of Accumulated Other Comprehensive Income (Loss) [Table Text Block]
The changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the three months ended June 30, 2017 and 2016 are as follows (in thousands):
Three months ended June 30, 2017
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
299

 
$
(1,120
)
 
$
(821
)
Other Comprehensive Income Before Reclassification
 
21

 

 
21

Amounts Reclassified from AOCI
 
8

 
57

 
65

Net current-period Other Comprehensive Income
 
29

 
57

 
86

Ending Balance
 
$
328

 
$
(1,063
)
 
$
(735
)
 
 
 
 
 
 
 
Three months ended June 30, 2016
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
185

 
$
(1,100
)
 
$
(915
)
Other Comprehensive (Loss) Income Before Reclassification
 
(8
)
 

 
(8
)
Amounts Reclassified from AOCI
 
10

 
43

 
53

Net current-period Other Comprehensive (Loss) Income
 
2

 
43

 
45

Ending Balance
 
$
187

 
$
(1,057
)
 
$
(870
)
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
235

 
$
(1,159
)
 
$
(924
)
Other Comprehensive Income Before Reclassification
 
85

 

 
85

Amounts Reclassified from AOCI
 
8

 
96

 
104

Net current-period Other Comprehensive Income
 
93

 
96

 
189

Ending Balance
 
$
328

 
$
(1,063
)
 
$
(735
)
 
 
 
 
 
 
 
Six months ended June 30, 2016
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
200

 
$
(1,135
)
 
$
(935
)
Other Comprehensive (Loss) Income Before Reclassification
 
(23
)
 

 
(23
)
Amounts Reclassified from AOCI
 
10

 
78

 
88

Net current-period Other Comprehensive (Loss) Income
 
(13
)
 
78

 
65

Ending Balance
 
$
187

 
$
(1,057
)
 
$
(870
)
 
 
 
 
 
 
 
(a) All amounts shown are net of tax. Amounts in parentheses indicate loss.

The following table sets forth the amounts reclassified from AOCI by component and the affected line item on the Condensed Consolidated Statements of Income for the three months ended June 30, 2017 and 2016 (in thousands):
Details about Other AOCI Components
 
Amounts Reclassified from AOCI Three Months Ended June 30, 2017(a)
 
Amounts Reclassified from AOCI Three Months Ended June 30, 2016(a)
 
Affected Line Items on Income Statement
Realized Gains on Investments
 
$
13

 
$
17

 
Other Income
Tax expense
 
(5
)
 
(7
)
 
Other Income
 
 
8

 
10

 
 
 
 
 
 
 
 
 
Amortization of Recognized Net Gain from Defined Benefit Items
 
93

 
71

 
Other Income (b)
Tax expense
 
(36
)
 
(28
)
 
Other Income
 
 
57

 
43

 
 
 
 
 
 
 
 
 
Total Reclassifications for the period, net of tax
 
$
65

 
$
53

 
 
 
 
 
 
 
 
 
Details about Other AOCI Components
 
Amounts Reclassified from AOCI Six Months Ended June 30, 2017(a)
 
Amounts Reclassified from AOCI Six Months Ended June 30, 2016(a)
 
Affected Line Items on Income Statement
Realized Gains on Investments
 
$
13

 
$
17

 
Other Income
Tax expense
 
(5
)
 
(7
)
 
Other Income
 
 
8

 
10

 
 
 
 
 
 
 
 
 
Amortization of Recognized Net Gain from Defined Benefit Items
 
157

 
128

 
Other Income (b)
Tax expense
 
(61
)
 
(50
)
 
Other Income
 
 
96

 
78

 
 
 
 
 
 
 
 
 
Total Reclassifications for the period, net of tax
 
$
104

 
$
88

 
 
 
 
 
 
 
 
 
(a) Amounts in parentheses indicate loss/expense.
(b) Included in computation of net periodic pension cost (see Note 2 for additional details).
Long-Term Debt Long-Term Debt (Tables)
Schedule of Long-term Debt Instruments [Table Text Block]
Long-Term Debt at June 30, 2017 and December 31, 2016 consisted of the following (in thousands):
 
2017
 
2016
Connecticut Water Service, Inc.:
 
 
 
4.09%
 
Term Loan Note
$
12,903

 
$
13,437

The Connecticut Water Company:
 
 
 
Var.
 
2004 Series Variable Rate, Due 2029
12,500

 
12,500

Var.
 
2004 Series A, Due 2028
5,000

 
5,000

Var.
 
2004 Series B, Due 2028
4,550

 
4,550

5.00%
 
2011 A Series, Due 2021
23,051

 
23,115

3.16%
 
CoBank Note Payable, Due 2020
8,000

 
8,000

3.51%