UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

Form 10-K

x	Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2010 or	

o	Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from	to	

Commission File Number 0-8084

Connecticut Water Service, Inc.
(Exact name of registrant as specified in its charter)

Connecticut
(State or other jurisdiction of
incorporation or organization)	06-0739839
(I.R.S. Employer Identification No.)	
 	 	
93 West Main Street, Clinton, CT
(Address of principal executive office)	06413
(Zip Code)	

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

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

Title of each Class
Common Stock, without par value	Name of each exchange on which registered
The Nasdaq Stock Market, Inc.	

Securities registered pursuant to Section 12 (g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o   No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o   No x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o

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

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

Large Accelerated Filer o	Accelerated Filer x	
Non-Accelerated Filer o	Smaller Reporting Company o	
(Do not check if smaller reporting company)

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

As of June 30, 2010, the aggregate market value of the registrant's voting Common Stock held by non-affiliates of the registrant was $180,060,935 based on the closing sale price on such date as reported on the NASDAQ.

Number of shares of Common Stock, no par value, outstanding as of March 1, 2011 was 8,703,295, excluding 125,531 common stock equivalent shares.

DOCUMENTS INCORPORATED BY REFERENCE

Document	 	Part of Form 10-K Into Which Document is Incorporated	
 	 	 	
Definitive Proxy Statement, dated March 31, 2011, for Annual Meeting of Shareholders to be held on May 12, 2011.	 	Part III	

 

Table of Contents

 	 	INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2010	 	 	
 	 	 	 	Page Number	
 	 	Special Note Regarding Forward-Looking Statements	 	4	
Part I	 	 	 	 	
Item 1.	 	Business	 	5	
Item 1A.	 	Risk Factors	 	8	
Item 1B.	 	Unresolved Staff Comments	 	11	
Item 2.	 	Properties	 	11	
Item 3.	 	Legal Proceedings	 	12	
Item 4.	 	Removed and Reserved	 	12	
 	 	 	 	 	
Part II	 	 	 	 	
Item 5.	 	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	 	12	
Item 6.	 	Selected Financial Data	 	14	
Item 7.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	15	
Item 7A.	 	Quantitative and Qualitative Disclosure about Market Risk	 	23	
Item 8.	 	Financial Statements and Supplementary Data	 	23	
Item 9.	 	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	 	23	
Item 9A.	 	Controls and Procedures	 	24	
Item 9B.	 	Other Information	 	24	
 	 	 	 	 	
Part III	 	 	 	 	
Item 10.	 	Directors, Executive Officers and Corporate Governance	 	24	
Item 11.	 	Executive Compensation	 	24	
Item 12.	 	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	 	24	
Item 13.	 	Certain Relationships and Related Transactions, and Director Independence	 	24	
Item 14.	 	Principal Accounting Fees and Services	 	24	
 	 	 	 	 	
Part IV	 	 	 	 	
Item 15.	 	Exhibits, Financial Statement Schedules	 	25	
 	 	Signatures	 	26	

 

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K (“10-K”), or incorporated by reference into this 10-K, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”) that are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on Connecticut Water Service, Inc. (referred to as “the Company”, “we”, “us”, or “our”).  These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.  In some cases you can identify forward-looking statements where statements are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “continue” or the negative of such terms or similar expressions.  Forward-looking statements included in this 10-K, or incorporated by reference into this 10-K, include, but are not limited to, statements regarding:

·  	projected capital expenditures and related funding requirements;	
·  	the availability and cost of capital;	
·  	developments, trends and consolidation in the water and wastewater utility industries;	
·  	dividend payment projections;	
·  	our ability to successfully acquire and integrate regulated water and wastewater systems, as well as unregulated businesses, that are complementary to our operations and the growth of our business;	
·  	the capacity of our water supplies, water facilities and wastewater facilities;	
·  	the impact of limited geographic diversity on our exposure to unusual weather;	
·  	the impact of conservation awareness of customers and more efficient plumbing fixtures and appliances on water usage per customer;	
·  	our capability to pursue timely rate increase requests;	
·  	our authority to carry on our business without unduly burdensome restrictions;	
·  	our ability to maintain our operating costs at the lowest possible level, while providing good quality water service;	
·  	our ability to obtain fair market value for condemned assets;	
·  	the impact of fines and penalties;	
·  	changes in laws, governmental regulations and policies, including environmental, health and water quality and public utility regulations and policies;	
·  	the decisions of governmental and regulatory bodies, including decisions to raise or lower rates;	
·  	our ability to successfully extend and expand our service contract work within our Service and Rentals Segment;	
·  	the development of new services and technologies by us or our competitors;	
·  	the availability of qualified personnel;	
·  	the condition of our assets;	
·  	the impact of legal proceedings;	
·  	general economic conditions;	
·  	the profitability of our Real Estate Segment, which is subject to the amount of land we have available for sale and/or donation, the demand for any available land, the continuation of the current state tax benefits relating to the donation of land for open space purposes and regulatory approval for land dispositions; and	
·  	acquisition-related costs and synergies.	

Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including but not limited to:

·  	changes in general economic, business, credit and financial market conditions;	
·  	changes in government regulations and policies, including environmental and public utility regulations and policies;	
·  	changes in environmental conditions, including those that result in water use restrictions;	
·  	abnormal weather conditions;	
·  	increases in energy and fuel costs;	
·  	unfavorable changes to the federal and/or state tax codes;	
·  	significant changes in, or unanticipated, capital requirements;	
·  	significant changes in our credit rating or the market price of our common stock;	
·  	our ability to integrate businesses, technologies or services which we may acquire;	
·  	our ability to manage the expansion of our business;	
·  	the extent to which we are able to develop and market new and improved services;	
·  	the continued demand by telecommunication companies for antenna site leases on our property;	
·  	the effect of the loss of major customers;	
·  	our ability to retain the services of key personnel and to hire qualified personnel as we expand;	
·  	labor disputes;	
·  	increasing difficulties in obtaining insurance and increased cost of insurance;	
·  	cost overruns relating to improvements or the expansion of our operations;	
·  	increases in the costs of goods and services;	
·  	civil disturbance or terroristic threats or acts; and	
·  	changes in accounting pronouncements.	

Given these uncertainties, you should not place undue reliance on these forward-looking statements.  You should read this 10-K and the documents that we incorporate by reference into this 10-K completely and with the understanding that our actual future results, performance and achievements may be materially different from what we expect.  These forward-looking statements represent our assumptions, expectations and beliefs only as of the date of this 10-K.  Except for our ongoing obligations to disclose certain information under the federal securities laws, we are not obligated, and assume no obligation, to update these forward-looking statements, even though our situation may change in the future.  For further information or other factors which could affect our financial results and such forward-looking statements, see Part I, Item 1A “Risk Factors.”  We qualify all of our forward-looking statements by these cautionary statements.

4

Table of Contents

PART I

ITEM 1.  BUSINESS

The Company

The Registrant, Connecticut Water Service, Inc. (referred to as “the Company”, “we”, “us”, or “our”) was incorporated in 1974, with The Connecticut Water Company (Connecticut Water) as its largest subsidiary which was organized in 1956. Connecticut Water Service, Inc. is a non-operating holding company, whose income is derived from the earnings of its four wholly-owned subsidiary companies.  In 2010, approximately 88% of the Company’s net income was attributable to water activities carried out within its regulated water company, Connecticut Water.  As of December 31, 2010, Connecticut Water supplied water to 89,402 customers, representing a population of over 300,000, in 55 towns throughout Connecticut.  As a regulated water company, Connecticut Water is subject to state regulation regarding financial issues, rates, and operating issues, and to various other state and federal regulatory agencies concerning water quality and environmental standards.

In addition to its regulated utility, the Company owns two active unregulated companies as of December 31, 2010.  In 2010, these unregulated companies, together with real estate transactions within Connecticut Water, contributed the remaining 12% of the Company’s net income through real estate transactions as well as services and rentals.  The two active companies are Chester Realty, Inc., a real estate company in Connecticut; and New England Water Utility Services, Inc. (NEWUS), which provides contract water and sewer operations and other water related services.

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

Our corporate headquarters are located at 93 West Main Street, Clinton, Connecticut 06413.  Our telephone number is (860) 669-8636, and our internet address is www.ctwater.com .

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

·  	Employee Code of Conduct	
·  	Audit Committee Charter	
·  	Board of Directors Code of Conduct	
·  	Compensation Committee Charter	
·  	Corporate Governance Committee Charter	

Additionally, information concerning the Company’s 2011 Annual Meeting Materials (2010 Annual Report and 2011 Proxy Statement) can be found under the “INVESTOR INFORMATION” menu, under the “Annual Report and Annual Meeting” tab.  The Company’s amended bylaws are available under the “CUSTOMER INFORMATION” menu.

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

Our Regulated Business

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

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

Costs to comply with environmental and water quality regulations are substantial.  Since the 1974 enactment of the Safe Drinking Water Act, we have spent approximately $59.7 million in constructing facilities and conducting aquifer mapping necessary to comply with the requirements of the Safe Drinking Water Act, and other federal and state regulations, of which $7.6 million was expended in the last five years.  The Company expects to spend approximately $1.2 million in 2011 on Safe Water Drinking Act projects, primarily to bring newly acquired systems up to the Company’s standards.  The Company believes that we are presently in compliance with current regulations, but the regulations are subject to change at any time.  The costs to comply with future changes in state or federal regulations, which could require us to modify existing filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial.

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

The rates we charge our water customers are established under the jurisdiction of and are approved by the Connecticut Department of Public Utility Control (DPUC).  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 July 14, 2010 are 9.75% and 7.32%, respectively.  Prior to July 14, 2010, Connecticut Water’s allowed return on equity and return on rate base were 10.125% and 8.07%, respectively.

 
5

Table of Contents
 
On October 29, 2009, Connecticut Water filed its second Water Infrastructure Conservation Act (WICA) application with the DPUC, requesting a 2.15% surcharge to customers’ bills, inclusive of the 0.95% surcharge approved in July 2009.  In response to that application on December 23, 2009, the DPUC approved a cumulative WICA surcharge of 2.1%.  The 2.1% surcharge appeared on customers’ bills beginning January 1, 2010 and remained until July 14, 2010 when, upon the implementation of a general rate increase it was incorporated into base rates and was no longer a surcharge.

On January 6, 2010, Connecticut Water filed a rate application with the DPUC, requesting a multi-year increase totaling $19.1 million above pro forma test year revenues, including the aforementioned WICA surcharge, over a three-year period.  The Company had proposed options for regulatory consideration, including a multi-year phase-in of rates that, if approved, would have been a first in Connecticut for water utilities.  In addition to the phased-in rate increase, the Company also sought a Water Conservation Adjustment Mechanism (“WCAM”), to allow the Company to continue to promote water conservation in an effective manner while addressing the financial impact of increased conservation by its customers.  The WCAM would have minimized the effects of conservation on the Company’s revenues through a recovery mechanism that would have been limited to a change in non-weather related residential sales, while at the same time allowing for the promotion of conservation to the benefit of customers and the environment, usually two opposing concerns.  In addition to the conservation efforts that have impacted sales, the need for an increase in rates was, in part, based upon an investment of approximately $62 million in Net Utility Plant since 2006, the last time the Company filed for a general rate increase.  In addition, increased operating costs for labor, employee benefits and other general operating needs, including chemicals, was requested.

On July 14, 2010, the DPUC issued its Final Decision in the case, granting an increase in revenues of $8.0 million, or approximately 13%, over pro forma test year revenues.  The DPUC approved a return on equity of 9.75%, lower than the 11.3% requested.  The new rates became effective for services rendered on or after July 14, 2010, at which point the previously approved WICA surcharges were folded into customers’ base charges.  The DPUC did not approve Connecticut Water’s requested WCAM approach to align conservation incentives for both Connecticut Water and its customers. Of Connecticut Water’s three-year requested increase of $19.1 million, $16.3 million was associated with the initial year.  The DPUC chose to not consider years 2 and 3 included in Connecticut Water’s application.  Connecticut Water is not precluded from seeking increased rates for future years as part of a new general rate filing should it choose to do so.

On October 29, 2010, Connecticut Water filed a WICA application with the DPUC requesting a 1.58% surcharge to customer bills representing investments of approximately $9.4 million in WICA related projects.  On December 28, 2010, the DPUC approved the 1.58% surcharge effective for all bills issued after January 1, 2011.

Our Water Systems

Our water infrastructure consists of 62 noncontiguous water systems in the State of Connecticut.  Our system, in total, consists of approximately 1,500 miles of water main and reservoir storage capacity of 7.0 billion gallons.  The safe, dependable yield from our 214 active wells and 18 reservoirs is approximately 54   million gallons per day.  Water sources vary among the individual systems, but overall approximately 34% of the total dependable yield comes from reservoirs and 66% from wells.

For the year-ended December 31, 2010, Connecticut Water’s 89,402 customers consumed approximately 7.0 billion gallons of water generating $66,408,000 in revenue.  We supply water, and in most cases, fire protection to all or portions of 55 towns in Connecticut.

The following table breaks down the above total figures by customer class as of December 31, 2010, 2009 and 2008:

 	 	2010	 	 	2009	 	 	2008	 	
Customers:	 	 	 	 	 	 	 	 	 	
Residential	 	 	79,604	 	 	 	78,820	 	 	 	78,254	 	
Commercial	 	 	5,692	 	 	 	5,690	 	 	 	5,646	 	
Industrial	 	 	422	 	 	 	425	 	 	 	425	 	
Public Authority	 	 	609	 	 	 	608	 	 	 	606	 	
Fire Protection	 	 	1,724	 	 	 	1,705	 	 	 	1,648	 	
Other (including non-metered accounts)	 	 	1,351	 	 	 	1,286	 	 	 	782	 	
Total	 	 	89,402	 	 	 	88,534	 	 	 	87,361	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Water Revenues (in thousands):	 	 	 	 	 	 	 	 	 	 	 	 	
Residential	 	$	42,103	 	 	$	36,471	 	 	$	37,963	 	
Commercial	 	 	7,725	 	 	 	6,729	 	 	 	7,150	 	
Industrial	 	 	1,755	 	 	 	1,459	 	 	 	1,822	 	
Public Authority	 	 	2,280	 	 	 	1,926	 	 	 	2,027	 	
Fire Protection	 	 	11,430	 	 	 	10,958	 	 	 	10,606	 	
Other (including non-metered accounts)	 	 	1,115	 	 	 	1,848	 	 	 	1,702	 	
Total	 	$	66,408	 	 	$	59,391	 	 	$	61,270	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Customer Water Consumption (millions of gallons):	 	 	 	 	 	 	 	 	 	 	 	 	
Residential	 	 	5,124	 	 	 	4,737	 	 	 	4,954	 	
Commercial	 	 	1,151	 	 	 	1,078	 	 	 	1,180	 	
Industrial	 	 	335	 	 	 	306	 	 	 	396	 	
Public Authority	 	 	348	 	 	 	351	 	 	 	365	 	
Total	 	 	6,958	 	 	 	6,472	 	 	 	6,895	 	

Connecticut Water owns various small, discrete parcels of land that are no longer required for water supply purposes.  At December 31, 2010, this land totaled approximately 490 acres.  Over the past several years, we have been disposing of these land parcels. For more information, please refer to Segments of Our Business below.

Additional information on land dispositions can be found in Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Commitments and Contingencies.

Competition

Connecticut Water faces competition from a few small privately-owned water systems operating within, or adjacent to, our franchise areas and from municipal and public authority systems whose service areas in some cases overlap portions of our franchise areas.

 
6

Table of Contents
 
Employees

As of December 31, 2010, we employed a total of 204 persons.  Our employees are not covered by collective bargaining agreements.

Organizational Review

As part of a broader organizational review, beginning in July 2010, the Company examined both its regulated and unregulated operations to ensure that it is maximizing the Company’s financial results while maintaining the high quality water and service our customers have come to expect.  During the third quarter the Company determined that a targeted reduction in workforce was appropriate.  The Company eliminated approximately 15 positions that centered on traditional managerial, officer and overhead positions.  The Company did not eliminate positions in direct service of its customers.  The Company recorded a one-time charge of approximately $786,000 related to this organizational review.  This charge represents the aggregate severance benefit provided to the employees leaving the Company and other costs associated with the review.  As of December 31, 2010, all payments related to the organizational review have been made.  The Company expects that the Organizational Review undertaken during 2010 will provide savings in future periods related to labor and employee benefit expenses.

Executive Officers of the Registrant

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

Name	 	Age in 2011*	 	Office	 	Period Held or Prior Position	 	Term of Office Expires	
E. W. Thornburg	 	50	 	Chairman, President, and Chief Executive Officer
 	 	Held position since March 2006
 	 	2011 Annual Meeting	
D. C. Benoit	 	54	 	Vice President – Finance, Chief Financial Officer and Treasurer	 	Held current position or other executive position with the Company since April 1996
 	 	2011 Annual Meeting	
T. P. O’Neill	 	56	 	Vice President – Service Delivery
 	 	Held current position or other engineering position with the Company since February 1980
 	 	2011 Annual Meeting	
M. P. Westbrook	 	52	 	Vice President – Customer and Regulatory Affairs	 	Held current position or other management position with the Company since September 1988
 	 	2011 Annual Meeting	
K. A. Johnson	 	44	 	Vice President –  Human Resources and Corporate Secretary	 	Held current position or other human resources position with the Company since May 2007.  Ms. Johnson previously served as the senior vice president, Human Resources and Organizational Development Officer for Rockville Bank.	 	2011 Annual Meeting	

* - Age shown is as of filing date of March 11, 2011.

For further information regarding the executive officers see the Company’s Proxy Statement dated March 31, 2011.

Segments of Our Business

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

Water Activities – The Water Activities segment is comprised of our core regulated water activities to supply public drinking water to our customers.  This segment encompasses all transactions of our regulated water company with the exception of certain real estate transactions.

Real Estate Transactions – Our Real Estate Transactions segment involves the sale or donation for income tax benefits of our real estate holdings.  These transactions can be effected by any of our subsidiary companies.  Through land donations and sales in previous years, the Company earned tax credits to use in future years.  The Company is limited by time and the amount of taxable income when using these credits.  During 2009, the Company completed the sale of a conservation easement of approximately 200 acres to the Town of Windsor Locks, CT.  Additionally, the Company made adjustments to tax valuation allowances associated with land donations made in previous years.  Finally, Chester Realty sold a non-regulated rental property in Killingly, CT for a small profit.  During 2008 and 2010, the Company did not make any land sales or donations; however, it did adjust its valuation allowances.  The Company is currently in discussions to sell approximately 175 acres to the Town of Plymouth, CT for open space purposes.  The Company expects the transaction, if approved by the Town’s residents and the DPUC, to be completed in late 2011 or early 2012.

A breakdown of the net income of this segment between our regulated and unregulated companies for the past three years is as follows:

 	 	Income (Loss) from Real Estate Transactions from Continuing Operations	 	
 	 	Regulated	 	 	Unregulated	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	
2010	 	$	(7,000	)	 	$	237,000	 	 	$	230,000	 	
2009	 	$	1,427,000	 	 	$	22,000	 	 	$	1,449,000	 	
2008	 	$	(160,000	)	 	 	--	 	 	$	(160,000	)	

 
7

Table of Contents
 
Services and Rentals – Our Services and Rentals segment provides contracted services to water and wastewater utilities and other clients and also leases certain of our properties to third parties through our unregulated companies.  The types of services provided include contract operations of water and wastewater facilities; Linebacker ® , our service line protection plan for public drinking water customers; and providing bulk deliveries of emergency drinking water to businesses and residences via tanker truck.  Our lease and rental income comes primarily from the renting of residential and commercial property.

Linebacker ® is an optional service line protection program offered by the Company to eligible residential customers through NEWUS covering the cost of repairs for leaking or broken water service lines which provide drinking water to a customer’s home.  For customers who enroll in this program, the Company will repair or replace a leaking or broken water service line, curb box, curb box cover, meter pit, meter pit cover, meter pit valve plus in-home water main shut off valve before the meter.  Beginning in January 2010 with the acquisition of certain assets from Home Service USA, NEWUS expanded its coverage offerings to Connecticut Water customers for failure of in-home plumbing and sewer and septic drainage lines.  Depending on the coverage selected, the Linebacker ® program costs between $70 and $170 per year for residential customers.  As of December 31, 2010, the Company had 21,761 customers enrolled in its Linebacker ® protection program.  Of these, 3,079 customers were enrolled in one of the expanded plans.

Some of the services listed above, including the service line protection plan, have little or no competition.  But there can be considerable competition for contract operations of large water and wastewater facilities and systems.  However, we have sought to develop a niche market by seeking to serve smaller facilities and systems in our service areas where there is less competition.  The Services and Rentals segment, while still a relatively small portion of our overall business, has grown over the past five years and has provided approximately 9%, 9% and 8% of our overall net income in 2010, 2009 and 2008, respectively.  Net income generated by this segment of our business was $899,000, $929,000 and $790,000 for the years 2010, 2009 and 2008, respectively.

ITEM 1A.  RISK FACTORS

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including, but not limited to, those set forth below, any one of which could cause our actual results to vary materially from recent results or anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, see the discussion in “Forward Looking Information” in Item 7 below – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements.”

Because we incur significant capital expenditures annually, we depend on the rates we charge our customers, which are subject to regulation.

The water utility business is capital intensive. On an annual basis, we spend significant sums for additions to or replacement of property, plant and equipment. Our ability to maintain and meet our financial objectives is dependent upon the rates we charge our customers. These rates are subject to approval by the DPUC.  The Company is entitled to file rate increase requests, from time to time, to recover our investments in utility plant and expenses. Once a rate increase petition is filed with the DPUC, the ensuing administrative and hearing process may be lengthy and costly.  We can provide no assurances that any future rate increase requests will be approved by the DPUC; and, if approved, we cannot guarantee that any such rate increase requests will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.  Additionally, the DPUC may rule that a company must reduce its rates.

Under a 2007 law, the DPUC may authorize regulated water companies to use a rate adjustment mechanism, known as a Water Infrastructure and Conservation Adjustment (WICA), for eligible projects completed and in service for the benefit of the customers.  For more information related to WICA, please refer to the “Executive Overview” found in Item 7 of this Form 10-K.

If we are unable to pay the principal and interest on our indebtedness as it comes due, or we default under certain other provisions of our loan documents, our indebtedness could be accelerated and our results of operations and financial condition could be adversely affected.

As of December 31, 2010, we had $111.7 million in long-term debt outstanding and $26.3 million in bank loans payable.  Our ability to pay the principal and interest on our indebtedness as it comes due will depend upon our current and future performance.  Our performance is affected by many factors, some of which are beyond our control.  We believe that our cash generated from operations, and, if necessary, borrowing under our existing and planned credit facilities, will be sufficient to enable us to make our debt payments as they become due.  If, however, we do not generate sufficient cash, we may be required to refinance our obligations or sell additional equity, which may be on terms that are not favorable to the Company as current terms.

No assurance can be given that any refinancing or sale of equity will be possible when needed or that we will be able to negotiate acceptable terms.  In addition, our failure to comply with certain provisions contained in our trust indentures and loan agreements relating to our outstanding indebtedness could lead to a default on these documents, which could result in an acceleration of our indebtedness.

Credit market volatility may affect our ability to refinance our existing debt, borrow funds under our existing lines of credit or incur additional debt.

During certain periods over the past several years, the volatility and disruption in the credit markets reached unprecedented levels.  In many cases, the markets contained limited credit capacity for certain issuers, and lenders had requested shorter terms.  The market for new debt financing was limited and in some cases not available at all.  In addition, the markets had increased the uncertainty that lenders will be able to comply with their previous commitments.  The Company noted improvements beginning during the second half of 2009 and throughout 2010.  If market disruption and volatility return, the Company may not be able to refinance our existing debt when it comes due, draw upon our existing lines of credit or incur additional debt, which may require us to seek other funding sources to meet our liquidity needs or to fund our capital expenditures budget.  We cannot assure you that we will be able to obtain debt or other financing on reasonable terms, or at all.

Failure to maintain our existing credit ratings could affect our cost of funds and related margins and liquidity position.

Since 2003, Standard & Poor's Ratings Services has rated our outstanding debt and has given credit ratings to us and our subsidiary The Connecticut Water Company.  Their evaluations are based on a number of factors, which include financial strength as well as transparency with rating agencies and timeliness of financial reporting.  On November 1, 2010, Standard & Poor's Ratings Services reaffirmed their ‘A’ credit rating on Connecticut Water Service, Inc. and The Connecticut Water Company, both with an outlook of "stable".  There can be no assurance that we will be able to maintain our current strong credit ratings.  Failure to do so could adversely affect our cost of funds and related margins and liquidity position.

8

Table of Contents
 
Market disruptions caused by the worldwide financial crisis could affect our ability to meet our liquidity needs at reasonable cost and our ability to meet long-term commitments, which could adversely affect our financial condition and results of operations.

During 2009, the Company increased its lines of credit from $21 million to $40 million.  During 2010, the Company renewed these lines of credit as they expired, with similar terms.  We rely on our revolving credit facilities and the capital markets to satisfy our liquidity needs. A return to disruptions in the credit markets or further deterioration of the banking industry’s financial condition, may discourage or prevent lenders from meeting their existing lending commitments, extending the terms of such commitments or agreeing to new commitments. Market disruptions may also limit our ability to issue debt securities in the capital markets.

Our inability to comply with debt covenants under our credit facilities could result in prepayment obligations.

We are obligated to comply with debt covenants under our loan and debt agreements.  Failure to comply with covenants under our credit facilities could result in an event of default, which if not timely cured or waived, could result in us being required to repay or finance these borrowings before their due date, could limit future borrowings, and result in cross default issues and increase borrowing costs.  The covenants are normal and customary in bank and loan agreements.  The Company was in compliance with all covenants at December 31, 2010.
 
Market conditions may unfavorably impact the value of our benefit plan assets and liabilities which then could require significant additional funding.

The performance of the capital markets affects the values of the assets that are held in trust to satisfy future obligations under the Company’s pension and postretirement benefit plans and could significantly impact our results of operations and financial position.  As detailed in the Notes to Consolidated Financial Statements, the Company has significant obligations in these areas and the Company holds significant assets in these trusts.  These assets are subject to market fluctuations, which may affect investment returns, which may fall below the Company’s projected return rates.  A decline in the market value of the pension and postretirement benefit plan assets will increase the funding requirements under the Company’s pension and postretirement benefit plans if the actual asset returns do not recover these declines in value.  Additionally, the Company’s pension and postretirement benefit plan liabilities are sensitive to changes in interest rates.  As interest rates decrease, the liabilities increase, potentially increasing benefit expense and funding requirements.  Further, changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions may also increase the funding requirements of the obligations related to the pension and other postretirement benefit plans.  Also, future increases in pension and other postretirement costs as a result of reduced plan assets may not be fully recoverable from our customers, and the results of operations and financial position of the Company could be negatively affected.

Our operating costs could be significantly increased because of state and federal environmental and health and safety laws and regulations.

Our water and wastewater operations are governed by extensive federal and state environmental protection and health and safety laws and regulations, including the federal Safe Drinking Water Act, the Clean Water Act and similar state laws, and federal and state regulations issued under these laws by the U.S. Environmental Protection Agency and state environmental regulatory agencies.  These laws and regulations establish, among other things, criteria and standards for drinking water and for discharges into the waters of the United States and/or Connecticut. Pursuant to these laws, we are required to obtain various environmental permits from environmental regulatory agencies for our operations.  We cannot assure that we have been or will be at all times in full compliance with these laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators.

Environmental laws and regulations are complex and change frequently.  These laws, and the enforcement thereof, have tended to become more stringent over time.  While we have budgeted for future capital and operating expenditures to maintain compliance with these laws and our permits, it is possible that new or stricter standards could be imposed that will raise our operating costs.  Although these costs may be recovered in the form of higher rates, there can be no assurance that the DPUC would approve rate increases to enable us to fully recover such costs.  In summary, we cannot be assured that our costs of complying with, or discharging liabilities under, current and future environmental and health and safety laws will not adversely affect our business, results of operations or financial condition.

Climate change laws and regulations may be adopted that could require compliance with greenhouse gas emissions standards and other climate change initiatives. Additional capital expenditures could be required and our operating costs could be increased in order to comply with new regulatory standards imposed by federal and state environmental agencies.

Climate change is receiving ever increasing attention worldwide.  Many scientists, legislators, and others attribute global warming to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions.  Possible new climate change laws and regulations, if enacted, may require us to monitor and/or change our utility operations.  It is possible that new standards could be imposed that will require additional capital expenditures or raise our operating costs.  Because it is uncertain what laws will be enacted, we cannot predict the potential impact of such laws on our future consolidated financial condition, results of operations, or cash flows.  Although these expenditures and costs may be recovered in the form of higher rates, there can be no assurance that the DPUC or other regulatory bodies that govern our business would permit us to recover such expenditures and costs.  We cannot assure you that our costs of complying with new standards or laws will not adversely affect our business, results of operations or financial condition.

New Streamflow Regulations could potentially impact our ability to serve our customers.

In 2009, the Connecticut Department of Environmental Protection (DEP) formally proposed   new regulations relative to the flow of water in the State’s rivers and streams.  In October and again in December 2010, the State Legislature’s Regulations Review Committee rejected the proposed rules as written, and later as revised by the DEP.  Since the regulations were rejected, the DEP is working to develop regulations that will be acceptable to a majority of stakeholders.  Any new streamflow regulation has the potential to restrict our access to water, raise our capital and operating expenses and adversely affect our revenues and earnings.  Although these costs may be recovered in the form of higher rates, there can be no assurance the DPUC would approve rate increases to enable us to recover such costs.

Our business is subject to seasonal fluctuations which could adversely affect demand for our water services and our revenues.

Demand for our water during the warmer months is generally greater than during cooler months due primarily to additional requirements for water in connection with irrigation systems, swimming pools, cooling systems and other outside water use. Throughout the year, and particularly during typically warmer months, demand will vary with temperature and rainfall levels. In the event that temperatures during the typically warmer months are cooler than normal, or if there is more rainfall than normal, the demand for our water may decrease and adversely affect our revenues.

9

Table of Contents
 
Declining per customer residential water usage may reduce our revenues, financial condition and results of operations in future years.

A trend of declining per customer residential water usage in Connecticut has been observed for the last several years, which we would attribute to increased water conservation, including the use of more efficient household fixtures and appliances among residential users.  Our regulated business is heavily dependent on revenue generated from rates we charge to our residential customers for the volume of water they use.  The rate we charge for our water is regulated by the DPUC and we may not unilaterally adjust our rates to reflect changes in demand.  Declining volume of residential water usage may have a negative impact on our operating revenues in the future if regulators do not reflect any usage declines in the rate setting design process.

Potential regulatory changes or drought conditions may impact our ability to serve our current and future customers’ demand for water and our financial results.

We depend on an adequate water supply to meet the present and future demands of our customers.  Changes in regulatory requirements could affect our ability to utilize existing supplies and/or secure new sources, as required.  Insufficient supplies or an interruption in our water supply could have a material adverse effect on our financial condition and results of operations.  Although not occurring in 2010, drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in sufficient quantities to our existing and future customers. An interruption in our water supply could have a material adverse effect on our financial condition and results of operations.  Moreover, governmental restrictions on water usage during drought conditions may result in a decreased demand for our water, even if our water reserves are sufficient to serve our customers during these drought conditions, which may adversely affect our revenues and earnings.

We are increasingly dependent on the continuous and reliable operation of our information technology systems.

We rely on our information technology systems in connection with the operation of our business, especially with respect to customer service and billing, accounting and, in some cases, the monitoring and operation of our treatment, storage and pumping facilities.  A loss of these systems or major problems with the operation of these systems could affect our operations and have a significant material adverse effect on our results of operations.

With the implementation of the Company’s new Enterprise Resource Planning (ERP) system, the Company delayed customer billings in order to verify the integrity of the system and the accuracy of those bills prior to mailing.  As a result, some billings and consequently, cash receipts were delayed.  The Company has increased its utilization of its lines of credit during this period.  Our operations, including plans to continue investment in new infrastructure, were not impacted.

The Company has returned to normal billing and collection processes and does not anticipate delays in billing or collection in subsequent periods.  The delay in billing contributed to the increase in the Company’s bad debt expense for the year of approximately $198,000 due to the reserve policy based upon aging of the receivables.  The Company fully anticipates that the reserve will return to more historical levels over the first quarter of 2011.

The failure of, or the requirement to repair, upgrade or dismantle, any of our dams may adversely affect our financial condition and results of operations.

We own and operate 32 dams throughout the state of Connecticut.  While the Company maintains robust dam maintenance and inspection programs, a failure of any of those dams could result in injuries and damage to residential and/or commercial property downstream for which we may be responsible, in whole or in part.  The failure of a dam could also adversely affect our ability to supply water in sufficient quantities to our customers and could adversely affect our financial condition and results of operations.  Any losses or liabilities incurred due to the failure of one of our dams might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

Any failure of our reservoirs, storage tanks, mains or distribution networks could result in losses and damages that may affect our financial condition and reputation.

Connecticut Water distributes water through an extensive network of mains and stores water in reservoirs and storage tanks located across Connecticut.  A failure of major mains, reservoirs, or tanks could result in injuries and damage to residential and/or commercial property for which we may be responsible, in whole or in part.  The failure of major mains, reservoirs or tanks may also result in the need to shut down some facilities or parts of our water distribution network in order to conduct repairs.  Such failures and shutdowns may limit our ability to supply water in sufficient quantities to our customers and to meet the water delivery requirements prescribed by governmental regulators, including the DPUC, and adversely affect our financial condition, results of operations, cash flow, liquidity and reputation.  Any business interruption or other losses might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

Any future acquisitions we may undertake may involve risks and uncertainties.

An important element of our growth strategy is the acquisition and integration of water systems in order to move into new service areas and to broaden our current service areas.  As of the date of this filing, the Connecticut Water Company now serves more than 89,000 customers, or a population of over 300,000 people, in 55 Connecticut towns.  We will not be able to acquire other businesses if we cannot identify suitable acquisition opportunities or reach mutually agreeable terms with acquisition candidates.  It is our intent, when practical, to integrate any businesses we acquire with our existing operations.  The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and cause diversion of our management's time and resources.  Future acquisitions by us could result in:

·  	dilutive issuances of our equity securities;	
·  	incurrence of debt and contingent liabilities;	
·  	failure to have effective internal control over financial reporting;	
·  	fluctuations in quarterly results; and	
·  	other acquisition-related expenses.	

Some or all of these items could have a material adverse effect on our business as well as our ability to finance our business and comply with regulatory requirements.  The businesses we acquire in the future may not achieve sales and profitability that would justify our investment and any difficulties we encounter in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls.  In addition, as consolidation becomes more prevalent in the water and wastewater industries, the prices for suitable acquisition candidates may increase to unacceptable levels and limit our ability to grow through acquisitions.

10

Table of Contents

Water supply contamination may adversely affect our business.

Our water supplies are subject to contamination, including contamination from the development of naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-made sources, such as Methyl Tertiary Butyl Ether   (MTBE), and possible terrorist attacks. In the event that our water supply is contaminated, we may have to interrupt the use of that water supply until we are able to substitute the flow of water from an uncontaminated water source or provide additional treatment.  We may incur significant costs in order to treat the contaminated source through expansion of our current treatment facilities, or development of new treatment methods.  If we are unable to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner, there may be an adverse effect on our revenues, operating results and financial condition.  The costs we incur to decontaminate a water source or an underground water system could be significant and could adversely affect our business, operating results and financial condition and may not be recoverable in rates.  We could also be held liable for consequences arising out of human exposure to hazardous substances in our water supplies or other environmental damage.  For example, private plaintiffs have the right to bring personal injury or other toxic tort claims arising from the presence of hazardous substances in our drinking water supplies.  Our insurance policies may not be sufficient to cover the costs of these claims.

The need to increase security may continue to increase our operating costs.

In addition to the potential pollution of our water supply as described above, we have taken steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply.  We have also tightened our security measures regarding the delivery and handling of certain chemicals used in our business.  We have and will continue to bear increased costs for security precautions to protect our facilities, operations and supplies. These costs may be significant.  We are currently not aware of any specific threats to our facilities, operations or supplies; however, it is possible that we would not be in a position to control the outcome of terrorist events should they occur.

The accuracy of our judgments and estimates about financial and accounting matters will impact our operating results and financial condition.

We make certain estimates and judgments in preparing our financial statements regarding, among others:
·  	the number of years to depreciate certain assets;	
·  	amounts to set aside for uncollectible accounts receivable and uninsured losses;	
·  	our legal exposure and the appropriate accrual for claims, including medical and workers’ compensation claims;	
·  	future costs for pensions and other post-retirement benefit obligations; and	
·  	possible tax allowances.	

The quality and accuracy of those estimates and judgments will have an impact on our operating results and financial condition.

In addition, we must estimate unbilled revenues and costs at the end of each accounting period.  If our estimates are not accurate, we will be required to make an adjustment in a future period.

Key employee turnover may adversely affect our operating results.

Our success depends significantly on the continued individual and collective contributions of our management team. The loss of the services of any member of our senior management team or the inability to hire and retain experienced management personnel could harm our operating results.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None

ITEM 2.  PROPERTIES

The properties of our regulated water company consist of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, treatment plants, pumping plants, transmission and distribution mains and conduits, mains and other facilities and equipment used for the collection, purification, storage and distribution of water.  In certain cases, our water company may be a party to limited contractual arrangements for the provision of water supply from neighboring utilities.  We believe that our properties are in good operating condition.  Water mains are located, for the most part, in public streets and, in a few instances, are located on land that we own in fee simple and/or land utilized pursuant to easement right, most of which are perpetual and adequate for the purpose for which they are held.

The net utility plant of the Company at December 31, 2010 was solely owned by Connecticut Water.  Connecticut Water’s Net Utility Plant balance as of December 31, 2010 was $344,219,000, approximately $19 million more than the balance of net utility plant as of December 31, 2009, due primarily to normal plant additions and construction spending related to infrastructure improvements.

Sources of water supply owned, maintained, and operated by Connecticut Water include eighteen reservoirs and eighty-nine well fields.  In addition, Connecticut Water has agreements with various neighboring water utilities to provide water, at negotiated rates, to our water systems.  Collectively, these sources have the capacity to deliver approximately fifty-two million gallons of potable water daily to the thirteen major operating systems in the following table. In addition to the principal systems identified, Connecticut Water owns, maintains, and operates forty-nine small, non-interconnected satellite and consecutive water systems that, combined, have the ability to deliver about two million gallons of additional water per day to their respective systems. For some small consecutive water systems, purchased water may comprise substantially all of the total available supply of the system.

11

Table of Contents
 
Connecticut Water owns and operates 22 water filtration facilities, having a combined treatment capacity of approximately 29.55 million gallons per day.

The Company’s estimated available water supply, including purchased water agreements, but excluding non-principal systems, is as follows:

System	 	Estimated Available Supply
(million gallons per day)	 	
Chester System	 	 	1.69	 	
Collinsville System	 	 	1.65	 	
Danielson System	 	 	3.76	 	
Gallup System	 	 	0.60	 	
Guilford System	 	 	10.10	 	
Naugatuck System	 	 	7.07	 	
Northern Western System	 	 	16.55	 	
Plainfield System	 	 	1.01	 	
Stafford System	 	 	1.00	 	
Terryville System	 	 	0.91	 	
Thomaston System	 	 	1.73	 	
Thompson System	 	 	0.29	 	
Unionville System	 	 	6.02	 	
Total	 	 	52.38	 	

As of December 31, 2010, the transmission and distribution systems of Connecticut Water consisted of approximately 1,500 miles of main.  On that date, approximately 77 percent of our mains were eight-inch diameter or larger.  Substantially all new main installations are cement-lined ductile iron pipe of eight-inch diameter or larger.

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

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4.  REMOVED AND RESERVED

PART II

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

Our Common Stock is traded on the NASDAQ Global Select Market under the symbol “CTWS”.  Our quarterly high and low stock prices as reported by NASDAQ and the cash dividends we paid during 2010 and 2009 are listed as follows:

 	 	Price	 	 	Dividends	 	
Period	 	High	 	 	Low	 	 	Paid	 	
2010	 	 	 	 	 	 	 	 	 	
First Quarter	 	$	25.12	 	 	$	21.57	 	 	$	.2275	 	
Second Quarter	 	 	24.28	 	 	 	20.00	 	 	 	.2275	 	
Third Quarter	 	 	24.15	 	 	 	20.80	 	 	 	.2325	 	
Fourth Quarter	 	 	27.90	 	 	 	23.60	 	 	 	.2325	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
2009	 	 	 	 	 	 	 	 	 	 	 	 	
First Quarter	 	$	24.76	 	 	$	17.31	 	 	$	.2225	 	
Second Quarter	 	 	22.63	 	 	 	19.31	 	 	 	.2225	 	
Third Quarter	 	 	22.86	 	 	 	20.57	 	 	 	.2275	 	
Fourth Quarter	 	 	26.45	 	 	 	21.68	 	 	 	.2275	 	

As of March 1, 2011, there were approximately 3,700 holders of record of our common stock.

We presently intend to pay quarterly cash dividends in 2011 on March 15, June 15, September 15 and December 15, subject to our earnings and financial condition, regulatory requirements and other factors our Board of Directors may deem relevant.

The Company’s Annual Meeting of Shareholders is scheduled for May 12, 2011 in Westbrook, Connecticut.

Purchases of Equity Securities by the Company – In May 2005, the Company adopted a common stock repurchase program (Share Repurchase Program).  The Share Repurchase Program allows the Company to repurchase up to 10% of its outstanding common stock, at a price or prices that are deemed appropriate.  As of December 31, 2010, no shares have been repurchased.  Currently, the Company has no plans to repurchase shares under the Share Repurchase Program.

12

Table of Contents

Performance Graph – Set forth below is a line graph comparing the cumulative total shareholder return for each of the years 2005 – 2010 on the Company’s Common Stock, based on the market price of the Common Stock and assuming reinvestment of dividends, with the cumulative total shareholder return of companies in the Standard & Poor’s 500 Index and the Standard and Poor’s 500 Utility Index.

 
 	 	2005	 	 	2006	 	 	2007	 	 	2008	 	 	2009	 	 	2010	 	
Connecticut Water Service, Inc.	 	 	100.00	 	 	 	96.31	 	 	 	103.44	 	 	 	107.31	 	 	 	117.36	 	 	 	137.52	 	
Standard & Poor’s 500 Index	 	 	100.00	 	 	 	115.79	 	 	 	122.16	 	 	 	76.96	 	 	 	97.33	 	 	 	111.99	 	
Standard & Poor’s 500 Utilities Index	 	 	100.00	 	 	 	120.99	 	 	 	144.43	 	 	 	102.58	 	 	 	114.79	 	 	 	121.06	 	

 
13

Table of Contents

ITEM 6. SELECTED FINANCIAL INFORMATION	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 SUPPLEMENTAL INFORMATION (Unaudited)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
SELECTED FINANCIAL DATA	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Years Ended December 31, (thousands of dollars except per share	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
amounts and where otherwise indicated)	 	2010	 	 	2009	 	 	2008	 	 	2007	 	 	2006	 	
CONSOLIDATED STATEMENTS OF INCOME	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Continuing Operations	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	$	66,408	 	 	$	59,391	 	 	$	61,270	 	 	$	59,026	 	 	$	46,945	 	
Operating Expenses	 	$	52,573	 	 	$	47,003	 	 	$	47,874	 	 	$	46,324	 	 	$	39,962	 	
Other Utility Income, Net of Taxes	 	$	742	 	 	$	704	 	 	$	579	 	 	$	552	 	 	$	542	 	
Total Utility Operating Income	 	$	14,577	 	 	$	13,092	 	 	$	13,975	 	 	$	13,254	 	 	$	7,525	 	
Interest and Debt Expense	 	$	5,853	 	 	$	4,744	 	 	$	5,198	 	 	$	4,411	 	 	$	4,461	 	
Net Income	 	$	9,798	 	 	$	10,209	 	 	$	9,424	 	 	$	8,781	 	 	$	6,708	 	
Cash Common Stock Dividends Paid	 	$	7,942	 	 	$	7,671	 	 	$	7,373	 	 	$	7,146	 	 	$	7,014	 	
Dividend Payout Ratio from Continuing Operations	 	 	81	%	 	 	75	%	 	 	78	%	 	 	81	%	 	 	105	%	
Weighted Average Common Shares Outstanding	 	 	8,531,741	 	 	 	8,447,950	 	 	 	8,377,428	 	 	 	8,270,494	 	 	 	8,187,801	 	
Basic Earnings Per Common Share from Continuing Operations	 	$	1.14	 	 	$	1.20	 	 	$	1.12	 	 	$	1.06	 	 	$	0.81	 	
Number of Shares Outstanding at Year End	 	 	8,676,849	 	 	 	8,573,744	 	 	 	8,463,269	 	 	 	8,376,842	 	 	 	8,270,394	 	
ROE on Year End Common Equity	 	 	8.7	%	 	 	9.4	%	 	 	9.1	%	 	 	8.8	%	 	 	7.0	%	
Declared Common Dividends Per Share	 	$	0.920	 	 	$	0.900	 	 	$	0.880	 	 	$	0.865	 	 	$	0.855	 	

CONSOLIDATED BALANCE SHEET	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stockholders' Equity	 	$	113,191	 	 	$	108,569	 	 	$	103,476	 	 	$	100,098	 	 	$	95,938	 	
Long-Term Debt (Consolidated, Excluding Current Maturities)	 	 	111,675	 	 	 	111,955	 	 	 	92,227	 	 	 	92,285	 	 	 	77,347	 	
Preferred Stock	 	 	772	 	 	 	772	 	 	 	772	 	 	 	772	 	 	 	772	 	
Total Capitalization	 	$	225,638	 	 	$	221,296	 	 	$	196,475	 	 	$	193,155	 	 	$	174,057	 	
Stockholders' Equity (Includes Preferred Stock)	 	 	51	%	 	 	49	%	 	 	53	%	 	 	52	%	 	 	56	%	
Long-Term Debt	 	 	49	%	 	 	51	%	 	 	47	%	 	 	48	%	 	 	44	%	
Net Utility Plant	 	$	344,219	 	 	$	325,202	 	 	$	299,233	 	 	$	277,662	 	 	$	263,187	 	
Total Assets	 	$	425,211	 	 	$	415,276	 	 	$	372,431	 	 	$	360,813	 	 	$	328,140	 	
Book Value - Per Common Share	 	$	13.05	 	 	$	12.66	 	 	$	12.23	 	 	$	11.95	 	 	$	11.60	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
OPERATING REVENUES BY	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
REVENUE CLASS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Residential	 	$	42,103	 	 	$	36,471	 	 	$	37,963	 	 	$	38,354	 	 	$	29,067	 	
Commercial	 	 	7,725	 	 	 	6,729	 	 	 	7,150	 	 	 	6,762	 	 	 	5,652	 	
Industrial	 	 	1,755	 	 	 	1,459	 	 	 	1,822	 	 	 	1,764	 	 	 	1,589	 	
Public Authority	 	 	2,280	 	 	 	1,926	 	 	 	2,027	 	 	 	1,924	 	 	 	1,507	 	
Fire Protection	 	 	11,430	 	 	 	10,958	 	 	 	10,606	 	 	 	9,482	 	 	 	8,708	 	
Other (Including Non-Metered Accounts)	 	 	1,115	 	 	 	1,848	 	 	 	1,702	 	 	 	740	 	 	 	422	 	
Total Operating Revenues	 	$	66,408	 	 	$	59,391	 	 	$	61,270	 	 	$	59,026	 	 	$	46,945	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Number of Customers (Average)	 	 	88,895	 	 	 	88,390	 	 	 	87,028	 	 	 	84,023	 	 	 	82,552	 	
Billed Consumption (Millions of Gallons)	 	 	6,958	 	 	 	6,472	 	 	 	6,895	 	 	 	7,257	 	 	 	6,918	 	
Number of Employees	 	 	204	 	 	 	225	 	 	 	226	 	 	 	206	 	 	 	200	 	

 
14

Table of Contents

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

FINANCIAL CONDITION
Executive Overview

The Company is a non-operating holding company, whose income is derived from the earnings of its three active wholly-owned subsidiary companies: The Connecticut Water Company (Connecticut Water), New England Water Utility Services, Inc. (NEWUS), and Chester Realty Company (Chester Realty).

In 2010, approximately 88% of the Company’s net income was attributable to the water activities of its largest subsidiary, Connecticut Water, a regulated water utility with 89,402 customers throughout 55 Connecticut towns, as of December 31, 2010.  The rates charged for service by Connecticut Water are subject to review and approval by the Connecticut Department of Public Utility Control (DPUC).

In the mid 1990s, Connecticut Water made a conscious decision to minimize its reliance on rate increase requests to drive its financial performance.  Instead, it relied upon unregulated operations and cost containment to grow the earnings of the Company without seeking higher rates.  After a successful extended period of meeting these objectives, it became clear in 2006 that a rate increase was needed to continue to provide shareholder value through increased earnings.  The Company decided to return to the more traditional model of recurring rate increase filings to efficiently collect its cost of both annual expenses and its investment in the infrastructure of the regulated business.  In 2006, the Connecticut Water communicated to its customers, regulators and shareholders that it expected to seek rate relief on a more recurring basis.

On January 6, 2010, Connecticut Water filed a rate application with the DPUC, requesting a multi-year increase totaling $19.1 million above pro forma test year revenues, including the aforementioned WICA surcharge, over a three-year period.  On July 14, 2010, the DPUC issued its Final Decision in the case, granting an increase in revenues of $8.0 million, or approximately 13%, over pro forma test year revenues.  The DPUC approved a return on equity of 9.75%.  The new rates became effective for services rendered on or after July 14, 2010, at which point   all previously approved infrastructure surcharges were folded into customers’ base charges.  The DPUC did not approve Connecticut Water’s multi-year requested increase of $19.1 million, $16.3 million was associated with the initial year.  The DPUC chose to not consider years 2 and 3 included in Connecticut Water’s application.  The Final Decision does not preclude Connecticut Water from seeking increased rates for future years as part of a new general rate filing should it choose to do so.

Recognizing the importance of timely infrastructure replacement and improvement, the Company, along with other investor-owned regulated water companies in the state, campaigned for the passage of the Water Infrastructure and Conservation Adjustment (WICA) Act in the Connecticut General Assembly, which was adopted in 2007.  WICA allows the Company to add a surcharge to customers’ bills, subject to an expedited review and approval by the DPUC and no more than twice a year, to reflect the replacement of certain types of aging utility plant; principally water mains, meters, service lines and water conservation related investments.

On October 29, 2010, Connecticut Water filed a WICA application with the DPUC requesting a 1.58% surcharge to customer bills representing investments of approximately $9.4 million in WICA related projects that were placed into service after April 12, the date the DPUC recognized for rate base purposes during the 2010 rate case.  On December 28, 2010, the DPUC approved the 1.58% surcharge effective for all bills issued after January 1, 2011.

The Company has and will continue to focus on minimizing operating costs that are passed along to its customers without sacrificing the quality service it values and the customers demand.  At the same time, the Company will continue to employ its current strategy of timely collection of appropriate costs and a fair rate of return for its shareholders through appropriate rates for its regulated water service.  As part of a broader organizational review, beginning in July 2010, the Company examined both its regulated and unregulated operations to ensure that it is maximizing the Company’s financial results while maintaining the high quality water and service our customers have come to expect.  During the third quarter the Company determined that a targeted reduction in workforce was appropriate.  The Company eliminated approximately 15 positions that centered on traditional managerial, officer and overhead positions.  The Company did not eliminate positions in direct service of its customers.  The Company recorded a one-time pre-tax charge of approximately $786,000 related to this organizational review.  This charge represents the aggregate severance benefit provided to the employees leaving the Company, legal costs associated with the review and out placement services provided to the effected employees.  The Company will continue to evaluate all segments of its business and will make additional changes if warranted.

The Company prides itself on being able to help water systems that do not have the resources to deliver the best water possible to their customers.  On February 16, 2010, the Company announced the acquisition of the assets of water systems in Killingworth and Mansfield, Connecticut.  These acquisitions added approximately 500 customers to the Company.  The system acquired in Killingworth had water quality issues that the previous owners were unable to address.  The Company designed, purchased, and installed a uranium treatment system that was brought on-line in October 2010.  Since the treatment system went on-line, uranium has not been detected at the system.

In 2010, Connecticut Water added 70 private well owners in our existing service territories.  In 2011 and beyond, the Company will continue its efforts to tie-in private well owners whose homes are in close proximity to our mains.  Additionally, the Company will continue to work with developers to encourage public water use for new residential construction within Connecticut Water’s service areas.

While the Company plans to file timely rate cases, continue to make acquisitions and, in the future, utilize the WICA adjustment to allow for more timely recovery of investment in utility plant, it will also look to NEWUS to increase its earnings in the unregulated business.  The Company will continue to seek out maintenance and service contracts with new customers and renew existing contracts that have proven to be beneficial to the Company, as well as to continue the expansion of the Linebacker® program.  In January 2010, NEWUS acquired the assets of Home Service USA.  Prior to the acquisition, Home Service USA offered Connecticut Water customers coverage for failure of home plumbing and septic drainage lines.  NEWUS agreed to purchase the right to provide the service to Connecticut Water customers and began offering its own comparable coverage.  As part of the agreement, Home Service USA will not offer its products to Connecticut Water customers for a period of ten years.  The new products offered by NEWUS have been integrated into the Linebacker® program.

During 2010, the Company entered into discussions to sell approximately 175 acres of land to the Town of Plymouth, CT for open space purposes.  The Town was awarded a Watershed and Open Space Grant from the Connecticut Department of Environmental Protection to assist in purchasing the land.  This transaction will allow the Company to receive financial benefit by disposing of property that is no longer needed for public water supply purposes while at the same time supporting environmental stewardship by ensuring the property is permanently maintained as open space.  The Company expects the transaction, if approved by the Town’s residents and the DPUC, to be completed in late 2011 or early 2012.

15

Table of Contents

Regulatory Matters and Inflation

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

Connecticut Water’s ability to recover its increased expenses and/or investment in utility plant is dependent on the rates we charge our customers.  Changes to these rates must be approved by the DPUC through formal rate proceedings.  Due to the subjectivity of certain items involved in the process of establishing rates such as customer usage, future customer growth, inflation, and allowed return on investment, we have no assurance that we will be able to raise our rates to a level we consider appropriate, or to raise rates at all, through any future rate proceeding.

Connecticut Water is also subject to environmental and water quality regulations, which are continually modified and refined to ensure the safety of the Company’s water sources and, ultimately, the public’s health.  Costs to comply with environmental and water quality regulations are substantial.  The costs to comply with future changes in state or federal regulations, which could require us to modify current filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial.  While there can be no guarantee that all expenditures related to increased regulation will be recoverable in rate proceedings, the Company believes that the regulatory environment in Connecticut would allow prudent expenditures to be recovered in rates.  To date, the Company has never had any costs associated with water quality and environmental spending refused in a general rate proceeding.  The Company believes that it is in compliance with current regulations, but the regulations are subject to change at any time.  During 2010, the Company incurred approximately $0.7 million in capital expenditures on Safe Drinking Water Act projects.  The Company expects to spend approximately $1.2 million on Safe Water Drinking Act projects in 2011, primarily to bring newly acquired systems up to the Company’s standards.

Critical Accounting Policies and Estimates

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

Public Utility Regulation – Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 980 “Regulated Operations” (“FASB ASC 980”), requires cost-based, rate-regulated enterprises such as Connecticut Water to reflect the impact of regulatory decisions in their financial statements.  The state regulators, through the rate regulation process, can create regulatory assets that result when costs are allowed for ratemaking purposes in a period after the period in which costs would be charged to expense by an unregulated enterprise.  The balance sheet includes regulatory assets and liabilities as appropriate, primarily related to income taxes and post-retirement benefit costs.  The Company believes, based on current regulatory circumstances, that the regulatory assets recorded are likely to be recovered and that its use of regulatory accounting is appropriate and in accordance with the provisions of FASB ASC 980.

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

Water Activities – Most of our water customers are billed quarterly, with the exception of larger commercial and industrial customers, as well as 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.  Connecticut Water accrues an estimate for metered customers for the amount of revenues earned relating to water delivered but unbilled at the end of each quarter.

Real Estate Transactions – Revenues are recorded when a sale or other transaction has been completed and title to the real estate has been transferred.

Services and Rentals – Revenues are recorded when the Company has delivered the services called for by contractual obligation.

Employee Benefit Plan Accounting – Management evaluates the appropriateness of the discount rate through the modeling of a bond portfolio which approximates the pension and postretirement plan liabilities.  Management further considers rates of high quality corporate bonds of approximate maturities as published by nationally recognized rating agencies consistent with the duration of the Company’s pension and postretirement plans.

The discount rate assumption we use to value our pension and postretirement benefit obligations has a material impact on the amount of expense we record in a given period.  Our 2010 and 2009 pension expense was calculated using assumed discount rates of 5.95% and 6.25%, respectively. Our 2010 and 2009 post-retirement welfare expense was calculated using assumed discount rates of 5.80% and 6.20%, respectively.  In 2011, our pension and postretirement welfare expense will be calculated using assumed discount rates of 5.50% and 5.35%, respectively.  The following table shows how much a one percent change in our assumed discount rate would have changed our reported 2010 pension and postretirement expense:

 	 	Increase (Decrease) in Pension Expense	 	 	Increase (Decrease) in Postretirement Expense	 	
1% Increase in the discount rate	 	$	(370,000	)	 	$	(189,000	)	
1% Decrease in the discount rate	 	$	430,000	 	 	$	229,000	 	

Other assumptions that affect the costs associated with our benefit plans include the assumed rate of return on plan assets and the expected rate of compensation increase.  The Company has assumed an 8% return on plan investments for 2010 and 2009 and a 3.5% and 4.5% rate of compensation increase for our pension and post-retirement welfare plans, in 2010 and 2009, respectively.  The assumed health care trend rate was 10% at December 31, 2010 and 2009, respectively.

16

Table of Contents
 
Outlook

The Company’s earnings and profitability are primarily dependent upon the sale and distribution of water, the amount of which is dependent on seasonal weather fluctuations, particularly during the summer months when water demand will vary with rainfall and temperature levels.  The Company’s earnings and profitability in future years will also depend upon a number of other factors, such as the ability to maintain our operating costs at current or lower levels, customer growth in the Company’s core regulated water utility business, growth in revenues attributable to non-water sales operations, availability and desirability of land no longer needed for water delivery for land sales, and the timing and adequacy of rate relief when requested, from time to time, by our regulated water company.

The Company believes that the factors described above and those described in detail below under the heading “Commitments and Contingencies” may have significant impact, either alone or in the aggregate, on the Company’s earnings and profitability in fiscal years 2011 and beyond.  Please also review carefully the risks and uncertainties described in Item 1A – Risk Factors and those described above under the heading “Special Note Regarding Forward Looking Statements”.

Based upon the outcome of the 2010 rate case, the Company expects Net Income from its Water Activities segment to increase in 2011 over 2010 levels, along with modest growth in its Services and Rentals segment.  During 2011 and subsequent years, the ability of the Company to maintain and increase its Net Income will principally depend upon the effect on the Company of the factors described above in this “Outlook” section, those factors described in the section entitled “Commitments and Contingencies” and the risks and uncertainties described in the “Special Note Regarding Forward-Looking Statements” and Item 1A “Risk Factors”.

FINANCIAL CONDITION
Liquidity and Capital Resources

The Company is not aware of any demands, events, or uncertainties that will result in a decrease of liquidity or a material change in the mix or relative cost of its capital resources, other than those outlined below.

With the implementation of the Company’s new Enterprise Resource Planning (ERP) system, the Company delayed customer billings in order to verify the integrity of the system and the accuracy of those bills prior to mailing.  As a result, some billings and consequently, cash receipts were delayed.  The Company has increased its utilization of its lines of credit during this period.  Its operations, including plans to continue investment in new infrastructure, are not impacted.

The Company has returned to normal billing and collection processes and does not anticipate delays in billing or collection in subsequent periods.  The delay in billing contributed to the increase in the Company’s bad debt expense for the year of approximately $198,000 due to the reserve policy based upon aging of the receivables.  The Company fully anticipates that the reserve will return to more historical levels over the first quarter of 2011.

In November 2008, the Company was authorized by its Board of Directors to increase the available lines of credit from $21 million to $40 million.  On June 30, 2009, the Company let expire one line of credit totaling $6 million and entered into a new $15 million line of credit agreement, which expires on June 25, 2011.  On August 12, 2009, the Company replaced an existing $3 million line of credit with a $10 million line of credit, which expires on August 10, 2011.  Finally, on September 15, 2009, the Company increased a third line of credit from $12 million to $15 million, with an expiration date of June 1, 2011.  The Company expects to renew expiring lines in 2011.  Interim Bank Loans Payable at December 31, 2010 and 2009 was approximately $26.3 million and $25.0 million, respectively, and represents the outstanding aggregate balance on these lines of credit.  As of December 31, 2010, the Company had $13.7 million in unused lines of credit.  Interest expense charged on interim bank loans will fluctuate based on market interest rates.

At December 31, 2010 and 2009, the weighted average interest rates on these short-term borrowings outstanding were 2.33% and 2.23%, respectively.

In 2010, the Company spent $26.2 million on capital projects.  The Company used a combination of its internally generated funds, borrowing under its available lines of credit, and a long term debt issuance to fund this construction budget.  The Company issued $20 million in private activity bonds issued through the Connecticut Development Authority (CDA), for a long term debt issuance in December 2009.  The bonds were issued on December 1, 2009 at five and one-tenth percent and are due December 1, 2039.  The Company recently obtained authorization through the CDA to issue up to $24 million in private activity bonds in 2011.  The Company expects to conduct a bond offering late in 2011 or early in 2012.

Standard and Poor’s, on November 1, 2010, affirmed their 'A' corporate credit rating on the Company with a stable outlook. The affirmation of the corporate credit rating follows their annual review of the Company and incorporates their expectation of adequate and timely rate relief and maintenance of our current financial risk profile. The stable outlook reflects improving regulation and timely rate relief in Connecticut.

The Company offers a dividend reinvestment plan (DRIP) to all registered shareholders, whereby shareholders can elect to have cash dividends directly reinvested into additional shares of the Company’s common stock.  During the years ended December 31, 2010 and 2009, shareholders reinvested $1,358,000 and $1,323,000, respectively, as part of the DRIP.

From 1999 through 2003, the Company issued stock options to certain employees of the Company.  No stock options have been issued by the Company since 2003.  During the year ended December 31, 2010, 14,074 options were exercised resulting in approximately $287,000 in proceeds to the Company.  For the same period in 2009, 17,498 options were exercised resulting in approximately $390,000 in proceeds to the Company.

17

Table of Contents

The following table shows the total construction expenditures excluding non-cash contributed utility plant for each of the last three years and what we expect to invest on construction projects in 2011.

 	 	Gross Construction Expenditures	 	 	Construction Funded by Developers & Others	 	 	Construction Funded by Company	 	
2010	 	$	26,692,000	 	 	$	452,000	 	 	$	26,240,000	 	
2009	 	$	28,349,000	 	 	$	751,000	 	 	$	27,598,000	 	
2008	 	$	20,737,000	 	 	$	860,000	 	 	$	19,877,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
2011 (Projected)	 	$	23,000,000	 	 	 	**	 	 	$	23,000,000	 	

** – The Company cannot predict the amount of construction funded by others.

During 2010, the Company incurred approximately $26.7 million of construction expenditures, including approximately $500,000 funded by developers and others.  The Company financed the expenditures through internally generated funds, long-term debt issuances, proceeds from its dividend reinvestment plan, customers’ advances, contributions in aid of construction and short-term borrowings.

Our Board of Directors has approved a $23.0 million construction budget for 2011, net of amounts to be financed by customer advances and contributions in aid of construction.  The Company will use a combination of its internally generated funds, borrowing under its available lines of credit and, depending on capital market conditions, a long term debt issuance.

As the Company looks forward to 2011 and 2012, it anticipates continued reinvestment to replace aging infrastructure and to seek recovery through periodic WICA applications.  The total cost of that investment is expected to exceed the amount of internally generated funds.  The Company expects that it will require external financing over the next two years.  In order to maintain a balanced capital structure, we expect to consider both debt and equity issuances.  As the capital investment planning process is completed in the coming periods, the Company expects to provide a reasonable range of these potential financings, including the recently obtained authorization of CDA bonds discussed above.

Off-Balance Sheet Arrangements and Contractual Obligations

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

The following table summarizes the Company’s future contractual cash obligations as of December 31, 2010:

Payments due by Periods	 	
(in thousands)	 	

Contractual Obligations	 	 
Total	 	 	Less
than 1
year	 	 	Years
2 and 3	 	 	Years
4 and 5	 	 	More
than 5
years	 	
Long-Term Debt (LTD)	 	$	111,675	 	 	$	--	 	 	$	--	 	 	$	--	 	 	$	111,675	 	
Interest on LTD	 	 	107,296	 	 	 	4,860	 	 	 	9,720	 	 	 	9,720	 	 	 	82,996	 	
Operating Lease Obligations	 	 	536	 	 	 	273	 	 	 	263	 	 	 	--	 	 	 	--	 	
Purchase Obligations (1) (2)	 	 	95,675	 	 	 	1,034	 	 	 	2,051	 	 	 	2,207	 	 	 	90,383	 	
Long-Term Compensation Agreement (3)	 	 	39,622	 	 	 	2,470	 	 	 	4,267	 	 	 	4,258	 	 	 	28,627	 	
Total (4) (5)	 	$	354,804	 	 	$	8,637	 	 	$	16,301	 	 	$	16,185	 	 	$	313,681	 	

(1) Connecticut Water has an agreement with the South Central Connecticut Regional Water Authority (RWA) to purchase water from RWA.  The agreement was signed on April 24, 2006 and will remain in effect for a minimum of fifty (50) years from that date.  Connecticut Water has agreed to purchase a maximum of one million (1,000,000) gallons of water per day from RWA.  The Company is required to pay $75,000 per year for access to this water.
(2) Connecticut Water has an agreement with The Metropolitan District (MDC) to purchase water from MDC.  The agreement became effective on October 6, 2000 for a term of fifty (50) years beginning May 19, 2003, the date the water supply facilities related to the agreement were placed in service.
(3) Pension and post retirement contributions cannot be reasonably estimated beyond 2010 and may be impacted by such factors as return on pension assets, changes in the number of plan participants and future salary increases.  The amounts included for pension and post retirement contributions are management’s best estimate, including the Company’s planned $1.2 million pension contribution in 2011.
(4) We pay refunds on Advances for Construction over a specific period of time based on operating revenues related to developer-installed water mains or as new customers are connected to and take service from such mains.  After all refunds are paid, any remaining balance is transferred to Contributions in Aid of Construction.  The refund amounts are not included in the above table because the refund amounts and timing are dependent upon several variables, including new customer connections, customer consumption levels and future rate increases, which cannot be accurately estimated.  Portions of these refund amounts are payable annually through 2020 and amounts not paid by the contract expiration dates become non-refundable.
(5) We intend to fund these contractual obligations with cash flows from operations and liquidity sources held by or available to us.

18

Table of Contents

RESULTS OF OPERATIONS

Overview of 2010 Results from Operations

Net Income for 2010 was $9,798,000, or $1.14 basic earnings per share, a decrease of $411,000, or $0.06 basic earnings per share, compared to 2009.  The decrease in earnings was principally due to lower net income in our Real Estate and Services and Rentals segments partially offset by higher net income in our Water Activities segment.  Changes in net income for our segments were as follows:

Business Segment	 	2010 Net Income	 	 	2009 Net Income	 	 	Increase (Decrease)	 	
Water Activities	 	$	8,669,000	 	 	$	7,831,000	 	 	$	838,000	 	
Real Estate	 	 	230,000	 	 	 	1,449,000	 	 	 	(1,219,000	)	
Services and Rentals	 	 	899,000	 	 	 	929,000	 	 	 	(30,000	)	
Total	 	$	9,798,000	 	 	$	10,209,000	 	 	$	(411,000	)	

Water Activities

The increase in net income from Water Activities for 2010 over 2009 was $838,000 or 10.7%.  A breakdown of the components of this increase was as follows:

 	 	2010	 	 	2009	 	 	Increase (Decrease)	 	
Operating Revenues	 	$	66,408,000	 	 	$	59,391,000	 	 	$	7,017,000	 	
Operation and Maintenance	 	 	33,105,000	 	 	 	32,181,000	 	 	 	924,000	 	
Depreciation	 	 	7,088,000	 	 	 	6,403,000	 	 	 	685,000	 	
Income Taxes	 	 	5,323,000	 	 	 	2,466,000	 	 	 	2,857,000	 	
Taxes Other than Income Taxes	 	 	6,271,000	 	 	 	5,953,000	 	 	 	318,000	 	
Organizational Review Charge	 	 	786,000	 	 	 	--	 	 	 	786,000	 	
Other Utility Income	 	 	742,000	 	 	 	704,000	 	 	 	38,000	 	
Other Deductions	 	 	(226,000	)	 	 	(784,000	)	 	 	558,000	 	
Interest and Debt Expense (net of AFUDC)	 	 	5,682,000	 	 	 	4,477,000	 	 	 	1,205,000	 	
Total Income from Water Activities	 	$	8,669,000	 	 	$	7,831,000	 	 	$	838,000	 	

Revenues from our water customers increased $7,017,000 or 11.8% to $66,408,000 for the year ended December 31, 2010 when compared to 2009.  The primary reasons for the increased revenues in 2010 were higher water production and consumption and rate increases approved by the DPUC during 2010.
-  	Water production increased by 6.2% for the year ended December 31, 2010.  The increase in production was due to more favorable weather during the second and third quarters of 2010 when compared to the same periods of 2009.  During these two quarters, when the weather is warm and dry, residential customers are more likely to use more water.  During 2009, the Town of Windsor Locks, CT, part of our largest service area, saw 102 days of rain compared to 77 days in 2010.  During the six month period of April through September 2010, the Company’s water production increased by approximately 13%, when compared to the same six month period of 2009.	
-  	During the first six months of 2010, customers were charged a 2.1% cumulative WICA surcharge that was not in effect during 2009.	
-  	Effective July 14, 2010, the WICA surcharge was folded into the Company’s approximate 13% rate increase to customers.	

The factors detailed above led to an increase in revenue from residential customers of $5,632,000 or 15.4%.  Residential customers represent our largest customer class and the group whose usage is most dependent on favorable weather.  For the year ended December 31, 2010, revenues from all other customer classes increased by approximately 10%.  Offsetting the increases described above was a decrease in revenues related to miscellaneous services, interest charged on late payments and turn-on/turn-off charges.

Operation and Maintenance (O&M) expense increased in 2010 by $924,000 due to the following changes in expenses:

Components of O&M	 	2010	 	 	2009	 	 	Increase (Decrease)	 	
Labor	 	$	12,093,000	 	 	$	11,637,000	 	 	$	456,000	 	
Water treatment (including chemicals)	 	 	2,553,000	 	 	 	2,253,000	 	 	 	300,000	 	
Pension costs	 	 	2,010,000	 	 	 	1,718,000	 	 	 	292,000	 	
Post-retirement medical costs	 	 	984,000	 	 	 	725,000	 	 	 	259,000	 	
Vehicle	 	 	1,481,000	 	 	 	1,351,000	 	 	 	130,000	 	
Customer	 	 	1,075,000	 	 	 	947,000	 	 	 	128,000	 	
Utility costs	 	 	3,527,000	 	 	 	3,433,000	 	 	 	94,000	 	
Regulatory commission expense	 	 	301,000	 	 	 	324,000	 	 	 	(23,000	)	
Other employee benefit costs	 	 	351,000	 	 	 	414,000	 	 	 	(63,000	)	
Outside services	 	 	1,404,000	 	 	 	1,590,000	 	 	 	(186,000	)	
Medical expense	 	 	1,714,000	 	 	 	2,220,000	 	 	 	(506,000	)	
Other	 	 	5,612,000	 	 	 	5,569,000	 	 	 	43,000	 	
Total O&M Expense	 	$	33,105,000	 	 	$	32,181,000	 	 	$	924,000	 	

19

Table of Contents
 
Operation and Maintenance costs for the year ended December 31, 2010 saw an increase of 2.9%, primarily due to items as follows:
-  	Labor costs increased in 2010 primarily due to a larger component of 2009 labor costs being capitalized as part of the implementation of a new Enterprise Resource Planning (ERP) system;	
-  	Water treatment costs increased due to higher costs associated with laboratory testing and waste disposal.  Additionally, the costs of chemicals increased when compared to 2009 due to higher prices and an increase in water production;	
-  	Pension and post-retirement medical costs increased due primarily to a decrease in the discount rate used to determine the future liabilities of the plans and, partially, to a decline in the market value of the plans’ assets in prior periods; and	
-  	Customer costs increased due to higher bad debt expense.  This was driven by a higher Accounts Receivable balance at December 31, 2010, when compared to 2009, due to higher consumption and higher rates in effect during the second half of 2010 and due to an increase in accounts receivable aged over 180 days, due in part to employees focusing on bill integrity with the implementation of the ERP system in the first quarter of 2010.  These increases to Customer costs were partially offset by a decrease in customer communication and postage costs.	

The increases in O&M discussed above were partially offset by the following decreases:
-  	Outside services decreased due to a reduction in legal fees associated with the favorable resolution of an on-going legal matter in our Unionville decision during 2010 and a reduction in temporary labor used as part of cost containment; and	
-  	Medical costs decreased 23% due to a reduction in claims and administrative expense as well as an increase in the amount contributed by employees through payroll deductions.  While the Company has taken steps to manage its medical costs by offering a wider variety of plans, including a high-deductible health plan, and passing some cost increases on to employees, it is difficult to project future costs as they are primarily dependant on claims made by employees in any given year.	

The Company’s Depreciation expense increased $685,000 or 10.7% from 2009 to 2010.  The primary driver of the increase in Depreciation expense is a higher Utility Plant balance in 2010.  A portion of this higher Utility Plant balance is related to the implementation of the Company’s new ERP system that went into service in the first quarter of 2010 which is depreciated at a higher rate than our typical water delivery infrastructure.  The Company’s prior ERP system was fully depreciated prior to the implementation of the new system.

The increase in Income Tax expense associated with the Water Activities segment of $2,857,000 was due primarily to higher pre-tax income and a higher effective income tax rate in 2010 when compared to 2009.  The drivers of the higher effective tax rate are decreases to flow through timing differences, including planned pension contributions, and the utilization of state tax credits associated with infrastructure investment made by the Company.

The increase in Taxes Other Than Income Taxes was primarily due to both higher payroll tax and property taxes due to higher utility plant balances.

As described above, the Company underwent an organizational review in July 2010.  The Company experienced a one-time third quarter of 2010 charge associated with the organizational reviews of $786,000.  The majority of that charge, approximately $583,000, related to severance packages offered to the employees affected by this review.  The remainder was split among fees related to legal and out-placement services and costs associated with the accelerated vesting of certain executive benefits.  As of December 31, 2010, all payments related to the organizational review have been made.  The Company expects that the Organizational Review undertaken during 2010 will provide savings in future periods related to labor and employee benefit expenses.

The decrease in Other Deductions was primarily due to lower executive employee benefit costs in 2010 when compared to the same period in 2009.

Interest and Debt Expense increased primarily due to the issuance of $20 million of debt in December 2009.

Real Estate

While the Company did not complete any land transactions during the year ending December 31, 2010, adjustments were made to valuation allowances recorded in earlier years which produced Net Income of $230,000 in 2010.  Through land donations and discount land sales in previous years, the Company earned tax credits to use in future years.  The Company is limited by time and the amount of taxable income when using these credits.  Each year, the Company assesses its ability to use these credits going forward and makes adjustments to its valuation allowances, accordingly.

During 2009, the Company completed the sale of a conservation easement to the Town of Windsor Locks, CT for $2 million.  The transaction generated $1.2 million in net income for the Company.  The Company also adjusted tax valuation allowances associated with land donations made in previous years generating approximately $207,000 in net income in the Real Estate segment in 2009.  Additionally, Chester Realty, sold a rental property in Killingly, CT during the third quarter of 2009, generating a small profit.

Income from the Real Estate segment is largely dependent on the tax deductions received on donations and, or, sales of available land.  This typically occurs when utility-owned land is deemed to be unnecessary to protect water sources.  The Company plans to continue to utilize land donations and sales in 2011, and beyond, to generate income for this segment of our business, including the potential sale of land to the Town of Plymouth discussed above.

Services and Rentals

Net income generated from the Services and Rental segment decreased in 2010 by $30,000, over 2009 levels, while earnings per basic share remained flat.  The decreased net income was primarily due to increases in general and administrative expenses in 2010.

20

Table of Contents
 
Overview of 2009 Results from Operations

Net Income for 2009 was $10,209,000, or $1.20 basic earnings per share, an increase of $785,000, or $0.08 basic earnings per share, compared to 2008.  The increase in earnings was due to higher net income in our Real Estate and Services and Rentals segments partially offset by decreases in net income in our Water Activities segment.  Changes in net income for our segments were as follows:

Business Segment	 	2009 Net Income	 	 	2008 Net Income (Loss)	 	 	Increase (Decrease)	 	
Water Activities	 	$	7,831,000	 	 	$	8,794,000	 	 	$	(963,000	)	
Real Estate	 	 	1,449,000	 	 	 	(160,000	)	 	 	1,609,000	 	
Services and Rentals	 	 	929,000	 	 	 	790,000	 	 	 	139,000	 	
Total	 	$	10,209,000	 	 	$	9,424,000	 	 	$	785,000	 	

Water Activities

The decrease in net income from Water Activities for 2009 over 2008 results was $963,000.  A breakdown of the components of this decrease was as follows:

 	 	2009	 	 	2008	 	 	Increase (Decrease)	 	
Operating Revenues	 	$	59,391,000	 	 	$	61,270,000	 	 	$	(1,879,000	)	
Operation and Maintenance	 	 	32,181,000	 	 	 	31,877,000	 	 	 	304,000	 	
Depreciation	 	 	6,403,000	 	 	 	6,438,000	 	 	 	(35,000	)	
Income Taxes	 	 	2,466,000	 	 	 	3,518,000	 	 	 	(1,052,000	)	
Taxes Other than Income Taxes	 	 	5,953,000	 	 	 	6,041,000	 	 	 	(88,000	)	
Other Utility Income	 	 	704,000	 	 	 	579,000	 	 	 	125,000	 	
Other Deductions	 	 	(784,000	)	 	 	(143,000	)	 	 	(641,000	)	
Interest and Debt Expense (net of AFUDC)	 	 	4,477,000	 	 	 	5,038,000	 	 	 	(561,000	)	
Total Income from Water Activities	 	$	7,831,000	 	 	$	8,794,000	 	 	$	(963,000	)	

Revenues from our water customers declined $1,879,000 or 3.1% to $59,391,000 for the year ended December 31, 2009.  Specific details of the decline in revenue are as follows:

-   	On July 1, 2009, the Company’s first WICA surcharge and the voluntarily enacted rate decrease, became effective.  The net effect of these two new items on customers’ bills was a decrease to operating revenue of approximately $287,000, or approximately 15% of the total year over year decrease in customer revenues.  WICA charges will continue to appear on customer’s bills until the Company’s next general rate case, including increases to WICA charges between cases, while the rate reduction was eliminated on January 1, 2010.	
-  	Water production for the year ended December 31, 2009 decreased by 4%.  A portion of this decline was related to lower residential demand due to the extremely wet and cool weather experienced in the second quarter of 2009.  In addition, our residential customers continued the declining usage throughout 2009.	
-  	Industrial revenues decreased by $363,000, or 20%, to $1,459,000 when compared to 2008, primarily due to the economic downturn affecting companies in our service regions.  A portion of the decrease was due to industrial customers cutting back on shifts and other budget cuts.	
-  	Partially offsetting the declining usage described above, was the implementation of the second phase of the Company’s 2006 rate increase that was effective April 1, 2008.  As a result, the first quarter of 2009 included an increase of rates of approximately 4.5% that was not included in rates in the first quarter of 2008.	
-  	The January 2009 acquisition of Ellington Acres added approximately $261,000 in new revenues from the additional customers served.	

The $304,000, or 1.0%, increase in Operation and Maintenance (O&M) expense was due to the following changes in expenses:

Components of O&M	 	2009	 	 	2008	 	 	Increase (Decrease)	 	
Medical expense	 	$	2,220,000	 	 	$	1,477,000	 	 	$	743,000	 	
Pension costs	 	 	1,718,000	 	 	 	1,258,000	 	 	 	460,000	 	
Water treatment (including chemicals)	 	 	2,253,000	 	 	 	2,051,000	 	 	 	202,000	 	
Other employee benefit costs	 	 	414,000	 	 	 	269,000	 	 	 	145,000	 	
Purchased water	 	 	1,121,000	 	 	 	993,000	 	 	 	128,000	 	
Property and Liability Insurance	 	 	1,119,000	 	 	 	993,000	 	 	 	126,000	 	
Customer	 	 	947,000	 	 	 	826,000	 	 	 	121,000	 	
Vehicle	 	 	1,351,000	 	 	 	1,442,000	 	 	 	(91,000	)	
Utility costs	 	 	3,433,000	 	 	 	3,534,000	 	 	 	(101,000	)	
Labor	 	 	11,637,000	 	 	 	11,935,000	 	 	 	(298,000	)	
Post-retirement medical costs	 	 	725,000	 	 	 	1,565,000	 	 	 	(840,000	)	
Other	 	 	5,243,000	 	 	 	5,534,000	 	 	 	(291,000	)	
Total O&M Expense	 	$	32,181,000	 	 	$	31,877,000	 	 	$	304,000	 	

Operation and Maintenance costs for the year ended December 31, 2009 increased 1.0%, when compared to the prior year, largely due to the employee focus on capital projects, both administrative and field related.  The primary administrative capital project is the implementation of the ERP system the Company began implementing in 2008.  The ERP system updated the Company’s accounting and customer information systems, as well as other improvements to our Information Technology.  Medical expenses increased primarily due to an increase in medical claims filed by employees, partially offset by an increase in the amount contributed by employees.  Pension costs increased primarily due to an increase to the discount rate.  Water treatment costs increased primarily due to an increase in the cost of key chemicals, despite a decrease in water production when compared to prior year.  The increase in other employee benefits relates primarily to increases in stock-based compensation costs for executives and increased expenses related to the Company’s 401(k) plan.  Purchased water costs increased in the period primarily due to an increase in water purchased in our Unionville and Mansfield systems, off-set by a reduction in purchased water costs in Naugatuck.  Additionally, the Company negotiated a reduction of bills related to 2007 purchased water that the Company realized as a reduction of expense in the first quarter of 2008.  During 2009, the Company was billed for water as it was purchased from neighboring utilities at the negotiated rates.  Insurance costs increased over 2008 levels due to an increase in the Company’s general liability premiums.  The Company saw an increase in its customer costs due to increases in uncollectible accounts and to an increase in customer communication costs.

21

Table of Contents

The increases to Operation and Maintenance expense discussed above were partially offset by the following decreases to expense.  The largest driver of decreased vehicle costs during 2009 was a reduction in fuel costs.  The Company saw a decrease in utility costs primarily due to decreased communication charges and lower electricity costs.  Labor costs have decreased compared to 2008 due to a large number of ongoing capital projects, including the implementation of the ERP system, where approximately 25% of our employees spent a portion of their time directly participating in the design and implementation of the new system.  For the year ended December 31, 2009, approximately $757,000 in Labor costs were related to the ERP system and not part of O&M expense.  Post-retirement medical costs decreased over 2008 levels due to changes in plan benefits.

The Company saw a slight decrease in its Depreciation expense from 2008 to 2009.  A higher utility plant in service balance and a large amount of capital projects during 2009 increased depreciation expense, however those increases were offset by the reduction in depreciation rates that resulted in a temporary reduction in rates for customers.  Additionally, the Company benefited from the amortization of the acquisition adjustment, as allowed by the DPUC, related to the acquisition of the assets of Birmingham Utilities’ Eastern Division (“Eastern”) in 2008.

The decrease in Income Tax expense associated with the Water Activities segment of $1,052,000 was due primarily to a lower effective income tax rate in 2009 when compared to 2008 and lower pre-tax income on Water Activities.  The drivers of the lower effective tax rate are increases to flow through timing differences, including planned pension contributions, and the utilization of state tax credits associated with infrastructure investment made by the Company.

The decrease in Taxes Other Than Income Taxes was primarily due to both lower payroll tax and property taxes due to a resolution of property tax liability related to the acquisition of Eastern in 2008.

The increase in Other Utility Operating Income was due to higher revenues generated from antenna sites on our utility property leased to telecommunication companies.

The increase in Other Deductions was primarily due to higher executive employee benefit costs in 2009 than during the same period in 2008.  The Company’s Supplemental Executive Retirement Plan (SERP) expense increased in part due to the decision by the Company in 2009 to characterize the individual SERP contracts, which were accounted for under APB 12, as a plan, now accounted for under FASB ASC 715 “Compensation – Retirement Benefits”.

Interest and Debt Expense decreased due to interest rates on our variable rate debt being lower throughout 2009 than 2008.  The Company expects interest expense to increase during 2010 due to the December 2009 debt issuance.

Real Estate

During 2009, the Company completed the sale of a conservation easement to the Town of Windsor Locks, CT for $2 million.  The transaction generated $1.2 million in net income for the Company.  Through land donations and discount land sales in previous years, the Company earned tax credits to use in future years.  The Company is limited by time and the amount of taxable income when using these credits.  Each year, the Company assesses its ability to use these credits going forward and makes adjustments to its valuation allowances, accordingly.  During 2009, the Company also adjusted tax valuation allowances associated with land donations made in previous years generating approximately $207,000 in net income in the Real Estate segment.  Additionally, Chester Realty, sold a rental property in Killingly, CT during the third quarter of 2009, generating a small profit.

While the Company did not complete any real estate transactions in 2008, an adjustment to the valuation allowances recorded in earlier years negatively impacted net income in 2008 by $160,000.

Income from the Real Estate segment is largely dependent on the tax deductions received on donations and, or, sales of available land.  This typically occurs when utility-owned land is deemed to be not necessary to protect water sources.  The Company plans to continue to utilize land donations and sales in 2010, and beyond, to generate income for this segment of our business.

Services and Rentals

Net income generated from the Services and Rental segment increased in 2009 by $139,000, over 2008 levels, with a $0.02 increase to basic earnings per share.  The increased net income was primarily due to decreases in general and administrative expenses and higher margins realized on individual management contracts in 2009.

22

Table of Contents
 
COMMITMENTS AND CONTINGENCIES

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

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

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

Rate Relief – Connecticut Water is a regulated public utility, which provides water services to its customers.  The rates that regulated companies charge their water customers are subject to the jurisdiction of the regulatory authority of the DPUC.  Connecticut Water’s allowed rate of return on equity and return on rate base are currently 9.75% and 7.32%, respectively.

In 2007, the State of Connecticut adopted legislation which permits regulated water companies to recapture money spent on eligible infrastructure improvements without a full rate case proceeding.  The DPUC may authorize regulated water companies to use a rate adjustment mechanism, such as a Water Infrastructure and Conservation Adjustment (WICA), for eligible projects completed and in service for the benefit of the customers.  Regulated water companies may only charge customers such an adjustment to the extent allowed by the DPUC based on a water company’s infrastructure assessment report, as approved by the DPUC and upon semiannual filings which reflect plant additions consistent with such report.

Land Dispositions – The Company and its subsidiaries own additional parcels of land in Connecticut, which may be suitable in the future for disposition, either by sale or by donation to municipalities, other local governments or private charitable entities.  These additional parcels would include certain Class I and II parcels previously identified for long term conservation by the Connecticut DEP, which have restrictions on development and resale based on provisions of the Connecticut General Statutes.

The Company is currently in discussions to sell approximately 175 acres to the Town of Plymouth, CT for open space purposes.  The Company expects the transaction, if approved by the Town’s residents and the DPUC, to be completed in late 2011 or early 2012.

Capital Expenditures – The Company has received approval from its Board of Directors to spend $23.0 million on capital expenditures in 2011, in part due to increased spending primarily for infrastructure improvements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The primary market risk faced by the Company is interest rate risk. As of December 31, 2010, the Company had no exposure to derivative financial instruments or financial instruments with significant credit risk or off-balance-sheet risks.  In addition, the Company is not subject in any material respect to any currency or other commodity risk.

The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company's exposure to interest fluctuations is managed at the Company and subsidiary operations levels through the use of a combination of fixed rate long-term debt (and variable rate borrowings) under financing arrangements entered into by the Company and its subsidiaries and the use of the interest rate swap agreement discussed below.  In November 2008, the Company was authorized by its Board of Directors to increase the available lines of credit from $21 million to $40 million.  On June 30, 2009, the Company let expire one line of credit totaling $6 million and entered into a new $15 million line of credit agreement, which expires on June 25, 2011.  On August 12, 2009, the Company replaced an existing $3 million line of credit with a $10 million line of credit, which expires on August 10, 2011.  Finally, on September 15, 2009, the Company increased a third line of credit from $12 million to $15 million, with an expiration date of June 1, 2011.  Interim Bank Loans Payable at December 31, 2010 and 2009 was approximately $26.3 million and $25.0 million, respectively, and represents the outstanding aggregate balance on these lines of credit.  Interest expense charged on interim bank loans will fluctuate based on market interest rates.

During the first quarter of 2004, Connecticut Water entered into a five-year interest rate swap transaction in connection with the refunding of its First Mortgage Bonds (Series V).   The swap agreement provides for Connecticut Water’s exchange of floating rate interest payment obligations for fixed rate interest payment obligations on a notional principal amount of $12,500,000.  The purpose of the interest rate swap was to manage the Company’s exposure to fluctuations in prevailing interest rates.  The interest rate swap expired on March 3, 2009.  The Company does not enter into derivative financial contracts for trading or speculative purposes and does not use leveraged instruments.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of Connecticut Water Service, Inc., and the Notes to Consolidated Financial Statements together with the report of PricewaterhouseCoopers LLP, independent registered public accounting firm are included herein on pages F-2 through F-23.

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

None

23

Table of Contents
 
ITEM 9A.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures – As of December 31, 2010, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)).  Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

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

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.  We have used the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in conducting our evaluation of the effectiveness of the internal control over financial reporting.  Based on our evaluation, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.  The effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

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

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

During the first quarter of 2010, the Company implemented a new Enterprise Resource Planning (ERP) system.  The implementation of the ERP system involved changes to certain internal controls over financial reporting.  Management has reviewed and evaluated the design of key controls in the new ERP system and the accuracy of the data conversion that took place during the implementation and did not identify a control deficiency or combination of control deficiencies that management believes meet the definition of a material weakness in internal control over financial reporting.  There is a risk such control deficiencies may exist that have not yet been identified and that could constitute, individually or in combination, a material weakness.  Management will continue to evaluate the operating effectiveness of related key controls during subsequent periods.

ITEM 9B.  OTHER INFORMATION

None
PART III

Pursuant to General Instruction G(3), the information called for by Items 10, 11, 12, 13 and 14 is hereby incorporated by reference to the Company’s definitive proxy statement to be filed on EDGAR on or about March 31, 2011.  Certain information concerning the executive officers of the Company is included in Item 1 of this report.

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11.  EXECUTIVE COMPENSATION

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

 
24

Table of Contents

PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)	 	 	1.	 	Financial Statements:	 	 	 	
 	 	 	 	 	The report of independent registered public accounting firm and the Company’s Consolidated Financial Statements listed in the Index to Consolidated Financial Statements on page F-1 hereof are filed as part of this report, commencing on page F-2	 	
 	 	 	 	 	 	 	Page	 	
 	 	 	 	 	Index to Consolidated Financial Statements and Schedule	 	 	F-1	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Report of Independent Registered Pubic Accounting Firm	 	 	F-2	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008	 	 	F-3	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008	 	 	F-3	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Consolidated Balance Sheets at December 31, 2010 and 2009	 	 	F-4	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008	 	 	F-5	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Notes to Consolidated Financial Statements	 	 	F-6	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	2.	 	Financial Statement Schedule:	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	The following schedule of the Company is included on the attached page as indicated	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Schedule II Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2010, 2009 and 2008	 	 	S-1	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	All other schedules provided for in the applicable regulations of the Securities and Exchange Commission have been omitted because of the absence of conditions under which they are required or because the required information is set forth in the financial statements or notes thereto.	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
(b)	 	 	 	 	Exhibits	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Exhibits for Connecticut Water Service Inc, are in the Index to Exhibits	 	 	E-1	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Exhibits heretofore filed with the Securities and Exchange Commission as indicated below are incorporated herein by reference and made a part hereof as if filed herewith.  Exhibits marked by asterisk (*) are being filed herewith.	 	 	 	 	

 
25

Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

 	 	Page	 	
Index to Consolidated Financial Statements and Schedule	 	 	F-1	 	
 	 	 	 	 	
Report of Independent Registered Pubic Accounting Firm	 	 	F-2	 	
 	 	 	 	 	
Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008	 	 	F-3	 	
 	 	 	 	 	
Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008	 	 	F-3	 	
 	 	 	 	 	
Consolidated Balance Sheets at December 31, 2010 and 2009	 	 	F-4	 	
 	 	 	 	 	
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008	 	 	F-5	 	
 	 	 	 	 	
Notes to Consolidated Financial Statements	 	 	F-6	 	
 	 	 	 	 	
Schedule II – Valuation Accounts	 	 	S-1	 	

 
F-1

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Connecticut Water Service, Inc.:
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of comprehensive income present fairly, in all material respects, the financial position of Connecticut Water Service, Inc. and its subsidiaries (the “Company”) at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.  Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 
 
/s/  PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
March 11, 2011

F-2

Table of Contents
CONNECTICUT WATER SERVICE, INC.

CONSOLIDATED STATEMENTS OF INCOME	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
For the Years Ended December 31, (in thousands, except per share data)	 	2010	 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	$	66,408	 	 	$	59,391	 	 	$	61,270	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Expenses	 	 	 	 	 	 	 	 	 	 	 	 	
   Operation and Maintenance	 	 	33,105	 	 	 	32,181	 	 	 	31,877	 	
   Depreciation	 	 	7,088	 	 	 	6,403	 	 	 	6,438	 	
   Income Taxes	 	 	5,323	 	 	 	2,466	 	 	 	3,518	 	
   Taxes Other Than Income Taxes	 	 	6,271	 	 	 	5,953	 	 	 	6,041	 	
   Orgainizational Review Charge	 	 	786	 	 	 	--	 	 	 	--	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
       Total Operating Expenses	 	 	52,573	 	 	 	47,003	 	 	 	47,874	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Operating Revenues	 	 	13,835	 	 	 	12,388	 	 	 	13,396	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Other Utility Income, Net of Taxes	 	 	742	 	 	 	704	 	 	 	579	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Utility Operating Income	 	 	14,577	 	 	 	13,092	 	 	 	13,975	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Other Income (Deductions), Net of Taxes	 	 	 	 	 	 	 	 	 	 	 	 	
   Gain (Loss) on Real Estate Transactions	 	 	230	 	 	 	1,449	 	 	 	(160	)	
   Non-Water Sales Earnings	 	 	899	 	 	 	929	 	 	 	790	 	
   Allowance for Funds Used During Construction	 	 	171	 	 	 	267	 	 	 	160	 	
   Other	 	 	(226	)	 	 	(784	)	 	 	(143	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
       Total Other Income (Deductions), Net of Taxes	 	 	1,074	 	 	 	1,861	 	 	 	647	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest and Debt Expenses	 	 	 	 	 	 	 	 	 	 	 	 	
   Interest on Long-Term Debt	 	 	4,628	 	 	 	3,937	 	 	 	4,241	 	
   Other Interest Charges	 	 	784	 	 	 	393	 	 	 	560	 	
   Amortization of Debt Expense	 	 	441	 	 	 	414	 	 	 	397	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
       Total Interest and Debt Expenses	 	 	5,853	 	 	 	4,744	 	 	 	5,198	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	 	9,798	 	 	 	10,209	 	 	 	9,424	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Preferred Stock Dividend Requirement	 	 	38	 	 	 	38	 	 	 	38	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Net Income Applicable to Common Stock	 	$	9,760	 	 	$	10,171	 	 	$	9,386	 	

Weighted Average Common Shares Outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	
   Basic	 	 	8,532	 	 	 	8,448	 	 	 	8,377	 	
   Diluted	 	 	8,633	 	 	 	8,523	 	 	 	8,430	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings Per Common Share:	 	 	 	 	 	 	 	 	 	 	 	 	
   Basic	 	$	1.14	 	 	$	1.20	 	 	$	1.12	 	
   Diluted	 	$	1.13	 	 	$	1.19	 	 	$	1.11	 	

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
For the Years Ended December 31, (in thousands)	 	 	2010	 	 	 	2009	 	 	 	2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income Applicable to Common Stock	 	$	9,760	 	 	$	10,171	 	 	$	9,386	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Other Comprehensive Income, net of tax	 	 	 	 	 	 	 	 	 	 	 	 	
   Qualified cash flow hedging instrument net of tax (benefit) expense	 	 	 	 	 	 	 	 	 	 	 	 	
      of $(1), $48, and $(52) in 2010, 2009, and 2008, respectively	 	 	3	 	 	 	4	 	 	 	(81	)	
   Adjustment to post-retirement benefit plans, net of tax expense	 	 	 	 	 	 	 	 	 	 	 	 	
      (benefit) of $12, $(49) and $(189) in 2010, 2009 and 2008, respectively	 	 	16	 	 	 	(140	)	 	 	(296	)	
   Unrealized Investment loss, net of tax expense (benefit) of $30,	 	 	47	 	 	 	247	 	 	 	(254	)	
      $(158) and $(162) in 2010, 2009 and 2008, respectively	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive Income	 	$	9,826	 	 	$	10,282	 	 	$	8,755	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of these consolidated financial statements.	 	 	 	 	 	 	 	 	 	 	 	 	

 
F-3

Table of Contents
CONNECTICUT WATER SERVICE, INC.

CONSOLIDATED BALANCE SHEETS	 	 	 	 	 	 	 	

December 31, (in thousands, except share amounts)	 	 	2010	 	 	2009	 	
 	 	 	 	 	 	 	 	
ASSETS	 	 	 	 	 	 	 	
Utility Plant	 	 	$	467,589	 	 	$	441,412	 	
Construction Work in Progress	 	 	 	4,013	 	 	 	6,751	 	
 	 	 	 	471,602	 	 	 	448,163	 	
Accumulated Provision for Depreciation	 	 	 	(127,383	)	 	 	(122,961	)	
Net Utility Plant	 	 	 	344,219	 	 	 	325,202	 	
Other Property and Investments	 	 	 	5,568	 	 	 	5,513	 	
Cash and Cash Equivalents	 	 	 	952	 	 	 	5,437	 	
Accounts Receivable (Less Allowance, 2010 - $1,061; 2009 - $472)	 	 	 	10,135	 	 	 	6,502	 	
Accrued Unbilled Revenues	 	 	 	6,344	 	 	 	5,416	 	
Materials and Supplies, at Average Cost	 	 	 	1,248	 	 	 	1,136	 	
Prepayments and Other Current Assets	 	 	 	1,749	 	 	 	1,471	 	
Total Current Assets	 	 	 	20,428	 	 	 	19,962	 	
Restricted Cash	 	 	 	1,226	 	 	 	12,697	 	
Unamortized Debt Issuance Expense	 	 	 	7,334	 	 	 	7,766	 	
Unrecovered Income Taxes	 	 	 	24,696	 	 	 	25,649	 	
Pension Benefits	 	 	 	6,296	 	 	 	6,897	 	
Post-Retirement Benefits Other Than Pension	 	 	 	5,451	 	 	 	2,496	 	
Goodwill	 	 	 	3,608	 	 	 	3,608	 	
Deferred Charges and Other Costs	 	 	 	6,385	 	 	 	5,486	 	
Total Regulatory and Other Long-Term Assets	 	 	 	54,996	 	 	 	64,599	 	
Total Assets	 	 	$	425,211	 	 	$	415,276	 	
 	 	 	 	 	 	 	 	 	 	
CAPITALIZATION AND LIABILITIES	 	 	 	 	 	 	 	 	 	
Common Stockholders' Equity:	 	 	 	 	 	 	 	 	 	
Common Stock Without Par Value:	 	 	 	 	 	 	 	 	 	
Authorized - 25,000,000 Shares - Issued and Outstanding:	 	 	 	 	 	 	 	 	 	
 	2010 - 8,676,849; 2009 - 8,573,744	 	 	$	70,024	 	 	$	67,286	 	
Retained Earnings	 	 	 	43,603	 	 	 	41,785	 	
Accumulated Other Comprehensive Income	 	 	 	(436	)	 	 	(502	)	
Common Stockholders' Equity	 	 	 	113,191	 	 	 	108,569	 	
Preferred Stock	 	 	 	772	 	 	 	772	 	
Long-Term Debt	 	 	 	111,675	 	 	 	111,955	 	
Total Capitalization	 	 	 	225,638	 	 	 	221,296	 	
Interim Bank Loans Payable	 	 	 	26,342	 	 	 	25,000	 	
Accounts Payable and Accrued Expenses	 	 	 	6,552	 	 	 	6,538	 	
Accrued Taxes	 	 	 	598	 	 	 	18	 	
Accrued Interest	 	 	 	993	 	 	 	954	 	
Other Current Liabilities	 	 	 	617	 	 	 	546	 	
Total Current Liabilities	 	 	 	35,102	 	 	 	33,056	 	
Advances for Construction	 	 	 	36,719	 	 	 	39,543	 	
Contributions in Aid of Construction	 	 	 	55,761	 	 	 	52,072	 	
Deferred Federal and State Income Taxes	 	 	 	34,246	 	 	 	32,454	 	
Unfunded Future Income Taxes	 	 	 	19,474	 	 	 	20,451	 	
Long-Term Compensation Arrangements	 	 	 	16,747	 	 	 	14,898	 	
Unamortized Investment Tax Credits	 	 	 	1,376	 	 	 	1,437	 	
Other Long-Term Liabilities	 	 	 	148	 	 	 	69	 	
Commitments and Contingencies	 	 	 	 	 	 	 	 	 	
Total Capitalization and Liabilities	 	 	$	425,211	 	 	$	415,276	 	
 	 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of these consolidated financial statements.	 	 	 	 	 	

 
F-4

Table of Contents
CONNECTICUT WATER SERVICE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
For the Years Ended December 31,  (in thousands)	 	2010	 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	 	
Operating Activities:	 	 	 	 	 	 	 	 	 	
  Net Income	 	$	9,798	 	 	$	10,209	 	 	$	9,424	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
  Adjustments to Reconcile Net Income to Net Cash	 	 	 	 	 	 	 	 	 	 	 	 	
    Provided by Operating Activities:	 	 	 	 	 	 	 	 	 	 	 	 	
        Deferred Revenues	 	 	239	 	 	 	527	 	 	 	(777	)	
        Allowance for Funds Used During Construction	 	 	(171	)	 	 	(238	)	 	 	(123	)	
        Depreciation (including $806 in 2010, $763 in 2009,	 	 	 	 	 	 	 	 	 	 	 	 	
            and $642 in 2008 charged to other accounts)	 	 	7,894	 	 	 	7,166	 	 	 	7,080	 	
        Change in Assets and Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
            (Increase) Decrease in Accounts Receivable and Accrued Unbilled Revenues	 	 	(4,561	)	 	 	175	 	 	 	(974	)	
            (Increase) Decrease in Other Current Assets	 	 	(380	)	 	 	328	 	 	 	204	 	
            Decrease (Increase) in Other Non-Current Items, net	 	 	968	 	 	 	551	 	 	 	(146	)	
            Increase (Decrease) in Accounts Payable, Accrued	 	 	 	 	 	 	 	 	 	 	 	 	
                 Expenses and Other Current Liabilities	 	 	1,272	 	 	 	438	 	 	 	(879	)	
            Increase in Deferred Income Taxes and Investment Tax Credits, Net	 	 	1,708	 	 	 	1,575	 	 	 	1,878	 	
               Total Adjustments	 	 	6,969	 	 	 	10,522	 	 	 	6,263	 	
               Net Cash and Cash Equivalents Provided by Continuing Operations	 	 	16,767	 	 	 	20,731	 	 	 	15,687	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Investing Activities:	 	 	 	 	 	 	 	 	 	 	 	 	
    Company Financed Additions to Utility Plant	 	 	(26,240	)	 	 	(27,598	)	 	 	(19,877	)	
    Advances from Others for Construction	 	 	(281	)	 	 	(513	)	 	 	(737	)	
     Net Additions to Utility Plant Used in Continuing Operations	 	 	(26,521	)	 	 	(28,111	)	 	 	(20,614	)	
     Purchase of water systems, net of cash acquired	 	 	(297	)	 	 	(1,469	)	 	 	(3,500	)	
     Purchase of customer contracts	 	 	(900	)	 	 	--	 	 	 	--	 	
     Release of Restricted Cash	 	 	11,460	 	 	 	--	 	 	 	8,393	 	
               Net Cash and Cash Equivalents Used in Investing Activities in Continuing Operations	 	 	(16,258	)	 	 	(29,580	)	 	 	(15,721	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Financing Activities:	 	 	 	 	 	 	 	 	 	 	 	 	
  Net Proceeds from Interim Bank Loans	 	 	26,342	 	 	 	25,000	 	 	 	12,074	 	
  Net Repayment of Interim Bank Loans	 	 	(25,000	)	 	 	(12,074	)	 	 	(6,459	)	
  Repayment of Long-Term Debt Including Current Portion	 	 	(280	)	 	 	(280	)	 	 	(57	)	
  Proceeds from Issuance of Long-Term Debt	 	 	--	 	 	 	6,903	 	 	 	--	 	
  Proceeds from Issuance of Common Stock	 	 	1,358	 	 	 	1,323	 	 	 	1,281	 	
  Proceeds from Exercise of Stock Options	 	 	287	 	 	 	390	 	 	 	218	 	
  Costs Incurred to Issue Long-Term Debt and Common Stock	 	 	(2	)	 	 	(464	)	 	 	(2	)	
  Advances from Others for Construction	 	 	281	 	 	 	513	 	 	 	737	 	
  Cash Dividends Paid	 	 	(7,980	)	 	 	(7,709	)	 	 	(7,411	)	
          Net Cash and Cash Equivalents (Used in) Provided by Financing Activities	 	 	(4,994	)	 	 	13,602	 	 	 	381	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Increase (Decrease) in Cash and Cash Equivalents	 	 	(4,485	)	 	 	4,753	 	 	 	347	 	
Cash and Cash Equivalents at Beginning of Year	 	 	5,437	 	 	 	684	 	 	 	337	 	
Cash and Cash Equivalents at End of Year	 	$	952	 	 	$	5,437	 	 	$	684	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-Cash Investing and Financing Activities:	 	 	 	 	 	 	 	 	 	 	 	 	
      Non-Cash Contributed Utility Plant (see Note 1 for details)	 	$	707	 	 	$	1,664	 	 	$	4,089	 	
      Short-term Investment of Bond Proceeds Held in Trust	 	$	1,226	 	 	$	12,697	 	 	$	--	 	
Supplemental Disclosures of Cash Flow Information:	 	 	 	 	 	 	 	 	 	 	 	 	
  Cash Paid for Continuing Operations During the Year for:	 	 	 	 	 	 	 	 	 	 	 	 	
    Interest	 	$	5,478	 	 	$	4,366	 	 	$	4,876	 	
    State and Federal Income Taxes	 	$	3,814	 	 	$	2,907	 	 	$	3,273	 	

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

 
F-5

Table of Contents
CONNECTICUT WATER SERVICE, INC.

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”)
Chester Realty, Inc. (“Chester Realty”)
New England Water Utility Services, Inc. (“NEWUS”)
Barnstable Holding Company (“Barnstable Holding”)

Connecticut Water is our sole public water utility company, which served 89,402 customers in 55 towns throughout Connecticut as of December 31, 2010.

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 â 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.

The Company has evaluated all subsequent events through the date the financial statements were issued.

Intercompany accounts and transactions have been eliminated.

PUBLIC UTILITY REGULATION – Our public water utility company is subject to regulation for rates and other matters by the Connecticut Department of Public Utility Control (“DPUC”) and follows accounting policies prescribed by the DPUC.  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, to reflect the impact of regulatory decisions in their financial statements. The state regulators, through the rate regulation process, can create regulatory assets that result when costs are allowed for ratemaking purposes in a period after the period in which the costs would be charged to expense by an unregulated enterprise.  The balance sheets include regulatory assets and liabilities as appropriate, primarily related to income taxes and post-retirement benefit costs.  In accordance with FASB ASC 980, costs which benefit future periods, such as tank painting, are expensed over the periods they benefit. The Company believes, based on current regulatory circumstances, that the regulatory assets recorded are likely to be recovered and that its use of regulatory accounting is appropriate and in accordance with the provisions of FASB ASC 980.

Regulatory assets and liabilities are comprised of the following:

(in thousands)	 	December 31	 	
 	 	2010	 	 	2009	 	
Assets:	 	 	 	 	 	 	
Postretirement benefits	 	$	11,747	 	 	$	9,393	 	
Unrecovered income taxes and other	 	 	19,474	 	 	 	20,451	 	
Deferred revenue (included in deferred charges)	 	 	4,122	 	 	 	4,361	 	
Other (included in deferred charges)	 	 	2,049	 	 	 	1,536	 	
Total regulatory assets	 	$	37,392	 	 	$	35,741	 	
 	 	 	 	 	 	 	 	 	
Liabilities:	 	 	 	 	 	 	 	 	
Investment Tax Credits	 	$	1,376	 	 	$	1,437	 	
Unfunded future income taxes and other	 	 	19,474	 	 	 	20,451	 	
Total regulatory liabilities	 	$	20,850	 	 	$	21,888	 	

Postretirement benefits include pension and other postretirement benefit costs.  The costs include actuarially determined pension and post-retirement benefits costs in excess of amounts funded.  Connecticut Water believes these costs will be recoverable in future years, through rates, as funding is required.  The recovery period is dependent on contributions made to the plans and the discount rate used to value the obligations.

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 will be recovered in rates in future years as they reverse.

Deferred revenue represents a portion of the rate increase granted in Connecticut Water’s 2007 rate decision.  The regulator’s decision required the Company to defer for future collection, beginning in 2008, a portion of the increase.

Regulatory liabilities include deferred investment tax credits.  These liabilities will be given back to customers in rates as tax deductions occur in the future.

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.

F-6

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
REVENUES – The Company’s accounting policies regarding revenue recognition by segment are as follows:

Water Activities – Most of our water customers are billed quarterly, with the exception of larger commercial and industrial customers, as well as 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.  Connecticut Water accrues 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 balance sheets.

With the implementation of the Company’s new Enterprise Resource Planning (ERP) system, the Company delayed customer billings in order to verify the integrity of the system and the accuracy of those bills prior to mailing.  As a result, some billings and consequently, cash receipts were delayed.  The Company has increased its utilization of its lines of credit during this period.  Its operations, including plans to continue investment in new infrastructure, are not impacted.

The Company has returned to normal billing and collection processes and does not anticipate delays in billing or collection in subsequent periods.  The delay in billing contributed to the increase in the Company’s bad debt expense for the year of approximately $198,000 due to the reserve policy based upon aging of the receivables.  The Company fully anticipates that the reserve will return to more historical levels over the first quarter of 2011.

Real Estate Transactions – Revenues are recorded when a sale or other transaction has been completed and title to the real estate has been transferred.

Services and Rentals – Revenues are recorded when the Company has delivered the services called for by contractual obligation.

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.  Retired or disposed of 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 – 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 Charges.  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 facilities.

Connecticut Water’s allowed rate of return on rate base is used to calculate its 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, Connecticut Water periodically receives 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 activities or financings.  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)	 	2010	 	 	2009	 	 	2008	 	
Additions to Utility Plant:	 	 	 	 	 	 	 	 	 	
Company Financed	 	$	26,240	 	 	$	27,598	 	 	$	19,877	 	
Allowance for Funds Used During Construction	 	 	171	 	 	 	238	 	 	 	123	 	
Subtotal – Utility Plant Increase to Rate Base	 	 	26,411	 	 	 	27,836	 	 	 	20,000	 	
Advances from Others for Construction	 	 	281	 	 	 	513	 	 	 	737	 	
Net Additions to Utility Plant	 	$	26,692	 	 	$	28,349	 	 	$	20,737	 	

Depreciation – Depreciation is computed on a straight-line basis at various rates as approved by the state regulator 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 1.7%, 1.6%, and 2.2% for 2010, 2009, and 2008, 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 Connecticut DPUC requires the flow-through method of accounting for most state tax temporary differences as well as for certain federal temporary differences.

The Company computed 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 recoverable in future years’ rates.

F-7

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
The Company believes that deferred income tax assets will be realized in the future.  The majority of unfunded future income taxes relate to deferred state income taxes.

Deferred Federal Income Taxes consist primarily of amounts that have been provided for accelerated depreciation subsequent to 1981, as required by federal income tax regulations.  Deferred taxes have also been provided for temporary differences in the recognition of certain expenses for tax and financial statement purposes as allowed by DPUC 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.

STOCK OPTIONS – In the past, the Company issued stock options to certain employees; but has not done so since 2003.  For more information regarding stock based compensation, see Note 13, Stock Based Compensation Plans.

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 DPUC.

GOODWILL – As part of the purchase of a water company in 2002, the Company recorded goodwill of $3.6 million 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”).

In accordance with FASB ASC 350, goodwill must be allocated to reporting units and reviewed for impairment at least annually.  The Company utilized an income valuation approach in the performance of the annual goodwill impairment test.  As of December 31, 2010, there was no impairment of the Company’s goodwill.

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,	 	2010	 	 	2009	 	 	2008	 	
Numerator (in thousands)	 	 	 	 	 	 	 	 	 	
Basic Net Income Applicable to Common Stock	 	$	9,760	 	 	$	10,171	 	 	$	9,386	 	
Diluted Net Income Applicable to Common Stock	 	$	9,760	 	 	$	10,171	 	 	$	9,386	 	
Denominator (in thousands)	 	 	 	 	 	 	 	 	 	 	 	 	
Basic Weighted Average Shares Outstanding	 	 	8,532	 	 	 	8,448	 	 	 	8,377	 	
Dilutive Effect of Stock Awards	 	 	101	 	 	 	75	 	 	 	53	 	
Diluted Weighted Average Shares Outstanding	 	 	8,633	 	 	 	8,523	 	 	 	8,430	 	
Earnings per Share	 	 	 	 	 	 	 	 	 	 	 	 	
Basic Earnings per Share	 	$	1.14	 	 	$	1.20	 	 	$	1.12	 	
Dilutive Effect of Stock Awards	 	 	0.01	 	 	 	0.01	 	 	 	0.01	 	
Diluted Earnings per Share	 	$	1.13	 	 	$	1.19	 	 	$	1.11	 	

NEW ACCOUNTING PRONOUNCEMENTS – FASB ASC 860 “Transfers and Servicing” (“FASB ASC 860”) improves the relevance and comparability of information that a reporting entity provides in its financial statements about transfers of financial assets.  The provisions of FASB ASC 860 became effective on January 1, 2010 and will be applied prospectively to transfers of financial assets completed after December 31, 2009.  The adoption of these provisions did not have an impact on the Company’s financial statements.

FASB ASC 810 “Consolidation” (“FASB ASC 810”) amends the consolidation guidance for variable interest entities.  The provisions were applicable on January 1, 2010.  The adoption of these provisions did not have an impact on the Company’s financial statements.

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”).  This update requires additional information to be disclosed principally in respect to Level 3 fair value measurements and transfers to and from Level 1 and Level 2 measurements.  In addition, enhanced disclosures are required concerning inputs and valuation techniques used to determine Level 2 and Level 3 fair value measurements.  ASU 2010-06 is effective for interim and annual reporting periods beginning after December 1, 2009, however, the requirements to disclose separately purchases, sales, issuances, and settlements in the Level 3 reconciliation are effective for fiscal years beginning after December 15, 2010.  The Company partially adopted this guidance effective January 1, 2010.  As this guidance provides only disclosure requirements, the adoption of these provisions did not impact the Company’s results of operations, cash flows or financial position.  For the portion of the guidance that does not become effective until 2011, the Company does not anticipate this update will have a material impact on its financial statements or disclosures.

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 on the Income Statement.  There were no such charges for the years ending December 31, 2010, 2009 and 2008.  Additionally, there were no accruals relating to interest or penalties as of December 31, 2010 and 2009.  The Company remains subject to examination by federal authorities for the 2005 through 2008 tax years and by state authorities for the tax years 2004 through 2009.

F-8

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
Income Tax Expense for the years ended December 31, is comprised of the following:

(in thousands)	 	2010	 	 	2009	 	 	2008	 	
Federal Classified as Operating Expense	 	$	5,513	 	 	$	3,566	 	 	$	3,631	 	
Federal Classified as Other Utility Income	 	 	368	 	 	 	342	 	 	 	267	 	
Federal Classified as Other Income	 	 	 	 	 	 	 	 	 	 	 	 	
Land Sales and Donations	 	 	(230	)	 	 	409	 	 	 	178	 	
Non-Water Sales	 	 	487	 	 	 	469	 	 	 	360	 	
Other	 	 	(257	)	 	 	(162	)	 	 	(195	)	
Total Federal Income Tax Expense	 	 	5,881	 	 	 	4,624	 	 	 	4,241	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
State Classified as Operating Expense	 	 	(190	)	 	 	(1,100	)	 	 	(113	)	
State Classified as Other Utility Income	 	 	97	 	 	 	90	 	 	 	64	 	
State Classified as Other Income	 	 	 	 	 	 	 	 	 	 	 	 	
Land Sales and Donations	 	 	--	 	 	 	27	 	 	 	(19	)	
Non-Water Sales	 	 	120	 	 	 	123	 	 	 	90	 	
Other	 	 	(43	)	 	 	(17	)	 	 	(23	)	
Total State Income Tax Expense	 	 	(16	)	 	 	(877	)	 	 	(1	)	
Total Income Tax Expense	 	$	5,865	 	 	$	3,747	 	 	$	4,240	 	
 
The components of the Federal and State income tax provisions are:

(in thousands)	 	2010	 	 	2009	 	 	2008	 	
Current Income Taxes	 	 	 	 	 	 	 	 	 	
Federal	 	$	3,902	 	 	$	2,338	 	 	$	1,906	 	
State	 	 	338	 	 	 	154	 	 	 	110	 	
Total Current	 	 	4,240	 	 	 	2,492	 	 	 	2,016	 	
Deferred Income Taxes, Net	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	 	 	 	 	 	 	 	 	 	 	 	
Investment Tax Credit	 	 	(61	)	 	 	(63	)	 	 	(63	)	
Deferred Revenue	 	 	(75	)	 	 	(75	)	 	 	264	 	
Land Donations	 	 	201	 	 	 	272	 	 	 	187	 	
Depreciation	 	 	1,909	 	 	 	2,254	 	 	 	1,583	 	
Other	 	 	5	 	 	 	(102	)	 	 	364	 	
Total Federal	 	 	1,979	 	 	 	2,286	 	 	 	2,335	 	
State	 	 	 	 	 	 	 	 	 	 	 	 	
Land Donations	 	 	--	 	 	 	35	 	 	 	85	 	
Other (A)	 	 	(354	)	 	 	(1,066	)	 	 	(196	)	
Total State	 	 	(354	)	 	 	(1,031	)	 	 	(111	)	
Total Deferred Income Taxes	 	 	1,625	 	 	 	1,255	 	 	 	2,224	 	
Total Income Tax	 	$	5,865	 	 	$	3,747	 	 	$	4,240	 	

(A)  	– Fixed capital credits account for $(1,089) of Other in 2009.	

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

(in thousands)	 	2010	 	 	2009	 	
Unrecovered Income Taxes	 	$	(24,696	)	 	$	(25,649	)	
Deferred Federal and State Income Taxes	 	 	34,246	 	 	 	32,454	 	
Unfunded Future Income Taxes	 	 	19,474	 	 	 	20,451	 	
Unamortized Investment Tax Credit	 	 	1,376	 	 	 	1,437	 	
Other	 	 	(185	)	 	 	(139	)	
Net Deferred Income Tax Liability	 	$	30,215	 	 	$	28,554	 	

F-9

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
Deferred income tax (assets) and liabilities are comprised of the following:

(in thousands)	 	2010	 	 	2009	 	
Charitable Contribution Carryforward (1)	 	$	(1,778	)	 	$	(2,216	)	
Valuation Allowance	 	 	1,386	 	 	 	1,623	 	
Tax Credit Carryforward (2)	 	 	(2,551	)	 	 	(2,350	)	
Prepaid Income Taxes on CIAC	 	 	(66	)	 	 	(66	)	
Prepaid Federal Income Tax on Services	 	 	(159	)	 	 	(145	)	
Other Comprehensive Income	 	 	(234	)	 	 	(275	)	
Accelerated Depreciation	 	 	32,520	 	 	 	30,626	 	
Net of AFUDC and Capitalized Interest	 	 	264	 	 	 	257	 	
Unamortized Investment Tax Credit	 	 	1,376	 	 	 	1,437	 	
Other	 	 	(543	)	 	 	(337	)	
Net Deferred Income Tax Liability	 	$	30,215	 	 	$	28,554	 	

(1)  	2010 charitable contribution carryover expires in 2012.	
(2)  	State tax credit carry-forwards expire beginning 2013 and ending in 2032.	

The calculation of Pre-Tax Income is as follows:

(in thousands)	 	2010	 	 	2009	 	 	2008	 	
Pre-Tax Income	 	 	 	 	 	 	 	 	 	
Net Income	 	$	9,798	 	 	$	10,209	 	 	$	9,424	 	
Income Taxes	 	 	5,865	 	 	 	3,747	 	 	 	4,240	 	
Total Pre-Tax Income	 	$	15,663	 	 	$	13,956	 	 	$	13,664	 	

In accordance with required regulatory treatment, 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:

 	 	2010	 	 	2009	 	 	2008	 	
Federal Statutory Tax Rate	 	 	34.0	%	 	 	34.0	%	 	 	34.0	%	
Tax Effect Differences:	 	 	 	 	 	 	 	 	 	 	 	 	
State Income Taxes Net of Federal Benefit	 	 	--	 	 	 	(4.3	%)	 	 	--	 	
Depreciation	 	 	0.4	%	 	 	1.7	%	 	 	1.6	%	
Charitable Contributions – Land Donation (Net of Valuation Allowance)	 	 	(1.5	%)	 	 	(1.3	)%	 	 	1.5	%	
Pension Costs	 	 	1.8	%	 	 	(4.1	%)	 	 	(5.1	%)	
Allowance for Funds Used During Construction	 	 	(0.4	%)	 	 	(0.6	%)	 	 	(0.3	%)	
Change in Estimate of Prior Year Income Tax Expense	 	 	--	 	 	 	0.9	%	 	 	(0.5	%)	
Rate Case Expense	 	 	(0.7	%)	 	 	0.4	%	 	 	0.6	%	
Other	 	 	3.8	%	 	 	0.2	%	 	 	(0.7	%)	
Effective Income Tax Rate	 	 	37.4	%	 	 	26.9	%	 	 	31.1	%	

In 2009, the generation of current year state income tax credits, as well as the recording of the 2008 state income tax credits through the return to accrual, resulted in the decrease of the effective rate related to State Income Taxes Net of Federal Benefit.  The difference between book and tax depreciation on pre-1981 assets has decreased due to retirements of old assets through the WICA program and expiring depreciable lives.  The tax deductible contribution to the pension plan is less than the book expense in 2010, while the tax deductible contribution to the pension plan was larger than book expense in 2009.  The increase in Other Tax Effect differences is primarily driven by book and tax differences for bad debt expense and post-retirement benefits other than pension (PBOP).  The decrease in direct write offs of bad debt between 2010 and 2009 resulted in a 1.1% increase in the effective rate from year to year.  The maximum allowable contribution to the PBOP was significantly lower in 2010 than 2009, resulting in a 1.4% increase in the effective rate from year to year.

F-10

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
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, 2008 through December 31, 2010, appears below:

(in thousands, except share data)	 	Shares	 	 	Issuance Amount	 	 	Expense	 	 	Total	 	
Balance, January 1, 2008	 	 	8,376,842	 	 	$	64,414	 	 	$	(1,606	)	 	$	62,808	 	
Stock and equivalents issued through Performance Stock Program, Net of Forfeitures	 	 	22,046	 	 	 	465	 	 	 	--	 	 	 	465	 	
Dividend Reinvestment Plan	 	 	52,606	 	 	 	1,287	 	 	 	--	 	 	 	1,287	 	
Stock Options Exercised and Expensed	 	 	     11,775	 	 	 	246	 	 	 	(2	)	 	 	244	 	
Balance, December 31, 2008	 	 	8,463,269	 	 	$	66,412	 	 	$	(1,608	)	 	$	64,804	 	
Stock and equivalents issued through Performance Stock Program, Net of Forfeitures	 	 	31,515	 	 	 	767	 	 	 	--	 	 	 	767	 	
Dividend Reinvestment Plan	 	 	61,462	 	 	 	1,323	 	 	 	--	 	 	 	1,323	 	
Stock Options Exercised and Expensed	 	 	17,498	 	 	 	394	 	 	 	(2	)	 	 	392	 	
Balance, December 31, 2009	 	 	8,573,744	 	 	$	68,896	 	 	$	(1,610	)	 	$	67,286	 	
Stock and equivalents issued through Performance Stock Program, Net of Forfeitures	 	 	31,282	 	 	 	1,077	 	 	 	--	 	 	 	1,077	 	
Dividend Reinvestment Plan	 	 	57,749	 	 	 	1,358	 	 	 	--	 	 	 	1,358	 	
Stock Options Exercised and Expensed	 	 	14,074	 	 	 	305	 	 	 	(2	)	 	 	303	 	
Balance, December 31, 2010 (1)	 	 	8,676,849	 	 	$	71,636	 	 	$	(1,612	)	 	$	70,024	 	

(1)  	Includes 42,594 restricted shares and 102,140 common stock equivalent shares issued through the Performance Stock Programs through December 31, 2010.	

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.

NOTE 4:  RETAINED EARNINGS

The summary of the changes in Retained Earnings for the period January 1, 2008 through December 31, 2010, appears below:

(in thousands, except per share data)	 	2010	 	 	2009	 	 	2008	 	
Balance, beginning of year	 	$	41,785	 	 	$	39,285	 	 	$	37,272	 	
Net Income	 	 	9,798	 	 	 	10,209	 	 	 	9,424	 	
Sub-total	 	 	51,583	 	 	 	49,494	 	 	 	46,696	 	
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:	 	 	 	 	 	 	 	 	 	 	 	 	
2010 $0.920 per Common Share	 	 	7,942	 	 	 	--	 	 	 	--	 	
2009 $0.900 per Common Share	 	 	--	 	 	 	7,671	 	 	 	--	 	
2008 $0.880 per Common Share	 	 	--	 	 	 	--	 	 	 	7,373	 	
Total Dividends Declared	 	 	7,980	 	 	 	7,709	 	 	 	7,411	 	
Balance, end of year	 	$	43,603	 	 	$	41,785	 	 	$	39,285	 	

NOTE 5:  ORGANIZATIONAL REVIEW

As part of a broader organizational review to improve operating efficiencies, the Company determined that a targeted reduction in workforce was appropriate.  During the third quarter of 2010, the Company terminated the employment of approximately 15 full time employees.  As a result of this action, the Company has paid approximately $583,000 representing termination benefits, including severance payments and payments for accrued vacation.  All severance agreements have been signed by the effected employees.  In addition to costs associated with severance, the Company also incurred approximately $122,000 related to employee benefits, including extension of medical benefits and the accelerated vesting of certain share based compensation and $81,000 related to outsourcing and legal fees.  Costs associated with this organizational review appear on the line “Organizational Review Charge” on the Consolidated Statements of Income and are considered part of Water Activities segment.  As of December 31, 2010, all payments related to the organizational review have been made.
 
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.

F-11

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
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 December 31, 2010:

(in thousands)	 	Level 1	 	 	Level 2	 	 	Level 3	 	
Asset Type:	 	 	 	 	 	 	 	 	 	
Money Market Fund	 	$	107	 	 	$	--	 	 	$	--	 	
Mutual Funds:	 	 	 	 	 	 	 	 	 	 	 	 	
Equity Funds (1)	 	 	494	 	 	 	--	 	 	 	--	 	
Index Funds (3)	 	 	160	 	 	 	--	 	 	 	--	 	
Total	 	$	761	 	 	$	--	 	 	$	--	 	

The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2009:

(in thousands)	 	Level 1	 	 	Level 2	 	 	Level 3	 	
Asset Type:	 	 	 	 	 	 	 	 	 	
Money Market Fund	 	$	46	 	 	$	--	 	 	$	--	 	
Mutual Funds:	 	 	 	 	 	 	 	 	 	 	 	 	
Equity Funds (1)	 	 	789	 	 	 	--	 	 	 	--	 	
Fixed Income Funds (2)	 	 	53	 	 	 	--	 	 	 	--	 	
Index Funds (3)	 	 	263	 	 	 	--	 	 	 	--	 	
Total	 	$	1,151	 	 	$	--	 	 	$	--	 	

(1)  	Mutual funds consisting primarily of equity securities.	
(2)  	Mutual funds consisting primarily of fixed income securities.	
(3)  	Mutual funds consisting primarily of funds linked to indices.	

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

RESTRICTED CASH – As part of the December 2009 bond offering, described in Note 7 to the Notes to the Consolidated Financial Statements, the Company recorded unused proceeds from this bond issuance as restricted cash as the funds can only be used for certain capital expenditures.  The Company expects to use the remainder of the proceeds during 2011, as the approved capital expenditures are completed.  The carrying amount approximates fair value

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 December 31, 2010 and 2009, the estimated fair value of the Company's long-term debt was $105,713,000 and $110,479,000, respectively, as compared to the carrying amounts of $111,675,000 and $111,955,000, respectively.

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.

NOTE 7:  LONG-TERM DEBT

Long-Term Debt at December 31, consisted of the following:

(in thousands)	 	2010	 	 	2009	 	
The Connecticut Water Company:	 	 	 	 	 	 	
Unsecured Water Facilities Revenue Bonds	 	 	 	 	 	 	
 	5.05	%	1998 Series A, Due 2028	 	$	9,580	 	 	$	9,625	 	
 	5.125	%	1998 Series B, Due 2028	 	 	7,530	 	 	 	7,600	 	
 	4.40	%	2003A Series, Due 2020	 	 	8,000	 	 	 	8,000	 	
 	5.00	%	2003C Series, Due 2022	 	 	14,795	 	 	 	14,795	 	
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	%	2005 A Series, Due 2040	 	 	14,885	 	 	 	14,885	 	
 	5.00	%	2007 A Series, Due 2037	 	 	14,835	 	 	 	15,000	 	
 	5.10	%	2009 A Series, Due 2039	 	 	20,000	 	 	 	20,000	 	
Total Long-Term Debt	 	$	111,675	 	 	$	111,955	 	

The Company does not have any principal payments required for years 2011 – 2015.

F-12

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
There are no mandatory sinking fund payments required on Connecticut Water’s outstanding Unsecured Water Facilities Revenue Refinancing 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.

Financial Covenants – The Company is required to comply with certain covenants in connection with various long term loan agreements.  The covenants are normal and customary in bank and loan agreements.  The Company was in compliance with all covenants at December 31, 2010.

NOTE 8:  PREFERRED STOCK

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

(in thousands, except share data)	 	2010	 	 	2009	 	
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”.

NOTE 9:  BANK LINES OF CREDIT

In November 2008, the Company was authorized by its Board of Directors to increase the available lines of credit from $21 million to $40 million.  On June 30, 2009, the Company let expire one line of credit totaling $6 million and entered into a new $15 million line of credit agreement, which expires on June 25, 2011.  On August 12, 2009, the Company replaced an existing $3 million line of credit with a $10 million line of credit, which expires on August 10, 2011.  Finally, on September 15, 2009, the Company increased a third line of credit from $12 million to $15 million, with an expiration date of June 1, 2011.  Interim Bank Loans Payable at December 31, 2010 and 2009 was approximately $26.3 million and $25.0 million, respectively, and represents the outstanding aggregate balance on these lines of credit.  Interest expense charged on interim bank loans will fluctuate based on market interest rates.

At December 31, 2010 and 2009, the weighted average interest rates on these short-term borrowings outstanding were 2.33% and 2.23%, respectively.  The Company expects to renew all lines of credit expiring in 2011.

NOTE 10:  UTILITY PLANT

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

(in thousands)	 	2010	 	 	2009	 	
Land	 	$	11,084	 	 	$	10,391	 	
Source of supply	 	 	29,742	 	 	 	28,922	 	
Pumping	 	 	29,624	 	 	 	28,511	 	
Water treatment	 	 	55,891	 	 	 	55,377	 	
Transmission and distribution	 	 	309,658	 	 	 	292,140	 	
General	 	 	37,306	 	 	 	32,493	 	
Held for future use	 	 	478	 	 	 	478	 	
Acquisition Adjustment	 	 	(6,194	)	 	 	(6,900	)	
Total	 	$	467,589	 	 	$	441,412	 	

The amounts of depreciable utility plant at December 31, 2010 and 2009 included in total utility plant were $417,631,000 and $393,021,000, respectively.  Non-depreciable plant is primarily funded through CIAC.

NOTE 11:  TAXES OTHER THAN INCOME TAXES

Taxes Other than Income Taxes consist of the following:

(in thousands)	 	2010	 	 	2009	 	 	2008	 	
Municipal Property Taxes	 	$	5,293	 	 	$	5,052	 	 	$	5,129	 	
Payroll Taxes	 	 	978	 	 	 	901	 	 	 	912	 	
Total Taxes Other than Income Taxes	 	$	6,271	 	 	$	5,953	 	 	$	6,041	 	

F-13

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
NOTE 12:  LONG-TERM COMPENSATION ARRANGEMENTS

The Company has accrued for the following long-term compensation arrangements as of December 31, 2010 and 2009:

(in thousands)	 	2010	 	 	2009	 	
Defined Benefit Pension Plan	 	$	3,768	 	 	$	5,899	 	
Post Retirement Benefit Other than Pension	 	 	7,019	 	 	 	3,340	 	
Supplemental Executive Retirement Plan	 	 	4,297	 	 	 	4,012	 	
Deferred Compensation	 	 	1,409	 	 	 	1,358	 	
Other Long-Term Compensation	 	 	254	 	 	 	289	 	
Total Long-Term Compensation Arrangements	 	$	16,747	 	 	$	14,898	 	

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 existing under 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, 2010 and 2009 were:

 	 	2010	 	 	2009	 	
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 8%.

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 Employee Retirement Income Security Act of 1974 regulations.  The Company amortizes actuarial gains and losses over the average remaining service period of active participants, without regard to a specified corridor of a percentage of the greater of the obligation or market-related value of assets.  A contribution of $3,400,000 was made in 2010 for the 2009 plan year.  The Company expects to make a contribution of approximately $1,200,000 in 2011 for the 2010 plan year.

The Company has amended its pension plan to exclude employees hired after January 1, 2009.

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

Pension Benefits (in thousands)	 	2010	 	 	2009	 	
Change in benefit obligation:	 	 	 	 	 	 	
Benefit obligation, beginning of year	 	$	37,182	 	 	$	32,886	 	
Service cost	 	 	1,668	 	 	 	1,454	 	
Interest cost	 	 	2,175	 	 	 	2,024	 	
Actuarial loss (gain)	 	 	1,462	 	 	 	1,969	 	
Benefits paid	 	 	(1,729	)	 	 	(1,151	)	
Benefit obligation, end of year	 	$	40,758	 	 	$	37,182	 	
 	 	 	 	 	 	 	 	 	
Change in plan assets:	 	 	 	 	 	 	 	 	
Fair value, beginning of year	 	$	31,283	 	 	$	23,262	 	
Actual return on plan assets	 	 	4,036	 	 	 	5,872	 	
Employer contributions	 	 	3,400	 	 	 	3,300	 	
Benefits paid	 	 	(1,729	)	 	 	(1,151	)	
Fair value, end of year	 	$	36,990	 	 	$	31,283	 	
 	 	 	 	 	 	 	 	 	
Funded Status	 	$	(3,768	)	 	$	(5,899	)	
 	 	 	 	 	 	 	 	 	
Amount Recognized in Consolidated Balance Sheets Consisted of:	 	 	 	 	 	 	 	 	
Non-current asset	 	$	--	 	 	$	--	 	
Current liability	 	 	--	 	 	 	--	 	
Non-current liability	 	 	(3,768	)	 	 	(5,899	)	
Net amount recognized	 	$	(3,768	)	 	$	(5,899	)	

F-14

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
The accumulated benefit obligation for all defined benefit pension plans was approximately $34,345,000 and $29,719,000 at December 31, 2010 and 2009, respectively.

Weighted-average assumptions used to determine benefit obligations at December 31:	 	2010	 	 	2009	 	
Discount rate	 	 	5.50	%	 	 	5.95	%	
Rate of compensation increase	 	 	3.50	%	 	 	4.50	%	
Weighted-average assumptions used to determine net periodic cost for years ended December 31:	 	 	 	 	 	 	 	 	
Discount rate	 	 	5.95	%	 	 	6.25	%	
Expected long-term return on plan assets	 	 	8.00	%	 	 	8.00	%	
Rate of compensation increase	 	 	4.50	%	 	 	4.50	%	

Prior to the 2007, the Company used Moody’s AA Corporate Bond Yields when selecting its Discount Rate for each of the pension plan.  Beginning with the year ended December 31, 2007, in an attempt to move away from generic yield curves and indices, the Company used a spot yield curve that attempts to mimic expected benefit payments.  The Company based its discount rate assumption on a single rate on the Citigroup Pension Discount Curve that approximated present value of the plan’s payment streams.

The following table shows the components of periodic benefit costs:

Pension Benefits (in thousands)	 	2010	 	 	2009	 	 	2008	 	
Components of net periodic benefit costs	 	 	 	 	 	 	 	 	 	
Service cost	 	$	1,668	 	 	$	1,454	 	 	$	1,259	 	
Interest cost	 	 	2,175	 	 	 	2,024	 	 	 	1,906	 	
Expected return on plan assets	 	 	(2,507	)	 	 	(2,229	)	 	 	(2,120	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Amortization of:	 	 	 	 	 	 	 	 	 	 	 	 	
Net transition obligation	 	 	2	 	 	 	2	 	 	 	2	 	
Net loss	 	 	69	 	 	 	69	 	 	 	69	 	
Prior service cost	 	 	602	 	 	 	398	 	 	 	142	 	
Net Periodic Pension Benefit Costs	 	$	2,009	 	 	$	1,718	 	 	$	1,258	 	

The following table shows the other changes in plan assets and benefit obligations recognized as a regulatory asset (liability):

Pension Benefits (in thousands)	 	2010	 	 	2009	 	
Change in net (gain) loss	 	$	(67	)	 	$	(1,674	)	
Amortization of transition obligation	 	 	(2	)	 	 	(2	)	
Amortization of net loss	 	 	(69	)	 	 	(69	)	
Amortization of prior service cost	 	 	(602	)	 	 	(398	)	
Total recognized to Regulatory (Liability) Asset	 	$	(740	)	 	$	(2,143	)	

Amounts Recognized as a Regulatory Asset (Liability) at December 31: (in thousands)	 	2010	 	 	2009	 	
Transition obligation	 	$	2	 	 	$	4	 	
Prior service cost	 	 	378	 	 	 	447	 	
Net (gain) loss	 	 	5,916	 	 	 	6,446	 	
Total Recognized as a Regulatory Asset (Liability)	 	$	6,296	 	 	$	6,897	 	

Amounts Recognized in Other Comprehensive Income at December 31: (in thousands)	 	2010	 	 	2009	 	
Transition obligation	 	$	--	 	 	$	--	 	
Prior service cost	 	 	--	 	 	 	--	 	
Net (gain) loss	 	 	327	 	 	 	466	 	
Total Recognized in Other Comprehensive Income	 	$	327	 	 	$	466	 	

Estimated Net Periodic Benefit Cost Amortizations for the periods January 1 - December 31,: (in thousands)	 	2011	 	
Amortization of transition obligation	 	$	2	 	
Amortization of prior service cost	 	 	69	 	
Amortization of net loss	 	 	750	 	
Total Estimated Net Periodic Benefit Cost Amortizations	 	$	821	 	

Plan Assets
The Company’s pension plan weighted-average asset allocations at December 31, 2010 and 2009 by asset category were as follows:

 	 	2010	 	 	2009	 	
Equity	 	 	67	%	 	 	66	%	
Fixed Income	 	 	33	%	 	 	34	%	
Total	 	 	100	%	 	 	100	%	

F-15

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
See Note 6 for discussion on how fair value is determined.  The fair values of the Company’s pension plan assets at December 31, 2010 were as follows:

(in thousands)	 	Level 1	 	 	Level 2	 	 	Level 3	 	
Asset Type:	 	 	 	 	 	 	 	 	 	
Money Market Fund	 	$	277	 	 	$	--	 	 	$	--	 	
Mutual Funds:	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed Income Funds (1)	 	 	12,015	 	 	 	--	 	 	 	--	 	
Equity Funds (2)	 	 	15,553	 	 	 	--	 	 	 	--	 	
Index Funds (3)	 	 	9,152	 	 	 	--	 	 	 	--	 	
Total	 	$	36,997	 	 	$	--	 	 	$	--	 	

The fair values of the Company’s pension plan assets at December 31, 2009 were as follows:

(in thousands)	 	Level 1	 	 	Level 2	 	 	Level 3	 	
Asset Type:	 	 	 	 	 	 	 	 	 	
Money Market Fund	 	$	208	 	 	$	--	 	 	$	--	 	
Mutual Funds:	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed Income Funds (1)	 	 	10,529	 	 	 	--	 	 	 	--	 	
Equity Funds (2)	 	 	13,017	 	 	 	--	 	 	 	--	 	
Index Funds (3)	 	 	7,529	 	 	 	--	 	 	 	--	 	
Total	 	$	31,283	 	 	$	--	 	 	$	--	 	

(1)  	Mutual funds consisting primarily of fixed income securities.	
(2)  	Mutual funds consisting primarily of equity securities.	
(3)  	Mutual funds consisting primarily of funds linked to indices.	

The Plan’s expected future benefit payments are:

(in thousands)	 	 	 	
2011	 	$	1,585	 	
2012	 	 	2,839	 	
2013	 	 	2,253	 	
2014	 	 	2,717	 	
2015	 	 	3,480	 	
Years 2016 – 2020	 	 	19,475	 	

POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP) – In addition to providing pension benefits, Connecticut Water, provides certain medical, dental and life insurance benefits to retired employees partially funded by a 501(c)(9) Voluntary Employee Beneficiary Association Trust that has been approved by the DPUC.  Substantially all of Connecticut Water’s employees may become eligible for these benefits if they retire on or after age 55 with 10 years of service.  The contribution for calendar years 2010 and 2009 was $258,000 and $658,000, respectively.

A regulatory asset has been recorded to reflect the amount which represents the future FASB ASC 715 costs expected to be recovered in customer rates.  In 1997, Connecticut Water requested and received approval from the DPUC to include FASB ASC 715 costs in customer rates.  The DPUC’s 1997 limited reopener of Connecticut Water’s general rate proceeding allowed it to increase customer rates $208,000 annually for FASB ASC 715 costs.  Prior to the January 2007 rate decision, Connecticut Water’s rates allowed for recovery of $473,100 annually for post-retirement benefit costs other than pension.  As a result of the January 2007 rate decision, the Company will follow the provisions of FASB ASC 715 for regulated companies that allows the creation of a regulatory asset for costs that will be recovered in the future under provisions of FASB ASC 980.

The Company amortizes actuarial gains and losses over the average remaining service period of active participants, without regard to a specified corridor of a percentage of the greater of the obligation or market-related value of assets.  Connecticut Water has elected to recognize the transition obligation on a delayed basis over a period equal to the plan participants' 21.6 years of average future service.

Another subsidiary company, Barnstable Water, also provides certain health care benefits to eligible retired employees.  Barnstable Water employees became eligible for these benefits if they retired on or after age 65 with at least 15 years of service.  Post-65 medical coverage is provided for retired employees up to a maximum coverage of $500 per quarter. Barnstable Water’s PBOP currently is not funded.  Barnstable Water no longer has any employees; therefore, no new participants will be entering Barnstable Water’s PBOP.  The tables below do not include Barnstable Water’s PBOP.  Barnstable Water’s PBOP had a Benefit Obligation of $52,000 at December 31, 2010 and 2009, respectively.  Additionally, this plan did not hold any assets as of December 31, 2010 and 2009.  Barnstable Water’s PBOP’s net periodic benefit costs were less than $1,000 in 2010 and 2009.

The Company has amended its PBOP to exclude employees hired after January 1, 2009.  In addition, effective April 1, 2009, the Company will no longer provide prescription drug coverage for its retirees age 65 and over.  Those retirees, who are entitled to Medicare coverage, will continue to receive the current non-prescription medical coverage.

F-16

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
The following tables set forth the benefit obligation and fair value of the assets of the Connecticut Water’s post-retirement health care benefits at December 31, the latest valuation date:

PBOP Benefits (in thousands)	 	2010	 	 	2009	 	
Change in benefit obligation:	 	 	 	 	 	 	
Benefit obligation, beginning of year	 	$	9,518	 	 	$	7,989	 	
Service cost	 	 	567	 	 	 	473	 	
Interest cost	 	 	574	 	 	 	488	 	
Plan participant contributions	 	 	--	 	 	 	94	 	
Actuarial (gain) loss	 	 	3,403	 	 	 	875	 	
Benefits paid	 	 	(619	)	 	 	(401	)	
Benefit obligation, end of year	 	$	13,443	 	 	$	9,518	 	
 	 	 	 	 	 	 	 	 	
Change in plan assets:	 	 	 	 	 	 	 	 	
Fair value, beginning of year	 	$	6,230	 	 	$	4,694	 	
Actual return on plan assets	 	 	606	 	 	 	1,185	 	
Employer contributions	 	 	258	 	 	 	658	 	
Plan participant contributions	 	 	--	 	 	 	94	 	
Benefits paid	 	 	(619	)	 	 	(401	)	
Fair value, end of year	 	$	6,475	 	 	$	6,230	 	
 	 	 	 	 	 	 	 	 	
Funded Status	 	$	(6,968	)	 	$	(3,288	)	
 	 	 	 	 	 	 	 	 	
Amount Recognized in Consolidated Balance Sheets Consisted of:	 	 	 	 	 	 	 	 	
Non-current asset	 	$	--	 	 	$	--	 	
Current liability	 	 	--	 	 	 	--	 	
Non-current liability	 	 	(6,968	)	 	 	(3,288	)	
Net amount recognized	 	$	(6,968	)	 	$	(3,288	)	

Weighted-average assumptions used to determine benefit obligations at December 31:	 	2010	 	 	2009	 	
Discount rate	 	 	5.35	%	 	 	5.80	%	
Weighted-average assumptions used to determine net periodic cost for years ended December 31:	 	 	 	 	 	 	 	 	
Discount rate	 	 	5.80	%	 	 	6.20	%	
Expected long-term return on plan assets	 	 	5.00	%	 	 	5.00	%	

Prior to the 2007, the Company used Moody’s AA Corporate Bond Yields when selecting its Discount Rate for each of the PBOP.  Beginning with the year ended December 31, 2007, in an attempt to move away from generic yield curves and indices, the Company used a spot yield curve that attempts to mimic expected benefit payments.  The Company based its discount rate assumption on a single rate on the Citigroup Pension Discount Curve that approximated present value of the plan’s payment streams.

The following table shows the components of periodic benefit costs:
 
PBOP Benefits (in thousands)	 	2010	 	 	2009	 	 	2008	 	
Components of net periodic benefit costs	 	 	 	 	 	 	 	 	 	
Service cost	 	$	567	 	 	$	473	 	 	$	632	 	
Interest cost	 	 	574	 	 	 	488	 	 	 	657	 	
Expected return on plan assets	 	 	(306	)	 	 	(272	)	 	 	(271	)	
Other	 	 	225	 	 	 	225	 	 	 	225	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Amortization of:	 	 	 	 	 	 	 	 	 	 	 	 	
Net transition obligation	 	 	(406	)	 	 	(406	)	 	 	120	 	
Recognized net loss	 	 	329	 	 	 	217	 	 	 	202	 	
Net Periodic Post Retirement Benefit Costs	 	$	983	 	 	$	725	 	 	$	1,565	 	

The following table shows the other changes in plan assets and benefit obligations recognized as a regulatory asset:

PBOP Benefits (in thousands)	 	2010	 	 	2009	 	
Change in net loss (gain)	 	$	3,103	 	 	$	(37	)	
Amortization of transition obligation	 	 	--	 	 	 	--	 	
Amortization of prior service credit	 	 	406	 	 	 	406	 	
Amortization of net loss	 	 	(329	)	 	 	(218	)	
Total recognized to Regulatory Asset	 	$	3,180	 	 	$	151	 	

Amounts Recognized as a Regulatory Asset at December 31: (in thousands)	 	2010	 	 	2009	 	
Transition obligation	 	$	--	 	 	$	--	 	
Prior service cost	 	 	(1,794	)	 	 	(2,200	)	
Net (gain) loss	 	 	5,724	 	 	 	2,950	 	
Total Recognized as a Regulatory Asset	 	$	3,930	 	 	$	750	 	

There were no other changes in plan assets and benefit obligations recognized as a regulatory asset.

F-17

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
Estimated Benefit Cost Amortizations for the periods January 1 - December 31,: (in thousands)	 	2011	 	
Amortization of transition obligation	 	$	--	 	
Amortization of prior service cost	 	 	(406	)	
Amortization of net loss (gain)	 	 	606	 	
Total Estimated Net Periodic Benefit Cost Amortizations	 	$	200	 	
 
Assumed health care cost trend rates at December 31:	 	2010	 	 	2009	 	
 	 	Medical	 	 	Dental	 	 	Medical	 	 	Dental	 	
Health care cost trend rate assumed for next year (1)	 	 	10.0	%	 	 	10.0	%	 	 	10.0	%	 	 	10.0	%	
Rate to which the cost trend rate is assumed to decline	 	 	5.0	%	 	 	5.0	%	 	 	5.0	%	 	 	5.0	%	
Year that the rate reaches the ultimate trend rate	 	 	2021	 	 	 	2021	 	 	 	2020	 	 	 	2020	 	

(1) – Zero percent trend rate from 2009 to 2010.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.  A one-percentage-point change in assumed health care cost trend rates would have the following effects on Connecticut Water’s plan and would have no impact on the Barnstable Water plan:

(in thousands)	 	1 Percentage-Point	 	
 	 	Increase	 	 	Decrease	 	
Effect on total of service and interest cost components	 	$	177	 	 	$	(144	)	
Effect on post-retirement benefit obligation	 	$	1,717	 	 	$	(1,430	)	

Plan Assets
Barnstable Water’s other post-retirement benefit plan has no assets.  Connecticut Water’s other post-retirement benefit plan weighted-average asset allocations at December 31, 2010 and 2009 by asset category were as follows:

 	 	2010	 	 	2009	 	
Equity	 	 	63	%	 	 	65	%	
Fixed Income	 	 	37	%	 	 	35	%	
Total	 	 	100	%	 	 	100	%	

See Note 6 for discussion on how fair value is determined.  The fair value of the Company’s PBOP assets at December 31, 2010 are as follows:

(in thousands)	 	Level 1	 	 	Level 2	 	 	Level 3	 	
Asset Type:	 	 	 	 	 	 	 	 	 	
Money Market	 	$	492	 	 	$	--	 	 	$	--	 	
Mutual Funds:	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed Income Funds (1)	 	 	1,897	 	 	 	--	 	 	 	--	 	
Equity Funds (2)	 	 	2,601	 	 	 	--	 	 	 	--	 	
Index Funds (3)	 	 	1,485	 	 	 	--	 	 	 	--	 	
Total	 	$	6,475	 	 	$	--	 	 	$	--	 	

The fair value of the Company’s PBOP assets at December 31, 2009 are as follows:

(in thousands)	 	Level 1	 	 	Level 2	 	 	Level 3	 	
Asset Type:	 	 	 	 	 	 	 	 	 	
Money Market	 	$	163	 	 	$	--	 	 	$	--	 	
Mutual Funds:	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed Income Funds (1)	 	 	2,043	 	 	 	--	 	 	 	--	 	
Equity Funds (2)	 	 	2,553	 	 	 	--	 	 	 	--	 	
Index Funds (3)	 	 	1,471	 	 	 	--	 	 	 	--	 	
Total	 	$	6,230	 	 	$	--	 	 	$	--	 	

(1)  	Mutual funds consisting primarily of fixed income securities.	
(2)  	Mutual funds consisting primarily of equity securities.	
(3)  	Mutual funds consisting primarily of funds linked to indices.	

F-18

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
Cash Flows
Connecticut Water contributed $258,000 to its other post-retirement benefit plan in 2010 for plan year 2010.  The Company expects to make a contribution of approximately $500,000 in 2011 for plan year 2011.

Expected future benefit payments are:

(in thousands)	 	 	 	
2011	 	$	467	 	
2012	 	 	522	 	
2013	 	 	557	 	
2014	 	 	601	 	
2015	 	 	651	 	
Years 2016 – 2020	 	 	4,584	 	

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP) – The Company and certain of its subsidiaries provide additional pension benefits to senior management through supplemental executive retirement contracts.  At December 31, 2010 and 2009, the actuarial present values of the projected benefit obligation of these contracts were $4,297,000 and $3,636,000, respectively.  Expense associated with these contracts was approximately $423,000 for 2010, $354,000 for 2009, and $48,000 for 2008 and is reflected in Other Income (Deductions) in the Statements of Income.

Included in Other Property and Investments at December 31, 2010 and 2009 is $3,074,000 and $3,026,000 of investments purchased by the Company to fund these obligations, primarily consisting of life insurance contracts.  The remaining assets are carried at fair value and are considered Level 1 within the fair value hierarchy as outlined under FASB ASC 820 and are included in the table shown in Note 6.

SAVINGS PLAN (401(k)) – The Company and certain of its subsidiaries maintain an employee savings plan which allows participants to contribute from 1% to 50% of pre-tax compensation plus for those aged 50 years and older catch-up contributions as allowed by law.  Effective January 1, 2009, the Company changed its 401(k) plan to meet the requirements of a special IRS safe harbor.  Under the provisions of this safe harbor plan, the Company will make an automatic contribution of 3% of compensation for all eligible employees, even if the employee does not make their own contributions.  For employees hired after January 1, 2009 and ineligible to participate in the Company’s pension plan, the Company will contribute an additional 1.5% of compensation.  Prior to January 1, 2009, the Company matches 50 cents for each dollar contributed by the employee up to 4% of the employee’s compensation.  The Company contribution charged to expense in 2010, 2009, and 2008 was $446,000, $433,000, and $231,000, respectively.

The Plan creates the possibility for an “incentive bonus” contribution to the 401(k) plan tied to the attainment of a specific goal or goals to be identified each year.  If the specific goal or goals are attained by the end of the year, all eligible employees, except officers and certain key employees, may receive up to an additional 1% of their annual base salary as a direct contribution to their 401(k) account. No incentive bonus was awarded in 2010, 2009 or 2008.

NOTE 13: STOCK BASED COMPENSATION PLANS

The Company follows FASB ASC 718, “Compensation – Stock Compensation” (“FASB ASC 718”) to account for all share-based payments to employees.

For purposes of calculating the fair value of each stock grant at the date of grant, the Company used the Black Scholes Option Pricing model.  Options begin to become exercisable one year from the date of grant. Vesting periods range from one to five years.  The maximum term ranges from five to ten years.

The Company’s 2004 Performance Stock Program (2004 PSP), approved by shareholders in 2004, authorizes the issuance of up to 700,000 shares of Company Common Stock.  As of December 31, 2010, there were 522,295 shares available for grant.  There are four forms of awards under the 2004 PSP.  Stock options are one form of award.  The Company has not issued any stock options since 2003, and does not anticipate issuing any for the foreseeable future.  The other three forms of award which the Company has continued to issue are:  Restricted Stock, Performance Shares and Cash Units.

Under the original Plans (1994 PSP) there were 700,000 shares authorized and 220,695 shares available for payment of dividend equivalents on shares already awarded under the 1994 PSP as performance shares at December 31, 2010.

Under the 2004 PSP and 1994 PSP (collectively, the PSPs), restricted shares of Common Stock, common stock equivalents or cash units may be awarded annually to officers and key employees.  Based upon the occurrence of certain events, including the achievement of goals established by the Compensation Committee, the restrictions on the stock can be removed.  Amounts charged to expense on account of restricted shares of Common Stock, common stock equivalents or cash units pursuant to the PSPs were $1,190,000, $962,000 and $714,000, for 2010, 2009 and 2008, respectively.

STOCK OPTIONS – The Company determined the fair value of each stock grant at the date of grant by using the Black Scholes Option Pricing model.  Options began to become exercisable one year from the date of grant.  Vesting periods ranged from one to five years.  The maximum term ranged from five to ten years.

No stock options were awarded or issued during 2010, 2009, or 2008.

 	 	2010	 	 	2009	 	 	2008	 	
 	 	Shares	 	 	Weighted Average Exercise Price	 	 	Shares	 	 	Weighted Average Exercise Price	 	 	Shares	 	 	Weighted Average Exercise Price	 	
Options:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Outstanding, beginning of year	 	 	77,388	 	 	$	26.24	 	 	 	94,886	 	 	$	25.52	 	 	 	106,661	 	 	$	24.74	 	
Forfeited	 	 	(9,640	)	 	 	27.54	 	 	 	--	 	 	 	--	 	 	 	--	 	 	 	--	 	
Exercised	 	 	(14,074	)	 	 	20.42	 	 	 	(17,498	)	 	 	22.33	 	 	 	(11,775	)	 	 	18.47	 	
Outstanding, end of year	 	 	53,674	 	 	$	27.54	 	 	 	77,388	 	 	$	26.24	 	 	 	94,886	 	 	$	25.52	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Exercisable, end of year	 	 	53,674	 	 	$	27.54	 	 	 	77,388	 	 	$	26.24	 	 	 	94,886	 	 	$	25.52	 	

F-19

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
The intrinsic value of options exercised during the year ended December 31, 2010 was $51,000.  The following table summarizes the price ranges of the options outstanding and options exercisable as of December 31, 2010:
 
 	 	 	Options Outstanding and Exercisable	 	
 	 	 	Shares	 	 	Weighted Average Remaining Contractual Life (years)	 	 	Weighted Average Exercise Price	 	
Range of prices:	 	 	 	 	 	 	 	 	 	 	
 	$18.00 - $20.99	 	 	 	--	 	 	 	--	 	 	$ 	--	 	
 	$21.00 - $23.99	 	 	 	--	 	 	 	--	 	 	 	--	 	
 	$24.00 - $26.99	 	 	 	19,104	 	 	 	1.9	 	 	 	25.78	 	
 	$27.00 - $29.99	 	 	 	34,570	 	 	 	1.9	 	 	 	28.51	 	
 	 	 	 	 	53,674	 	 	 	1.9	 	 	$	27.54	 	

The intrinsic value of exercisable options as of December 31, 2010 was approximately $35,000.  The average remaining contractual term of exercisable options as of December 31, 2010 was approximately 1.9 years.

RESTRICTED STOCK AND COMMON STOCK EQUIVALENTS – The Company has granted restricted shares of Common Stock and Performance Shares to key members of management under the 2004 PSP.  These Common Stock share awards provide the grantee with the rights of a shareholder, including the right to receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the restriction period.  The value of these restricted shares is based on the market price of the Company’s Common Stock on the date of grant and compensation expense is recorded on a straight-line basis over the awards’ vesting periods.

RESTRICTED STOCK (Non-Performance-Based Awards) – The following tables summarize the non-performance-based restricted stock amounts and activity:

For the years ended December 31,	 	2010	 	 	2009	 	
 	 	Number of Shares	 	 	Grant Date Weighted Average Fair Value	 	 	Number of Shares	 	 	Grant Date Weighted Average Fair Value	 	
Non-vested at beginning of year	 	 	8,449	 	 	$	25.18	 	 	 	12,220	 	 	$	25.18	 	
Granted	 	 	--	 	 	 	--	 	 	 	--	 	 	 	--	 	
Vested	 	 	(4,370	)	 	 	24.95	 	 	 	(3,771	)	 	 	25.18	 	
Forfeited	 	 	--	 	 	 	--	 	 	 	--	 	 	 	--	 	
Non-vested at end of year	 	 	4,079	 	 	$	25.43	 	 	 	8,449	 	 	$	25.18	 	

The restricted stock shares began vesting during 2007.  There were no forfeitures during 2010 or 2009.

Total stock-based compensation recorded in the statement of income related to the non-performance-based restricted stock awards was $109,000, $95,000, and $95,000 during the years ended December 31, 2010, 2009, and 2008, respectively.  The Compensation Committee of the Board of Directors may approve retirement of key employees that trigger accelerating vesting.

As of December 31, 2010, $78,000 of unrecognized compensation costs related to non-performance-based restricted stock is expected to be recognized over a straight-line basis for a period of 6 years.

RESTRICTED STOCK AND COMMON STOCK EQUIVALENTS (Performance-Based) – The following tables summarize the performance-based restricted stock amounts and activity:

For the years ended December 31,	 	2010	 	 	2009	 	
 	 	Number of Shares	 	 	Grant Date Weighted Average Fair Value	 	 	Number of Shares	 	 	Grant Date Weighted Average Fair Value	 	
Non-vested at beginning of year	 	 	45,257	 	 	$	23.97	 	 	 	32,444	 	 	$	24.43	 	
Granted	 	 	28,878	 	 	 	22.75	 	 	 	26,157	 	 	 	23.28	 	
Vested	 	 	(19,733	)	 	 	23.38	 	 	 	(10,548	)	 	 	23.68	 	
Forfeited	 	 	(6,328	)	 	 	23.28	 	 	 	(2,796	)	 	 	23.92	 	
Non-vested at end of year	 	 	48,074	 	 	$	23.57	 	 	 	45,257	 	 	$	23.97	 	

Total stock based compensation recorded in the Consolidated Statements of Income related to performance-based restricted stock awards was $1,080,000, $867,000, and $619,000 for the year ended December 31, 2010, 2009, and 2008, respectively.

The Company is estimating a forfeiture rate of 30%.  Upon meeting specific performance targets, 13,600 shares, reduced for actual performance targets achieved in 2010, will begin vesting in the first quarter of 2011 and the remaining earned shares will vest over three years.  The cost is being recognized ratably over the vesting period.  The aggregate intrinsic value of performance-based restricted stock as of December 31, 2010 was $516,000.

F-20

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
NOTE 14: SEGMENT REPORTING

Our Company operates principally in three segments: water activities, real estate transactions, and services and rentals.  The water segment is comprised of our core regulated water activities to supply water to our customers.  Our real estate transactions segment involves selling or donating for income tax benefits our limited excess real estate holdings.  Our services and rentals segment provides services on a contract basis and also leases certain of our properties to third parties.  The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies.

Financial data for reportable segments is as follows:

(in thousands)	 	Revenues	 	 	Depreciation	 	 	Other Operating Expenses	 	 	Other Income (Deductions)	 	 	Interest Expense (net of AFUDC)	 	 	Income Taxes	 	 	Net Income (Loss)	 	
For the year ended December 31, 2010	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Water Activities	 	$	67,753	 	 	$	7,088	 	 	$	40,301	 	 	$	(525	)	 	$	5,682	 	 	$	5,488	 	 	$	8,669	 	
Real Estate Transactions	 	 	--	 	 	 	--	 	 	 	--	 	 	 	--	 	 	 	--	 	 	 	(230	)	 	 	230	 	
Services and Rentals	 	 	5,074	 	 	 	7	 	 	 	3,618	 	 	 	--	 	 	 	(57	)	 	 	607	 	 	 	899	 	
Total	 	$	72,827	 	 	$	7,095	 	 	$	43,919	 	 	$	(525	)	 	$	5,625	 	 	$	5,865	 	 	$	9,798	 	
For the year ended December 31, 2009	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Water Activities	 	$	60,648	 	 	$	6,403	 	 	$	38,255	 	 	$	(934	)	 	$	4,506	 	 	$	2,719	 	 	$	7,831	 	
Real Estate Transactions	 	 	2,160	 	 	 	--	 	 	 	275	 	 	 	--	 	 	 	--	 	 	 	436	 	 	 	1,449	 	
Services and Rentals	 	 	4,735	 	 	 	14	 	 	 	3,204	 	 	 	--	 	 	 	(5	)	 	 	593	 	 	 	929	 	
Total	 	$	67,543	 	 	$	6,417	 	 	$	41,734	 	 	$	(934	)	 	$	4,501	 	 	$	3,748	 	 	$	10,209	 	
For the year ended December 31, 2008	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Water Activities	 	$	62,288	 	 	$	6,438	 	 	$	38,027	 	 	$	(326	)	 	$	5,075	 	 	$	3,628	 	 	$	8,794	 	
Real Estate Transactions	 	 	--	 	 	 	--	 	 	 	--	 	 	 	--	 	 	 	--	 	 	 	160	 	 	 	(160	)	
Services and Rentals	 	 	4,855	 	 	 	23	 	 	 	3,596	 	 	 	--	 	 	 	(6	)	 	 	452	 	 	 	790	 	
Total	 	$	67,143	 	 	$	6,461	 	 	$	41,623	 	 	$	(326	)	 	$	5,069	 	 	$	4,240	 	 	$	9,424	 	

The Revenues shown in Water Activities above consist of revenues from water customers of $66,408,000, $59,391,000 and $61,270,000 in the years 2010, 2009 and 2008, respectively.  Additionally, there were revenues associated with utility plant leased to others of $1,345,000, $1,257,000 and $1,018,000 in the years 2010, 2009 and 2008, respectively which are reflected in Other Utility Income, Net of Taxes on the consolidated statements of income.

The table below shows assets by segment:

At December 31 (in thousands):	 	2010	 	 	2009	 	
Total Plant and Other Investments:	 	 	 	 	 	 	
Water	 	$	349,221	 	 	$	330,151	 	
Non-Water	 	 	566	 	 	 	564	 	
Total Plant and Other Investments	 	 	349,787	 	 	 	330,715	 	
 	 	 	 	 	 	 	 	 	
Other Assets:	 	 	 	 	 	 	 	 	
Water	 	 	72,600	 	 	 	77,622	 	
Non-Water	 	 	2,824	 	 	 	6,939	 	
Total Other Assets	 	 	75,424	 	 	 	84,561	 	
Total Assets	 	$	425,211	 	 	$	415,276	 	

NOTE 15:  COMMITMENTS AND CONTINGENCIES

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

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

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

Rate Relief – Connecticut Water is a regulated public utility, which provides water services to its customers.  The rates that regulated companies charge their water customers are subject to the jurisdiction of the regulatory authority of the DPUC.  Connecticut Water’s allowed rate of return on equity and return on rate base are currently 9.75% and 7.32%, respectively.

In 2007, the State of Connecticut adopted legislation which permits regulated water companies to recapture money spent on eligible infrastructure improvements without a full rate case proceeding.  The DPUC may authorize regulated water companies to use a rate adjustment mechanism, such as a Water Infrastructure and Conservation Adjustment (WICA), for eligible projects completed and in service for the benefit of the customers.  Regulated water companies may only charge customers such an adjustment to the extent allowed by the DPUC based on a water company’s infrastructure assessment report, as approved by the DPUC and upon semiannual filings which reflect plant additions consistent with such report.

F-21

Table of Contents
CONNECTICUT WATER SERVICE, INC.
 
Land Dispositions – The Company and its subsidiaries own additional parcels of land in Connecticut, which may be suitable in the future for disposition, either by sale or by donation to municipalities, other local governments or private charitable entities.  These additional parcels would include certain Class
I and II parcels previously identified for long term conservation by the Connecticut DEP, which have restrictions on development and resale based on provisions of the Connecticut General Statutes.

The Company is currently in discussions to sell approximately 175 acres to the Town of Plymouth, CT for open space purposes.  The Company expects the transaction, if approved by the Town’s residents and the DPUC, to be completed in late 2011 or early 2012.

Capital Expenditures – The Company has received approval from its Board of Directors to spend $23.0 million on capital expenditures in 2011, in part due to increased spending primarily for infrastructure improvements.

NOTE 16:  QUARTERLY FINANCIAL DATA (Unaudited)

Selected quarterly financial data for the years ended December 31, 2010 and 2009 appears below:

(in thousands, except for per share data)
 
 	 	First Quarter	 	 	Second Quarter	 	 	Third Quarter	 	 	Fourth Quarter	 	
 	 	2010	 	 	2009	 	 	2010	 	 	2009	 	 	2010	 	 	2009	 	 	2010	 	 	2009	 	
Operating Revenues	 	$	13,801	 	 	$	13,381	 	 	$	15,901	 	 	$	15,147	 	 	$	21,006	 	 	$	16,659	 	 	$	15,700	 	 	$	14,204	 	
Total Utility Operating Income	 	 	2,283	 	 	 	2,223	 	 	 	3,714	 	 	 	3,215	 	 	 	5,910	 	 	 	5,451	 	 	 	2,670	 	 	 	2,203	 	
Net Income	 	 	1,070	 	 	 	1,144	 	 	 	2,312	 	 	 	2,266	 	 	 	4,651	 	 	 	5,759	 	 	 	1,765	 	 	 	1,040	 	
Basic Earnings per Common Share	 	 	0.12	 	 	 	0.13	 	 	 	0.28	 	 	 	0.27	 	 	 	0.54	 	 	 	0.67	 	 	 	0.20	 	 	 	0.13	 	
Diluted Earnings per Common Share	 	 	0.12	 	 	 	0.13	 	 	 	0.27	 	 	 	0.27	 	 	 	0.54	 	 	 	0.67	 	 	 	0.20	 	 	 	0.12	 	

 
F-22

Table of Contents

Exhibit
Number	 
Description	
3.1	Certificate of Incorporation of Connecticut Water Service, Inc. amended and restated as of April, 1998. (Exhibit 3.1 to Form 10-K for the year ended 12/31/98).	
3.2	By-Laws, as amended, of Connecticut Water Service, Inc. as amended and restated as of August 16, 2007. (Exhibit 3.1 to Form 8-K filed on August 21, 2007).	
3.3	Certification of Incorporation of The Connecticut Water Company effective April, 1998. (Exhibit 3.3 to Form 10-K for the year ended 12/31/98).	
3.4	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Connecticut Water Service, Inc. dated August 6, 2001. (Exhibit 3.4 to Form 10-K for the year ended 12/31/01).	
3.5	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Connecticut Water Service, Inc. dated April 23, 2004. (Exhibit 3.5 to Form 10-Q for the quarter ended 3/31/03).	
4.1	Loan Agreement dated as of October 1, 2003 between the Connecticut Development Authority and The Connecticut Water Company. (Exhibit 4.12 to Form 10-K for the year ended 12/31/03).	
4.2	Indenture of Trust dated as of October 1, 2003 between the Connecticut Development Authority and The Connecticut Water Company. (Exhibit 4.13 to Form 10-K for the year ended 12/31/03).	
4.3	Loan Agreement dated as of October 1, 2003 between the Connecticut Development Authority and The Connecticut Water Company. (Exhibit 4.14 to Form 10-K for the year ended 12/31/03).	
4.4	Indenture of Trust dated as of October 1, 2003 between the Connecticut Development Authority and The Connecticut Water Company.  (Exhibit 4.15 to Form 10-K for the year ended 12/31/03).	
4.5	Bond Purchase Agreement dated as of October 10, 2003 among Connecticut Development Authority, The Connecticut Water Company and A.G. Edwards and Sons, Inc.  (Exhibit 4.16 to Form 10-K for the year ended 12/31/03).	
4.6	Line of Credit Agreement dated as of March 12, 2004 between Webster Bank and Connecticut Water Service, Inc. (Exhibit 4.17 to Form 10-Q for the quarter ended 3/31/04).	
4.7	Bond Purchase Agreement dated as of March 12, 2004, among The Connecticut Water Company and A.G. Edwards & Sons, Inc. (Exhibit 4.18 to Form 10-Q for the quarter ended 3/31/04).	
4.8	Indenture of Trust, dated as of March 1, 2004, between The Connecticut Water Company and U.S. Bank National Association, as Trustee.  (Exhibit 4.19 to Form 10-Q for the quarter ended 3/31/04).	
4.9	Reimbursement and Credit Agreement, dated as of March 1, 2004, between The Connecticut Water Company and Citizen’s Bank of Rhode Island. (Exhibit 4.20 to Form 10-Q for the quarter ended 3/31/04).	
4.10	Letter of Credit issued by Citizen’s Bank of Rhode Island, dated as of March 4, 2004.  (Exhibit 4.21 to Form 10-Q for the quarter ended 3/31/04).	
4.11	Agreement No. DWSRF 200103-C Project Loan Agreement between the State of Connecticut and Unionville Water Company under the Drinking Water State Revolving Fund (DWSRF) Program, dated as of April 19, 2004.  (Exhibit 4.22 to Form 10-Q for the quarter ended 6/30/04).	
4.12	Collateral Assignment of Water Service Charges and Right to Receive Water Service Expense Assessments and Security Agreement between Unionville Water Company and the State of Connecticut, dated as of June 3, 2004.  (Exhibit 4.23 to Form 10-Q for the quarter ended 6/30/04).	
4.13	Bond Purchase Agreement, dated September 1, 2004, among The Connecticut Water Company, Connecticut Development Authority, and A.G. Edwards & Sons, Inc.  (Exhibit 4.24 to Form 10-Q for the quarter ended 9/30/04).	
4.14	Indenture of Trust, dated August 1, 2004, between The Connecticut Water Company and U.S. Bank National Association, as Trustee, 2004A Series.  (Exhibit 4.25 to Form 10-Q for the quarter ended 9/30/04).	
4.15	Indenture of Trust, dated August 1, 2004, between The Connecticut Water Company and U.S. Bank National Association, as Trustee, 2004B Series.  (Exhibit 4.26 to Form 10-Q for the quarter ended 9/30/04).	
4.16	Loan Agreement, dated August 1, 2004, between The Connecticut Water Company and Connecticut Development Authority for 2004 Series.  (Exhibit 4.27 to Form 10-Q for the quarter ended 9/30/04).	
4.17	Loan Agreement, dated August 1, 2004, between The Connecticut Water Company and Connecticut Development Authority for 2004B Series.  (Exhibit 4.28 to Form 10-Q for the quarter ended 9/30/04).	
4.18	Reimbursement and Credit Agreement, dated as of August 1, 2004, between The Connecticut Water Company and Citizen’s Bank of Rhode Island, 2004A Series.  (Exhibit 4.29 to Form 10-Q for the quarter ended 9/30/04).	
4.19	Reimbursement and Credit Agreement, dated as of August 1, 2004, between The Connecticut Water Company and Citizen’s Bank of Rhode Island, 2004B Series.  (Exhibit 4.30 to Form 10-Q for the quarter ended 9/30/04).	
4.20	Letters of Credit, each dated September 2, 2004, between The Connecticut Water Company and Citizen’s Bank of Rhode Island, with respect to each of the 2004A and 2004B Series Bonds.  (Exhibit 4.31 to Form 10-Q for the quarter ended 9/30/04).	
4.21	Bond Purchase Agreement, dated October 28, 2005, among The Connecticut Water Company, Connecticut Development Authority and A.G. Edwards & Sons, Inc., Connecticut Water 2005A Series. (Exhibit 4.24 to Form 10-K for the year ended 12/31/05).	
4.22	Loan Agreement, dated October 1, 2005, between The Connecticut Water Company and Connecticut Development Authority, Connecticut Water 2005A Series. (Exhibit 4.25 to Form 10-K for the year ended 12/31/05).	
4.23	Indenture of Trust, dated October 1, 2005, between Connecticut Development Authority and U.S. Bank National Association, as Trustee, Connecticut Water 2005A Series. (Exhibit 4.26 to Form 10-K for the year ended 12/31/05).	
4.24	Insurance Agreement, dated November 30, 2005, between The Connecticut Water Company and Financial Guaranty Insurance Company, as Insurer for The Connecticut Water 2005A Series. (Exhibit 4.27 to Form 10-K for the year ended 12/31/05).	
4.25	Bond Purchase Agreement, dated November 16, 2005, among The Crystal Water Company of Danielson, Connecticut Water Service, Inc., Connecticut Development Authority and A.G. Edwards & Sons, Inc., Crystal Water 2005A Series. (Exhibit 4.28 to Form 10-K for the year ended 12/31/05).	
4.26	Guaranty dated as of October 1, 2005 from Connecticut Water Service, Inc. to U.S. Bank National Association, as Trustee, Crystal Water 2005A Series. (Exhibit 4.29 to Form 10-K for the year ended 12/31/05).	
4.27	Loan Agreement, dated October 1, 2005, between The Crystal Water Company of Danielson and Connecticut Development Authority, Crystal Water 2005A Series. (Exhibit 4.30 to Form 10-K for the year ended 12/31/05).	
4.28	Indenture of Trust, dated October 1, 2005, between Connecticut Development Authority and U.S. Bank National Association, as Trustee, Crystal Water 2005A Series. (Exhibit 4.31 to Form 10-K for the year ended 12/31/05).	
4.29	Insurance Agreement, dated November 30, 2005, between The Crystal Water Company of Danielson and Financial Guaranty Insurance Company, as Insurer for the Crystal Water 2005A Series. (Exhibit 4.32 to Form 10-K for the year ended 12/31/05).	
4.30	First Amendment to Reimbursement and Credit Agreement, dated as of April 28, 2006, between The Connecticut Water Company and Citizen’s Bank of Rhode Island, 2004A Series.  (Exhibit 10.1 to Form 10-Q for the period ending 3/31/06).	
4.31	First Amendment to Reimbursement and Credit Agreement, dated as of April 28, 2006, between The Connecticut Water Company and Citizen’s Bank of Rhode Island, 2004B Series.  (Exhibit 10.2 to Form 10-Q for the period ending 3/31/06).	
4.32	First Amendment to Reimbursement and Credit Agreement, dated as of April 28, 2006, between The Connecticut Water Company and Citizen’s Bank of Rhode Island, 2004 Series Variable Rate, due 2029. (Exhibit 10.3 to Form 10-Q for the period ending 3/31/06).	
4.33	Bond Purchase Agreement, dated December 5, 2007, among The Connecticut Water Company, Connecticut Development Authority, and Edward Jones and Company, L.P. water facilities Revenue Bonds – 2007A Series (AMT).  (Exhibit 4.33 to Form 10-K for the year ended 12/31/07)	
4.34	Loan Agreement dated as of December 5, 2007, among The Connecticut Water Company, and Connecticut Development Authority, Water Facilities Revenue Bonds – 2007A Series (AMT).  (Exhibit 4.34 to Form 10-K for the year ended 12/31/07)	
4.35	Indenture of Trust dated as of December 5, 2007, among The Connecticut Water Company, and Connecticut Development Authority, Water Facilities Revenue Bonds – 2007A Series (AMT).  (Exhibit 4.35 to Form 10-K for the year ended 12/31/07)	
4.36	Second Amendment to Reimbursement and Credit Agreement, dated as of August 23, 2007 between The Connecticut Water Company and Citizen’s Bank of Rhode Island 2004 A Series.  (Exhibit 10.2 to the Form 10-Q for the period ending June 30, 2009)	
4.37	Second Amendment to Reimbursement and Credit Agreement, dated as of August 23, 2007 between The Connecticut Water Company and Citizen’s Bank of Rhode Island 2004 B Series.  (Exhibit 10.3 to the Form 10-Q for the period ending June 30, 2009)	
4.38	Second Amendment to Reimbursement and Credit Agreement, dated as of August 23, 2007 between The Connecticut Water Company and Citizen’s Bank of Rhode Island 2004 Series Variable Rate, due 2009.  (Exhibit 10.4 to the Form 10-Q for the period ending June 30, 2009)	
4.39	Third Amendment to Reimbursement and Credit Agreement, dated as of August 23, 2007 between The Connecticut Water Company and Citizen’s Bank of Rhode Island 2004 A Series.  (Exhibit 10.5 to the Form 10-Q for the period ending June 30, 2009)	
4.40	Third Amendment to Reimbursement and Credit Agreement, dated as of August 23, 2007 between The Connecticut Water Company and Citizen’s Bank of Rhode Island 2004 B Series.  (Exhibit 10.6 to the Form 10-Q for the period ending June 30, 2009)	
4.41	Third Amendment to Reimbursement and Credit Agreement, dated as of August 23, 2007 between The Connecticut Water Company and Citizen’s Bank of Rhode Island 2004 Series Variable Rate, due 2009.  (Exhibit 10.7 to the Form 10-Q for the period ending June 30, 2009)	
4.42	Bond Purchase Agreement among The Connecticut Water Company, the Connecticut Development Authority and Edward D. Jones &Co., L.P., as underwriter dated December 2, 2009.  (Exhibit 4.42 to Form 10-K for the year ended December 31, 2009).	
4.43	Loan Agreement between The Connecticut Water Company and the Connecticut Development Authority, dated as of December 1, 2009.  (Exhibit 4.43 to Form 10-K for the year ended December 31, 2009).	
4.44	Indenture of Trust for the Bonds between the Connecticut Development Authority and U.S. Bank National Associations, as Trustee, dated December 1, 2009.  (Exhibit 4.44 to Form 10-K for the year ended December 31, 2009).	
10.1	Pension Plan Fiduciary Liability Insurance for The Connecticut Water Company Employees' Retirement Plan and Trust, Savings Plan of The Connecticut Water Company and The Connecticut Water Company VEBA Trust Fund.  (Exhibit 10.1 to Registration Statement No. 2-74938).	
10.2	Directors and Officers Liability and Corporation Reimbursement Insurance.  (Exhibit 10.2 to Registration Statement No. 2-74938).	
10.3	Directors Deferred Compensation Plan, effective as of January 1, 1980, as amended as of January 1, 2008.  (Exhibit 10.7 to Form 8-K filed on January 30, 2008).	
10.4	Nonstandardized Adoption Agreement Prototype Cash or Deferred Profit-Sharing Plan, effective as of January 1, 2009.	
10.5	The Connecticut Water Company Employees’ Retirement Plan as amended and restated as of August 10, 2010.  (Exhibit 10.1 to Form 8-K filed on August 13, 2010).	
10.6	November 4, 1994 Amendment to Agreement dated December 11, 1957 between The Connecticut Water Company (successor to the Thomaston Water Company) and the City of Waterbury.  (Exhibit 10.16 to Form 10-K for year ended 12/31/94).	
10.7	Agreement dated August 13, 1986 between The Connecticut Water Company and the Metropolitan District.  (Exhibit 10.14 to Form 10-K for the year ended 12/31/86).	
10.8	Report of the Commission to Study the Feasibility of Expanding the Water Supply Services of the Metropolitan District.  (Exhibit 14 to Registration Statement No. 2-61843).	
10.9	Bond Exchange Agreements between Connecticut Water Service, Inc., The Connecticut Water Company Bankers Life Company and Connecticut Mutual Life Insurance Company dated October 23, 1978.  (Exhibit 14 to Form 10-K for the year ended 12/31/78).	
10.10	Dividend Reinvestment and Common Stock Purchase Plan, as amended and restated as of August 19, 2008.  (Exhibit 4 to Form S-3, Registration Statement No. 333-153910, filed on October 8, 2008).	
10.11	Contract for Supplying Bradley International Airport.  (Exhibit 10.21 to Form 10-K for the year ended 12/31/84).	
10.12	Report of South Windsor Task Force.  (Exhibit 10.23 to Form 10-K for the year ended 12/31/87).	
10.13	Trust Agreement for The Connecticut Water Company Welfare Benefits Plan (VEBA) dated January 1, 1989.  (Exhibit 10.21 to Form 10-K for year ended 12/31/89).	
10.14	1994 Performance Stock Program, as amended and restated as of April 26, 2002. (Exhibit A to Proxy Statement dated 3/19/02).	
10.14a	First Amendment to The Connecticut Water Service, Inc. Performance Stock Program Amended and Restated as of April 26, 2002 (the “Plan”) dated December 1, 2005. (Exhibit 10.22a to Form 10-K for the year ended 12/31/05).	
10.14b	Second Amendment to The Connecticut Water Service, Inc. Performance Stock Program Amended and Restated as of April 26, 2002 (the “Plan”) dated January 1, 2008. (Exhibit 10.5 to 8-K filed on 1/30/08).	
10.15	2004 Performance Stock Program, as of April 23, 2004.  (Appendix A to Proxy Statement dated 3/12/04).	
10.15a	First Amendment to The Connecticut Water Service, Inc. 2004 Performance Stock Program, dated January 7, 2004. (Exhibit 10.23f to Form 10-K for the year ended 12/31/05).	
10.15b	Second Amendment to The Connecticut Water Service, Inc. 2004 Performance Stock Program, dated January 1, 2008. (Exhibit 10.6 to Form 8-K filed on 1/30/08).	
10.15c	Connecticut Water Service, Inc. Performance Stock Program Incentive Stock Option Grant Form.  (Exhibit 10.1 to Form 10-Q for the quarter ended 9/30/04).	
10.15d	Connecticut Water Service, Inc. Performance Stock Program Non-Qualified Stock Option Grant Form.  (Exhibit 10.2 to Form 10-Q for the quarter ended 9/30/04).	
10.15e	Restricted Stock Agreement, standard form for officers, dated December 1, 2005 (Exhibit 10.1 to Form 8-K dated 1/13/06).	
10.15f	Long-Term Performance Award Agreement, standard form for officers, dated January 11, 2006 (Exhibit 10.2 to Form 8-K dated 1/13/06).	
10.15g	Performance Award Agreement, standard form for officers, dated January 11, 2006 (Exhibit 10.3 to Form 8-K dated 1/13/06).	
10.16	Settlement Agreement between Connecticut Water Company, Mary J. Healey, Office of Consumer Counsel of the State of Connecticut, and the Prosecutorial Staff of the DPUC, dated December 4, 2006.  (Exhibit 10.1 to Form 8-K dated 12/6/06).	
10.16a	Revised Settlement Agreement between Connecticut Water Company, Mary J. Healey, Office of Consumer Counsel of the State of Connecticut, and the Prosecutorial Staff of the DPUC, dated December 20, 2006.  (Exhibit 99.1 to Form 8-K dated 1/18/07).	
10.16b	Final Decision of the Connecticut DPUC, Docket No. 06-07-08, dated January 16, 2007. (Exhibit 99.2 to Form 8-K dated 1/18/07).	
10.16c	Final Decision of the Connecticut DPUC, Docket No. 06-07-08, dated March 28, 2008. (Exhibit 99.1 to Form 8-K dated 4/3/08).	
10.17	Form of Amended Restated Employment Agreement with the Company’s executive officers (Exhibit 10.19 to Form 10-K for year ended December 31, 2008), including:
a)  Peter J. Bancroft
b)  David C. Benoit
c)  Terrance P. O’Neill
d)  Eric W. Thornburg
e)  Maureen P. Westbrook	
10.18	Form of Amended Restated Employment Agreement with the Company’s executive officers (Exhibit 10.20 to Form 10-K for year ended December 31, 2008), including:
a)  Kristen A. Johnson
b)  Daniel J. Meaney
c)  Nicholas A. Rinaldi	
10.19	Form of Amended and Restated Supplemental Executive Retirement Agreement with the Company’s executive officers (Exhibit 10.21 to Form 10-K for year ended December 31, 2008), including:
a)  Peter J. Bancroft
b)  David C. Benoit
c)  Kristen A. Johnson
d)  Daniel J. Meaney
e)  Terrance P. O’Neill
f)  Nicholas A. Rinaldi
g)  Eric W. Thornburg
h)  Maureen P. Westbrook	
10.20*	Form of Amended and Restated Deferred Compensation Agreement with the Company’s executive officers (effective January 1, 2011), including:
a)  Peter J. Bancroft
b)  David C. Benoit
c)  Kristen A. Johnson
d)  Daniel J. Meaney
e)  Terrance P. O’Neill
f)  Nicholas A. Rinaldi
g)  Eric W. Thornburg
h)  Maureen P. Westbrook	
10.21	Master Loan Agreement and Promissory Note between Connecticut Water Service, Inc. and CoBank, ACB, dated June 29, 2009.  (Exhibit 10.1 to Form 8-K filed on July 2, 2009)	
10.22	Line of credit agreement dated August 12, 2009 between Bank of America, N.A. and Connecticut Water Service, Inc.  (Exhibit 10.1 to Form 10-Q for the quarter ending September 30, 2009)	
10.23	Line of credit agreement dated August 12, 2009 between RBS Citizens, National Association and Connecticut Water Service, Inc.  (Exhibit 10.2 to Form 10-Q for the quarter ending September 30, 2009)	
21*	Connecticut Water Service, Inc. Subsidiaries Listing.	
23.1*	Consent of Independent Registered Public Accounting Firm.	
31.1*	Rule 13a-14 Certification of Eric W. Thornburg, Chief Executive Officer.	
31.2*	Rule 13a-14 Certification of David C. Benoit, Chief Financial Officer.	
32.1**	Certification of Eric W. Thornburg, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
32.2**	Certification of David C. Benoit, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
Note:	Exhibits 10.1 through 10.5l, 10.13 through 10.15g, and 10.19 through 10.22 set forth each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.	

* = filed herewith
** = furnished herewith

E-1

Table of Contents

SIGNATURES

 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 	CONNECTICUT WATER SERVICE, INC.
Registrant	
March 11, 2011	By   /s/   Eric W. Thornburg
Eric W. Thornburg
Chairman, President and Chief Executive Officer	

 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Connecticut Water Service, Inc. in the capacities and on the dates indicated.

Signature	 	Title	 	Date	
/s/   Eric W. Thornburg
Eric W. Thornburg
 	 	Chairman, President, and Chief Executive Officer (Principal Executive Officer)	 	March 11, 2011	
/s/   David C. Benoit
David C. Benoit
 	 	Vice President – Finance, Chief Financial Officer and Treasurer (Principal Financial Officer)	 	March 11, 2011	
/s/   Nicholas A. Rinaldi
Nicholas A. Rinaldi	 	Controller (Principal Accounting Officer)	 	March 11, 2011	

 
Signature	 	Title	 	Date	
/s/   Mary Ann Hanley
Mary Ann Hanley
 	 	Director	 	March 9, 2011	
/s/   Heather Hunt
Heather Hunt
 	 	Director	 	March 9, 2011	
/s/   Mark G. Kachur
Mark G. Kachur
 	 	Director	 	March 5, 2011	
/s/   David A. Lentini
David A. Lentini
 	 	Director	 	March 9, 2011	
/s/   Arthur C. Reeds
Arthur C. Reeds
 	 	Director	 	March 8, 2011	
/s/   Lisa J. Thibdaue
Lisa J. Thibdaue
 	 	Director	 	March 9, 2011	
/s/   Carol P. Wallace
Carol P. Wallace
 	 	Director	 	March 9, 2011	
/s/   Donald B. Wilbur
Donald B. Wilbur
 	 	Director	 	March 2, 2011	

 
26

Table of Contents

CONNECTICUT WATER SERVICE, INC. and SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

(in thousands)
Description	 	Balance Beginning of Year	 	 	Additions Charged to Income	 	 	Deductions From Reserves (1)	 	 	Balance End of Year	 	
Allowance for Uncollectible Accounts	 	 	 	 	 	 	 	 	 	 	 	 	
Year Ended December 31, 2010	 	$	472	 	 	$	648	 	 	$	59	 	 	$	1,061	 	
Year Ended December 31, 2009	 	$	376	 	 	$	401	 	 	$	305	 	 	$	472	 	
Year Ended December 31, 2008	 	$	352	 	 	$	286	 	 	$	262	 	 	$	376	 	

(1) Amounts charged off as uncollectible after deducting recoveries.

S-1

Table of Contents

Exhibit 21

CONNECTICUT WATER SERVICE, INC.

SUBSIDIARIES

Following is a list of the subsidiaries of Connecticut Water Service, Inc., each of which, unless otherwise indicated, is wholly owned by the company either directly or through another subsidiary.

Name	State of Incorporation	
Registrant:	 	
Connecticut Water Service, Inc.	Connecticut	
Subsidiaries:	 	
The Connecticut Water Company	Connecticut	
Chester Realty, Inc.	Connecticut	
New England Water Utility Services, Inc.	Connecticut	
The Barnstable Holding Company	Connecticut	

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (333-153910) and on Form S-8 (Nos. 333-94525, 333-51702, 333-88554, and 333-117494) of Connecticut Water Service, Inc. of our report dated March 11, 2011 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers, LLP

Stamford, Connecticut
March 11, 2011

Exhibit 31.1
Rule 13a-14 Certification
Form 10-K

CERTIFICATIONS

I, Eric W. Thornburg, certify that:

1.  	I have reviewed this annual report on Form 10-K of Connecticut Water Service, Inc.;	
2.  	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
3.  	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
4.  	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d -15(f)) for the registrant and have:	
a.  	Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
b.  	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
c.  	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;	
d.  	Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
5.  	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
a.  	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
b.  	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.	

/s/   Eric W. Thornburg
Eric W. Thornburg
Chief Executive Officer
March 11, 2011

Exhibit 31.2
Rule 13a-14 Certification
Form 10-K

CERTIFICATIONS

I, David C. Benoit, certify that:

1.  	I have reviewed this annual report on Form 10-K of Connecticut Water Service, Inc.;	
2.  	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
3.  	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
4.  	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d -15(f)) for the registrant and have:	
a.  	Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
b.  	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
c.  	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;	
d.  	Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
5.  	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
a.  	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
b.  	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.	

/s/   David C. Benoit
David C. Benoit
Chief Financial Officer
March 11, 2011

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Connecticut Water Service, Inc. (the “ Company”) on Form 10-K for the period ending December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric W. Thornburg, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 (1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/   Eric W. Thornburg
Eric W. Thornburg
Chief Executive Officer
March 11, 2011

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Connecticut Water Service, Inc. (the “ Company”) on Form 10-K for the period ending December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David C. Benoit, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 (1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/   David C. Benoit
David C. Benoit
Chief Financial Officer
March 11, 2011

AMENDED AND RESTATED
DEFERRED COMPENSATION AGREEMENT

THIS AGREEMENT (the “Deferred Compensation Agreement”) is made this ______ day of __________________, 2011 and between The Connecticut Water Company (together with any affiliated companies hereinafter collectively referred to as the "Employer") and
_______________________ (hereinafter referred to as the "Employee").

WITNESSETH:

WHEREAS, the Employee is among a select group of management or highly compensated employees of the Employer; and

 WHEREAS, the Employer and the Employee entered into an Amended and Restated Deferred Compensation Agreement dated January 24, 2008; and

 WHEREAS, the Employer and the Employee reserved the right to amend said Agreement; and

WHEREAS, the Employer and the Employee wish to enter into this Amended and Restated Deferred Compensation Agreement (the "Agreement") on the terms herein set forth, effective as of January 1, 2011;

NOW, THEREFORE, in consideration of the premises and the mutual and dependent promises herein, the parties hereto agree as follows:

1.   DEFERRED COMPENSATION .  The Employee may file a written election with the Employer in the form attached to this Agreement or such other form as may be approved by the Employer to defer up to 12 percent (12%) of the Employee's salary.  Such amount shall be credited to a Deferred Compensation Account as provided in Section 2 hereof.  This election to defer the receipt of salary must be made before the beginning of the calendar year for which the salary is earned and shall remain in effect, unless terminated or changed, or until the date the Employee ceases to be an employee of the Employer.  Any election termination or change of a deferral election must be made on a form provided by the Employer for such purpose and may only be made with respect to salary which will be earned on and after the January 1 following the Employer's receipt of such form provided that such form is received at least seven (7) days prior to the applicable January 1.

2.   DEFERRED COMPENSATION ACCOUNT .  The Employer shall maintain on its books and records a Deferred Compensation Account to record its liability for future payments of deferred compensation and interest thereon required to be paid to the Employee or his beneficiary pursuant to this Agreement.  However, the Employer shall not be required to segregate or earmark any of its assets for the benefit of the Employee or his beneficiary.  The amount reflected in said Deferred Compensation Account shall be available for the Employer's general corporate purposes and shall be available to the Employer's general creditors.  The amount reflected in said Deferred Compensation Account shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors of the Employee or his beneficiary, and any attempt to anticipate, alienate, transfer, assign or attach the same shall be void.  Neither the Employee nor his beneficiary may assert any right or claim against any specific assets of the Employer.  The Employee or his beneficiary shall have only a contractual right against the Employer for the amount reflected in said Deferred Compensation Account and shall have the status of general unsecured creditors.  Notwithstanding the foregoing, in order to pay amounts which may become due under this Agreement, the Employer may establish a grantor trust (hereinafter the "Trust") within the meaning of Section 671 of the Internal Revenue Code of 1986, as amended.  The assets in such Trust shall at all times be subject to the claims of the general creditors of the Employer in the event of the Employer's bankruptcy or insolvency, and neither the Employee nor any beneficiary shall have any preferred claim or right, or any beneficial ownership interest in, any such assets of the Trust prior to the time such assets are paid to an Employee or beneficiary pursuant to this Agreement.

The Employer shall credit to said Deferred Compensation Account the amount of any salary to which the Employee becomes entitled and which is deferred pursuant to Section 1 hereof, such amount to be credited as of the first business day of each month.  The Employer shall also credit to said Deferred Compensation Account an Interest Equivalent in the amount and manner set forth in Section 3 hereof.

 3.            PAYMENT OF DEFERRED COMPENSATION

 (a)            Separation from Service On or After Attainment of Age 55 .  If the Employee should separate from service on or after his attainment of age fifty-five (55) for any reason other than death or an account of “Cause” as defined in subsection (c) below, he shall be entitled to receive payment of the entire amount of his Deferred Compensation Account including an Interest Equivalent, as described below, in the form of an actuarially equivalent life annuity providing for equal annual payments for the life of the Employee.  Such actuarially equivalent life annuity shall be computed on the basis of a mortality table that assumes a life expectancy of age eighty (80) and uses the Interest Factor described below (payment shall continue for the life of the Employee, even if the Employee continues to live past eighty (80)).  If the Employee is a “specified employee” as that term is defined under Section 409A at the time of separation from service, the first annual annuity payment under this subsection shall be paid on the first day of the seventh month following the date of the Employee’s separation from service, and subsequent payments shall be made on anniversaries of that date.  If the Employee is not a “specified employee” at the time of separation from service, the first annual payment under this subsection shall be paid on the first day of the month following the date of the Employee’s separation from service, and subsequent payments shall be made on anniversaries of that date.

There shall be credited to the Employee's Deferred Compensation Account as of each January 1 and July 1, commencing with July 1, 1996 until payment of such account begins, as additional deferred compensation, an Interest Equivalent equal to fifty   percent (50%) of the product of (i) the AAA Corporate Bond Yield Averages published by Moody's Bond Survey for the Friday ending on or immediately preceding the applicable January 1 and July 1 plus 3 percentage points (the "Interest Factor"), multiplied by (ii) the balance of the Employee's Deferred Compensation Account, including the amount of Interest Equivalent previously credited to such Employee's account, as of the preceding day (i.e., December 31 or June 30).  The Interest Factor used to compute the annuity payable upon the Employee's separation from service on or after his attainment of age fifty-five (55) shall be calculated based upon the Interest Factor as of the January 1 or July 1 immediately preceding the date of the Employee's separation from service, whichever shall fall nearer to the date of the Employee ' s separation from service.

(b)   Separation from Service Prior to Attainment of Age 55 .  If the Employee should separate from service prior to his attainment of age fifty-five (55) for any reason other than death or on account of "Cause" as defined in subsection (c) below, the Employee shall be entitled to receive payment in a lump sum of the entire amount of his Deferred Compensation Account, including the same Interest Equivalent as described in subsection (a) above.  If the Employee is a “specified employee” as that term is defined under Section 409A at the time of separation from service, payment under this subsection shall be made on the date which is six (6) months following the date payment would otherwise be made pursuant to the following sentence.  If the Employee is not a “specified employee” at the time of separation from service, payment under this subsection shall be made on the third (3 rd ) day following separation from service.

(c)   Separation from Service for Cause .

(i)           If the employment of the Employee is terminated by the Employer for Cause, the Employee shall be entitled only to a return of amounts deferred pursuant to Section 1 hereof.

(ii)           If the Employee is so terminated on or after age 55, payment shall be made in accordance with the terms of Section 3(a) above.  However, the Employee shall not be entitled to the Interest Equivalent for any years prior to such termination, and such Interest Equivalent shall not be included in determining Employee’s benefit hereunder.  An Interest Factor shall be utilized in calculating the amount of the annuity payable in accordance with the last sentence of subsection (a) above.

(iii)           If the Employee is so terminated prior to attainment of age 55, payment of the return of amounts deferred (excluding any Interest Equivalent) shall be made in a lump sum.  If the Employee is a “specified employee” as that term is defined under Section 409A at the time of separation from service, payment under this subsection shall be made on the date which is six (6) months following the date payment would otherwise be made pursuant to the following sentence.  If the Employee is not a “specified employee” at the time of separation from service, payment under this subsection shall be made on the third (3 rd ) day following separation from service.

(iv)           As used in this Agreement, the term "Cause" shall mean:

 	(A)	the Employee's rendering, while employed by the Employer, of any services, assistance or advice, either directly or indirectly, to any person, firm or organization competing with, or in opposition to, the Employer;	

 	(B)	the Employee's allowing, while employed by the Employer, any use of his name by any person, firm or organization competing with, or in opposition to, the Employer; or	

 	(C)	willful misconduct by the Employee, including, but not limited to, the commission by the Employee of a felony or the perpetration by the Employee of a common law fraud upon the Employer.	

(d)   Death While Employed .  Notwithstanding anything to the contrary contained in the foregoing, if the Employee should die while employed by the Employer, his beneficiary, designated pursuant to Section 4 hereof, shall receive in a lump sum, in lieu of the amount(s) otherwise payable to the Employee under this Agreement, a death benefit equal to the greater of (i) the Hypothetical Death Benefit, as defined in subsection (f) hereof, and (ii) the entire amount of his Deferred Compensation Account at the date of his death, assuming that an Interest Equivalent were credited to such account as of each January 1 and July 1, occurring after the first deferral hereunder until the date of death at the rate set forth in subsection (a) hereof.  Such beneficiary shall receive such death benefit on the thirtieth (30 th ) day following the death of the Employee.

(e)   Death After Separation from Service .

(i)           If the Employee should die after his separation from service, whether prior to or on or after attainment of age 55, and prior to the date on which payment of his Deferred Compensation Account has commenced in the form of an annuity in accordance with subsection (a) or has been paid in the form of a lump sum as provided in subsection (b), his beneficiary, designated pursuant to Section 4 hereof, shall receive in a lump sum, in lieu of the amount(s) otherwise payable to the Employee under this Agreement, a death benefit equal to the entire amount of the Employee's Deferred Compensation Account, including the same Interest Equivalent as described in subsection (a) above, at the date of his death, provided that the Employee's employment shall not have terminated on account of "Cause" as defined in subsection (c) hereof.  In the event that the Employee should die after the termination of his employment for “Cause,” whether prior to or on or after attainment of age 55, and in either case prior to the date upon which payment of his Deferred Compensation Account has been made or has commenced, his beneficiary, designated pursuant to Section 4 hereof, shall receive a return of the amounts deferred (excluding any Interest Equivalent).  No Interest Equivalent shall be credited to the Employee ' s Deferred Compensation Account in the event of the Employee's death after his termination on account of "Cause" as provided in subsection (c) hereof.  In either case, the Employee's beneficiary shall receive such death benefit on the thirtieth (30 th ) day following the death of the Employee.

(ii)           If the Employee should die after his separation from service with the Employer on or after attainment of age 55 (not on account of “Cause”) and after the date on which payment of his Deferred Compensation Account and the Interest Equivalent set forth in subsection (a) hereof has commenced in the form of an annuity as provided in subsection (a), no additional benefits shall be payable under this Agreement after the Employee's death except to the extent that the Employee did not receive prior to his death benefits in an amount equal to or greater than the Employee’s Deferred Compensation Account plus any Interest Equivalent credited thereto, as of the date of the Employee’s death.  If the Employee dies prior to receiving benefits equal to or greater than the Employee’s Deferred Compensation Account plus any Interest Equivalent credited thereto as of the date of the Employee’s death, his beneficiary shall be entitled to a lump sum payment, thirty (30) days following Employee’s death, equal to the difference between benefits paid to the Employee hereunder and the Employee’s Deferred Compensation account, plus any Interest Equivalent credited thereto, as of the date of the Employee’s death.

(iii)           If the Employee should die after his separation from service with the Employer on or after attainment of age 55 on account of “Cause” and after the date payments have commenced to him in the form of an annuity as provided in subsection (c), no additional benefits shall be payable under this Agreement after the Employee’s death except to the extent the Employee did not receive prior to his death benefits in an amount equal to or greater than the amounts deferred (excluding any Interest Equivalent earned while employed).  In such event, his beneficiary shall be entitled to a lump sum payment, thirty (30) days following Employee’s death, equal to the difference between benefits paid to the Employee hereunder and the amounts deferred (excluding any Interest Equivalent earned while employed).

(iv)           If the Employee should die after his separation from service with the Employer and after the date on which payment has been paid to him in the form of a lump sum pursuant to subsection (b) or (c), no additional benefits shall be payable upon the Employee's death.

(f)   Hypothetical Death Benefit .  For purposes of this Agreement, the term "Hypothetical Death Benefit” shall mean a lump sum benefit equal to the proceeds of any policy of key-man life insurance on the life of the Employee, of which the Employer is owner and beneficiary, and which policy is designated by the Employer as subject to the provisions hereof, reduced by (i) the amount of any tax imposed on the Employer with respect to such proceeds and (ii) the cost to the Employer of any tax deductions postponed as a result of salary deferrals pursuant to Section 1 hereof and increased by (iii) the tax deduction to the Employer which would result from payment of the Hypothetical Death Benefit to a beneficiary of the Employee.  For purposes of (ii) above, an opportunity cost factor of six (6) percent pre-tax interest will be applied during the period of postponed deductions under (ii).  The calculation of the Hypothetical Death Benefit shall be done by the Employer, whose calculation shall be final and binding on the Employee and his beneficiary.  Anything herein to the contrary notwithstanding, the Employer shall not be required to purchase a policy of key-man life insurance on the life of any Employee, and any such policy purchased by the Employer, and all proceeds thereof, shall remain at all times available to the Employer's general creditors.

(g)   Termination of Employment .  In order for the Employee to be considered to have terminated employment with the Employer, the Employee must have incurred a separation from service from the Employer (and all related companies) within the meaning of Section 409A, and the term termination of employment shall be construed and interpreted in a manner consistent with the term separation from service.

4.            BENEFICIARY .  The Employee has notified or will in the future notify the Employer of the person or persons entitled to receive payments on the death of the Employee.  For the purposes of this Agreement, such person or persons are herein referred to collectively as the "beneficiary."  The person whom an Employee designates as his beneficiary for this purpose must be one of the following: the Employee ' s spouse; father, mother, sister, brother, son or daughter.  The beneficiary may also be a legal ward living with and dependent on the Employee at the time of his death.  If the Employee dies and has not designated a beneficiary, his beneficiary shall be his spouse, if living; otherwise, his beneficiary shall be deemed to be his estate.  An Employee's beneficiary designation may be changed at any time by the Employee giving written notice to the Employer of such change.  The rights of any beneficiary presently or hereafter designated are subject to any changes made in this Agreement by the Employee and the Employer.

5.   WITHHOLDING .  The Employer shall be permitted to withhold from any payment to the Employee or his beneficiary hereunder all federal, state or other taxes which may be required with respect to such payment.

6.   ARBITRATION .  In the event that a dispute shall arise with respect to any of the provisions of this Agreement, either the Employer or the Employee or his beneficiary, as the case may be, may give written notice to the other stating the claims that said party desires to arbitrate, and naming an arbitrator.  Within ten (10) days after the receipt of such notice, the party receiving same shall appoint a second arbitrator by written notice to be sent to the party who requested arbitration.  Within ten (10) days after receipt of such notice of appointment of the second arbitrator, the two (2) arbitrators so appointed shall meet to select a third arbitrator and shall give written notice of such selection to the Employer and the Employee or his beneficiary.  The decision of a majority of the arbitrators shall be conclusive and binding upon the Employer and the Employee or his beneficiary.  All notices hereunder shall be by registered mail addressed to the last known address of the party entitled to receive notice.  The Employer and the Employee shall each pay their own costs incurred in the arbitration proceeding.

7.            MISCELLANEOUS .

(a)   This Agreement shall be binding upon the parties hereto, their heirs, executors, administrators, successors and assigns.  The Employer agrees that it will not be a party to any merger, consolidation or reorganization unless and until its obligations hereunder shall be expressly assumed by its successor or successors.

(b)   This Agreement may be amended at any time by mutual written agreement of the parties hereto, but no amendment shall operate to give the Employee, or any beneficiary designated by him, either directly or indirectly, any interest whatsoever in any funds or assets of the Employer, except the right to receive the payments herein provided.

(c)   Deferrals under this Agreement may be suspended by the Employer effective as of any January 1, following the time that tax or other laws are enacted or interpreted which result or will result in costs to the Employer significantly in excess of those contemplated at the time of the execution hereof.  In the event of such suspension, the Employer ' s sole obligation shall be to pay to the Employee in accordance with Section 3 above.  In no event may deferrals be ceased during a calendar year by action of either the Employer or the Employee, or both.

(d)   This Agreement shall not supersede any contract of employment, whether oral or written, between the Employer and the Employee, nor shall it affect or impair the rights and obligations of the Employer and the Employee, respectively, thereunder.  Nothing contained herein shall impose any obligation on the Employer to continue the employment of the Employee.

(e)   If Moody's Bond Survey shall cease to publish the Corporate Bond Yield Averages referred to in Section 3 hereof, a similar average selected by the Board of Directors of the Employer, in its sole discretion, shall be used.

(f)   This Agreement shall be executed in duplicate, and each executed copy of this Agreement shall be deemed an original.

(g)   This Agreement shall be construed in all respects under the laws of the State of Connecticut, subject to applicable federal law.

(h)   This Agreement has been prepared with reference to Section 409A and should be interpreted and administered in a manner consistent with Section 409A.

(i)   This Amendment and Restatement is effective as of January 1, 2011.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written.

THE CONNECTICUT WATER COMPANY

 By                                                                           
 Date
      Its

 Date