Company Quick10K Filing
Quick10K
Connecticut Water Service
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$69.60 12 $839
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-09 Earnings, Shareholder Vote, Other Events, Exhibits
8-K 2019-05-03 Regulation FD, Exhibits
8-K 2019-04-03 Regulation FD, Exhibits
8-K 2019-02-20 Regulation FD
8-K 2019-01-23 Regulation FD, Exhibits
8-K 2019-01-09 Regulation FD, Exhibits
8-K 2018-12-17 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-12-03 Other Events, Exhibits
8-K 2018-11-16 Shareholder Vote, Other Events, Exhibits
8-K 2018-11-09 Earnings, Exhibits
8-K 2018-11-08 Regulation FD, Exhibits
8-K 2018-11-06 Other Events
8-K 2018-11-05 Regulation FD, Exhibits
8-K 2018-10-24 Regulation FD, Exhibits
8-K 2018-10-17 Regulation FD, Exhibits
8-K 2018-10-15 Regulation FD, Exhibits
8-K 2018-10-02 Regulation FD, Exhibits
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-08-05 Enter Agreement, Regulation FD, Exhibits
8-K 2018-07-20 Regulation FD, Exhibits
8-K 2018-07-16 Regulation FD, Exhibits
8-K 2018-07-13 Regulation FD, Exhibits
8-K 2018-06-18 Regulation FD, Exhibits
8-K 2018-06-08 Regulation FD, Exhibits
8-K 2018-06-06 Regulation FD, Exhibits
8-K 2018-05-30 Enter Agreement, Regulation FD, Exhibits
8-K 2018-05-21 Regulation FD, Exhibits
8-K 2018-05-11 Shareholder Vote, Other Events, Exhibits
8-K 2018-05-10 Regulation FD, Exhibits
8-K 2018-05-07 Regulation FD, Exhibits
8-K 2018-05-03 Regulation FD, Exhibits
8-K 2018-04-28 Regulation FD, Exhibits
8-K 2018-04-19 Regulation FD, Other Events, Exhibits
8-K 2018-04-02 Officers
8-K 2018-03-23 Regulation FD, Exhibits
8-K 2018-03-07 Officers, Other Events, Exhibits
8-K 2018-02-07 Enter Agreement, Other Events, Exhibits
R Ryder System 3,270
CXW Corecivic 2,570
TWIN Twin Disc 189
ALAC Alberton Acquisition 147
OESX Orion Energy Systems 48
PKKW Parkway Acquisition 0
EEP Enbridge Energy Partners 0
ACMC American Church Mortgage 0
STDY Steadymed 0
DTV DirecTV 0
CTWS 2019-03-31
Part I, Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Part I, Item 3: Quantitative and Qualitative Disclosure About Market Risk
Part I, Item 4: Controls and Procedures
Part Ii, Item 1: Legal Proceedings
Part Ii, Item 1A: Risk Factors
Part Ii, Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Part Ii, Item 6: Exhibits
EX-31.1 exhibit311q12019.htm
EX-31.2 exhibit312q12019.htm
EX-32 exhibit32q12019.htm

Connecticut Water Service Earnings 2019-03-31

CTWS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ctws10qq12019.htm CTWS FORM 10-Q MARCH 31, 2019 Document


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

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019 or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________


Commission File Number: 0-8084
cwclogocolora01.jpg
Connecticut Water Service, Inc.
(Exact name of registrant as specified in its charter)
Connecticut
(State or other jurisdiction of
incorporation or organization)
 
06-0739839
(I.R.S. Employer Identification No.)
 
 
 
93 West Main Street, Clinton, CT
(Address of principal executive offices)
 
06413
(Zip Code)

(860) 669-8636
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, without par value
CTWS
The Nasdaq Stock Market, LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x        No ¨

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

Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o

 
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o





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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date
12,063,252
Number of shares of common stock outstanding, April 1, 2019
(Includes 98,493 common stock equivalent shares awarded under the Performance Stock Programs)



CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

Financial Report
March 31, 2019

TABLE OF CONTENTS

Part I, Item 1:  Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 31
Exhibit 32
Exhibit 101.INS
Exhibit 101.SCH
Exhibit 101.CAL
Exhibit 101.DEF
Exhibit 101.LAB
Exhibit 101.PRE



CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
ASSETS
 
March 31, 2019
 
December 31, 2018
Utility Plant
 
$
992,169

 
$
983,220

Construction Work in Progress
 
15,200

 
14,765

 
 
1,007,369

 
997,985

Accumulated Provision for Depreciation
 
(262,237
)
 
(258,192
)
Net Utility Plant
 
745,132

 
739,793

Other Property and Investments
 
12,540

 
11,501

Cash and Cash Equivalents
 
2,730

 
2,856

Accounts Receivable (Less Allowance, 2019 - $1,280; 2018 - $1,236)
 
12,645

 
14,169

Accrued Unbilled Revenues
 
9,763

 
10,011

Materials and Supplies, at Average Cost
 
1,675

 
1,679

Prepayments and Other Current Assets
 
13,302

 
9,943

Total Current Assets
 
40,115

 
38,658

Restricted Cash
 
965

 

Unrecovered Income Taxes - Regulatory Asset
 
78,429

 
75,763

Pension Benefits - Regulatory Asset
 
9,025

 
9,337

Post-Retirement Benefits Other Than Pension - Regulatory Asset
 
129

 
133

Goodwill
 
66,403

 
66,403

Deferred Charges and Other Costs
 
10,898

 
11,755

Total Regulatory and Other Long-Term Assets
 
165,849

 
163,391

Total Assets
 
$
963,636

 
$
953,343

CAPITALIZATION AND LIABILITIES
 
 

 
 

Common Stockholders’ Equity:
 
 

 
 

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

 
 

     Issued and Outstanding: 2019 - 12,063,252; 2018 - 12,054,712
 
$
190,899

 
$
190,433

Retained Earnings
 
102,658

 
104,188

Accumulated Other Comprehensive (Loss)
 
(275
)
 
(485
)
Common Stockholders’ Equity
 
293,282

 
294,136

Long-Term Debt
 
257,382

 
257,511

Total Capitalization
 
550,664

 
551,647

Current Portion of Long-Term Debt
 
4,030

 
4,059

Interim Bank Loans Payable and Other Short-Term Debt
 
65,948

 
54,249

Accounts Payable and Accrued Expenses
 
7,186

 
13,782

Accrued Interest
 
1,663

 
1,531

Current Portion of Refund to Customers - Regulatory Liability
 
2,548

 
2,331

Other Current Liabilities
 
3,126

 
3,101

Total Current Liabilities
 
84,501

 
79,053

Advances for Construction
 
25,154

 
22,654

Deferred Federal and State Income Taxes
 
31,466

 
31,593

Unfunded Future Income Taxes
 
70,422

 
67,725

Long-Term Compensation Arrangements
 
31,698

 
31,043

Unamortized Investment Tax Credits
 
1,038

 
1,057

Excess Accumulated Deferred Income Tax - Regulatory Liability
 
29,469

 
29,611

Refund to Customers - Regulatory Liability
 

 
534

Other Long-Term Liabilities
 
3,418

 
3,345

Total Long-Term Liabilities
 
192,665

 
187,562

Contributions in Aid of Construction
 
135,806

 
135,081

Commitments and Contingencies
 

 

Total Capitalization and Liabilities
 
$
963,636

 
$
953,343


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

4


CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands, except per share amounts)
 
2019
 
2018
Operating Revenues
$
26,246

 
$
24,853

Operating Expenses
 
 
 
Operation and Maintenance
12,922

 
13,020

Depreciation
4,817

 
4,705

Income Tax Expense (Benefit)
212

 
(7
)
Taxes Other Than Income Taxes
3,092

 
2,857

Total Operating Expenses
21,043

 
20,575

Net Operating Revenues
5,203

 
4,278

Other Utility Income, Net of Taxes
199

 
267

Total Utility Operating Income
5,402

 
4,545

Other (Deductions) Income, Net of Taxes
 
 
 
Gain on Real Estate Transactions
12

 

Non-Water Sales Earnings
486

 
396

Allowance for Funds Used During Construction
156

 
53

Merger and Acquisition Costs
(925
)
 
(3,261
)
Other
313

 
(346
)
Total Other (Loss) Income, Net of Taxes
42

 
(3,158
)
Interest and Debt Expense
 
 
 
Interest on Long-Term Debt
2,632

 
2,562

Other Interest Expense (Income), Net
507

 
1

Amortization of Debt Expense and Premium, Net
67

 
51

Total Interest and Debt Expense
3,206

 
2,614

Net Income (Loss)
2,238

 
(1,227
)
Preferred Stock Dividend Requirement

 
9

Net Income (Loss) Applicable to Common Stock
$
2,238

 
$
(1,236
)
Weighted Average Common Shares Outstanding:
 
 
 
Basic
11,962

 
11,862

Diluted
12,060

 
12,080

Earnings Per Common Share:
 
 
 
Basic
$
0.19

 
$
(0.10
)
Diluted
$
0.19

 
$
(0.10
)
Dividends Per Common Share
$
0.3125

 
$
0.2975


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


5


CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands)

 
2019
 
2018
Net Income (Loss)
$
2,238

 
$
(1,227
)
Other Comprehensive Income, net of tax
 

 
 

Reclassification to Pension and Post-Retirement Benefits Other than Pension, net of tax (expense) of $(13) and $(13) in 2019 and 2018
37

 
34

Unrealized gain on investments, net of tax (expense) benefit of $(64) and $10 in 2019 and 2018
173

 
(26
)
Other Comprehensive Income, net of tax
210

 
8

Comprehensive Income (Loss)
$
2,448

 
$
(1,219
)
































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

6


CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands, except per share amounts)

 
2019
 
2018
Balance at Beginning of Period
$
104,188

 
$
102,417

Net Income (Loss)
2,238

 
(1,227
)
 
106,426

 
101,190

Dividends Declared:
 

 
 

Cumulative Preferred, Class A, $0.20 per share in 2018

 
3

Cumulative Preferred, Series $0.90, $0.225 per share in 2018

 
6

Common Stock - 2019 $0.3125 per share; 2018 $0.2975 per share
3,768

 
3,595

 
3,768

 
3,604

Balance at End of Period
$
102,658

 
$
97,586




































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


7


CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands)
 
2019
 
2018
Operating Activities:
 
 
 
Net Income (Loss)
$
2,238

 
$
(1,227
)
Adjustments to Reconcile Net Income (Loss) to Net Cash and Cash Equivalents Provided by
 
 
 
Operating Activities:
 
 
 
Deferred Revenues
(871
)
 
(103
)
Provision for Deferred Income Taxes and Investment Tax Credits, Net
(341
)
 
(124
)
Allowance for Funds Used During Construction
(156
)
 
(53
)
Depreciation and Amortization (including $423 and $233 in 2019 and 2018, respectively, charged to other accounts)
5,240

 
4,938

Gain on Real Estate Transactions
(12
)
 

Change in Assets and Liabilities:
 
 
 
Decrease in Accounts Receivable and Accrued Unbilled Revenues
1,772

 
2,431

Increase in Prepaid Income Taxes and Prepayments and Other Current Assets
(3,376
)
 
(2,242
)
Decrease in Other Non-Current Items
1,638

 
2,456

Decrease in Accounts Payable, Accrued Expenses and Other Current Liabilities
(554
)
 
(3,873
)
Total Adjustments
3,340

 
3,430

Net Cash and Cash Equivalents Provided by Operating Activities
5,578

 
2,203

Investing Activities:
 

 
 

Net Additions to Utility Plant
(14,823
)
 
(6,933
)
Net Cash and Cash Equivalents Used in Investing Activities
(14,823
)
 
(6,933
)
Financing Activities:
 
 
 
Net Proceeds from Interim Bank Loans
65,948

 
29,197

Net Repayment of Interim Bank Loans
(54,249
)
 
(19,281
)
Proceeds from the Issuance of Long-Term Debt
1,686

 

Costs to Issue Long-Term Debt and Common Stock
(17
)
 

Proceeds from Issuance of Common Stock
278

 
380

Repayment of Long-Term Debt Including Current Portion
(1,224
)
 
(1,151
)
Advances from Others for Construction
1,430

 
(409
)
Cash Dividends Paid
(3,768
)
 
(3,604
)
Net Cash and Cash Equivalents Provided by Financing Activities
10,084

 
5,132

Net Increase in Cash and Cash Equivalents
839

 
402

Cash and Cash Equivalents and Restricted Cash at Beginning of Period
2,856

 
3,618

Cash and Cash Equivalents and Restricted Cash at End of Period
$
3,695

 
$
4,020

Non-Cash Investing and Financing Activities:
 

 
 

Non-Cash Contributed Utility Plant
$
1,140

 
$
398

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash Paid for:
 
 
 
Interest
$
3,087

 
$
2,506

State and Federal Income Taxes
$
130

 
$
120


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

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
Basis of Preparation of Financials

The condensed consolidated financial statements included herein have been prepared by Connecticut Water Service, Inc. (“CTWS” or the “Company”) and its wholly-owned subsidiaries, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that are of a normal recurring nature which are, in the opinion of management, necessary to a fair statement of the results for interim periods.  Certain information and footnote disclosures have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  The Company’s primary operating subsidiaries are: The Connecticut Water Company (“Connecticut Water”), The Heritage Village Water Company (“HVWC”) and The Avon Water Company (“Avon Water”) in the State of Connecticut and The Maine Water Company (“Maine Water”) in the State of Maine (together, the “Regulated Companies”). The Condensed Consolidated Balance Sheet at December 31, 2018 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “10-K”).

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.  

Proposed Merger with SJW Group

On August 5, 2018, the Company entered into a Second Amended and Restated Agreement and Plan of Merger (the “Revised Merger Agreement”) with SJW Group, a Delaware corporation (“SJW”), and Hydro Sub, Inc., a Connecticut corporation and a direct wholly owned subsidiary of SJW (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of SJW (the “Merger”). Subject to the terms and conditions of the Revised Merger Agreement, at the effective time of the Merger, each outstanding share of our common stock (other than certain cancelled shares) will be automatically converted into the right to receive an amount in cash equal to $70.00 per share, payable without interest. The Revised Merger Agreement amends and restates in its entirety the Amended and Restated Agreement and Plan of Merger (the “First Amended and Restated Merger Agreement”), dated as of May 30, 2018, by and among the Company, SJW and Merger Sub, which amended and restated in its entirety the Agreement and Plan of Merger (the “Original Merger Agreement”), dated as of March 14, 2018, by and among the Company, SJW and Merger Sub.

The Board of Directors approved, adopted and declared advisable the Revised Merger Agreement and the Merger and recommended that the Company’s shareholders approve the Revised Merger Agreement following a comprehensive review of the transaction. The Revised Merger Agreement was approved by the Company’s shareholders on November 16, 2018. The Merger is subject to certain customary closing conditions, including, among other things, approval of the Revised Merger Agreement by the Company’s shareholders (which was received on November 16, 2018) and regulatory approvals (including the approval of the Connecticut Public Utilities Regulatory Authority (“PURA”) and the Maine Public Utilities Commission (“MPUC”)). The required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the “HSR Act”), was terminated early on April 27, 2018, and the early termination expired on April 27, 2019. The Company and SJW re-filed the necessary notifications under the HSR Act on April 4, 2019, and the required waiting period was terminated early on April 15, 2019. On October 15, 2018, the Federal Communications Commission (“FCC”) consented to the joint application for transfer of control filed by the Company and SJW on October 4, 2018 and amended on October 12, 2018. On April 19, 2019, the FCC granted the Company and SJW’s request to extend the transfer of control deadline to October 20, 2019. No further clearance from the FCC is required.

On May 4, 2018, Maine Water filed with MPUC an application for approval of the Merger. On May 7, 2018, the Company and SJW filed with PURA a joint application for approval of the Merger. Following the start on May 31, 2018 of a 45-day go-shop process permitted by the First Amended and Restated Merger Agreement, the Company and SJW withdrew their joint PURA application on June 19, 2018, and filed a new joint application on July 18, 2018 following the end of the go-shop process. On January 9, 2019, the Company and SJW withdrew their current application before PURA and announced that they were continuing to evaluate their regulatory approach, including the possibility of submitting a new application to PURA in connection with the Merger. On January 23, 2019, Maine Water voluntarily requested to withdraw its application before MPUC, aligning the Maine regulatory process with the regulatory process in Connecticut. After a thorough review conducted by the management and boards of the Company and SJW, and with the support of their respective Connecticut regulatory counsel, the Company disclosed on February 21, 2019 that the companies decided to file new applications with PURA and MPUC which are intended to address PURA’s concerns. The Company and SJW filed a new joint application with PURA on

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

April 3, 2019, and Maine Water filed a new application with MPUC on May 3, 2019. PURA must make a ruling on the merger within 120 days after the filing of an application, unless the Company and SJW agree to an extension of the 120-day timeframe. MPUC must make a ruling on the merger within 60 days after the filing of an application, unless it determines that the necessary investigation cannot be concluded within 60 days, in which event it can extend the review period for up to an additional 120 days.

On July 20, 2018, the California Public Utilities Commission (“CPUC”) formally issued an Order Instituting Investigation (the “Order”) providing that CPUC will investigate whether the Merger is subject to CPUC approval and the Merger’s anticipated impacts within California. CPUC held a public participation hearing on January 31, 2019 in connection with the Order. By a letter dated February 21, 2019, SJW informed CPUC that it would file a new application with PURA in connection with the Merger. On March 4, 2019, CPUC suspended the Order pending a final decision by PURA. On April 19, 2019, the City of San José submitted a request to CPUC that it resume its investigation of the Merger.

Regulatory Matters

The rates we charge our water and waste water customers in Connecticut and Maine are established under the jurisdiction of and are approved by PURA and the MPUC, respectively. It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return. The Regulated Companies’ allowed returns on equity and allowed returns on rate base are as follows:

As of March 31, 2019
 
Allowed Return on Equity
 
Allowed Return on Rate Base
Connecticut Water
 
9.75
%
 
7.32
%
HVWC (blended water and wastewater rates)
 
10.10
%
 
7.19
%
Avon Water
 
10.00
%
 
7.79
%
Maine Water
 
9.50
%
 
7.96
%

The PURA establishes rates in Connecticut on a company-wide basis while the MPUC approves Maine Water’s rates on a division-by-division basis. Each of Connecticut Water, HVWC, Avon Water and Maine Water are allowed, subject to regulatory approval, to add surcharges to customers’ bills in order to recover certain costs associated with approved capital projects in between full rate cases, as well as approved surcharges for Water Revenue Adjustments, in Connecticut, as discussed in more detail below. HVWC has not added surcharges to customers’ bills in order to recover certain approved capital projects as of March 31, 2019, however, HVWC, as ordered by PURA, began to utilize Water Revenue Adjustments for water and wastewater as of March 31, 2017.

On January 3, 2018, PURA reopened the most recent rate case decisions for the Company’s Connecticut Regulated Companies to determine what, if any, adjustments to rates are appropriate to account for revisions to tax laws, including corporate tax rates, contained in the Federal Tax Cuts and Jobs Act (“Tax Act”). On January 23, 2019, PURA issued a decision that determined the appropriate accounting and rate treatments for the reduction in the Federal Corporate Income Tax rate from 35 to 21 percent. The reduction in the Federal Corporate Income Tax impacts two specific areas of corporate income tax that the regulated water utilities must account for: a) the income tax expense included in rates charged to customers; and b), the Excess Accumulated Deferred Income Tax (“EADIT”) liability accrued on the regulated utilities books.

PURA has directed regulated water companies, including Avon and HVWC, to create a regulatory liability as of January 1, 2018 to account for the reduced Federal Corporate Income Tax expense and defer treatment until the companies file their next general rate cases, at which point the companies will propose a method to return the regulatory liability to customers. During the year ended December 31, 2018, Avon Water and HVWC recorded regulatory liabilities in the amounts of $154,000 and $89,000, respectively. Avon Water and HVWC will continue to record additional liabilities each month until their next rate cases. For the quarter ended March 31, 2019, Avon Water and HVWC recorded an additional $37,000 and $21,000, respectively, to the regulatory liabilities. Additionally, PURA directed Avon Water and HVWC, to establish a liability account for the EADIT from January 1, 2018, going forward, which will also be returned to customers commencing with the their next rate cases. As discussed below, Connecticut Water has entered into a settlement agreement with the Connecticut Office of Consumer Counsel (“OCC”), which was approved by PURA, which covers treatment of the Tax Act.

On January 11, 2018, the MPUC issued a notice of investigation to determine the impact of the Tax Act on Maine Water. The investigation allowed the MPUC to determine what, if any, adjustments to rates would be appropriate to account for revisions to tax laws, including corporate tax rates contained in the Tax Act. On March 15, 2019, the MPUC issued an Order concluding

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

the investigation, directing Maine Water to create regulatory liabilities in five of their ten operating divisions, collectively totaling $157,587 for the year ended December 31, 2018. Maine Water will continue to record additional liabilities each month until the company’s next rate case in each division. For the quarter ended March 31, 2019, Maine Water recorded an additional $39,000 to the regulatory liabilities. Further, the Order directs Maine Water to file general rate cases in the same five divisions on or before March 1, 2022. During the year ended December 31, 2018, Maine Water recorded a regulatory liability in the amount of $167,000 in anticipation of the Order.

Maine Water Land Sale
On March 11, 2016, Maine Water entered into a purchase and sale agreement with the Coastal Mountains Land Trust, a Maine nonprofit corporation (the “Land Trust”) pursuant to which Maine Water agreed to sell two conservation easements to the Land Trust on approximately 1,400 acres of land located in the towns of Rockport, Camden and Hope, in Knox County, Maine valued in the aggregate at $3.1 million. The land has a book value of approximately $270,000 and is included in “Other Property and Investments” on the Company’s Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018. The easements and purchase prices are as follows:

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

The first transaction regarding Mirror Lake was completed on September 27, 2018. As a result of the transaction, Maine Water has recognized $435,000 in net income in the period and has recorded a regulatory liability of $435,000 that will be refunded to customers over a one-year period, beginning January, 2019. In addition to the net income recorded as a result of the transaction, the Company recorded a $100,000 deferred income tax benefit due to the timing difference related to the cash refund to customers. The total net income benefit recorded by the Company for this transaction was $535,000 presented as $625,000 in gain on real estate transactions offset by $90,000 of donation deduction in the Other line item. Maine Water also made a $250,000 contribution to the Land Trust at the closing.

The second transaction regarding Grassy pond is scheduled to close on or before December 31, 2019. The second transaction is structured such that Maine Water will sell a conservation easement valued at $1,200,000 for $600,000. Accordingly, Maine Water expects to claim a $600,000 charitable deduction on the bargain sale. Similarly to the first transaction, net proceeds from the second transaction will be shared equally between the customers of the Camden Rockland division and Maine Water.

Connecticut Rates
Connecticut Water’s Water Infrastructure Conservation Adjustment (“WICA”) was 2.15% and 9.81% at March 31, 2019 and 2018, respectively. Connecticut Water’s WICA was reset to zero during 2018 as a result of a rate ruling on the Company’s limited reopener and settlement agreement issued by PURA, as discussed below. As of March 31, 2019 and 2018, respectively, Avon Water’s WICA surcharge was 9.31% and 8.09%. As of March 31, 2019, HVWC has not filed for a WICA surcharge.

On February 6, 2018, Connecticut Water filed a petition with PURA to reopen Connecticut Water’s 2010 rate case proceeding (previously reopened in 2013) for the limited purpose of approving a Settlement Agreement entered into by Connecticut Water and the OCC (the “Agreement”). The Agreement proposes a change in Connecticut Water’s customer rates effective for bills rendered on and after April 1, 2018 made up of the following two components: (1) the revenue requirements associated with a $36.3 million addition to rate base to reflect necessary upgrades to Connecticut Water’s Rockville Water Treatment Plant; and (2) the folding in to base rates of the Company’s present WICA surcharges. In addition, the Agreement provides that:
1.Upon implementation of new rates under the Agreement, until such time as new rates are adopted in a general rate case, through a temporary modification of the earnings sharing mechanism, Connecticut Water customers will receive one hundred percent of any earnings in excess of levels allowed by law rather than limiting such customer credits to 50% as contemplated by applicable law;
2.Connecticut Water agrees it will not file for a general increase of Connecticut Water’s base rates unless those rates are to be effective on or after January 1, 2020;
3.The pending proceeding initiated by PURA in Docket No. 09-12-11RE03, Application of The Connecticut Water Company for Amended Rates – Federal Tax Cuts and Jobs Act shall be closed; and
4.Connecticut Water shall continue to make investments in infrastructure replacement consistent with its approved WICA plan. Connecticut Water shall be allowed to continue to pursue recovery of eligible projects through WICA.

On August 15, 2018, PURA issued a final decision that accepted the conditions of a revised settlement agreement. The primary facets of the revised settlement agreement were the revenue requirements associated with the Rockville Water Treatment Plant, discussed above, and the folding of previously approved WICA surcharges into base rates, which reset Connecticut Water’s WICA to zero and resolution of the Company’s obligations related to the Tax Act. New rates were effective as of April 1, 2018.

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

Connecticut Water’s and HVWC’s allowed revenues for the three months ended March 31, 2019, as approved by PURA during each company’s most recent general rate case and including subsequently approved WICA surcharges, are approximately $20.1 million. Through normal billing for the three months ended March 31, 2019, revenue for Connecticut Water and HVWC would have been approximately $19.2 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water and HVWC recorded $0.9 million in additional revenue for the three months ended March 31, 2019. Avon Water does not currently have PURA approval to apply the WRA surcharge to its customers’ bills and, therefore, does not currently use the WRA mechanism.

Maine Rates
In Maine, the overall, cumulative Water Infrastructure Charge (“WISC”) for all divisions was 5.7% and 4.1% as a percentage of total revenues as of March 31, 2019 and 2018, respectively.

A water revenue adjustment mechanism law in Maine became available to regulated water utilities in Maine on October 15, 2015. Maine Water is currently precluded from seeking new rates in the Biddeford and Saco division due to provisions in the settlement agreement with the MPUC. Maine’s rate-adjustment mechanism could provide revenue stabilization in divisions with declining water consumption and Maine Water expects to request usage of this mechanism in future rate filings when consumption trends support its use.

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, 2019 and 2018.

Pension Benefits
Components of Net Periodic Cost (in thousands):
 
Three Months
Period ended March 31,
2019
 
2018
Service Cost
$
451

 
$
524

Interest Cost
854

 
778

Expected Return on Plan Assets
(1,220
)
 
(1,169
)
Amortization of:
 

 
 

Prior Service Cost
4

 
4

Net Recognized Loss
393

 
670

Net Periodic Benefit Cost
$
482

 
$
807


The Company expects to make a total contribution of approximately $4,050,000 in 2019 for the 2018 plan year.


12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Post-Retirement Benefits Other Than Pension (PBOP)
Components of Net Periodic Cost (in thousands):
 
Three Months
Period ended March 31,
2019
 
2018
Service Cost
$
68

 
$
83

Interest Cost
141

 
125

Expected Return on Plan Assets
(92
)
 
(93
)
Amortization of:
 

 
 

Recognized Net Gain
(38
)
 
(6
)
Net Periodic Benefit Cost
$
79

 
$
109


3.
Earnings per Share and Common Stock

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

Three months ended March 31,
2019
 
2018
Common Shares Outstanding End of Period
12,063,252

 
12,089,125

Weighted Average Shares Outstanding (Days Outstanding Basis):
 

 
 

Basic
11,961,541

 
11,861,961

Diluted
12,059,833

 
12,080,484

 
 
 
 
Basic Earnings per Share
$
0.19

 
$
(0.10
)
Dilutive Effect of Stock Awards

 

Diluted Earnings per Share
$
0.19

 
$
(0.10
)

Total unrecognized compensation expense for all stock awards was approximately $2.2 million as of March 31, 2019 and will be recognized over a weighted average period of 1.4 years.

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 periods January 1, 2018 through March 31, 2018 and January 1, 2019 through March 31, 2019, appears below:

(in thousands, except share data)
Shares
 
Issuance Amount
 
Expense
 
Total
Balance, January 1, 2018
12,065,016

 
195,731

 
(4,090
)
 
191,641

Stock and equivalents issued through Performance Stock Program, Net of Forfeitures
16,987

 
232

 

 
232

Dividend Reinvestment Plan
7,122

 
380

 

 
380

Balance, March 31, 2018
12,089,125

 
196,343

 
(4,090
)
 
192,253

 
 
 
 
 
 
 
 
Balance January 1, 2019
12,054,712

 
194,523

 
(4,090
)
 
190,433

Stock and equivalents issued through Performance Stock Program, Net of Forfeitures and Redemptions
4,404

 
188

 

 
188

Dividend Reinvestment Plan
4,136

 
278

 

 
278

Balance, March 31, 2019
12,063,252

 
$
194,989

 
$
(4,090
)
 
$
190,899



13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.
Recently Adopted and New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)ASU No. 2016-02, “Leases (Topic 842)”, (“ASU No. 2016-02”), which will require lessees to recognize the following for all leases at the commencement date of a lease: a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Public business entities should apply the amendments in ASU No. 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. As required, the Company adopted ASU No. 2016-02 in January 2019 using the modified retrospective approach, see Note 12 for more details.

5.
Revenues from Contracts with Customers

Accounting Policy
Our revenues are primarily from tariff-based sales. We provide water and wastewater services to customers under these tariffs without a defined contractual term (at-will).  As the revenue from these arrangements is based upon the amount of the water and wastewater services supplied and billed in that period (including estimated billings), there was not a shift in the timing or pattern of revenue recognition for such sales when compared to our revenue recognition prior to the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU No. 2014-09”).  We have also completed the evaluation of our other revenue streams, including those tied to longer term contractual commitments and the Company’s Linebacker program.

Customers are primarily billed quarterly on a cycle basis. To match revenues with associated expenses, we accrue unbilled revenues for water and wastewater services delivered to customers, but not yet billed at month end, creating a contract asset.

Nature of Goods and Services
Water Operations - We currently provide retail water and wastewater services to five primary customer classes. Our largest customer class consists of residential customers, which include single private dwellings and individual apartments. Our commercial class consists primarily of main street businesses, our industrial class consists primarily of manufacturing and processing businesses that turn raw materials into products, our public authority class represents services provided primarily to municipality or other government customers, and, finally, our fire protection class consists of services related to fire suppression systems and fire hydrants. Connecticut Water’s management has determined that tariff-based receipts; except for the WRA and other deferred revenue mechanisms, which are considered alternative revenue programs; are considered revenues from contracts with customers.
The Company has performance obligations for the service of standing ready to deliver water to customers. The Company recognizes revenue at a fixed rate as it provides these services, as approved by regulators. These arrangements generally do not have fixed terms and remain in effect as long as the customer consumes the utility service. The rates are set by PURA and the MPUC through the rate-making process and represent the stand-alone selling price of Company’s service to stand ready to deliver.
The Company has performance obligations for the service of delivering the commodity of water to customers. The Company recognizes revenue at a price per unit of water delivered (gallons, cubic feet, etc.), based on the tariffs established by our regulators. These arrangements generally do not have fixed terms and remain in effect as long as the customer consumes the utility service. The rates are set by PURA and the MPUC through the rate-making process and represent the stand-alone selling price of a bundled product comprising the commodity and the service of delivering such commodity.
The Company has a performance obligation related to administrative services such as turn-on/turn-off services, assessment of late charges, etc. The Company views that these services are not distinct in the context of the contract because they are highly interdependent for the effective delivery of water service provided to consumers.

Based on the above discussion, the Company believes that the Goods and Services provided under customer contracts constitute a single performance obligation. The Company believes that this performance obligation is satisfied over time.

Services and Rentals - We provide contracted services to water utilities and other clients and also lease certain of our properties to third parties. The types of services provided include contract operations of water; Linebacker, our service line protection plan for public drinking water customers; and providing bulk deliveries of emergency drinking water to businesses and

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

residences via tanker truck. Our lease and rental income comes primarily from the renting of residential and commercial property. The goods and services provided by Linebacker have been determined to be based on the stand ready nature of the Company to provide the goods and services and, therefore, customers simultaneously receive and consume the benefits provided by the Company. The other revenue streams in the Services and Rentals segment, including contracted services to water utilities and other clients, have performance obligations that are satisfied at a point in time, and likewise will not have a shift in the timing or pattern of revenue recognition.

Disaggregation of Revenue
The following table disaggregates our revenue by major source and customer class (in thousands):

 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
Water Operations
 
 
 
 
Residential
 
$
14,683

 
$
14,409

Commercial
 
3,039

 
2,930

Industrial
 
718

 
719

Public Authority
 
829

 
747

Fire Protection
 
5,343

 
5,172

Other (including non-metered accounts)
 
763

 
874

Water Operations Revenues from Contracts with Customers
 
25,375

 
24,851

Alternative Revenue Program
 
871

 
2

Other
 
336

 
373

Total Revenue from Water Operations
 
26,582

 
25,226

Services and Rentals
 
 
 
 
Contract Operations
 
577

 
569

Linebacker
 
651

 
618

Services and Rentals Revenues from Contracts with Customers
 
1,228

 
1,187

Other
 
47

 
18

Total Revenue from Services and Rentals
 
1,275

 
1,205

Total Revenue from Real Estate Transactions
 

 

 
 
 
 
 
Total Revenues from Contracts with Customers
 
26,603

 
26,038

 
 
 
 
 
Total Revenue
 
$
27,857

 
$
26,431



15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table shows the components of Accounts Receivable and Accrued Unbilled Revenues related to revenues from contracts with customers:

 
 
March 31, 2019
 
December 31, 2018
Accounts Receivable
 
 
 
 
Water Operations Segment
 
$
11,640

 
$
11,890

Services and Rentals Segment
 
120

 
238

Accounts Receivable from Contracts with Customers
 
11,760

 
12,128

Other accounts receivable
 
885

 
2,041

Total Accounts Receivable
 
$
12,645

 
$
14,169

 
 
 
 
 
Accrued Unbilled Revenues from Contracts with Customers
 
$
9,763

 
$
10,011


Accounts Receivable and Accrued Unbilled Revenues: Accounts receivable are comprised of trade receivables primarily from our regulated water customers. The Company records their accounts receivable at cost, which approximates fair value. Additionally, the Company establishes an allowance for uncollectible accounts based on historical losses, management’s assessment of existing economic conditions, customer payment trends, and other factors. The Company assesses late payment fees on trade receivables based on contractual past-due terms established with customers and approved by PURA or the MPUC. The provision for bad debts is charged to operating expense.

The Company’s customers are primarily billed quarterly in cycles having billing dates that do not generally coincide with the end of a fiscal quarter. This results in customers having received water or waste water services that they have not been billed for as of a given period’s end. The Company estimates its unbilled revenues by applying an average billed rate to total unbilled deliveries for each customer class.

6.
Accumulated Other Comprehensive Income

The changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the three months ended March 31, 2019 and 2018 are as follows (in thousands):
Three months ended March 31, 2019
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
258

 
$
(743
)
 
$
(485
)
Other Comprehensive Loss Before Reclassification
 
173

 

 
173

Amounts Reclassified from AOCI
 

 
37

 
37

Net current-period Other Comprehensive (Loss) Income
 
173

 
37

 
210

Ending Balance
 
$
431

 
$
(706
)
 
$
(275
)
 
 
 
 
 
 
 
Three months ended March 31, 2018
 
Unrealized Gains on Investments
 
Defined Benefit Items
 
Total
Beginning Balance (a)
 
$
442

 
$
(870
)
 
$
(428
)
Other Comprehensive Income Before Reclassification
 
(43
)
 

 
(43
)
Amounts Reclassified from AOCI
 
17

 
34

 
51

Net current-period Other Comprehensive Income
 
(26
)
 
34

 
8

Ending Balance
 
$
416

 
$
(836
)
 
$
(420
)
 
 
 
 
 
 
 
(a) All amounts shown are net of tax. Amounts in parentheses indicate loss.


16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table sets forth the amounts reclassified from AOCI by component and the affected line item on the Condensed Consolidated Statements of Income for the three months ended March 31, 2019 and 2018 (in thousands):
Details about Other AOCI Components
 
Amounts Reclassified from AOCI Three Months Ended March 31, 2019 (a)
 
Amounts Reclassified from AOCI Three Months Ended March 31, 2018 (a)
 
Affected Line Items on Income Statement
Realized Gains on Investments
 
$

 
$
24

 
Other Income
Tax expense
 

 
(7
)
 
Other Income
 
 

 
17

 
 
 
 
 
 
 
 
 
Amortization of Recognized Net Gain from Defined Benefit Items
 
51

 
47

 
Other Income (b)
Tax expense
 
(14
)
 
(13
)
 
Other Income
 
 
37

 
34

 
 
 
 
 
 
 
 
 
Total Reclassifications for the period, net of tax
 
$
37

 
$
51

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


17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7.
Long-Term Debt

Long-Term Debt at March 31, 2019 and December 31, 2018 consisted of the following (in thousands):
 
2019
 
2018
4.09%
 
CTWS
Term Loan Note
$
10,948

 
$
11,235

4.15%
 
CTWS
CoBank Term Note Payable, Due 2037
14,260

 
14,386

Total CTWS
25,208

 
25,621

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

 
12,500

Var.
 
Connecticut Water
2004 Series A, Due 2028
5,000

 
5,000

Var.
 
Connecticut Water
2004 Series B, Due 2028
4,550

 
4,550

5.00%
 
Connecticut Water
2011 A Series, Due 2021
22,665

 
22,717

3.16%
 
Connecticut Water
CoBank Note Payable, Due 2020
8,000

 
8,000

3.51%
 
Connecticut Water
CoBank Note Payable, Due 2022
14,795

 
14,795

4.29%
 
Connecticut Water
CoBank Note Payable, Due 2028
17,020

 
17,020

4.72%
 
Connecticut Water
CoBank Note Payable, Due 2032
14,795

 
14,795

4.75%
 
Connecticut Water
CoBank Note Payable, Due 2033
14,550

 
14,550

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

 
30,000

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

 
19,930

3.53%
 
Connecticut Water
NY Life Senior Note, Due September 2037
35,000

 
35,000

Total Connecticut Water
198,805

 
198,857

4.75%
 
HVWC
2011 Farmington Bank Loan, Due 2034
4,256

 
4,300

3.05%
 
Avon Water
Mortgage Note Payable, due 2033
3,090

 
3,134

8.95%
 
Maine Water
1994 Series G, Due 2024
5,400

 
5,400

2.68%
 
Maine Water
1999 Series J, Due 2019

 
85

0.00%
 
Maine Water
2001 Series K, Due 2031
492

 
533

2.58%
 
Maine Water
2002 Series L, Due 2022
45

 
53

1.53%
 
Maine Water
2003 Series M, Due 2023
221

 
271

1.73%
 
Maine Water
2004 Series N, Due 2024
311

 
311

0.00%
 
Maine Water
2004 Series O, Due 2034
100

 
107

1.76%
 
Maine Water
2006 Series P, Due 2026
301

 
331

1.57%
 
Maine Water
2009 Series R, Due 2029
187

 
197

0.00%
 
Maine Water
2009 Series S, Due 2029
471

 
493

0.00%
 
Maine Water
2009 Series T, Due 2029
1,320

 
1,383

0.00%
 
Maine Water
2012 Series U, Due 2042
136

 
142

1.00%
 
Maine Water
2013 Series V, Due 2033
1,235

 
1,285

1.00%
 
Maine Water
2019 Series W, Due 2048
1,012

 

4.24%
 
Maine Water
CoBank Note Payable, Due 2024
4,500

 
4,500

4.18%
 
Maine Water
CoBank Note Payable, Due 2026
5,000

 
5,000

5.51%
 
Maine Water
CoBank Note Payable, Due 2043
8,000

 
8,000

2.40%
 
Maine Water
Series N, Due 2022
626

 
826

1.86%
 
Maine Water
Series O, Due 2025
710

 
710

2.23%
 
Maine Water
Series P, Due 2028
1,174

 
1,233

0.01%
 
Maine Water
Series Q, Due 2035
1,491

 
1,584

1.00%
 
Maine Water
Series R, Due 2025
1,767

 
1,767

Total Maine Water
34,499

 
34,211

Add: Acquisition Fair Value Adjustment
(204
)
 
(189
)
Less: Current Portion
(4,030
)
 
(4,059
)
Less: Unamortized Debt Issuance Expense
(4,242
)
 
(4,364
)
Total Long-Term Debt
$
257,382

 
$
257,511


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

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


On December 13, 2018, Maine Water executed and delivered to CoBank a new Promissory Note and Single Advance Term Loan Supplement, dated October 30, 2018 (the “Fourth Promissory Note”). On the terms and subject to the conditions set forth in the Fourth Promissory Note issued pursuant to the Agreement, CoBank agreed to make an unsecured loan (the “Loan”) to Maine Water in the principal amount of $8,000,000 at 5.51%, due December 30, 2043. The proceeds of the above described Loan from CoBank were used to refinance existing debt and to finance certain capital expenditures.

On February 1, 2019, Maine Water secured a 30 year loan for $1,686,700 from the Maine Municipal Bond Bank and the Maine Department of Health and Human Services Drinking Water State Revolving Fund to fund a portion of the construction of a new finished water storage tank in Skowhegan, Maine (2019 Series W, Due 2048). The terms of the loan provide that up to $674,680 of the loan will be forgiven and the net amount, $1,012,020, will be repaid over a 30 year term at an interest rate no less than 1.0%.

During the first three months of 2019, the Company paid approximately $413,000 related to Connecticut Water Service’s 2017 CoBank issuance as well as the Company’s Term Note Payable issued as part of the 2012 acquisition of Maine Water, approximately $723,000 in sinking funds related to Maine Water’s outstanding bonds, approximately $44,000 in sinking funds related to HVWC’s bank loan and $44,000 related to Avon Water’s mortgage note payable.

Financial Covenants – The Company and its subsidiaries are required to comply with certain covenants in connection with various long term loan agreements.  The most restrictive of these covenants is to maintain a consolidated debt to capitalization ratio of not more than 60%. Additionally, Maine Water has restrictions on cash dividends paid based on restricted net assets. The Company and its subsidiaries were in compliance with all covenants at March 31, 2019.

8.
Fair Value Disclosures

FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“FASB ASC 820”) provides enhanced guidance for using fair value to measure assets and liabilities and expands disclosure with respect to fair value measurements.

FASB ASC 820 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs).  The hierarchy consists of three broad levels, as follows:

Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are either directly or indirectly observable.
Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that the Company believes market participants would use.

The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of March 31, 2019 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Asset Type:
 
 
 
 
 
 
 
Money Market Fund
$
1

 
$

 
$

 
$
1

Mutual Funds:
 

 
 

 
 

 
 

Equity Funds (1)
2,046

 

 

 
2,046

Fixed Income Funds (2)
663

 

 

 
663

Total
$
2,710

 
$

 
$

 
$
2,710



19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2018 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Asset Type:
 
 
 
 
 
 
 
Money Market Fund
$
97

 
$

 
$

 
$
97

Mutual Funds:
 

 
 

 
 

 
 

Equity Funds (1)
1,797

 

 

 
1,797

Fixed Income Funds (2)
647

 

 

 
647

Total
$
2,541

 
$

 
$

 
$
2,541

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

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

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

Company Owned Life Insurance – The fair value of Company Owned Life Insurance is based on the cash surrender value of the contracts. These contracts are based principally on a referenced pool of investment funds that actively redeem shares and are observable and measurable and are presented on the “Other Property and Investments” line item of the Company’s Consolidated Balance Sheets. The value of Company Owned Life Insurance at March 31, 2019 and December 31, 2018 was $4,485,000 and $4,170,000, respectively.

Long-Term Debt – The fair value of the Company’s fixed rate long-term debt is based upon borrowing rates currently available to the Company.  As of March 31, 2019 and December 31, 2018, the estimated fair value of the Company’s long-term debt was $269,768,000 and $260,829,000, respectively, as compared to the carrying amounts of $261,624,000 and $261,875,000, respectively. The estimated fair value of long term debt was calculated using a discounted cash flow model that uses comparable interest rates and yield curve data based on the A-rated MMD (Municipal Market Data) Index which is a benchmark of current municipal bond yields. Under the fair value hierarchy, the fair value of long term debt is classified as a Level 2 measurement.

Advances for Construction – Customer advances for construction had a carrying amount of $25,154,000 and $22,654,000 at March 31, 2019 and December 31, 2018, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.

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

9.
Segment Reporting

The Company operates principally in three business segments: Water Operations, Real Estate Transactions, and Services and Rentals. Financial data for the segments is as follows (in thousands):
Three months ended March 31, 2019
Segment
 
Revenues
 
Pre-Tax Income
 
Income Tax (Benefit) Expense
 
Net Income
Water Operations
 
$
26,582

 
$
1,703

 
$
(37
)
 
$
1,740

Real Estate Transactions
 

 

 
(12
)
 
12

Services and Rentals
 
1,275

 
653

 
167

 
486

Total
 
$
27,857

 
$
2,356

 
$
118

 
$
2,238


20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Three months ended March 31, 2018
Segment
 
Revenues
 
Pre-Tax Income
 
Income Tax (Benefit) Expense
 
Net (Loss) Income
Water Operations
 
$
25,226

 
$
(1,875
)
 
$
(252
)
 
$
(1,623
)
Real Estate Transactions
 

 

 

 

Services and Rentals
 
1,205

 
546

 
150

 
396

Total
 
$
26,431

 
$
(1,329
)
 
$
(102
)
 
$
(1,227
)

The revenues shown in Water Operations above consisted of revenues from water and wastewater customers of $26,246,000 and $24,853,000 for the three months ended March 31, 2019 and 2018. Additionally, there were revenues associated with utility plant leased to others of $336,000 and $373,000 for the three months ended March 31, 2019 and 2018, respectively. The revenues from water and wastewater customers for the three months ended March 31, 2019 and 2018 include $931,000 and $61,000 in additional revenues related to the application of the WRA, respectively.

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

Assets by segment (in thousands):
 
March 31, 2019
 
December 31, 2018
Total Plant and Other Investments:
 
 
 
Water Operations
$
756,433

 
$
748,374

Non-Water
1,239

 
1,114

 
757,672

 
749,488

Other Assets:
 
 
 
Water Operations
205,753

 
201,429

Non-Water
211

 
2,426

 
205,964

 
203,855

Total Assets
$
963,636

 
$
953,343


10.
Income Taxes

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

The Company adopted the Internal Revenue Service (“IRS”) temporary tangible property regulations on the Company’s 2012 Federal tax return. Since that time, the Company has been recording a provision for any possible disallowance of a portion of the repair deduction if the Company’s Federal tax return were to be reviewed by the IRS. While the Company believes that the deductions taken on its tax returns are appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. For the three months ended March 31, 2019, the Company recorded a provision of $260,000 for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. The Company had previously recorded a provision of $3.3 million in prior years for a cumulative total of $3.6 million.

From time to time, the Company may be assessed interest and penalties by taxing authorities.  In those cases, the charges would appear on the Other line item within the Other Income (Deductions), Net of Taxes section of the Company’s Condensed Consolidated Statements of Income.  There were no such charges for the three months ended March 31, 2019 and 2018.  Additionally, there were no accruals relating to interest or penalties as of March 31, 2019 and December 31, 2018.  The Company remains subject to examination by federal and state tax authorities for the 2015 through 2017 tax years.


21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company is currently engaged in an analysis to determine the amount of expenditures related to tangible property that will be reflected on its 2018 Federal Tax Return to be filed in September 2019.  In addition, the Company has estimated the portion of its infrastructure investment that will qualify as a repair deduction for 2019 and has reflected that deduction in its effective tax rate, net of any reserves.  Consistent with other differences between book and tax expenditures, the Company is required to use the flow-through method to account for any timing differences not required by the IRS to be normalized.

The Company’s effective income tax rate for the three months ended March 31, 2019 and 2018 was 5.0% and 7.7%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the three months ended March 31, 2019 and 2018, was 7.0% and 26.7%, respectively. In 2019, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut, and amortizations of accumulated excess deferred taxes. In 2018, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut, and an IRS audit adjustment. Excluding discrete items, there was a decrease in the effective tax rate year over year for the three month period of approximately 19.7%. The decrease in the effective tax rate for this period can be attributed to a higher performance stock deduction in 2018 than in 2019. The blended Federal and State statutory income tax rates during the three months ended March 31, 2019 and 2018 were 28%, 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, including the basis difference for the adoption of the tangible property regulations.

11.
Bank Lines of Credit and Other Short-Term Debt

As of March 31, 2019, the Company maintained a $15.0 million line of credit agreement with CoBank, which is currently scheduled to expire on July 1, 2020.  The Company maintains an additional line of credit of $75.0 million with Citizens Bank, N.A. (“Citizens”), with an expiration date of December 14, 2023.  Additionally, Avon Water maintained a $3.0 million line of credit with Northwest Community Bank, which expired on September 30, 2018, at which point it converted to other short-term debt and was paid off in full in February 2019. As of March 31, 2019, the total lines of credit available to the Company were $90.0 million.  As of March 31, 2019 and December 31, 2018, the Company had $65.9 million and $52.6 million respectively, of Interim Bank Loans Payable and Other Short-Term Debt. As of March 31, 2019, the Company had $24.1 million in unused lines of credit.  Interest expense charged on lines of credit will fluctuate based on market interest rates.

12.
Leases

During the first quarter of 2019, the Company adopted ASU No. 2016-02 by recognizing and measuring leases existing at, or entered into after, January 1, 2018. As permitted by ASU No. 2016-02, the Company elected (i) not to reevaluate land easements if they were not previously accounted for as leases, (ii) to apply hindsight when assessing lease term and impairment of the right-of-use (“ROU”) asset, (iii) not to apply the recognition requirements to short-term leases and (iv) not to separate non-lease components from associated lease components for substantially all classes of underlying assets. Upon adoption of ASU No. 2016-02, the Company recorded ROU assets and lease liabilities in connection with its operating leases. ROU assets are included in Prepayments and Other Current Assets and Deferred Charges and Other Costs and lease liabilities are included in Other Current Liabilities and Other Long-Term Liabilities on the Condensed Consolidated Balance Sheets. Operating lease expense is included in Operation and Maintenance expenses in the Condensed Consolidated Statements of Income. The impact of adopting ASU No. 2016-02 was not material to the Company’s financial statements for the periods presented.

The Company has operating leases primarily related to buildings, office equipment and land use agreements that convey use of the land during the arrangement for certain of its source water wells. Operating leases primarily have fixed payments with expiration dates ranging from 2019 to 2074, some of which include options to extend the leases from 1 to 10 years and some have options to terminate at the Company’s discretion. At December 31, 2018 and March 31, 2019, the Company’s ROU assets and lease liabilities for operating leases totaled approximately $1.5 million for each period. The Company’s lease liabilities at December 31, 2018 and March 31, 2019 were calculated using a rate indicative of what the Company believes would be secured for incremental long-term debt. These rates were 4.11% and 4.32% as of March 31, 2019 and December 31, 2018, respectively.

At December 31, 2018, expected lease payments over the remaining terms of the leases were approximately $3.4 million with the expected lease payments for no one year being material. Operating leases did not have an impact to the Company’s Condensed Consolidated Statements of Income or Condensed Consolidated Statements of Cash Flows.


22


Part I, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the accompanying unaudited financial statements and related notes thereto and the audited financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2018.

General Information

Proposed Merger with SJW Group

On August 5, 2018, the Company entered into a Second Amended and Restated Agreement and Plan of Merger (the “Revised Merger Agreement”) with SJW Group, a Delaware corporation (“SJW”), and Hydro Sub, Inc., a Connecticut corporation and a direct wholly owned subsidiary of SJW (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of SJW (the “Merger”). Subject to the terms and conditions of the Revised Merger Agreement, at the effective time of the Merger, each outstanding share of our common stock (other than certain cancelled shares) will be automatically converted into the right to receive an amount in cash equal to $70.00 per share, payable without interest. The Revised Merger Agreement amends and restates in its entirety the Amended and Restated Agreement and Plan of Merger (the “First Amended and Restated Merger Agreement”), dated as of May 30, 2018, by and among the Company, SJW and Merger Sub, which amended and restated in its entirety the Agreement and Plan of Merger (the “Original Merger Agreement”), dated as of March 14, 2018, by and among the Company, SJW and Merger Sub.

The Board of Directors approved, adopted and declared advisable the Revised Merger Agreement and the Merger and recommended that the Company’s shareholders approve the Revised Merger Agreement following a comprehensive review of the transaction. The Revised Merger Agreement was approved by the Company’s shareholders on November 16, 2018. The Merger is subject to certain customary closing conditions, including, among other things, approval of the Revised Merger Agreement by the Company’s shareholders (which was received on November 16, 2018) and regulatory approvals (including the approval of the Connecticut Public Utilities Regulatory Authority (“PURA”) and the Maine Public Utilities Commission (“MPUC”)). The required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the “HSR Act”), was terminated early on April 27, 2018, and the early termination expired on April 27, 2019. The Company and SJW re-filed the necessary notifications under the HSR Act on April 4, 2019, and the required waiting period was terminated early on April 15, 2019. On October 15, 2018, the Federal Communications Commission (“FCC”) consented to the joint application for transfer of control filed by the Company and SJW on October 4, 2018 and amended on October 12, 2018. On April 19, 2019, the FCC granted the Company and SJW’s request to extend the transfer of control deadline to October 20, 2019. No further clearance from the FCC is required.

On May 4, 2018, Maine Water filed with MPUC an application for approval of the Merger. On May 7, 2018, the Company and SJW filed with PURA a joint application for approval of the Merger. Following the start on May 31, 2018 of a 45-day go-shop process permitted by the First Amended and Restated Merger Agreement, the Company and SJW withdrew their joint PURA application on June 19, 2018, and filed a new joint application on July 18, 2018 following the end of the go-shop process. On January 9, 2019, the Company and SJW withdrew their current application before PURA and announced that they were continuing to evaluate their regulatory approach, including the possibility of submitting a new application to PURA in connection with the Merger. On January 23, 2019, Maine Water voluntarily requested to withdraw its application before MPUC, aligning the Maine regulatory process with the regulatory process in Connecticut. After a thorough review conducted by the management and boards of the Company and SJW, and with the support of their respective Connecticut regulatory counsel, the Company disclosed on February 21, 2019 that the companies decided to file new applications with PURA and MPUC which are intended to address PURA’s concerns. The Company and SJW filed a new joint application with PURA on April 3, 2019, and Maine Water filed a new application with MPUC on May 3, 2019. PURA must make a ruling on the merger within 120 days after the filing of an application, unless the Company and SJW agree to an extension of the 120-day timeframe. MPUC must make a ruling on the merger within 60 days after the filing of an application, unless it determines that the necessary investigation cannot be concluded within 60 days, in which event it can extend the review period for up to an additional 120 days.

On July 20, 2018, the California Public Utilities Commission (“CPUC”) formally issued an Order Instituting Investigation (the “Order”) providing that CPUC will investigate whether the Merger is subject to CPUC approval and the Merger’s anticipated impacts within California. CPUC held a public participation hearing on January 31, 2019 in connection with the Order. By a letter dated February 21, 2019, SJW informed CPUC that it would file a new application with PURA in connection with the Merger. On March 4, 2019, CPUC suspended the Order pending a final decision by PURA. On April 19, 2019, the City of San José submitted a request to CPUC that it resume its investigation of the Merger.


23


Regulatory Matters

The rates we charge our water and waste water customers in Connecticut and Maine are established under the jurisdiction of and are approved by PURA and the MPUC, respectively. It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return. The Regulated Companies’ allowed returns on equity and allowed returns on rate base are as follows:

As of March 31, 2019
 
Allowed Return on Equity
 
Allowed Return on Rate Base
Connecticut Water
 
9.75
%
 
7.32
%
HVWC (blended water and wastewater rates)
 
10.10
%
 
7.19
%
Avon Water
 
10.00
%
 
7.79
%
Maine Water
 
9.50
%
 
7.96
%

The PURA establishes rates in Connecticut on a company-wide basis while the MPUC approves Maine Water’s rates on a division-by-division basis. Each of Connecticut Water, HVWC, Avon Water and Maine Water are allowed, subject to regulatory approval, to add surcharges to customers’ bills in order to recover certain costs associated with approved capital projects in between full rate cases, as well as approved surcharges for Water Revenue Adjustments, in Connecticut, as discussed in more detail below. HVWC has not added surcharges to customers’ bills in order to recover certain approved capital projects as of March 31, 2019, however, HVWC, as ordered by PURA, began to utilize Water Revenue Adjustments for water and wastewater as of March 31, 2017.

On January 3, 2018, PURA reopened the most recent rate case decisions for the Company’s Connecticut Regulated Companies to determine what, if any, adjustments to rates are appropriate to account for revisions to tax laws, including corporate tax rates, contained in the Federal Tax Cuts and Jobs Act (“Tax Act”). On January 23, 2019, PURA issued a decision that determined the appropriate accounting and rate treatments for the reduction in the Federal Corporate Income Tax rate from 35 to 21 percent. The reduction in the Federal Corporate Income Tax impacts two specific areas of corporate income tax that the regulated water utilities must account for: a) the income tax expense included in rates charged to customers; and b), the Excess Accumulated Deferred Income Tax (“EADIT”) liability accrued on the regulated utilities books.

PURA has directed regulated water companies, including Avon and HVWC, to create a regulatory liability as of January 1, 2018 to account for the reduced Federal Corporate Income Tax expense and defer treatment until the companies file their next general rate cases, at which point the companies will propose a method to return the regulatory liability to customers. During the year ended December 31, 2018, Avon Water and HVWC recorded regulatory liabilities in the amounts of $154,000 and $89,000, respectively. Avon Water and HVWC will continue to record additional liabilities each month until their next rate cases. For the quarter ended March 31, 2019, Avon Water and HVWC recorded an additional $37,000 and $21,000, respectively, to the regulatory liabilities. Additionally, PURA directed Avon Water and HVWC, to establish a liability account for the EADIT from January 1, 2018, going forward, which will also be returned to customers commencing with the their next rate cases. As discussed below, Connecticut Water has entered into a settlement agreement with the Connecticut Office of Consumer Counsel (“OCC”), which was approved by PURA, which covers treatment of the Tax Act.

On January 11, 2018, the MPUC issued a notice of investigation to determine the impact of the Tax Act on Maine Water. The investigation allowed the MPUC to determine what, if any, adjustments to rates would be appropriate to account for revisions to tax laws, including corporate tax rates contained in the Tax Act. On March 15, 2019, the MPUC issued an Order concluding the investigation, directing Maine Water to create regulatory liabilities in five of their ten operating divisions, collectively totaling $157,587 for the year ended December 31, 2018. Maine Water will continue to record additional liabilities each month until the company’s next rate case in each division. For the quarter ended March 31, 2019, Maine Water recorded an additional $39,000 to the regulatory liabilities. Further, the Order directs Maine Water to file general rate cases in the same five divisions on or before March 1, 2022. During the year ended December 31, 2018, Maine Water recorded a regulatory liability in the amount of $167,000 in anticipation of the Order.


24


Maine Water Land Sale
On March 11, 2016, Maine Water entered into a purchase and sale agreement with the Coastal Mountains Land Trust, a Maine nonprofit corporation (the “Land Trust”) pursuant to which Maine Water agreed to sell two conservation easements to the Land Trust on approximately 1,400 acres of land located in the towns of Rockport, Camden and Hope, in Knox County, Maine valued in the aggregate at $3.1 million. The land has a book value of approximately $270,000 and is included in “Other Property and Investments” on the Company’s Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018. The easements and purchase prices are as follows:

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

On June 25, 2018, an amendment to the agreement was made to extend closing of the first transaction to September 30, 2018, from June 30, 2018.  This amendment also will extend the second closing into 2020.  Maine Water will make a $250,000 contribution to the Land Trust upon completion of the closing of the first easement sale.  Maine Water also expects to claim a charitable deduction for the $600,000 in excess of the fair market value of the second easement over the $600,000 sale price. The first half of this easement sale, and Maine Water’s related contribution to the Land Trust, was completed in the third quarter of 2018. As a result of the transaction, the Company has recognized $435,000 in net income in the period and has recorded a regulatory liability of $435,000 that will be refunded to customers over a one-year period, beginning January 1, 2019. In addition to the net income recorded as part of the transaction, the Company recorded a $100,000 deferred income tax benefit due to the timing difference related to the cash refund to customers.  The total net income benefit recorded by the Company for this transaction was $535,000 presented as $625,000 in gain on real estate transactions offset by $90,000 of donation deduction in the Other line item.

Connecticut Rates
Connecticut Water’s Water Infrastructure Conservation Adjustment (“WICA”) was 2.15% and 9.81% at March 31, 2019 and 2018, respectively. Connecticut Water’s WICA was reset to zero during 2018 as a result of a rate ruling on the Company’s limited reopener and settlement agreement issued by PURA, as discussed below. As of March 31, 2019 and 2018, respectively, Avon Water’s WICA surcharge was 9.31% and 8.09%. As of March 31, 2019, HVWC has not filed for a WICA surcharge.

On February 6, 2018, Connecticut Water filed a petition with PURA to reopen Connecticut Water’s 2010 rate case proceeding (previously reopened in 2013) for the limited purpose of approving a Settlement Agreement entered into by Connecticut Water and the OCC (the “Agreement”). The Agreement proposes a change in Connecticut Water’s customer rates effective for bills rendered on and after April 1, 2018 made up of the following two components: (1) the revenue requirements associated with a $36.3 million addition to rate base to reflect necessary upgrades to Connecticut Water’s Rockville Water Treatment Plant; and (2) the folding in to base rates of the Company’s present WICA surcharges. In addition, the Agreement provides that:
1.
Upon implementation of new rates under the Agreement, until such time as new rates are adopted in a general rate case, through a temporary modification of the earnings sharing mechanism, Connecticut Water customers will receive one hundred percent of any earnings in excess of levels allowed by law rather than limiting such customer credits to 50% as contemplated by applicable law;
2.
Connecticut Water agrees it will not file for a general increase of Connecticut Water’s base rates to be effective before January 1, 2020;
3.
The pending proceeding initiated by PURA in Docket No. 09-12-11RE03, Application of The Connecticut Water Company for Amended Rates – Federal Tax Cuts and Jobs Act shall be closed; and
4.
Connecticut Water shall continue to make investments in infrastructure replacement consistent with its approved WICA plan. Connecticut Water shall be allowed to continue to pursue recovery of eligible projects through WICA and apply WRA charges as authorized.

On August 15, 2018, PURA issued a final decision that accepted the conditions of a revised settlement agreement. The primary facets of the revised settlement agreement were the revenue requirements associated with the Rockville Water Treatment Plant, discussed above, and the folding of previously approved WICA surcharges into base rates, which reset Connecticut Water’s WICA to zero and resolution of the Company’s obligations related to the Tax Act. New rates were effective as of April 1, 2018.

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

25


eligible for WICA surcharges were expanded to include energy conservation projects, improvements required to comply with streamflow regulations, and improvements to certain acquired systems.

Connecticut Water’s and HVWC’s allowed revenues for the three months ended March 31, 2019, as approved by PURA during each company’s most recent general rate case and including subsequently approved WICA surcharges, are approximately $20.0 million. Through normal billing for the three months ended March 31, 2019, revenue for Connecticut Water and HVWC would have been approximately $19.1 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water and HVWC recorded $0.9 million in additional revenue for the three months ended March 31, 2019. Avon Water does not currently have PURA approval to apply the WRA surcharge to its customers’ bills and, therefore, does not currently use the WRA mechanism.

Maine Rates
In Maine, the overall, cumulative Water Infrastructure Charge (“WISC”) for all divisions was 5.7% and 4.1% as a percentage of total revenues as of March 31, 2019 and 2018, respectively.

A water revenue adjustment mechanism law in Maine became available to regulated water utilities in Maine on October 15, 2015. Maine Water is currently precluded from seeking new rates in the Biddeford and Saco division due to provisions in the settlement agreement with the MPUC. Maine’s rate-adjustment mechanism could provide revenue stabilization in divisions with declining water consumption and Maine Water expects to request usage of this mechanism in future rate filings when consumption trends support its use.

Critical Accounting Policies and Estimates

The Company maintains its accounting records in accordance with accounting principles generally accepted in the United States of America and as directed by the PURA and the MPUC, to which the Company’s regulated water utility subsidiaries are subject.  Significant accounting policies employed by the Company, including the use of estimates, were presented in the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Critical accounting policies are those that are the most important to the presentation of the Company’s financial condition and results of operations.  The application of such accounting policies requires management’s most difficult, subjective, and complex judgments and involves uncertainties and assumptions.  The Company’s most critical accounting policies pertain to public utility regulation related to ASC 980 “Regulated Operations”, revenue recognition (including the WRA), goodwill impairment, accounting for leases, income taxes and accounting for pension and other post-retirement benefit plans.  Each of these accounting policies and the application of critical accounting policies and estimates were discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Management must use informed judgments and best estimates to properly apply these critical accounting policies.  Because of the uncertainty in these estimates, actual results could differ from estimates used in applying the critical accounting policies.  The Company is not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect its financial condition or results of operations.

Outlook

The following modifies and updates the “Outlook” section of the Company’s 2018 Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

The Company expects Net Income from its Water Operations segment to decrease in 2019 over 2018 levels, primarily due to the costs associated with the merger with SJW. Partially offsetting these costs, the Company expects revenue increases resulting from the settlement agreement between Connecticut Water and Connecticut’s OCC approved by PURA during 2018, revenue increases due to the utilization of WISC in Maine and WICA in Connecticut, continued cost containment efforts, and modest growth in its Services and Rentals segment.

The Company believes that the factors described above and those described in detail under the heading “Commitments and Contingencies” below may have significant impact, either alone or in the aggregate, on the Company’s earnings and profitability in fiscal years 2019 and beyond.  Please also review carefully the risks and uncertainties described in the sections entitled Item 1A – Risk Factors, “Commitments and Contingencies” in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and the risks and uncertainties described in the “Forward-Looking Information” section below.

26



Our Use of Non-GAAP Financial Measures

We consider Adjusted Net Income as a key business metric, which is a Non-GAAP financial measure.

We define Adjusted Net Income as Net Income excluding certain material items outside of normal business operations. For this Non-GAAP financial measure, we consider these items to be expenses related to mergers and acquisitions.   This includes costs incurred in 2019 and 2018 for the proposed merger with SJW.

Adjusted Net Income is a supplemental financial measure used by us and by external users of our financial statements and is considered to be an indicator of the operational strength and performance of our business. Adjusted Net Income allows us to assess our performance without regard to the impact of matters that we do not consider indicative of the operating performance of our business.

We use Adjusted Net Income to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with GAAP, provides a more complete understanding of factors and trends affecting our business. We believe Adjusted Net Income assists our Board of Directors, management and investors in comparing our operating performance on a consistent basis from period to period because they remove the impact of certain material items outside of normal business operations (such as the costs incurred for the proposed merger with SJW) from our operating results.

Despite the importance of this Non-GAAP financial measure in analyzing our business, measuring and determining incentive compensation and otherwise evaluating our operating performance, Adjusted Net Income is not a measurement of financial performance under GAAP, may have limitations as an analytical tool and should not be considered in isolation from, or as an alternative to, Net Income or any other measure of our performance derived in accordance with GAAP. Adjusted Net Income is not a measure of profitability under GAAP.

We also urge you to review the reconciliation of this Non-GAAP financial measure included in the Results of Operations section of this Quarterly Report. To properly and prudently evaluate our business, we encourage you to review the Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report and to not rely on any single financial measure to evaluate our business. In addition, because the Adjusted Net Income measure is susceptible to varying calculations, such Non-GAAP financial measures may differ from, and may therefore not be comparable to, similarly titled measures used by other companies.

Results of Operations

Three months ended March 31
Net Income for the three months ended March 31, 2019 increased from the same period in the prior year by $3,465,000 to $2,238,000. Earnings per basic average common share were $0.19 and $(0.10) during the three months ended March 31, 2019 and 2018, respectively.

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

Business Segment
 
March 31, 2019
 
March 31, 2018
 
Increase/(Decrease)
Water Operations
 
$
1,740

 
$
(1,623
)
 
$
3,363

Real Estate Transactions
 
12

 

 
12

Services and Rentals
 
486

 
396

 
90

Total
 
$
2,238

 
$
(1,227
)
 
$
3,465



27


Adjusted Net Income
Adjusted Net Income for the three months ended March 31, 2019 and 2018 was as follows (in follows):

 
 
2019
 
2018
 
Increase (Decrease)
Net Income (Loss)
 
$
2,238

 
$
(1,227
)
 
$
3,465

Merger and Acquisition Costs
 
925

 
3,261

 
$
(2,336
)
Financing Costs
 
99

 
5

 
$
94

Adjusted Net Income
 
$
3,262

 
$
2,039

 
$
1,223


Non-GAAP Adjusted Net Income for the three months ended March 31, 2019 increased from the same period in the prior year by $1,223,000.

See “Our Use of Non-GAAP Financial Measures” for a discussion of our use of Non-GAAP Adjusted Net Income.

Revenue

Revenue from our regulated customers increased by $1,393,000, or 5.6%, to $26,246,000 for the three months ended March 31, 2019 when compared to the same period in 2018.  The primary cause in the increase in revenues related to increased rates at Connecticut Water, which were effective as of April 1, 2018, and higher WISC surcharges in Maine.

Operation and Maintenance Expense

Operation and Maintenance (“O&M”) expense decreased by $98,000, or 0.8%, for the three months ended March 31, 2019 when compared to the same period of 2018. The following table presents the components of O&M expense for the three months ending March 31, 2019 and 2018 (in thousands):

Expense Components
 
March 31, 2019
 
March 31, 2018
 
Increase / (Decrease)
Pension
 
$
372

 
$
529

 
$
(157
)
Investor relations
 
139

 
291

 
(152
)
Customer
 
382

 
516

 
(134
)
Property and liability insurance
 
400

 
514

 
(114
)
Outside services
 
872

 
968

 
(96
)
Purchased water
 
269

 
357

 
(88
)
Payroll
 
4,488

 
4,494

 
(6
)
Maintenance
 
1,043

 
1,007

 
36

Medical
 
1,087

 
1,046

 
41

Utility costs
 
1,358

 
1,255

 
103

Vehicles
 
537

 
433

 
104

Other benefits
 
554

 
297

 
257

Other
 
1,421

 
1,313

 
108

Total
 
$
12,922

 
$
13,020

 
$
(98
)

The changes in individual items are described below:
Pension costs decreased in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to an increase in the discount rate;
Investor relations costs decreased in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to a decrease in directors’ fees, and other director-related expenses;
During the three months ended March 31, 2019, the Company saw a decrease in Customer costs compared to the same period in 2018, primarily related to a reduction in uncollectible accounts. Additionally, there were decreases in postage and other customer communication costs, partially off set by a small increase in legal collections fees;

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Property and liability insurance decreased in the period ended March 31, 2019 when compared to the same period in 2018 primarily due to a reduction in premiums charged by our insurers; and
Outside services primarily decreased in the quarter ended March 31, 2019 compared to the same period in 2018 due to reduced costs associated with consulting services and legal costs, partially off set by increases in temporary labor and auditing fees.

The decreases described above were partially offset by the following increases to O&M expense:
Other benefits costs increased in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to higher costs associated with the performance awards program of officers and other senior leaders in the Company;
Utility costs increased in the quarter ended March 31, 2019 relative to the same period in 2018. The primary reason for this increase was higher electricity costs, partially off set by a reduction in certain communication costs; and
Medical costs increased from 2018 to 2019 primarily due to an increase in claims filed by our employees and their families.

The Company saw an approximate $112,000, or 2.4%, increase in its Depreciation expense for the three months ended March 31, 2019 compared to the same period in 2018. The increase was primarily due to higher Utility Plant in Service as of March 31, 2019 compared to March 31, 2018, driven by continued spending on WICA and WISC projects in Connecticut and Maine, respectively.

The Company had $212,000 in above-the-line Income Tax expense in the three months ended March 31, 2019 compared to a $7,000 in Income Tax benefit in the same period of 2018. The Company’s effective income tax rate for the three months ended March 31, 2019 and 2018 was 5.0% and 7.7%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the three months ended March 31, 2019 and 2018, was 7.0% and 26.7%, respectively. In 2019, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut, and amortizations of accumulated excess deferred taxes. In 2018, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut, and an IRS audit adjustment. Excluding discrete items, there was a decrease in the effective tax rate year over year for the three month period of approximately 19.7%. The decrease in the effective tax rate for this period can be attributed to a higher performance stock deduction in 2018 than in 2019.

Other Income (Deductions), Net of Taxes increased for the three months ended March 31, 2019 by $3,200,000. The primary driver of this increase was after-tax costs associated with the announced merger with SJW, which were $925,000 and $3,261,000 in the quarters ending March 31, 2019 and 2018, respectively. Additionally, the Company saw increases in Real Estate Transactions, Non-Water Sales Earnings and AFUDC during 2019.

Total Interest and Debt Expense increased by $592,000 in the three months ended March 31, 2019 when compared to the same period in 2018. The increase was primarily due to higher debt balances outstanding, including recent debt issuances in Maine, and increased borrowing under our lines of credit at March 31, 2019 when compared to March 31, 2018.

Liquidity and Capital Resources

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

Borrowing Facilities

As of March 31, 2019, the Company maintained a $15.0 million line of credit agreement with CoBank, which is currently scheduled to expire on July 1, 2020.  The Company maintains an additional line of credit of $75.0 million with Citizens Bank, N.A. (“Citizens”), with an expiration date of December 14, 2023.  Additionally, Avon Water maintained a $3.0 million line of credit with Northwest Community Bank, which expired on September 30, 2018, at which point it converted to other short-term debt and was paid off in full in February 2019. As of March 31, 2019, the total lines of credit available to the Company were $90.0 million.  As of March 31, 2019 and December 31, 2018, the Company had $65.9 million and $52.6 million respectively, of Interim Bank Loans Payable and Other Short-Term Debt. As of March 31, 2019, the Company had $24.1 million in unused lines of credit.  Interest expense charged on lines of credit will fluctuate based on market interest rates.

On December 13, 2018, Maine Water executed and delivered to CoBank a new Promissory Note and Single Advance Term Loan Supplement, dated October 30, 2018 (the “Fourth Promissory Note”). On the terms and subject to the conditions set forth in the Fourth Promissory Note issued pursuant to the Agreement, CoBank agreed to make an unsecured loan (the “Loan”) to

29


Maine Water in the principal amount of $8,000,000 at 5.51%, due December 30, 2043. The proceeds of the above described Loan from CoBank were used to refinance existing debt and to finance certain capital expenditures.

On February 1, 2019, Maine Water secured a 30 year loan for $1,686,700 from the Maine Municipal Bond Bank and the Maine Department of Health and Human Services Drinking Water State Revolving Fund to fund a portion of the construction of a new finished water storage tank in Skowhegan, Maine (2019 Series W, Due 2048). The terms of the loan provide that up to $674,680 of the loan will be forgiven and the net amount, $1,012,020, will be repaid over a 30 year term at an interest rate no less than 1.0%.

During the first three months of 2019, the Company paid approximately $413,000 related to Connecticut Water Service’s 2017 CoBank issuance as well as the Company’s Term Note Payable issued as part of the 2012 acquisition of Maine Water, approximately $723,000 in sinking funds related to Maine Water’s outstanding bonds, approximately $44,000 in sinking funds related to HVWC’s bank loan and $44,000 related to Avon Water’s mortgage note payable.

Credit Rating

In January 2019, Standard & Poor’s Rating Services (“S&P”) reduced its ‘A’ corporate credit rating on the Company to ‘A-’ based on S&P’s uncertainty surrounding the Company's potential merger with SJW, including the increased likelihood that the pending transaction may not close as expected. Also, contributing to the revised rating was the Company’s elevated capital spending, regulatory lag and temporarily increased merger costs and the impact these factors are expected to have on certain financial measures. Additionally, S&P revised the Company’s ratings outlook to stable from negative due to their view that the Company will continue to effectively manage regulatory risk in key jurisdictions, including in Connecticut and in Maine.

Stock Plans

The Company offers a dividend reinvestment and stock purchase plan (“DRIP”) for all registered shareholders and for the customers and employees of our regulated water companies, whereby participants can opt to have cash dividends directly reinvested into additional shares of the Company. In August 2011, the Board of Directors approved amendments to the DRIP (effective as of January 1, 2012) that permit the Company to add, at the Company’s discretion, an “up to 5.00% purchase price discount” feature to the DRIP which is intended to encourage greater shareholder, customer and employee participation in the DRIP. In August 2014, the Board of Directors approved further amendments to the DRIP to reflect the Company’s appointment of a new common stock transfer agent. On August 11, 2017, the Board of Directors approved a Third Amended and Restated DRIP which expanded the class of participants to include any persons other than registered shareholders, customers and employees described above, upon an initial minimum purchase of $500. The DRIP was also amended to add 129,000 additional shares to the DRIP’s share reserve and to revise certain monthly and quarterly share purchase requirements. During the three months ended March 31, 2019 and 2018, plan participants invested $278,000 and $380,000, respectively, in additional shares as part of the DRIP.

2019 Construction Budget

The Board of Directors approved a $85.7 million construction budget for 2019, net of amounts to be financed by customer advances and contributions in aid of construction.  The Company will fund the capital budget through a combination of its internally generated funds, borrowing under its available lines of credit and potential new debt issuances by both Connecticut Water and Maine Water in 2019.

As the Company looks forward to the remainder of 2019 and 2020, it anticipates continued reinvestment to replace aging infrastructure and to seek recovery of these costs through periodic WICA and WISC applications. The total cost of that investment may exceed the amount of internally generated funds. The Company expects to rely upon its internally generated funds and short-term borrowing facilities and new debt issuances over the next 12-24 months.

Commitments and Contingencies

The Company adopted the Internal Revenue Service (“IRS”) temporary tangible property regulations on the Company’s 2012 Federal tax return. Since that time, the Company has been recording a provision for any possible disallowance of a portion of the repair deduction if the Company’s Federal tax return were to be reviewed by the IRS. While the Company believes that the deductions taken on its tax returns are appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. For the three months ended March 31, 2019, the Company recorded a provision of $260,000 for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. The Company had previously recorded a provision of $3.3 million in prior years for a cumulative total of $3.6 million.

30



The Company is currently engaged in an analysis to determine the amount of expenditures related to tangible property that will be reflected on its 2018 Federal Tax Return to be filed in September 2019.  In addition, the Company has estimated the portion of its infrastructure investment that will qualify as a repair deduction for 2019 and has reflected that deduction in its effective tax rate, net of any reserves.  Consistent with other differences between book and tax expenditures, the Company is required to use the flow-through method to account for any timing differences not required by the IRS to be normalized.

There were no material changes under this subheading to any of the other items previously disclosed by the Company in its Annual Report on Form 10-K for the year December 31, 2018.

Forward-Looking Information

Certain statements made in this Quarterly Report on Form 10-Q, (“10-Q”) 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, as amended (“Exchange Act”) that are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on us.  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-Q, include, but are not limited to, statements regarding:

the proposed Merger between the Company and SJW Group, the anticipated timing of the Merger and our ability to successfully complete the Merger;
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 in both Connecticut and Maine;
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;
the amount of repair tax deductions and the Internal Revenue Service’s ultimate acceptance of the deduction methodology; and
acquisition-related costs and synergies.


31


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:

the risks associated with the proposed Merger between the Company and SJW Group, the anticipated timing of the Merger and our ability to successfully complete the Merger;
changes in public utility regulations and policies;
changes in general economic, business, credit and financial market conditions;
changes in environmental conditions, including those that result in water use restrictions;
the determination of what qualifies for a repair expense tax deduction;
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 continuous and reliable operation of our information technology systems, including the impact of cyber security attacks or other cyber-related events;
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-Q, the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (“10-K”) and the documents that we incorporate by reference into the 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-Q.  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” found in the 10-K.  We qualify all of our forward-looking statements by these cautionary statements.

Part I, Item 3:  Quantitative and Qualitative Disclosure About Market Risk

The primary market risk faced by the Company is interest rate risk.  The Company has 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, variable long-term debt and short-term variable borrowings under financing arrangements entered into by the Company and its subsidiaries.  As of March 31, 2019, the Company had $90.0 million of variable rate lines of credit with two banks, under which the Company had $65.9 million of interim bank loans payable at March 31, 2019.

As of March 31, 2019, the Company had $22.05 million of variable-rate long-term debt outstanding.  Holding other variables constant, including levels of indebtedness, a one-percentage point change in interest rates would impact pre-tax earnings by approximately $0.2 million, annually.  The Company monitors its exposure to variable rate debt and will make future financing decisions as the need arises.


32


Part I, Item 4:  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2019, 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.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2019, there have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II, Item 1:  Legal Proceedings

On June 14, 2018, two nearly identical putative class action complaints were filed against the members of the Board of Directors, SJW and Mr. Eric W. Thornburg (the chief executive officer and president of SJW) on behalf of the Company’s shareholders in the Connecticut Superior Court in the Judicial District of Middlesex under the captions Dunn v. Benoit, et al., Case No. MMX-CV18-6021536-S (Conn. Super. Ct.) and Tillotson v. Benoit, et al., Case No. MMX-CV18-6021537-S (Conn. Super. Ct.), respectively. The complaints, as amended on September 18, 2018 and September 20 2018, respectively, allege, among other things, that (i) the members of the Board of Directors breached their fiduciary duties owed to the Company’s shareholders in connection with negotiating the Merger, (ii) the Company’s preliminary proxy statement, filed with the Securities and Exchange Commission on August 20, 2018 in respect of the special meeting of its shareholders held on November 16, 2018 in connection with the Merger, omits certain material information and (iii) SJW and Mr. Thornburg aided and abetted the alleged breaches by the Board of Directors. Among other remedies, the actions seek to recover rescissory and other damages and attorneys’ fees and costs. The parties to these actions entered into an agreement in principle to settle and release all claims that were or could have been alleged by the plaintiffs in those actions. On November 20, 2018, the plaintiffs in these two actions filed motions seeking an award of attorneys’ fees of $1.5 million, which the Company intends to oppose.

On October 5, 2018, a putative class action complaint and a direct action complaint were filed against the Company and the members of the Board of Directors in the United States District Court for the District of Connecticut under the captions Paskowitz v. Connecticut Water Service, et al., Case No. 3:18-cv-01663 (D. Conn.) and Assad v. Connecticut Water Service, et al., Case No. 3:18-cv-01664 (D. Conn.), respectively. The nearly identical complaints allege that the defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 by causing certain supposed misstatements or omissions to be included in the October 2, 2018 definitive proxy statement filed with the Securities and Exchange Commission in respect of the special meeting of its shareholders held on November 16, 2018 in connection with the Merger. Among other remedies, the actions seek to recover rescissory and other damages and attorneys’ fees and costs. The parties to these actions entered into an agreement in principle to settle and release all claims that were or could have been alleged by the plaintiffs in those actions.

We are involved in various other 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 the subject that presents a reasonable likelihood of a material adverse impact on the Company.

Part II, Item 1A: Risk Factors

Information about the material risks related to our business, financial condition and results of operations for the three months ended March 31, 2019 does not materially differ from that set out under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. You should carefully consider the risk factors and other information discussed in our Annual Report on Form 10-K for the year ended December 31, 2018, as well as the information provided elsewhere in this report. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair the Company’s business operations, financial condition or operating results.

Part II, Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

No stock repurchases were made during the quarter ended March 31, 2019.


33


Part II, Item 6: Exhibits

Exhibit Number
 
Description
 
 
 
3.1
 
Amended and Restated Certificate of Incorporation of Connecticut Water Service, Inc. dated May 11, 1998 (Exhibit 3.1 to Form 10-K for the year ended 12/31/98).
 
 
 
3.2
 
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Connecticut Water Service, Inc. dated August 27, 1998 (Exhibit 3 to Form 8-K filed on September 25, 1998).
 
 
 
3.3
 
 
 
 
3.4
 
 
 
 
3.5
 
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).
 
 
 
3.6
 
 
 
 
31.1*
 
 
 
 
31.2*
 
 
 
 
32**
 
 
 
 
101.INS**
 
XBRL Instance Document
 
 
 
101.SCH**
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
* filed herewith
** furnished herewith

34


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Connecticut Water Service, Inc.
(Registrant)
 
 
 
Date:
May 8, 2019
By:  /s/ David C. Benoit
 
 
David C. Benoit
President and Chief Executive Officer
 
 
 
Date:
May 8, 2019
By:  /s/ Robert J. Doffek
 
 
Robert J. Doffek
Chief Financial Officer, Treasurer and Controller

35