CONNECTICUT WATER SERVICE INC / CT, 10-K filed on 3/13/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Jan. 31, 2017
Jun. 30, 2016
Document and Enity Information [Abstract]
 
 
 
Entity Registrant Name
CONNECTICUT WATER SERVICE INC / CT 
 
 
Entity Central Index Key
0000276209 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Public Float
 
 
$ 619,633,255 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
11,258,790 
 
CONSOLIDATED STATEMENTS OF INCOME (USD $)
Share data in Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Operating Revenues
$ 98,667,000 
$ 96,041,000 
$ 94,020,000 
Operating Expenses
 
 
 
Operation and Maintenance
44,191,000 
48,052,000 
44,445,000 
Depreciation
13,905,000 
12,871,000 
11,784,000 
Income Taxes
2,570,000 
(818,000)
3,596,000 
Taxes Other Than Income Taxes
9,796,000 
9,294,000 
9,031,000 
Total Operating Expenses
70,462,000 
69,399,000 
68,856,000 
Net Operating Revenues
28,205,000 
26,642,000 
25,164,000 
Other Utility Income, Net of Taxes
744,000 
797,000 
833,000 
Total Utility Operating Income
28,949,000 
27,439,000 
25,997,000 
Other Income (Deductions), Net of Taxes
 
 
 
Gain (Loss) on Real Estate Transactions
(54,000)
349,000 
50,000 
Non-Water Sales Earnings
1,219,000 
1,394,000 
1,471,000 
Allowance for Funds Used During Construction
1,198,000 
530,000 
518,000 
Other
(1,009,000)
(214,000)
(202,000)
Total Other Income, Net of Taxes
1,354,000 
2,059,000 
1,837,000 
Interest and Debt Expense
 
 
 
Interest on Long-Term Debt
7,714,000 
7,087,000 
7,023,000 
Other Interest Charges
(922,000)
(458,000)
(573,000)
Amortization of Debt Expense
124,000 
108,000 
65,000 
Total Interest and Debt Expense
6,916,000 
6,737,000 
6,515,000 
Net Income
23,387,000 
22,761,000 
21,319,000 
Preferred Stock Dividend Requirement
38,000 
38,000 
38,000 
Net Income Applicable to Common Stock
23,349,000 
22,723,000 
21,281,000 
Weighted Average Common Shares Outstanding:
 
 
 
Basic (in shares)
11,009 
10,958 
10,893 
Diluted (in shares)
11,228 
11,164 
11,091 
Earnings Per Common Share:
 
 
 
Basic (in dollars per share)
$ 2.12 
$ 2.07 
$ 1.95 
Diluted (in dollars per share)
$ 2.08 
$ 2.04 
$ 1.92 
Adjustment to post-retirement benefit plans, net of tax benefit (expense) of $15, $(505), and $735 in 2016, 2015, and 2014, respectively
(24,000)
765,000 
(1,527,000)
Unrealized Investment gain (loss), net of tax (expense) benefit of $(22), $62 and $(25), in 2016, 2015, and 2014, respectively
35,000 
(97,000)
39,000 
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Parent
11,000 
668,000 
(1,488,000)
Comprehensive Income
$ 23,398,000 
$ 23,429,000 
$ 19,831,000 
CONSOLIDATED STATEMETS OF INCOME (Parentheticals) (USD $)
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Reclassification to Pension and Post-Retirement Benefits Plans, net of tax (benefit) expense of
$ (15,000)
$ 505,000 
$ (735,000)
Unrealized Investment loss, net of tax expense (benefit) of
$ 22,000 
$ (62,000)
$ 25,000 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
ASSETS
 
 
Utility Plant
$ 777,860 
$ 722,447 
Construction Work in Progress
33,748 
23,298 
Gross Utility Plant
811,608 
745,745 
Accumulated Provision for Depreciation
(210,212)
(199,461)
Net Utility Plant
601,396 
546,284 
Other Property and Investments
9,071 
8,126 
Cash and Cash Equivalents
1,564 
731 
Accounts Receivable (Less Allowance, 2016 - $1,100; 2015 - $947)
13,024 
11,012 
Accrued Unbilled Revenues
8,171 
8,259 
Materials and Supplies
1,536 
1,617 
Prepayments and Other Current Assets
5,069 
5,393 
Total Current Assets
29,364 
27,012 
Restricted Cash
846 
Unamortized Debt Issuance Expense
5,318 
5,786 
Unrecovered Income Taxes - Regulatory Asset
93,264 
77,510 
Pension Benefits - Regulatory Asset
12,266 
12,414 
Post-Retirement Benefits Other Than Pension - Regulatory Asset
265 
468 
Goodwill
30,427 
30,427 
Deferred Charges and Other Costs
8,449 
7,628 
Total Regulatory and Other Long-Term Assets
144,671 
129,293 
Total Assets
784,502 
710,715 
CAPITALIZATION AND LIABILITIES
 
 
Common Stock Without Par Value: Authorized - 25,000,000 Shares - Issued and Outstanding: 2016 - 11,248,458; 2015 - 11,192,882
145,739 
144,534 
Retained Earnings (Accumulated Deficit)
91,213 
80,378 
Accumulated Other Comprehensive Loss
(924)
(935)
Common Stockholders' Equity
236,028 
223,977 
Preferred Stock
772 
772 
Long-Term Debt
197,047 
171,868 
Total Capitalization
433,847 
396,617 
Debt, Current
4,859 
2,842 
Interim Bank Loans Payable
32,953 
16,085 
Accounts Payable and Accrued Expenses
13,116 
11,882 
Accrued Interest
1,012 
727 
Customer Refund Liability, Current
855 
2,994 
Other Current Liabilities
2,330 
2,409 
Total Current Liabilities
55,125 
36,939 
Advances for Construction
19,127 
21,444 
Deferred Federal and State Income Taxes
50,558 
48,036 
Unfunded Future Income Taxes
90,977 
74,712 
Long-Term Compensation Arrangements
33,540 
34,389 
Unamortized Investment Tax Credits
1,189 
1,264 
Customer Refund Liability, Noncurrent
108 
993 
Other Long-Term Liabilities
5,074 
5,273 
Total Long-Term Liabilities
200,573 
186,111 
Contributions in Aid of Construction
94,957 
91,048 
Commitments and Contingencies
Total Capitalization and Liabilities
$ 784,502 
$ 710,715 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2016
Dec. 31, 2015
Issued
11,248,458 
11,192,882 
Common Stock, Shares, Outstanding
11,248,458 
11,192,882 
ASSETS
 
 
Allowance
$ 1,100,000 
$ 947,000 
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 COMPREHENSIVE INCOME (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Parent
$ 11 
$ 668 
$ (1,488)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $)
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Other Comprehensive Income, net of tax
 
 
 
Reclassification to Pension and Post-Retirement Benefits Plans, net of tax (benefit) expense of
$ (15,000)
$ 505,000 
$ (735,000)
Unrealized Investment loss, net of tax expense (benefit) of
$ 22,000 
$ (62,000)
$ 25,000 
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (USD $)
In Thousands, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2016
Sep. 30, 2016
Jun. 30, 2016
Mar. 31, 2016
Dec. 31, 2015
Sep. 30, 2015
Jun. 30, 2015
Mar. 31, 2015
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Balance at Beginning of Period
 
 
 
$ 80,378 
 
 
 
$ 69,370 
$ 80,378 
$ 69,370 
$ 59,277 
Net Income
761 
9,535 
9,943 
3,148 
2,228 
8,755 
8,675 
3,103 
23,387 
22,761 
21,319 
Dividends Declared:
 
 
 
 
 
 
 
 
 
 
 
Cumulative Preferred, Class A, $0.20 per share
 
 
 
 
 
 
 
 
38 
38 
38 
Common Stock - 2012 $0.2375 per share; 2011 $0.2325 per share
 
 
 
 
 
 
 
 
12,514 
11,715 
11,188 
Total Dividends Declared
 
 
 
 
 
 
 
 
12,552 
11,753 
11,226 
Balance at End of Period
91,213 
 
 
 
80,378 
 
 
 
91,213 
80,378 
69,370 
Series A Voting
 
 
 
 
 
 
 
 
 
 
 
Dividends Declared:
 
 
 
 
 
 
 
 
 
 
 
Cumulative Preferred, Class A, $0.20 per share
 
 
 
 
 
 
 
 
12 
12 
12 
Cumulative Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Dividends Declared:
 
 
 
 
 
 
 
 
 
 
 
Cumulative Preferred, Class A, $0.20 per share
 
 
 
 
 
 
 
 
$ 26 
$ 26 
$ 26 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Operating Activities:
 
 
 
Net Income
$ 23,387 
$ 22,761 
$ 21,319 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 
 
Deferred Revenues
(893)
(1,344)
(3,461)
Allowance for Funds Used During Construction
(1,198)
(530)
(518)
Depreciation and Amortization (including $732 in 2016, $27 in 2015, and $673 in 2014 charged to other accounts)
13,173 
12,898 
12,457 
Gain (Loss) on Sale of Properties
54 
(349)
(50)
Change in Assets and Liabilities:
 
 
 
Increase in Accounts Receivable and Accrued Unbilled Revenues
(1,925)
984 
(291)
Increase in Prepayments and Other Current Assets
338 
6,540 
(5,012)
Decrease in Other Non-Current Items
(2,741)
11,383 
(1,286)
Increase in Accounts Payable, Accrued Expenses and Other Current Liabilities
176 
(3,695)
1,169 
Increase in Deferred Income Taxes and Investment Tax Credits, Net
2,950 
(7,502)
5,878 
Total Adjustments
9,934 
18,385 
8,886 
Net Cash and Cash Equivalents Provided by Operating Activities
33,321 
41,146 
30,205 
Investing Activities:
 
 
 
Net Additions to Utility Plant Used in Continuing Operations
(66,689)
(48,025)
(45,668)
Proceeds from Sale of Land Held-for-investment
14 
243 
Release of restricted cash
846 
(846)
5,779 
Net Cash and Cash Equivalents Used in Investing Activities
(65,834)
(48,857)
(39,646)
Financing Activities:
 
 
 
Proceeds from Interim Bank Loans
32,953 
16,085 
1,991 
Repayment of Interim Bank Loans
(16,085)
(1,991)
Proceeds from Issuance of Common Stock
1,610 
1,536 
1,697 
Proceeds from Issuance of Long-term Debt
49,930 
4,352 
4,500 
Costs to Issue Long-Term Debt and Common Stock
(88)
(37)
(2)
Repayment of Long-Term Debt Including Current Portion
(22,772)
(2,476)
(4,114)
Advances from Others for Construction
350 
251 
699 
Cash Dividends Paid
(12,552)
(11,753)
(11,226)
Net Cash and Cash Equivalents (Used in) Provided by Financing Activities
33,346 
5,967 
(6,455)
Net Increase in Cash and Cash Equivalents
833 
(1,744)
(15,896)
Cash and Cash Equivalents at Beginning of Period
731 
2,475 
18,371 
Cash and Cash Equivalents at End of Year
1,564 
731 
2,475 
Non-Cash Investing and Financing Activities:
 
 
 
Non-Cash Contributed Utility Plant
1,394 
1,282 
1,130 
Short-term Investment of Bond Proceeds Held in Restricted Cash
846 
 
Cash Paid for:
 
 
 
Interest
6,678 
6,761 
6,665 
State and Federal Income Taxes
$ 445 
$ 537 
$ 1,135 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parentheticals) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Depreciation charged to other accounts
$ 732 
$ 27 
$ 673 
Summary of Significant Accounting Policies
Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]
NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION – The Consolidated Financial Statements include the operations of Connecticut Water Service, Inc. (the “Company”), an investor-owned holding company and its wholly-owned subsidiaries, including:

The Connecticut Water Company (“Connecticut Water”)
The Maine Water Company (“Maine Water”)
Chester Realty, Inc. (“Chester Realty”)
New England Water Utility Services, Inc. (“NEWUS”)
The Barnstable Holding Company (“Barnstable Holding”) - Inactive

As of December 31, 2016, Connecticut Water and Maine Water were our regulated public water utility companies (collectively the “Regulated Companies”), which together served 124,968 customers in 77 towns throughout Connecticut and Maine.

Chester Realty is a real estate company whose net profits from rental of property are included in the “Other Income (Deductions), Net of Taxes” section of the Consolidated Statements of Income in the “Non-Water Sales Earnings” category.

NEWUS is engaged in water-related services, including the Linebacker® program, emergency drinking water, pool water and contract operations.  Its earnings are included in the “Non-Water Sales Earnings” category of the Consolidated Statements of Income.

Intercompany accounts and transactions have been eliminated.

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 a portion of its 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 months ended June 30, 2016 and $1.6 million for the 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.

The Company performed various quantitative and qualitative analyses and determined that these errors were not material to the previously reported quarterly and annual results. The Company also determined that recording these entries as an out-of- period adjustment during the second quarter of 2016 was not material to the full year ended December 31, 2016 results of operations.

PUBLIC UTILITY REGULATION – Connecticut Water is subject to regulation for rates and other matters by the Connecticut Public Utility Regulatory Authority (“PURA”) and follows accounting policies prescribed by the PURA.  Maine Water is subject to regulation for rates and other matters by the Maine Public Utilities Commission (“MPUC”). The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which includes the provisions of Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 980 “Regulated Operations” (“FASB ASC 980”).  FASB ASC 980 requires cost-based, rate-regulated enterprises, such as Connecticut Water and Maine Water, to reflect the impact of regulatory decisions in their financial statements. The state regulators, through the rate regulation process, can create regulatory assets and liabilities that result when costs and benefits are allowed for ratemaking purposes in a period after the period in which the costs or benefits would be charged to expense by an unregulated enterprise.  The Consolidated Balance Sheets include regulatory assets and liabilities as appropriate, primarily related to income taxes, post-retirement benefit costs and deferred revenues associated with the Water Revenue Adjustment (“WRA”) used by Connecticut Water.  In accordance with FASB ASC 980, costs which benefit future periods are amortized over the periods they benefit. The Company believes, based on current regulatory circumstances, that the regulatory assets recorded are probable to be recovered and that its use of regulatory accounting is appropriate and in accordance with the provisions of FASB ASC 980.

Regulatory assets and liabilities are comprised of the following:

(in thousands)
December 31,
 
2016
 
2015
Assets:
 
 
 
Pension Benefits and Post-Retirement Benefits Other Than Pension
$
12,531

 
$
12,882

Unrecovered Income Taxes
93,264

 
77,510

Deferred revenue (included in Prepayments and Other Current Assets and Deferred Charges and Other Costs)
3,910

 
5,033

Other (included in Prepayments and Other Current Assets and Deferred Charges and Other Costs)
4,276

 
3,561

Total regulatory assets
$
113,981

 
$
98,986

Liabilities:
 

 
 

Other (included in Other Current Liabilities)
$
1,710

 
$
1,567

Unamortized Investment Tax Credits
1,189

 
1,264

Refunds to Customers (including Current Portion of Refund to Customers)
963

 
3,987

Unfunded Future Income Taxes (including Other Long-Term Liabilities)
90,977

 
74,712

Total regulatory liabilities
$
94,839

 
$
81,530



Pension and post-retirement benefits include costs in excess of amounts funded.  The Company believes these costs will be recoverable in future years, through rates, as funding is required and has recorded regulatory assets for those costs.  The recovery period is dependent on contributions made to the plans and remaining life expectancy.

Certain items giving rise to deferred state income taxes, as well as a portion of deferred federal income taxes related primarily to differences between book and tax depreciation expense, are recognized for ratemaking purposes on a cash or flow-through basis and are recognized as unrecovered future income taxes that will be recovered in rates in future years as they reverse. In addition, basis differences resulting from the repair tax deduction adopted in 2013 contribute to the change in unfunded future income taxes.

Deferred revenue represents a portion of the rate increase granted in Connecticut Water’s 2007 rate decision.  The PURA decision required the Company to defer for future collection, beginning in 2008, a portion of the increase. Additionally, revenue recorded under the WRA, discussed below, is included in deferred revenue.

Regulatory liabilities include deferred investment tax credits and amounts to be refunded to customers as a result of the adoption of the tangible property regulations in Connecticut and Maine.  These liabilities will be given back to customers in rates as tax deductions occur in the future.

Regulatory Matters

The rates we charge our customers in Connecticut and Maine are established under the jurisdiction of and are approved by the PURA and 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 as of December 31, 2016 were 9.75% and 7.32%, respectively. Maine Water’s average allowed return on equity and return on rate base, as of December 31, 2016 were 9.50% and 7.96%, respectively. The PURA establishes rates in Connecticut on a company-wide basis while the MPUC approves Maine Water’s rates on a division-by-division basis. Both Connecticut Water and Maine Water are permitted 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 in Connecticut, as discussed in more detail below.

University of Connecticut Agreement
Connecticut Water and the University of Connecticut (“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 Environmental Impact Evaluation (“EIE”) and record of decision, as approved by the Office of Policy and Management, an agency of the State of Connecticut, 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 was responsible for obtaining any required regulatory permits, licenses and approvals to implement the water supply solution, including but not limited to those from PURA, the Connecticut Department of Energy and Environmental Protection (“DEEP”) and the Connecticut Department of Public Health (“DPH”). The capital improvements were completed on time and the pipeline was connected to the UCONN campus in December 2016, which was within the agreed upon timeframe.

Town of Mansfield Agreement
Connecticut Water and the Town of Mansfield entered into an 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; and
Pursuant to the Agreement, a Water System Advisory Committee (“WSAC”) was 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 meets quarterly.

The former off-campus customers of UCONN in the Town of Mansfield became customers of Connecticut Water in December 2016.

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

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

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

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

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

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

During the fourth quarter of 2016, Connecticut Water filed an application with PURA seeking approval of the transaction, which the Company expects to receive in April 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 December 31, 2015 and is included in “Utility Plant” on the Company’s 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
In Connecticut, the Water Infrastructure Conservation Adjustment (“WICA”) was 7.13%, 4.19% and 1.59% above base rates at December 31, 2016, 2015, and 2014, respectively. On January 26, 2017, Connecticut Water filed a WICA application with the PURA requesting a 1.09% surcharge to customers’ bills, representing approximately $8.5 million in WICA related projects. Additionally, on February 9, 2017, Connecticut Water filed its annual WICA reconciliation which requested a 0.06% surcharge, which would replace the 0.03% reconciliation adjustment filed in January 2016. If approved as filed, Connecticut Water’s cumulative WICA surcharge, effective April 1, 2017, will be 8.25%.

Since 2013, Connecticut law has authorized a 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’s allowed revenues for the year ended December 31, 2016, as approved by PURA during our 2010 general rate case and including subsequently approved WICA surcharges, were approximately $76.7 million. Through normal billing for the year ended December 31, 2016 operating revenue for Connecticut Water would have been approximately $75.6 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water recorded $1.1 million in additional revenue for the year ended December 31, 2016. During the year ended December 31, 2015 and 2014, Connecticut Water recorded $1.6 million and $3.7 million, respectively, in additional revenue related to the WRA.

Maine Rates
In Maine, the overall, approved cumulative Water Infrastructure Charge (“WISC”) for all divisions was 4.7%, 1.6% and 2.0% above base rates as of December 31, 2016, 2015 and 2014, respectively. Two pending WISC filings as of December 31, 2016 have since been approved in the first quarter of 2017, bringing the total to 6.5%.

In 2014 and 2015, Maine Water petitioned the MPUC for approval of accounting orders that would address (1) the return to its customers a federal income tax refund stemming from the adoption of the Internal Revenue Service (“IRS”) Revenue Procedure 2012-19 (“Repair Regulations”), and (2) the treatment of any benefit resulting from the elimination of deferred tax liabilities previously recorded on these qualifying fixed assets that are now deducted under the Repair Regulations.

On February 26, 2015, the MPUC approved a stipulation between Maine Water and the Office of the Public Advocate that refunds $2.9 million to the customers of the eight divisions over a two-year period starting no later than July 1, 2015, and allows the flow-through treatment of the repair deduction as of January 1, 2014. In addition, Maine Water agreed not to file a general rate case during the two-year refund period in any of the eight divisions that were allowed the refund.

On June 22, 2015, the MPUC approved a settlement agreement between Maine Water and the Office of the Public Advocate that allowed for the amortization of the deferred tax liabilities over a one to nine year period, depending on the division. Maine Water commenced amortization per the agreed upon schedule.

With the completion of these two dockets, Maine Water recorded in the quarter ended June 30, 2015 the retroactive benefit associated with the flow-through of the Repair Regulations from January 1, 2014. The 2014 benefit, reflected in the second quarter of 2015, was approximately $931,000, or $0.09 per basic share outstanding.

A newly passed 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 in certain divisions due to various agreements with the MPUC, but is evaluating how and when this new mechanism can be implemented.

USE OF ESTIMATES – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

REVENUES – The Company’s accounting policies regarding revenue recognition by segment are as follows:

Water Operations – Most of our water customers are billed quarterly, with the exception of larger commercial and industrial customers, as well as certain public and private fire protection customers who are billed monthly.  Most customers, except fire protection customers, are metered.  Revenues from metered customers are based on their water usage multiplied by approved, regulated rates and are earned when water is delivered.  Public fire protection revenues are based on the length of the water main, and number of hydrants in service and are earned on a monthly basis.  Private fire protection charges are based on the diameter of the connection to the water main.  Our Regulated Companies accrue an estimate for metered customers for the amount of revenues earned relating to water delivered but unbilled at the end of each quarter, which is reflected as “Accrued Unbilled Revenues” in the accompanying Consolidated Balance Sheets. Beginning in 2013, Connecticut Water began to record deferred revenue to represent under collection from customers based upon allowed revenues as approved by PURA. More detailed information, including revenues, costs and income taxes associated with the segment can be found in Note 14, “Segment Reporting”.

Real Estate Transactions – Revenues are recorded when a sale or other transaction has been completed and title to the real estate has been transferred. Net income from the Real Estate Transactions segment is shown net in the “Other Income (Deductions), Net of Taxes” portion of the Company’s Consolidated Statements of Income. More detailed information, including revenues, costs and income taxes associated with the segment can be found in Note 14, “Segment Reporting”.

Services and Rentals – Revenues are recorded when the Company has delivered the services called for by contractual obligation. Net income from the Services and Rentals segment is shown net in the “Other Income (Deductions), Net of Taxes” portion of the Company’s Consolidated Statements of Income. More detailed information, including revenues, costs and income taxes associated with the segment can be found in Note 14, “Segment Reporting”.

UTILITY PLANT – Utility plant is stated at the original cost of such property when first devoted to public service.  Utility plant accounts are charged with the cost of improvements and replacements of property including an Allowance for Funds Used During Construction (“AFUDC”).  Retired or disposed depreciable plant is charged to accumulated provision for depreciation together with any costs applicable to retirement, less any salvage received.  Maintenance of utility plant is charged to expense.  Accounting policies relating to other areas of utility plant are listed below:

Allowance For Funds Used During Construction – AFUDC is the cost of debt and equity funds used to finance the construction of utility plant. The amount shown on the Consolidated Statements of Income relates to the equity portion.  The debt portion is included as an offset to “Other Interest Income, Net”.  Generally, utility plant under construction is not recognized as part of rate base for ratemaking purposes until facilities are placed into service, and accordingly, AFUDC is charged to the construction cost of utility plant.  Capitalized AFUDC, which does not represent current cash income, is recovered through rates over the service lives of the assets.

Our Regulated Companies’ allowed rate of return on rate base is used to calculate AFUDC.

Customers’ Advances For Construction, Contributed Plant and Contributions In Aid Of Construction –Under the terms of construction contracts with real estate developers and others, the Regulated Companies periodically receive either advances for the costs of new main installations or title to the main after it is constructed and financed by the developer.  Refunds are made, without interest, as services are connected to the main, over periods not exceeding fifteen years and not in excess of the original advance.  Unrefunded balances, at the end of the contract period, are credited to contributions in aid of construction (“CIAC”) and are no longer refundable.

Utility Plant is added in two ways.  The majority of the Company’s plant additions occur from direct investment of Company funds that originated through operating or financings activities.  The Company manages the construction of these plant additions.  These plant additions are part of the Company’s depreciable utility plant and are generally part of rate base.  The Company’s rate base is a key component of how its regulated rates are set, and is recovered through the depreciation component of the Company’s rates.  The second way in which plant additions occur are through developer advances and contributions.  Under this scenario either the developer funds the additions through payments to the Company, who in turn manages the construction of the project, or the developer pays for the plant construction directly and contributes the asset to the Company after it is complete.  Plant additions that are financed by a developer, either directly or indirectly, are excluded from the Company’s rate base and not recovered through the rates process, and are also not depreciated.

The components that comprise net additions to Utility Plant during the last three years ending December 31 are as follows:

(in thousands)
2016
 
2015
 
2014
Additions to Utility Plant:
 
 
 
 
 
Company Financed
$
66,339

 
$
47,774

 
$
44,969

Allowance for Funds Used During Construction
1,198

 
530

 
518

Subtotal – Utility Plant Increase to Rate Base
67,537

 
48,304

 
45,487

Advances from Others for Construction
350

 
251

 
699

Net Additions to Utility Plant
$
67,887

 
$
48,555

 
$
46,186



Depreciation – Depreciation is computed on a straight-line basis at various rates as approved by the state regulators on a company by company basis.  Depreciation allows the Company to recover the investment in utility plant over its useful life.  The overall consolidated company depreciation rate, based on the average balances of depreciable property, was 1.9%, 1.9%, and 1.9% for 2016, 2015, and 2014, respectively.

INCOME TAXES – The Company provides income tax expense for its utility operations in accordance with the regulatory accounting policies of the applicable jurisdictions. The Company’s income tax provision is calculated on a separate return basis. The Connecticut PURA requires the flow-through method of accounting for most state tax temporary differences as well as for certain federal temporary differences. The MPUC requires the flow-through method of accounting for most state temporary differences and normalized accounting for most federal temporary differences. However, in its approvals of the stipulation agreements between Maine Water and the Office of the Public Advocate, issued in 2015, the MPUC has allowed flow-through method of accounting stemming from Maine Water’s adoption of the IRS’ Repair Regulations in all of its divisions.

The Company computes deferred tax liabilities for all temporary book-tax differences using the liability method prescribed in FASB ASC 740 “Income Taxes” (“FASB ASC 740”). Under the liability method, deferred income taxes are recognized at currently enacted income tax rates to reflect the tax effect of temporary differences between the financial reporting and tax bases of assets and liabilities.  Such temporary differences are the result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements. Deferred tax liabilities that have not been reflected in tax expense due to regulatory treatment are reflected as “Unfunded Future Income Taxes”, and are expected to be included in future years’ rates.

The Company believes that deferred income tax assets, net of provisions, will be realized in the future. The majority of unfunded future income taxes, prior to 2013, relate to deferred state income taxes regarding book to tax depreciation differences. Beginning in 2013, basis differences resulting from the repair tax deduction contribute to the change in unfunded income taxes.

Deferred Federal and State Income Taxes include amounts that have been provided for accelerated depreciation subsequent to 1981, as required by federal income tax regulations, as well as the basis differences associated with expenditures qualifying for repair tax deduction as clarified by the IRS in regulations issued in 2013. Deferred taxes have also been provided for temporary differences in the recognition of certain expenses for tax and financial statement purposes as allowed by regulatory ratemaking policies.

MUNICIPAL TAXES – Municipal taxes are reflected as “Taxes Other Than Income Taxes” and are generally expensed over the twelve-month period beginning on July 1 following the lien date, corresponding with the period in which the municipal services are provided.

UNAMORTIZED DEBT ISSUANCE EXPENSE – The issuance costs of long-term debt, including the remaining balance of issuance costs on long-term debt issues that have been refinanced prior to maturity, and related call premiums, are amortized over the respective lives of the outstanding debt, as approved by the PURA and the MPUC.

GOODWILL – As part of the purchase of regulated water companies, the Company recorded goodwill of $30.4 million as of December 31, 2016 representing the amount of the purchase price over net book value of the assets acquired.  The Company accounts for goodwill in accordance with Accounting Standards Codification 350 “Intangibles – Goodwill and Other” (“FASB ASC 350”). As a result of the rate order issued by the MPUC, the Company reduced its goodwill balance by $1.3 million in the year ended December 31, 2015.

As part of FASB ASC 350, the Company is required to perform an annual review of goodwill for any potential impairment, which we perform as of December 31 each year. We update the assessment between the annual testing if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. As allowed under FASB ASC 350, the Company performed a qualitative analysis of its goodwill for the year ended December 31, 2016. A qualitative analysis includes a review of internal and external factors that could have an impact on a reporting unit’s fair value when compared to its carrying amount. These factors included a review of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific events, changes in reporting units and a review of the Company’s stock price.

The last quantitative analysis of impairment was performed as of December 31, 2015, which concluded that the estimated fair value of the Water Operations reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount by at least 71% as of December 31, 2015.  Additionally, the Company believes that no event has occurred which would trigger impairment since the last quantitative test performed.  Based on these factors and other factors considered in its qualitative analysis, the Company believes that it is more likely than not that the fair market value is more than the carrying value of the Water Operation Segment and therefore, no goodwill impairment was recognized in 2016 and 2015.

We may be required to recognize an impairment of goodwill in the future due to market conditions or other factors that are beyond our control and unrelated to our performance. Those market events could include a decline in the forecasted results in our business plan, significant adverse rate case results, changes in capital investment budgets or changes in interest rates that could permanently impair the fair value of a reporting unit. Recognition of impairments of a significant portion of goodwill would negatively impact our reported results of operation and total capitalization, the effects of which could be material and could make it more difficult to maintain our credit ratings, secure financing on favorable terms, maintain compliance with debt covenants and meet expectations of our regulators.

EARNINGS PER SHARE – The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share for the years ended December 31:

Years ended December 31,
2016
 
2015
 
2014
Numerator (in thousands)
 
 
 
 
 
Basic Net Income Applicable to Common Stock
$
23,349

 
$
22,723

 
$
21,281

Diluted Net Income Applicable to Common Stock
$
23,349

 
$
22,723

 
$
21,281

Denominator (in thousands)
 

 
 

 
 

Basic Weighted Average Shares Outstanding
11,009

 
10,958

 
10,893

Dilutive Effect of Stock Awards
219

 
206

 
198

Diluted Weighted Average Shares Outstanding
11,228

 
11,164

 
11,091

Earnings per Share
 

 
 

 
 

Basic Earnings per Share
$
2.12

 
$
2.07

 
$
1.95

Dilutive Effect of Stock Awards
0.04

 
0.03

 
0.03

Diluted Earnings per Share
$
2.08

 
$
2.04

 
$
1.92



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

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU No. 2015-03”). The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. ASU No. 2015-03 requires retrospective application and represents a change in accounting principle. The update became effective for the Company on January 1, 2016, which had the effect of reducing the December 31, 2015 “Long-Term Debt” and “Total Regulatory and Other Long-Term Assets” balances by $5,786,000 on the Consolidated Balance Sheet.

In July 2015, the FASB issued ASU No. 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 will not have an impact on the Company.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU No. 2015-16”) which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers would now recognize measurement-period adjustments during the period in which they determine the amount of the adjustment. ASU No. 2015-16 is effective for the Company on January 1, 2017 and will be adopted on a prospective basis. The adoption is not expected to have a material impact on our consolidated financial position.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes” (“ASU No. 2015-17”). ASU No. 2015-17 requires net deferred tax assets and liabilities to be classified as non-current on the Company’s Consolidated Balance Sheets. Prior to adoption of the new standard, net deferred tax assets and liabilities were presented separately as current and non-current on the Consolidated Balance Sheets.  ASU No. 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company adopted ASU No. 2015-17, effective January 1, 2016, which had the effect of reducing the December 31, 2015 “Prepayments and Other Current Assets” and “Deferred Federal and State Income Taxes” balances by $17,000 on the Consolidated Balance Sheet.

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 position and results of operations, but does not expect that the adoption of this guidance will have material impact.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”). ASU No. 2016-09 impacts several aspects of the accounting for share-based payment transactions, including classification of certain items on the Consolidated Statement of Cash Flows and accounting for income taxes.  Specifically, ASU No. 2016-09 requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the Consolidated Statements of Income, introducing a new element of volatility to the provision for income taxes. ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company early adopted ASU No. 2016-09 during the second quarter of 2016, which had the effect of decreasing the “Other” line item on the Consolidated Statements of Income for the year ended December 31, 2016 by approximately $19,000.

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.
Income Tax Expense
Income Taxes
NOTE 2:  INCOME TAX EXPENSE

Under ASC 740, we 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. From time to time, the Company is 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 Consolidated Statements of Income.  There were no such charges or accruals for the years ending December 31, 2016, 2015, and 2014.

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.  On March 24, 2015, the Company was notified by the Connecticut Department of Revenue Services that the audit was expanded to include the 2012 and 2013 tax years. The State focused its review on tax credits associated with fixed capital investment. The Company and the State came to an agreement (“Closing Agreement”) regarding investments eligible for the credit. The Closing Agreement was executed on May 4, 2015. The Company had previously recorded a provision for the possible disallowance of these credits and, therefore, there was minimal impact in 2015.

On the 2012 tax return, filed in September 2013, Connecticut Water filed a change in accounting method to adopt the IRS temporary tangible property regulations. On the 2013 Federal tax return, filed in September 2014, Maine Water filed the same change in accounting method. 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 2012 would be reviewed. This review, which began in the first quarter of 2014 and was completed in the first quarter of 2015, resulted in no change to the tax liability. Since the Company had previously recorded a provision for the possible disallowance of the repair deduction in prior periods, the completion of the audit resulted in the reversal of the reserves in the amount of $1,185,000. While the Company maintains the belief that the deduction taken on its tax return is appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities.  Therefore, as required by FASB ASC 740, during the year ended December 31, 2016, the Company recorded a provision of $3.1 million 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 $6.3 million in the prior year for a cumulative total of $9.4 million.

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.

Income Tax (Benefit) Expense for the years ended December 31, is comprised of the following:

(in thousands)
 
2016
 
2015
 
2014
Federal Classified as Operating (Benefit) Expense
 
$
1,782

 
$
(562
)
 
$
2,919

Federal Classified as Other Utility Income
 
385

 
409

 
424

Federal Classified as Other Income (Expense)
 
 

 
 

 
 

Land Sales and Donations
 
57

 
(70
)
 
26

Non-Water Sales
 
702

 
664

 
788

Other
 
(686
)
 
(832
)
 
(825
)
Total Federal Income Tax (Benefit) Expense
 
2,240

 
(391
)
 
3,332

State Classified as Operating (Benefit) Expense
 
788

 
(257
)
 
677

State Classified as Other Utility Income
 
92

 
98

 
100

State Classified as Other Income (Expense)
 
 

 
 

 
 

Land Sales and Donations
 

 
(287
)
 
6

Non-Water Sales
 
172

 
196

 
194

Other
 
(126
)
 
(128
)
 
(82
)
Total State Income Tax (Benefit) Expense
 
926

 
(378
)
 
895

Total Income Tax (Benefit) Expense
 
$
3,166

 
$
(769
)
 
$
4,227



The components of the Federal and State income tax provisions are:

(in thousands)
 
2016
 
2015
 
2014
Current Income Taxes
 
 
 
 
 
 
Federal
 
$
(15
)
 
$
315

 
$
427

State
 
463

 
201

 
(306
)
Total Current
 
448

 
516

 
121

Deferred Income Taxes, Net
 
 

 
 

 
 

Federal
 
 

 
 

 
 

Investment Tax Credit
 
(75
)
 
(75
)
 
(75
)
Excess Deferred Taxes
 
(110
)
 
192

 

Deferred Revenue
 
(353
)
 
(754
)
 
215

Land Donations
 
37

 
(179
)
 
(56
)
Depreciation
 
1,769

 
660

 
1,728

Net Operating Loss Carry-forwards
 
(1,258
)
 
(1,171
)
 
(600
)
AMT Credit Carry-forwards
 

 
53

 

Provision for uncertain positions
 
2,487

 
874

 
2,177

Other
 
(242
)
 
(306
)
 
(484
)
Total Federal
 
2,255

 
(706
)
 
2,905

State
 
 

 
 

 
 

Land Donations
 
55

 
41

 

Provision for uncertain positions
 
611

 
41

 
663

Other
 
(203
)
 
(661
)
 
538

Total State
 
463

 
(579
)
 
1,201

Total Deferred Income Taxes
 
2,718

 
(1,285
)
 
4,106

Total Income Tax
 
$
3,166

 
$
(769
)
 
$
4,227



Deferred income tax (assets) and liabilities are categorized as follows on the Consolidated Balance Sheets:

(in thousands)
 
2016
 
2015
Unrecovered Income Taxes - Regulatory Asset
 
$
(93,264
)
 
$
(77,510
)
Deferred Federal and State Income Taxes
 
50,558

 
48,036

Unfunded Future Income Taxes
 
90,977

 
74,712

Unamortized Investment Tax Credits - Regulatory Liability
 
1,189

 
1,264

Net Deferred Income Tax Liability
 
$
49,460

 
$
46,502



Net deferred income tax liability increased from December 31, 2015 to December 31, 2016 due to the current year tax effects of temporary differences mostly related to plant items and the recording of provisions for uncertain tax positions.

Deferred income tax (assets) and liabilities are comprised of the following:

(in thousands)
 
2016
 
2015
Tax Credit Carry-forward (1)
 
$
(968
)
 
$
(904
)
Charitable Contribution Carry-forwards (2)
 
(389
)
 
(372
)
Valuation Allowance on Charitable Contributions
 
107

 

Prepaid Income Taxes on CIAC
 
58

 
63

Net Operating Loss Carry-forwards (3)
 
(5,132
)
 
(3,730
)
Valuation Allowance on Net Operating Losses
 
1,471

 
1,326

Other Comprehensive Income
 
(589
)
 
(597
)
Accelerated Depreciation
 
51,119

 
49,341

Provision on Repair Deductions
 
9,464

 
6,366

Long-Term Compensation Agreements
 
(4,416
)
 
(4,004
)
Unamortized Investment Tax Credits
 
1,189

 
1,264

Other
 
(2,454
)
 
(2,251
)
Net Deferred Income Tax Liability
 
$
49,460

 
$
46,502



(1)
State tax credit carry-forwards expire beginning in 2019 and ending in 2040.
(2)
Charitable Contribution carry-forwards expire with the filing of the 2016 Federal and State Tax Returns in 2017 and ending in 2021.
(3)
Net operating loss carry-forwards expire beginning in 2017 and ending in 2036.

The calculation of Pre-Tax Income is as follows:

(in thousands)
 
2016
 
2015
 
2014
Pre-Tax Income
 
 
 
 
 
 
Net Income
 
$
23,387

 
$
22,761

 
$
21,319

Income Taxes
 
3,166

 
(769
)
 
4,227

Total Pre-Tax Income
 
$
26,553

 
$
21,992

 
$
25,546



In accordance with required regulatory treatment, certain deferred income taxes are not provided for certain timing differences. This treatment, along with other items, causes differences between the statutory income tax rate and the effective income tax rate.  The differences between the effective income tax rate recorded by the Company and the statutory federal tax rate are as follows:

 
 
2016
 
2015
 
2014
Federal Statutory Tax Rate
 
34.0
 %
 
34.0
 %
 
34.0
 %
Tax Effect Differences:
 
 

 
 

 
 

State Income Taxes Net of Federal Benefit
 
2.6
 %
 
 %
 
1.3
 %
Property Related Items
 
(30.4
)%
 
(19.2
)%
 
(25.0
)%
Performance Stock
 
(0.8
)%
 
0.2
 %
 
1.2
 %
Pension Costs
 
(0.4
)%
 
(1.7
)%
 
2.9
 %
Repair Regulatory Liability
 
(3.9
)%
 
(11.5
)%
 
(6.3
)%
Change in Estimate of Prior Year Income Tax Expense
 
0.3
 %
 
(10.6
)%
 
(1.4
)%
Provision for Uncertain Tax Positions
 
10.2
 %
 
4.1
 %
 
9.2
 %
Other
 
0.3
 %
 
1.2
 %
 
0.7
 %
Effective Income Tax Rate
 
11.9
 %
 
(3.5
)%
 
16.6
 %


In the second quarter of 2015, the MPUC approved the flow through treatment of the repair tax deduction. The flow through treatment of the deductions taken on the Company’s 2013 tax return is reflected in the change in estimate of prior year income tax expense. In addition, the adoption of the repair tax deduction allowed for a benefit which is reflected in property related items.  Beginning in the second quarter of 2014, the return to customers of the repair tax benefit is reflected under Repair Regulatory Liability. Provisions for uncertain tax positions were recorded to reflect the possible challenge of the Company’s methodology for determining its repair deduction as required by FASB ASC 740.
Common Stock
Common stock
NOTE 3:  COMMON STOCK

The Company has 25,000,000 authorized shares of common stock, no par value.  A summary of the changes in the common stock accounts for the period January 1, 2014 through December 31, 2016, appears below:

(in thousands, except share data)
Shares
 
Issuance Amount
 
Expense
 
Total
Balance, January 1, 2014
11,038,232

 
$
142,681

 
$
(4,090
)
 
$
138,591

Stock and equivalents issued through Performance Stock Program, Net of Forfeitures
35,433

 
1,396

 

 
1,396

Dividend Reinvestment Plan
50,965

 
1,697

 

 
1,697

Balance, December 31, 2014
11,124,630

 
145,774

 
(4,090
)
 
141,684

Stock and equivalents issued through Performance Stock Program, Net of Forfeitures
25,575

 
1,314

 

 
1,314

Dividend Reinvestment Plan
42,677

 
1,536

 

 
1,536

Balance, December 31, 2015
11,192,882

 
148,624

 
(4,090
)
 
144,534

Stock and equivalents issued through Performance Stock Program, Net of Forfeitures
22,128

 
(405
)
 

 
(405
)
Dividend Reinvestment Plan
33,448

 
1,610

 

 
1,610

Balance, December 31, 2016 (1)
11,248,458

 
$
149,829

 
$
(4,090
)
 
$
145,739



(1)
Includes 53,821 restricted shares and 217,954 common stock equivalent shares issued through the Performance Stock Programs through December 31, 2016.

The Company may not pay any dividends on its common stock unless full cumulative dividends to the preceding dividend date for all outstanding shares of Preferred Stock of the Company have been paid or set aside for payment.  All such Preferred Stock dividends have been paid.
Retained Earnings
Retained Earnings
NOTE 4:  RETAINED EARNINGS

The summary of the changes in Retained Earnings for the period January 1, 2014 through December 31, 2016, appears below:

(in thousands, except per share data)
 
2016
 
2015
 
2014
Balance, beginning of year
 
$
80,378

 
$
69,370

 
$
59,277

Net Income
 
23,387

 
22,761

 
21,319

Sub-total
 
103,765

 
92,131

 
80,596

Dividends declared:
 
 
 
 
 
 
Cumulative Preferred Stock, Series A, $0.80 per share
 
12

 
12

 
12

Cumulative Preferred Stock, Series $0.90, $0.90 per share
 
26

 
26

 
26

Common Stock:
 
 
 
 
 
 
$1.115, $1.05 and $1.01 per Common Share in 2016, 2015 and 2014, respectively
 
12,514

 
11,715

 
11,188

Total Dividends Declared
 
12,552

 
11,753

 
11,226

Balance, end of year
 
$
91,213

 
$
80,378

 
$
69,370

Accumulated Other Comprehensive Income (Loss) (Notes)
Comprehensive Income (Loss) Note [Text Block]
NOTE 5: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in Accumulated Other Comprehensive Income/(Loss) (“AOCI”) by component, net of tax, for the years ended December 31, 2016, 2015, and 2014, appear below:
(in thousands)
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Balance as of January 1, 2014 (a)
 
$
259

 
$
(374
)
 
$
(115
)
Other Comprehensive Income (Loss) Before Reclassification
 
2

 
(1,748
)
 
(1,746
)
Amounts Reclassified from AOCI
 
37

 
221

 
258

Net current-period Other Comprehensive Income (Loss)
 
39

 
(1,527
)
 
(1,488
)
Balance as of December 31, 2014
 
$
298

 
$
(1,901
)
 
$
(1,603
)
Other Comprehensive (Loss) Income Before Reclassification
 
(195
)
 
582

 
387

Amounts Reclassified from AOCI
 
97

 
184

 
281

Net current-period Other Comprehensive (Loss) Income
 
(98
)
 
766

 
668

Balance as of December 31, 2015
 
$
200

 
$
(1,135
)
 
$
(935
)
Other Comprehensive Income (Loss) Before Reclassification
 
24

 
(227
)
 
(203
)
Amounts Reclassified from AOCI
 
11

 
203

 
214

Net current-period Other Comprehensive Income (Loss)
 
35

 
(24
)
 
11

Balance as of December 31, 2016
 
$
235

 
$
(1,159
)
 
$
(924
)
 
 
 
 
 
 
 
(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 Consolidated Statements of Income for the for the years ended December 31, 2016, 2015, and 2014:
Details about Other AOCI Components (in thousands)
 
Amounts Reclassified from AOCI for the Year Ended December 31, 2016(a)
 
Amounts Reclassified from AOCI for the Year Ended December 31, 2015(a)
 
Amounts Reclassified from AOCI for the Year Ended December 31, 2014(a)
 
Affected Line Items on Income Statement
Realized Gains on Investments
 
$
17

 
$
148

 
$
55

 
Other
Tax expense
 
(6
)
 
(51
)
 
(18
)
 
Other
Total Reclassified from AOCI
 
11

 
97

 
37

 
 
 
 
 
 
 
 
 
 
 
Amortization of Recognized Net Gain from Defined Benefit Items
 
308

 
281

 
335

 
Other (b)
Tax expense
 
(105
)
 
(97
)
 
(114
)
 
Other
Total Reclassified from AOCI
 
203

 
184

 
221

 
 
 
 
 
 
 
 
 
 
 
Total Reclassifications for the period, net of tax
 
$
214

 
$
281

 
$
258

 
 
 
 
 
 
 
 
 
 
 
(a) Amounts in parentheses indicate loss/expense.
(b) Included in computation of net periodic pension cost (see Note 12 “Long-Term Compensation Arrangements” for additional details).
Fair Value Disclosures
Fair Value Disclosures
NOTE 6:  FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB 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 tables summarize our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2016 and 2015.  These instruments are included in “Other Property and Investments” on the Company’s Consolidated Balance Sheets:

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


December 31, 2015
 
 
 
 
 
 
 
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Asset Type:
 
 
 
 
 
 
 
Money Market Fund
$
122

 
$

 
$

 
$
122

Mutual Funds:
 

 
 

 
 

 
 

Equity Funds (1)
1,441

 

 

 
1,441

Fixed Income Funds (2)
485

 

 

 
485

Total
$
2,048

 
$

 
$

 
$
2,048



(1)
Mutual funds consisting primarily of equity securities.
(2)
Mutual funds consisting primarily of fixed income securities.

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 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 Maine Water’s bond offerings in March and November of 2015, the Company recorded unused proceeds from these bond issuances as restricted cash as the funds can only be used for certain capital expenditures.  The Company used the remainder of the proceeds during 2016, as the approved capital expenditures were completed.  The carrying amount of restricted cash as of December 31, 2015 approximates fair value.  Under the fair value hierarchy the fair value of restricted cash 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 December 31, 2016 and 2015 was $3,075,000 and $2,909,000, 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 and similar marketable securities.  As of December 31, 2016 and 2015, the estimated fair value of the Company’s long-term debt was $210,463,000 and $191,616,000, respectively, as compared to the carrying amounts of $202,365,000 and $177,654,000, 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 $19,127,000 and $21,444,000 at December 31, 2016 and 2015, 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.
Long-Term Debt
Long-Term Debt
NOTE 7:  LONG-TERM DEBT

Long-Term Debt at December 31, consisted of the following:
(in thousands)
2016
 
2015
Connecticut Water Service, Inc.:
 
 
 
4.09%
 
Term Loan Note and Supplement A, Due 2027
$
13,437

 
$
14,472

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

 
19,930

5.00%
 
2011 A Series, Due 2021
23,115

 
23,303

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

 

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

 

Total The Connecticut Water Company
164,255

 
134,443

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

 
8,100

2.68%
 
1999 Series J, Due 2019
254

 
339

0.00%
 
2001 Series K, Due 2031
615

 
656

2.58%
 
2002 Series L, Due 2022
67

 
75

1.53%
 
2003 Series M, Due 2023
341

 
361

1.73%
 
2004 Series N, Due 2024
371

 
401

0.00%
 
2004 Series O, Due 2034
120

 
127

1.76%
 
2006 Series P, Due 2026
391

 
411

1.57%
 
2009 Series R, Due 2029
217

 
227

0.00%
 
2009 Series S, Due 2029
583

 
628

0.00%
 
2009 Series T, Due 2029
1,634

 
1,760

0.00%
 
2012 Series U, Due 2042
154

 
160

1.00%
 
2013 Series V, Due 2033
1,335

 
1,360

2.52%
 
CoBank Note Payable, Due 2017
1,965

 
1,965

4.24%
 
CoBank Note Payable, Due 2024
4,500

 
4,500

7.72%
 
Series L, Due 2018
2,250

 
2,250

2.40%
 
Series N, Due 2022
1,101

 
1,176

1.86%
 
Series O, Due 2025
790

 
830

2.23%
 
Series P, Due 2028
1,294

 
1,324

0.01%
 
Series Q, Due 2035
1,771

 
1,864

1.00%
 
Series R, Due 2025
2,250

 
2,488

Various
 
Various Capital Leases
8

 
17

Total The Maine Water Company
29,211

 
31,019

Add:  Acquisition Fair Value Adjustment
321

 
562

Less:  Current Portion
(4,859
)
 
(2,842
)
Less: Unamortized Debt Issuance Expense
(5,318
)
 
(5,786
)
Total Long-Term Debt
$
197,047

 
$
171,868



The Company’s required principal payments for the years 2017 through 2021 are as follows:

(in thousands)
 
 
2017
 
$
4,859

2018
 
$
5,342

2019
 
$
3,194

2020
 
$
3,186

2021
 
$
3,239



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.

On March 17, 2015, Maine Water completed the issuance of $1,864,050 aggregate principal amount of its First Mortgage Bonds, Series Q, 0.01% due March 17, 2035 (the “Series Q Bonds”). The Series Q Bonds were issued by Maine Water to the Maine Municipal Bond Bank (the “Bank”) and the proceeds of the issuance were loaned (the “Series Q Loan”) by the Bank to Maine Water pursuant to a Loan Agreement by and between Maine Water and the Bank dated as of March 17, 2015. The proceeds of the Series Q Loan were used by Maine Water to fund various water facilities projects, including the replacement of a booster station and modifications to a treatment plant, each located in the City of Biddeford, Maine.

On November 25, 2015, Maine Water completed the issuance of $2,487,630 aggregate principal amount of its First Mortgage Bonds, Series R, 1.0% due November 25, 2025 (the “Series R Bonds”). The Series R Bonds were issued by Maine Water to the Bank and the proceeds of the issuance were loaned (the “Series R Loan”) by the Bank to Maine Water pursuant to a Loan Agreement by and between Maine Water and the Bank dated as of November 25, 2015. The proceeds of the Series R Loan were used by Maine Water to fund the construction of a 3 million gallon water storage tank, located in the City of Biddeford, Maine, which replaced an existing in-ground 7.5 million gallon reservoir.

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 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.

In addition to paying off the 2009A Bonds, Due 2039 using the proceeds of the July CoBank issuance discussed above, during the year ending December 31, 2016, the Company paid approximately $1,035,000 related to Connecticut Water Service’s Term Note Payable issued as part of the 2012 acquisition of Maine Water and approximately $1,808,000 in sinking funds related to Maine Water’s outstanding bonds.

Financial Covenants – The Company is 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 was in compliance with all covenants at December 31, 2016.
Preferred Stock
Preferred Stock
NOTE 8:  PREFERRED STOCK

The Company’s Preferred Stock at December 31, consisted of the following:

(in thousands, except share data)
 
2016
 
2015
Connecticut Water Service, Inc.
 
 
 
 
Cumulative Series A Voting, $20 Par Value; Authorized, Issued and Outstanding 15,000 Shares
 
$
300

 
$
300

Cumulative Series $0.90 Non-Voting, $16 Par Value; Authorized 50,000 Shares, Issued and Outstanding 29,499
 
472

 
472

Total Preferred Stock
 
$
772

 
$
772



All or any part of any series of either class of the Company’s issued Preferred Stock may be called for redemption by the Company at any time.  The per share redemption prices of the Series A and Series $0.90 Preferred Stock, if called by the Company, are $21.00 and $16.00, respectively.

The Company is authorized to issue 400,000 shares of an additional class of Preferred Stock, $25 par value, the general preferences, voting powers, restrictions and qualifications of which are similar to the Company’s existing Preferred Stock.  No shares of the $25 par value Preferred Stock have been issued.

The Company is also authorized to issue 1,000,000 shares of $1 par value Preference Stock, junior to the Company’s existing Preferred Stock in rights to dividends and upon liquidation of the Company.  150,000 of such shares have been designated as “Series A Junior Participating Preference Stock”.
Lines of Credit
Lines of Credit
NOTE 9:  BANK LINES OF CREDIT

The Company maintains a $15 million line of credit agreement with CoBank, ACB, that is currently scheduled to expire on July 1, 2020.  The Company maintains an additional line of credit of $45 million with RBS Citizens, N.A., with an expiration date of April 25, 2021.  As of December 31, 2016 the total lines of credit available to the Company were $60 million.  As of December 31, 2016 and 2015, the Company had $33.0 million and $16.1 million of “Interim Bank Loans Payable”, respectively.  As of December 31, 2016, the Company had $27.0 million in unused lines of credit.  Interest expense charged on interim bank loans will fluctuate based on market interest rates.

At December 31, 2016 and 2015, the weighted average interest rates on these short-term borrowings outstanding was 2.7% and 2.4%, respectively.
Utility Plant
NOTE 10:  UTILITY PLANT

The components of utility plant and equipment at December 31, were as follows:

(in thousands)
2016
 
2015
Land
$
13,724

 
$
13,615

Source of supply
36,405

 
35,973

Pumping
38,902

 
37,110

Water treatment
84,594

 
81,544

Transmission and distribution
530,716

 
490,489

General
75,438

 
66,341

Held for future use
432

 
432

Acquisition Adjustment
(2,351
)
 
(3,057
)
Total
$
777,860

 
$
722,447



The amounts of depreciable utility plant at December 31, 2016 and 2015 included in total utility plant were $719,070,000 and $664,415,000, respectively.  Non-depreciable plant is primarily funded through CIAC.
The components of utility plant and equipment at December 31, were as follows:

(in thousands)
2016
 
2015
Land
$
13,724

 
$
13,615

Source of supply
36,405

 
35,973

Pumping
38,902

 
37,110

Water treatment
84,594

 
81,544

Transmission and distribution
530,716

 
490,489

General
75,438

 
66,341

Held for future use
432

 
432

Acquisition Adjustment
(2,351
)
 
(3,057
)
Total
$
777,860

 
$
722,447

Taxes Other than Income Taxes
Taxes Other Than Income Taxes
NOTE 11:  TAXES OTHER THAN INCOME TAXES

Taxes Other than Income Taxes consist of the following:

(in thousands)
 
2016
 
2015
 
2014
Municipal Property Taxes
 
$
8,501

 
$
7,896

 
$
7,659

Payroll Taxes
 
1,295

 
1,398

 
1,372

Total Taxes Other than Income Taxes
 
$
9,796

 
$
9,294

 
$
9,031

Pension and Other Post-Retirement Benefits
Pension and Other Post-Retirement Benefits
NOTE 12:  LONG-TERM COMPENSATION ARRANGEMENTS

The Company has accrued for long-term compensation arrangements as of December 31 as follows:

(in thousands)
2016
 
2015
Defined Benefit Pension Plan
$
16,628

 
$
19,232

Post-Retirement Benefit Other than Pension
5,246

 
5,041

Supplemental Executive Retirement Plan
8,688

 
7,915

Deferred Compensation
2,932

 
2,131

Other Long-Term Compensation
46

 
70

Total Long-Term Compensation Arrangements
$
33,540

 
$
34,389



Investment Strategy – The Corporate Finance and Investment Committee (the “Committee”) reviews and approves the investment strategy of the investments made on behalf of various pension and post-retirement benefit plans provided by the Company and certain of its subsidiaries.  The Company uses a variety of mutual funds, managed by different fund managers, to achieve its investment goals.  The Committee wants to ensure that the plans establish a target mix that is expected to achieve investment objectives, by assuring a broad diversification of investment assets among investment types, while avoiding short-term changes to the target asset mix, unless unusual market conditions make such a move appropriate to reduce risk.

The targeted asset allocation ratios for those plans as set by the Committee at December 31:

 
2016
 
2015
Equity
65
%
 
65
%
Fixed Income
35
%
 
35
%
Total
100
%
 
100
%


The Committee recognizes that a variation of up to 5% in either direction from its targeted asset allocation mix is acceptable due to market fluctuations.

Our expected long-term rate of return on the various benefit plan assets is based upon the plan’s expected asset allocation, expected returns on various classes of plan assets as well as historical returns.  The expected long-term rate of return on the Company’s pension plan assets is 7.25%.

PENSION
Defined Benefit Plan – The Company and certain of its subsidiaries have a noncontributory defined benefit pension plan covering qualified employees.  In general, the Company’s policy is to fund accrued pension costs as permitted by federal income tax and The Employee Retirement Income Security Act of 1974 regulations.  The Company amortizes actuarial gains and losses over the average remaining service period of active participants.  A contribution of $5,525,000 was made in 2016 for the 2015 plan year.  The Company expects to make a contribution of approximately $2,971,000 in 2017 for the 2016 plan year.

The Company has amended its pension plan to exclude employees hired after January 1, 2009. The Company’s pension plan was amended by the Board of Directors in 2012 primarily to admit current Maine Water and former Aqua Maine employees that were hired before April 1, 2013 to participate under the terms and provisions in effect for Aqua Maine upon the purchase of Maine Water by the Company. The pension plan was also amended in 2014 to reflect the changed definition of spouse under Federal law. Effective January 1, 2015, the Pension Plan was further amended and restated to consolidate prior amendments, and to comply with various legislative and regulatory developments.  The amended and restated Plan was submitted to the IRS with the Company’s application for a Determination Letter on January 29, 2016.

The following tables set forth the benefit obligation and fair value of the assets of the Company’s defined benefit plans at December 31, the latest valuation date:

Pension Benefits (in thousands)
2016
 
2015
Change in benefit obligation:
 
 
 
Benefit obligation, beginning of year
$
75,845

 
$
79,815

Service cost
1,895

 
2,152

Interest cost
3,212

 
3,114

Actuarial loss (gain)
2,017

 
(4,350
)
Benefits paid
(3,553
)
 
(4,806
)
Administrative expenses
(109
)
 
(80
)
Benefit obligation, end of year
$
79,307

 
$
75,845

Change in plan assets:
 

 
 

Fair value, beginning of year
$
56,613

 
$
61,635

Actual return on plan assets
4,203

 
(136
)
Employer contributions
5,525

 

Benefits paid
(3,553
)
 
(4,806
)
Administrative expenses
(109
)
 
(80
)
Fair value, end of year
$
62,679

 
$
56,613

Funded Status
$
(16,628
)
 
$
(19,232
)
Amount Recognized in Consolidated Balance Sheets Consisted of:
 

 
 

Non-current asset
$

 
$

Current liability

 

Non-current liability
(16,628
)
 
(19,232
)
Net amount recognized
$
(16,628
)
 
$
(19,232
)


The accumulated benefit obligation for all defined benefit pension plans was approximately $70,748,000 and $66,818,000 at December 31, 2016 and 2015, respectively.

Weighted-average assumptions used to determine benefit obligations at December 31:
2016
 
2015
Discount rate
4.10
%
 
4.30
%
Rate of compensation increase
4.00
%
 
4.00
%

Weighted-average assumptions used to determine net periodic cost for years ended December 31:
2016
 
2015
 
2014
Discount rate
4.30
%
 
3.95
%
 
4.90
%
Expected long-term return on plan assets
7.25
%
 
7.25
%
 
7.25
%
Rate of compensation increase
4.00
%
 
4.00
%
 
4.00
%


The Company based its discount rate assumptions the Citigroup Above Median AA Pension Discount Curve.

The following table shows the components of periodic benefit costs:

Pension Benefits (in thousands)
2016
 
2015
 
2014
Components of net periodic benefit costs
 
 
 
 
 
Service cost
$
1,895

 
$
2,152

 
$
1,829

Interest cost
3,212

 
3,114

 
3,087

Expected return on plan assets
(4,080
)
 
(3,847
)
 
(3,567
)
Amortization of: