CONNECTICUT WATER SERVICE INC / CT, 10-Q filed on 5/10/2012
Quarterly Report
Document and Entity Information (USD $)
3 Months Ended
Mar. 31, 2012
Jun. 30, 2011
Entity Registrant Name
CONNECTICUT WATER SERVICE INC / CT 
 
Entity Central Index Key
0000276209 
 
Current Fiscal Year End Date
--12-31 
 
Entity Well-known Seasoned Issuer
No 
 
Entity Voluntary Filers
No 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Accelerated Filer 
 
Entity Public Float
 
$ 214,731,952 
Entity Common Stock, Shares Outstanding
8,799,551 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q1 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2012 
 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
3 Months Ended 12 Months Ended
Mar. 31, 2012
Dec. 31, 2011
ASSETS
 
 
Utility Plant
$ 560,612 
$ 487,540 
Construction Work in Progress
8,485 
6,160 
Gross Utility Plant
569,097 
493,700 
Accumulated Provision for Depreciation
(156,175)
(133,673)
Net Utility Plant
412,922 
360,027 
Other Property and Investments
5,899 
5,563 
Cash and Cash Equivalents
3,371 
1,012 
Accounts Receivable (Less Allowance, 2012 - $1,105; 2011 - $1,088)
9,367 
8,436 
Accrued Unbilled Revenues
7,260 
6,477 
Materials and Supplies
1,482 
1,126 
Prepayments and Other Current Assets
4,651 
1,830 
Total Current Assets
26,131 
18,881 
Restricted Cash
15,932 
15,930 
Unamortized Debt Issuance Expense
7,672 
7,296 
Unrecovered Income Taxes - Regulatory Asset
31,025 
29,255 
Pension Benefits - Regulatory Asset
13,487 
13,862 
Post-Retirement Benefits Other Than Pension - Regulatory Asset
4,072 
3,967 
Goodwill
22,362 
3,608 
Deferred Charges and Other Costs
8,451 
6,442 
Total Regulatory and Other Long-Term Assets
103,001 
80,360 
Total Assets
547,953 
464,831 
CAPITALIZATION AND LIABILITIES
 
 
Common Stock Without Par Value: Authorized - 25,000,000 Shares - Issued and Outstanding: 2012 - 8,799,551; 2011 - 8,755,398
72,794 
72,345 
Retained Earnings
46,482 
46,669 
Accumulated Other Comprehensive Loss
(770)
(825)
Common Stockholders' Equity
118,506 
118,189 
Preferred Stock
772 
772 
Long-Term Debt
188,030 
135,256 
Total Capitalization
307,308 
254,217 
Current Portion of Long-Term Debt
1,225 
0 
Interim Bank Loans Payable
27,171 
21,372 
Accounts Payable and Accrued Expenses
5,512 
7,166 
Accrued Taxes
0 
302 
Accrued Interest
2,115 
1,002 
Other Current Liabilities
1,741 
586 
Total Current Liabilities
37,764 
30,428 
Advances for Construction
33,647 
32,517 
Contributions in Aid of Construction
69,571 
60,679 
Deferred Federal and State Income Taxes
41,537 
31,075 
Unfunded Future Income Taxes
29,183 
29,255 
Long-Term Compensation Arrangements
27,402 
25,232 
Unamortized Investment Tax Credits
1,432 
1,313 
Other Long-Term Liabilities
109 
115 
Total Long-Term Liabilities
202,881 
180,186 
Commitments and Contingencies
   
   
Total Capitalization and Liabilities
$ 547,953 
$ 464,831 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
ASSETS
 
 
Allowance
$ 1,105 
$ 1,088 
Capitalization Longterm Debt And Equity [Abstract]
 
 
Common Stock, Par Value (in dollars per share)
$ 0 
$ 0 
Common Stock, Shares Authorized (in shares)
25,000,000 
25,000,000 
Common Stock, Shares Issued (in shares)
8,799,551 
8,755,398 
Common Stock, Shares Outstanding (in shares)
8,799,551 
8,755,398 
CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Income Statement [Abstract]
 
 
Operating Revenues
$ 18,540 
$ 15,989 
Operating Expenses
 
 
Operation and Maintenance
9,635 
8,010 
Depreciation
2,387 
1,872 
Income Taxes
979 
1,102 
Taxes Other Than Income Taxes
1,988 
1,645 
Total Operating Expenses
14,989 
12,629 
Net Operating Revenues
3,551 
3,360 
Other Utility Income, Net of Taxes
176 
178 
Total Utility Operating Income
3,727 
3,538 
Other Income (Deductions), Net of Taxes
 
 
Non-Water Sales Earnings
350 
193 
Allowance for Funds Used During Construction
56 
31 
Other
(143)
(134)
Total Other Income, Net of Taxes
263 
90 
Interest and Debt Expense
 
 
Interest on Long-Term Debt
1,920 
1,149 
Other Interest Charges
77 
105 
Amortization of Debt Expense
83 
106 
Total Interest and Debt Expense
2,080 
1,360 
Net Income
1,910 
2,268 
Preferred Stock Dividend Requirement
9 
9 
Net Income Applicable to Common Stock
$ 1,901 
$ 2,259 
Weighted Average Common Shares Outstanding:
 
 
Basic (in shares)
8,651 
8,579 
Diluted (in shares)
8,781 
8,694 
Earnings Per Common Share:
 
 
Basic (in dollars per share)
$ 0.22 
$ 0.26 
Diluted (in dollars per share)
$ 0.22 
$ 0.26 
Dividends Per Common Share (in dollars per share)
$ 0.2375 
$ 0.2325 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Other Comprehensive Income [Abstract]
 
 
Net Income Applicable to Common Stock
$ 1,901 
$ 2,259 
Other Comprehensive Income, net of tax
 
 
Qualified Cash Flow Hedging Instrument Expense, net of tax benefit of $0 and $0 in 2012 and 2011
0 
1 
Reclassification to Pension and Post-Retirement Benefits Other Than Pension, net of tax benefit of $12 in 2012 and $4 in 2011
(6)
(6)
Unrealized (loss) gain on investments, net of tax expense of $40 in 2012 and $1 in 2011
61 
2 
Comprehensive Income
$ 1,956 
$ 2,256 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Other Comprehensive Income, net of tax
 
 
Qualified Cash Flow Hedging Instrument Expense, net of tax (benefit) expense of
$ 0 
$ 0 
Reclassification to Pension and Post-Retirement Benefits Plans, net of tax (benefit) expense of
12 
4 
Unrealized Investment loss, net of tax expense (benefit) of
$ 40 
$ 1 
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Balance at Beginning of Period
$ 46,669 
$ 43,603 
Net Income
1,910 
2,268 
Retained Earnings before Dividends
48,579 
45,871 
Dividends Declared:
 
 
Common Stock - 2012 $0.2375 per share; 2011 $0.2325 per share
2,088 
2,021 
Total Dividends Declared
2,097 
2,030 
Balance at End of Period
46,482 
43,841 
Cumulative Preferred Stock
 
 
Dividends Declared:
 
 
Cumulative Preferred, Class A, $0.20 per share
6 
6 
Series A Voting
 
 
Dividends Declared:
 
 
Cumulative Preferred, Class A, $0.20 per share
$ 3 
$ 3 
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Parenthetical)
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Dividends Declared:
 
 
Common Stock (in dollars per share)
$ 0.2375 
$ 0.2325 
Cumulative Preferred Stock
 
 
Dividends Declared:
 
 
Preferred Stock (in dollars per share)
$ 0.225 
$ 0.225 
Series A Voting
 
 
Dividends Declared:
 
 
Preferred Stock (in dollars per share)
$ 0.200 
$ 0.200 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Operating Activities:
 
 
Net Income
$ 1,910 
$ 2,268 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 
Deferred Revenues
60 
60 
Allowance for Funds Used During Construction
(56)
(31)
Depreciation (including $27 and $201 in 2012 and 2011 charged to other accounts)
2,414 
2,073 
Change in Assets and Liabilities:
 
 
Decrease in Accounts Receivable and Accrued Unbilled Revenues
131 
1,108 
Increase in Prepayments and Other Current Assets
(2,230)
(1,637)
Decrease in Other Non-Current Items
460 
1,050 
Decrease in Accounts Payable, Accrued Expenses and Other Current Liabilities
(1,130)
(301)
Increase in Deferred Income Taxes and Investment Tax Credits, Net
548 
486 
Total Adjustments
197 
2,808 
Net Cash and Cash Equivalents Provided by Operating Activities
2,107 
5,076 
Investing Activities:
 
 
Company Financed Additions to Utility Plant
(3,880)
(2,895)
Advances to (from) Others for Construction
70 
(70)
Net Additions to Utility Plant Used in Continuing Operations
(3,810)
(2,965)
Purchase of water systems, net of cash acquired
(35,754)
0 
Net Cash and Cash Equivalents Used in Investing Activities
(39,564)
(2,965)
Financing Activities:
 
 
Proceeds from Interim Bank Loans
27,171 
26,297 
Repayment of Interim Bank Loans
(21,372)
(26,342)
Proceeds from Issuance of Common Stock
354 
332 
Proceeds from the Exercise of Stock Options
88 
0 
Costs to Issue Long-Term Debt and Common Stock
60 
0 
Repayment of Long-Term Debt Including Current Portion
(406)
(190)
Proceeds from the Issuance of Long-Term Debt
36,088 
0 
Advances (to) from Others for Construction
(70)
70 
Cash Dividends Paid
(2,097)
(2,030)
Net Cash and Cash Equivalents (Used in) Provided by Financing Activities
39,816 
(1,863)
Net Increase (Decrease) in Cash and Cash Equivalents
2,359 
248 
Cash and Cash Equivalents at Beginning of Period
1,012 
952 
Cash and Cash Equivalents at End of Year
3,371 
1,200 
Non-Cash Investing and Financing Activities:
 
 
Non-Cash Contributed Utility Plant
78 
112 
Short-term Investment of Bond Proceeds Held in Restricted Cash
15,932 
1,226 
Cash Paid for:
 
 
Interest
1,007 
1,066 
State and Federal Income Taxes
$ 1,852 
$ 1,225 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 
Depreciation charged to other accounts
$ 27 
$ 201 
Basis of Preparation of Financials
Basis of Preparation of Financials
1.  Basis of Preparation of Financials

The consolidated financial statements included herein have been prepared by CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that are of a normal recurring nature which are, in the opinion of management, necessary to a fair statement of the results for interim periods.  The Company’s primary operating subsidiaries are The Connecticut Water Company (“Connecticut Water”) and The Maine Water Company (“Maine Water”).  Certain information and footnote disclosures have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  The Balance Sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2011.

The results for interim periods are not necessarily indicative of results to be expected for the year since the consolidated earnings are subject to seasonal factors.  Effective January 1, 2012, the Company acquired Maine Water, discussed further in Note 10 below.  As a result, the Company’s consolidated balance sheet at December 31, 2011 and the consolidated statement of net income for the three months ended March 31, 2011 do not include Maine Water.  Maine Water’s results are presented in the consolidated balance sheet and consolidated statement of net income at March 31, 2012.

Pension and Other Post-Retirement Benefits
Pension and Other Post-Retirement Benefits
2.  Pension and Other Post-Retirement Benefits

The following tables set forth the components of pension and other post-retirement benefit costs for the three months ended March 31, 2012 and 2011.

Pension Benefits
Components of Net Periodic Cost (in thousands):

Period ended March 31,
 
2012
  
2011
 
Service Cost
 $524  $443 
Interest Cost
  645   545 
Expected Return on Plan Assets
  (687)  (675)
Amortization of:
        
Transition Obligation
  --   -- 
Prior Service Cost
  17   17 
Net Loss
  358   188 
Net Periodic Benefit Cost
 $857  $518 

The Company does not expect to make a contribution in 2012 for the 2011 plan year, as allowed by the current funding status.

Post-Retirement Benefits Other Than Pension (PBOP)
Components of Net Periodic Cost (in thousands):

Period ended March 31,
 
2012
  
2011
 
Service Cost
 $157  $187 
Interest Cost
  141   179 
Expected Return on Plan Assets
  (68)  (75)
Other
  56   56 
Amortization of:
        
Prior Service Cost
  (201)  (101)
Recognized Net Loss
  166   160 
Net Periodic Benefit Cost
 $251  $406 

On May 16, 2011, Connecticut Water notified participants in its PBOP plan of an amendment that would limit the life-time benefits of participants to $100,000, effective July 1, 2011.
Earnings per Share
Earnings per Share
3.  Earnings per Share

Earnings per weighted average common share are calculated by dividing net income applicable to common stock by the weighted average number of shares of common stock outstanding during the respective periods as detailed below (diluted shares include the effect of unexercised stock options):

Three months ended March 31,
 
2012
  
2011
 
        
Common Shares Outstanding End of Period:
  8,799,551   8,704,500 
Weighted Average Shares Outstanding (Days Outstanding Basis):
        
Basic
  8,650,913   8,578,873 
Diluted
  8,781,100   8,694,036 
          
Basic Earnings per Share
 $0.22  $0.26 
Dilutive Effect of Unexercised Stock Options
  --   -- 
Diluted Earnings per Share
 $0.22  $0.26 

Total unrecognized compensation expense for all stock awards was approximately $1.4 million as of March 31, 2012 and will be recognized over the next three years.
New Accounting Pronouncements
New Accounting Pronouncements
4.  New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, which amends Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosure (“ASC 820”), to update guidance related to fair value measurements and disclosures as a step towards achieving convergence between generally accepted accounting principles and international financial reporting standards.  ASU 2011-04 clarifies intent about application of existing fair value measurements and disclosures, changes certain requirements for fair value measurements and requires expanded disclosures.  ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  Adoption of 2011-04 did not have an impact on the Company’s results of operations, cash flows or financial position.
Long-Term Debt
Long-Term Debt
5.  Long-Term Debt

Long-Term Debt at March 31, 2012, including the debt assumed with the acquisition of The Maine Water Company effective January 1, 2012, and December 31, 2011 consisted of the following (in thousands):

   
2012
 
2011
Connecticut Water Service, Inc.:
       
4.09%
Term Loan Note and Supplement A
 
$18,000
 
$--
Var.
Term Loan Note and Supplement B
 
18,088
 
--
Total Connecticut Water Service, Inc.
 
36,088
 
--
         
The Connecticut Water Company:
       
Unsecured Water Facilities Revenue Bonds
       
5.05%
1998 Series A, Due 2028
 
9,550
 
9,550
5.125%
1998 Series B, Due 2028
 
7,495
 
7,495
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
 
14,795
 
14,805
5.00%
2007 A Series, Due 2037
 
14,560
 
14,570
5.10%
2009 A Series, Due 2039
 
19,950
 
20,000
5.00%
2011 A Series, Due 2021
 
23,943
 
23,991
Total The Connecticut Water Company
 
135,138
 
135,256
         
The Maine Water Company:
       
8.95%
1994 Series G, Due 2024
 
9,000
 
--
5.05%
1999 Series H, Due 2024
 
1,970
 
--
2.68%
1999 Series J, Due 2019
 
524
 
--
0.00%
2001 Series K, Due 2031
 
780
 
--
2.58%
2002 Series L, Due 2022
 
98
 
--
1.53%
2003 Series M, Due 2023
 
421
 
--
1.73%
2004 Series N, Due 2024
 
491
 
--
0.00%
2004 Series O, Due 2034
 
147
 
--
1.76%
2006 Series P, Due 2026
 
471
 
--
1.57%
2009 Series R, Due 2029
 
247
 
--
0.00%
2009 Series S, Due 2029
 
784
 
--
0.00%
2009 Series T, Due 2029
 
2,200
 
--
Total The Maine Water Company
 
17,133
 
--
         
Add:  Maine Acquisition Fair Value Adjustment
 
896
   
Less:  Current Portion
 
(1,225)
 
--
         
Total Long-Term Debt
 
$188,030
 
$135,256
 
 
- 9 -
 
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
 
As of March 31, 2012, the Company and its subsidiaries will make principal payments of approximately of $1,225,000 over the next twelve months.

In December 2011, Connecticut Water borrowed $22.05 million through the issuance of Water Facilities Revenue Bonds by the Connecticut Development Authority (Authority).  Connecticut Water received approximately $24,000,000 in cash in exchange for the issuance of bonds with an aggregate principal amount of $22,050,000 for a 10-year term and a 5% coupon.  Connecticut Water recorded a bond premium in connection with this transaction and will amortize that premium over the life of the bond.  The proceeds from the sale of the bonds will be used to finance construction and installation of various capital improvements to the Connecticut Water’s existing water system.

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.

On January 1, 2012,the Company and CoBank entered into an amendment to the CoBank Agreement (the “Amendment”) and two additional Promissory Note and Single Advance Term Loan Supplements providing for two additional Term Loans to the Company (the “Term Loan Notes and Supplements”).  Under the terms of the Amendment and the Term Loan Notes and Supplements, on January 3, 2012 the Company borrowed from CoBank, in the aggregate, an additional $36.1 million of an available $40 million to be applied to the Company’s acquisition of the issued and outstanding capital stock of Aqua Maine, Inc. from Aqua America, Inc., as more fully described in Note 10 below.

Under one Term Loan Note and Supplement, CoBank loaned the Company $18.0 million, which Term Loan shall be repaid by the Company in 60 equal quarterly installments of principal and interest over a 15-year amortizing term, with the first installment paid on April 20, 2012 and the last installment due on January 20, 2027.  Under the other Term Loan Note and Supplement, CoBank loaned the Company $18.1 million, which Term Loan shall be repaid by the Company in quarterly interest payments and repayment of the principal balance in full on the earlier of July 30, 2013 or upon the Company raising equity capital, in the aggregate, up to the outstanding amount owed under the second Term Note and Supplement.

Under the initial Promissory Note and each of the Term Loan Notes and Supplements, the Company will pay interest on any Loans made by CoBank in accordance with one or more of the following interest rate options, as selected periodically by the Company: (1) at a weekly quoted variable rate, a rate per annum equal to the rate of interest established by CoBank on the first business day of each week; (2) at a fixed rate per annum to be quoted by CoBank in its sole discretion in each instance for periods of 180 days or more; or (3) at a fixed rate per annum equal to LIBOR plus 1.75% for 1, 2, 3, 6, 9 or 12 month interest periods.  Interest shall be calculated on the actual number of days each Loan is outstanding on the basis of a year consisting of 360 days.

Financial Covenants – The Company and its subsidiaries are required to comply with certain covenants in connection with various long term loan agreements.  The Company and its subsidiaries were in compliance with all covenants at March 31, 2012.
Fair Value Disclosures
Fair Value Disclosures
6.  Fair Value Disclosures

Accounting Standards Codifications (“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.

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 March 31, 2012 (in thousands):

   
Level 1
  
Level 2
  
Level 3
  
Total
 
Asset Type:
            
Company Owned Life Insurance
 $--  $2,443  $--  $2,443 
Money Market Fund
  77   --   --   77 
Mutual Funds:
                
Equity Funds (1)
  835   --   --   835 
Total
 $912  $2,443  $--  $3,355 

The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2011 (in thousands):

   
Level 1
  
Level 2
  
Level 3
  
Total
 
Asset Type:
            
Company Owned Life Insurance
 $--  $2,269  $--  $2,269 
Money Market Fund
  28   --   --   28 
Mutual Funds:
                
Equity Funds (1)
  852   --   --   852 
Total
 $880  $2,269  $--  $3,149 

(1)  
Mutual funds consisting primarily of equity securities.
 
 
- 10 -
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
 
The fair value of Company Owned Life Insurance is based on the cash surrender value of the contracts. These contracts are based principally on a referenced pool of investment funds that actively redeem shares and are observable and measurable.

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

Cash and cash equivalents – Cash equivalents consist of highly liquid instruments with original maturities at the time of purchase of three months or less.  The carrying amount approximates fair value.  Under the fair value hierarchy the fair value of cash and cash equivalents is classified as a Level 1 measurement.
 
Restricted Cash – As part of the Connecticut Water’s December 2011 bond offering, 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 2012, as the approved capital expenditures are completed.  The carrying amount approximates fair value.  Under the fair value hierarchy the fair value of restricted cash is classified as a Level 1 measurement.

Long-Term Debt – The fair value of the Company's fixed rate long-term debt is based upon borrowing rates currently available to the Company.  As of March 31, 2012 and December 31, 2011, the estimated fair value of the Company's long-term debt was $202,073,000 and $135,048,000, respectively, as compared to the carrying amounts of $188,030,000 and $135,256,000, respectively. The estimated fair value of long term debt was calculated using a discounted cash flow model that uses comparable interest rates and yield curve data based on the A -rated MMD (Municipal Market Data) Index which is the benchmark of current municipal bond yields. Under the fair value hierarchy the fair value of long term debt is classified as a Level 2 measurement.

The fair values shown above have been reported to meet the disclosure requirements of accounting principles generally accepted in the United States and do not purport to represent the amounts at which those obligations would be settled.
Segment Reporting
Segment Reporting
7.  Segment Reporting

The Company operates principally in three business segments: Water Activities, Real Estate Transactions, and Services and Rentals.  Results of operations for the three months ended March 31, 2012 include the results of Maine Water.  Financial data for the segments is as follows (in thousands):

Three Months Ended March 31, 2012
 
Segment
 
Revenues
  
Pre-Tax Income
  
Income Tax Expense
  
Net Income
 
Water Activities
 $18,889  $2,485  $925  $1,560 
Real Estate Transactions
  --   --   --   -- 
Services and Rentals
  1,335   591   241   350 
Total
 $20,224  $3,076  $1,166  $1,910 

Three Months Ended March 31, 2011
 
Segment
 
Revenues
  
Pre-Tax Income
  
Income Tax Expense
  
Net Income
 
Water Activities
 $16,323  $3,257  $1,182  $2,075 
Real Estate Transactions
  --   --   --   -- 
Services and Rentals
  1,167   329   136   193 
Total
 $17,490  $3,586  $1,318  $2,268 

The revenues shown in Water Activities above consist of revenues from water customers of $18,540,000 and $15,989,000 for the three months ended March 31, 2012 and 2011, respectively.  Additionally, there were revenues associated with utility plant leased to others of $349,000 and $334,000 for the three months ended March 31, 2012 and 2011, respectively.

The Company owns various small, discrete parcels of land that are no longer required for water supply purposes.  From time to time, the Company may sell or donate these parcels, depending on various factors, including the current market for land, the amount of tax benefits received for donations and the Company’s ability to use any benefits received from donations.  During the three months ended March 31, 2012 and 2011, the Company did not engage in any such transactions.

Assets by segment (in thousands):

   
March 31, 2012
  
December 31, 2011
 
Total Plant and Other Investments:
      
Water Activities
 $418,159  $364,955 
Non-Water
  662   635 
    418,821   365,590 
Other Assets:
        
Water Activities
  107,990   96,996 
Non-Water
  21,142   2,245 
    129,132   99,241 
Total Assets
 $547,953  $464,831 
 
Income Tax Expense
Income Taxes
8.  Income Taxes

ASC 740 “Income Taxes” (“ASC 740”) addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The reassessment of the Company’s tax positions in accordance with ASC 740 did not have an impact on the Company’s results of operations, financial condition or liquidity.

From time to time, the Company may be assessed interest and penalties by taxing authorities.  In those cases, the charges would appear on the Other line item on the Income Statement.  There were no such charges for the three month periods ended March 31, 2012 and 2011.  Additionally, there were no accruals relating to interest, penalties or uncertain tax positions as of March 31, 2012 and December 31, 2011.  The Company remains subject to examination by federal authorities for the 2008 and 2010 tax years, and by state authorities for the 2008 through 2010 tax years.  The Internal Revenue Service commenced an examination of the Company’s federal income tax return for the 2009 tax year during the second quarter of 2011.  The Company received notification in December 2011 that no change will be made to the 2009 federal tax liability.

The Company’s effective income tax rate for the first three months of 2012 and 2011 was 37.9% and 36.7%, respectively.  The statutory income tax rates during the same periods were 41% and 39%, respectively.  In determining its annual estimated effective tax rate for interim periods, the Company reflects its estimated permanent and flow-through tax differences for the taxable year.
Lines of Credit
Lines of Credit
9.  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 with CoBank, ACB, which was amended in May 2010 and July 2011 and is currently scheduled to mature on June 25, 2013.  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, 2013.  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, 2013.  On December 30, 2011, the Company terminated its $10 million line of credit.  The Company expects to maintain the two remaining lines of credit totaling $30 million and to renew the lines of credit annually, each with a rolling two year expiration date.  Upon the acquisition of Maine Water, the total lines of credit available to the Company increased to $34 million, due to Maine Water’s $4 million line of credit expiring August 21, 2012.  Maine Water expects to renew the line of credit prior to expiration with similar terms.  Interim Bank Loans Payable at March 31, 2012 and December 31, 2011 was approximately $27.2 million and $21.4 million, respectively, and represents the outstanding aggregate balance on these lines of credit.  As of March 31, 2012, the Company had $6.8 million in unused lines of credit.  Interest expense charged on interim bank loans will fluctuate based on market interest rates.
Aquisitions
Business Combination Disclosure [Text Block]
10.  Acquisitions

Effective January 1, 2012, the Company completed the acquisition of Aqua Maine, Inc. (“AM”) from Aqua America, Inc. (“AA”) for a total cash purchase price, adjusted at closing, of $35.6 million.  Subsequent to the closing, the name of AM was changed to The Maine Water Company (“Maine Water”).  Maine Water is a public water utility regulated by the Maine Public Utilities Commission (“MPUC”) that serves approximately 16,000 customers in 11 water systems in the State of Maine.  The acquisition is consistent with the Company’s growth strategy and makes the Company the largest U.S. based publicly-traded water utility company in New England.  The acquisition expanded the Company’s footprint into another New England state, providing some diversity with respect to weather and regulatory climate and ratemaking.  The Company is accounting for the acquisition in accordance with Accounting Standards Codification (“ASC”) 805 “Business Combinations”.

The following table summarizes the fair value of the assets acquired on January 1, 2012, the date of the acquisition (in thousands):

Net Utility Plant
 $51,861 
Cash and Cash Equivalents
  1,607 
Accounts Receivable, net
  974 
Prepayments and Other Current Assets
  1,819 
Goodwill
  17,540 
Deferred Charges and Other Costs
  4,352 
Total Assets Acquired
 $78,153 
      
Long-Term Debt, including current portion
 $18,259 
Accounts Payable and Accrued Expenses
  1,137 
Other Current Liabilities
  1,289 
Advances for Construction
  1,186 
Contributions in Aid of Construction
  8,886 
Deferred Federal and State Income Taxes
  8,919 
Other Long-Term Liabilities
  2,737 
Total Liabilities Assumed
 $42,413 
      
Net Assets Acquired
 $35,740 

The estimated fair values of the assets acquired and the liabilities assumed were determined based on the accounting guidance for fair value measurement under GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value analysis assumes the highest and best use of the assets by market participants. The allocation of the purchase price includes an adjustment to fair value related to the non-regulated customer relationship of Maine Water and any associated deferred taxes, as well as the fair value of Maine Water’s long term debt. The excess of the purchase price paid over the estimated fair value of the assets acquired and the liabilities assumed was recognized as goodwill, none of which is deductible for tax purposes
 
 
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CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
 
The following unaudited pro forma summary for the quarter ended March 31, 2011 presents information as if Maine Water had been acquired on January 1, 2011 and assumes that there were no other changes in our operations.  The following pro forma information does not necessarily reflect the actual results that would have occurred had the Company operated the business since January 1, 2011, nor is it necessarily indicative of the future results of operations of the combined companies (in thousands):

Quarter ended March 31, 2011
   
Operating Revenues
 $18,611 
Other Water Activities Revenues
  334 
Real Estate Revenues
  -- 
Service and Rentals Revenues
  1,350 
Total Revenues
 $20,295 
      
Net Income
 $2,576 
      
Basic Earnings per Average Share Outstanding
 $0.30 
Diluted Earnings per Average Share Outstanding
 $0.30 

The following table summarizes the results of Maine Water for the quarter ended March 31, 2012, and is included in the Consolidated Statement of Income for the period (in thousands):

Quarter ended March 31, 2012
   
Operating Revenues
 $2,644 
Other Water Activities Revenues
  -- 
Real Estate Revenues
  -- 
Service and Rentals Revenues
  160 
Total Revenues
 $2,804 
      
Net Income
 $355 
      
Basic Earnings per Average Share Outstanding
 $0.04 
Diluted Earnings per Average Share Outstanding
 $0.04 

Additionally, in February 2012, The Connecticut Water Company acquired a small water system in Hebron, Connecticut for $130,000.  The water system serves three multi-unit apartment buildings.