##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
 Form 10-K (X) Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2003or(  ) Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from        toCommission File Number 0-8084
 Connecticut Water Service, Inc.  Connecticut
    
    06-0739839(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)93 West Main Street, Clinton, CT
    
    06413(Address of principal executive office)
    
    (Zip Code)
 Registrants telephone number, including area code (860) 669-8636
Registrants website: www.ctwater.com  Securities registered pursuant to Section 12 (b) of the Act: Title of each Class
    
    Name of each exchange on which registeredNone
    
    Not applicable
 Securities registered pursuant to Section 12 (g) of the Act:  Common Stock, without par value
(Title of Class) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.  Yes ü     No Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K, (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  (ü) Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.  Yes ü     No




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The aggregate market value of the registrants voting Common Stock held by
non-affiliates, computed on the price of such stock at the close of business on
June 30, 2003 is $201,620,443. 7,924,603 Number of shares of Common Stock outstanding, March 1, 2004
(excluding 49,970 common stock equivalent shares) DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Into WhichDocument
    
    Document is IncorporatedDefinitive Proxy Statement, dated
    
    Part IIIMarch 10, 2004, for Annual Meetingof Shareholders to be held onApril 23, 2004.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR THE COMPANYS COMMON STOCK AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURESITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANYITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESLOAN AGREEMENTINDENTURE OF TRUSTLOAN AGREEMENTINDENTUREBOND PURCHASE AGREEMENTRETIREMENT AGREEMENTRETIREMENT AGREEMENTRETIREMENT AGREEMENT: EXECUTIVETRUST AGREEMENTPOST-EGTRRA AMENDMENTSUPPLEMENTAL PARTICIPATION AGREEMENTSUPPLEMENTAL PARTICIPATION AGREEMENTSIXTH AMENDMENT TO RETIREMENT PLANMEMORANDUM OF UNDERSTANDINGSUBSIDIARIESCONSENT OF PRICEWATERHOUSECOOPERS LLPEXPLANATION OF ABSENCE OF CONSENTCERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION    Table of Contents  INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2003 PageNumberPart IItem 1.
    
    Business
    
    
    4Item 2.
    
    Properties
    
    
    9Item 3.
    
    Legal Proceedings
    
    
    11Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    11Part IIItem 5.
    
    Market for the Companys Common Stock and Related
Stockholder Matters
    
    
    12Item 6.
    
    Selected Financial Data
    
    
    13Item 7.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    14Item 7A.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    26Item 8.
    
    Financial Statements and Supplementary Data
    
    
    26Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
    
    
    26Item 9A.
    
    Controls and Procedures
    
    
    27Part IIIItem 10.
    
    Directors and Executive Officers of the Company
    
    
    28Item 11.
    
    Executive Compensation
    
    
    29Item 12.
    
    Security Ownership of Certain Beneficial Owners and
Management
    
    
    29Item 13.
    
    Certain Relationships and Related Transactions
    
    
    29Item 14.
    
    Principal Accountant Fees and Services
    
    
    29Part IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on
Form 8-K
    
    
    30Signatures
    
    
    32




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4 This Form 10-K contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. Forward-looking statements should be
read in conjunction with the cautionary statements included in this Form 10-K
in Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations under the heading Forward Looking Information. 
 PART I 
 ITEM 1. BUSINESS The Company The Registrant, Connecticut Water Service, Inc. (referred to as the Company,
we or our) was organized in 1956. Connecticut Water Service, Inc. is a
non-operating holding company, whose income is derived from the earnings of its
eleven wholly-owned subsidiary companies. In 2003 approximately 80% of the
Companys earnings were attributable to water activities carried out within its
five regulated water companies: The Connecticut Water Company, The Gallup Water
Service, Incorporated, The Crystal Water Company of Danielson, The Barnstable
Water Company and The Unionville Water Company. These five companies supply
water to 86,750 customers in 42 towns throughout Connecticut and Massachusetts.
Each of these companies is subject to state regulation regarding financial
issues, rates, and operating issues, and to various other state and federal
regulatory agencies concerning water quality and environmental standards. In
addition to its regulated utilities, the Company owns six unregulated
companies: Chester Realty, Inc., a real estate company in Connecticut; New
England Water Utility Services, Inc., which provides contract water and sewer
operations and other water related services; Connecticut Water Emergency
Services, Inc., a provider of drinking and pool water by tanker truck; Crystal
Water Utilities Corporation, a holding company which owns The Crystal Water
Company of Danielson and three small rental properties; BARLACO, a real estate
company in Massachusetts; and Barnstable Holding Company, a holding company
which owns The Barnstable Water Company and BARLACO. In 2003, these
unregulated companies, in conjunction with the regulated water companies,
contributed the remaining 20% of the Companys earnings through real estate
transactions as well as services and rentals. Our mission is to provide high quality water service to our customers at a fair
return to our stockholders while maintaining a work environment that attracts,
retains and motivates our employees to achieve a high level of performance. Our corporate headquarters are located at 93 West Main Street, Clinton,
Connecticut 06413. Our telephone number is 860.669.8636, and our Internet
address is www.ctwater.com.




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5 The Companys annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports will be made
available free of charge through the INVESTOR INFO (SEC Filings) section of
the Companys Internet website (http://www.ctwater.com) as soon as practicable
after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission. The following documents are also available
through the CORPORATE GOVERNANCE section of our website:  
    
    Code of Ethics
    
    Role of Board
    
    Role and Composition of Committees
    
    Audit Committee Charter
    
    Compensation Committee Charter
    
    Corporate Governance Committee Charter Copies of each of the Companys SEC filings (without exhibits) and corporate
governance documents mentioned above will also be mailed to investors, upon
request. Our Regulated Business Our business is subject to seasonal fluctuations and weather variations. The
demand for water is generally greater during the warmer months than the cooler
months due to customers high water consumption related to cooling systems and
various outdoor uses such as private and public swimming pools and lawn
sprinklers. Demand will vary with rainfall and temperature levels from year to
year and season to season, particularly during the warmer months. In general, the profitability of the water utility industry is largely
dependent on the timeliness and adequacy of rates allowed by utility regulatory
commissions. In addition, profitability is affected by numerous factors over
which we have little or no control, such as costs to comply with security,
environmental, and water quality regulations. Inflation and other factors also
impact costs for construction, materials and personnel related expenses. Costs to comply with environmental and water quality regulations are
substantial. Since the 1974 enactment of the Safe Drinking Water Act we have
spent approximately $50,500,000 in constructing facilities and conducting
aquifer mapping necessary to comply with the requirements of the Safe Drinking
Water Act, and other federal and state regulations, of which $2,548,000 was
expended in the last five years. We are presently in compliance with current
regulations, but the regulations are subject to change at any time. The costs
to comply with future changes in state or federal regulations, which could
require us to modify existing filtration facilities and/or construct new ones,
or to replace any reduction of the safe yield from any of our current sources
of supply, could be substantial. Our water companies derive their rights and franchises to operate from special
state acts that are subject to alteration, amendment or repeal and do not grant
us exclusive rights to our service areas. Our franchises are free from
burdensome restrictions, are unlimited as to time, and authorize us to sell
potable water in all the towns we now serve. There is the possibility that a
state could revoke our franchises and allow a governmental entity to take over
some or all of our systems. From time to time such legislation is
contemplated.




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6 The rates we charge our water customers are established under the jurisdiction
of and are approved by a state regulatory agency. It is our policy to seek
rate relief as necessary to enable us to achieve an adequate rate of return.
The following table shows information related to each of our water companies
most recent general rate filing. Date of Last
    
    Allowed
    
    AllowedRate
    
    Return on
    
    Return onDecision
    
    Equity
    
    Rate BaseBarnstable
    
    
    1998
    
    
    
    12.5
    %
    
    
    11.31
    %Connecticut Water
    
    
    1991
    
    
    
    12.7
    %
    
    
    10.74
    %Crystal
    
    
    1995
    
    
    
    12.35
    %
    
    
    10.16
    %Gallup
    
    
    1994
    
    
    
    N/A
    *
    
    
    N/A
    *Unionville
    
    
    1999
    ***
    
    
    12.35
    %
    
    
    N/A
    **
  *
    
    Gallups rates were based on its net income requirement, not on a rate of
return methodology.**
    
    Unionvilles rates were based on a return on equity methodology, not a rate
base methodology.***
    
    Beginning mid-2003, Unionville began imposing a 30% surcharge on its
customers water bills to recover financing and operating costs related to the
construction and use of a water interconnection with a neighboring water
supplier. Annually the surcharge is subject to a retroactive refund to
ratepayers if total revenue for Unionville exceeds certain stipulated amounts.
As part of the decision authorizing the surcharge, the Connecticut Department
of Public Utility Control also limited the conditions upon which Unionville may
seek a rate increase prior to September 1, 2005. Our Water Systems Our water infrastructure consists of 29 noncontiguous water systems in the
State of Connecticut and one water system in Massachusetts. Our system, in
total, consists of 1,370 miles of water main and reservoir storage capacity of
7.0 billion gallons. The safe, dependable yield from our 131 active wells and
20 reservoirs is approximately 52 million gallons per day. Water sources vary
among the individual systems, but overall approximately 42% of the total
dependable yield comes from reservoirs and 58% from wells. We supply water, and in most cases, fire protection to all or portions of 42
towns in Connecticut and Massachusetts. The following table lists the customer
count, operating revenues and customer water consumption for each of our water
companies as of December 31, 2003. Number
    
    Water
    
    Customer Waterof
    
    Revenues
    
    ConsumptionWater Company
    
    customers
    
    ($000's)
    
    (millions of gallons)Barnstable Water Company
    
    
    7,174
    
    
    $
    2,517
    
    
    
    813Connecticut Water Company
    
    
    68,895
    
    
    
    39,301
    
    
    
    5,688Crystal Water Company
    
    
    3,694
    
    
    
    2,071
    
    
    
    438Gallup Water Service
    
    
    1,225
    
    
    
    642
    
    
    
    89Unionville Water Company
    
    
    5,762
    
    
    
    2,584
    
    
    
    612Total
    
    
    86,750
    
    
    $
    47,115
    
    
    
    7,640




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7 The following table breaks down the above total figures by customer class: Water
    
    Customer WaterNumber of
    
    Revenues
    
    ConsumptionCustomer Class
    
    customers
    
    ($000's)
    
    (millions of gallons)Residential
    
    
    76,886
    
    
    $
    29,172
    
    
    
    5,235Commercial
    
    
    6,274
    
    
    
    6,210
    
    
    
    1,579Industrial
    
    
    436
    
    
    
    1,616
    
    
    
    443Public Authority
    
    
    575
    
    
    
    1,494
    
    
    
    383Fire Protection
    
    
    1,638
    
    
    
    8,105
    
    
    
    0Other (including
non-metered accounts)
    
    
    941
    
    
    
    518
    
    
    
    0Total
    
    
    86,750
    
    
    $
    47,115
    
    
    
    7,640
 Disposition of Property Our water companies own various small, discrete parcels of land that are no
longer required for water supply purposes. At December 31, 2003 this land
totaled approximately 500 acres. Over the past years we have been slowly
disposing of such excess land. The largest transaction to date has been the
donation of land by the Crystal Water Company to the Town of Killingly for
protected open space purposes over a three-year period, 2002  2004. In January
2004, the final parcel of land was transferred to the Town. Over the three-year
period the following acreage was donated to the Town under this agreement: Year
    
    Acres
    
    After-tax Profit2002
    
    
    54
    
    
    $
    293,0002003
    
    
    178
    
    
    $
    942,0002004
    
    
    133
    
    
    $
    712,000
 Primarily due to a Connecticut corporate tax credit, which was legislatively
enacted in 2000, the donation of land for protected open space purposes results
in a greater after-tax profit to the Company than a sale of the land would
provide. Future disposition of land by our Connecticut regulated water companies is
limited by the Memorandum of Understanding that the Company entered into with
the Connecticut Department of Environmental Protection on December 4, 2002 (See
Moratorium on Land Sales in the Commitments and Contingencies section of ITEM
7 of this Form 10-K). We also have a limited amount of land held by our unregulated companies.
Included in this category is approximately 100 acres of land held by BARLACO
Inc., which we acquired in February 2001 in conjunction with the Companys
acquisition of The Barnstable Holding Company.




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8 Competition Our water companies face competition, presently not material, from a few
private water systems operating within, or adjacent to, their franchise areas
and from municipal and public authority systems whose service areas in some
cases overlap portions of our water companies franchise areas. Employees As of December 31, 2003, we employed a total of 195 persons. Our employees are
not covered by collective bargaining agreements. We believe that our relations
with our employees are good. Segments of Our Business For management purposes we divide our business into three Business segments:
Water Activities, Real Estate Transactions, and Services and Rentals. The Water Activities segment is comprised of our core regulated water
activities to supply public drinking water to our customers. This segment
encompasses all transactions of all our regulated companies with the exception
of real estate transactions and service and rental activities. Our Real Estate Transactions segment involves the sale or donation for income
tax benefits of our limited excess real estate holdings. These transactions can
be effected by either our regulated or unregulated companies. A breakdown of
the net profits of this segment between our regulated and unregulated companies
for the past three years is as follows: Net Income from Real Estate TransactionsRegulated

    Unregulated

    Total2003
    
    $
    942,000
    
    
    $
    87,000
    
    
    $
    1,029,0002002
    
    $
    440,000
    
    
    
    
    
    
    $
    440,0002001
    
    $
    1,121,000
    
    
    
    
    
    
    $
    1,121,000
 Our Services and Rentals segment provides contracted services to water and
wastewater utilities and other clients and also leases certain of our
properties to third parties. Both our regulated and unregulated companies offer
these transactions. The types of services provided include contract operations
of water and wastewater facilities; Linebacker®, our service line protection
plan for public drinking water customers, and providing bulk deliveries of
emergency drinking water to businesses and residences via tanker truck. Our
lease and rental income comes primarily from telecommunication antennas placed
on our water storage tanks by telecommunication companies, as well as from the
renting of residential and commercial property.




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9 Some of the services listed above, including the service line protection plan
and antenna leases, have little or no competition. But there can be
considerable competition for contract operations of large water and wastewater
facilities and systems. However, we have sought to develop a niche market by
seeking to serve smaller facilities and systems in our service areas where
there is less competition. The services and rentals segment, while relatively
new and a small portion of our overall business, has grown significantly over
the past five years and now provide nearly eight percent of our overall net
income. The table below describes the net profits generated by this segment of
our business from our regulated and unregulated companies for the past three
years: Net Income from Real Estate TransactionsRegulated

    Unregulated

    Total2003
    
    $
    411,000
    
    
    $
    322,000
    
    
    $
    733,0002002
    
    $
    274,000
    
    
    $
    170,000
    
    
    $
    444,0002001
    
    $
    240,000
    
    
    $
    132,000
    
    
    $
    372,000
 
 ITEM 2. PROPERTIES The properties of our water companies consist of land, easements, rights
(including water rights), buildings, reservoirs, standpipes, dams, wells,
supply lines, treatment plants, pumping plants, transmission and distribution
mains and conduits, mains and other facilities and equipment used for the
collection, purification, storage and distribution of water. Although, our
regulated water companies own their principal properties in fee, substantially
all of the properties owned by Barnstable Water, Connecticut Water, Crystal
Water and Unionville Water companies are subject to liens as security for
outstanding debt. In addition, in certain cases, our water companies are
parties to limited contractual arrangements for the provision of water supply
from neighboring utilities. We believe that our properties are in good
operating condition. Water mains are located, for the most part, in public
streets and, in a few instances, are located on land that we own in fee and
land utilized pursuant to easement right, most of which are perpetual and
adequate for the purpose for which they are held. The net utility plant balances of the water companies at December 31, 2003 were
as follows: Net Utility PlantBarnstable
    
    $
    6,468,000Connecticut Water
    
    
    196,568,000Crystal
    
    
    10,416,000Gallup
    
    
    3,250,000Unionville
    
    
    18,396,000Total
    
    $
    235,098,000




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10 Sources of water supply owned, maintained, and operated by our regulated water
companies include eighteen reservoirs and fifty-five well fields. In addition,
Connecticut Water has an agreement with the Metropolitan District Commission
(MDC) (a public water and sewer authority presently serving the City of
Hartford and portions of surrounding towns), which provides, among other
things, for the operation and maintenance by MDC of a filtration plant to
supply up to 650,000 gallons of treated water per day for Connecticut Waters
Collinsville System. Collectively, these sources have the capacity to deliver
approximately fifty-one million gallons of potable water daily to the sixteen
major operating systems in the following table. In addition to the principal
systems identified, our regulated water companies own, maintain, and operate
fifteen small, non-interconnected satellite and consecutive water systems that,
combined have the ability to deliver about one million gallons of additional
water per day to their respective systems. For some small consecutive water
systems, purchased water may comprise substantially all of the total available
supply of the system. Our regulated water companies own and operate fifteen water filtration
facilities, having a combined treatment capacity of approximately 26.33 million
gallons per day. Of these facilities, twelve are owned by Connecticut Water,
two by Unionville Water, and one by Crystal Water. Gallup and Barnstable Water
do not have, or require, water filtration facilities. The companies estimated available water supply, not including water purchases
or non-principal systems, is as follows: ESTIMATEDAVAILABLE SUPPLY(MILLION GALLONS PERDAY)Barnstable
    
    
    3.41Connecticut WaterGuilford System
    
    
    8.60Chester System
    
    
    1.69Naugatuck System
    
    
    7.02Terryville System
    
    
    0.91Thomaston System
    
    
    1.08Collinsville System
    
    
    0.65Northern Western System
    
    
    15.12Somers System
    
    
    0.38Stafford System
    
    
    1.00CrystalDanielson System
    
    
    3.69Plainfield System
    
    
    1.01Thompson System
    
    
    0.29KIP System
    
    
    0.50Gallup
    
    
    1.44Unionville
    
    
    4.35Total
    
    
    51.14
 As of December 31, 2003, the transmission and distribution systems of our five
water companies consisted of approximately 1,370 miles of main. On that date,
approximately 75 percent of our mains were eight-inch diameter or larger.
Substantially all new main installations are cement-lined ductile iron pipe of
eight-inch diameter or larger.




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11 The size of each companys system(s) in terms of miles of mains is as follows: Miles ofTransmission andDistribution WaterMainsBarnstable Water
    
    
    100Connecticut Water
    
    
    1,070Crystal
    
    
    70Gallup
    
    
    20Unionville
    
    
    110Total
    
    
    1,370
 We believe that our properties are maintained in good condition and in
accordance with current regulations and standards of good waterworks industry
practice. 
 ITEM 3. LEGAL PROCEEDINGS We are involved in various legal proceedings from time to time. Although the
results of legal proceedings cannot be predicted with certainty, there are no
pending legal proceedings to which we, or any of our subsidiaries are a party,
or to which any of our properties is subject, that presents a reasonable
likelihood of a material adverse impact on the Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.




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12 
 PART II 
 ITEM 5. MARKET FOR THE COMPANYS COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our Common Stock is traded on the NASDAQ exchange under the symbol CTWS. Our
quarterly high and low stock prices as reported by NASDAQ and the cash
dividends we paid during 2003 and 2002 are listed as follows: Price
    
    
    
    
    
    DividendsPeriod
    
    
    
    
    
    High
    
    
    
    
    
    Low
    
    Paid2003First Quarter
    
    
    
    
    
    $
    27.49
    
    
    
    
    
    
    $
    24.00
    
    
    $
    .2050Second Quarter
    
    
    
    
    
    
    26.96
    
    
    
    
    
    
    
    24.22
    
    
    $
    .2050Third Quarter
    
    
    
    
    
    
    30.41
    
    
    
    
    
    
    
    25.20
    
    
    $
    .2075Fourth Quarter
    
    
    
    
    
    
    30.25
    
    
    
    
    
    
    
    26.96
    
    
    $
    .20752002First Quarter
    
    
    
    
    
    $
    31.00
    
    
    
    
    
    
    $
    26.53
    
    
    $
    .2022Second Quarter
    
    
    
    
    
    
    31.09
    
    
    
    
    
    
    
    24.00
    
    
    $
    .2022Third Quarter
    
    
    
    
    
    
    30.00
    
    
    
    
    
    
    
    20.35
    
    
    $
    .2050Fourth Quarter
    
    
    
    
    
    
    27.12
    
    
    
    
    
    
    
    24.05
    
    
    $
    .2050
 As of March 1, 2004 there were approximately 5,000 holders of record of our
common stock. We presently intend to pay quarterly cash dividends in 2004 on March 15, June
15, September 15 and December 15 subject to our earnings and financial
condition, regulatory requirements and other factors our Board of Directors may
deem relevant.




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SUPPLEMENTAL INFORMATION (Unaudited) 
 ITEM 6. SELECTED FINANCIAL DATA Years Ended December 31, (thousands of dollars except per shareamounts and where otherwise indicated)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999CONSOLIDATED STATEMENTS OF INCOME
Operating Revenues
    
    $
    47,115
    
    
    $
    45,830
    
    
    $
    45,392
    
    
    $
    43,997
    
    
    $
    45,171Operating Expenses
    
    $
    35,584
    
    
    $
    33,996
    
    
    $
    34,078
    
    
    $
    32,335
    
    
    $
    33,382Operating Income
    
    $
    11,531
    
    
    $
    11,834
    
    
    $
    11,314
    
    
    $
    11,662
    
    
    $
    11,789Interest and Debt Expense
    
    $
    4,635
    
    
    $
    4,534
    
    
    $
    4,632
    
    
    $
    4,782
    
    
    $
    4,720Net Income Applicable to Common Stock
    
    $
    9,172
    
    
    $
    8,742
    
    
    $
    8,401
    
    
    $
    7,858
    
    
    $
    7,780Cash Common Stock Dividends Paid
    
    $
    6,529
    
    
    $
    6,277
    
    
    $
    6,105
    
    
    $
    5,890
    
    
    $
    5,688Dividend Payout Ratio
    
    
    71
    %
    
    
    72
    %
    
    
    73
    %
    
    
    75
    %
    
    
    73
    %Weighted Average Common Shares Outstanding
    
    
    7,956,426
    
    
    
    7,717,608
    
    
    
    7,619,031
    
    
    
    7,604,546
    
    
    
    7,593,376Basic Earnings Per Average Common Share
    
    $
    1.15
    
    
    $
    1.13
    
    
    $
    1.10
    
    
    $
    1.03
    
    
    $
    1.02Number of Shares Outstanding at Year End
    
    
    7,967,381
    
    
    
    7,939,713
    
    
    
    7,649,362
    
    
    
    7,604,594
    
    
    
    7,596,141ROE on Year End Common Equity
    
    
    11.0
    %
    
    
    10.9
    %
    
    
    11.9
    %
    
    
    11.7
    %
    
    
    12.0
    %Declared Common Dividends Per Share*
    
    $
    0.825
    
    
    $
    0.814
    
    
    $
    0.804
    
    
    $
    0.795
    
    
    $
    0.787CONSOLIDATED BALANCE SHEET
Common Stockholders Equity
    
    $
    83,315
    
    
    $
    79,975
    
    
    $
    70,783
    
    
    $
    67,110
    
    
    $
    64,915Long-Term Debt
    
    $
    64,754
    
    
    $
    64,734
    
    
    $
    63,953
    
    
    $
    66,283
    
    
    $
    67,099Minority Interest
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    117
    
    
    $
    142Preferred Stock (Consolidated, Excluding Current Maturities)
    
    $
    847
    
    
    $
    847
    
    
    $
    847
    
    
    $
    847
    
    
    $
    847Total Capitalization
    
    $
    148,916
    
    
    $
    145,556
    
    
    $
    135,583
    
    
    $
    134,357
    
    
    $
    133,003Stockholders Equity (Includes Preferred Stock)
    
    
    57
    %
    
    
    56
    %
    
    
    53
    %
    
    
    51
    %
    
    
    49
    %Long-Term Debt
    
    
    43
    %
    
    
    44
    %
    
    
    47
    %
    
    
    49
    %
    
    
    51
    %Net Utility Plant
    
    $
    235,098
    
    
    $
    229,097
    
    
    $
    202,330
    
    
    $
    193,169
    
    
    $
    187,613Book Value  Per Common Share
    
    $
    10.46
    
    
    $
    10.07
    
    
    $
    9.25
    
    
    $
    8.82
    
    
    $
    8.55OPERATING REVENUES BY
REVENUE CLASS
Residential
    
    $
    29,172
    
    
    $
    28,680
    
    
    $
    28,621
    
    
    $
    27,364
    
    
    $
    28,422Commercial
    
    
    6,210
    
    
    
    6,036
    
    
    
    5,941
    
    
    
    5,817
    
    
    
    6,093Industrial
    
    
    1,616
    
    
    
    1,709
    
    
    
    1,687
    
    
    
    1,905
    
    
    
    1,850Public Authority
    
    
    1,494
    
    
    
    1,436
    
    
    
    1,460
    
    
    
    1,481
    
    
    
    1,561Fire Protection
    
    
    8,105
    
    
    
    7,434
    
    
    
    7,187
    
    
    
    6,960
    
    
    
    6,861Other (including non-metered accounts)
    
    
    518
    
    
    
    535
    
    
    
    496
    
    
    
    470
    
    
    
    384Total Operating Revenues
    
    $
    47,115
    
    
    $
    45,830
    
    
    $
    45,392
    
    
    $
    43,997
    
    
    $
    45,171Number of Customers (Average)
    
    
    86,145
    
    
    
    82,119
    
    
    
    78,156
    
    
    
    77,183
    
    
    
    76,061Billed Consumption (Millions of Gallons)
    
    
    7,640
    
    
    
    7,418
    
    
    
    7,259
    
    
    
    6,911
    
    
    
    7,330Number of Employees
    
    
    195
    
    
    
    191
    
    
    
    181
    
    
    
    184
    
    
    
    180




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##### Table of Contents



14 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FINANCIAL CONDITION Overview The Company is a non-operating holding company, whose income is derived from
the earnings of its eleven wholly-owned subsidiary companies. In 2003,
approximately 80% of the Companys earnings were attributable to water
activities carried out within its five regulated water companies: The
Connecticut Water Company, The Gallup Water Service, Incorporated, The Crystal
Water Company of Danielson, The Barnstable Water Company and The Unionville
Water Company. Over 95% of this water activity income comes from The
Connecticut Water Company (Connecticut Water) our largest subsidiary and water
company. Connecticut Water has not had an increase in its rates since 1991.
Primarily due to the construction of six major water treatment plants during
the late 1970s and throughout the 1980s, our overall investment in gross
utility plant increased by $122,881,000, or 270%, from 1978 to 1991 which
resulted in our water rates being amongst the highest in Connecticut. In 1991
we began developing opportunities to increase revenues and earnings without
raising regulated water rates. Through these efforts we have successfully:  -
    
    Increased our consolidated earnings each year since 1991
without increasing water rates, and;-
    
    Continued increasing our common dividend payments per share
during this period. We believe that it is likely that we will have to seek regulatory approval to
increase rates charged at some or all of our 5 regulated water companies during
the next 5 years. The material factors that will affect our decision to
consider rate increases in the next 5 years are:  -
    
    Expected increases in infrastructure investment are necessary
to insure a safe, reliable water system remains in place,-
    
    Modest historical and projected annual growth in regulated
water sales of approximately 1.5%, and;-
    
    Increases in operating costs such as wage, pension, medical and
insurance costs. On a year-to-year basis our earnings are primarily influenced by weather
patterns that affect our customers water usage and thereby our revenues. Our
revenues may fluctuate by as much as $1.5 million (or 3.0%) over or under a
normal year because customers use more water in hot, dry years and less water
in cool, rainy years. Regulatory Matters and Inflation The Company, like all other businesses, is affected by inflation, most notably
by the continually increasing costs required to maintain, improve and expand
its service capabilities. The cumulative effect of inflation over time results
in significantly higher operating costs and facility replacement costs, which
must be recovered from future cash flows.




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##### Table of Contents



15 Our water companies are also subject to environmental and water quality
regulations. Costs to comply with environmental and water quality regulations
are substantial. We are currently in compliance with current regulations, but
the regulations are subject to change at any time. The costs to comply with
future changes in state or federal regulations, which could require us to
modify current filtration facilities and/or construct new ones, or to replace
any reduction of the safe yield from any of our current sources of supply,
could be substantial. Our water companies ability to recover their increased expenses and/or
investment in utility plant is dependent on the regulatory rates they charge
their customers. Changes to these rates must be approved by the appropriate
regulatory authority through formal rate proceedings. The rates of our four
Connecticut based water companies are regulated by the Connecticut Department
of Public Utility Control and our Massachusetts water companys rates are
regulated by the Massachusetts Department of Telecommunications and Energy. Due
to the subjectivity of certain items involved in the process of establishing
rates such as future customer growth, inflation and allowed return on
investment, we have no assurance that our water companies will be able to raise
their rates to a level we consider appropriate, or to raise their rates at all,
through any future rate proceeding. Critical Accounting Policies and Estimates The Companys consolidated financial statements are prepared in conformity with
Generally Accepted Accounting Principles in the United States of America (GAAP)
and as directed by the regulatory commissions to which the Companys
subsidiaries are subject. (See Note 1 to the Consolidated Financial Statements
for a discussion of our significant accounting policies.) The Company believes
the following policies and estimates are critical to the presentation of its
consolidated financial statements. Public Utility Regulation- Statement of Financial Accounting Standards -
Financial Accounting Standards No. 71, Accounting for the Effects of Certain
Types of Regulation (FAS 71), requires cost based, rate-regulated enterprises
such as the Companys water companies to reflect the impact of regulatory
decisions in their financial statements. The state regulators, through the
rate regulation process, can create regulatory assets that result when costs
are allowed for ratemaking purposes in a period after the period in which costs
would be charged to expense by an unregulated enterprise. The balance sheet
includes regulatory assets and liabilities as appropriate, primarily related to
income taxes and post-retirement benefit costs. The Company believes, based on
current regulatory circumstances, that the regulatory assets recorded are
likely to be recovered and that its use of regulatory accounting is appropriate
and in accordance with the provisions of FAS 71. Material regulatory assets
are earning a return. Revenue
Recognition Revenue from metered customers includes billings to
customers based on quarterly meter readings plus an estimate of water used
between the customers last meter reading and the end of the accounting period.
The unbilled revenue amount is listed as a current asset on the balance sheet.
The amount recorded as unbilled revenue is generally higher during the summer
months when water sales are higher. Based upon historical experience,
management believes the Companys estimate of unbilled revenues is reasonable.




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16 Pension
Plan Accounting The discount rate assumption we use to value our
pension benefit obligations has a material impact on the amount of pension
expense we record in a given period. Our 2002 and 2003 pension expense was
calculated using assumed discount rates of 7.25% and 6.5%, respectively. In
2004 our pension expense will be calculated with an assumed discount rate of
6.25%. The following shows how much a one percent change in our assumed
discount rate would have changed our reported 2003 pension expenses: Increase(Decrease)in expenseA 1% increase in the discount rate
    
    
    ($196,000
    )A 1% decrease in the discount rate
    
    $
    222,000
 Outlook The Companys profitability is primarily attributable to the sale and
distribution of water, the amount of which is dependent on seasonal weather
fluctuations, particularly during the summer months when water demand will vary
with rainfall and temperature levels. After the terrorist strike on September 11, 2001, water companies have had to
increase security on their water supplies and facilities. This has resulted in
increases in operating and capital costs related to security, which are
typically recoverable in a rate proceeding. FINANCIAL CONDITION Liquidity and Capital Resources In recent years, we have attempted to limit our investment in utility plant to
the amount of funds generated from our consolidated operations. Under this
policy, the Company has not been required to significantly increase its
long-term debt obligations in order to fund its annual construction program.
The following table shows the total construction expenditures for each of the
last three years and what we expect to invest on construction projects in 2004. ConstructionGross
    
    Funded by
    
    ConstructionConstruction
    
    Developers &
    
    Funded byExpenditures
    
    Others
    
    Company2001
    
    $
    14,218,000
    
    
    $
    4,332,000
    
    
    $
    9,886,0002002
    
    $
    15,691,000
    
    
    $
    4,992,000
    
    
    $
    10,699,0002003
    
    $
    11,909,000
    
    
    $
    3,522,000
    
    
    $
    8,387,0002004 (Projected)
    
    $
    14,464,000
    
    
    $
    3,300,000
    
    
    $
    11,164,000




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17 We currently fund our working capital requirements through our lines of credit
with three banks, which provide liquidity to satisfy ongoing cash needs. We
consider the current aggregate $12,500,000 lines of credit to be adequate to
finance any expected short-term borrowing requirements that may arise in 2004.
All the lines have one-year lives and will expire at different dates in 2004.
We expect to renew the lines in 2004. The interest rates payable are variable
and fluctuate over time based on financial conditions. The weighted average
interest rate on the $9,700,000 balance outstanding at December 31, 2003 was
1.523%. During 2003 interest rates fell to historically low levels. We took advantage
of the low rates and refinanced a portion of our long-term debt in the fourth
quarter of 2003. On October 30, 2003, Connecticut Water borrowed $22.93 million
from the issuance of Water Facilities Refunding Revenue Bonds by the
Connecticut Development Authority. The bonds were sold in two series with the
following terms: 2003 A Series: $8,000,000 (Non-AMT)
2003 C Series: $14,930,000 (AMT)
    
    4.40% Maturing 12/15/2020
5.00% Maturing 09/01/2022
 The proceeds of the transaction were used to redeem the Series R and S first
mortgage bonds of Connecticut Water Company and paid for a portion of the
expenses associated with the issuance. During the first quarter of 2004, Connecticut Water refinanced an additional
portion of its long-term debt through the issuance of $12,500,000 of variable
rate, taxable debenture bonds Series 2004 with a maturity date of January 4,
2029. The bonds have been secured by an irrevocable direct pay letter of
credit issued by a financial institution, with a five-year term expiring in
March 2009. The proceeds of the sale of the bonds, which are general debt
obligations of Connecticut Water, will be used to redeem the $12,050,000
aggregate principal amount of Connecticut Waters First Mortgage Bonds (Series
V) and to pay a portion of the expenses associated with the bonds refunding. In connection with the issuance of the Bonds, Connecticut Water entered into an
interest rate swap transaction with a counterparty in the notional principal
amount of $12,500,000. The interest rate swap agreement provides that,
beginning in April 2004 and thereafter on a monthly basis, Connecticut Water
will pay the counterparty a fixed interest rate of 3.73% on the notional amount
for a period of five years. In exchange, the counterparty will, beginning in
April 2004 and thereafter on a monthly basis, pay Connecticut Water a floating
interest rate (based on 105% of the U.S. Dollar one-month LIBOR rate) on the
notional amount for a period of five years. The purpose of the interest rate
swap is to manage the Companys exposure to fluctuations in prevailing interest
rates. During the first six months of 2004, Unionville expects to secure $1.6 million
through the Drinking Water State Revolving Fund for costs incurred in
developing a water interconnection with a neighboring water supplier. The
funds will be used to pay off a portion of the balances outstanding under bank
lines of credit.




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18 Off-Balance Sheet Arrangements and Contractual Obligations We do not use off-balance sheet arrangements such as securitization of
receivables with any unconsolidated entities or other parties. The Company does
not engage in trading or risk management activities and does not have material
transactions involving related parties other than the interest rate swap
agreement discussed above. The following table summarizes the Companys future contractual cash
obligations as of December 31, 2003: Payments due by Periods(in thousands of dollars)Less
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    Years
    
    Years
    
    than 5Contractual Obligations
    
    Total
    
    year
    
    1 - 3
    
    4 and 5
    
    yearsLong-Term Debt
    
    $
    65,008
    
    
    $
    254
    
    
    $
    802
    
    
    $
    580
    
    
    $
    63,372Operating Lease Obligations
    
    
    2,050
    
    
    
    781
    
    
    
    912
    
    
    
    293
    
    
    
    64Purchase Obligations (1)
    
    
    29,002
    
    
    
    750
    
    
    
    1,334
    
    
    
    1,218
    
    
    
    25,700Total
    
    $
    96,060
    
    
    $
    1,785
    
    
    $
    3,048
    
    
    $
    2,091
    
    
    $
    89,136
   (1)
    
    Includes long and short-term capital purchase obligations. Purchase
obligations include agreements to purchase goods or services that are
enforceable and legally binding on the registrant and that specify all
significant terms, including: fixed or minimum quantities, fixed minimum or
variable price provisions; and the approximate timing of the transaction. Interim Bank Loans Payable at year-end 2003 was $9,700,000, which is $2,750,000
higher than at the end of 2002. During 2003, the Company incurred approximately $11.9 million of construction
expenditures. The Company financed such expenditures through internally
generated funds, customers advances, contributions in aid of construction and
short-term borrowings. The Board of Directors has approved an $11.2 million construction budget for
2004, net of amounts to be financed by customer advances and contributions in
aid of construction. Funds primarily provided by operating activities are
expected to finance this entire construction program given normal weather
patterns and related operating revenue billings. Refer to Note 10, Utility
Plant and Construction Program, in Notes to the Consolidated Financial
Statements for additional discussion of the Companys future construction
program. RESULTS OF OPERATIONS Overview of 2003 Results Earnings for 2003 were higher than 2002 due to increased profits in our Real
Estate and Services and Rentals business segments, which more than offset a
reduction in profits from our Water Activities segment.




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19 The profits generated by the real estate segment increased from 2002 primarily
because the most valuable parcel of the three parcels being donated to the Town
of Killingly, CT over a three-year period was donated in 2003. The net profits
(tax benefits) by year from donations under this agreement are: 2002
    
    $
    293,0002003
    
    $
    942,0002004*
    
    $
    712,000
  *
    
    donated in January, 2004 The net profits generated from the services and rental segment increased by 65%
from 2002. In 2003, we increased the profit margins generated by our service
contract operations, increased customer enrollment in our service line
maintenance program and increased the number of leases we have with
telecommunications companies that lease space on our water storage tanks for
their antenna sites. We have been working hard to grow this segment of the
business and are optimistic that we can continue to do so. Our net profits and
growth rates for this segment over the last thee years are: Services andRentalIncreased NetProfit OverPrior Year
    
    % Increase2001
    
    $
    106,000
    
    
    
    40
    %2002
    
    $
    72,000
    
    
    
    19
    %2003
    
    $
    289,000
    
    
    
    65
    %
 Earnings from our core Water Activities segment declined in 2003. The
unusually rainy and cool weather experienced during 2003 caused our customers
on average to use less water than they would normally use. Operating revenues
overall were approximately $1.3 million lower in 2003 than they would have been
in a normal weather year. This segment also experienced a 16.5% increase in
operation and maintenance expense in 2003. In addition to picking up 10
additional months of expenses associated with Unionville, which was acquired on
October 31, 2002, this segment experienced higher wages, medical, pension,
insurance, and power costs. There was also a higher than normal incidence of
weather related main breaks in addition to the normal increases in depreciation
and property tax expense related to the Companys increased investment in
utility plant. Somewhat offsetting these negative impacts on earnings was a
1.5% increase in the number of utility customers plus a lower 2003 effective
income tax rate due to book/tax timing differences, lower pre-tax income and a
reduction in estimated tax liabilities associated with non-current periods.




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20 Results on a comparable basis Because we acquired Unionville on October 31, 2002, and because we accounted
for the acquisition of Unionville under the purchase method of accounting, our
consolidated income statements include different amounts of Unionville
operating results in years 2001, 2002 and 2003. Number of monthsOf Unionville OperatingResults2001
    
    
    02002
    
    
    22003
    
    
    12
 To assist us and our investors in analyzing operating results by income
statement line, Company management internally looks at our consolidated results
without Unionville to measure performance on a comparable company basis. The
following are comparable income statements with the results of Unionville
removed.




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##### Table of Contents



21 2003 Results Compared with 2002INCOME STATEMENTSFor the years ended, December 31, (inthousands)
    
    2003
    
    2002Without
    
    
    
    
    
    
    
    
    
    WithoutConsolidated
    
    Unionville
    
    Unionville
    
    Consolidated
    
    Unionville
    
    UnionvilleOperating Revenues
    
    $
    47,115
    
    
    $
    2,584
    
    
    $
    44,531
    
    
    
    45,830
    
    
    
    361
    
    
    $
    45,469Operating ExpensesOperation and Maintenance
    
    
    22,759
    
    
    
    1,588
    
    
    
    21,171
    
    
    
    19,531
    
    
    
    226
    
    
    
    19,305Depreciation
    
    
    5,684
    
    
    
    472
    
    
    
    5,212
    
    
    
    5,187
    
    
    
    74
    
    
    
    5,113Income Taxes
    
    
    2,008
    
    
    
    140
    
    
    
    1,868
    
    
    
    4,482
    
    
    
    6
    
    
    
    4,476Taxes Other Than Income Taxes
    
    
    5,133
    
    
    
    204
    
    
    
    4,929
    
    
    
    4,796
    
    
    
    36
    
    
    
    4,760Total Operating Expenses
    
    
    35,584
    
    
    
    2,404
    
    
    
    33,180
    
    
    
    33,996
    
    
    
    342
    
    
    
    33,654Utility Operating Income
    
    
    11,531
    
    
    
    180
    
    
    
    11,351
    
    
    
    11,834
    
    
    
    19
    
    
    
    11,815Other Income (Deductions), Net
of TaxesGain on Property Transactions

    
    1,029
    
    
    
    
    
    
    
    1,029
    
    
    
    440
    
    
    
    
    
    
    
    440Non-Water Sales Earnings
    
    
    733
    
    
    
    18
    
    
    
    715
    
    
    
    444
    
    
    
    
    
    
    
    444Allowance for Funds Used During
Construction
    
    
    476
    
    
    
    58
    
    
    
    418
    
    
    
    470
    
    
    
    8
    
    
    
    462Other
    
    
    76
    
    
    
    1
    
    
    
    75
    
    
    
    126
    
    
    
    1
    
    
    
    125Total Other Income
(Deductions),
Net of Taxes
    2,314
    
    
    
    77
    
    
    
    2,237
    
    
    
    1,480
    
    
    
    9
    
    
    
    1,471Interest and Debt ExpensesInterest on Long-Term Debt
    
    
    4,016
    
    
    
    92
    
    
    
    3,924
    
    
    
    3,909
    
    
    
    16
    
    
    
    3,893Other Interest Charges
    
    
    385
    
    
    
    10
    
    
    
    375
    
    
    
    365
    
    
    
    
    
    
    
    365Amortization of Debt Expense
    
    
    234
    
    
    
    1
    
    
    
    233
    
    
    
    260
    
    
    
    
    
    
    
    260Total Interest and Debt
Expenses
    
    
    4,635
    
    
    
    103
    
    
    
    4,532
    
    
    
    4,534
    
    
    
    16
    
    
    
    4,518Net Income Before Preferred
Dividends
    
    
    9,210
    
    
    
    154
    
    
    
    9,056
    
    
    
    8,780
    
    
    
    12
    
    
    
    8,768Preferred Stock Dividend
Requirement
    
    
    38
    
    
    
    
    
    
    
    38
    
    
    
    38
    
    
    
    
    
    
    
    38Net Income Applicable to Common
Stock
    
    $
    9,172
    
    
    $
    154
    
    
    $
    9,018
    
    
    
    8,742
    
    
    
    12
    
    
    $
    8,730




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##### Table of Contents



22 2002 Results Compared
with 2001 INCOME STATEMENTS
For the years ended, December 31, (in thousands) 2002
    
    2001Without
    
    WithoutConsolidated
    
    Unionville
    
    Unionville
    
    UnionvilleOperating Revenues
    
    $
    45,830
    
    
    $
    361
    
    
    $
    45,469
    
    
    $
    45,392Operating
ExpensesOperation and Maintenance
    
    
    19,531
    
    
    
    226
    
    
    
    19,305
    
    
    
    20,076Depreciation
    
    
    5,187
    
    
    
    74
    
    
    
    5,113
    
    
    
    4,837Income Taxes
    
    
    4,482
    
    
    
    6
    
    
    
    4,476
    
    
    
    4,777Taxes Other Than Income Taxes
    
    
    4,796
    
    
    
    36
    
    
    
    4,760
    
    
    
    4,388Total Operating Expenses
    
    
    33,996
    
    
    
    342
    
    
    
    33,654
    
    
    
    34,078Utility Operating Income
    
    
    11,834
    
    
    
    19
    
    
    
    11,815
    
    
    
    11,314Other Income (Deductions), Net
of TaxesGain on Property Transactions
    
    
    440
    
    
    
    
    
    
    
    440
    
    
    
    1,121Non-Water Sales Earnings
    
    
    444
    
    
    
    
    
    
    
    444
    
    
    
    372Allowance for Funds Used During
Construction
    
    
    470
    
    
    
    8
    
    
    
    462
    
    
    
    439Merger Costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (352
    )Other
    
    
    126
    
    
    
    1
    
    
    
    125
    
    
    
    177Total Other Income
(Deductions),
Net of Taxes
    
    
    1,480
    
    
    
    9
    
    
    
    1,471
    
    
    
    1,757Interest and
Debt ExpensesInterest and Debt Expenses
Interest on Long-Term Debt
    
    
    3,909
    
    
    
    16
    
    
    
    3,893
    
    
    
    4,057Other Interest Charges
    
    
    365
    
    
    
    
    
    
    
    365
    
    
    
    353Amortization of Debt Expense
    
    
    260
    
    
    
    
    
    
    
    260
    
    
    
    222Total Interest and Debt
Expenses
    
    
    4,534
    
    
    
    16
    
    
    
    4,518
    
    
    
    4,632Net Income Before Preferred
Dividends
    
    
    8,780
    
    
    
    12
    
    
    
    8,768
    
    
    
    8,439Preferred Stock Dividend
Requirement
    
    
    38
    
    
    
    
    
    
    
    38
    
    
    
    38Net Income Applicable to Common
Stock
    
    $
    8,742
    
    
    $
    12
    
    
    $
    8,730
    
    
    $
    8,401




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23 2002 Compared with 2001 Net income applicable to common stock for 2002 in total increased from that of
2001 by $341,000, or $.03 per average basic share. The 2002 increase includes
$12,000 relating to two months of 2002 net income generated by Unionville which
was acquired on October 31, 2002. Excluding Unionvilles operating results: Operating revenues increased only .2% despite a 1.6% increase in number of
customers served due to a decline in the average amount of water our customers
consumed. While the 2002 average customer water usage might be considered
average, the 2001 customer water usage was atypically high due to the drought
conditions we experienced in 2001. Non recurring items contributing to the 2002 increase in net income were:  
    
    a 2002 $344,000 mark to market adjustment on the Companys common
stock equivalent shares outstanding
    
    2001 merger costs of $352,000 relating to the Companys pooling
of interests treatment of the 2001 Barnstable acquisition. COMMITMENTS AND CONTINGENCIES Security Recent enactment of the Bioterriorism Response Act of 2001 require
all public water systems serving over 3,300 people to prepare Vulnerability
Assessments (VA) of their critical utility assets. The assessments are to be
submitted to the U.S. Environmental Protection Agency by June 2004 followed by
an Emergency Response Plan by December 2004. The information within the VA is
not subject to release to the public and is protected from Freedom of
Information inquiries. Investment in security-related improvements is ongoing
and management believes that the costs associated with any such improvements
would be chargeable for recovery in future rate proceedings. Reverse Privatization Our water companies derive their rights and franchises
to operate from state laws that are subject to alteration, amendment or repeal,
and do not grant permanent exclusive rights to our service areas. Our
franchises are free from burdensome restrictions, are unlimited as to time, and
authorize us to sell potable water in all towns we now serve. There is the
possibility that states could revoke our franchises and allow a governmental
entity to take over some or all of our systems. From time to time such
legislation is contemplated. The Town of Barnstable, Massachusetts has advised the Company that it is
actively considering the acquisition of the Companys wholly-owned subsidiary,
The Barnstable Holding Company. The Town takes the position that it has the
right to acquire The Barnstable Holding Company pursuant to the provisions of
Massachusetts legislation passed in 1911. The Company has advised the Town of
Barnstable that the Company does not believe the Town has any statutory right
to acquire The Barnstable Holding Company.




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24 Environmental and Water Quality Regulation The Company is subject to
environmental and water quality regulations. Costs to comply with
environmental and water quality regulations are substantial. We are currently
in compliance with current regulations, but the regulations are subject to
change at any time. The costs to comply with future changes in state or
federal regulations, which could require us to modify current filtration
facilities and/or construct new ones, or to replace any reduction of the safe
yield from any of our current sources of supply, could be substantial. Moratorium on Land Sales On December 4, 2002, the Company entered into a
Memorandum of Understanding (MOU) with the State of Connecticut Department of
Environmental Protection (DEP). The MOU provides for a voluntary two-year
moratorium on the sale of approximately 7,100 acres of undeveloped Class I, II,
and III water company lands held by the Companys Connecticut water company
subsidiaries. Class I and II water company lands, as defined by Public Health
Code regulations, are those that are within the watershed or drainage area of a
public water supply. Class III lands are those that are not located within the
watershed. Under the terms of the MOU, the DEP in cooperation with the
Companys Connecticut water companies will assess and evaluate all undeveloped
Class I, II and III land holdings to determine the desirability of the State of
Connecticuts acquiring the land for open space and to develop strategies to
fund the acquisitions of such properties in fee or by easement from the
Company. If the DEP determines that the Companys Class I, II and III land
holdings are desirable, the Company and the DEP have agreed to negotiate in
good faith to determine a price for the Companys land holdings based upon
appraised values. However, the Company is not obligated by the MOU to sell
such lands to the State of Connecticut. If the DEP determines that certain
parcels of Class III land covered by the MOU do not meet its criteria for
desirable open space, the Company can apply to the Department of Public Utility
Control to sell or otherwise dispose of the land. The Company has no intention
of selling or otherwise disposing of Class I and II lands that have an impact
on drinking water supply and water quality. The MOU does not affect the land
donation to the Town of Killingly mentioned above. In 2003, the DEP released
approximately 130 acres of land from the restrictions of the MOU. Rock Excavation Contract In 2002, Connecticut Water signed a contract with O
& G Industries, Inc. of Torrington, Connecticut regarding excavation of rock
from a 28-acre parcel of land that the company owns in Prospect, Connecticut.
At that time, the Company expected that the rock excavation could yield income
of $2  $3 million in total over the 20-year life of the contract. A subsequent
environmental assessment has indicated that the property contains sensitive
wetland areas, which have to be protected. The Company now expects minimal
proceeds from this project if it goes forward at all. Taxes Due to the current environment of state budget deficits, the Company
and its subsidiaries may be subject to a higher tax burden through changes in
state legislation. Also, the Companys future property tax burden may increase
as state aid to towns is decreased.




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##### Table of Contents



25 FORWARD LOOKING INFORMATION This report, including managements discussion and analysis, contains certain
forward-looking statements regarding the Companys results of operations and
financial position. These forward looking statements are based on current
information and expectations, and are subject to risks and uncertainties, which
could cause the Companys actual results to differ materially from expected
results. Our water companies are subject to various federal and state regulatory
agencies concerning water quality and environmental standards. Generally, the
water industry is materially dependent on the adequacy of approved rates to
allow for a fair rate of return on the investment in utility plant. The
ability to maintain our operating costs at the lowest possible level, while
providing good quality water service, is beneficial to customers and
stockholders. Profitability is also dependent on the timeliness of rate
relief, when necessary, and numerous factors over which we have little or no
control, such as the quantity of rainfall and temperature, industrial demand,
financing costs, energy rates, tax rates, and stock market trends which may
affect the return earned on pension assets, and compliance with environmental
and water quality regulations. The profitability of our other revenue sources
is subject to the amount of land we have available for sale and/or donation,
the demand for the land, the continuation of the current state tax benefits
relating to the donation of land for open space purposes, regulatory approval
of land dispositions, the demand for telecommunications antenna site leases and
the successful extensions and expansion of our service contract work. We
undertake no obligation to update or revise forward-looking statements, whether
as a result of new information, future events, or otherwise.




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26 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The primary market risk faced by the Company is interest rate risk. As of
December 31, 2003, the Company had no exposure to derivative financial
instruments or financial instruments with significant credit risk or
off-balance sheet risks. In addition, the Company is not subject in any
material respect to any currency or other commodity risk. The Company is subject to the risk of fluctuating interest rates in the
normal course of business. The Companys exposure to interest fluctuations is
managed at the Company and subsidiary operations levels through the use of a
combination of fixed rate long-term debt (and variable rate borrowings) under
financing arrangements entered into by the Company and its subsidiaries and the
use of the interest rate swap agreement discussed below. The Company has
$12,500,000 current lines of credit with three banks, under which interim bank
loans payable at December 31, 2003 were $9,700,000. During the first quarter of 2004, Connecticut Water entered into a
five-year interest rate swap transaction in connection with the refunding of
its First Mortgage Bonds (Series V). The swap agreement provides for
Connecticut Waters exchange of floating rate interest payment obligations for
fixed rate interest payment obligations on a notional principal amount of
$12,500,000. The purpose of the interest rate swap is to manage the Companys
exposure to fluctuations in prevailing interest rates. See Liquidity and
Capital Resources section of Item 7  Managements Discussion and Analysis
and Results of Operations above for further information. The Company does not
enter into derivative financial contracts for trading or speculative purposes
and does not use leveraged instruments. Management does not believe that changes in interest rates will have a
material effects on income or cash flow during 2004, although there can be no
assurances that interest rates will not significantly change. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of Connecticut Water Service, Inc., and
the Notes to Consolidated Financial Statements together with the reports of
PricewaterhouseCoopers LLP are included herein on pages F-2 through F-26. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES On June 20, 2002, the Company filed a Form 8-K to report the dismissal of
Arthur Andersen LLP as its independent accountants and the retainer of
PricewaterhouseCoopers LLP as the Companys new independent accountants.




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27 
 ITEM 9A. CONTROLS AND PROCEDURES As of December 31, 2003, 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 Rule 13a-14(c) and Rule13a-15(e)). Based upon, and as of the date of that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures were effective, in all material
respects, to ensure that information required to be disclosed in the reports
the Company files and submits under the Exchange Act is accumulated and
communicated to management, including the Companys Chief Executive Officer and
Chief Financial Officer as appropriate to allow timely decisions regarding
disclosure to be made within the time periods specified in the SECs rules and
forms. Further, there were no changes in the Companys internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.




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28 
 PART III Pursuant to General Instruction G(3), the information called for by Items 10,
(except for information concerning the executive officers of the Company) 11,
12, 13 and 14 is hereby incorporated by reference to the Companys definitive
proxy statement to be filed on EDGAR on or about March 10, 2004. Information
concerning the executive officers of the Company is included as Item 10 of this
report. 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following is a list of the executive officers of the Company: Period Held or
    
    Term of OfficeName
    
    Age
    
    Office
    
    Prior Position
    
    ExpiresM. T. Chiaraluce
    
    61
    
    President, Chief
    
    Held position of
    
    2004 Annual MeetingExecutive Officer
    
    President sinceand Chairman of the
    
    January, 1992 andBoard
    
    position of ChiefExecutive Officersince July, 1992D. C. Benoit
    
    46
    
    Vice President 
    
    Held current
    
    2004 Annual MeetingFinance, Chief
    
    position or otherFinancial Officer
    
    executive positionand Treasurer
    
    with the companysince April, 1996J. R. McQueen
    
    61
    
    Vice President 
    
    Held current
    
    2004 Annual MeetingEngineering and
    
    position or otherPlanning
    
    management orengineeringposition with theCompany sinceOctober, 1965T. P. ONeill
    
    50
    
    Vice President 
    
    Held current
    
    2004 Annual MeetingOperations
    
    position or otherengineeringposition with theCompany sinceFebruary, 1980M. P. Westbrook
    
    44
    
    Vice President 
    
    Held current
    
    2004 Annual MeetingAdministration and
    
    position or otherGovernment Affairs
    
    management positionwith the Companysince September,1988P. J. Bancroft
    
    54
    
    Assistant Treasurer
    
    Held current
    
    2004 Annual Meetingand Controller
    
    position or otheraccounting positionwith the Companysince October, 1979M. G. DiAcri
    
    58
    
    Corporate Secretary
    
    Held administrative
    
    2004 Annual Meetingposition with theCompany sinceFebruary, 1990




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##### Table of Contents



29 For further information regarding the executive officers see the Companys
Proxy Statement dated March 10, 2004. 
 ITEM 11. EXECUTIVE COMPENSATION 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES




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##### Table of Contents






30

PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



|(a) |  | 1. |  | Financial Statements:                                                                                                                                                                                                                                                      
|--- |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  |    |  | The report of the Companys management, the report of independent
public auditors and the Companys Consolidated Financial Statements
listed in the Index to Consolidated Financial Statements on page
F-1 hereof are filed as part of this report, commencing on page
F-2.

|   |  |                                                                                                                                                                                                                                                                                                         |  |     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|   |  |                                                                                                                                                                                                                                                                                                         |  | Page
|   |  | Index to Consolidated Financial Statements and Schedule                                                                                                                                                                                                                                                 |  | F-1 
|   |  | Reports of Independent Auditors                                                                                                                                                                                                                                                                         |  | F-2 
|   |  | Consolidated Statements of Income for the years Ended December 31, 2003, 2002, and 2001                                                                                                                                                                                                                 |  | F-4 
|   |  | Consolidated Balance Sheets at December 31, 2003 and 2002                                                                                                                                                                                                                                               |  | F-5 
|   |  | Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                                                                                                                                                                                                              |  | F-6 
|   |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                              |  | F-7 
|2. |  | Financial Statement Schedules:                                                                                                                                                                                                                                                                          |  |     
|   |  | The following schedules of the Company are included on the attached
pages as indicated:                                                                                                                                                                                                                 |  |     
|   |  | Reports of Independent Auditors on Financial Statement Schedules                                                                                                                                                                                                                                        |  | S-1 
|   |  | Schedule II Valuation and Qualifying Accounts and Reserves for the years ended
December 31, 2003, 2002 and 2001                                                                                                                                                                                         |  | S-2 
|   |  |                                                                                                                                                                                                                                                                                                         |  |     
|   |  | All other schedules provided for in the applicable accounting
regulations of the Securities and Exchange Commission have
been omitted because of the absence of conditions under
which they are required or because the required information
is set forth in the financial statements or notes thereto. |  |     





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##### Table of Contents



31

|   |  |                                                                                                                                                                                                                                      |  |     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|   |  |                                                                                                                                                                                                                                      |  | Page
|3. |  | Exhibits:                                                                                                                                                                                                                            |  |     
|   |  |                                                                                                                                                                                                                                      |  |     
|   |  | Exhibits for Connecticut Water Service, Inc. are in the Index to Exhibits                                                                                                                                                            |  | E-1 
|   |  |                                                                                                                                                                                                                                      |  |     
|   |  | Exhibits heretofore filed with the Securities and
Exchange Commission as indicated below are
incorporated herein by reference and made a part
hereof as if filed herewith. Exhibits marked by
asterisk (*) are being filed herewith. |  |     
|   |  |                                                                                                                                                                                                                                      |  |     
|   |  | (b)      Reports on Form 8-K:                                                                                                                                                                                                        |  |     
|   |  |                                                                                                                                                                                                                                      |  |     
|   |  | None                                                                                                                                                                                                                                 |  |     





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##### Table of Contents



F-1

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

|                                                                                           |  |      |     | 
|------------------------------------------------------------------------------------------ |  | ---- | --- | 
|                                                                                           |  | Page
|                                                                                           |  |     
|Index to Consolidated Financial Statements and Schedule                                    |  |      | F-1 | 
|Reports of Independent Auditors                                                            |  |      | F-2 | 
|Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001     |  |      | F-4 | 
|Consolidated Balance Sheets at December 31, 2003, and 2002                                 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                 |  |      | F-7 | 
|Reports of Independent Auditors on Financial Statement Schedules                           |  |      | S-1 | 
|Valuation and Qualifying Accounts                                                          |  |      | S-2 | 





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F-2

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Connecticut Water Service, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and cash flows present fairly, in all
material respects, the financial position of Connecticut Water Service, Inc.
and subsidiaries at December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the two years ended December 31,
2003 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Companys management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. The financial statements
of Connecticut Water Service, Inc. and subsidiaries for the year ended December
31, 2001 were audited by other independent accountants who have ceased
operations. Those independent accountants expressed an unqualified opinion on
those financial statements in their report dated February 8, 2002.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 2004, except for Note 16, as to which the date is March 4, 2004





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##### Table of Contents



F-3

Set forth below is a copy of a report previously issued by Arthur Andersen LLP,
in connection with the Companys filing on Form 10-K for the year ended
December 31, 2001. This audit report has not been reissued by Arthur Andersen
LLP in connection with the Companys filing on Form 10-K. See Exhibit 23.2 for
further discussion.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Connecticut Water Service, Inc.:

We have audited the accompanying consolidated balance sheets of Connecticut
Water Service, Inc., and Subsidiaries (a Connecticut corporation) as of
December 31, 2001 and 2000, and the related consolidated statements of income
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Connecticut Water
Service, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.

/s/ Arthur Andersen LLP

Hartford, Connecticut
February 8, 2002





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Connecticut Water Service, Inc. and Subsidiaries

F-4

CONSOLIDATED STATEMENTS OF INCOME

|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |        |        | 
|---------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|For the Years Ended December 31, (in thousands, except per share data) |                                              | 2003                                          |        | 2002   |        | 2001
|                                                                       |                                              |                                               |        |        |        |     
|Operating Revenues                                                     |                                              | $                                             | 47,115 |        |        | $    | 45,830 |        |        | $ | 45,392 |       
|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|Operating Expenses                                                     |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|                                                                       | Operation and Maintenance                    |                                               |        | 22,759 |        |      |        | 19,531 |        |   |        | 20,076 |       
|                                                                       | Depreciation                                 |                                               |        | 5,684  |        |      |        | 5,187  |        |   |        | 4,837  |       
|                                                                       | Income Taxes                                 |                                               |        | 2,008  |        |      |        | 4,482  |        |   |        | 4,777  |       
|                                                                       | Taxes Other Than Income Taxes                |                                               |        | 5,133  |        |      |        | 4,796  |        |   |        | 4,388  |       
|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|                                                                       |                                              | Total Operating Expenses                      |        |        | 35,584 |      |        |        | 33,996 |   |        |        | 34,078 | 
|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|Utility Operating Income                                               |                                              |                                               | 11,531 |        |        |      | 11,834 |        |        |   | 11,314 |       
|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|Other Income (Deductions), Net of Taxes                                |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|                                                                       | Gain on Property Transactions                |                                               |        | 1,029  |        |      |        | 440    |        |   |        | 1,121  |       
|                                                                       | Non-Water Sales Earnings                     |                                               |        | 733    |        |      |        | 444    |        |   |        | 372    |       
|                                                                       | Allowance for Funds Used During Construction |                                               |        | 476    |        |      |        | 470    |        |   |        | 439    |       
|                                                                       | Merger Costs                                 |                                               |        |       |        |      |        |       |        |   |        | (352   | )     
|                                                                       | Other                                        |                                               |        | 76     |        |      |        | 126    |        |   |        | 177    |       
|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|                                                                       |                                              | Total Other Income (Deductions), Net of Taxes |        |        | 2,314  |      |        |        | 1,480  |   |        |        | 1,757  | 
|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|Interest and Debt Expenses                                             |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|                                                                       | Interest on Long-Term Debt                   |                                               |        | 4,016  |        |      |        | 3,909  |        |   |        | 4,057  |       
|                                                                       | Other Interest Charges                       |                                               |        | 385    |        |      |        | 365    |        |   |        | 353    |       
|                                                                       | Amortization of Debt Expense                 |                                               |        | 234    |        |      |        | 260    |        |   |        | 222    |       
|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|                                                                       |                                              | Total Interest and Debt Expenses              |        |        | 4,635  |      |        |        | 4,534  |   |        |        | 4,632  | 
|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|Net Income Before Preferred Dividends                                  |                                              |                                               | 9,210  |        |        |      | 8,780  |        |        |   | 8,439  |       
|Preferred Stock Dividend Requirement                                   |                                              |                                               | 38     |        |        |      | 38     |        |        |   | 38     |       
|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|Net Income Applicable to Common Stock                                  |                                              | $                                             | 9,172  |        |        | $    | 8,742  |        |        | $ | 8,401  |       
|                                                                       |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|Weighted Average Common Shares Outstanding:                            |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|                                                                       | Basic                                        |                                               |        | 7,956  |        |      |        | 7,718  |        |   |        | 7,619  |       
|                                                                       | Diluted                                      |                                               |        | 8,002  |        |      |        | 7,771  |        |   |        | 7,662  |       
|Earnings Per Common Share:                                             |                                              |                                               |        |        |        |      |        |        |        |   |        |       
|                                                                       | Basic                                        |                                               | $      | 1.15   |        |      | $      | 1.13   |        |   | $      | 1.10   |       
|                                                                       | Diluted                                      |                                               | $      | 1.15   |        |      | $      | 1.12   |        |   | $      | 1.10   |       

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





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Connecticut Water Service, Inc. and Subsidiaries

F-5

CONSOLIDATED BALANCE SHEETS

|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |         |        |         | 
|------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------- | ------------------------------- | -------------------------------------------------------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | 
|December 31, (in thousands, except share amounts) |                                                                | 2003                                        |                                 | 2002                                                    
|                                                  |                                                                |                                             |                                 |                                                         
|ASSETS                                            |                                                                |                                             |                                 |                                                          |         |        |         |        
|                                                  | Utility Plant                                                  |                                             | $                               | 319,616                                                  |         |        | $       | 308,385 |        
|                                                  | Construction Work in Progress                                  |                                             |                                 | 9,291                                                    |         |        |         | 9,592   |        
|                                                  | Utility Plant Acquisition Adjustments                          |                                             |                                 | (1,274                                                   | )       |        |         | (1,278  | )      
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  |                                                                |                                             | 327,633                         |                                                          |         |        | 316,699 |        
|                                                  | Accumulated Provision for Depreciation                         |                                             |                                 | (92,535                                                  | )       |        |         | (87,602 | )      
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  |                                                                | Net Utility Plant                           |                                 |                                                          | 235,098 |        |         |         | 229,097 |       
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  | Other Property and Investments                                 |                                             |                                 | 3,829                                                    |         |        |         | 3,557   |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  | Cash                                                           |                                             |                                 | 1,122                                                    |         |        |         | 464     |        
|                                                  | Accounts Receivable (Less Allowance, 2003 - $271; 2002 - $240) |                                             |                                 | 5,150                                                    |         |        |         | 5,157   |        
|                                                  | Accrued Unbilled Revenues                                      |                                             |                                 | 3,779                                                    |         |        |         | 3,619   |        
|                                                  | Materials and Supplies, at Average Cost                        |                                             |                                 | 920                                                      |         |        |         | 960     |        
|                                                  | Prepayments and Other Current Assets                           |                                             |                                 | 265                                                      |         |        |         | 173     |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  |                                                                | Total Current Assets                        |                                 |                                                          | 11,236  |        |         |         | 10,373  |       
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  | Unamortized Debt Issuance Expense                              |                                             |                                 | 6,204                                                    |         |        |         | 5,080   |        
|                                                  | Unrecovered Income Taxes                                       |                                             |                                 | 15,006                                                   |         |        |         | 10,718  |        
|                                                  | Post-Retirement Benefits Other Than Pension                    |                                             |                                 | 946                                                      |         |        |         | 846     |        
|                                                  | Goodwill                                                       |                                             |                                 | 3,608                                                    |         |        |         | 3,608   |        
|                                                  | Other Costs                                                    |                                             |                                 | 1,619                                                    |         |        |         | 1,520   |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  |                                                                | Total Regulatory and Other Long-Term Assets |                                 |                                                          | 27,383  |        |         |         | 21,772  |       
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  |                                                                |                                             |                                 | Total Assets                                             |         | $      | 277,546 |         |         | $      | 264,799 | 
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|CAPITALIZATION AND LIABILITIES                    |                                                                |                                             |                                 |                                                          |         |        |         |        
|                                                  | Common Stockholders Equity:                                   |                                             |                                 |                                                          |         |        |         |         |        
|                                                  |                                                                |                                             | Common Stock Without Par Value: |                                                          |         |        |         |         |         |        |        
|                                                  |                                                                |                                             |                                 | Authorized
- 15,000,000 Shares - Issued and Outstanding: |         |        |         |         |         |        |         | 
|                                                  |                                                                |                                             |                                 | 2003
-  7,967,379; 2002  -  7,939,713                    |         | $      | 53,766  |         |         | $      | 53,069  | 
|                                                  |                                                                |                                             | Retained Earnings               |                                                          |         | 29,549 |         |         |         | 26,906 |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  |                                                                |                                             |                                 | Common Stockholders Equity                              |         |        | 83,315  |         |         |        | 79,975  | 
|                                                  |                                                                |                                             | Preferred Stock                 |                                                          |         | 847    |         |         |         | 847    |        
|                                                  |                                                                |                                             | Long-Term Debt                  |                                                          |         | 64,754 |         |         |         | 64,734 |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  |                                                                |                                             |                                 | Total Capitalization                                     |         |        | 148,916 |         |         |        | 145,556 | 
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|Interim Bank Loans Payable                        |                                                                |                                             | 9,700                           |                                                          |         |        | 6,950   |        
|Current Portion of Long-Term Debt                 |                                                                |                                             | 254                             |                                                          |         |        | 242     |        
|Accounts Payable                                  |                                                                |                                             | 5,419                           |                                                          |         |        | 6,539   |        
|Accrued Taxes                                     |                                                                |                                             | (1,254                          | )                                                        |         |        | 659     |        
|Accrued Interest                                  |                                                                |                                             | 626                             |                                                          |         |        | 747     |        
|Other Current Liabilities                         |                                                                |                                             | 366                             |                                                          |         |        | 341     |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|                                                  |                                                                |                                             |                                 | Total Current Liabilities                                |         |        | 15,111  |         |         |        | 15,478  | 
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|Advances for Construction                         |                                                                |                                             | 24,579                          |                                                          |         |        | 22,069  |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|Contributions in Aid of Construction              |                                                                |                                             | 44,337                          |                                                          |         |        | 43,373  |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|Deferred Federal and State Income Taxes           |                                                                |                                             | 23,073                          |                                                          |         |        | 20,633  |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|Unfunded Future Income Taxes                      |                                                                |                                             | 12,840                          |                                                          |         |        | 9,871   |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|Long-Term Compensation Arrangements               |                                                                |                                             | 6,812                           |                                                          |         |        | 5,877   |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|Unamortized Investment Tax Credits                |                                                                |                                             | 1,878                           |                                                          |         |        | 1,942   |        
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        
|Commitments and Contingencies                     |                                                                |                                             |                                 |                                                          |         |        |         |        
|                                                  |                                                                |                                             |                                 | Total Capitalization and Liabilities                     |         | $      | 277,546 |         |         | $      | 264,799 | 
|                                                  |                                                                |                                             |                                 |                                                          |         |        |         |         |        

The accompanying notes are an integral part of these consolidated financial statements.
F-6





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##### Table of Contents



Connecticut Water Service, Inc. and Subsidiaries

F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |       |       |        |  
|---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----- | ----- | ------ | ------- | ----- | ----- | ------ | ------- | ----- | ----- | ------ | -
|For the Years Ended December 31, (in thousands)                                                |                                                                                                                                          | 2003                                                                                              |                                                                                                 | 2002                                                                                    |       | 2001 
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |      
|Operating Activities:                                                                          |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |        
|                                                                                               | Net Income Before Preferred Dividends                                                                                                    |                                                                                                   | $                                                                                               | 9,210                                                                                   |       |       | $      | 8,780   |       |       | $      | 8,439   |      
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|                                                                                               | Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:                                                        |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|                                                                                               |                                                                                                                                          |                                                                                                   | Depreciation (including $176 in 2003, $164 in 2002,
and $169 in 2001 charged to other accounts) |                                                                                         |       | 5,860 |        |         |       | 5,351 |        |         |       | 5,006 |       
|                                                                                               |                                                                                                                                          |                                                                                                   | Change in Assets and Liabilities:                                                               |                                                                                         |       |       |        |         |       |       |        |         |       |       |       
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 | (Increase) in Accounts Receivable and
Accrued Unbilled Revenues                         |       |       | (153   | )       |       |       | (165   | )       |       |       | (153   | )
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 | (Increase) Decrease in Other Current Assets                                             |       |       | (52    | )       |       |       | 57     |         |       |       | (191   | )
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 | (Increase) in Other Non-Current Items                                                   |       |       | (621   | )       |       |       | (89    | )       |       |       | (45    | )
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 | Increase (Decrease) in Accounts Payable, Accrued
Expenses and Other Current Liabilities |       |       | (3,129 | )       |       |       | (867   | )       |       |       | 1,089  |  
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 | Increase in Deferred Income Taxes and
Investment Tax Credits, Net                       |       |       | 2,376  |         |       |       | 747    |         |       |       | 675    |  
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 | Total Adjustments                                                                       |       |       | 4,281  |         |       |       | 5,034  |         |       |       | 6,381  |  
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 | Net Cash Provided by Operating Activities                                               |       |       | 13,491 |         |       |       | 13,814 |         |       |       | 14,820 |  
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|Investing Activities:                                                                          |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |        
|                                                                                               | Gross Additions to Utility Plant (including
Allowance For Funds Used During Construction of
$476 in 2003, $470 in 2002 and $439 in 2001) |                                                                                                   |                                                                                                 | (11,909                                                                                 | )     |       |        | (15,691 | )     |       |        | (14,218 | )    
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|Financing Activities:                                                                          |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |        
|                                                                                               | Proceeds from Interim Bank Loans                                                                                                         |                                                                                                   |                                                                                                 | 9,700                                                                                   |       |       |        | 6,950   |       |       |        | 1,825   |      
|                                                                                               | Repayment of Interim Bank Loans                                                                                                          |                                                                                                   |                                                                                                 | (6,950                                                                                  | )     |       |        | (1,875  | )     |       |        | (1,800  | )    
|                                                                                               | Reduction of Long-Term Debt Including Current Portion                                                                                    |                                                                                                   |                                                                                                 | 32                                                                                      |       |       |        | (2,376  | )     |       |        | (405    | )    
|                                                                                               | Proceeds from Issuance of Common Stock                                                                                                   |                                                                                                   |                                                                                                 | 699                                                                                     |       |       |        | 753     |       |       |        | 1,392   |      
|                                                                                               | Advances, Contributions and Funds from
Others for Construction, Net                                                                      |                                                                                                   |                                                                                                 | 3,522                                                                                   |       |       |        | 4,992   |       |       |        | 4,332   |      
|                                                                                               | Costs Incurred to Issue Long-Term Debt and Common Stock                                                                                  |                                                                                                   |                                                                                                 | (1,360                                                                                  | )     |       |        | (192    | )     |       |        | (15     | )    
|                                                                                               | Cash Dividends Paid                                                                                                                      |                                                                                                   |                                                                                                 | (6,567                                                                                  | )     |       |        | (6,315  | )     |       |        | (6,143  | )    
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 | Net Cash Provided by (Used in) Financing Activities                                     |       |       | (924   | )       |       |       | 1,937  |         |       |       | (814   | )
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|Net Increase (Decrease) in Cash                                                                |                                                                                                                                          |                                                                                                   | 658                                                                                             |                                                                                         |       |       | 60     |         |       |       | (212   | )      
|Cash at Beginning of Year                                                                      |                                                                                                                                          |                                                                                                   | 464                                                                                             |                                                                                         |       |       | 102    |         |       |       | 314    |        
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|Cash at End of Year (Excludes Cash Acquired from Purchase of
Unionville Water Company in 2002) |                                                                                                                                          |                                                                                                   | 1,122                                                                                           |                                                                                         |       |       | 162    |         |       |       | 102    |        
|Cash Acquired from Purchase of Unionville Water Company                                        |                                                                                                                                          |                                                                                                   |                                                                                                |                                                                                         |       |       | 302    |         |       |       |       |        
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|Cash at End of Year                                                                            |                                                                                                                                          | $                                                                                                 | 1,122                                                                                           |                                                                                         |       | $     | 464    |         |       | $     | 102    |        
|                                                                                               |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|Non-Cash Investing and Financing Activities:                                                   |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |        
|                                                                                               |                                                                                                                                          | Purchase of Unionville Water Company by Issuance of
Company Common Stock (see Note 2 for details) |                                                                                                 | $                                                                                       |      |       |        | $       | 6,166 |       |        | $       |      |      
|Supplemental Disclosures of Cash Flow Information:                                             |                                                                                                                                          |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |        
|                                                                                               | Cash Paid During the Year for:                                                                                                           |                                                                                                   |                                                                                                 |                                                                                         |       |       |        |         |       |       |        |         |      
|                                                                                               |                                                                                                                                          | Interest (net of amounts capitalized)                                                             |                                                                                                 | $                                                                                       | 4,522 |       |        | $       | 4,811 |       |        | $       | 3,836 |      
|                                                                                               |                                                                                                                                          | State and Federal Income Taxes                                                                    |                                                                                                 | $                                                                                       | 2,407 |       |        | $       | 3,780 |       |        | $       | 3,260 |      

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





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##### Table of Contents



F-7 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION-The consolidated financial statements include the
operations of Connecticut Water Service, Inc. (the Company), an investor-owned
holding company and its eleven wholly owned subsidiaries, listed below: The Connecticut Water Company (Connecticut Water) The
Gallup Water Service, Incorporated (Gallup)
 Crystal
Water Utilities Corporation
 The
Crystal Water Company of Danielson (Crystal Water)
 Chester
Realty, Inc.
 New
England Water Utility Services, Inc.
 Connecticut
Water Emergency Services, Inc.
 The
Barnstable Holding Company
 The
Barnstable Water Company (Barnstable Water)
 BARLACO
 The
Unionville Water Company (Unionville)
 Connecticut Water, Gallup, Crystal Water, Barnstable Water and Unionville (our
water companies) are public water utility companies serving 86,750 customers
in 42 towns throughout Connecticut and Massachusetts. Crystal Water Utilities Corporation is a holding company, owning the stock of
Crystal Water Company of Danielson and three small rental properties. Chester Realty, Inc. is a real estate company whose net profits from rental of
property are included in the Other Income (Deductions), Net of Taxes section of
the Consolidated Statements of Income in the Non-Water Sales Earnings category. New England Water Utility Services, Inc. is engaged in water-related services,
including the Linebacker®program, and contract operations. Its earnings are
included in the Non-Water Sales Earnings category in the Other Income
(Deductions), Net of Taxes section of the Consolidated Statements of Income. Connecticut Water Emergency Services, Inc. is a provider of emergency drinking
water and pool water via tanker trucks. Its net earnings are included in the
Non-Water Sales Earnings category in the Other Income (Deductions), Net of
Taxes section of the Consolidated Statements of Income. Barnstable Holding Company is a holding company, owning the stock of Barnstable
Water Company and BARLACO. BARLACO is a real estate company whose net profits
from land sales are included in the Gain on Property Transactions category in
the Other Income (Deductions), Net of Taxes section of the Consolidated
Statements of Income. Intercompany accounts and transactions have been eliminated, except those
allocating costs for regulatory purposes between our regulated and
non-regulated companies. PUBLIC UTILITY REGULATION Four of our water companies are subject to
regulation for rates and other matters by the Connecticut Department of Public
Utility Control (DPUC) and follow accounting policies prescribed by the DPUC.
The Barnstable Water Company is subject to the regulation of the Massachusetts
Department of Telecommunications and Energy (DTE) and follows accounting
policies prescribed by the DTE. The Company prepares its financial statements
in accordance with Generally Accepted Accounting Principles in the United
States of America (GAAP), which includes the provisions of Statement of
Financial Accounting Standards No. 71, Accounting for the Effects of Certain
Types of Regulation, (FAS 71). FAS 71 requires cost-based, rate-regulated
enterprises such as our water companies to reflect the impact of regulatory
decisions in their financial statements. The state regulators, through the rate
regulation process, can create regulatory assets that result when costs are
allowed for ratemaking purposes in a period after the period in which the costs
would be charged to expense by an unregulated enterprise. The balance sheets
include regulatory assets and liabilities as appropriate, primarily related to
income taxes and post-retirement benefit costs. In accordance with ratemaking
procedures, costs which benefit future periods, such as tank painting, are
expensed over the periods they benefit. The Company believes, based on current
regulatory circumstances, that the regulatory assets recorded are likely to be
recovered and that its use of regulatory accounting is appropriate and in
accordance with the provisions of FAS 71. Material regulatory assets are
earning a return. USE OF ESTIMATES- The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates. CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-8 REVENUES- Most of our water customers are billed quarterly, with the exception
of larger commercial and industrial customers, as well as public fire
protection customers who are billed monthly. Most customers, except fire
protection customers are metered. Revenues from metered customers are based on
their usage multiplied by approved, regulated rates. Public fire protection
charges are based on the length and diameter of the water main, and number of
hydrants in service. Private fire protection charges are based on the diameter
of the connection to the water main. Our water companies accrue an estimate
for the amount of revenues relating to sales earned but unbilled at the end of
each quarter. UTILITY PLANT- Utility plant is stated at the original cost of such property
when first devoted to public service. In the case of acquisitions, the
difference between the original cost and the cost to our water companies is
charged or credited to utility plant acquisition adjustments. Utility plant
accounts are charged with the cost of improvements and replacements of property
including an allowance for funds used during construction. Retired or disposed
of depreciable plant is charged to accumulated provision for depreciation
together with any costs applicable to retirement, less any salvage received.
Maintenance of utility plant is charged to expense. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION- Allowance for Funds Used During
Construction (AFUDC) is the cost of debt and equity funds used to finance the
construction of our water companies utility plant. Generally, utility plant
under construction is not recognized as part of rate base for ratemaking
purposes until facilities are placed into service, and accordingly, AFUDC is
charged to the construction cost of utility plant. Capitalized AFUDC, which
does not represent current cash income, is recovered through rates over the
service lives of the facilities. In order for certain water system acquisitions made in and after 1995 to not
degrade earnings, The Connecticut Water Company has received DPUC approval to
record AFUDC on certain of its investments in these systems. Through December
31, 2003, Connecticut Water has capitalized approximately $2,729,000 of AFUDC
relating to financing these acquisitions. This amount is expected to be
recovered in Connecticut Waters next rate case. Each companys allowed rate of return on rate base is used to calculate its
AFUDC. DEPRECIATION- Over 99% of the Companys depreciable plant is owned by its five
water companies. Depreciation is computed on a straight-line basis at various
rates as approved by the state regulators on a company by company basis.
Depreciation allows the utility to recover the investment in utility plant over
its useful life. The overall consolidated company depreciation rate, based on
the average balances of depreciable property, was 2.1% for 2003, 1.9% for 2002
and 2.0% for 2001. CUSTOMERS ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS IN AID OF
CONSTRUCTION -Under the terms of construction contracts with real estate
developers and others, our water companies receive advances for the costs of
new main installations. Refunds are made, without interest, as services are
connected to the main, over periods not exceeding fifteen years and not in
excess of the original advance. Unrefunded balances, at the end of the
contract period, are credited to contributions in aid of construction (CIAC)
and are no longer refundable. INCOME TAXES- The Company provides income tax expense for its utility
operations in accordance with the regulatory accounting policies of the
applicable jurisdictions (Connecticut and Massachusetts). The Connecticut DPUC
requires the flow-through method of accounting for most state tax temporary
differences as well as for certain federal temporary differences. The Company computed deferred tax reserves for all temporary book-tax
differences using the liability method prescribed in FAS 109  Accounting for
Income Taxes. Under the liability method, deferred income taxes are recognized
at currently enacted income tax rates to reflect the tax effect of temporary
differences between the financial reporting and tax bases of assets and
liabilities. Such temporary differences are the result of provisions in the
income tax law that either require or permit certain items to be reported on
the income tax return in a different period than they are reported in the
financial statements. Deferred tax liabilities that have not been reflected in
tax expense due to regulatory treatment are described as unfunded future income
taxes, and are expected to be recoverable in future years rates. The Company believes that all deferred income tax assets will be realized in
the future. The majority of all unfunded future income taxes relate to
deferred state income taxes. Deferred Federal Income Taxes consist primarily of amounts that have been
provided for accelerated depreciation subsequent to 1981, as required by
federal income tax regulations. Deferred taxes have also been provided for
temporary differences in the recognition of certain expenses for tax and
financial statement purposes as allowed by DPUC ratemaking policies. MUNICIPAL TAXES Municipal taxes are generally expensed over the twelve-month
period beginning on July 1 following the lien date, corresponding with the
period in which the municipal services are provided. CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-9 STOCK OPTIONS The Company has a Stock-Based Compensation Plan with two
components: the Performance Stock Program and the Stock Option Program, which
are described more fully in Note 13. FAS No. 123 Accounting for Stock-Based
Compensation, encourages entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, FAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principles Board (APB) opinion No. 25 Accounting for
Stock Issued to Employees and provide pro forma net income and pro forma
earnings per share disclosures for employee stock grants as if the
fair-value-based method defined in FAS No. 123 had been applied. The Company accounts for its Stock Option Program under the recognition and
measurement principles of APB No. 25. As such, no compensation cost related to
the Stock Option Program is reflected in Net Income, as all options under this
program had an exercise price equal to market value of the underlying common
stock on the date of grant. The following table illustrates the effect on Net
Income and Earnings Per Share if the Company had applied the fair value
recognition provisions of FAS No. 123 to the Stock Option Program. Year Ended December 312003
    
    2002
    
    2001(in thousands, except for per share data)Net income, as reported
    
    $
    9,172
    
    
    $
    8,742
    
    
    $
    8,401Add: Total stock-based employee
compensation expense determined under
intrinsic value based method for all awards,
net of related tax effects
    
    
    109
    
    
    
    
    
    
    
    Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects
    
    
    (383
    )
    
    
    (218
    )
    
    
    (264
    )Pro forma net income
    
    $
    8,898
    
    
    $
    8,524
    
    
    $
    8,137Earnings per share:Basic  as reported
    
    $
    1.15
    
    
    $
    1.13
    
    
    $
    1.10Basic  pro forma
    
    $
    1.12
    
    
    $
    1.10
    
    
    $
    1.07Diluted  as reported
    
    $
    1.15
    
    
    $
    1.12
    
    
    $
    1.10Diluted  pro forma
    
    $
    1.11
    
    
    $
    1.10
    
    
    $
    1.06
 Under the Companys Performance Stock Program, restricted shares of Common
Stock, common stock equivalents or cash may be awarded annually to officers and
key employees. To the extent that the goals established by the Compensation
Committee have been attained, the restrictions on the stock are removed.
Amounts charged to expense pursuant to the Performance Stock Program were
$251,000, $201,000 and $349,000, for 2003, 2002 and 2001, respectively. These
amounts are included in Net Income, as reported. UNAMORTIZED
DEBT ISSUANCE EXPENSE -The issuance costs of long-term debt,
including the remaining balance of issuance costs on long-term debt issues that
have been refinanced prior to maturity, and related call premiums, are
amortized over the respective lives of the outstanding debt, as approved by the
state regulators. GOODWILL- The Company adopted FAS No. 142, Goodwill and Other Intangible
Assets (FAS 142), effective January 1, 2002. FAS 142 requires that goodwill no
longer be amortized on a ratable basis. In accordance with FAS 142, goodwill
must be allocated to reporting units and reviewed for impairment at least
annually. The Company utilized a net income valuation approach in the
performance of the annual goodwill impairment test. EARNINGS
PER SHARE -The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share for the years ended
December 31, 2003, 2002, and 2001. CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-10 Years ended December 31,
    
    2003
    
    2002
    
    2001Basic earnings per share
    
    $
    1.15
    
    
    $
    1.13
    
    
    $
    1.10Dilutive effect of unexercised stock options
    
    
    
    
    
    
    .01
    
    
    
    Diluted earnings per share
    
    $
    1.15
    
    
    $
    1.12
    
    
    $
    1.10Numerator (in thousands):Basic net income
    
    $
    9,172
    
    
    $
    8,742
    
    
    $
    8,401Diluted net income
    
    $
    9,172
    
    
    $
    8,742
    
    
    $
    8,401Denominator (in thousands):Basic weighted average shares outstanding
    
    
    7,956
    
    
    
    7,718
    
    
    
    7,619Dilutive effect of unexercised stock options
    
    
    46
    
    
    
    53
    
    
    
    43Diluted weighted average shares outstanding
    
    
    8,002
    
    
    
    7,771
    
    
    
    7,662
 RECLASSIFICATION
-Certain reclassifications have been made to conform
previously reported data to the
current presentation. NEW ACCOUNTING PRONOUNCEMENTS In April 2003, the FASB issued FAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
(FAS 149). This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FAS 133, Accounting for Derivative Instruments and
Hedging Activities. In particular, this statement (1) clarifies under what
circumstances a contract with an initial net investment meets the definition of
a derivative, (2) clarifies when a derivative contains a financing component,
(3) amends the definition of an underlying instrument to conform it to language
used in FASB Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and (4) amends certain other existing pronouncements. Those changes
will result in more consistent reporting of contracts as either derivatives or
hybrid instruments. FAS 149 is effective for derivative contracts entered into
after June 30, 2003. The adoption of FAS 149 did not have a material impact on
the Companys operating results, financial position, or cash flows. FAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity (FAS 150) was issued in May 2003. This
Statement establishes standards for how certain financial instruments with
characteristics of both liabilities and equity are classified and measured. It
requires that many financial instruments previously classified as equity now be
classified as a liability (or an asset in some circumstances). These financial
instruments are as follows: financial instrument issued in the form of shares
that is mandatorily redeemable  that embodies an unconditional obligation
requiring the issuer to redeem it by transferring its assets at a specified or
determinable date (or dates) or upon an event that is certain to occur; a
financial instrument, other than an outstanding share, that at inception,
embodies an obligation to repurchase the issuers equity shares, or is indexed
to such an obligation, and that requires or may require the issuer to settle
the obligation by transferring assets; a financial instrument that embodies an
unconditional obligation, or a financial instrument other than an outstanding
share that embodies a conditional obligation, that the issuer must or may
settle by issuing a variable number of its equity shares, if, at inception, the
monetary value of the obligation is based solely or predominantly on any of the
following: a) a fixed monetary amount known at inception, for example, a
payable settleable with a variable number of equity shares; b) variations in
something other than the fair value of equity shares, for example, a financial
instrument indexed to the S&P 500 and settleable with a variable number of
equity shares; c) variations inversely related to changes in the fair value of
equity shares, for example, a written put option that could be net share
settled. FAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise effective at the first interim
period beginning after June 15, 2003. The adoption of FAS 150 did not have a
material effect on the Companys operating results, financial position, or cash
flows. CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-11 In January 2004, the FASB issued FASB Staff Position No. 106-01, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (FSP No. FAS 106-1). This statement
permits a sponsor of a post-retirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting for
the effects of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003. Regardless of whether a sponsor elects that deferral, the FSP
requires certain disclosures pending further consideration of the underlying
issues. The Company has met those disclosure requirements in Note 12: Pension
and Other Post-Retirement Employee Benefits. NOTE 2: 2002 PURCHASE ACQUISITION On October 31, 2002, the Company issued 249,715 shares of its common stock in
exchange for all the outstanding common stock of The Unionville Water Company
(Unionville). The exchange ratio was approximately 4.16 shares of the
Companys common stock for each outstanding share of Unionville stock. The
transaction was valued at approximately $6.2 million. This acquisition was
accounted for under the purchase method of accounting, and as such the balances
and income statement activity from the acquisition date forward are included in
the financial statements. As a result, goodwill of $3.6 million was recorded
and allocated to our water segment. There were no other intangible assets
identified as part of the acquisition. NOTE 3: INCOME TAX EXPENSE Income Tax Expense for the years ended December 31, is comprised of the
following: (in thousands)
    
    2003
    
    2002
    
    2001Federal Classified as Operating Expense
    
    $
    1,752
    
    
    $
    4,065
    
    
    $
    4,225Federal Classified as Other Income:Land Sales
    
    
    (11
    )
    
    
    
    
    
    
    Land Donation
    
    
    (246
    )
    
    
    (105
    )
    
    
    (254
    )Non-Water Sales
    
    
    352
    
    
    
    276
    
    
    
    164Other
    
    
    (66
    )
    
    
    (52
    )
    
    
    (42
    )Total Federal Income Tax Expense
    
    
    1,781
    
    
    
    4,184
    
    
    
    4,093State Classified as Operating Expense
    
    
    256
    
    
    
    417
    
    
    
    552State Classified as Other Income:Land Sales
    
    
    (3
    )
    
    
    (1
    )
    
    
    Land Donation
    
    
    (733
    )
    
    
    (360
    )
    
    
    (1,012
    )Non-Water Sales
    
    
    91
    
    
    
    54
    
    
    
    41Other
    
    
    22
    
    
    
    (18
    )
    
    
    6Total State Income Tax Expense (Benefit)
    
    
    (367
    )
    
    
    92
    
    
    
    (413
    )Total Income Tax Expense
    
    $
    1,414
    
    
    $
    4,276
    
    
    $
    3,680
 CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-12 The components of the Federal and State income tax provisions are: 2003
    
    2002
    
    2001Current:Federal
    
    $
    (51
    )
    
    $
    2,835
    
    
    $
    3,062State
    
    
    483
    
    
    
    192
    
    
    
    (48
    )Total Current
    
    
    432
    
    
    
    3,027
    
    
    
    3,014Deferred Income Taxes, Net:FederalInvestment Tax Credit
    
    
    (64
    )
    
    
    (63
    )
    
    
    (63
    )Capitalized Interest
    
    
    25
    
    
    
    23
    
    
    
    23Depreciation
    
    
    2,167
    
    
    
    798
    
    
    
    910Other
    
    
    (296
    )
    
    
    591
    
    
    
    161Total Federal
    
    
    1,832
    
    
    
    1,349
    
    
    
    1,031StateDepreciation
    
    
    6
    
    
    
    
    
    
    
    (1
    )Other
    
    
    (856
    )
    
    
    (100
    )
    
    
    (364
    )Total State
    
    
    (850
    )
    
    
    (100
    )
    
    
    (365
    )Total Deferred Income Taxes, Net
    
    
    982
    
    
    
    1,249
    
    
    
    666Total
    
    $
    1,414
    
    
    $
    4,276
    
    
    $
    3,680
 Deferred income tax liabilities are categorized as follows on the Consolidated Balance Sheet: 2003
    
    2002Deferred Federal and State Income Taxes
    
    $
    23,073
    
    
    $
    20,633Unfunded Future Income Taxes
    
    
    12,840
    
    
    
    9,871Net Deferred Income Tax Liability
    
    $
    35,913
    
    
    $
    30,504
 Deferred income tax liabilities are comprised of the following: 2003
    
    2002Depreciation
    
    $
    34,648
    
    
    $
    29,237Other
    
    
    1,265
    
    
    
    1,267Net Deferred Income Tax Liability
    
    $
    35,913
    
    
    $
    30,504
 The calculation of Pre-Tax Income is as follows: 2003
    
    2002
    
    2001Pre-Tax IncomeNet Income Before Preferred Dividends
    
    $
    9,210
    
    
    $
    8,780
    
    
    $
    8,439Income Taxes
    
    
    1,414
    
    
    
    4,276
    
    
    
    3,680Total Pre-Tax Income
    
    $
    10,624
    
    
    $
    13,056
    
    
    $
    12,119
 CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-13 In accordance with required regulatory treatment, deferred income taxes are not
provided for certain timing differences. This treatment, along with other
items, causes differences between the statutory income tax rate and the
effective income tax rate. The decrease in the Companys effective income tax
rate is partially associated with a reassessment of tax reserves which was
completed during the third quarter of 2003 when the Company filed its 2002
Income Tax Returns as well as the tax benefit associated with land donations in
2003 and the associated tax credits and deductions. The differences between
the effective income tax rate recorded by the Company and the statutory federal
tax rate are as follows: 2003
    
    2002
    
    2001Federal Statutory Income Tax Rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %Tax Effect of Differences:State Income Taxes Net of Federal Benefit:State Income Tax Excluding Land Donation Credit
    
    
    2.3
    %
    
    
    2.3
    %
    
    
    3.3
    %Land Donation Credit
    
    
    (4.5
    %)
    
    
    (1.8
    %)
    
    
    (5.5
    %)Depreciation
    
    
    
    
    
    
    .5
    %
    
    
    1.2
    %Charitable Contribution  Land Donation
    
    
    (4.7
    %)
    
    
    (1.7
    %)
    
    
    (4.5
    %)Pension Costs
    
    
    (.3
    %)
    
    
    (.7
    %)
    
    
    .6
    %Debt Refinancing Costs
    
    
    (4.4
    %)
    
    
    .2
    %
    
    
    .2
    %Non-Deductible Merger Costs
    
    
    
    
    
    
    
    
    
    
    1.0
    %Change in Estimate of Prior Year Income Tax Expense
    
    
    (11.5
    %)
    
    
    
    
    
    
    Common Stock Equivalents
    
    
    .9
    %
    
    
    
    
    
    
    1.1
    %Other
    
    
    1.5
    %
    
    
    
    
    
    
    (1.0
    %)Effective Income Tax Rate
    
    
    13.3
    %
    
    
    32.8
    %
    
    
    30.4
    %
 NOTE 4: COMMON STOCK The Company has 15,000,000 authorized shares of common stock, no par value. A
summary of the changes in the common stock accounts for the period January 1,
2001 through December 31, 2003, appears below: Issuance(in thousands, except share data)
    
    Shares
    
    Amount
    
    Expense
    
    TotalBalance, January 1, 2001
    
    
    7,604,594
    
    
    $
    46,350
    
    
    $
    (1,385
    )
    
    $
    44,965Stock and equivalents issued through
Performance Stock Program
    
    
    5,353
    
    
    
    457
    
    
    
    
    
    
    
    457Purchase Minority Interest of Barnstable
Holding Company
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    125Stock Split  fractional shares
    
    
    (752
    )
    
    
    
    
    
    
    (11
    )
    
    
    (11
    )Stock Options Exercised
    
    
    40,167
    
    
    
    810
    
    
    
    (4
    )
    
    
    806Balance, December 31, 2001
    
    
    7,649,362
    

    
    
    47,742
    
    
    
    (1,400
    )
    
    
    46,342Purchase Unionville Water Company
    
    
    249,715
    
    
    
    6,166
    
    
    
    (190
    )
    
    
    5,976Stock and equivalents issued through
Performance Stock Program
    
    
    6,672
    
    
    
    21
    
    
    
    
    
    
    
    21Stock Options Exercised
    
    
    33,964
    
    
    
    732
    
    
    
    (2
    )
    
    
    730Balance, December 31, 2002
    
    
    7,939,713
    
    
    
    54,661
    
    
    
    (1,592
    )
    
    
    53,069Stock and equivalents issued through
Performance Stock Program
    
    
    8,347
    
    
    
    305
    
    
    
    
    
    
    
    305Stock Options Exercised
    
    
    19,319
    
    
    
    394
    
    
    
    (2
    )
    
    
    392Balance, December 31, 2003(1)
    
    
    7,967,379
    
    
    $
    55,360
    
    
    $
    (1,594
    )
    
    $
    53,766
  (1)
    
    Includes 503 restricted and 44,952 common stock equivalent shares issued
through the Performance Stock
Program through December 31, 2003. CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-14 The Companys Shareholder Rights Plan was authorized by the Board of Directors
on August 12, 1998. Pursuant to the Plan, the Board authorized a dividend
distribution of one Right to purchase one one-hundredth of a share of Series A
Junior Participating Preference Stock of the Company for each outstanding share
of the Companys common stock. The distribution was effected October 11, 1998. Upon the terms of the Shareholder Rights Plan, each Right will entitle
shareholders to buy one one-hundredth of a share of Series A Junior
Participating Preference Stock at a purchase price of $90, and the Rights will
expire October 11, 2008. The Rights will be exercisable only if a person or
group acquires 15% or more of the Companys common stock, or announces a tender
or exchange offer for 15% or more of the Companys common stock. The Board
will be entitled to redeem the Rights at $0.01 per Right at any time before
such acquisition occurs, and upon certain conditions after such a position has
been acquired. Upon the acquisition of 15% or more of the Companys common stock by any person
or group, each Right will entitle its holder to purchase, at the Rights
purchase price, a number of shares of the Companys common stock having a
market value equal to twice the Rights purchase price. In such event, Rights
held by the acquiring person will not be allowed to purchase any of the
Companys common stock or other securities of the Company. If, after the
acquisition of 15% or more of the Companys common stock by any person or
group, the Company should consolidate with or merge with and into any person
and the Company should not be the surviving company, or if the Company should
be the surviving company and all or part of its common stock should be
exchanged for the securities of any other person, or if more than 50% of the
assets or earning power of the Company were sold, each Right (other than Rights
held by the acquiring person, which will become void) will entitle its holder
to purchase, at the Rights purchase price, a number of shares of the acquiring
Companys common stock having a market value at that time equal to twice the
Rights purchase price. The Company may not pay any dividends on its common stock unless full
cumulative dividends to the preceding dividend date for all outstanding shares
of Preferred Stock of the Company have been paid or set aside for
payment. All such Preferred Stock dividends have been paid. NOTE 5: ANALYSIS OF RETAINED EARNINGS The summary of the changes in Retained Earnings for the period January 1, 2001
through December 31, 2003, appears below: (in thousands, except per share data)
    
    2003
    
    2002
    
    2001Balance, Beginning of Year
    
    $
    26,906
    
    
    $
    24,441
    
    
    $
    22,145Income Before Preferred Stock Dividends
    
    
    9,210
    
    
    
    8,780
    
    
    
    8,43936,116
    
    
    
    33,221
    
    
    
    30,584Dividends Declared:Cumulative Preferred Stock, Series A, $.80 Per Share
    
    
    12
    
    
    
    12
    
    
    
    12Cumulative Preferred Stock, Series $.90, $.90 Per Share
    
    
    26
    
    
    
    26
    
    
    
    26Common Stock:2003 $0.825 Per Share
    
    
    6,529
    
    
    
    
    
    
    
    2002 $0.810 Per Share
    
    
    
    
    
    
    6,277
    
    
    
    2001 $0.800 Per Share
    
    
    
    
    
    
    
    
    
    
    6,1056,567
    
    
    
    6,315
    
    
    
    6,143Balance, End of Year
    
    $
    29,549
    
    
    $
    26,906
    
    
    $
    24,441
 NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of
each of the following financial instruments. CASH Cash consists of highly liquid instruments with original maturities at
the time of purchase of three months or less. The carrying amount approximates
fair value. LONG-TERM DEBT- The fair value of the Companys fixed rate long-term debt is
based upon borrowing rates currently available to the Company. As of December
31, 2003 and 2002, the estimated fair value of the
Companys long-term debt was $73,678,000 and $70,438,000, respectively, as
compared to the carrying
amounts of $64,754,000 and $64,734,000, respectively. CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-15 The fair values shown above have been reported to meet the disclosure
requirements of FAS No. 107, Disclosures About Fair Values of Financial
Instruments and do not purport to represent the amounts at which those
obligations would be settled. NOTE 7: LONG-TERM DEBT Long-Term Debt at December 31, consisted of the following: (in thousands)
    
    
    
    2003
    
    2002The Connecticut Water CompanyFirst Mortgage Bonds:5.875%
    
    Series R, Due 2022
    
    $
    
    
    
    $
    14,6456.65%
    
    Series S, Due 2020
    
    
    
    
    
    
    8,0005.75%
    
    Series T, Due 2028
    
    
    5,000
    
    
    
    5,0005.3%
    
    Series U, Due 2028
    
    
    4,550
    
    
    
    4,5506.94%
    
    Series V, Due 2029
    
    
    12,050
    
    
    
    12,05021,600
    
    
    
    44,245Unsecured Water Facilities
Revenue Refinancing Bonds5.05%
    
    1998 Series A, Due 2028
    
    
    9,640
    
    
    
    9,6255.125%
    
    1998 Series B, Due 2028
    
    
    7,695
    
    
    
    7,7204.40%
    
    2003A Series, Due 2020
    
    
    8,000
    
    
    
    5.00%
    
    2003C Series, Due 2022
    
    
    14,930
    
    
    
    40,265
    
    
    
    17,345Total Connecticut Water Company
    
    
    61,865
    
    
    
    61,590Crystal Water Utilities
Corporation8.0%
    
    Westbank, Due 2017
    
    
    117
    
    
    
    122Crystal Water Company
of Danielson7.82%
    
    Connecticut Development Authority, Due 2020
    
    
    469
    
    
    
    483Chester Realty6%
    
    Note Payable, Due 2006
    
    
    57
    
    
    
    78Barnstable Water
Company10.2%
    
    Indianapolis Life Insurance, Due 2011
    
    
    1,425
    
    
    
    1,525Unionville Water Company8.125%
    
    Farmington Savings Bank, Due 2011
    
    
    1,075
    
    
    
    1,178Total Connecticut
Water Service, Inc.
    
    
    65,008
    
    
    
    64,976Less Current Portion
    
    
    (254
    )
    
    
    (242
    )Total Long-Term Debt
    
    
    $
    64,754
    
    
    $
    64,734
 The Companys principal payments required for years 2004  2008 are as follows: (In thousands)2004 -
    
    $
    2542005 -
    
    $
    2662006 -
    
    $
    2682007 -
    
    $
    2682008 -
    
    $
    282
 CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-16 Substantially all utility plant is pledged as collateral for long-term debt. In October 2003, Connecticut Water refinanced its Series R, First Mortgage
Bonds with 5.00% 2003 C Series Unsecured, Tax-Exempt Water Facilities Revenue
Refinancing Bonds and refinanced Series S, First Mortgage Bonds with 4.40% 2003
A Series Unsecured, Tax-Exempt Water Facilities Revenue Refinancing Bonds. There are no mandatory sinking fund payments required on Connecticut Water
Companys outstanding First Mortgage Bonds or the Unsecured Water Facilities
Revenue Refinancing Bonds. However, the 1998 Series A and B and the 2003
Series A and C 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. The outstanding bonds of the Company may be initially called for redemption at
the following dates and prices  Series T, July 1, 2003 and Series U, September
1, 2003 at 100% plus accrued interest to the date of redemption; Series V,
January 1, 2004 at 103.5%, 1998 Series A and B Unsecured Water Facilities
Revenue Refinancing Bonds, March 1, 2008 at 100% plus accrued interest; 2003
Series A Unsecured Water Facilities Revenue Refinancing Bonds, December 15,
2008 at 100% plus accrued interest; 2003 Series C Unsecured Water Facilities
Revenue Refinancing Bonds, September 1, 2008 at 100% plus accrued interest. Barnstable Water Companys note payable has been unconditionally guaranteed by
the Company. The note agreement with Indianapolis Life Insurance Company
requires the Company to meet certain financial covenants, restricts the
Companys ability to incur additional debt unless certain financial tests are
met, restricts liens to secure additional long-term borrowings, restricts the
type of investments that the Company can purchase and contains a significant
prepayment premium. The Company was in compliance with the restrictive
covenants at December 31, 2003 and 2002. Unionville Water Companys term note with Farmington Savings Bank requires
monthly payments of principal and interest. The note bears a fluctuating
interest rate. The interest rate is adjusted on each 60-month anniversary date
from the effective date of May 1, 1996. On the anniversary date (Interest
Change Date) the interest rate shall be increased or decreased to a rate
determined by adding 2.5 percentage points to the most recent Federal Home Loan
Bank of Boston Long-Term, Regular, 5 year, Fixed Rate Mortgage Rate (Index),
available 45 days prior to the Interest Change Date, rounded to the next
highest one-eighth of one percentage point. Unionville may prepay the
principal balance outstanding under the note without penalty for the thirty
days preceding each Interest Change Date upon 30 days prior written notice to
the bank. Prepayment made at any other time requires a prepayment penalty,
which is 110% of the present value of the difference between the interest on
the amount prepaid for the remaining term to the next Interest Change Date, as
determined by the Current Index and the interest on the same amount for the
remaining term to the next Interest Change Date, as determined by the Index in
effect for that maturity on the day the prepayment is made. NOTE 8: PREFERRED STOCK The Companys Preferred Stock at December 31, consisted of the following: (in thousands, except share data)
    
    2003
    
    2002Connecticut Water Service, Inc.Cumulative Series A Voting, $20 Par Value; Authorized, Issued and
Outstanding 15,000 Shares
    
    $
    300
    
    
    $
    300Cumulative Series $.90 Non-Voting, $16 Par Value; Authorized 50,000
Shares, Issued and Outstanding 29,499 Shares
    
    
    472
    
    
    
    472772
    
    
    
    772Barnstable Water Company6% Cumulative, $100 Par Value; Authorized, Issued and
Outstanding 750 Shares
    
    
    75
    
    
    
    75Total Preferred Stock
    
    $
    847
    
    
    $
    847
 All or any part of any series of either class of the Companys issued Preferred
Stock may be called for redemption by the Company at any time. The per share
redemption prices of the Series A and Series $.90 Preferred Stock, if called by
the Company, are $21.00 and $16.00, respectively. The Company is authorized to issue 400,000 shares of an additional class of
Preferred Stock, $25 par value, the general preferences, voting powers,
restrictions and qualifications of which are similar to the Companys existing
Preferred Stock. No shares of the $25 par value Preferred Stock have been
issued. CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-17 The Company is also authorized to issue 1,000,000 shares of $1 par value
Preference Stock, junior to the
Companys existing Preferred Stock in rights to dividends and upon liquidation
of the Company. 150,000 of such shares have been designated as Series A
Junior Participating Preference Stock. Pursuant to the Shareholder Rights
Plan, described in Note 4, the Company keeps reserved and available for
issuance one one-hundredth of a
share of Series A Junior Participating Preference Stock for each outstanding
share of the Companys common
stock. Barnstable Water Company paid Preferred Dividends of $4,500 in each of 2003,
2002 and 2001. These dividends are included in the Other category of the Other
Income (Deductions) section of the Consolidated Statements of Income. These
preferred shareholders have 1/10 of a common vote for matters related to
Barnstable Water Company. NOTE 9: BANK LINES OF CREDIT The Company has a total of $12,500,000 in lines of credit provided by three
banks. All of the lines have one year lives and will expire at different dates
in 2004. The Company expects the lines of credit to be renewed in 2004. The
total available on the lines of credit as of December 31, 2003 and 2002 were
$2,800,000 and $5,550,000, respectively. Bank commitment fees associated with
the lines of credit were approximately $30,000, $30,000, and $22,500 in 2003,
2002, and 2001 respectively. At December 31, 2003 and 2002, the weighted average interest rates on
short-term borrowings outstanding were 1.52% and 1.77%, respectively. NOTE 10: UTILITY PLANT AND CONSTRUCTION PROGRAM The components of utility plant and equipment at December 31, were as follows: (in thousands)
    
    2003
    
    2002Land
    
    $
    9,604
    
    
    $
    9,770Source of Supply
    
    
    19,417
    
    
    
    18,059Pumping
    
    
    24,375
    
    
    
    23,841Water Treatment
    
    
    47,547
    
    
    
    46,692Transmission and Distribution
    
    
    199,660
    
    
    
    191,603General
    
    
    18,548
    
    
    
    17,955Held for Future Use
    
    
    465
    
    
    
    465Total
    
    $
    319,616
    
    
    $
    308,385
 The amounts of depreciable utility plant at December 31, 2003 and 2002 included
in total utility plant were $284,561,000 and $276,150,000, respectively. Our water companies are engaged in continuous construction programs. Estimated
annual capital expenditures, net of amounts financed by customer advances and
contributions in aid of construction, are expected to be approximately
$11,164,000 during 2004, $13,075,000 during 2005, and $13,580,000 in 2006.
During the years 2007 and 2008, construction expenditures for routine
improvements to the water distribution system are expected to be approximately
$8,000,000 each year. NOTE 11: TAXES OTHER THAN INCOME TAXES Taxes Other than Income Taxes consist of the following: (in thousands)
    
    2003
    
    2002
    
    2001Municipal Property Taxes
    
    $
    4,452
    
    
    $
    4,149
    
    
    $
    3,788Payroll Taxes
    
    
    681
    
    
    
    647
    
    
    
    600Total
    
    $
    5,133
    
    
    $
    4,796
    
    
    $
    4,388
 NOTE 12: PENSION AND OTHER POST-RETIREMENT EMPLOYEE BENEFITS GENERAL- As of December 31, 2003, Connecticut Water had 167 employees, Gallup
3, Crystal 8, Connecticut Water Emergency Services 1, Barnstable Water 9, and
Unionville 7 for a total of 195 employees. The Companys officers are
employees of Connecticut Water. Employee expenses are charged between
companies as appropriate. Effective December 31, 2002, the Connecticut Water
Company Pension Plan and the Barnstable Water Company Pension Plan merged. CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-18 Investment Strategy The Pension Trust and Finance Committee (the Committee)
reviews and approves the investment strategy of the investments made on behalf
of various pension and post-retirement benefit plans existing under the Company
and certain of its subsidiaries. The Committee targeted asset allocation at December 31, 2003 and 2002 were as
follows: 2003
    
    2002Equity
    
    
    65
    %
    
    
    60
    %Fixed Income
    
    
    35
    %
    
    
    40
    %Total
    
    
    100
    %
    
    
    100
    %
 The Committee recognizes that a variation of up to 5% in either direction from
its targeted asset allocation mix is acceptable due to market fluctuations. PENSION Defined Contribution Plan One of the Companys subsidiaries, Unionville, had
through 2003 a noncontributory defined contribution pension plan which covered
all employees who had completed one year of service. Unionville provided a
contribution to the plan based upon 10% of the participants annual payroll.
The Unionville contribution charged to expense under this plan for the twelve
months ended December 31, 2003 was $31,000 and for the two-month period ended
December 31, 2002 was $9,000. Effective December 31, 2003 the Unionville
pension plan was terminated. Effective January 1, 2004, the employees of
Unionville are covered by the Companys noncontributory defined benefit pension
plan. Defined Benefit PlansThe Company and certain of its subsidiaries have
noncontributory defined benefit pension plans covering qualified employees. In
general, the Companys policy is to fund accrued pension costs as permitted by
federal income tax and Employee Retirement Income Security Act of 1974
regulations. A contribution of approximately $914,000 was made in January 2004
for plan year 2003 and a contribution of $743,000 was made for plan year 2002
in 2002. The following tables set forth the funded status of the Companys retirement
plans at December 31, the latest valuation date: Pension Benefits(in thousands)
    
    2003
    
    2002Change in Benefit Obligation:Benefit obligation, beginning of year
    
    $
    21,929
    
    
    $
    18,720Service Cost
    
    
    843
    
    
    
    705Interest Cost
    
    
    1,390
    
    
    
    1,345Plan Amendments
    
    
    (2
    )
    
    
    Actuarial loss/(gain)
    
    
    535
    
    
    
    1,930Benefits paid
    
    
    (883
    )
    
    
    (771
    )Benefit obligation, end of year
    
    $
    23,812
    
    
    $
    21,929Change in Plan Assets:Fair Value, beginning of year
    
    $
    17,742
    
    
    $
    19,343Actual return on plan assets
    
    
    3,452
    
    
    
    (1,573
    )Employer contribution
    
    
    
    
    
    
    743Benefits paid
    
    
    (883
    )
    
    
    (771
    )Fair Value, end of year
    
    $
    20,311
    
    
    $
    17,742Funded Status
    
    $
    (3,501
    )
    
    $
    (4,187
    )Unrecognized net actuarial (gain) loss
    
    
    298
    
    
    
    1,669Unrecognized transition obligation
    
    
    36
    
    
    
    48Unrecognized prior service cost
    
    
    935
    
    
    
    1,045Accrued Cost
    
    $
    (2,232
    )
    
    $
    (1,425
    )
 CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-19 The accumulated benefit obligation for all defined benefit pension plans was
approximately $18,800,000 and $17,057,000 at December 31, 2003 and 2002,
respectively. Weighted-average assumptions used to determine benefit
obligations at December 31: 2003
    
    2002Discount rate
    
    
    6.25
    %
    
    
    6.50
    %Expected return on plan assets
    
    
    8.00
    %
    
    
    8.00
    %
 Weighted-average assumptions used to determine net periodic
cost for years ended December 31: 2003
    
    2002Discount rate
    
    
    6.50
    %
    
    
    7.25
    %Expected long-term return on plan assets
    
    
    8.00
    %
    
    
    8.00
    %Rate of compensation increase
    
    
    4.50
    %
    
    
    4.50
    %
 The discount rate is based on interest rates for long-term, high quality, fixed
income investments. The Company looks at the general trend of several
different bond indices. Pension Benefits(in thousands)
    
    2003
    
    2002
    
    2001Components of net periodic benefit costsService cost
    
    $
    843
    
    
    $
    705
    
    
    $
    614Interest cost
    
    
    1,390
    
    
    
    1,345
    
    
    
    1,261Expected return on plan assets
    
    
    (1,544
    )
    
    
    (1,543
    )
    
    
    (1,502
    )Amortization of:Unrecognized net transition asset
    
    
    12
    
    
    
    13
    
    
    
    (20
    )Unrecognized net (gain)/loss
    
    
    (2
    )
    
    
    (252
    )
    
    
    (356
    )Unrecognized prior service cost
    
    
    108
    
    
    
    108
    
    
    
    107Net Periodic Pension Benefit Costs
    
    $
    807
    
    
    $
    376
    
    
    $
    104
 Plan Assets The Companys pension plan weighted-average asset allocations at December 31,
2003, and 2002 by asset category were as follows: 2003
    
    2002Equity Securities
    
    
    66
    %
    
    
    59
    %Fixed Income
    
    
    34
    
    
    
    41Total
    
    
    100
    %
    
    
    100
    %
 Cash Flows The Company contributed $914,000 to its pension plan in 2004 for plan year 2003
and expects to make an estimated $1.5 million contribution for plan year 2004
in 2004. POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP)- In addition to providing
pension
benefits, a subsidiary company, Connecticut Water, provides certain medical,
dental and life insurance benefits to retired employees partially funded by a
501(c)(9) Voluntary Employee Beneficiary Association Trust that has been
approved by the DPUC. Substantially all of Connecticut Waters employees may
become eligible for these benefits if they retire on or after age 55 with 10
years of service. The contribution for calendar years 2003 and 2002 was
$473,100 for each year. CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




---



##### Table of Contents



F-20 A deferred regulatory asset has been recorded to reflect the amount which
represents the future operating revenues expected to be recovered in customer
rates under FAS 106. In 1997, Connecticut Water requested and received
approval from the DPUC to include FAS 106 costs in customer rates. The DPUCs
1997 limited reopener of Connecticut Waters general rate proceeding allowed it
to increase customer rates $208,000 annually for FAS 106 costs. Connecticut
Waters current rates now allow for recovery of $473,100 annually for
post-retirement benefit costs other than pension. Connecticut Water has elected to recognize the transition obligation on a
delayed basis over a period equal to the plan participants 21.6 years of
average future service. The Company has elected to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. The benefit
obligation and net periodic post-retirement benefit costs do not reflect the
effects of the Act on the plan. The specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when issued,
could require previously reported information to be changed. Another subsidiary company, Barnstable Water, also provides certain health care
benefits to eligible retired employees. Substantially all Barnstable Water
employees may become eligible for these benefits if they retire on or after age
65 with at least 15 years of service. Post-65 medical coverage is provided for
employees up to a maximum coverage of $500 per quarter. Barnstable Water has
incurred annual expenses for PBOP of $11,000, $12,000, $12,000 for 2003, 2002
and 2001, respectively. Barnstable Waters PBOP currently is not funded. The following tables set forth the funded status of the Companys
post-retirement health care benefits at December 31, the latest valuation date: Connecticut Water
    
    Barnstable Water(in thousands)
    
    2003
    
    2002
    
    2003
    
    2002Change in Benefit Obligation:Benefit obligation, beginning of year
    
    $
    5,507
    
    
    $
    4,171
    
    
    $
    98
    
    
    $
    83Service Cost
    
    
    270
    
    
    
    223
    
    
    
    2
    
    
    
    2Interest Cost
    
    
    314
    
    
    
    309
    
    
    
    6
    
    
    
    7Plan Participant Contributions
    
    
    52
    
    
    
    47
    
    
    
    
    
    
    
    Plan Amendments
    
    
    (400
    )
    
    
    
    
    
    
    
    
    
    
    Actuarial loss/(gain)
    
    
    (129
    )
    
    
    1,184
    
    
    
    (8
    )
    
    
    10Benefits paid
    
    
    (380
    )
    
    
    (427
    )
    
    
    (4
    )
    
    
    (4
    )Benefit obligation, end of year
    
    $
    5,234
    
    
    $
    5,507
    
    
    $
    94
    
    
    $
    98Change in Plan Assets:Fair Value, beginning of year
    
    $
    2,592
    
    
    $
    2,684
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    442
    
    
    
    (185
    )
    
    
    
    
    
    
    Employer contribution
    
    
    473
    
    
    
    473
    
    
    
    4
    
    
    
    4Participants contributions
    
    
    52
    
    
    
    47
    
    
    
    
    
    
    
    Benefits paid
    
    
    (380
    )
    
    
    (427
    )
    
    
    (4
    )
    
    
    (4
    )Fair Value, end of year
    
    $
    3,179
    
    
    $
    2,592
    
    
    $
    
    
    
    $
    Funded Status
    
    $
    (2,055
    )
    
    $
    (2,915
    )
    
    $
    (94
    )
    
    $
    (98
    )Unrecognized net actuarial (gain) loss
    
    
    25
    
    
    
    420
    
    
    
    (46
    )
    
    
    (41
    )Unrecognized transition obligation
    
    
    1,084
    
    
    
    1,649
    
    
    
    64
    
    
    
    70Accrued Cost
    
    $
    (946
    )
    
    $
    (846
    )
    
    $
    (76
    )
    
    $
    (69
    )Weighted-average assumptions used to determine
benefit obligations at December 31:Discount rate
    
    
    6.25
    %
    
    
    6.50
    %
    
    
    6.25
    %
    
    
    6.50
    %Expected return on plan assets (net of tax)
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    
    
    
    
    Weighted-average assumptions used to determine net
periodic benefit cost for years ended December 31:Discount rate
    
    
    6.50
    %
    
    
    7.25
    %
    
    
    6.50
    %
    
    
    7.25
    %Expected long-term return on plan assets
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    
    
    
    
    Rate of compensation increase
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    
    
    
    
    
 The discount rate is based on interest rates for long-term, high quality, fixed
income investments. The Company looks at the general trend of several
different bond indices. CONNECTICUT WATER SERVICE,
INC. AND SUBSIDIARIES




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##### Table of Contents



F-21 Connecticut Water
    
    Barnstable Water(in thousands)
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Components of net periodic benefit costsService cost
    
    $
    270
    
    
    $
    223
    
    
    $
    190
    
    
    $
    2
    
    
    $
    2
    
    
    $
    4Interest cost
    
    
    314
    
    
    
    309
    
    
    
    276
    
    
    
    6
    
    
    
    7
    
    
    
    6Expected return on plan assets
    
    
    (145
    )
    
    
    (141
    )
    
    
    (128
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of:Unrecognized net transition asset
    
    
    165
    
    
    
    165
    
    
    
    165
    
    
    
    6
    
    
    
    6
    
    
    
    6Recognized net (gain)/loss
    
    
    (31
    )
    
    
    (84
    )
    
    
    (135
    )
    
    
    (4
    )
    
    
    (3
    )
    
    
    (4
    )Net Periodic Pension and Post Retirement
Benefit Costs
    
    $
    573
    
    
    $
    472
    
    
    $
    368
    
    
    $
    10
    
    
    $
    12
    
    
    $
    12
 In determining the 2003 and 2002 accumulated post-retirement benefit
obligation, health care cost trends were assumed to be 8.5% grading 0.5% per
year to 4%. Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. Assumed health care cost trend rates at December 31: 2003
    
    2002Medical
    
    Dental
    
    Medical
    
    DentalHealth care cost trend rate
assumed for next year
    
    
    8.5
    %
    
    
    8.0
    %
    
    
    8.5
    %
    
    
    8.0
    %Rate to which the cost trend
rate is assumed to decline
    
    
    4.0
    %
    
    
    3.5
    %
    
    
    4.0
    %
    
    
    3.5
    %Year that the rate reaches
the ultimate trend rate
    
    
    2013
    
    
    
    2013
    
    
    
    2012
    
    
    
    2012
 A one-percentage-point change in assumed health care cost trend rates would
have the following effects on Connecticut Waters plan and would have no impact
on the Barnstable Water plan: 1-Percentage-Point
    
    1-Percentage-Point(in thousands)
    
    Increase
    
    DecreaseEffect on total of service and interest cost components
    
    $
    89
    
    
    $
    (73
    )Effect on post-retirement benefit obligation
    
    $
    663
    
    
    $
    (556
    )
 Plan Assets Barnstable Waters other post-retirement benefit plan has no assets.
Connecticut Waters other postretirement benefit plan weighted-average asset
allocations at December 31, 2003 and 2002, by asset category were as follows: 2003
    
    2002Equity Securities
    
    
    55
    %
    
    
    48
    %Fixed Income
    
    
    45
    
    
    
    52Total
    
    
    100
    %
    
    
    100
    %
 CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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##### Table of Contents



Cash Flows Connecticut Water is expected to contribute $473,100 to its other
post-retirement benefit plan in 2004 for plan year 2004. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN- Connecticut Water provides additional
pension benefits to senior management through a supplemental executive
retirement plan. At December 31, 2003 and at December 31, 2002 the actuarial
present value of the projected benefit obligation was $918,000 and $788,000,
respectively. Expense associated with this plan was $152,000 for 2003,
$108,000 for 2002, and $93,000 for 2001. SAVINGS PLAN -The Company and certain of its subsidiaries maintains an
employee savings plan which allows participants to contribute from 1% to 15% of
pre-tax compensation plus for those age 50 and older catch-up contributions as
allowed by law. The Company matches 50 cents for each dollar contributed by the
employee up to 4% of the employees compensation. The Company contribution
charged to expense in 2003, 2002 and 2001 was $166,000, $161,000, and $150,000,
respectively. The Plan creates the possibility for an incentive bonus contribution to the
401(k) plan tied to the attainment of a specific goal or goals to be identified
each year. If the specific goal or goals are attained by the end of the year,
all eligible employees, except officers and certain key employees, may receive
up to an additional 1% of their annual base salary as a direct contribution to
their 401(k) account. No incentive bonus was awarded in 2003. An incentive
bonus of .4% of base pay, or $30,000 was awarded in 2002. For 2001, $41,000
was awarded as an incentive bonus of .6% of base pay. NOTE 13: STOCK-BASED COMPENSATION PLAN The Company has two components to its Stock-Based Compensation Plan (the Plan):
The Stock Option Program (SOP) and the Performance Stock Program (PSP). In
total under the Plan there were 700,000 shares authorized and 234,686 shares
available for grant at December 31, 2003. The Plan terminates on April 22,
2004. The Board of Directors has adopted a new plan that is subject to
shareholder approval. STOCK OPTION PROGRAM As part of the Companys SOP, stock options are
permitted to be issued to officers and key employees. The Company accounts for
this plan under APB Opinion No. 25, under which no compensation cost has been
recognized in the Consolidated Statements of Income. On a pro forma basis, the
Companys net income and earnings per share are shown in Note 1. For purposes of this calculation, the Company arrived at the fair value of each
stock grant at the date of grant by using the Black Scholes Option Pricing
model with the following weighted average assumptions used for grants for the
years ended December 31, 2003, 2002 and 2001. 2003
    
    2002
    
    2001Expected life (years)
    
    
    5.00
    
    
    
    6.00
    
    
    
    9.40Risk-free interest rate (percentage)
    
    
    2.79
    
    
    
    3.09
    
    
    
    5.07Volatility (percentage)
    
    
    30.00
    
    
    
    30.00
    
    
    
    27.36Dividend yield
    
    
    2.91
    
    
    
    3.13
    
    
    
    2.70
 Options begin to become exercisable one year from the date of grant. Vesting
periods range from one to five years.
The maximum term ranges from five to ten years. The per share weighted average fair value of stock options granted during 2003,
2002 and 2001 was $6.42, $5.82 and $8.67 respectively. F-22




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##### Table of Contents



For the Years Ended December 31,2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOptions:Outstanding, beginning of year
    
    
    235,101
    
    
    $
    21.41
    
    
    
    229,811
    
    
    $
    20.18
    
    
    
    236,228
    
    
    $
    18.39Granted
    
    
    36,053
    
    
    
    29.05
    
    
    
    39,254
    
    
    
    25.78
    
    
    
    33,750
    
    
    
    22.99Terminated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (19,319
    )
    
    
    16.91
    
    
    
    (33,964
    )
    
    
    18.12
    
    
    
    (40,167
    )
    
    
    16.22Outstanding, end of year
    
    
    251,835
    
    
    
    22.85
    
    
    
    235,101
    
    
    
    21.41
    
    
    
    229,811
    
    
    
    20.18Exercisable, end of year
    
    
    119,992
    
    
    $
    21.35
    
    
    
    71,581
    
    
    $
    20.74
    
    
    
    47,630
    
    
    $
    19.94
 Options exercised during 2003 ranged in price from $14.83 per share to $22.33
per share. The following table summarizes the price ranges of the options
outstanding and options exercisable as of December 31, 2003: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageContractual
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Life (years)
    
    Price
    
    Shares
    
    PriceRange of prices:$12.00 - $14.99
    
    
    49,252
    
    
    
    5.3
    
    
    $
    14.83
    
    
    
    26,709
    
    
    $
    14.83$15.00 - $17.99
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $18.00 - $20.99
    
    
    35,516
    
    
    
    6.9
    
    
    
    20.42
    
    
    
    24,359
    
    
    
    20.42$21.00 - $23.99
    
    
    58,010
    
    
    
    5.9
    
    
    
    22.33
    
    
    
    42,237
    
    
    
    22.33$24.00 - $26.99
    
    
    39,254
    
    
    
    8.9
    
    
    
    25.78
    
    
    
    9,814
    
    
    
    25.78$27.00 - $29.99
    
    
    69,803
    
    
    
    8.6
    
    
    
    28.52
    
    
    
    16,873
    
    
    
    27.95251,835
    
    
    
    7.2
    
    
    $
    22.85
    
    
    
    119,992
    
    
    $
    21.35
 NOTE 14: SEGMENT REPORTING Our Company operates principally in three segments: water activities, real
estate transactions, and services and rentals. The water segment is comprised
of our core regulated water activities to supply water to our customers. Our
real estate transactions segment involves selling or donating for income tax
benefits our limited excess real estate holdings. Our services and rentals
segment provides services on a contract basis and also leases certain of our
properties to third parties. The accounting policies of each reportable
segment are the same as those described in the summary of significant
accounting policies. Financial data for reportable segments is as follows: F-23




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##### Table of Contents



InterestExpenseandPreferredOther
    
    
    
    
    
    DividendOperating
    
    Other Income
    
    (net of
    
    Income
    
    Net(in thousands)
    
    Revenues
    
    Depreciation
    
    Expenses
    
    (Deductions)
    
    AFUDC)
    
    Taxes
    
    IncomeFor the year ended
December 31, 2003
Water Activities
    
    $
    47,115
    
    
    $
    5,684
    
    
    $
    27,892
    
    
    $
    22
    
    
    $
    4,187
    
    
    $
    1,964
    
    
    $
    7,410Real Estate Transactions
    
    
    170
    
    
    
    
    
    
    
    133
    
    
    
    (1
    )
    
    
    
    
    
    
    (993
    )
    
    
    1,029Services and Rentals
    
    
    3,829
    
    
    
    23
    
    
    
    2,630
    
    
    
    
    
    
    
    
    
    
    
    443
    
    
    
    733Total
    
    $
    51,114
    
    
    $
    5,707
    
    
    $
    30,655
    
    
    $
    21
    
    
    $
    4,187
    
    
    $
    1,414
    
    
    $
    9,172For the year ended
December 31, 2002
Water Activities
    
    $
    45,830
    
    
    $
    5,187
    
    
    $
    24,326
    
    
    $
    127
    
    
    $
    4,104
    
    
    $
    4,482
    
    
    $
    7,858Real Estate Transactions
    
    
    5
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    (467
    )
    
    
    440Services and Rentals
    
    
    2,928
    
    
    
    20
    
    
    
    2,186
    
    
    
    
    
    
    
    
    
    
    
    278
    
    
    
    444Total
    
    $
    48,763
    
    
    $
    5,207
    
    
    $
    26,544
    
    
    $
    127
    
    
    $
    4,104
    
    
    $
    4,293
    
    
    $
    8,742For the year ended
December 31, 2001
Water Activities
    
    $
    45,392
    
    
    $
    4,837
    
    
    $
    24,402
    
    
    $
    (273
    )
    
    $
    4,231
    
    
    $
    4,741
    
    
    $
    6,908Real Estate Transactions
    
    
    
    
    
    
    
    
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    (1,266
    )
    
    
    1,121Services and Rentals
    
    
    2,431
    
    
    
    15
    
    
    
    1,839
    
    
    
    
    
    
    
    
    
    
    
    205
    
    
    
    372Total
    
    $
    47,823
    
    
    $
    4,852
    
    
    $
    26,386
    
    
    $
    (273
    )
    
    $
    4,231
    
    
    $
    3,680
    
    
    $
    8,401
 At December 31 (in thousands)
    
    2003
    
    2002Total Plant and Other Investments:Water
    
    $
    237,947
    
    
    $
    231,676Non-Water
    
    
    980
    
    
    
    978238,927
    
    
    
    232,654Other Assets:Water
    
    
    37,175
    
    
    
    31,761Non-Water
    
    
    1,444
    
    
    
    38438,619
    
    
    
    32,145Total Assets
    
    $
    277,546
    
    
    $
    264,799
 F-24




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##### Table of Contents



NOTE 15: COMMITMENTS AND CONTINGENCIES REVERSE PRIVATIZATION Our water companies derive their rights and franchises
to operate from state law that are subject to alteration, amendment or repeal
and do not grant permanent exclusive rights to our service areas. Our
franchises are free from burdensome restrictions, are unlimited as to time, and
authorize us to sell potable water in all towns we now serve. There is the
possibility that states could revoke our franchises and allow a governmental
entity to take over some or all of our systems. From time to time such
legislation is contemplated. The Town of Barnstable, Massachusetts has advised the Company that it is
actively considering the acquisition of the Companys wholly-owned subsidiary,
The Barnstable Holding Company. The Town takes the position that it has the
right to acquire The Barnstable Holding Company pursuant to the provisions of
Massachusetts legislation passed in 1911. The Company has advised the Town of
Barnstable that the Company does not believe the Town has any statutory right
to acquire The Barnstable Holding Company. ENVIRONMENTAL AND WATER QUALITY REGULATION The Company is subject to
environmental and water quality regulations. Costs to comply with
environmental and water quality regulations are substantial. We are in
compliance with current regulations, but the regulations are subject to change.
The costs to comply with future changes in state or federal regulations, which
could require us to modify current filtration facilities and/or construct new
ones, or to replace any reduction of the safe yield from any of our current
sources of supply, could be substantial. CONSTRUCTION Our water companies estimated capital expenditures for 2004,
2005 and 2006 are $11.1 million, $13.1 million and $13.6 million respectively.
These capital expenditures are net of amounts financed by customer advances and
contributions in aid of construction. These expenditures are expected to be
financed primarily with internally generated funds. MORATORIUM ON LAND SALES On December 4, 2002, the Company entered into a
Memorandum of Understanding (MOU) with the State of Connecticut Department of
Environmental Protection (DEP). The MOU provides for a voluntary two-year
moratorium on the sale of approximately 7,100 acres of undeveloped Class I, II,
and III water company lands held by the Companys Connecticut water company
subsidiaries. Class I and II water company lands, as defined by Public Health
Code regulations, are those that are within the watershed or drainage area of a
public water supply. Class III lands are those that are not located within the
watershed. Under the terms of the MOU, the DEP in cooperation with the
Companys Connecticut water companies will assess and evaluate all undeveloped
Class I, II and III land holdings to determine the desirability of the State of
Connecticuts acquiring the land for open space and to develop strategies to
fund the acquisitions of such properties in fee or easement from the Company.
If the DEP determines that the Companys Class I, II and III land holdings are
desirable, the Company and the DEP have agreed to negotiate in good faith to
determine a price for the Companys land holdings based upon appraised values.
However, the Company is not obligated by the MOU to sell such lands to the
State of Connecticut. If the DEP determines that certain parcels of Class III
land covered by the MOU do not meet its criteria for desirable open space, the
Company can apply to the Department of Public Utility Control to sell or
otherwise dispose of the land. The Company has no intention of selling or
otherwise disposing of Class I and II lands that have an impact on drinking
water supply and water quality. The MOU does not affect the land donation to
the Town of Killingly mentioned above. In 2003, the DEP released approximately
130 acres of land from the restrictions of the MOU. SECURITY Recent enactment of the Bioterrorism Response Act of 2001 require
all public water systems serving over 3,300 people to prepare Vulnerability
Assessments (VA) of their critical utility assets. The assessments are to be
submitted to the U.S. Environmental Protection Agency by June 2004 followed by
an Emergency Response Plan by December 2004. The information within the VA is
not subject to release to the public and is protected from Freedom of
Information inquiries. Investment in security-related improvements is ongoing
and management believes that the costs associated with any such improvements
would be chargeable for recovery in future rate proceedings. ROCK EXCAVATION CONTRACT In 2002, Connecticut Water signed a contract with O
& G Industries, Inc. of Torrington, Connecticut regarding excavation of rock
from a 28-acre parcel of land that the company owns in Prospect, Connecticut.
At that time, the Company expected that the rock excavation could yield income
of $2  $3 million in total over the 20-year life of the contract. A
subsequent environmental assessment has indicated that the property contains
sensitive wetland areas which have to be protected. The Company now expects
minimal proceeds from this project if it goes forward at all. TAXES Due to the current environment of state budget deficits, the Company
and its subsidiaries may be subject to a higher tax burden through changes in
state legislation. Also, the Companys future property tax burden may increase
as state aid to towns is decreased. F-25




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##### Table of Contents



NOTE 16: SUBSEQUENT EVENTS 2004 LAND DONATION In January 2004, 133 acres of unimproved land were donated
to the Town of Killingly, Connecticut for protected open space purposes. The
expected after tax benefit of this donation is approximately $712,000. SERIES V REFINANCING On March 4, 2004, Connecticut Water refinanced an
additional portion of its long-term debt through the issuance of $12,500,000 of
variable rate, taxable debenture bonds Series 2004 with a maturity date of
January 4, 2029. The bonds have been secured by an irrevocable direct pay
letter of credit issued by a financial institution, with a five-year term
expiring in March 2009. The proceeds of the sale of the bonds, which are
general debt obligations of Connecticut Water, will be used to redeem the
$12,050,000 aggregate principal amount of Connecticut Waters First Mortgage
Bonds (Series V) and to pay a portion of the expenses associated with the
bonds refunding. In connection with the issuance of the Bonds, Connecticut Water entered into an
interest rate swap transaction with a counterparty in the notional principal
amount of $12,500,000. The interest rate swap agreement provides that,
beginning in April 2004 and thereafter on a monthly basis, Connecticut Water
will pay the counterparty a fixed interest rate of 3.73% on the notional amount
for a period of five years. In exchange, the counterparty will, beginning in
April 2004 and thereafter on a monthly basis, pay Connecticut Water a floating
interest rate (based on 105% of the U.S. Dollar one-month LIBOR rate) on the
notional amount for a period of five years. The purpose of the interest rate
swap is to manage the Companys exposure to fluctuations in prevailing interest
rates. NOTE 17: QUARTERLY FINANCIAL DATA (Unaudited) Selected quarterly financial data for the years ended December 31, 2003 and
2002 appears below: (in thousands, except for per share data) Net Income
    
    Basic Earnings PerUtility
    
    Applicable to
    
    AverageOperating Revenues
    
    Operating Income
    
    Common Stock
    
    Common Share2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002First Quarter
    
    $
    10,901
    
    
    $
    10,284
    
    
    $
    2,016
    
    
    $
    2,499
    
    
    $
    2,110
    
    
    $
    1,544
    
    
    $
    0.27
    
    
    $
    0.20Second Quarter
    
    
    10,841
    
    
    
    10,727
    
    
    
    2,048
    
    
    
    2,593
    
    
    
    1,222
    
    
    
    1,866
    
    
    
    0.15
    
    
    
    0.24Third Quarter
    
    
    13,673
    
    
    
    13,799
    
    
    
    4,606
    
    
    
    4,408
    
    
    
    3,873
    
    
    
    3,850
    
    
    
    0.49
    
    
    
    0.50Fourth Quarter
    
    
    11,700
    
    
    
    11,020
    
    
    
    2,861
    
    
    
    2,334
    
    
    
    1,967
    
    
    
    1,482
    
    
    
    0.24
    
    
    
    0.19Year
    
    $
    47,115
    
    
    $
    45,830
    
    
    $
    11,531
    
    
    $
    11,834
    
    
    $
    9,172
    
    
    $
    8,742
    
    
    $
    1.15
    
    
    $
    1.13
 F-26




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##### Table of Contents



ExhibitNumber
    
    Description3.1
    
    Certificate of Incorporation of Connecticut Water Service, Inc. amended
and restated as of April, 1998. (Exhibit 3.1 to Form 10-K for the year
ended 12/31/98).3.2
    
    By-Laws, as amended, of Connecticut Water Service, Inc. as amended and
restated as of August 12, 1999. (Exhibit 3.2 to Form 10-K for the year
ended 12/31/99).3.3
    
    Certification of Incorporation of The Connecticut Water Company effective
April, 1998. (Exhibit 3.3 to Form 10-K for the year ended 12/31/98).3.4
    
    Certificate of Amendment to the Certificate of Incorporation of
Connecticut Water Service, Inc. dated August 6, 2001. (Exhibit 3.4 to Form
10-K for the year ended 12/31/01).4.1
    
    Indenture of Mortgage and Deed of Trust from The Connecticut Water
Company to The Connecticut Bank and Trust Company, Trustee, dated as of
June 1, 1956. (Exhibit 4.3(a) to Registration Statement No. 2-61843).4.2
    
    Supplemental Indentures thereto dated as of
  (i)
    
    February 1, 1958 (Exhibit 4.3(b) (i) to Registration Statement
No. 2-61843)(ii)
    
    September 1, 1962 (Exhibit 4.3(b) (ii) to Registration Statement No. 2-61843)(iii)
    
    January 1, 1966 (Exhibit 4.3(b) (iii) to Registration Statement No. 2-61843)(iv)
    
    July 1, 1966 (Exhibit 4.3(b) (iv) to Registration Statement No. 2-61843)(v)
    
    January 1, 1971 (Exhibit 4.3(b) (v) to Registration
Statement No. 2-61843)(vi)
    
    September 1, 1974 (Exhibit 4.3(b) (vi) to Registration Statement No. 2-61843)(vii)
    
    December 1, 1974 (Exhibit 4.3(b) (vii) to Registration Statement No. 2-61843)(viii)
    
    January 1, 1976 (Exhibit 4(b) to Form 10-K for the year ended 12/31/76)(ix)
    
    January 1, 1977 (Exhibit 4(b) to Form 10-K for the year ended 12/31/76)(x)
    
    September 1, 1978 (Exhibit 2.12(b) (x) to
Registration Statement No. 2-66855)(xi)
    
    December 1, 1978 (Exhibit 2.12(b) (xi) to Registration Statement No. 2-66855)(xii)
    
    June 1, 1979 (Exhibit 2.12(b) (xii) to Registration Statement No. 2-66855)(xiii)
    
    December 1, 1983 (Exhibit 4.2 (xiii) to Form 10-K for the year ended 12/31/83) E-1




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##### Table of Contents



(xiv)
    
    January 1, 1987 (Exhibit 4.2 (xiv) to Form 10-K for the year ended 12/31/86)(xv)
    
    May 1, 1989 (Exhibit 4.2 (xv) to Form 10-K for year ended 12/31/89)(xvi)
    
    June 1, 1991 (Exhibit 4.2 (xvi) to Form 10-K for year ended 12/31/91)(xvii)
    
    August 1, 1992 (Exhibit 4.2 (xvii) to Form 10-K for year ended 12/31/92)(xviii)
    
    October 1, 1993 (Exhibit 4.2 (xviii) to Form 10-K for year ended 12/31/93)(xix)
    
    June 1, 1993 (Exhibit 4.2 (xix) to Form 10-K for year ended 12/31/93)(xx)
    
    September 1, 1993 (Exhibit 4.2 (xx) to Form 10-K for year ended 12/31/93)(xxi)
    
    December 1, 1993 (Exhibit 4.2 (xxi) to Form 10-K for year ended 12/31/93)(xxii)
    
    March 1, 1994 (Exhibit 4.2 (xxii) to Form 10-K for year ended 12/31/94) 4.3
    
    Loan Agreement dated as of October 1, 1993, between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.3 to
Form 10-K for year ended December 31, 1993).4.4
    
    Loan Agreement dated as of June 1, 1993, between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.4 to
Form 10-K for year ended December 31, 1993).4.5
    
    Loan Agreement dated as of September 1, 1993, between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.5 to
Form 10-K for year ended December 31, 1993).4.6
    
    Loan Agreement dated as of August 1, 1992 between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.10
to Form 10-K for the year ended December 31, 1992).4.7
    
    Bond Purchase Agreement dated as of December 1, 1993. (Exhibit 4.8 to
Form 10-K for year ended December 31, 1993).4.8
    
    Loan Agreement dated as of March 9, 1998 between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.8 to
Form 10-K for the year ended 12/21/98).4.9
    
    Loan Agreement dated as of April 19, 1990 between the Connecticut
Development Authority and The Crystal Water Company of Danielson. (Exhibit
4.9 to Form 10.K for the year ended 12/31/99).4.10
    
    Loan Agreement dated as of February 9, 1996 between New London Trust, F.S.B.
and The Crystal Water Company of Danielson. (Exhibit 4.10 to Form 10-K for
the year ended 12/31/99).
 E-2




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##### Table of Contents



4.11
    
    Loan Agreement dated as of April 11, 1991 between Farmington Savings Bank
and The Unionville Water Company. (Exhibit 4.11 to Form 10-K for the
year ended 12/31/02).4.12*
    
    Loan Agreement dated as of October 1, 2003 between the Connecticut
Development Authority and The Connecticut Water Company.4.13*
    
    Indenture of Trust dated as of October 1, 2003 between the Connecticut
Development Authority and The Connecticut Water Company.4.14*
    
    Loan Agreement dated as of October 1, 2003 between the Connecticut
Development Authority and The Connecticut Water Company.4.15*
    
    Indenture of Trust dated as of October 1, 2003 between the Connecticut
Development Authority and The Connecticut Water Company.4.16*
    
    Bond Purchase Agreement dated as of October 10, 2003 among Connecticut
Development Authority, The Connecticut Water Company and A.G. Edwards and
Sons, Inc.10.1
    
    Pension Plan Fiduciary Liability Insurance for The Connecticut Water
Company Employees Retirement Plan and Trust, The Connecticut Water
Company Tax Credit Employee Stock Ownership Plan, as Amended and Restated,
Savings Plan of The Connecticut Water Company and The Connecticut Water
Company VEBA Trust Fund. (Exhibit 10.1 to Registration Statement No.
2-74938).10.2
    
    Directors and Officers Liability and Corporation Reimbursement Insurance.
(Exhibit 10.2 to Registration Statement No. 2-74938).10.3
    
    Directors Deferred Compensation Plan, effective as of January 1, 1980, as
amended as of April 22, 1994. (Exhibit 10.3 to Form 10-K for the year
ended 12/31/02).10.4
    
    The Connecticut Water Company Deferred Compensation Agreement dated
December 1, 1984. (Exhibit 10.4 to Form 10-K for the year ended December
31, 1984).10.5
    
    The Connecticut Water Company Amended and Restated Deferred Compensation
Agreement dated May 14, 1999. (Exhibit 10.5 to Form 10-K for the year
ended 12/31/99).
a.    Marshall T. Chiaraluce
b.    David C. Benoit
c.    James R. McQueen
d.    Kenneth W. Kells10.6
    
    The Connecticut Water Company Supplemental Executive Retirement Agreement
with William C. Stewart. (Exhibit 10.6a to Form 10-K for year ended
December 31, 1991).
 E-3




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##### Table of Contents



10.7
    
    The Connecticut Water Company Supplemental Executive Retirement Agreement
with Marshall T. Chiaraluce dated December 16, 1991. (Exhibit 10.6b to
the Form 10-K for year ended 12/31/91).10.7.1
    
    The Connecticut Water Company First Amended Supplemental Executive
Retirement Agreement with Marshall T. Chiaraluce dated August 1, 1999.
(Exhibit 10.7.2 to Form 10-K for the year ended 12/31/99).10.7.1a*
    
    The Connecticut Water Company Second Amended Supplemental Executive
Retirement Agreement with Marshall T. Chiaraluce dated December 17, 2003.10.7.2
    
    The Connecticut Water Company Supplemental Executive Retirement
Agreement
with Michele G. DiAcri dated February 28, 2000. (Exhibit 10.7.2 to
Form 10-K for the year ended 12/31/01).10.7.2a*
    
    The Connecticut Water Company Second Amended Supplemental Executive
Retirement Agreement with Michele G. DiAcri dated December 17, 2003.10.8
    
    The Connecticut Water Company Supplemental Executive Retirement Agreement
 standard form for other officers, dated December 4, 1991. (Exhibit 10.6b
to Form 10-K for the year ended 12/31/91).10.8.1
    
    The Connecticut Water Company First Amended Supplemental Executive
Retirement Agreement  standard form for other officers, dated August 1,
1999. (Exhibit 10.8.2 to Form 10-K for the year ended 12/31/99).10.8.2*
    
    The Connecticut Water Company Second Amended Supplemental Executive
Retirement Agreement  standard form for other officers, dated December
17, 2003.
a)    David C. Benoit
b)    Peter J. Bancroft
c)    James R. McQueen
d)    Terrance P. ONeill
e)    Maureen P. Westbrook10.9
    
    Amended and restated employment agreement between The Connecticut Water
Company and Connecticut Water Service, Inc. with officers, amended and
restated as of May 9, 2001. (Exhibit 10.9 to Form 10-K for the year ended
12/31/01).
a)    Marshall T. Chiaraluce
b)    Michele G. DiAcri
c)    James R. McQueen
d)    David C. Benoit
e)    Peter J. Bancroft
f)    Maureen P. Westbrook
g)    Terrance P. ONeill
 E-4




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##### Table of Contents



10.9.1
    
    Employment agreement between The Connecticut Water Company and
Connecticut Water Service, Inc. with Kevin T. Walsh, amended and restated
as of January 9, 2002. (Exhibit 10.9.1 to Form 10-K for the year ended
12/31/02).10.10
    
    Employment and Consulting Agreement between Richard L. Mercier and
Gallup Water Service, Inc. dated April 15, 1999. (Exhibit 10.10 to Form
10-K for the year ended 12/31/99).10.11
    
    Employment and Consulting Agreement between Roger Engle and
Crystal Water Company of Danielson dated September 29, 1999.
(Exhibit 10.11 to Form 10-K for the year ended 12/31/99).10.12
    
    Savings Plan of The Connecticut Water Company, amended and restated effective
as of October 1, 2000. (Exhibit 10.12 to Form 10-K for the year ended 12/31/01).10.12.1*
    
    Trust Agreement between Connecticut Water Company and Riggs Bank N.A.,
Trustee, dated as of June 1, 2002.10.12.2*
    
    Post-EGTRRA Amendment to the Savings Plan of The Connecticut Water Company,
effective January 1, 2002.10.12.3*
    
    Supplemental Participation Agreement to the Savings Plan of The
Connecticut Water Company between The Unionville Water Company and
Connecticut Water Company, dated December 30, 2003.10.12.4*
    
    Supplemental Participation Agreement to the Savings Plan of The
Connecticut Water Company between The Crystal Water Company of Danielson
and Connecticut Water Company, dated December 30, 2003.10.13
    
    The Connecticut Water Company Employees Retirement Plan as amended and
restated as of January 1, 1997. (Exhibit 10.11 to Form 10-K for the year
ended 12/31/98).10.13.1
    
    First amendment, dated August 16, 2000 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective January 1,
1997.
(Exhibit 10.13.1 to Form 10-K for the year ended 12/31/02).10.13.2
    
    Second amendment, dated November 14, 2000 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective January 1,
1997. (Exhibit 10.13.2 to Form 10-K for the year ended 12/31/02).10.13.3
    
    Third amendment, dated November 14, 2001 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective January 1,
1997. (Exhibit 10.13.3 to Form 10-K for the year ended 12/31/02).10.13.4
    
    Fourth amendment, dated August 14, 2002 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective January 1,
1997. (Exhibit 10.13.4 to Form 10-K for the year ended 12/31/02).
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##### Table of Contents



10.13.5
    
    Fifth amendment, dated August 14, 2002 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective January 1,
1997. (Exhibit 10.13.5 to Form 10-K for the year ended 12/31/02).10.13.6*
    
    Sixth amendment, dated November 10, 2003 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective November
12, 2003.10.14
    
    Water Supply Agreement dated June 13, 1994, between The Connecticut
Water Company and the Hazardville Water Company. (Exhibit 10.15 to Form
10-K for year ended December 31, 1994).10.15
    
    November 4, 1994 Amendment to Agreement dated December 11, 1957 between
The Connecticut Water Company (successor to the Thomaston Water Company)
and the City of Waterbury. (Exhibit 10.16 to Form 10-K for year ended
December 31, 1994).10.16
    
    Contract between The Connecticut Water Company and The Rockville Water
and Aqueduct Company dated as of January 1, 1976. (Exhibit 9(b) to Form
10-K for the year ended December 31, 1975).10.17
    
    Agreement dated August 13, 1986 between The Connecticut Water Company
and the Metropolitan District. (Exhibit 10.14 to Form 10-K for the year
ended December 31, 1986).10.18
    
    Report of the Commission to Study the Feasibility of Expanding the Water
Supply Services of the Metropolitan District. (Exhibit 14 to Registration
Statement No. 2-61843).10.19
    
    Plan of Merger dated December 18, 1978 of Broad Brook Water Company, The
Collinsville Water Company, The Rockville Water and Aqueduct Company, The
Terryville Water Company and The Thomaston Water Company with and into The
Connecticut Water Company. (Exhibit 13 to Form 10-K for the year ended
December 31, 1978).10.20
    
    Bond Exchange Agreements between Connecticut Water Service, Inc., The
Connecticut Water Company Bankers Life Company and Connecticut Mutual Life
Insurance Company dated October 23, 1978. (Exhibit 14 to Form 10-K for
the year ended December 31, 1978).10.21
    
    Dividend Reinvestment and Common Stock Purchase Plan, amended and
restated as of November 15, 2001. (Exhibit 99.1 to post-effective
amendment filed on December 5, 2001 to Form S-3, Registration Statement
No. 33-53211).10.22
    
    Contract for Supplying Bradley International Airport. (Exhibit 10.21 to
Form 10-K for the year ended December 31, 1984).10.23
    
    Report of South Windsor Task Force. (Exhibit 10.23 to Form 10-K for
the year ended December 31, 1987).
 E-6




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##### Table of Contents



10.24
    
    Trust Agreement for The Connecticut Water Company Welfare Benefits Plan
(VEBA) dated January 1, 1989. (Exhibit 10.21 to Form 10-K for year ended
December 31, 1989).10.25
    
    1994 Performance Stock Program, as amended and restated as
of April 26, 2002. (Exhibit A to Proxy Statement dated March 19, 2002).10.26
    
    Loan Agreement dated as of February 15, 1991 between Indianapolis Life
Insurance Company and The Barnstable Water Company. (Exhibit 10.26 to Form
10-K for the year ended 12/31/01).10.27
    
    Guaranty Agreement by Connecticut Water Service, Inc. and Second
Amendment to Note Agreement of Barnstable Water Company dated as of
February 23, 2001. (Exhibit 10.27 to Form 10-K for the year ended
12/31/01).10.28*
    
    Memorandum of Understanding between the State of Connecticut and
Connecticut Water Service, Inc. dated December 4, 2002.23.1*
    
    Consent of PricewaterhouseCoopers LLP.23.2*
    
    Explanation concerning absence of current written consent of Arthur Andersen LLP.31.1*
    
    Rule 13a-14 Certification of Marshall T. Chiaraluce, Chief Executive Officer.31.2*
    
    Rule 13a-14 Certification of David C. Benoit, Chief Financial Officer.32.1*
    
    Certification of Marshall T. Chiaraluce, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of David C. Benoit, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    = filed herewith Note:
    
    Exhibits 10.1 through 10.13, 10.24 and 10.25 set forth each management
contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form-10K.
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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT
SCHEDULES To the Board of Directors and Stockholders of
Connecticut Water Service, Inc.: Our audits of the consolidated financial statements referred to in our report dated February 11, 2004 appearing
in this Annual Report on Form 10-K of Connecticut Water Service, Inc. also included an audit of the 2003 and 2002
financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial
statement schedules present fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. The 2001 consolidated financial statement
schedule information of the Company was audited by other independent accountants who have ceased operations.
Those independent accountants expressed an unqualified opinion on that financial statement schedule information
in their report dated February 8, 2002. /s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 2004, except for Note 16, as to which the date is March 4, 2004. The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by
Arthur Andersen LLP. This report applies to supplemental Schedule II  Valuation and Qualifying Accounts for the
years ended December 31, 2001. Refer to Exhibit 23.2 for further discussion. Report of Predecessor Auditor (Arthur Andersen LLP) on Financial Statement Schedules We have audited, in accordance with accounting principles generally accepted in the United States, the financial
statements of Connecticut Water Service, Inc. included in this Form 10-K, and have issued our report thereon
dated February 8, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the accompanying index to consolidated financial statements and schedule is
presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP
Hartford, Connecticut
February 8, 2002 S-1




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##### Table of Contents



CONNECTICUT WATER SERVICE, INC. and SUBSIDIARIES
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS Balance
    
    Additions
    
    Deductions
    
    BalanceBeginning
    
    Charged to
    
    From
    
    End ofDescription
    
    of Year
    
    Income
    
    Reserves(1)
    
    YearAllowance for Uncollectible
Accounts
Year Ended December 31, 2003
    
    $
    240
    
    
    $
    186
    
    
    $
    155
    
    
    $
    271Year Ended December 31, 2002
    
    $
    234
    
    
    $
    165
    
    
    $
    159
    
    
    $
    240Year Ended December 31, 2001
    
    $
    218
    
    
    $
    171
    
    
    $
    155
    
    
    $
    234
  (1) Amounts charged off as uncollectible after deducting recoveries. S-2




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. CONNECTICUT WATER SERVICE, INC.
RegistrantBy
    
    /s/ Marshall T. ChiaraluceMarshall T. Chiaraluce
President, Chairman of the Board and Chief
Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Connecticut Water
Service, Inc. in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Marshall T. Chiaraluce

Marshall T. Chiaraluce
(Principal Executive Officer)
    
    Director, President Chairman
of the Board, and Chief
Executive Officer
    
    March 12, 2004/s/ David C. Benoit

David C. Benoit
(Principal Financial and Accounting Officer)
    
    Vice President  Finance,
Chief Financial Officer and
Treasurer
    
    March 12, 2004
 32




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##### Table of Contents



/s/ Roger Engle

Roger Engle
    
    Director
    
    March 1, 2004/s/ Mary Ann Hanley

Mary Ann Hanley
    
    Director
    
    March 1, 2004/s/ Marcia Hincks

Marcia Hincks
    
    Director
    
    March 1, 2004/s/ Mark G. Kachur

Mark G. Kachur
    
    Director
    
    March 1, 2004/s/ David A. Lentini

David A. Lentini
    
    Director
    
    March 1, 2004/s/ Ronald D. Lengyel

Ronald D. Lengyel
    
    Director
    
    March 1, 2004/s/ Robert F. Neal

Robert F. Neal
    
    Director
    
    March 1, 2004/s/ Arthur C. Reeds

Arthur C. Reeds
    
    Director
    
    February 20, 2004/s/ Lisa J. Thibdaue

Lisa J. Thibdaue
    
    Director
    
    March 1, 2004/s/ Carol P. Wallace

Carol P. Wallace
    
    Director
    
    March 1, 2004/s/ Donald B. Wilbur

Donald B. Wilbur
    
    Director
    
    March 1, 2004
 33